Category Archives: Economics & Finance
The bailouts were just the tip of the enormous iceberg of corruption in the global finance system.
The recent drop in the price of gold has lead to a run on physical gold. and the US mint has run out of tenth ounce coins.
Could this be an early warning sign of the coming econopocalypse?
Note the article link described tenth ounce coins as being 3.4 grams, but i thought a tenth of an ounce was 3.11 grams. who knew?
Game theory is the idea that every activity we do, or decision we make can be thought of as a game. A game may be simple or complex and may have strategy that is obvious or subtle.
If you remember from our last session we were cutting cakes.
There are only two ways to cut a cake really, fairly or unfairly. The way the cake is cut depends on the rules of the game.
Let’s make the rules of the game.
There are two players.
The first player cuts the cake into two parts, each part may be any size.
The second player chooses one of the two parts to keep as their piece of cake.
The first player then keeps the part of the cake the second player did not take.
* I think we can all agree that if player 1 chose which piece before player 2, player 2 would frequently receive nothing.
Most of us learned this game as children, usually a parental figure gives two children a food item to divide and states the rules similar to the way I have described them.
Usually this game results in fair distribution if the rules are followed.
You should be able to see in your mind how this game generally plays out. However there are circumstances where a very different result occurs.
To explain this I will use a pay off table.
Player 1 has two possible strategies 1) be fair OR 2) not be fair in the cutting of the cake.
Player 2 has 2 choices 1) be smart and take the biggest piece OR 2) not be smart and take the smaller piece.
* It is possible that player 2 is not hungry, or is unable to determine which piece is larger (49% vs 51%) or feeling quite generous, or is a woman on a first date.
When playing these games we assume the opponent is rational and is seeking the best possible outcome for themselves. If you opponent is not rational it is difficult to apply in many cases.
Generally in game theory the following convention is used, player 1 uses rows (horizontal) to determine their strategy and player 2 uses columns (vertical) to determine their strategy.
The result of the game is where the two strategies intersect.
For each strategy combination there is the corresponding box in a grid with 2 numbers separated by a coma, the number on the left is players 1 reward, the number on the right is player 2 reward.
Reward numbers are positive for a gain and negative for a loss.
In the pay off chart below I have color coded the rewards to match the players, though this is not commonly done. Think of this as economics paint by numbers.
We can use the pay off chart to analyze the game.
Lets assume I am player 1
The first this you should notice is if I cut the cake fairly I know what my reward will be, and it doesn’t not matter if my friend is smart or not.
The second this you should notice is the highest and lowest rewards in the game for me occur when I cut the cake unfairly. Cutting the cake unfairly is therefore a risky strategy and I am gambling on my ‘friend’ being stupid in order to get a larger reward.
Thirdly because the game seems have an unofficial title of “Are you stupid my friend?” a game like this can be used to test the intelligence of an opponent.
Fourthly an opponent in this game can ‘play stupid’ and let you take the large reward assuming you will assume he (or she) is stupid in the future when you risk even more on a future game ( 75 vs 25).
Player 1 Player 2
Cake 1 60 40 ( Player 1 unfair, player 2 not smart (apparently…) )
Cake 2 25 75 ( Player 1 even more unfair, player 2 suddenly smart ( surprise!) )
Totals 85 115 ( Who is stupid now?)
This type of strategy is the conman game or poker game.
Interestingly the conman game strategy is almost foolproof as long as a second game follows and player 1 is still unfair. The only way a prospective conman game can loose here is if player one switches strategy to fair (or less unfair, 55 vs 45) after their initial windfall. Ironically the conman can be defeated by player 1 getting a conscience or giving up the gamble.
The other important thing about games is sometimes the same games are repeated and sometimes they are played with different games in between and sometimes games are only played once. Entirely different strategies apply to a series of games as apply to ‘one off’ games.
Who thought cutting a cake into two parts could be so complex?
This is why I get very concerned when people talk about ‘redistribution of wealth’.
If all of this was too difficult for you to understand I have some sound advice for you, try to be fair in your dealings, and never trust a socialist, a banker, a salesperson or a anyone employed by the government.
We put the NOM in economics!
“Owners of capital will stimulate working class to buy more and more expensive goods, houses and technology, pushing them to take in more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks which will have to be nationalized and State will have to take the road which will eventually lead to communism.”
Karl Marx, 1867
Well he wasn’t all wrong.
A road you say?
So what does this road look like?
Karl Marx never had a job in his life, so what would he know about the working class or work itself?
Imagine you and a friend were given a cake to divide between yourselves.
In your mind a 50% share seems fair, and it is. Lets call than 50 units.
Me 50 , friend 50
But what if you were greedy and wanted more?
Me 60, friend 40
My gain 10, friend gain -10.
sum of gains (10 -10) = 0
All the gains would be considered losses to your friend, and vice versa.
No matter which way the cake is divided no player can get more without the other player(s) losing.
This is is what a zero sum game is; all of the losses and gains to players in the game sum to zero.
Some games are zero sum and some are not.
If the cake grew or shrunk, it would not be a zero sum game.
A situation where no player can gain without the other losing is called Pareto optimal.
Pareto optimal can apply to a single payer determining a position in a game or situation.
A good example of Pareto optimal seating position
From The Big Bang theory.
Congratulations you have just learned two important concepts in economics. Not so hard was it?
What are these primitive villagers up to you may ask?
Actually they are anarcho-primitivists, but that’s not the point.
This is a cargo cult. These people actually believe that somehow the construction of this model aeroplane will cause cargo ( wondrous goods) to appear. This belief system started when US and allied forces arrived in South East Asia and Melanesia to form army bases and airstrips to fight the Japanese imperial army and navy. In setting up bases they did hand out a few trinkets along the way to keep the locals happy. The locals were quite amazed at the wondrous, magical and apparently godlike powers of the cargo and its owners. Eventually the planes and ships stopped coming and with that, the cargo stopped coming also. Seeing the obvious linkage between the vehicles ( aeroplanes, jeeps, and airstrips) and the cargo they formed the belief that if they could make their own airstrips, aeroplanes and jeeps from local materials the cargo would return.
So year after year they would create such effigies in hope the cargo would return. It sounds quite silly if you know the fallacy of their thinking. But you must admire their skill and determination. Among cargo cult fetishes that are built are, Aeroplanes, Airstrips, Airport control towers and even Jeeps and machine guns.
Unfortunately none of these effigies are functional, because the builders lack the actual knowledge behind how they actually work. If they did know for example how heavier than air, powered, controlled flight worked, their considerable efforts might have different results.
They have allowed unqualified belief determine they actions, rather than logic and simple experiments.
The first true aeroplanes were developed about 110 years ago, only 40 years before cargo cults developed. There are many competing claims as to who actually did it first. But According to some it was not the wright brothers, they give credit to an obscure New Zealander, Richard Pearce and his flying machine, which looks strangely similar to a modern micro-lite. Adding to the kudos of first powered, heavier than air, controlled flight , Pearce created many innovations, aerolons, variable pitch propeller, triangular under carriage with 3 wheels, a joystick for control and an air cooled reciprocating engine.
Amusingly the wing struts of his aeroplane were made from bamboo, just like some cargo cult planes today. Unlike the cargo cult aeroplanes his one actually flew, and with a degree of control also.
Strangely Pearce didn’t use the one really important innovation, aerodynamic lift, his aeroplane simply dragged itself into the air with lots of horsepower and the wings stopped it falling back to the earth. Pearce used approximately twice the horse power as the Wright brothers used in their flyer. Pearce kept few records and didn’t promote his invention, lived in an isolated corner of the world, so others who worked at the same time and a little later, got the credit. The Wright brothers do deserve credit for a very structured and documented approach to they way they developed the aeroplane, even determining the viscosity of air to put in their calculations and using aerodynamic lift.
All of this was a progression from hot air balloons, parachutes, gliders and uncontrolled flight to the final goal the modern aeroplane. People learned the phenomenon of flight and the properties of air to accomplish their goal of flight. The men who jumped off cliff flapping their arms were not successful.
Had the cargo cult members been successful in getting plane flying, they might fly to the US in their bamboo aeroplane and land hoping for cargo to magically load itself on their aeroplane. Once again they would be thwarted because there must be surplus or extremely low cost cargo and fuel for this to happen.
This of course brings us to Economics, another poorly understood cargo cult for many people, particularly Socialists and Neo conservatives.
As different as they both seem socialists and neo conservatives either don’t know or don’t want to talk (or think) about where money comes from.
Marx; How can the state provide everything to everyone when the state cannot cannot produce value? Marx argued that only human labour is of value, and therefore the state ( not having its own body) simply cannot create value, and must rob from Peter to pay Paul. Good if you are Paul, bad if you are Peter. Eventually everyone becomes Peter in socialism, apart from a few Pauls’ at the top.
Economics: Read about Zero sum game and tragedy of the commons.
Neo-Cons; How can the market provide, if all the means of exchange are privately controlled debt notes, counterfeited into existence, whose supply and value are arbitrarily manipulated by a self interested third party? In theory Neo-Cons should be screaming for 100% backed, hard money, but seem to think, too big to fail, bail out the incompetent fraud peddling banksters is the way to go.
Economics: Read about properties of money (particularly about how fiat is not real money)
The worst thing about economics is that it seems so abstract, and involves some maths, and that is a really big hurdle to most people.
The majority of economics can be explained with axioms, short stories, and situations to consider.
A list some basic economic axioms here, trickier ones with a *. Honestly it’s not that hard.
Zero Sum game.
Tragedy of the commons.
Battle of the sexes game.
Game of chicken.
properties of money.
chain store paradox.
Principal – agent problem.
Irrationality of price wars*
Barriers to growth.
Sensitivity to initial conditions*
Supply and demand*
If you don’t understand Economics, you might as well build a rough copy of a space ship out of plastic bottles in your back lawn and hope ET will save you.
For captain obvious:
If you don’t understand how something works, there is no point idolizing some aspect of it, thinking it will be a substitute for knowledge.
For all the George Orwell fans, you will remember than in the book 1984 the state claimed to have invented the aeroplane, but Winston Smith remembered from this childhood that this was not true.
This is really the horror story of the hour, people who put their life savings into a bank account, only to lose most of it. Can’t say that it wasn’t on the cards. but will we learn from their mistakes when it finally happens here, as it most likely will ? How come Cyprus couldn’t do what Iceland did? Ah, yes, the Euro. How did that work out for you guys? I am happy ,as always, to blame the banks for a great deal of this fiasco, but Greece should have known better all along that their economy could not compete with those of Central Europe. so why is Greece so scared to leave the Euro zone ? And if Greece is too scared, what about other bankrupt countries like Italy, Spain, Portugal? Surely one of them will take the money and run ! Waiting with bated breath….
And all this from a former JP Morgan CEO! Looks like good people can be found in unexpectant places, or as my favorite songwriter once said “There’s good guys and assholes on every block.” Mostly Assholes on some blocks , though. This is a spoof article from the Daily Currant.
Cypriots are clearly not trusting the banks right now. Many banks are having special bank holidays.
ATM bank runs have occurred. A rather coincidental ‘out of order’ message.
5 of 17 EU countries need a bail out now. Bailout is the new word for robbery