Steve Keen on economic self-cannibalism

Great article by Steve Keen, reflecting on 40 years of change as traditional neo-classical economics has become less important and less influential in his academic environment. One excerpt below, but worth reading the whole thing: 

I started out as a True Believer in what I didn’t even know was neoclassical economics when I began my Arts/Law degree at Sydney University in 1971. In 2013 – 40 years after I graduated from the Arts degree – I ended up as the world’s most famous unemployed economist. And from the outset of my days as a radical in economics, I could see this end game coming. Though I certainly didn’t anticipate my own redundancy (or that of 12 of my colleagues) at UWS, it was obvious that economics was on a hiding to nothing to collapse from the heart of any business degree to its appendix.

The reason is simple: neoclassical economics (and neoclassical economists) annoy the hell out of most other business academics. They have a ‘holier than thou’ attitude about the intellectual rigor of economics versus the wishy-washy (marketing) or mechanical (accounting) nature of other disciplines, and they frankly think that some (if not all) of these other disciplines are simply unnecessary.

In a dialectical reaction, many of their looked-down-upon companion subjects in business faculties evolved precisely because economics deigned their topics to be unimportant. The real-world needs of business (as well as some of the delusions of managers) gave rise to a panoply of business subjects whose practitioners returned in kind the contempt of the economists. By the early 1970s, the academics in these ‘inferior’ disciplines already outnumbered the economists, and as they grew in number, the contest for the scarce core units in business degrees intensified.

By alienating all their rivals, economists were on a hiding to nothing to be driven towards extinction. When it came to a vote at faculty level about what subjects were needed in a given degree (in the days when academics enjoyed a modicum of democracy), the hopelessly outnumbered economists would assert the centrality of economics to any business degree.

Their fellow faculty members would listen and nod – and then vote economics down.

I saw this firsthand when, as the two most prominent student activists in the ‘Day of Protest’ revolt at Sydney University in 1973, Richard Osborne and I were invited to speak to the Faculty of Economics about the proposal to investigate the Department of Economics. We spoke strongly in favour of the motion – as did Frank Stilwell, Evan Jones, Gavan Butler, Jock Collins, and several staff from other disciplines. We awaited the rejoinder from Hogan and Simkin, and when it came, it was devastating – to their own cause.

Simkin spoke on both their behalves. He noted that in 1969, when there had been a serious dispute in Economics, it had been preceded by one in Philosophy. Now in 1973, there was a serious dispute in Economics, and yet again it had been preceded by one in Philosophy.

That was it. We waited for the punch-line – correlation proving causation with a perfect linear regression between disturbances in Philosophy and copycat actions in Economics –but Professor Simkin evidently regarded making that deduction as an exercise for the remainder of the Faculty. Neither he nor Hogan said another word.

I ended the awkward silence that followed by noting that, even though the correlation was correct, it did not explain why the copycat effect always occurred in Economics – rather than in, say, Italian. There was something endogenous to the tribulations in economics, and they deserved investigation.

The Dean handed out the secret ballot forms, and the vote was taken. He announced the score: 24 to 14 in favour of investigating the Department. Richard and I and the soon-to-be Political Economy staff were jubilant – as were most of the Faculty – and we poured out of the boardroom in loud celebration.

As we headed towards the stairs down to the main quadrangle, I glanced back at the boardroom to see that Simkin and Hogan were still sitting, immobile, back in the boardroom. Not only had they not left their chairs, they had not moved – nor were they talking to each other. They simply sat there stunned, staring into the space in front of them, in obvious and profound shock. They had clearly not even entertained the prospect that the vote might go against them.

That was the first of many votes that neoclassical economists were to lose from that time on – and not only at Sydney University. Faculty after Faculty across Australia and the globe voted to progressively reduce the compulsory economics content of business degrees. And the neoclassical economists never changed their tactics – or rather, the lack of them. They never considered that they might need to alter their product – that would be too much like market research. Nor that they should perhaps lobby the other disciplines – that would be too much like politics.

Instead, the purity of the science was defended at every challenge – even as the diminishing time devoted to it resulted in a trivialised tuition replacing rigor. The other disciplines whose votes held the fate of economics in their hands continued to be disparaged and regarded as interlopers, who themselves should be expunged from university – even as the economists were the ones who were effectively being expunged.

The situation did not improve when managerialism replaced academic democracy, because the law of large numbers alone guaranteed that the bureaucratic overlords in Business Faculties would be drawn from almost any discipline other than economics. What was once done by the ballot was now done by decree (after, of course, due consultation), and the final result was that economics found itself expelled from what once were Faculties of Economics – and in the worst instances, abolished altogether – with a single first year subject preserved solely because Accounting standards require accountants to take at least one unit of economics.

What a dismal fate for the dismal science – the more so because it was so largely self-inflicted. If economics had been capable of reinvention in response to its unpopularity – as well as in a sane response to the discovery of its many internal logical and empirical contradictions – it could have preserved itself as a vital discipline. It perhaps could have even re-assimilated those competitor departments that its rarefied definition of economics had conjured into being.

But that did not happen. Schumpeter lives today in management departments rather than economics (though these days they cite Porter instead), precisely because neoclassical economists excluded him from the canon. Marketing evolved because economists disparaged the task of trying to find out what rational consumers must already know anyway. Operations Research developed because economists knew that calculus was all one needed: this Deming process control stuff was meaningless, given the immutable law of diminishing returns.

Read more: http://www.businessspectator.com.au/article/2013/7/8/economy/self-cannibalisation-economics#ixzz2YRsbh500

A Different Burger Story - Wallop Pork Burgers

The whole of KL have been inundated with premium burgers, mainly beef burgers. We have My Burger Lab, Burgartory, etc... But everyone should know that pork burgers beat beef burgers anytime of the day. We have Ninja Joe, it is good but there are many things they could do better.

There is another decent pork burger place called Wallop, find KAYU Nasi Kandar and its in one of the shops. Again, they may not be as cool or spend heavily in design for the place, but they are sincere about their burgers.



Get the extra bacon ....

Verdict:
Bun 7/10
Pork patty 8/10
Condiments  6/10
Chips  6/10

There are a few things they could certainly improve on ... the cheese, get better cheeses. Besides normal bacon, provide crispy bacon as well. Must have french and english mustard on the side. Love the raw onions but should also have caramelised onions. To be fair, its more a mom and pop shop and they try hard. Give it a go.

This Must Have Happened To All Of Us When We Were Young .....

Koon Yew Yin On Jaya Tiasa

Dear XXXXX (a senior analyst),

I attached herewith JayaTiasa Chairman's opening statement for its annual report for year ending June 2012. The following are my comment:

1. It has one of the largest, if not the largest plywood and logging business in Malaysia

2. The started planting oil palms in 2002 aggressively and the report showed that it had planted nearly 60,000 ha. Looking at the age profile and FFB/ha production at various palm ages, this company has sustainable profit growth for the next 10 or more years. 

3. Just before the bonus issue of 2 for everyone held, the share price was nearly Rm 10 and the company placed out 15% of the total issued shares at Rm 7.90. After the bonus issue, the financial institution would have paid Rm 2.63 per share and it closed at Rm 2.09 yesterday. 

4. Reforestation or replanting trees is viable long term business. Please see the 2 attachments. The company must have spent quite a large amount for planting trees. As a result the NTA is more than RM 4.00 per share. 

I wrote to the company secretary to enquire why the Chairman said that the trees will take 12-15 years to grow while according these attached reports the trees can be harvested in about 7 years. She replied that they need the trees to have a minimum of 35 cm diameter for the production of veneer. For chip boards manufacture the trees can be any size. 

5. I like the way they keeping planting oil palms aggressively. They planted about 60,000 ha in 10 years. I expect to see more planted area in its annual report for year ending June 2013. 

I have been buying this share for the last few months and there were lots of sellers because the company is currently showing poor profit. I think I have mopped up all the tired holders' shares. I am beginning to find less sellers. My family members and I have accumulated more than 23 million shares. 

I have not seen any analyst report on Jaya Tiasa? Why are you not interested in this share with sustainable profit growth in the next 10 years? 

I consider this is the most undervalued plantation share in the market. Fortunately or unfortunately it is not listed under plantation and that is why it is not so obvious and glaring at investors. 

Best wishes

Yew Yin          
--------------------------------------------------------------
Just Out - report On JT by CIMB

Jaya Tiasa Holdings   | PDF

Beneficiary of higher log prices

JT MK / JTIA.KL | TRADING BUY - Maintained | RM2.00 - Tgt. RM2.36 Mkt.Cap: US$608.00m | Avg.Daily Vol: US$0.52m | Free Float: 38.50%

Plantations | Author(s): Xiao Jun SAW,

▊ Our more positive view on Jaya Tiasa's timber business was reinforced during a recent non-deal roadshow with the group. Management thinks that the higher log prices could last till March next year. This will lift timber earnings of the group in the coming quarters. We maintain our Trading Buy call on Jaya Tiasa. The stock is not an Outperform as we expect it to be re-rated only in the short term, driven mainly by stronger timber earnings in the next few quarters. Also unchanged are our earnings forecasts and our target price of RM2.36, which is based on sum-of-parts. Key re-rating catalysts include a potential positive earnings surprise relative to consensus.   What Happened We took Jaya Tiasa's CEO and senior management team on a one-day NDR in Kuala Lumpur last week to meet with 11 institutional funds. During the meetings, management provided updates on its plantation and timber divisions. Most investors were keen to know whether the current strong log prices were sustainable as they were concerned that the recent decline in the rupee against the US$ may impact future timber demand from India. Management indicated that demand for Sarawak logs from India is fairly inelastic given the country’s preference for Sarawak logs, which are comprised mainly of the Meranti species. The group believes the current high log prices will be sustained until March next year as it expects log supply to remain tight given that the rainy season in Sarawak is due to start in September. The group also expects plywood prices to trend higher in 2H13, driven by improved housing activities in Japan and the impending imposition of anti-dumping duties on Chinese plywood that are made from hardwood by the US in Sep 13.    What We Think Management broadly concurs with our view that current log prices could stay high till the end of the year and that plywood prices could rise as a result of stronger housing activity in Japan. We expect Jaya Tiasa to report better timber earnings in its 4QFY13 this coming Aug due to higher selling prices for its logs. We also expect the higher plywood prices to further boost its timber profitability in FY14.    What You Should Do We believe there is upside to its current share price as the rising timber prices have not been fully appreciated by the market.

Websites I Frequent Most

Internet radio is a blast ... and one of the best free sites is SHOUTCAST, whatever your fancy. Mine is always tuned to JAZZ category, sub category VOCAL, and my favourite station is The Penthouse (nothing to do with the magazine ... errr, I think), I think I should have been born in the 40-50s.

http://www.shoutcast.com/
http://www.shoutcast.com/radio/Vocal%20Jazz


Needless to say, one of the best daily papers. The biz section is actually very much Dealbook.

http://www.nytimes.com/


Next favourite online paper.


http://www.smh.com.au/


Best site for soccer highlights as I will always miss the games.

http://www.soccer-blogger.com/

A most wonderful site to watch the many incredible works, all the conspiracy theories, real life re-enactment stories, thorough analytical pieces on important issues.

http://www.freedocumentaries.org/

My go to site to learn more about fine wines and cigars.

http://www.jamessuckling.com/asia-hong-kong/
http://www.jamessuckling.com/cigars/

A great time waster, not really, ... great site for the humanities and social sciences put together in a very attention grabbing way.

http://twistedsifter.com/

Christianity based magazine, but you wouldn't know it from the way they lay out the content. Excellent articles on life issues and living well without sounding preachy.

http://www.relevantmagazine.com/

Easily the best food site for home cooks, Malaysians & Singaporeans in particular. 

http://www.foodcanon.com/

Revolutionary and evolutionary ideas and discussions, a bit high brow and academic at times but worth a visit a month.

http://bigthink.com/

Thinking again about time

I have a column coming out in Bloomberg in the next few days. The topic is time -- literally -- and how to think about it. For people reading the column, I thought I'd offer some links to things I've written here before exploring the topic in more detail, and also to some original papers that explore the ideas in much greater depth.

Much of the recent research on this topic has been done by Ole Peters of the London Mathematical Laboratory and Santa Fe Institute. The gist of his overall argument is that the usual ensemble averages used to compute "expected" returns in finance and economics are, in many cases, simply wrong. This is not the correct way to make decisions in the real world. We're all used to the idea of averaging over possible outcomes, weighted by the appropriate probabilities, and asking: is the result positive or negative? If positive, then the gamble or investment is worth it, if we can accept the risk. But this is not a legitimate way of thinking, for it averages over parallel worlds, not through time -- where we actually live.

The trouble is that usual average over different outcomes mixes potential worlds in which we go broke with others in we get rich, and does this mixing all at once, immediately, so that good outcomes coming from one path cancel out bad outcomes coming from other paths. Importantly, this mixing takes the often irreversible consequences of bad outcomes (bankruptcy, for example) out of the picture. If you make hugely risky investments, this average gives you full credit for all the wonderful possible outcomes, weighted appropriately for their likelihood, which of course seems sensible. What it doesn't do is account for the very real fact that the bad outcomes may effectively wipe you out entirely and take you out of the game, making it impossible to play again -- in which case you will never get to experience those eventual big payoffs.

I've written three earlier blog posts -- here, here and here -- exploring his idea from different angles. These give links to Peters original papers and also to some other valuable discussions of this fundamental way of thinking. One further paper of interest is this recent work by Peters and William Klein which looks at how the assumption of ergodicity is systematically violated by the process of geometric Brownian motion, which is of course a workhorse model in finance and economics.

I'd like to just quote one paragraph from the latter paper to make the point of how counterintuitive this stuff is. We're all very used to thinking in terms of ensemble averages. Average over all the outcomes, weighted by the appropriate probabilities, and this should give you a good handle on whether the gamble is worth taking or not. But this view is totally mistaken. Indeed, as Peters and Klein point out,

In Geometric Brownian Motion, it is possible for the ensemble average to grow exponentially, while any individual trajectory decays exponentially on su fficiently long time scales [1]. Multiplicative growth is manifestly non-ergodic. But precisely the opposite is often assumed in economics, for instance in [2], p.98: "If a gamble is `favorable' from the point of view of the expectation value [ensemble average] and you have the choice of repeating it many times [time average], then it is wise to do so. For eventually, your amount of money [is] bound to increase."

That first sentence really sums up the problem. You can do the ensemble average and say, "Hey, I expect to get exponential growth! Let's go for it." Then you actually play and find you get wiped out. Try again and still get wiped out. See that everyone who plays the same game also gets wiped out. Strange. You may eventually accept that thinking in terms of parallel worlds isn't quite the right thing to do.

Of course, Peters analyses are also closely linked to the famous Kelly criterion introduced by IBM mathematician John Larry Kelly in 1956. The theory of practical betting based on this criterion has been extensively developed by Ed Thorpe and many others. See this summary paper, for example. There is a huge literature on this, and I don't in any way want to imply that people in finance have not been thinking about this. Many have. However, the failures of the expected value approach through ensembles is not appreciated widely enough.

It goes without saying, of course, that everything becomes more uncertain and complicated in the usual case from real life -- especially in finance -- where one does not know that actual probability distribution from which outcomes are being drawn. Perhaps there is no such distribution. In this cases, Thorpe and colleagues rightly counsel even greater caution:

The theory and practical application of the Kelly criterion is straightforward when the underlying probability distributions are fairly accurately known. However, in investment

applications this is usually not the case. Realized future equity returns may be very different from what one would expect using estimates based on historical returns. Consequentlypractitioners who wish to protect capital above all, sharply reduce risk as their drawdown increases

S&M Show Wednesday Podcast

The Unbearable Lightness of Being Syed Mokhtar ... Ewein ... etc..

http://www.bfm.my/snm-show.html

Song pick: Ballroom Blitz by The Sweet