Category Archives: Economics

Iron money: economic isolation on the Upper Peninsula frontier

These are fragmentary notes – and a few links – regarding the introduction of "iron money" into the economy of Marquette County, Michigan, and the controversy surrounding it leading up to the 1876 Presidential election.

Timeline

Panic of 1857.

Panic of 1873.

Newspaper accounts

The New York Times was in 1876 a Republican newspaper, and did not have the reputation it maintains today as a "newspaper of record". 

Tilden's Iron Currency, New York Times, July 19, 1876

A Swindler of Labor, New York Times, August 23, 1876

The Sham Reformer. New York Times, October 3, 1876

Tilden and the Iron Money, "Red Specular", New York Times, October 4, 1876

The Tilden Iron Money Question, "Red Specular", New York Times, October 5, 1876

Tilden's Sharp Tricks, New York Times, October 19, 1876

Magazine articles

The Legacy of Peter White, George Merk, Michigan History Magazine, Vol. 83, No. 3.  May-June 1999

Iron Money, William van Kosky, Michigan History Magazine v90 n2, March-April 2006

Books

The Honorable Peter White, Ralph Williams, 1907

Fraud of the Century: Rutherford B. Hayes, Samuel Tilden, and the Stolen Election of 1876, Roy Morris Jr., 2004

Iron Will: Cleveland-Cliffs and the Mining of Iron Ore, 1847-2006, Reynolds and Dawson, 2011

Archives

Peter White papers, Bentley Historical Library, Ann Arbor MI

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“On Wine Bullshit” from the Journal of Wine Economics

Richard E. Quandt takes on descriptive adjectives for wines in his essay "On Wine Bullshit".

We did one other thing. We arranged all the attributes in alphabetical order, and then
used a random number generator to select (without replacement) either 10 or 15 attributes
from among them and then replicated this experiment a number of times. Here are the
results for one particular replication of the experiment for truly hypothetical wines.

Château La Merde, 1995. Packed and tight, with oily, smoked game and petrol, yet
with refined fruit, a hint of black fruit and olive flavors and aromas, and supported
by meaty fruit, undergrowth and lush tannins running through the lengthy finish.
Best from 2007 through 2025, Inky, with olive-tinged black currants, blackberries,
tobacco and delicious vegetable flavors.

There's more good writing about wine and economics in the Journal of Wine Economics, published by Cambridge University Press.

Bitcoin, conspicuous consumption, and conspicuous waste

From the Bitcointalk forums, 2011: "Bitcoins are peacock tails"

A series of studies, "Peacocks, Porsches and Thorstein Veblen: Conspicuous Consumption as a Sexual Signaling System," was published recently in the Journal of Personality and Social Psychology. A peacock's tail is beautiful: magnificent plumage, iridescent colors. Alas, it is also wasteful. It takes a tremendous amount of energy to develop. Sound like bitcoins?

Let's look at the Bitcoin as a signal of conspicuous consumption and conspicuous waste. 

The BBC reports, quoting Blockchain, that current Bitcoin miners are consuming $147,000 per day in electricity, and generating $681,000 in profiles from the mining. That doesn't count any of the investment in hardware for Bitcoin mining rigs, which has its own embedded hardware and energy cost.

That you get a Bitcoin as a result of burning energy and setting up equipment is a perfect signal (for those who are tuned into it) that you have the technical skills and cash resources to create some new token of value. It's valuable to the extent that it's difficult to create, and if you don't have the patience to create it, you can buy them up for cash like the Winkelvoss twins are said to have done.

Now to quote my favorite cranky Norwegian immigrant economist, Thorstein Veblen (1902):

Throughout the entire evolution of conspicuous expenditure, whether of goods or of services or human life, runs the obvious implication that in order to effectually mend the consumer's good fame it must be an expenditure of superfluities. In order to be reputable it must be wasteful.

Bitcoins are almost the perfect expression of conspicuous waste, and in a benefit that Veblen might not have guessed at, they are liquid in a peculiar way such that it's impossible to distinguish between someone who has purchased them vs. someone who has a mining rig going full bore creating them. How peculiar a commodity to have no intrinsic value that's obvious right now, but that is a perfect signal either that you have consumed a lot of energy or a lot of money to have acquired them. In this sense they look like they are Veblen goods, where they are more in demand depending on them being more expensive.

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Thorstein Veblen, cranky economist, on handmade goods
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Conspicuous consumption and sharing

Prediction markets are too easy to game, so let’s play games instead

Prediction markets provide a nice, idealized way to use market mechanisms to predict the future. They are a slightly idealized version of an office betting pool and allow small scale bets (real or virtual) on future events. Unlike a real futures market, where you can get guarantees of future performance on things like delivery of gasoline or frozen orange juice, there's no way that betting on some prospective GOP hopeful will lift your candidate to office.

Market manipulation is the bane of most prediction markets. Consider Intrade, a prediction market in which GOP hopefuls are listed. The media will report that a newcomer is trading well, but won't necessarily note that the frontrunner's place is based on less than $500 worth of daily trades. If someone were to want to bump their favorite over the top for at least a little while it would only take pocket money from a proper hidden campaign pocket to game the system in your favor.

Gaming the system is a problem in systems that pretend to be markets, and where some ideal form of market is lionized as a way to gain enlightenment from the invisible hand of Adam Smith. Turning the system into a game to be one sullies the economist's ideals of a rational allocation of resources based on infinite economic rigor.

Why fight people's tendencies to want to subvert the intent of the system builder? The new hot trend in online environments is gamification, where gaming the system becomes the whole goal of the system. Unlike markets, which try to come to truth with some single-valued score of value, games have the opportunity to bring the world into a lovely multi-valued focus, with different people winning each at their own version of the game. The introduction of badges, short term competitions, lots of ways to score points and other fun side games overwhelms the narrow trading interests in market-based predicitons. 

The future of prediction markets lives inside complex predictive games. The game design has to take into account not only the rapid conclusions that you can draw when you have an efficient market for opinions, but also the continuous efforts you have to keep up to maintain people's attention on a topic for any length of time. The good games reward active participation; the challenge becomes how to draw conclusions from the work of engaged gamers working inside your system.

Thanks to Brian Kerr for the idea. Games are on my mind because of the work of the Ann Arbor District Library and Eli Neiburger to build games into the summer reading program at the library. I tried to predict library use with a prediction market in 2007, and attendance at lunch in 2009, using Inkling Markets. The game of choice at the Workantile Exchange is a version of bingo; when I bring my kid to work an alert player may win. The Intrade GOP market shows the book of available trades; at this writing, purchasing about 300 shares of Mitt Romney would push the price up 8% at a cost of less than $1200. Empire Avenue turns social media friendships into a giant game, with badges and prizes.

Thorstein Veblen, cranky economist, on handmade goods

For future reference, since I end up immediately thinking of Veblen when I read about artisanal tofu. This from Theory of the Leisure Class is on hand-made goods (emphasis added).

The position here taken is enforced in a felicitous manner by the place assigned in the economy of consumption to machine products. The point of material difference between machine-made goods and the hand-wrought goods which serve the same purposes is, ordinarily, that the former serve their primary purpose more adequately. They are a more perfect product—show a more perfect adaptation of means to end. This does not save them from disesteem and deprecation, for they fall short under the test of honorific waste. Hand labor is a more wasteful method of production; hence the goods turned out by this method are more serviceable for the purpose of pecuniary reputability; hence the marks of hand labor come to be honorific, and the goods which exhibit these marks take rank as of higher grade than the corresponding machine product. Commonly, if not invariably, the honorific marks of hand labor are certain imperfections and irregularities in the lines of the hand-wrought article, showing where the workman has fallen short in the execution of the design. The ground of the superiority of hand-wrought goods, therefore, is a certain margin of crudeness. This margin must never be so wide as to show bungling workmanship, since that would be evidence of low cost, nor so narrow as to suggest the ideal precision attained only by the machine, for that would be evidence of low cost.

The Gutenberg edition of Theory of the Leisure Class is a convenient edition, since it's all on one page; it also has those honorific marks of hand labor, including exhortations at the end to give the reader "Plain Vanilla ASCII" upon request.

With the passage of time, of course, the details of the relationship between man and machine also change. Goods produced on an old machine, ideally one for which parts cannot be obtained except by manufacturing them yourself, obtain the high status of handmade goods. The more obscure the equipment, the better, and imperfections in old equipment provide the same "honorific marks" of handmade goods. 

 

Related articles

Bitcoin, conspicuous consumption, and conspicuous waste

Breeding black swans

I had a disturbing thought while rereading Malcolm Gladwell's piece on Nassim Taleb in his latest book which collects his New Yorker essays. What if Taleb is not only profiting from unknownable random adverse events, but also encouraging their proliferation?

The logic runs like this. You place a series of bets, where if you lose you lose $1 and if you win you win $1000000. The bets are on some implausible condition, one which (at the outset) there is no chance of happening. You bet the first time, you lose; the counterparty is $1 richer and one iota more confident. You bet again.

If there really is a one in a million chance of winning, in the long run you will break even. The scary notion, though is the thought that by losing over and over again you can change the probabilities of the game, so that once you have lost 1000 times your opponent – who is $1000 richer – will start making decisions about how they conduct their business that increases the chance that you will win this long-shot bet.

Your series of losses are funding the adversary's bad behavior. They are up $1000, haven't lost in 3 years, have an unbroken string of fiscal quarters where each and every quarter they beat the analysts estimates by a penny. Management becomes bolder, knowing that their track record demands that they confidently take on risks that 3 or 6 or 12 years ago whey would have shunned. After a long interrupted run of good fortune misinterpreted as careful skill they seek out the next incrementally more risky and profitable opportunity in order to pursue the growth that you have funded.

I'm challenged to reconcile the strategy of "small wins", where you look to succeed in small ways over and over again to build confidence, with the Taleb style strategy of "small losses" where you take lots and lots of calibrated long shot bets that often lose. It's discouraging to think that the confidence that you are building with the Karl Weick style small win strategy of building upon small incremental gains might be deliberately funded by someone who is set up to profit big time if you grow for a long time and then lose it all.

The smallest piece of lego

is still worth fighting over, if you and your brother both want it.

What’s the smallest piece of lego?

A eurobricks forum suggests it is a flower petal.

Lugnut says a gold coin, weighing in at just over 0.056 g; the flower petal is a hefty 0.064 g.

For reference, a 1×1 plate is 0.176 g and a 1×8 brick is 3.06 g.

You’ll need a lot of legos to build a lego mosaic. I don’t even want to thing about the cost of lego bricks per kilogram, or maybe I will; this package of 25 1×8 bricks has an MSRP of $6, or about $80/kg, or $36/lb. This discussion on classic-space suggests mixed lego goes for $9-12/lb in 2009 dollars.

LEGO is a registered trademark owned by the LEGO Group. And don’t you forget it.