The Real Lesson of the Excel Error

As reiterated by this NYT article by Robert Pollin and Michael Ash, the main debate that animates commentators is the relationship between national debt and GDP growth. This discourse has arisen from an error that on an Excel sheet during the publication of the paper under reference in the article. My view is that the paper looked a bit too neat in determining the threshold at which debt begins to constrain further growth and provided ammunition to ideologues to justify sharp reductions in debt and to counter-punch against those economists who considered a Keynesian approach as a solution.

To my mind, this state of affairs reflects the state of affairs in academia today and more particularly in economics. To be clear, the discipline of economics integrates quantitative tools impressively and provides meaning to phenomenon that would not be tractable. However, that supremely capable economists made this error and that the paper was then taken as a holy grail in the effect of the nexus between debt and economic growth is cause to pause and contemplate. This is because while the quantitative tools are sufficiently developed, it is worrying that it took a couple of years for the error to be discovered and for an explanation to issue. This merely highlights my concern that too much of economic reasoning is suspended whenever a paper is issued that claims to find a connection that answers a topical policy issue.

To my mind, the lesson is that all professionals economists must be as suspicious as they are impressed with the tools that they deploy. The whole profession suffers when errors are that easily missed and that verification is not performed before the studies are given prominence.  

Apple Shares Still A Good Deal

The punditry is full of alarmist messages that Apple has lost its mojo due to the perception that the companies corporation's growth has reached its zenith. I am prepared to state that while I have only reviewed the summary of the statements made by Apple, it is clear that most of the pundits are either ignorant or deliberately distorting the picture.

To start with, an amazing run of nearly a decade of quarter after quarter of increasing profit levels is statistically rare and would be expected to come to an end sometime during the corporation's lifetime. because of that superior accomplishment, it is annoying that this end in growth rate of profits is being read as marking an end to the corporation's dominance based on a fall in share prices.

Added to the above, one would think that Apple released a product that performed poorly when the release of the iPhone in late 2012 went really well and is still the gadget to beat in the smart phone category. It is true that the targets set by financial analysts were not met neither set nor endorsed by the management of Apple. Financial analysts are perfectly entitled to setting sales, market share and revenue targets as they judge fit but are not allowed to reverse themselves when those targets are not met by suggesting that the firm is doing poorly.

So while the share price has fallen, I am certain that those who are selling away are not making a good decision based on the results of a quarter in which revenues were high but profits dropped. To my mind, this is perfect illustration of the poor link between equity values and the performance of a corporation.  As Cassie Slane states here, the share price is lower than it was a decade ago. This is perhaps the moment to buy into Apple. 

John Kay Makes Sense of Money

"The transition from the world in which money is valuable because it is valuable to one in which money is valuable because it is money could happen only because centuries of experience had established confidence that such money would be accepted. There are two commodities-paper money and gold- whose price permanently exceeds fundamental value. But only two. But with gold looking as volatile as Bitcoin, perhaps only one." John Kay  

Big Data is Big But is Not Everything

I still consider myself a keen student of statistics and the use of quantitative approaches to understanding reality or events. For that reason, I am particularly keen to read and understand the claims being made by the "Big Data" movement that digitization of transactions and availability of high powered chips makes it possible today to obtain large data sets for analysis. The claim proceeds to state that big data is now the future and that the availability of information will make all of us very smart and create a deeper understanding of commercial, social and other transactions of life.

Like all claims that come with conventional wisdom, I am suspicious of the unquestioned exuberance over the possibilities created by "Big data". And yet the strength of this narrative is such that few people question it especially as it is now the loudly proclaimed by governments and large management and business firms that are leaders in providing policy and business advise.

David Brooks, writing in the NYT here, provides an incisive view of the "Big Data" movement and dissects the claims being made about it. He raises two important points, the first being that there are certain areas of individual life in which subjective preferences are still dominant and so it is important for "Big data" enthusiasts to be alert to the limits of this movement. To my mind, the most important refutation in the article is the push back against the claim that the surfeit of data obviates the need to create theories because correlations and other statistical techniques will reveal connections between variables.

This preposterous claim by the "Big Data" fundamentalists that theory is obsolete is rightly questioned by the author. In addition, Nate Silver, who himself is a very creative and competent statistician, tackles the claim in this book. Those who make the claim that the mere existence of large troves of data makes theory building unnecessary are overstating the case because any attempt to review and determine the degree of connection between two variables means that a theory exists about their connection. of significance too is that prediction and establishing linkages between phenomenon is not poor because of the absence of data but because of the inability of most professionals to distinguish between the signals and noise. In other words, a spurious connection may exists but unless a plausible theory is used to examine the claim, then big data will find all manner of connections that are just noises.  

Just because more data will be conveniently available does not mean that statistical ken will develop in proportion to it. Indeed, my guess and expectation is that the supply of poor statistical reasoning will rise. Society will still need to find good quantitative thinkers among the volume of "Big Data" crowd. 

Book Review: How the West Was Lost

I am not a tough grader of books because producing a sensible piece of work is very very difficult but found that the author here could have done better with her categories. The title of the book is so far removed from its content because it concentrates on some of the real economic policies blunders of successive US administrations but to add examples from Uk once in a while does not constitute what is known as "The West". I have no doubt about the author's credentials at all but would be cautious when the solutions proposed involved protectionism and closing up into a north American alliance.

Also startling for me is the neo-Malthusian argument that the world is running out of energy, land and food on account of growing populations. Now, this is an argument that is not only set against the grain of history but also requires far more sophistication to pull off than merely stating that it requires 9 kilogrammes of grain to produce an equivalent weight of beef and therefore that the world is doomed. On the same path is the argument made without evidence that conflict around resources such as water will shortly be normal without evidence for it.

In conclusion, I agree that david Ricardo's theory of comparative advantage has been questioned several times but just because China is a "Volume Maximizer" is not evidence that comparative advantage is obsolete. As it is, the simple mathematics of comparative advantage show that no country could hold an absolute advantage in every product imaginable. More recently China's labour costs have been rising and this alone means that Ms Moyo may need to update her arguments. Similarly, the fact that the US is close to being self sufficient in energy undercuts the argument that reliance upon energy imports harms its economy.  

Finally, I find that the book is a very good polemical work but ignores countries that have managed economies very well. In the entire publication, i am surprised that Canada was hardly mentioned except towards the end in the suggestion that the US should go into a North American alliance with its neighbor. In the end, the book puts up a lot of information on the misallocation of resources in the US but does not provide evidence to me that the US, leave alone the West, is really lost.