Monthly Archives: November 2015

Saving and Investment with Rapid Depreciation

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Tyler Cowen writes,

it seems to me highly premature to assume we know what is going on with short-term negative real rates

Let me try to tell the disinflation story again. Suppose that most capital goods these days have computing devices built into them. Consequently, there is rapid improvement in capital. This in turn means that:

1. Today’s capital goods are much more productive then yesterday’s.

2. The real price of capital goods is falling over time.

3. Depreciation of existing capital goods is rapid. What you buy today is obsolete in a few years.

I teach students a basic formula for the profitability of buying a durable good:

profitability = rental rate + appreciation – interest cost

Suppose that the rental rate on new capital is very high. That is, it is very productive. However, the appreciation rate is very negative. You may need a negative interest rate to convince you that it is profitable to obtain capital.

What else would be true if this were the story? Assets that do not depreciate would be very attractive. So if you believe that real estate does not depreciate, you want to invest in it. If you believe that corporate “brand value” does not depreciate it, you want to buy shares in firms that have a lot of brand value.

More needs to be worked out.

Joseph Henrich on Cultural Transmission

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The book is The Secret of Our Success, and I am only a little way into it. An excerpt:

evolutionary reasoning suggests that learners should use a wide range of cues to figure out whom to selectively pay attention to and learn from. Such cues allow them to target those people most likely to possess information that will increase the learner’s survival and reproduction. . .individuals should combine cues related to the models’ health, happiness, skill, reliability, competence, success, age, and prestige, as well as correlated cues like displays of confidence or pride. These cues should be integrated with others related to self-similarity, such as sex, temperament, or ethnicity

I think that by emphasizing how little knowledge we generate internally compared with knowledge we acquire through cultural transmission, this book could bolster libertarian/conservative views. It certainly reinforces my doubts about the ability of technocrats to “fix” society. Henrich does not do much with this, although skipping ahead to the next-to-last paragraph in the book:

Humans are bad at intentionally designing effective institutions and organizations, though I’m hoping that we get deeper insights into human nature and cultural evolution this can improve. Until then, we should take a page from cultural evolution’s playbook and design “variation and selection systems” that will allow alternative institutions or organizational forms to compete. We can dump the losers, keep the winners, and hhopefully gain some general insights during the process.

Yes, Professor Henrich, we have a term for that. We call it “the market.”

No Libertarians in a Civilization vs. Barbarism Wave

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Jonathan S. Tobin makes the case that big cities are experiencing a crime wave, in part because of delegitimization of police.

This may or may not be true. However, I think it does reflect the views of those who think in terms of the civilization vs. barbarism axis.

I think that recent developments in the Middle East, starting with the behavior of Hamas during the Gaza war and continuing with the behavior of ISIS, have struck a nerve among those inclined toward the civilization vs. barbarism axis.

Even if you do not believe that conservatives are right, you have to acknowledge that the news cycle suggests that we are in a civilization vs. barbarism wave. In my opinion, that is why Rand Paul is doing so poorly in the polls. You can criticize him as a candidate, but it is hard to argue that the other candidates are so stellar that they outshine him. I just think that the public is more receptive to the conservative axis than to the libertarian axis. This may always be true, but it is particularly true now.