Complexity and Decision-Making

Economics,Social Science — Zac Townsend @ November 6, 2012 9:26 am

The Great Man theory of history is usually considered too limited (see yesterday's post). This argument is perhaps best expressed in War and Peace, where Tolstoy goes on long discussions on the imaginary significance of great men, including obviously Napoleon. Or, as Isaiah Berlin says in the "Hedgehog and the Fox: An Essay on Tolstoy's View of History," Tolstoy perceived a "central tragedy" of human life:

...if only men would learn how little the cleverest and most gifted among them can control, how little they can know of all the multitude of factors the orderly movement of which is the history of the world...

We can think of this in a more limited fashion when it comes to Generals or even CEOs. This comment on Hacker News put it well:

People overrate what people can honestly achieve in highly chaotic environments. 15% of corporate CEOs are replaced every year - notice how companies don't change much from year to year though - I have. However, changing often definitely let's us lionize the lucky ones (see hedge funds, startups, novels, movies, tv shows and any other at scale, highly path dependent, chaotic and random systems).

My question though is whether this is changing. "Big data" and associated analyses may give us the ability to understand large systems in ways that were never before possible.

Just as an example, Friedrich Hayek has a famous argument in his work that the reason the government cannot run the "commanding heights" of the economy is because of information. Simply put there is no way for the government to amass and understand the information necessary to choose prices an set supply and demand, and that price is the only true reflection of preferences. History might have caught up with Hayek. We are entering an era where massive datasets and computational social science will allow us to understand people's revealed preferences better than any mechanism in history--even prices. Obviously I have set up a straw-man here in a sense, but the greater point is that we can begin to understand people's behavior and preferences far better by gathering massive information about them and their surroundings than can be revealed by a thousand theorems in American Economic Review.

I am particularly interested in what this means for local, state, and federal governments. (Political campaigns already use massive amounts of voter history and consumer data to microtarget potential voters, see this book and this one.) Governments collect large amounts of data on the services provided to individuals and outcomes of those service. New York City is slowly building the capabilities to cross-reference and understand all of this data and its implications for human behavior. As they work to collect, knit together, and derive meaning from massive administrative datasets, the very nature of what governments can know about citizens and how they can provide services could change.

Cesar Hildalgo comments on the data collected by government and the hope they move to big data:

Governments are much slower, but they're starting to collect data, and they have always been a very information-intensive business. Governments invented taxing, and taxation requires fine-grain data on how much you earn and where you live. Governments, actually "states" a long time ago, invented last names. People in villages didn't need last names. You were able to get around with just a first name. They had to invent last names for taxation, for drafting, so government is a very information-intensive business. In their innovation agenda, in order to do the things that they do better, governments are going to need to embrace big data.

I see, little by little, that there are people inside all of these organizations that are starting to have that battle. They tend to be younger people and were born into this Internet generation. Sometimes it's hard for them to have this fight. As time goes on, there's going to be more and more people that are going to see the value of data that is not only monetization, but also is providing better services, is understanding the world better, is understanding diseases, understanding the way that cities work, mobility, many types of things. Not just targeting people with ads. I think that there's more than that.

The three main problem paradigms (prediction, modeling, and detection) of machine learning, data mining, and artificial intelligence can be used to ask questions about government as service. For example, can we predict in a child welfare context who is most likely to end up in a juvenile deliquescence context? Can we model the individuals who receive housing subsidies that are most likely to commit crime? Can we detect the spread of knowledge of a new government program? What predictions can we made using leading indicator data? Allow me to focus on New York City as an illustrative example. New York City has a system that allows users to screen families for more than 35 city, state, and federal benefit programs. On the other hand, City agencies collect a massive number of variables related to demographics, location, risk-assessment tools, court dates, child welfare contact, police action, and more. If this data could be knitted together, we could begin to understand the life-cycle of families in their behavior and use of government service, and begin to model needs profiles in a way never before possible.

So, we live in an era where we have a large number of sensors that are collecting more data, we have the means and methods to analyze the gathered data, and we have the ability to be dynamic, instantly responsive models. With this all together, we may enter an era where CEOs, Generals, and other leaders are able to understand and respond to chaotic systems.

Security Isn't Free, Either

Economics,Ideas,Reading — Zac Townsend @ October 30, 2012 9:30 am

On the tradeoff between risk and reward. It begins with a simple anecdote:

I once heard a Harvard professor give a talk describing the yumminess vs. safety scale for food regulation. Yummy food (yes, I’m quoting here) is frequently unsafe, and safe food rarely yummy. Head to the Texas border, he said, to see it in action. The same ingredients are used in burritos on either side of the border, but the Mexican version, with its unpasteurized cheese and fresher, unmedicated chicken, bursts with both flavor and, occasionally, Salmonella. The American version is recognizable as a burrito but has little taste in common with its more daring cousin. We’ve sacrificed some deliciousness in favor of safety.

But don't be fooled, this guy has things to say:

Such questions are the stuff of nightmares and of responsible government, and the abilities to humanely understand, resolve and – most of all – explain their nuances are the differences between great leaders and tyrants.

I have been very interested lately in thinking about risks and too which extents government should go to mitigate them. I don't have anything fully formed on the topic yet, but is pretty obvious that as the limit reaches probability zero on any risk the cost function approaches infinity. That is, it gets more and more expensive to decrease smaller and smaller risks toward making something not happen with probability one. That might be worth it if the risk is nuclear attack on New York, but it makes less sense in the case of things the government avoids just because they look bad.

Today’s Idea: A Social Enterprise YCombinator in New York City

Economics,New York City,Politics — Zac Townsend @ January 26, 2011 11:48 pm

My idea is to use the best elements of YCombinator as a model for funding social enterprises in New York City. I want to create a non-profit which uses a cohort or batch model to fund social enterprises. This NFP would give the fellows start up capital, weekly dinners with relevant experts, and the social support and pressure of other fellows.

Ultimately, the goal is to create many more long-lasting social enterprises addressing the City's problems. In some ways, like YCombinator or Techstars we would serve as a screening mechanism, by which philanthropists and Foundations might feel more comfortable investing if someone went through the program. But, more importantly, we would support founders in their journey toward doing both good and well. By creating an environment where experts and support can be provided to a group at once, where social entrepreneurs in the City know and reenforce each other, we can make the City a more just, equitable and fair place.

To steal Ashoka’s definition of a social entrepreneur, I mean people that “individuals with innovative solutions to society’s most pressing social problems. They are ambitious and persistent, tackling major social issues and offering new ideas for wide-scale change.” There are a ton of places to support the next big web applications, but not enough places supporting the next crop of social enterprises, more importantly, by using YC's model of funding in batches, with everyone in New York City, we get economies of scale and support that Echoing Green or Ashoka don't see.

Exemplars to look to in the City might include Geffeory Canada from Harlem Children’s Zone and Elisabeth Mason at SingleStop USA. Although the latter is now a national organization, it began with a New York focus, something we would demand of our companies. This way we can create an experience and support network which is topical, focused and relevant.

So, let’s say twenty start-ups a year. They get 100k over two years, health insurance and a great deal of technical assistance in everything from financial analysis to local politics. The twenty of them are pulled together once a week for dinner where some expert on social entrepreneurship or the City speaks for the first six month. Like others, we invest in passionate people with good ideas. We can provide the access to funders, the critical eye to improve ideas, and a lot of expertise, but we cannot replace the single-minded, driven, crazed founder who wants to make a difference. If you are not incorporated, we will pay your legal fees (or someone will do it pro bono), and for 501(c)3, we would serve as a tax-free pass through. The only requirements are that you have to be in New York City, you have to have a social purpose, and you have to be less than two years old. For companies that are non-profit we expect to be paid back within 10 years (that is, its more a loan than anything else), if they are for-profit we expect 3-5% equity like a seed-stage fund. The ultimate goal is that after some infusion of cash into the social incubator (as an NFP/Foundation), that it would be self-sustaining in the long-term.

We also want to support the people selected for the fellowship in making connections among themselves (ultimately making a alumni base that will support one another), as well as the people and institutions in New York. We want to create a central hub by which institutional and individual relationships are built and maintained on behalf of the Fellowship and its future members, so that fellows have a network of experts in the social entrepreneurship, not-for-profit, political, academic, and economics development communities to draw on.

There is one organization in the City that does work similar to this, the Blue Ridge Foundation, who give cash grants and a high level of direct engagement from Foundation staff. Fundamentally the difference is that they have ten NFPs in their current portfolio and six alumni, where this NFP or Foundation, ideally a public/private partnership, will support twice that many social enterprises each year.

To sum up: I think the most impactful thing we can do is 1) Give the entrepreneurs breathing room to work on their idea 2) Provide them technical assistance and our experts 3) Help them with fundraising, in a sense we are their board until they get one, although we wouldn't necessarily want a spot on their board and we make connections to donors and last 4) We could provide institutional access, that is, ideally we would have relationships in the City, so if they wanted to work on schools we could help them with DOE, they wanted to work with children, we could help them with ACS, etc. That is, social enterprise is more inherently political than other companies.

A More Holistic View Of Economic Growth

Economics — Zac Townsend @ December 16, 2010 8:02 pm

When I was in high school, PBS had a documentary called Commanding Heights. A fine documentary about the history of economic thought and globalization in the 20th century, much better than the book that proceeded it.  (The books predictions and tone got turned upside down by September 11). Ultimately the documentary is  slightly too full-throated in its defense of globalization. Nonetheless, a comment by Jeffrey Sachs may have been what prompted me to think about development economics for the first time in my life:

The world is more unequal than at any time in world history. There's a basic reason for that, which is that 200 years ago everybody was poor. A relatively small part of the world achieved what the economists call a modern economic growth. Those countries represent only about one-sixth of humanity, and five-sixths of humanity is what we call the developing world. It's the vast majority of the world. The gap can be 100-1, maybe a gap of $30,000 per person and $300 per person. And that's absolutely astounding to be on the same planet and to have that extreme variation in material well being.

I tend to think that economists can be too focused on models of the modern macroeconomics of the developed world when thinking about development. That is why I loved my Theory of Economic Development class at Brown, It included modern models, but Professor Oded Galore is an advocate for thinking about the long-view of economic history, and suggested we read books such as Guns, Germs and Steel. He calls his model Unified Growth Theory (Wikipedia page), and I'm not sure how much traction it has had among economists. The first paragraph from his overview of UGT:

The evolution of economies during the major portion of human history was marked by Malthusian Stagnation. Technological progress and population growth were miniscule by modern standards and the average growth rate of income per capita in various regions of the world was even slower due to the offsetting effect of population growth on the expansion of resources per capita. In the past two centuries, in contrast, the pace of technological progress increased significantly in association with the process of industrialization. Various regions of the world departed from the Malthusian trap and experienced initially a considerable rise in the growth rates of income per capita and population. Unlike episodes of technological progress in the pre-Industrial Revolution era that failed to generate sustained economic growth, the increasing role of human capital in the production process in the second phase of industrialization ultimately prompted a demographic transition, liberating the gains in productivity from the counterbalancing effects of population growth. The decline in the growth rate of population, and the associated enhancement of technological progress and human capital formation, paved the way for the emergence of the modern state of sustained economic growth.

This is all by way of introducing an interview with Deirdre McCloskey in the National Review. I find her incorporation of dignity and rhetoric as economic drivers to be fascinating. It makes modern economic growth part of a larger historical movement going back to the enlightenment. The article's introduction does a good job of closing out my post:

Economic history looks, in graphic representation, like a hockey stick. For tens of thousands of years we traced nasty, brutish, and short lives along the shaft. Children anticipated a world no different from their grandparents’. Shakespeare’s audiences had only marginally better lives than Sophocles’. But at the beginning of the 18th century, mankind — beginning with the British and Dutch — hit the blade of that hockey stick, enjoying an unprecedentedly sharp and irreversible upturn in prosperity, life expectancy, and health. Ever since, the world has changed more quickly in every generation than it had previously in millennia. By all criteria, human life has improved in ways unthinkable 300 years ago.

Solving the mysteries of the birth of the Industrial Revolution (and, subsequently, the modern world) has been the primary task and test of economic history. And, according to Deirdre McCloskey, all explanations so far have failed. Those failures, in turn, indicate the failings of modern economics. Her magnum opus, an explanation of the birth and flourishing of the bourgeoisie and its subsequent transformation of the modern world, will occupy at least six volumes. This month, Chicago University Press releases the second installment: Bourgeois Dignity: Why Economics Can’t Explain the Modern World.

Traditional economic models — the ones we find in Econ 101 — center on labor, capital, technology, population, etc. McCloskey’s economics incorporates two more factors: dignity and rhetoric. Economics, she argues, has failed be a humane science that accounts for the ways in which things like human speech — rhetoric — influence the way a society lives and works. After a detailed examination of traditional explanations of economic growth, McCloskey concludes that each is inadequate, and that the only explanation for the peculiar birth of the modern world is speech: At the beginning of the 18th century, people in the Netherlands and Britain began talking about commerce as a good thing — a novelty at that time. They gave dignity to the bourgeoisie. And that drove capitalism, giving birth to the modern world.

The Bank Job: How Goldman Navigated The Collapse Of September 2008

Economics,Politics — Zac Townsend @ December 16, 2010 3:30 pm

Interesting article from Vanity Fair on Goldman Sachs, the firm's history, the crisis, and their minting of money.

Trade Deficits A Little Bit Skewed

Data,Economics — Zac Townsend @ December 15, 2010 2:16 pm

I think its obvious from many of my posts that I am interested in statistics and data analysis. I'm also interested in the failure of unexamined metrics.  Ethan, an old friend of mine from Brown, shared WSJ's Tech Supply Chain Exposes Limits of Trade Metrics, which notes that Apple's iPhone, as it is produced in China, add to the US trade deficit. I think that director-general of the World Trade Organization explains the failure of that stat best:

"What we call 'Made in China' is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries that preceded its assembly in China in the global value chain," Pascal Lamy, director-general of the World Trade Organization, said in a speech in October. "The concept of country of origin for manufactured goods has gradually become obsolete." Mr. Lamy said that if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures —would be cut in half. That means, he argued, that political tensions over trade deficits are probably larger than they should be. "The statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided, and hence counterproductive, decisions," Mr. Lamy said in his speech to the French Senate in Paris.