Finance Career: Q&A for Physics PhD Seeking Advice | TwoFishQuant

[twofish-quant]

In the case of non-public information, nothing can be done about that, since neither the general public nor universities for that matter (except to a limited number of researchers) have access to this.

That's wrong.

University researchers can and do have access to lots of non-public information which they can and should filter for public consumption. Let me give you a real example. I can't post here what the research that I'm doing, because I don't know that someone won't take that information and try to make money off the stock market. Even if it doesn't happen, the SEC will can get annoyed if I say something that can be interpreted as promoting a stock.

Now, what I *can* (and in fact do) do is to talk with people in local universities about what we are working on. I can do this because I know and trust the person that I'm talking to is not going to buy stocks with that information, and from the point of view of the SEC, I'm not making a "public offering." The reason I do this is so that the professor can then take that information and then adjust their course offerings to reflect what I've told them.

There is a lot of mathematical research that we are doing that we can't make publicly available. However, we do have a set of academics that are "white gloves." We feed them our mathematical research, they make some adjustments, and then they publish. Our name is not on the papers, and we and the regulators prefer it that way.

As far as filtering out poor information that is actually publicly available, there are ways to get around this problem, through the ranking of websites, investigating multiple sources of information, checking at references, cross-checking with Wikipedia (and the references they provide), etc. Granted, all of this is time-consuming, but it can be done.

But how do you know that you've got it right?

I'm not arguing that universities shouldn't give ANY advice (including good advice). What I'm stating is that universities (or more specifically, the professors and career counselling services who are currently employed at universities) should be more honest about the advice they are giving, which includes acknowledging their own limitations or lack of knowledge.

1) One thing that's fun is that often people don't know what they don't know.

2) I don't think that bad advice is the big problem. The bigger problem involves cultural biases. Yes you *could* go into industry, but you are a rotten nasty loser if you do it.

3) One thing that I found was that getting the skills that I needed to be productive in industry made me much less competitive when I applied for graduate schools. Because I was reading marketing books, I got "B"'s in classes that I could have gotten A's in, and that seriously hurt me when it came time go get into graduate school.

In this way, students will then have a means of weighing the advice they are given, and thus be able to make better decisions about the future, and the universities will thus ensure that they maintain their credibility.

I think that assumes that people are more autonomous than they actually are. One thing that I've found interesting is that one big trick that sales people do is to give people the illusion of choice. Sales people can't point a gun at your head and force you to buy a car, but they have a lot of psychological tricks that they use to push you in that direction.

First of all, is it the case that universities in the US do not pay taxes? Certainly each individual professors and staff members pay income tax, and I thought that businesses owned and operated by the universities pay taxes as well.

Non-profit universities do not pay tax. If the universities owns a for-profit business that's taxable.

Anyways, if in fact universities do not pay taxes is immaterial to me, because universities do work for the public good, in terms of providing higher education and providing high quality research.

But by working for the public good, you are subject to higher standards. If I go to buy a car, I know that the salesman is not acting in my interests, and if the salesman lies to me and convinces me to buy the car, to some extent, it's my fault since I should have known not to trust a car salesman completely.

Because universities are supposed to work for the public good, there are higher standards. The difficulty is that universities have "private interests." Universities are businesses and they are under pressure to increase tuition. If you go to a car salesman, and ask "do I really need this car?" the salesman will say *absolutely* and then pull out every psychological trick that they can to get you to sign on the dotted line.

The difficulty for universities is that they are also under similar pressures, but the rules are different for public institutions. That means that if the provided bad advice in the past, you just can't say "your fault." You can't change the past, but having people say "I'm sorry we screwed up, what can we do to make it not happen again?" would help. I don't hear people saying that.

First of all, universities are only one of many factors behind economic growth; an important factor, but only one factor. Second, university budgets in the US are the responsibility of individual states, and their budgets (along with many other state programs) are being cut as a consequence of the budget crises affecting the states, due in no small part to state constitutions mandating a balanced budget and banning deficits.

1) It's a critical factor

2) University budgets are the responsibility of the individual states, but most of the money is Federal. State constitutions mandate balanced budgets, but there is this big loophole that states receive Federal transfer payments, and if you look at where the money ultimately comes from, it's mostly Federal.

If you really want to stop university budgets from getting cut, then the only meaningful thing that can be done is for the federal government to bail out the state governments.

Well, yeah...

But what you can do is to hold enough protests at the state level to stop cuts, that the state legislatures are forced to beg for money from the Federal government. If the state legislatures can balance their budgets by cutting state universities, they will. Whoever screams least gets cut. If you scream at the state legislatures not to do that, then the numbers won't match, so they'll have to go to the Federal government. At which point you play the game in Congress. The Federal government can do two things that state governments can't. It can run deficits and print money.

One person can't do much, but one person in an organized system can do a lot.

However, it is worth keeping in mind that many vocational training is provided by community colleges.

Which are being cut by state governments. One good thing about community colleges is that getting a two-year degree from a CC is often a stepping stone to a four year degree at a local public university.

Now what I'd like to see is to see an alliance between MIT and community colleges. Personally, I think it's a mistake for MIT to focus on creating a distance education partnership with Harvard. The institution that MIT really should reach out to is Roxbury Community College. One thing that RCC can provide is vocational training so that physics Ph.D.'s don't starve once they get their degree.

University degrees do provide "social capital" but social capital on its own does not mean all that much unless if it directly leads to meaningful employment.

But it does. If you know someone that works in a major bank, they can give you the e-mail of someone that you can send your resume to with a reasonable assurance that someone will at least read the resume. If you hang around managers, HR people, and CEO's, you figure out how they think and that gets you in the door.

Furthermore, I feel that the stigma associated with vocational training in the US is unproductive, since there is a demand in the US for skilled labor. Combined with the currently high unemployment rate, perhaps we should be re-assessing the value of vocational training.

The trouble is that when there is a high unemployment rate, the knives come out. If there are N job openings and 1.1 N job seekers then increasing training is just going to make the problem worse.

One problem with increasing training is that you end up with the Ph.D. problem. If we train 100,000 air conditioning repair men then you will likely end up with 90,000 unemployed air conditioning repair men who are worse off because they have debt.

[QOTE]You are assuming here that China will continue to maintain their impressive rates of economic growth, which is far from guaranteed[/QUOTE]

People in China are looking ahead and seeing problems and they are dealing with them. There are limits to China's current growth model, and it is going to hit them in the next few years. That's why people are working *NOW* to start fixing the problems so that you don't end up with an economic crisis in ten to twenty years.

The general belief in China is that long term, China needs to move into science and technology. This is going to take two to three decades to do, which is why people are starting *NOW*.

The thing about China is that it has a plan. It may be a bad plan, but people are thinking about what the Chinese economy is going to look like in 2050, and it's going to have a lot of science and technology. What worries me about the US, is that no one is even thinking about 2050. I haven't even heard people talk about 2020. This is bad for science. If your time horizon is two years, then science is a waste of money. If your time horizon is fifty years, then it's stupid to cut science now.

The good news for the US is that it has such a good science infrastructure that it's going to take a decade of incompetence to destroy it. People are being stupid now, but there is still lots of time to stop it before things get bad.

Furthermore, young people's higher approval of China is directly linked to the nation's ability to deliver on employment. Once that changes, I envision that public opinion will very quickly sour, and given the repressive nature of the regime, things could get very ugly very quickly, as is already evident in the number of protests in rural areas against land seizures (and these are protests that have been publicly reported).

So rather than sit back and let things fall apart, the government is actually *doing stuff*. If you have lots of unemployed people, they start getting angry and demonstrating. So what can we get them to do to avoid that. Well, there are some railroads to be built.

Employment is essential to keep the government in power, so the government is moving heaven and Earth to get people jobs.

China is currently able to flood money in science and technology because they have large reserves of cash (primarily due to the tendency of the average Chinese to save money in state-owned banks, which is due in no small part to insecurity brought on by lack of property rights). Once the Chinese economy will transition to a more consumer-based economy, that large reserve of cash will start to diminish, and China's ability to spend will become more constricted.

So maybe it's not such a good idea to move to a consumer-based economy. Singapore has high savings rates, and if through science and technology you can maintain high growth rates, you can keep saving massive amounts of money.

Savings -> science -> technology -> productivity -> more savings

The big limit is when people get old and start withdrawing their savings. How do you keep productivity with fewer workers. Science to the rescue!

Before one can even begin to organize and hold protests, or act, one needs to know what they are protesting for or against, and that begins by asking questions first. It's the act of questioning that serves as an impetus for action.

Sometimes you don't. There's something to be said for saying "we are angry, we just want results, you are the people in power, you figure out how to get us stuff." Getting people to think too much is "psychology trick #2343" for making sure that nothing happens.

 

[twofish-quant]

Singapore has minimal institutional similarity to PRC. It's even more of a free market than the West. It's essentially 1930s Britain projected into a future where the actual Britain had taken a different fork instead of voting for a Labour landslide in 1945. The same really is true of HK, but PRC does at least now own HK. My point is the best case scenario is that, in GDP per capita terms, HK:PRC::NYC:USA, and since PRC assumed control the economy of HK has grown at ~3% annually in real terms.

With enough time, you can make large institutional changes. For a developed economy, 3% is outstanding. The question for a developed economy is whether you want 0% without technology or 3% with technology. Historically three percent growth is huge. That was the average growth rate of the industrial revolution.

Over a lifetime, 1% growth means 2x wealth, whereas 3% growth means 8x. Chinese growth rates are going down, and the question is whether they are going to stabilize at 3% or 0%, and to get 3%, you need science and technology.

I agree HSR is more useful than making a lot of steel and burying it. The question is, is it the best use of resources possible? I don't know.

Does it really matter?

The trouble with getting into arguments over what is "best" is that it's an excuse to do nothing.

So maybe HSR is good for China, or maybe not, but governments are often mistaken about things, because it seems to be impossible to centralise information in massive bureaucracies and use it effectively.

BTW, I've read Von Mises, and know about the socialist calculation problem. I actually agree with a lot of stuff that he says, but I think he gets some things critically wrong.

There are some things that governments are horrible at. Some things that governments are good at. In any event, the government in 2007 realized that if it didn't generate employment and fast, it would be faced with what happened in Egypt, so the government went and asked what project would keep people too busy to demonstrate, and if it produces economic value, that's a nice side effect.

Government projects don't 'create jobs', they move them from what the private sector wants to do to what the state wants to do.

No, they move people from "unemployed" to "working." It may be acceptable for the private sector to have lots of people doing nothing, but in China having lots of unemployed people means mass protests, and so it's unacceptable. One reason that the US has higher unemployment than China is that US political system can tolerate 8% unemployment indefinitely without a revolution. China can't.

That's the key issue. It's not that research is bad, but it's a secondary effect, something you get when you're rich because you don't need to focus all resources on survival, and can instead do something charitable for the world in 20, 30 years time. Or maybe not.

The thing about survival is that it's not good enough for most people. No one in the US need to starve and the biggest problem with poor people is obesity and not malnutrition. If you like the way things are, and don't see any need for making things better, faster, cheaper then there really isn't that much need for science.

The thing about China is that it's no longer in starvation mode. The last famine in China was in 1973. So if Chinese people were merely content with "not starving" then you don't need to do anything else. But people aren't content with that. People want more stuff, and for that you need constant economic growth.

China's current growth model is going to hit a wall around 2020. Since the government wants to stay in power past 2020, people are trying to figure out what is going to work. Part of the reason people are worried NOW is that the first plans are going to fail.

Just to be clear, I'm not worried about the United States collapsing economically. What I am worried about is that the US turns into Japan, and loses the "frontier spirit".

 

[twofish-quant]

So why are there major differences in economic outcome across national borders? The bottom line is that in some countries it is illegal to make investments that would yield a return at the market rate, or the government would take too much for it to be worthwhile

I think it's a *lot* more complicated than that. One problem with "market rate" is that you have to have a market, and getting one is non-trivial. One problem is that people sort of assume that if you don't have a "free market" system then you have a Stalinist system when in fact there are other possibilities.

The state could in principle do the same things. The problem is that it doesn't work in practice, and there are good theoretical economic reasons for that.

I find that most theoretical economists just end up formalize how they think the world should work rather than looking at how it really does work.

A "hands off" policy toward the banking system also doesn't work. The trouble is that the state is the ultimate guarantor of the banking system, so if the state isn't heavily involved at regulating the system, what people will do is to make "head I win, tails the state loses" bets.

Now in principle, you could have things work with a "no bailout" policy. The trouble with that is that you can set up a situation in which "no bailout=the world blows up". At that point the state is forced to do a bailout. The trouble is that if people know that the state is going to to a bailout you get back to the previous situation. You *say* that you aren't going to bail me out, but I don't believe you.

 

[twofish-quant]

Not really. Solid evidence of the 20th century has been that market economies work, and command economies don't.

Not so clear. The Soviet economy seemed to work very, very well in the 1950's. It fell apart around 1970. Now *why* it fell apart is an interesting question. I would argue for Vladimir Popov's model in which the Soviet Union stopped infrastructure investment in the 1950's.

Essentially, the trouble was that because Soviet planning was based on production quotas rather than profit, there was strong disincentive to replacing aging machinery. You lost your quota, and there was no way of calculating the economic benefit of the new machines. This didn't matter in 1950, because the Soviets had to repair everything because of WWII, but it started to kill the economy in the 1970's. If that's the explanation, then it's going to be pretty bad for the US (however, unlike the Soviet Union, the US has a strong enough political system to prevent total collapse).

The baffling thing is why people kept trying command economies despite all the failures, and even more so, why a lot of people still favour them today.

Because no one arguing for a Soviet command economy. One thing about China was that since 1950, "Soviet=bad" so that in the late 1970's, there was strong resistance to reinstituting Soviet style economic planning. One thing about Soviet economic planning is that it requires something like a Josef Stalin, and the Communist Party in 1980 (or now) simply does not have that sort of power or economic unity.

Having some central planner order a factory to produce 500 locomotives just will not work well for the reasons that von Mises and Kornai pointed out. Now what I think will work is to have a pricing system in which you reflect economic costs. So a government bureaucrat looks at the cost of 500 locomotives and can compare that with the price of say 10 aircraft carriers. By changing tax rates and purchasing things at market prices rather than forcing people to build them, you get around the socialist calculation problem.

There are some similarities between the Chinese economy and the theories of Oskar Lange. It's not a concidence since there was a lot of Eastern European influence in Chinese thinking circa 1980.

I used to wonder why people clung to Soviet models after it seemed obvious that they wouldn't work. Then I see people cling to neo-liberal economic ideas after it is pretty clear at least to me that there is something seriously wrong with them, and it makes more sense. One issue is that you can't replay history, so when the Soviet model fails, you can try to argue that there wasn't enough "real communism", and I've seen similar arguments that things fell apart because we don't have "real markets." You can get into large arguments over this, but the counterargument that I find convincing is a political one. If you can't realistically have "perfect communism" then it's pointless to argue about whether it is a good thing. Similarly if you can't have "perfect capitalism" then it's pointless to argue that it's a good thing.

One problem is the idea that if you oppose X you must support Y. I think that Soviet economic planning doesn't work, but Chinese style economic planning works in China (whether it would work or not in the US, I don't know, and I doubt it).

 

[twofish-quant]

I think your idea of usefulness is very contrived. Earth scientists, chemists, and environmental/chemical/mechanical engineers also write models of diffusive phenomena. What is special about astrophysics that makes for better model writers?

Astrophysical simulations use a lot more compute power than most engineering simulations. Also most engineering simulations can be done with "canned programs". Essentially the equations are the same from situation to situation whereas the boundary conditions are different.

In oil/gas and finance it's the opposite. The boundary conditions are trivial whereas the dynamics changes.

 

[atyy]

Singapore has minimal institutional similarity to PRC. It's even more of a free market than the West. It's essentially 1930s Britain projected into a future where the actual Britain had taken a different fork instead of voting for a Labour landslide in 1945. The same really is true of HK, but PRC does at least now own HK. My point is the best case scenario is that, in GDP per capita terms, HK:PRC::NYC:USA, and since PRC assumed control the economy of HK has grown at ~3% annually in real terms.

How can Singapore be more of a "free market" when a majority of its population lives in (really good) government housing?

 

[twofish-quant]

I think that China lost to Japan because Japan had more of a Western market economy, and Japan lost to US because US had more of a Western market economy.

So how did Russia win? One reason people in China were attracted to the Soviet model in the 1950's was watching the Russians just annihilate the Japanese army. Gee. Wish we could do that...

In principle China could have had the same productivity per worker as the US, with no indigenous scientific contributions required, and built 50 aircraft carriers and 200,000 aircraft and squashed Japan.

Don't think so. Aircraft was invented in 1903, and you just can't copy an aircraft carrier or build aircraft factories. It's actually both sad and enlightening to see the problems China has now trying to build civil aircraft and aircraft carriers. It's pretty clear that Chinese civil aircraft manufacturers and military shipyards are pretty clueless. But if you don't try to build a rotten airplane, you'll never build a good one.

There's also the little matter of whether other countries will let you copy their stuff. I'm sure that China would love to have the latest designs for American aircraft carriers. One big reason China is working on high-speed rail rather than aircraft is that most countries are much less annoyed when you copy their railroad designs than if you copy aircraft designs, because there are fewer military applications.

It didn't because it was ruled by first monarchists, then nationalists and socialists, who all thought that command economies were good.

Because of Russia. Also, if you are in a life and death struggle for national survival, you can make the argument that command economies are good. Militaries are not run on market principles, and one way of thinking of China in 1940 was to imagine the entire population being one big army. This also happened in the United States. Once you are on a war footing, then you have price controls and rationing.

Now you can argue that people in 1950 were mistaken, because once Russia got to 1970, things fell apart. But one wonders if the same thing is happening to the "capitalist model". I can imagine someone in 2020 looking at the "neo-liberalism" the same way that people in 1995 looks at communism.

There's also generational issues. The Cold War was an important part of my childhood, and the fall of the Soviet Union was one of the important defining events of my youth. So it's interesting to know that people in college today didn't experience that and their view of the world is likely to be quite different because there are things in my memory that aren't in theirs.

 

[twofish-quant]

How can Singapore be more of a "free market" when a majority of its population lives in (really good) government housing?

So does much of Hong Kong. Hong Kong is "central planning done right." The HK leaves some things to the market, but it is extremely intrusive in other things (such as health care where HK copied the British model). There are some areas (land policy) where you see the PRC copying Hong Kong.

The Singapore government is also pretty intrusive with things like Temasek holdings.

 

[intelwanderer]

Seconded.

 

[StatGuy2000]

The trouble is that when there is a high unemployment rate, the knives come out. If there are N job openings and 1.1 N job seekers then increasing training is just going to make the problem worse.

One problem with increasing training is that you end up with the Ph.D. problem. If we train 100,000 air conditioning repair men then you will likely end up with 90,000 unemployed air conditioning repair men who are worse off because they have debt.

The problem that the US is currently experiencing is not just a high unemployment rate, but also a mismatch between the skills currently possessed by those who are unemployed (or not yet employed) and those jobs that are currently in demand as of this moment. (There's also a problem with mobility of workers, which for the moment I will not address)

The situation we're facing is that there are N job openings, but out of the 1.1N job seekers, only, say, 1.1N/10 = 0.11N of them would possesses the necessary skills or qualifications to actually be even hireable. Therefore, many of these N jobs end up being unfilled even though you have a large pool of job seekers.

So given that situation, wouldn't it make economic sense to provide some form of vocational training to reduce the mismatch and ensure that more of the N jobs end up being filled? I would argue yes.

So rather than sit back and let things fall apart, the government is actually *doing stuff*. If you have lots of unemployed people, they start getting angry and demonstrating. So what can we get them to do to avoid that. Well, there are some railroads to be built.

Employment is essential to keep the government in power, so the government is moving heaven and Earth to get people jobs.

I agree that China is indeed "doing stuff" to avoid the scenario of masses of unemployed people causing problems. All I'm stating is that there may be limits to China's ability to provide the levels of growth to ensure low unemployment, especially if their reserves of cash will diminish or the rest of the world economy goes into recession (a very real possibility given the problems with the Eurozone).

So maybe it's not such a good idea to move to a consumer-based economy. Singapore has high savings rates, and if through science and technology you can maintain high growth rates, you can keep saving massive amounts of money.

Savings -> science -> technology -> productivity -> more savings

The big limit is when people get old and start withdrawing their savings. How do you keep productivity with fewer workers. Science to the rescue!

First of all, Singapore has high savings rates because the vast majority Singaporeans do not own any property (given the lack of land in an island-state like Singapore, that shouldn't be all that surprising). And the high economic growth rates in Singapore is not based primarily due to investments in science and technology, but more due to its unique position as a trading hub with the rest of Southeast Asia, and by extension the rest of East Asia (access to cheap labour from nearby countries such as Indonesia and the Philippines is a notable contributor as well, along with high immigration rates).

On your other point, China as of this moment is already transitioning into a consumer-based economy (as it inevitably would given the growth of the middle class), so it is only inevitable that savings rates will diminish. This will only accelerate given the rapid aging of the Chinese population (due in no small part to the one-child policy).

 

[Moppy]

Agreeing with Statguy2000.

Singapore's wealth in the main, came from a) the location of its seaport, b) banking, c) a benevolent dictatorship that was able to implement long term plans. Sings in general don't want to be scientists. They want to be lawyers, doctors and bankers. "Why you want to be scientist? No money lah". These days it's a retail trade hub too, but that's more a side effect of the first 3.

Saving rates are generally higher in Asian cultures than western. In the case of Singapore, being left with nothing is almost taboo. The government doesn't admit that truly homeless people exist - their official line is "homeless are that way by choice". The HDB system (public housing) doesn't cover everyone. There's 2 population figures. One includes migrant workers of which they have a gigantic amount all living in camps (and probably homeless, I don't know). The other doesn't.

China isn't really communist in the traditional sense of the word.

What concerns American businesses (financially as opposed to ideologically) is not Chinese communism, but Chinese capitalism and the value of their currency.

In the third world, Chinese are using a start-up type model, similar to how Silicon Valley works: small companies of about 3 guys, iterate your product, build as you go. It's much more agile than the traditional method of entering with a megacorp, paying your R&D upfront, and starting with a complete product. As a result, this agility means China is much more able to sieze opportunties in the developing world, such as Africa and Brazil, and this helps to explain their growing influence. Having a sort of command economy also helps as it can focus on long term issues; it's quite hard to get people to vote for a 25 year plan run by a 5 year government.

IOO China has too much saved up and "should" really spend some of that on social programs. I can't remember what they have. it's something like USD 3 trillion in reserves? They will spend it but I'm not sure they have decided how best to go about it. That's not really something I know much about. (*)

As you say, China's got a huge problem with population age. Recently passed/thinking of passing a law that requries children to care for their parents, after the parent reaches a certain age. Don't know if that came to pass or not.

(*) What they will do with the money.

 

[atyy]

First of all, Singapore has high savings rates because the vast majority Singaporeans do not own any property (given the lack of land in an island-state like Singapore, that shouldn't be all that surprising).

This website claims that the fraction of households in Singapore that own their homes is 88.6% http://www.singstat.gov.sg/stats/keyind.html .

 

[Locrian]

That statistic is not incompatible with StatGuy2000's statement. Just need more people per household (which they do have).

 

[boomtrain]

How can Singapore be more of a "free market" when a majority of its population lives in (really good) government housing?

The Singaporean government manages to get by spending only 17% of GDP. http://www.heritage.org/index/country/singapore#limited-government

it's possible to have both a relatively free market and a functioning government

 

[boomtrain]

The trouble is that when there is a high unemployment rate, the knives come out. If there are N job openings and 1.1 N job seekers then increasing training is just going to make the problem worse.

One problem with increasing training is that you end up with the Ph.D. problem. If we train 100,000 air conditioning repair men then you will likely end up with 90,000 unemployed air conditioning repair men who are worse off because they have debt.

I'm not sure this is accurate: http://www.nytimes.com/2010/07/02/business/economy/02manufacturing.html?_r=1

If we train people to have useful skills, businesses will use them. particularly businesses facing a skills shortage.

 

[atyy]

The Singaporean government manages to get by spending only 17% of GDP. http://www.heritage.org/index/country/singapore#limited-government

it's possible to have both a relatively free market and a functioning government

Yes, of course, I was questioning the point that it's "more of a free market". I think it shows that one can have both free market and socialist elements, such as good government housing, side by side. The underlying conception may be that free-market versus socialism is not always a useful "degree of freedom".

 

[boomtrain]

Yes, of course, I was questioning the point that it's "more of a free market". I think it shows that one can have both free market and socialist elements, such as good government housing, side by side. The underlying conception may be that free-market versus socialism is not always a useful "degree of freedom".

Isn't it generally more of a free market though? Its economic freedom rank is 2nd in the world, according to the Heritage Foundation:
http://www.heritage.org/index/country/singapore

 

[atyy]

Isn't it generally more of a free market though? Its economic freedom rank is 2nd in the world, according to the Heritage Foundation:
http://www.heritage.org/index/country/singapore

That is a very interesting number indeed. I guess I was simply making the point that the Heritage Foundation itself makes: "State ownership and involvement in key sectors remains substantial. A government statutory entity, the Central Provident Fund, administers public housing, health care, and various other programs, and public debt is over 90 percent of GDP."

 

[mdxyz]

Yes, of course, I was questioning the point that it's "more of a free market". I think it shows that one can have both free market and socialist elements, such as good government housing, side by side. The underlying conception may be that free-market versus socialism is not always a useful "degree of freedom".

Every country has elements of both, but it's a matter of degree, and the more free market less socialistic countries generally do better.

I gather than in the US, socialism is a very bad and extreme word that even its supporters don't like attached to them. This is not the case in Britain, so apologies if what I say seems overly polemical to you.Twofish - that is an awful lot of replies, so I can't promise I'll reply to all of it. I will try to reply to what I think are the most important points. edit: ok so I did end up replying to most of it; also I'd like to join the people from earlier thanking you for making interesting posts.

With enough time, you can make large institutional changes. For a developed economy, 3% is outstanding. The question for a developed economy is whether you want 0% without technology or 3% with technology.

I don't think that that is the choice or anything like it. If you disagree, do you have any empirical reason, or is it just a feeling?

My argument has been that basic research is not excludable, ie. everyone gets it, and soon everyone benefits. For instance, the man who developed the world wide web was British, and working in Switzerland. Did this mean that the WWW was localised in either of those places for some time, with no one else getting the benefit? Countries adopted internet largely in line with how open their institutions in general were to investors coming along and building new infrastructure to make a profit, and where people were already wealthy enough to take advantage of it.

So I think the choice is more like, if the world as a whole invests a lot in basic research, the world as a whole might get 2% growth. If not, 1.5% growth.

Does it really matter?

The trouble with getting into arguments over what is "best" is that it's an excuse to do nothing.

It does matter, because if due to inefficient allocation the return on investment is 2% less than it should be maybe that really will wipe out GDP growth.

BTW, I've read Von Mises, and know about the socialist calculation problem. I actually agree with a lot of stuff that he says, but I think he gets some things critically wrong.

Mises is historically interesting and more right than most at that time, but the more modern economics is good too. Look up neoclassical growth models and 'conditional convergence'. Also public choice theory, if you are interested in governments and how they allocate resources.

No, they move people from "unemployed" to "working." It may be acceptable for the private sector to have lots of people doing nothing, but in China having lots of unemployed people means mass protests, and so it's unacceptable. One reason that the US has higher unemployment than China is that US political system can tolerate 8% unemployment indefinitely without a revolution. China can't.

The empirical evidence for this effect is weak.

(I'm actually amazed Obama made falsifiable predictions, as he is usually a competent politician. Probably some adviser got fired for this.)

---

Now in principle, you could have things work with a "no bailout" policy. The trouble with that is that you can set up a situation in which "no bailout=the world blows up". At that point the state is forced to do a bailout. The trouble is that if people know that the state is going to to a bailout you get back to the previous situation. You *say* that you aren't going to bail me out, but I don't believe you.

To play devil's advocate, maybe it is good if the world blows up. Recently everyone has decided that more regulation is needed because banks are too reckless. Well if everyone's savings and pensions were wiped out, I'd bet that banks would get a whole lot less reckless very quickly. I wouldn't be surprised if a lot of people started holding a substantial fraction of their savings in gold bars in a safe deposit box. So this sort of thing is a result, not exactly of socialism, but of government interventionism certainly. I agree that politically this is infeasible, but politics is not part of the free market.

Not so clear. The Soviet economy seemed to work very, very well in the 1950's. It fell apart around 1970. Now *why* it fell apart is an interesting question. I would argue for Vladimir Popov's model in which the Soviet Union stopped infrastructure investment in the 1950's.

Essentially, the trouble was that because Soviet planning was based on production quotas rather than profit, there was strong disincentive to replacing aging machinery. You lost your quota, and there was no way of calculating the economic benefit of the new machines. This didn't matter in 1950, because the Soviets had to repair everything because of WWII, but it started to kill the economy in the 1970's. If that's the explanation, then it's going to be pretty bad for the US (however, unlike the Soviet Union, the US has a strong enough political system to prevent total collapse).

I think this is plausible, because nationalisation killed a lot of British industry in the same way. But that's the whole problem: nationalised industries respond to political pressures and if there's no internal market it's more or less impossible to make any comparison in value beyond the very most basic ("10,000t of steel is better than 5,000t of steel" - at least until people start messing with the definition of steel). If you favour a nationalised investment fund that just investments money in the market like anyone else, then that's a lot less damaging.

Note that places like Singapore having big sovereign wealth funds is often a symptom of them being more free market than places like the US. This is because it means they fund their state pensions and unemployment insurance schemes via investing the contributions. In the US and Europe, these things are still controlled by the state but the contributions are spent immediately and the benefits are paid for using inter-generational transfers and debt.

I used to wonder why people clung to Soviet models after it seemed obvious that they wouldn't work. Then I see people cling to neo-liberal economic ideas after it is pretty clear at least to me that there is something seriously wrong with them, and it makes more sense. One issue is that you can't replay history, so when the Soviet model fails, you can try to argue that there wasn't enough "real communism", and I've seen similar arguments that things fell apart because we don't have "real markets." You can get into large arguments over this, but the counterargument that I find convincing is a political one. If you can't realistically have "perfect communism" then it's pointless to argue about whether it is a good thing. Similarly if you can't have "perfect capitalism" then it's pointless to argue that it's a good thing.

We can at least say that, while both are flawed, the fake-markets have worked a lot better than the fake-communism. I'm open to the possibility there is some better system than markets, but it's not any of the ones I've heard of, and most of the improvements I can think of involve moving more toward markets.

---

So how did Russia win? One reason people in China were attracted to the Soviet model in the 1950's was watching the Russians just annihilate the Japanese army. Gee. Wish we could do that...

What do you think the US would have done to it? Or even the Germans, another command economy, who were inflicting 3:1 casualty ratio on the USSR even as they were retreating everywhere throughout 1944. The Japanese army in Manchuria would have been squashed by any of the great powers, because it had hardly any tanks or aircraft. Production had been diverted to the navy and airforce long before.

Don't think so. Aircraft was invented in 1903, and you just can't copy an aircraft carrier or build aircraft factories. It's actually both sad and enlightening to see the problems China has now trying to build civil aircraft and aircraft carriers. It's pretty clear that Chinese civil aircraft manufacturers and military shipyards are pretty clueless. But if you don't try to build a rotten airplane, you'll never build a good one.

There's also the little matter of whether other countries will let you copy their stuff. I'm sure that China would love to have the latest designs for American aircraft carriers. One big reason China is working on high-speed rail rather than aircraft is that most countries are much less annoyed when you copy their railroad designs than if you copy aircraft designs, because there are fewer military applications.

I agree it couldn't have happened 1936-1937, but 1911-1937 is a long time. The misleading thing is to think like an engineer. To an engineer, what matters is if you have the plans to build an aircraft carrier, and then if you have enough steel, and then skilled people who can make steel. But this is more of a management question. If you've got good institutions that are getting everyone to do profit-maximising jobs, soon you're going to be rich and can just pay people to learn those things or buy engineers from abroad who know how to build aircraft carriers. Most of the Japanese ships that defeated the Russians in 1905 were built in, then designed in, then just partially equipped by Britain, and orders were given in English. But Japan still ended up owning Port Arthur, not Britain.

In 1911, no one could build an aircraft carrier because no one knew what an aircraft carrier was.

Because of Russia. Also, if you are in a life and death struggle for national survival, you can make the argument that command economies are good. Militaries are not run on market principles, and one way of thinking of China in 1940 was to imagine the entire population being one big army. This also happened in the United States. Once you are on a war footing, then you have price controls and rationing.

Maybe, but it still matters how rich you are when you start this. If you take US economy of 1941 and convert everything for war, you can make a lot more war materiel than if you take the Japanese economy of 1941 and convert everything for war. The advantage for a centralised society if you can convert for war in, say, 1931, and then you can win against a stronger opponent for the first 12 months, until they can sort themselves out.

Now you can argue that people in 1950 were mistaken, because once Russia got to 1970, things fell apart. But one wonders if the same thing is happening to the "capitalist model". I can imagine someone in 2020 looking at the "neo-liberalism" the same way that people in 1995 looks at communism.

Problem is that it's mroe like people were more delusional in 1950. Here are two graphs from Maddison:

http://phobos.ramapo.edu/~theed/Cold_War/f_Conclusion/media/GDP Rate_b.jpg
http://phobos.ramapo.edu/~theed/Cold_War/f_Conclusion/media/GDP Graph_US_USSR_b.jpg

Two interesting things:

1. USSR never gets close to the USA
2. USSR's temporary improvement comes because of slower than usual US growth, not faster than usual USSR growth

 

[atyy]

Every country has elements of both, but it's a matter of degree, and the more free market less socialistic countries generally do better.

I gather than in the US, socialism is a very bad and extreme word that even its supporters don't like attached to them. This is not the case in Britain, so apologies if what I say seems overly polemical to you.

I'm not one of those who considers socialism bad. I was actually trying to say that Singapore's success is partially due to socialist elements.

 

[chill_factor]

Astrophysical simulations use a lot more compute power than most engineering simulations. Also most engineering simulations can be done with "canned programs". Essentially the equations are the same from situation to situation whereas the boundary conditions are different.

In oil/gas and finance it's the opposite. The boundary conditions are trivial whereas the dynamics changes.

Thank you. I remember you saying before that in astrophysics that the dynamics change frequently, and the boundary conditions are trivial, whereas in say, engine design or pollution modeling, the dynamics stay roughly the same and complicated boundary conditions are the problem. Can you give examples of the equations *changing*?

 

[twofish-quant]

Can you give examples of the equations *changing*?

Sure.

Contract A: I lend you X dollars, tomorrow you pay me back Y0 dollars, then next day I lend you X1 dollars. The next day you let me back Y1 dollars. We do this for six months and at the end up pay me Y dollars. Let's suppose with interest the intermediate cash flows are zero.

Contract B: Now let's suppose I lend you X dollars and you lend me back Y dollars in six months.

OK, since the intermediate cash flows are zero A and B are mathematically identical, and worth exactly the same. That is... Until 2008.

The rules changed. The thing is that if I lend you money for one day, and you look like you are going to go broke, I stop lending you money in contract A. Since you have my money in contract B, I can't stop lending money. So what you end up with is that since 2008, Contracts A and B have different values, so one thing that physics Ph.D.'s try to do is to come up with equations that describe the new relationships between A and B.

Another example:

I have a contract with you, that says that I loan you X dollars in exchange you deposit Y dollars as collateral. If certain events happen (i.e. SP500 goes below value Z), you will be required to put up more collateral. Now I have two contracts. Contract A says that you have to put up the new money in dollars. Contract B says that you have to put up the new money in either dollars or euros. Now before 2008, the difference in value between contract A and B was negligible, because people didn't think much about what happens when companies go broke. They aren't now, and contracts A and B are worth very different amounts

(Quick question on an interview: which contracts are worth more?)

Now I don't want to imply that *only* astrophysicists study these things. If some ocean physicists says "hey, we study that too" I would be tickled pink. I'm not an ocean physicist, but I'm sure that they study something that would be useful to me.

 

[twofish-quant]

My argument has been that basic research is not excludable, ie. everyone gets it, and soon everyone benefits.

And I disagree. Even to *copy* technology requires a non-trivial amount of science and technology skill. People in China benefit a lot more from the WWW than people in say Haiti, because China has institutions that can take advantage of that, and Haiti doesn't. One reason China is spending money on railroads rather than airplanes is that trains are easier to copy than airplanes, and China doesn't have the skill to copy civil aircraft.

The other point is that for basic research to be useful you need a good entrepreneurial economy. If basic research *alone* could create prosperity, then the Soviet Union would never have fell. Russia had excellent basic research, it also had no mechanism for converting that research into economic growth.

For instance, the man who developed the world wide web was British, and working in Switzerland. Did this mean that the WWW was localised in either of those places for some time, with no one else getting the benefit? Countries adopted internet largely in line with how open their institutions in general were to investors coming along and building new infrastructure to make a profit, and where people were already wealthy enough to take advantage of it.

In looking out how places do and don't benefit from technology, it's better to look at regions rather than countries. Cuprertino, California and Austin, Texas benefited from the web a lot more than Detroit, Michigan or Jackson, Mississippi. Also a lot of the financial networks are regional. For example, if you have a great idea in Cuppertino, you rather easily find people to fund it. This isn't true in Detroit.

One reason for looking at regions is that you can better see the processes. I don't think that you say that Detroit is less "free market" than Cuppertino. You can point to some specific aspects. Such as non-compete clauses.

So I think the choice is more like, if the world as a whole invests a lot in basic research, the world as a whole might get 2% growth. If not, 1.5% growth.

And that's ***HUGE****!

It's the difference between 3.4x growth over 100 years and 6.24x growth.

This also explains why people were so ga-ga over the Soviets. During the industry revolution, the typical growth rate was 3%. The Soviets in the 1950's were able to get 6%, that is totally un-freaking-precedented historically. Now the US was able to do a lot better and the Soviets hit a wall. But if you look at typical growth rates from 1870 to 1950 then it's not surprising that people thought that the Soviets had found salvation.

Look up neoclassical growth models and 'conditional convergence'. Also public choice theory, if you are interested in governments and how they allocate resources.

Yup. I know about the Solow growth model. The thing about technology is that it changes both the returns on capital and the amount of technology depreciation. The thing about public choice theory is that who governments allocate resources depends on the institutional context. In the case of China for example, you have state-owned enterprises, but the heads of the SOE's are rewarded based on the profit that they make, which leads to a different set of behaviors if you have a different set of institutional incentives.

The way that I view things is

institutional framework -> human incentives -> mathematical model that describes those incentives.

To play devil's advocate, maybe it is good if the world blows up.

1) The problem is that if the world blows up, then there are no incentives for "good" behavior. You have two banks, one in which the people are "with clue" and do good risk management. One in which people are idiots and then have horrible risk management. Bank B blows up the world. This puts people in Bank A out of a job. Now if you know that this is going to happen, then the rational thing to do is to just get as much money as you can and go nuts. What's the point in being "good" if you are dead whatever you do?

2) The government just will not let the world blow up, and if they say that they will, no one will believe them. You saw this with Freddie and Fannie. Everyone know that they would get bailed out, so their securities would be priced as if they were government backed.

Well if everyone's savings and pensions were wiped out, I'd bet that banks would get a whole lot less reckless very quickly.

If *everyone's* savings were wiped out, then people would get a lot *more* reckless. Again, what's the point in being "good" if you are going to suffer for it? What's the point in saving anything if you know it's going to get wiped out. I mean, if there are no consequences, then the rational thing to do is to take every cent I have and blow it on hookers and cocaine.

Also putting it into gold in safety deposit boxes doesn't work. If things get really bad, they you won't be able to trust the people holding the boxes, and if you try to keep the gold yourself, you'll end up being prey to thieves.

We actually saw this in Russia and Latin America. Also "trust" explains a lot of things about the Chinese economy. One reason that people buy real estate is that it's tough to steal a house. It's not hard to steal things *in* a house, but it's hard to steal a house. Whereas with a stock all you have is a piece of paper.

I wouldn't be surprised if a lot of people started holding a substantial fraction of their savings in gold bars in a safe deposit box.

Yup. You see this where people start holding dollars. The trouble is that this makes economic transfers much. much more inefficient, and if things get bad enough, even that's not going to work. If things break down enough, who is going to protect your gold? The police? HA... They'll be first in line to steal it.

At which point you are stuck. You don't have the institutions for saving, which means no economic growth which means no institutions for saving.

Note that places like Singapore having big sovereign wealth funds is often a symptom of them being more free market than places like the US. This is because it means they fund their state pensions and unemployment insurance schemes via investing the contributions. In the US and Europe, these things are still controlled by the state but the contributions are spent immediately and the benefits are paid for using inter-generational transfers and debt.

I don't think it's useful to classify things into more free market or less free market. For example, in China, you argue that non-state pension funds are better because they are more socialist.

The other thing is that the US Federal government has a huge amount of money in the Social Security Trust fund, and theoretically it could invest that money in the stock market. The reason that it doesn't has to do with the fact that people in the United States don't think that the government should own industries, whereas people in France or China are less resistant to that idea.

We can at least say that, while both are flawed, the fake-markets have worked a lot better than the fake-communism. I'm open to the possibility there is some better system than markets, but it's not any of the ones I've heard of, and most of the improvements I can think of involve moving more toward markets.

The central role of markets is something that is not under serious question. The question involves how do you structure and regulate markets. Most of the changes that I've seen have been to fix the obvious "bad incentives" that you find in markets.

But this is more of a management question. If you've got good institutions that are getting everyone to do profit-maximising jobs, soon you're going to be rich and can just pay people to learn those things or buy engineers from abroad who know how to build aircraft carriers.

You can have rich people, but a government that is starved for money. If the government doesn't have money, you don't have an army, and once you don't have an army, other people come with their armies and take your wealth. You can be lucky like the United States and not worry about that, but China had less lucky geography.

I agree that good institutions are important, but then we get tauntological. Good institutions produce wealth. Producing wealth is the definition of good institutions. That doesn't tell me anything useful.

Two interesting things:
1. USSR never gets close to the USA
2. USSR's temporary improvement comes because of slower than usual US growth, not faster than usual USSR growth

Cut the graph off in 1960, and the USSR looks very impressive. One could argue that the growth in the 1960's and 1990's was due to investments in science and technology and that if the US didn't respond to Sputnik that there would have been less GDP growth. Or maybe not.

The other thing is where you start the graph. If you go back to 1925 and start it with the Great Depression, then the USSR looks outstanding.

One fun game to play is "stop the clock". You stop the clock at a point in time and then see how the world looks. If you "stop the clock" in 1965, then you see Soviet growth rates starting to trend down and US growth rates starting to trend up, but in 1965 you have no way of knowing if this was a "blip" or a permanent trend.

Now it wasn't until the mid-1970's, when people realized that this *wasn't* a blip, and then you give it another ten years for the bureaucracies to start responding, at which point you are with Gorbachev.

The reason that "stop the clock" is a fun and scary game is that you realize that people in 1965 who saw Soviet style planning as the wave of the future weren't idiots. Based on the data that they had, that was a reasonable conclusion. Now it looks idiotic from the point of view of 1990. But one reason I'm not to harsh on people in the past, is that I'm sure there will be something that people in 2030 think that I'm idiotic about.

 

[twofish-quant]

The Singaporean government manages to get by spending only 17% of GDP. http://www.heritage.org/index/country/singapore#limited-government

it's possible to have both a relatively free market and a functioning government

I don't know about Singapore, but I do know that in HK these numbers are extremely misleading.

For example, public transit is usually a loss making government function. However, in HK public transit makes a profit because the government gives them land around subway stations, where they build malls, and the MTR corporation makes money from those malls. This only works because the government owns all land in HK. Similarly, when the government subsidizes housing, this doesn't show up as a budget item because the government owns a lot of apartments, and it rents them out at below market. It can do that because it owns the flats, so all that shows up on the official expenditure is the cost of maintenance which is near zero.

Also, HK doesn't pay for defense. It gets a PLA garrison for free (half smiley).

Because there are so many things that are "off-book" I think using HK as an example of "small government" is *very* misleading. I don't know the details of Singapore, but I suspect that there are similar things going on.

 

[twofish-quant]

Every country has elements of both, but it's a matter of degree, and the more free market less socialistic countries generally do better.

One problem here is that I don't think that you can come up with non-tauntological definition of "amount of free market."

What you can do is to just show people an economy and say "does this look like a free market to you?" which is what the various indices do. The trouble with that is that things get "tauntological." You start *defining* "free-market" as "economies that work" and *defining* "socialism" as "economies that don't." That's good marketing. Trouble with that is that it tells you nothing about the policies that you want to follow. Since Singapore "works" you can point to the parts of it that are "free market." Suppose Singapore turned out to be a basket case. Then you say "socialist!"

One reason I bring up Singapore is that there are some papers from the Heritage Foundation circa 1990 that claimed Singapore was doomed because it was too socialist. But since it worked I guess it's a free market.

I gather than in the US, socialism is a very bad and extreme word that even its supporters don't like attached to them. This is not the case in Britain, so apologies if what I say seems overly polemical to you.

It's the opposite in China, socialism is good, therefore you try to attach socialism to everything. For example, in China, you don't talk about privatization. That's a dirty word. You talk about "spreading ownership to the people" or "people managed enterprises". There is widespread admiration for the Hong Kong economy in China, so when I talk about Hong Kong as "central planning done right" that's how a lot of the political leadership in China sees it.

One other point which is extremely relevant for physics Ph.D.'s, is that the "free market" as most people imagine it, no longer exists in banking. Everything now is extremely regulated. One reason salaries have been trending down is that now the government has to approve bonus and compensation policy in most banks, and that puts downward pressure on compensation (although it still is very good).

 

[Moppy]

This website claims that the fraction of households in Singapore that own their homes is 88.6% http://www.singstat.gov.sg/stats/keyind.html .

The website is correct but that's not what "ownership" means. Those are still government provided houses and sold at a subsidy. To buy *privately* needs a lot more money.

 

[twofish-quant]

The website is correct but that's not what "ownership" means. Those are still government provided houses and sold at a subsidy. To buy *privately* needs a lot more money.

The official home ownership rate in Beijing is around 70%

http://www.kth.se/polopoly_fs/1.122089!/Menu/general/column-content/attachment/86.pdf

As with all statistics, this is with some caveats. It likely includes only official residents in Beijing. Also, the reason most urban Chinese own their homes is because the government in the mid-1990's, just gave title to worker apartments to the people occupying them.

One reason Chinese savings rates are high is that there are large numbers of people who don't have to pay rent.

 

[Moppy]

1) The problem is that if the world blows up, then there are no incentives for "good" behavior.

This is the first or second thing you've said that I agree with. I asked my financial advisor what he thought about the "euro crisis" when it all started. He said that they didn't care about the political, social or emotional issues. The purpose of a bank is to make money, not prop up the state and "you wouldn't want it any other way, or you'd have moved to China". I thought about it for about 5 seconds, then I realized he was right.

Edit: For those that don't grok, the state in his words refers to all those unimportant things like 'the job market'.

 

[Moppy]

The official home ownership rate in Beijing is around 70%

http://www.kth.se/polopoly_fs/1.122089!/Menu/general/column-content/attachment/86.pdf

As with all statistics, this is with some caveats. It likely includes only official residents in Beijing. Also, the reason most urban Chinese own their homes is because the government in the mid-1990's, just gave title to worker apartments to the people occupying them.

One reason Chinese savings rates are high is that there are large numbers of people who don't have to pay rent.

And that's the third thing :-)

Many people here (not you) not understanding the concept of "ownership" of state sponored items.

Edit: 3rd thing you have said that I agree with.

 

[StatGuy2000]

The official home ownership rate in Beijing is around 70%

http://www.kth.se/polopoly_fs/1.122089!/Menu/general/column-content/attachment/86.pdf

As with all statistics, this is with some caveats. It likely includes only official residents in Beijing. Also, the reason most urban Chinese own their homes is because the government in the mid-1990's, just gave title to worker apartments to the people occupying them.

One reason Chinese savings rates are high is that there are large numbers of people who don't have to pay rent.

As you stated earlier, the statistics above will likely only include official residents, and hence would not take into account the large numbers of "migrant workers" i.e. those who originally come from rural areas but who migrate to urban areas for employment. Given the hukou system of residency classification, these people are unable to obtain title to real estate in the urban areas and are often denied many social services such as education, etc.

http://en.wikipedia.org/wiki/Hukou_system#Effect_on_rural_workers

Furthermore, I would be interested in knowing what the home or land ownership rates for those living in rural China. I ask this due to reports about land seizures in rural areas to make way for industrial development, and violent protests that result from this.