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Archive for November 2010

What is money? The problem of the clipped english shilling

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Ignorance (of how money works) is bliss

This is a follow-up to our posting on Schiff’s book – How an Economy Grows and Why it Crashes

There were certain events in history, initiated by hooligans, that have tested the mettle of some of the greatest thinkers of the age.  One such event happened in England in the 1600’s and tested the mettle of the likes of John Locke, Issac Newton, the whole of the English Parliament, and others. 

Perhaps certain questions should not be asked (Ignorance is bliss).  But sometimes certain questions are forced upon us by the actions of others.  The question, the debate, the solution, and the consequence move history along its path.  Thank god for hooligans that can force philosophers, academics, kings, and potentates, to think about things that these folks would never have come up with by themselves.

English Shilling Coin + Chisel =  a difficult question

Some time around the 1600’s in England there appeared, quite unexpectedly,  “clipped Shillings”.  Someone found out that they could take a chisel and clip the sides off of a Shilling coin thus removing some of the silver and still pass the coin off as a Shilling.  Hmmm.  The clippings of silver from the coin could then be melted down and sold as silver bullion abroad.  What was discovered by these ingenious hooligans was that a  Shilling coin still had the same exchange value of  a Shilling coin even though  it was missing some (or much) of its silver content.  Imagine that!  Imagine the possibilities!  Clipped shillings got some people asking questions that, perhaps, should not be asked.  What’s the value of a coin and how exactly does a coin derive value?

What’s the value of a coin?

John Locke was one of the great philosophers of the time.  Here is what he thought about the chiseled and clipped coins –

Silver has a natural value that kings and lawmakers could not change.  There was only one source of value to a coin and that was its silver content.  Any change in its denomination (engraved value) would be a fruitless fraud.  Shillings were only silver in a different guise.  Coins only had the intrinsic value of the underlying precious metal from which it was minted.  No king, lawmaker, or monarch could create an additional value by turning silver metal into a coin.  Essentially, no king, lawmaker, or king could enhance the value of a natural element such as silver or gold by coinage.

Hundreds of influential people entered into the debate including the likes of  Issac Newton.  The issue was this.  Since the clipped Shillings were damaged they had to be collected.  Once collected, do we remint them at their original silver content or do we remint the coin at the lower silver content devalued by the chisel but still exchanged by people for the value of a shilling?

A new level of sophistication of understanding money

One the one side, as a practical matter, the facts were that people accepted the clipped Shillings at face value just as they would accept a Shilling that was not clipped.  This proved that the monarch under whose authority the coins were minted did add extrinsic value to the coin over and above the natural value of the silver content.  This was an understanding of money (coins) as a medium of exchange that was not necessarily tied to their intrinsic value in silver or gold.  Money as a medium of exchange could be separated from the value of precious metals.

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Written by frrl

November 30, 2010 at 7:32 pm

Kelly Bundy would recommend: How an Economy Grows and Why it Crashes

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Bud:    In college, I’m reading the philosophy of Plato
Kelly: You mean Mickey Mouse’s dog wrote a book?

If you want to know how an economy works and you don’t want to read one of those dry textbook-style books then you might want to try How an Economy Grows and Why it Crashes by Peter D. Schiff and Andrew J. Schiff

A Fish Story

Wrapped appropriately in a fish story, this book is about the mechanics of a nation’s economy – growth and crash and some of the reasons for both.  I am not sure who the target audience for this book would be but when I picked it up from the new books table at the local public  library I thought of Kelly Bundy of Married with Children fame. (more

The Kelly Bundy character played by Christina Applegate certainly did not like reading books.  But Kelly may like this book by Schiff.

The authors say the island fishing story is an allegory of U.S. economic history.  That is true, but what has been practiced as U.S. economic and monetary policy has antecedents well back to the time of Rome.  So the book is also an allegory of decisions governments made when they got into monetary trouble throughout history – not just what happened in American history.  What was that saying about learning from the past or being condemned to repeat it?

Island Fishing & Entrepreneurship

The book starts out with three men living on an island – Able, Baker, and Charlie.  It’s a closed economy.  The three of them live at a subsistence level.  They spend all their time catching fish by hand to live.  It takes all day to catch one fish and they need to consume one fish per day to survive.  So, the book starts out with the most simply economy possible.  There is no savings, no credit, no investment, and nothing that increases a man’s productive capacity to catch more than one fish per day. 

Man has more of an aspirational vision than this.  Wake, fish, eat, and sleep.  And Able was just the guy that was going to take some risk to make things happen on the island.

Able in an entrepreneur and he comes up with the idea of a fish catcher.  A fish catcher could increase his productivity so that he does not have to spend all day catching a single fish.  If this invention works then he wouldn’t have to spend all day catching fish and he could use his time for something else.  For example, Able could use this extra time – made possible by the increase of productive capacity of the tool – to make some clothes, build a shelter, and write a screenplay for a feature film.  Able sets out to build a net.

Taking Risk, Lending, Interest Rates, Banks, Inter-island Trade, and the Crash

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Physics Envy and the Taxonomy of Uncertainty

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What is Physics Envy and who has it?

Physics Envy is what Economists and Financial analysts get when they find out what physicists can do.  Physicists have a model, a collection of mathematical formulas and, with a set of initial conditions, they can (essentially) predict the future.  At least predict the future to a level of practical utility, certainty, and repeatability that they can land a man on the Moon and get some rovers to Mars.

Wow!  Even though Econ and Finance folks have models and they can crank a lot of math they can’t do that in their discipline.  When Econ and Finance people turn the crank on their models they don’t get much of anything – at least anything for the predictability of  financial markets at the level of certainty that would be the analogue of getting a man on the moon, a rover to Mars, landing an Intercontinental Ballistic Missile to within a 1/2 mile of target from the other side of the globe launched from an underwater submarine, or predicting an eclipse of the sun a millennium into the future to an accuracy of about 1 minute.  Why?  Why can’t Econ and finance folks crank this level of certainty?

Overconfidence in models for financial markets

Not that economists and finance folks have not tried to do what physicists have accomplished.  In fact, they have tried.  And they believe in the model and the math.  But the results predicted by the  model don’t always fit the facts (Reality is a bummer).  You might want to ponder if the financial crises of the past, present, and perhaps into the future are caused by an overconfidence on the part of economists, finance folks, and those that push the great levers of federal and global financial policy who believe in these models and that they can predict the future or know the future  in the same way as Classical Newtonian Physics.

To cite just one example, the Efficient Market Hypothesis.

Those who defend quants insist that markets are efficient and the actions of arbitrageurs impose certain mathematical relationships among prices that can be modeled, measured, and managed. Is finance a science or an art?

Richard Feynman knows

So, here is the rub, from Nobel Prize winning Physicist Richard Feynman

Imagine how much harder physics would be if electrons had feelings!
– Richard Feynman, speaking at a Caltech graduation ceremony

That’s exactly to the point.  Economics and finance are about people – not the laws of nature.  People have feelings, make mistakes, are driven by emotions, and are fallible..  They are not predictable as are billiard balls or planets.   This is why models in finance or economics  will never reach the level of certainty of Physics.  Thus, Physics Envy.  To skin these cats ( all deference to Schrödinger’s cat ) requires a careful and rigorous understanding of uncertainty.

Taxonomy of Uncertainty

All of this cames from (or at least the first I heard of it) was a lecture delivered at the MIT Innovations in Management Conference back in 2007.  I recently found that a new draft (March 2010) of a paper on this subject is now available ( link at the end of this posting)

This paper is long (74) pages but it is a good read especially if you can remember some high school physics on Hooke’s Law for springs and simple harmonic motion.  The authors use this simple physics example (block of mass M on a frictionless 1-D surface connected to a spring  attached to a wall with the system obeying Hooke’s Law – a fully deterministic system) to demonstrate how adding “noise” (unknowns) into the system can take a model that is capable of predicting to complete certainty down to nothing.  What is the “noise” in the system?  Take it as Feynman’s “electrons with feelings” – people and this idea of (see below) “Reflexivity”.

Taxonomy of Uncertainty
1: Complete Certainty
2: Risk without Uncertainty
3: Fully Reducible Uncertainty
4: Partially Reducible Uncertainty
5: Irreducible Uncertainty
∞: Zen Uncertainty

Here is a little more meat from the paper
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Written by frrl

November 23, 2010 at 7:04 pm

Vintage Steve Jobs: Good Artists Copy; Great Artists Steal

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Watch and listen to some vintage Steve Jobs talk about his experience visiting Xerox PARC in the days before Macintosh.  At PARC, Jobs saw three things: Smalltalk, ethernet, and a graphical user interface.

It’s not so much about the technology per se, or for technology as an end it itself.  It’s  about recognizing how to use technology to enable people to work, do things, and think things they never did or thought about before.  This is what the folks at Xerox PARC could not see; but what Steve Jobs did see.  And Steve took it all from them.

It’s about thinking differently, right?  When Steve Jobs was a kid his father used to buy old cars, fix them in the family driveway, and then resell them.  Steve was not so much interested in the mechanics of fixing cars; he was more interested in the types of people who originally bought the cars he saw sitting in his fathers driveway.

In the short video you will also hear Steve talk about John Sculley.  Sculley was the CEO that the Apple Board brought in to run Apple in 1983 when they thought that Seve Jobs, at 28 years old, was not up to the task.

Take a watch

To get an insight into the early life of Steve jobs –
Steve Jobs, the Journey Is the Reward

More on John Sculley and Steve Jobs
https://frrl.wordpress.com/2010/10/26/notable-being-steve-jobs-boss/

Steve Jobs at Stanford – “How to Live before you Die”
https://frrl.wordpress.com/2010/01/25/steve-jobs-apple-ceo-how-to-live-before-you-die/

Think about it some more – Who owns creativity?  Who owns Culture?
https://frrl.wordpress.com/2010/06/04/creativity-innovation-and-intellectual-property-lessons-from-fashions-free-culture/
https://frrl.wordpress.com/2010/06/05/who-owns-culture/

Written by frrl

November 23, 2010 at 7:27 am

Review of Copernic Desktop Search

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Can you find your stuff?

So you just bought that 2TB external hard drive… adding to the 1TB external hard drive you already had.  Plus you have the internal hard drives in your desktop PC or laptop. Do you have a home network with a network drive?  How many terabytes is that?  Can you find your stuff?

You have documents like MS Word, Excel, Power Point, Microsoft Project and PDF’s; and you have your digital photos, and music.  What’s in those zip files? Can you find all your stuff?  How many different files types do you have?  Maybe 150 different types of files with all sorts of different content and formats.

I know there is Microsoft search and Google desktop search. The world is filled with options.  Sometimes we are overwhelmed with choices and options.

Compernic Desktop Search

Here is another option for desktop search.  If you don’t lile Windows Search and you don’ t like Google Desktop Search you may want to try this option – Copernic Desktop Search.

Copernic Desktop Search is free – at least the home edition.  If you like it and want additional capability you can upgrade to the Professional or Network versions.  For me, the home edition serves my needs of indexing multi-terabytes of disk and millions of files.

You can get Copernic here – http://www.copernic.com/en/products/desktop-search/index.html

Pro’s

  1. You can fine-tune the search targets down to individual disks and folders
  2. After finding targets the search can be refined within the search result collection
  3. Fine grain control is available to limit the indexing of files based on file size (skip very large files of very small files)
  4. Add/Remove file types to index.  Default is 150 different file types.  You can add any filetype
  5. By file type, you can control if just the name and/or the file content is indexed
  6. Preview pane can show the search term in context and lauch the appropriate application to view or play (music, video) the selected file in the collection
  7. Hover over found music files shows the tags
  8. No real limit to how many files can be indexed
  9. Control of where the index file is located along with ability to move/delete/reindex the file as needed
  10. Intuitive user interface

Additional features that would be of value

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Written by frrl

November 21, 2010 at 7:02 am

Burt Fishers Review of the Flex Radio 1500

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For all you Amateur Radio folks, Shortwave listeners, experimenters, and fans of Software Defined Radios…

You just can’t stop Burt Fisher, K1OIK.  His risk of $600 on the new Flex Radio 1500 Beta gives you this great review of the radio.  A product like the Flex Radio is more like a piece of test equipment than it is a radio for traditional use.  But as you can see, radio and electronic experimentation combined with digital techniques is alive and well both for those who want to build it and for those who … if you build it, they will come. 

Come see Burt Fishers review:

Here are some other video reviews by Burt Fisher of Software Defined Radios

https://frrl.wordpress.com/2009/03/04/software-defined-radio-review-of-the-flexradio-5000/
https://frrl.wordpress.com/2009/05/05/demo-of-the-flex-5000-software-defined-radio/

For the technically inclined – here’s the nitty-gritty
https://frrl.wordpress.com/2009/03/07/the-basics-of-software-defined-radio/

For everyone else –
http://en.wikipedia.org/wiki/Software-defined_radio

Here is the FlexRadio 1500 product page –
http://www.flex-radio.com/Products.aspx?topic=F1.5k_features

Written by frrl

November 18, 2010 at 6:26 am

A computer simulation: Why the Rich get Richer and the poor – lose everything

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The rich get richer and the poor get poorer. You’ve heard that before. It is a maxim so often repeated, and so often confirmed by experience, that it begins to sound like a law of nature, as familiar and irresistible as gravity. And indeed perhaps there is some physical or mathematical rule governing the distribution of wealth in the world…  – American Scientist – Follow the Money

How the World Works

There are at least two ways to find out how the world works.  The first is to go out there and test it using real stuff.  The second way is to build models and simulate how the world works – as close as you can for the relevant area of interest – and see what happens. 

So, lets say you have designed a new jet fighter and want to see how it flys.  You could get a test pilot and let him/her try to fly it – “Here, try this out.  If you crash, let us know.”.  Another way, the preferred way, is to build a model and run a simulation.  This latter alternative is preferred by test pilots and those funding these ventures.

How about investments and trading?  Do you go out there, risking your treasure, to see “what happens” with real money?  Or, can you run a simulation first, testing various investment and trading strategies, without risking financial capital?

Sound too abstract and irrelevant?  How about the simple example of a  Yard Sale?  Everyone has been to one.  Can you create a computational model of a yard sale, test various scenarios to see what happens under different trading rules and participant behavior?  Sure, it’s all about rules, the model, and how people behave in the model.

Economics of Trade – Yard Sale Computational Simulation

Even slight departures from perfect pricing bring a new dynamic to the yard-sale model. If I buy your rusty wheelbarrow and pay more than it’s worth, I am left slightly poorer after the transaction, and you are a little richer. Conversely, if I pay less than fair value, I gain a little, and you lose.

In either case there has been a transfer of wealth, typically a small fraction of the price paid. These transfers are where the action is in the modeled economy; as a matter of fact, the model can ignore the transaction itself—there’s no need to talk about toasters and wheelbarrows—and simply consider the net transfer of wealth.

The question is: What happens when this process is repeated many times? If some of the traders are shrewder than others, you would certainly expect them to do well in the long run; likewise the perennial suckers are going to lose their shirts. But suppose that everyone is equally skillful, so that who wins and who loses is purely a matter of chance. The amount of gain and loss is also determined at random—but it’s always less than the total wealth of the poorer agent, so that traders never risk losing more than they own.

Before reading on, you might try to predict what will happen in such an economy. If everyone starts out with the same bankroll, how will the assets be distributed after many random exchanges?  Will the levels of wealth remain uniform? Perhaps the system will evolve toward a Gaussian distribution, with most people having a middling amount of money, while a few are very poor and a few are rich?

Here is the answer given by the computer experiment: If trading continues long enough, essentially all the wealth winds up in the hands of one person…

Hands-on.  Try it for yourself

While looking for something else related to modeling and computational simulation I came across these two easy-to-use simulation of simple investment choices and a simple Yard Sale model.  There are a number of inputs that can be dialed-in to set various parameters.  After dialing-in the rules of trading game you can run the scenario and see what happens.

If you spend some time with these models , you can find those scenarios (rules and choice people make) where clearly, the rich get richer and the poor – well, lose everything.

You can run the simulations off of a web page at the links below

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Written by frrl

November 16, 2010 at 6:05 pm

Posted in Uncategorized

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