Archive for April, 2010

Zipf’s Law and city size

Tuesday, April 20th, 2010

Harvard economist Edward L. Glaeser has an interesting post today on a law named after the linguist George Kinglsley Zipf. Zipf found that the frequency of any word in a text is inversely proportional to its rank in the frequency table. The same relationship has been observed in rankings unrelated to language, including the size distribution (population) of cities.

University of Minnesota economist Thomas Holmes and UBC economist Sanghoon Lee found, however, that Zipf’s Law does not hold for fixed geographical boundaries. In other words, Zipf’s Law for cities appears to result from urban sprawl rather than population density. Their work was published as “Cities as Six-by-Six-Mile Squares: Zipf’s Law?”, in the book Agglomeration Economics edited by Edward Glaeser (University of Chicago Press, 2010)

“Zipf’s Law” is one of the great curiosities of urban research. The law claims that the number of people in a city is inversely proportional to the city’s rank among all cities.  In other words, the biggest city is about twice the size of the second biggest city, three times the size of the third biggest city, and so forth. ….

But [researchers have shown that] Zipf’s Law seems to be mainly a product of city or metropolitan area boundaries, not the natural distribution of population.

Professors Holmes and Lee ignored political boundaries and split America up using a six-by-six-mile grid. Their cities are squares crafted without any attention to actual boundaries. Using Census Block level data, they calculate the population of each square in the grid. It turns out that Zipf’s Law doesn’t work for these fixed geographic areas.

Professors Holmes and Lee find that “for squares above 1,000 in population, a Zipf’s plot has a piecewise linear shape, with a kink at around a population of 50,000,” and “below the kink the slope is 0.75; above the kink, it is around 2.”

In other words, in dense areas population drops far more quickly with rank than Zipf’s Law would suggest, and in less dense areas, population drops off far too slowly to be compatible with Zipf’s Law. Zipf’s Law is a bust at describing the population levels of areas within fixed boundaries.

Edward L. Glaeser, “A Tale of Many Cities”, Economix, 20 April 2010.

Would the findings of Holmes and Lee apply also to countries of Asia and Europe, where cities have a denser core, with less urban sprawl? This topic should be added to someone’s research agenda.

A concern that I have with population statistics is that definitions of “city” are varied and arbitrary. Some cities include all surrounding suburbs – even rural farmland! – whereas others are restricted to an urban core, surrounded by suburbs. The approach of Holmes and Lee has the advantage that boundaries are fixed. The disadvantage is that it fails to distinguish a densely-populated square surrounded by densely-populated squares from one surrounded by empty squares.

the political economy of fiscal restraint

Sunday, April 18th, 2010

An excellent column today from George Mason University economist Tyler Cowen.

Canada … cut federal government spending by about 20 percent from 1992 to 1997. ….

To be sure, the spending cuts meant fewer government services, most of all for health care, and big cuts in agricultural subsidies. But Canada remained a highly humane society, and American liberals continue to cite it as a beacon of progressive values. ….

It’s less obvious that the United States can head down the same path, partly because many Americans are so cynical about policy makers. ….

Forces like the Tea Party movement argue for fiscal conservatism, though it isn’t obvious that they are creating the conditions for success. Over the last year, we have been treated to the spectacle of conservatives defending Medicare against proposed cuts, in large part to curry favor with voters and mobilize sentiment against the Democratic health care plan.

Tyler Cowen, “Economic View: Can’t Cut Spending? Look Around the Globe”, New York Times, 18 April 2010.

geographers and economists

Saturday, April 17th, 2010

[O]ver much of the past three decades the methodologies of geographers and economists have been steadily diverging. …. [But] mainstream economics isn’t going away: like it or not, the White House has a Council of Economic Advisers, not a Council of Geographical Advisers, the World Bank hires lots of economists and not many geographers, and so on.

Paul Krugman, “The New Economic Geography, Now Middle-Aged”, Prepared for presentation to the Association of American Geographers, 16 April 16 2010.

Edmund Wolf

Saturday, April 17th, 2010

Martin Wolf reflects on the life of his father, “the man to whom I will say a final goodbye this week, almost 13 years after his death”.

On April 23, I, my brother, Daniel, and members of our families will be celebrating the 100th birthday of our father, Edmund, in Vienna, the city in which he grew up. I wonder what our father would have made of this event. Most probably, he would have appreciated the irony: even in death he is far more a part of the world in which he would have perished, had he stayed, than of the England that was his home for the last 60 years of his life. ….

When I grew up it never occurred to me that I, too, would become a journalist, as he had done. I thought I would be a professional economist. When I did become a journalist, by accident, at the age of 41, I thought my work would be very far removed from his. I now understand that this has not been so.

Martin Wolf, “The Diary: Martin Wolf”, Financial Times, 17 April 2010.

Edmund Wolf (1910-1997) was a remarkable person who earned his living primarily as a journalist, but was also an accomplished playwright and a director of film documentaries. An exhibition (free admission) celebrating his life and work opens 22 April and runs through 17 September 2010 in Vienna’s Literaturhaus, Seidengasse 13, in the 7th district.

Elsewhere, Martin Wolf’s Exchange continues. The question this fortnight is “Would institutional changes make the eurozone work better and, if so, what should they be?”. Martin lists four possible ways to improve the currency union. So far, 13 comments have been posted.

Neither FT link is gated; registration is not required for access.

economics as faith (8)

Wednesday, April 14th, 2010

FT columnist John Kay provides another example of what I have dubbed ‘faith-based economics’, this one drawn from high theory rather than vulgar econometrics.

[Advanced macroeconomics today is] associated with the idea of rational expectations – which might be described as the idea that households and companies make economic decisions as if they had available to them all the information about the world that might be available. If you wonder why such an implausible notion has won wide acceptance, part of the explanation lies in its conservative implications. Under rational expectations, not only do firms and households know already as much as policymakers, but they also anticipate what the government itself will do, so the best thing government can do is to remain predictable. Most economic policy is futile.

John Kay, “Economics may be dismal, but it is not a science”, Financial Times, 14 April 2010.

The appeal of “economics as faith” is almost always political.  Heretic John Kay discards the efficient market hypothesis (EMH) and dynamic stochastic general equilibrium (DSGE) as useless theories, concluding “There is no universal economic theory, and new economic thinking must necessarily be eclectic. That insight is Keynes’s greatest legacy.”

investment booms and bust

Tuesday, April 13th, 2010

Financial journalist Edward Chancellor profiles two “fascinating new papers” on economic history, drafted by University of Minnesota mathematician Andrew Odlyzko.

Railways were first established in Britain in the 1820s. But it was only in the middle of the following decade that a great expansion took place. As railway shares soared, planned new investment in the railway network rose to around 8 per cent of GDP, or more than three times higher than expenditure on US fibre optics during the internet boom, according to Mr Odlyzko.

The good times didn’t last. Railway shares collapsed in 1837 ….

The … excitement surrounding the steam age engendered a second more extravagant mania. Whereas in 1836 Parliament had authorised nearly 1,000 miles of new railways, in the frenzied year of 1845 more than 4,500 miles of new lines were sanctioned. …. Railway shares in the broader market doubled[, before collapsing after 1846.] ….

The extreme over-estimation of the potential market size for railways in the 1840s undermines the notion that financial markets digest all available information. Investors fall for “mythical numbers”, says Mr Odlyzko, who a decade ago pointed out the falsity of the claim that internet traffic was doubling every three months. In similar fashion, investors today accept uncritically the magical vision of a billion Chinese urban consumers.

The railway manias remind us of the pitfalls of forecasting models, however basic. In addition, there is the problem that prominent forecasters are generally in the pay of promoters. The Victorian traffic-takers turned out to be no more independent than Wall Street analysts of the internet age.

Edward Chancellor, “Bubbles: a Victorian lesson in mania”, Financial Times, 2010.

Andrew Odlyzko’s short paper on the railway mania of the 1830s can be downloaded here.

His book length (322-page) manuscript covering the manias of the 1830s and 1840s can be downloaded here.

Investors who lost money in 1840s railway mania include Charles Darwin, John Stuart Mill, and the Brontë sisters.

the bailout and future of Greece

Monday, April 12th, 2010

The Europeans announced Sunday they would provide 30 billion euros of assistance to Greece, amid informed rumors that the IMF will offer another 10-15 billion.  With a total of say 40-45 billion euros in the bag – more than the market was expecting — the Greeks have time to make changes.

The Greek government, helped by the market threat of a near term collapse, appear to have strong armed the other eurozone countries into a generous package without making efforts to change seriously their (Greek) fiscal policy.  This is good for near term calm, but it does not solve any of the inherent problems now manifest in the eurozone.

Often assistance packages of this nature just help “smart money” to get out ahead of a default.  This could be the case here; 40-45 billion euros total money could last roughly one year.  Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.

Peter Boone and Simon Johnson, “Greece Saved For Now – Is Portugal Next?”, The Baseline Scenario, 11 April 2010.

Christian fundamentalists and Israel

Friday, April 9th, 2010

I never understood why Christian fundamentalists are so supportive of Israel. After reading Karen Armstrong’s fascinating The Bible: A Bigraphy, I understand.

[A] new apocalyptic vision … gripped conservative American Protestants in the late nineteenth century. This was the creation of an Englishman, John Nelson Darby (1800-82), who found few followers in Britain but toured the United States to great acclaim between 1859 and 1877. He was convinced, on the basis of a literal reading of Revelation, that God would shortly bring this era of history to an end in an unprecedentedly terrible disaster. Antichrist, the fake redeemer whose coming before the end had been foretold by St Paul, would initially be welcomed and would deceive the unwary. He would then inflict seven years of tribulation, war and massacre upon humanity, but eventually Jesus would descend to earth and defeat him on the plain of Armageddon outside Jerusalem. Christ would then rule on earth for a thousand years until the Last Judgement brought history to a close. The attraction of this theory was that true believers would be spared. Darby maintained that shortly before Tribulation, there would be a ‘rapture’, a ‘snatch’ of born-again Christians, who would be whisked up to heaven and would thus escape the sufferings of the end time.

[...]

[20th century] Protestant fundamentalists … evolved a Christian Zionism that was paradoxically anti-Semetic. The Jewish people had been central to the ‘Rapture’ vision of John Darby. Jesus could not return unless the Jews were living in the Holy Land. The creation of the State of Israel in 1948 was seen by fundamentalist ideologue Jerry Falwell as the ‘greatest single sign indicating the imminent return of Jesus Christ’. Support for Israel was mandatory. But Darby had taught that the Antichrist would slaughter two-thirds of the Jews living in Palestine in the end time, so fundamentalist writers looked forward to a massacre in which Jews would die in ghastly numbers.

Karen Armstrong, The Bible: A Biography (Grove Press, NY, 2007), pp. 200, 215.

British author Karen Armstrong (1944-) is a former Roman Catholic nun best known for A History of God (1994), a book that traces  the evolution of the idea of God from its ancient roots in the Middle East to modern times. Her latest book, The Case for God (Knopf, 2009), is a response to the atheism of Richard Dawkins, Christopher Hitchens, Sam Harris and Daniel Dennett.

Krugman on climate change

Thursday, April 8th, 2010

Princeton economist Paul Krugman has written a concise survey of the economics of climate change for next Sunday’s New York Times Magazine. He has little sympathy for those who oppose taxes on carbon or limits on carbon emissions.

What you hear from conservative opponents of a climate-change policy … is that any attempt to limit emissions would be economically devastating. ….

This reaction — this extreme pessimism about the economy’s ability to live with cap and trade — is very much at odds with typical conservative rhetoric. After all, modern conservatives express a deep, almost mystical confidence in the effectiveness of market incentives — Ronald Reagan liked to talk about the “magic of the marketplace.” They believe that the capitalist system can deal with all kinds of limitations, that technology, say, can easily overcome any constraints on growth posed by limited reserves of oil or other natural resources. And yet now they submit that this same private sector is utterly incapable of coping with a limit on overall emissions, even though such a cap would, from the private sector’s point of view, operate very much like a limited supply of a resource, like land. Why don’t they believe that the dynamism of capitalism will spur it to find ways to make do in a world of reduced carbon emissions? Why do they think the marketplace loses its magic as soon as market incentives are invoked in favor of conservation?

Clearly, conservatives abandon all faith in the ability of markets to cope with climate-change policy because they don’t want government intervention. Their stated pessimism about the cost of climate policy is essentially a political ploy rather than a reasoned economic judgment.

Paul Krugman, “Building a Green Economy”, New York Times Sunday Magazine, 11 April 2010.

Martin Wolf’s new blog

Wednesday, April 7th, 2010

Martin Wolf has begun a “Q&A” blog that is open, ungated, and warmly appreciated by Thought du Jour. “Austrian economics” is the first of a promised series of fortnightly posts.

My first topic is a little arcane, but important: it is the view of the crisis given by Austrian economics. …. [E]conomists working in the Austrian tradition … have argued that: inflation-targeting is inherently destabilising; that fractional reserve banking creates unmanageable credit booms; and that the resulting global “malinvestment” explains the subsequent financial crash. I have sympathy with this point of view. But Austrians also say – as their predecessors said in the 1930s – that the right response is to let everything rotten be liquidated, while continuing to balance the budget as the economy implodes. I find this unconvincing. Mass bankruptcy is extremely costly. Moreover, it is impossible to separate what is healthy from what is unhealthy during a general economic collapse triggered by an implosion of the financial system.

Martin Wolf, “Does Austrian economics understand financial crises better than other schools of thought?”, Martin Wolf Exchange, 1 April 2010.

The post has elicited many responses (56 and growing), beginning the evening of 6 April. Most comments are critical of the Austrian school. “steve.bannister”, for example, writes on 7 April:

“Austrian economics is mostly ideology masquerading as economics. There is nothing fundamentally useful about letting the poorest people starve.”

There is some defence of Austrian economics, such as  “markrobertson927″ (writing also on 7 April):

“Only the Austrians, for all their faults, understand the importance of looking beyond the current cycle to secure greater stability in the long run. (If you subscribe to Keynes’s view that in the long run we’re all dead, you should be ashamed of yourself).”

Participation is not restricted to FT subscribers, so join the discussion if the spirit moves you.