Broken Symmetry

Storytelling Synchronizes Neural Networks

From the Wired Science blog:

When two people experience a deep connection, they’re informally described as being on the same wavelength. There may be neurological truth to that. Brain scans of a speaker and listener showed their neural activity synchronizing during storytelling. The stronger their reported connection, the closer the coupling.

Links to earlier related posts:

Focal Points Constitute Organizations by Synchronizing the Phase of Human Rhythms

The Synchronized Flow Theory of the Firm

Organic Economics

Inflation and Commercial Research and Development

Guess when these words were written:

The Democrats may or may not be less concerned with a balanced federal budget than the Republicans.... [T]he responsible Republican leadership has said again and again that if business should really turn down they would not hesitate to lower taxes or make whatever deficit-producing moves were necessary to restore prosperity and eliminate unemployment....

Even if this change in policy had not become generally accepted, certain other changes have occurred that would produce much the same results, though possibly not so quickly.... [Historically], much of the federal revenue came from customs duties and similar excise sources. These fluctuated moderately with the level of prosperity but as a whole were fairly stable. Today, in contrast, 80 per cent of the federal revenue comes from corporate and personal income taxes. This means that any sharp decline in the general level of business causes a corresponding decline in revenue.

Meanwhile, various devices such as farm price supports and unemployment compensation have been imbedded in the laws. At just the time that a business decline would be greatly reducing the federal government's income, expenditures in these fields made mandatory by legislation would cause governmental expenses to mount sharply. Add to this the definite intention of reversing any unfavorable business trend by cutting taxes, building more public works, and lending money to various hard-pressed business groups, and it becomes increasingly plain that if a real depression were to occur the federal deficit would easily run at a rate of...

Historical Notes on Resale Price Maintenance and Financial Regulatory Reform

The various persons who are concerned in the process of marketing from producer to consumer are not really successive purchasers, but are bound to each other just as successive feoffees of manioral lands were bound by subinfeudation before the statute of Quia Emptores.

-Zecharia Chaffee, Jr.

And since we're on the topic of historical anachronisms...

The demise of the Bank of the United States as a national institution left the field to the banks chartered by the States. These at once made the most of their opportunity; and helped, as they were, by receiving on deposit large sums of the distributed public moneys, they increased rapidly, and 1837 saw 634 of them in the country, having an aggregate capital of $291,000,000. With the great prosperity which, in the shape of State bank-notes, came over the country with these financial changes, arose also a spirit of the wildest speculation. Public lands were the chosen field of the operators, and the dealing ran into millions. It was all based, though, on the current notes, many of these being issued by " wildcat" banks, and worthless. Trouble seemed certain, and President Jackson, in trying to establish our finances on a sound basis, issued his famous Specie Circular, ordering all agents to accept nothing but specie in payment for the public lands. This precipitated the crash. The banks were called upon at once to redeem all their circulation in specie, and after vainly attempting to do so, they suspended payment on May 9, 1837. Six months later, no relief having come, a meeting of 136 delegates from banks all over the country was held in New York to consider whether means could be devised for resumption, but no relief at that time was found possible.

Let's hope that promoters of financial regulatory reform have been students of financial history.

Korean Sentry Gun, U.S. Patent Pending

From Tech Reviews:

South Korea’s military has deployed machine-gun-toting robots along the heavily fortified border with North Korea, and a related promo video delivers more shock and awe than Kim Jong-Il singing the blues.

From the published U.S. patent application:

Note the correspondence address. A colleague of mine is prosecuting the application.

Price Discrimination, Airline Edition

The airline industry has some unusual characteristics in terms of competition, a point which Charlie Munger has pointed out in the past:

Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.

If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.

Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.

Thus I was pleased recently when I checked in for a flight and found that I could pay extra for more leg room, and had to pay for each checked bag. Yes, pleased. "Finally!" I thought, "The airlines are finding new product and service dimensions along which to compete. Maybe we'll see higher quality of service if more creative capital finds its way into the market."

But a news item today provided a new perspective on the challenges faced by managers and owners in the airline industry:

U.S. House Democrats criticized airlines Wednesday for increasingly charging for checked baggage, seat selection and other services, and indicated they are considering legislation to tax the revenue collected from the fees.

Back to the sardine tin!

Poor Alexander Hamilton!

Today I visited the Old Patent Office, which is now the National Portrait Gallery. I was eager to see two portraits in particular, one of Hamilton and another of Washington. neither disappointed. I wish I could say the same of the short bio posted next to the Hamilton portrait:

This copy was written by an antagonist to Hamilton. Nobody was a more partisan Hamilton-hater than John Adams, who (unjustly) blamed Hamilton for his loss of a second term in office. One suspects that the end of the first paragraph may have been written in sarcasm, referring to Hamilton's "success in marriage" and "reputation in law and politics." Note that he is the "instigator" of the Federalist papers. Harumph.

The second paragraph is even worse. Hamilton's policies were allegedly "intended to cement the moneyed interests to the new government," and "dominated Washington's administration." Washington was a thoroughly independent mind, who solicited Jefferson's opinion as often as Hamilton's, at least during his first term while Washington didn't yet know the extent of Jefferson's duplicitous betrayals. The last sentence recovers the fumble, but I hate that one has to read that far to find the praise so richly deserved for the memory of this man.

On the plus side, there was no portrait of Burr, at least none that I found. On the minus, there was none of Gouverneur Morris, who rivals Hamilton for my personal favorite among the Founders.

Martin Wolf on the Perils of the Land Cycle

Martin Wolf in the Financial Times (free registration required):

I am a land speculator – a mini-aristocrat in a land where private appropriation of the fruits of others’ efforts has long been a prime route to wealth. This appropriation of the rise in the value of land is not just unfair: what have I done to deserve this increase in my wealth? It has obviously dire consequences.

The problem is compounded in California by the redistributive transfer from individuals to corporations that is Proposition 13. The other day, a puzzling question came up: Why haven't voters in California managed at least to repeal Prop. 13 to the extent it benefits for-profit corporations?

Wise Observations on Patenting by FTC Commissioner Rosch

From a speech given in May 2010 to the Computer and Communication Industry Association:

But one should be careful not to conclude from these studies that patents offer no benefit in high technology industries. That is because patents can have benefits beyond merely stimulating and disseminating new technology. Patents can also help to commercialize inventions. Specifically, patent rights can facilitate relationships between inventors and entities with established marketing and development capabilities. Patents can make information a tradable commodity through the use of licenses. Absent patent protection, inventors might be less willing to discuss their inventions with other firms for fear of misappropriation.

The ability to transfer inventions to other firms allows startup companies to focus exclusively on technology development and to avoid the added complexity of vertical integration. We often see in the biotech sector, for example, large, established companies acquiring promising startups once their new drug or device reaches later-stage clinical trials, which can be expensive and time consuming. To put it simply, patents facilitate specialization in invention itself.

To make the point even sharper -- the ability to transfer inventions permits inventors to work with multiple entities, thereby permitting the growth of human capital to compound both spatially and temporally.

Andrew Lo on Physics Envy and the Financial Crisis

Available here:

Faith in any person or organization claiming to have a deep and intuitive grasp of market opportunities and risks is no better or worse than putting the same faith and money behind a mysterious black-box strategy. What matters in each case is the transparency of the process, an opportunity to assess the plausibility and limitations of the ideas on which a strategy is based, clarity about expectations for risks as well as returns, an alignment of incentives between the investment manager and the investor, and proper accountability for successes and failures. Part of the recent distrust of quantitative models is that they are inanimate, and therefore inherently difficult to trust. Even when we manage to develop a certain level of comfort with a quantitative strategy, ongoing due diligence is needed to assess the consistency, integrity, and incentives of the human beings responsible for implementing the strategy. It is important to distinguish our emotional needs from the formal process of assessing the models themselves, for which a degree of quantitative literacy will always be required.

Lo improves a number of arguments that long-time readers of B.S. may find familiar. I couldn't agree more with his conclusions.

For an extended discussion of the history of the crisis, I recommend Gillian Tett's Fool's Gold.

Andy Grove on the Human Capital Needed for Scaling

This is easily the most insightful analysis of the most important issue the United States now faces that I have read this month:

Since the early days of Silicon Valley, the money invested in companies has increased dramatically, only to produce fewer jobs. Simply put, the U.S. has become wildly inefficient at creating American tech jobs. We may be less aware of this growing inefficiency, however, because our history of creating jobs over the past few decades has been spectacular -- masking our greater and greater spending to create each position.

My hope is that the loosening of the currency peg will help reverse some of these trends over the coming decades.