Broken Symmetry

Sichelman and O'Connor on The Guild Origins of Patent Law in the Venetian Republic

Presented yesterday at the IP Scholars Conference:

A key assumption of today’s standard account of patents is that, absent patent protection, all products would generally be purchased in a competitive market. However, the first regularized patent system appeared during the Renaissance in the Venetian Republic, which was a highly regulated economy. In the Venetian economy, many types of products - particularly, artisanal or technological products - could typically be produced and sold only by artisan and merchant guilds. One important exception to the guilds’ monopolies were 'patents,' which initially provided non-guild members - particularly foreigners - the privilege of being able to sell products and practice methods that were otherwise within the sole province of the guilds. Directly contrary to the view that patents tend to diminish competition, patents in the Venetian Republic enabled a new kind of competition from outside of the guild system. This article explores the role patents played in promoting competition in the Venetian Republic. This exploration is important for understanding not only the historical genesis of the patent system, but also in gaining a deeper understanding of the patent system today.

SSRN link here.

According to their account, the patent system in Venice was setup initially to give talented foreigners a chance at competing with the entrenched guilds. The same agency responsible for immigration was also responsible for examining and granting patents.

Meanwhile, in Silicon Valley, we're sending talented immigrants home after we're done educating them.

What Would Hamilton Do?

From Michael McConnell:

But here is the irony. All this high‐toned government, the unelected and long‐termed Governors of the Federal Reserve, supported by Senators and Representatives serving for decades these establishment figures are the ones who have created the current mess. They did nothing to curb budget deficits or to reform entitlements when it might have been done less painfully. They wallowed in earmarks and budget gimmickry, set unrealistically low interest rates, borrowed ever‐increasing sums of money to satisfy current expenses, and made promises that are unsustainable but somehow never get contained. And it is the placard‐waving, Jeffersonian common horde flocking to town halls and filling town squares, who have become the champions of Hamiltonian concern for the long run: “Spend less, tax less and borrow less,” they say. Bring back the Hamiltonian dream, where penniless bastards from nowhere can rise by the sheer force of intellect, hard work, and audacity to succeed in an America that prefers opportunity to entitlement, that lets losing businesses fail, and winning businesses make serious money.

How ironic it will be if Hamilton’s dream of a national blessing were restored by the very low‐toned, democratic, unruly politics that he thought incapable of it.

The last bit brings to mind Franklin's reply to the woman who asked him, immediately after the Constitutional Convention adjourned, what kind of government had they had given us. I guess we've done alright by Franklin so far.

Resolving the St. Petersburg Paradox and the Flaws in the Efficient Market Hypothesis Too

How much would you pay to play a game in which a coin was flipped, and each time it landed heads the payout was doubled from a starting value of $1? The expected value of this game is not finite, and yet most people are not willing to pay more than a few bucks for it, much less borrow to play.

This is the so-called St. Petersburg Paradox. The earliest solution was proposed by Bernoulli, who suggested that the value people attached to their wealth went as a logarithmic rather than linear function of increasing wealth. Given that assumption, he calculated the amount a person should be willing to wager as log(change in wealth due to payout from lottery) - log (wealth - wager).

But this calculation is not quite correct even though it resolves the paradox by explaining why most people won't wager much: People won't wager much because that logarithm runs off to infinity fast as the wager approaches even a fraction of wealth -- producing a zero in the denominator.

One way to see that this calculation is incorrect is because it treats the wager as a static cost, existing independent of how the payoff increases with increasing flips. Another way to say the same thing is that the wager has time-value in the form of interest. So the expected value and the wager should be treated together in the utility function in successive flips of the coin. What you should wager depends not just on how much, but when the payoff comes.

Ole Peters tells the full story of the St. Petersburg Paradox, including the errors in its analysis later introduced by economist Karl Menger, and propagated by Arrow and Samuelson, in glorious detail here.

I am grateful to Rick Bookstaber for pointing me to the paper.

"So what?" you might ask. Well, if one gets into the habit of treating economic variables as time-series rather than ensemble averages -- as the correction demands -- then one immediately is forced out into the realm of non-equilibrium statistical mechanics and dynamics.

Ole Peters and Alexander Adamou have already proposed a correction to EMH. According to them, it is not prices that are efficient and cannot be arbitraged, but rather the use of leverage to produce larger than logarithmic gains.

I'm completely drowning in patent litigation right now, but eventually I would like to offer some thoughts on what these papers mean for competition and innovation policy. What should be considered analogous to leverage in intellectual property markets?

The potential implications for investors are also interesting and need to be thought through. Do we now have a quantitative insight into how and why so many of the investors who have consistently beat the market over the past few decades have advised against leverage. Buffett, in particular, is famous from eschewing leverage and advising others to do the same.

RIP Steve

Steve was a Bob Dylan fan. In his memory:

Supreme Court Affirms the Priority of Individual Rights under the Patent Act

Stanford v. Roche decided today:

Since 1790, the patent law has operated on the premise that rights in an invention belong to the inventor. The question here is whether the University and Small Busi-ness Patent Procedures Act of 1980—commonly referred toas the Bayh-Dole Act—displaces that norm and automati-cally vests title to federally funded inventions in federal contractors. We hold that it does not.

As noted in the Sotomayor concurrence, footnote 2 on page 5 expressly reserved the questions that would have been raised by consideration of the Federal Circuit's precedents regarding interpretation of patent assignments. Thus, the guidance on choice of law that seemed possible after oral arguments have been reserved for future consideration. It is notable, however, that even the dissenters (Breyer and Ginsburg) who addressed the Federal Circuit precedent were silent as to the choice of law question.

This Day in History: University Research and the Internet

From the Computer History Museum:

March 16, 1990

Internet Extends Beyond U.S. to Europe

The National Science Foundation announces it will extend its network with a high-speed data link to Europe. Five years earlier, the Internet in its modern form had started to develop rapidly thanks to the formation of the NSFNET, which linked five supercomputer centers in the United States. Later in 1990, Europe contributed to the growth of the Internet when CERN's Tim Berners-Lee developed HTML, the language used for the World Wide Web.

Has any technological development done more to change the world in the same period of time? Why do some folks seem to have forgotten how the Internet got started? There were lots of venture capital funds around in 1990. How many were ponying up to fund a transatlantic link between NSFNET and Europe?

Paul Samuelson the Investor

From Economic Principals:

It turns out that the great MIT economist was influential in the creation of one of the earliest and most influential hedge funds. Launched in 1970, Commodities Corp. blazed a trail of extremely high returns throughout the 1970s and early ’80s, before disappearing in various pieces into Bermuda mailboxes and Goldman Sachs. Many of its star traders – Bruce Kovner of Caxton and Paul Tudor Jones, chief among them—formed successful hedge funds of their own. Samuelson thus had a ringside seat at the birth of an influential industry that is still only poorly understood.

About the same time, he invested a substantial amount in shares of Warren Buffet’s Berkshire Hathaway Inc. It was in 1970, too, that he won the Nobel prize in economics, the second to be awarded. Long famous for the fortune that his pioneering textbook earned him after 1948, it turns out that Samuelson may have made more money as an investor than as an author. He was both smarter and richer than is generally understood: as an investor, a bigger winner, perhaps, than the more volatile John Maynard Keynes.

Via Tyler Cowen at MR. More evidence for the Paul-Samuelson-as-Isaac-Newton theory?

Remember MLK Jr.

Alexander Hamilton Redeemed

On a trip to D.C. in August, I visited the Old Patent Office, which is now the National Portrait Gallery, and encountered the 1806 Trumbull portrait of Alexander Hamilton, and this note on his biography:

I previously blogged about this here. I am pleased to report that -- thanks to the attention and sympathy of Peter Malkin and the museum's Director -- the note has been replaced by the following:

This is much an improvement on the old version, although not what I submitted as a suggested replacement, which is the following:

Alexander Hamilton -- “the most brilliant American statesman who ever lived,” as Theodore Roosevelt called him -- was born on an isle in the Caribbean to an unwed single mother. Driven by a voracious appetite for knowledge and insatiable professional ambition, Hamilton was sent on full-scholarship to college on the mainland after his poetry was published in a local newspaper. Not yet thirty, Hamilton quit his job as General Washington’s senior advisor during the Revolutionary War so that he could see combat. Hamilton, together with Madison, was a prime mover behind the summoning of the Constitutional Convention, and the chief non-judicial interpreter of the Constitution through his authorship and editing of the The Federalist. As the first Secretary of the Treasury, Hamilton laid the foundations for the nation’s financial system through charter of the first federal bank and the assumption of the states’ war debt by the federal government.

The new version takes small missteps. Hamilton was not actually orphaned until near the end of his life, when his father died on a small island in the Caribbean never having reconciled with his son. The description of Hamilton as part of Washington's "family" sounds strange to me, although Washington did in some ways take on the role of surrogate parent to Hamilton, and Hamilton's abrupt resignation to serve in combat does, in some ways, give the feel of teenage rebellion. Also, the "Federalist Papers" were published as "The Federalist," although that name for those documents is common enough so that I would not call it incorrect. More substantively, I wouldn't have mentioned Aaron Burr by name out of principle, although Hamilton's early death in a duel is a relevant fact that I had omitted from my version.

If you're interested in the early history of the United States, and in one of the most inspiring personal biographies from that period, then please read Ron Chernow's Alexander Hamilton, which was the ultimate impetus for the replacement of this note for the portrait.

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.

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.

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.

Thoughts on Bilski

The majority opinion breaks in favor of inventors and patent owners. On the whole, this was a good day for the patent system. Chief Judge Rader got to keep the machine or transformation test, but not its status as the sole test for eligibility. Business methods are not categorically unpatentable, although the particular result here cuts against patenting particular trading strategies. But not many investors who make money trading have any incentive to spend that money patenting their strategies.

The Stevens concurrence is the most interesting part of the Opinion for me. The Supreme Court ought to try to articulate theory to guide the lower courts in drafting rules and applying them to unprecedented facts. I agree with him there.

But I disagree with his attempt to deny the historical case for patenting of business methods. For example, he calls the patenting in England of life insurance contracts a clerical error. More categorically, he cites Judge Dyk with approval:

[I]t does not appear that anyone seriously believed that one could patent “a method for organizing human activity.”

To get there, Stevens (and Dyk, and those who join them) have to distinguish patents from other sorts of privilege granted by the English monarchy at the time. But what is the basis for that distinction? Stevens is guilty of the same crime as the majority for not saying.

In fact, exclusive rights were granted to particular methods for organizing human activity on a routine basis at that time in England. Like patents of invention or importation, these grants of exclusive rights took the form of open letters or charters from the sovereign. Among these were charters for the Massachusetts Bay Colony, for example. Patents and corporations share a common historical origin. More words from Justice Stevens on their similarities and differences might have been useful in supporting the distinction. Perhaps Judge Dyk will have a say on remand.

How does the shoe feel on the other foot, Prof. Stone?

Couldn't help laughing at the following:

I am therefore delighted to support Kagan's confirmation. I hope conservatives will do so as well. It is time for us to bring a sense of civility, integrity and mutual respect back to the confirmation process. Five years ago, in an effort to move us in that direction, I wrote post on huffington endorsing the confirmation of John Roberts as Chief Justice of the Supreme Court ("John Roberts: Bush's Blink,"July 27, 2005).

Prof. Stone neglects to mention his partisan attack on the Alito nomination, which intervened:

Whatever else Judge Alito may or may not have made clear about his views on such issues as abortion, federalism, and religious freedom, he has certainly made clear that he has no interest in restraining the acts of this commander-in-chief. That, in my judgment, poses a serious threat to the nation, and is a more than adequate reason for the Senate – Republicans and Democrats alike – to deny his confirmation to the Supreme Court of the United States.

What Lessig has to say on the nomination is more interesting.

Negative Feedback in Money Supply, the Chinese Peg, and American Real Estate

More from Chernow's biography of Hamilton, which ought to be required reading for any aspiring minarchist:

For political and legal reasons, Hamilton had to address the loaded question of paper money. The Constitution outlawed the issue of paper money by the states; everybody remembered the worthless Continentals printed by Congress during the Revolution. Should the federal government now issue paper money? Fearing an inflationary peril, Hamilton scotched the idea: "The stamping of paper is an operation so much easier than the laying of taxes that a government in the practice of paper emissions would rarely fail in any such emergency to indulge itself too far." As an alternative, Hamilton touted a central bank that could issue paper currency in the form of banknotes redeemable for coins. This would set in motion a self-correcting system. If the bank issued too much paper, holders would question its value and exchange it for gold and silver; this would then force the bank to curtail its supply of paper, restoring its value.

Hamilton saw clearly that the system needed negative feedback to be what Chernow calls "self-correcting."

What is the source of negative feedback to our currency system now? Since 1971 the dollar has not been redeemable against precious metals.

Some people might answer the Federal Reserve, which indeed can adjust interest rates. But what's to stop the Federal Reserve from doing exactly what Hamilton feared -- i.e., lowering interest rates faster than taxes can be levied? We all know the answer to that question today. Let's not forget it.

A better answer might be currency derivatives, such as credit default swaps. These indeed can slow inflation -- if enough are traded and accurately priced. This hints at a somewhat subtle aspect of the kind of "self-correcting system" envisioned by Hamilton: the holders that are likely to exchange paper for gold and silver early when the currency is overvalued will do much, much better than the people who try to exchange it last. And so it is with derivatives. The effectiveness of derivatives as a correcting force depends on the information available and information processing capacity of the average market participant. So long as valuations are independent, but identically distributed, a central limit theorem will apply, forcing transactions toward a set of "rational" prices. But valuations are neither independent nor identically distributed in a crisis; they're highly correlated and indeterminately distributed.

The best answer is other currencies. The economy is global, and if the dollar gets overvalued relative to the yen or euro, then people will start trading dollars for yen or euros until they're matched. Foreign currencies are to the dollar today what gold and silver were in Hamilton's time. In Hamilton's day, there were planters in the south who exchanged tobacco warehouse bills as a currency. Some even bartered. It's not impossible to imagine that people in the United States might some day be paid in Euros or yen rather than dollars. It partly depends, as Hamilton understood, on how much our government can collect in taxes.

The case of the Chinese yuan is interesting because it is pegged to the dollar. What effect does that have on the negative feedback? The effect seems to be damping -- i.e., if our government's credit improves faster than China's, then the peg will nonetheless slow deflation. Conversely, if our government's credit degrades faster than China's (the scenario that for now seems more likely), then the peg will slow inflation.

"Deflation" and "inflation" here mean deflation and inflation relative to other foreign currencies. Another effect of the peg -- perhaps the most important over the past ten years -- has been the lack of any negative feedback to appreciation in Chinese credit or depreciation in U.S. credit relative to each other. In effect, the dollar is not the dollar anymore, but the dollar/yuan. Whereas without the peg, Chinese would at some point have demanded more currency from American businesses in exchange for their goods, with the peg in place, that point has been delayed while the Chinese government has accumulated larger and larger sums of dollars. Today, China's central bank has a currency reserve of U.S. dollars roughly equal to the excess dollars in circulation in the U.S. banking system ($1 trillion).

Let's say the peg was removed. The immediate consequence would be worldwide scramble to exchange dollars for yuan. The Chinese government, with its huge position, would be a big loser over the short run since it has no practical way to exchange that sum. The United States economy would be an even bigger loser, since runaway inflation would likely put the financial system back into cardiac arrest, destroying the confidence and credibility needed for trade to continue and the economy to function.

But longer term, we'd both recover. The Chinese would take a notional hit to their credit, but they have a solid infrastructure in place now, and could replenish their losses with taxes on their new middle class. The United States, in turn, would take longer to recover since we'd have to go back to making things that we've been importing for over ten years before the government would have revenue to tax.

The Chinese government cannot accumulate dollars indefinitely. The peg must be removed at some point. American real estate looks like a great bet in view of that contingency, despite its ugly state at the moment.

UPDATE: Well I guess I won't have to wait as long as I thought to find out whether any of this is correct. See here.

Books which have influenced me most

With encouragement from Tyler Cowen, here's my list. "Influential" to me means it has changed the way I understand the world. In some cases, that happened fast. In others, slowly as I reread. In some cases, both.

To elaborate on something Tyler eluded to -- in preparing this list my awareness of how much it was people rather than books that influenced me was heightened.

I'm also grouping a few in one because their length was physically limited by technology in a way that makes the group comparable in length to only a portion of others on the list.

1. Galatians (what does it mean to be free?), 1 John (what is love?), Job (why evil? why not nihilism?), 1 Samuel (for the stories about David).
2. Feynman Lectures, especially the lecture from volume II on principal of least action.
3. Conceptual Physics by Hewitt, which I studied over the summer in seventh grade and credit as much as any book for my interest in physics.
4. Problematics of Jurisprudence by Posner, which I read the summer before law school. Posner sets the bar for intellectual courage.
5. The Common Law by Holmes, which led me to understand law as a complex adaptive system long before I had heard the terms.
6. The Intelligent Investor by Benjamin Graham, Zwieg edition, which gave me the theory I needed to understand corporate finance after I had learned how to prepare and read financial statements.
7. Buffett's letters to his shareholders as collected by Cunningham, which together with Charlie Munger's almanack (honorable mention) took my understanding of Graham's theory to a point where I could connect it up with mathematical principles I learned studying physics.
8. Waddell & Bodek on the Rebirth of American Industry, which awakened me to the way in which accounting rules are responsible for commercial culture.
9. The Happiness Hypothesis by Haidt, which gave me a reason to start reading psychology and sociology literature for the first time.
10. Creativity by Csikszentmihalyi, which gave me the last few puzzle pieces I needed to connect up the many domains of knowledge I have studied formally and informally (physics, law, economics, psychology, sociology) into an integrated whole.

Is there a European Union? The United States used to be compared with European States.

Tyler Cowen today observes:

Say that Portugal, Italy, and Greece were more like Germany, economically speaking that is. Toss in Albania to make the contrast starker. They would have higher productivity and higher output. They would export more. But with their higher wealth, they would import more too. That includes more imports from Germany, most likely. German *net exports* might well decline, as Germans buy more olive oil and high-powered computer software from Albania. But German exports need not decline *on net* (over a longer run of continuing global growth they certainly will not decline) and that should prove good enough for the German model to sustain itself.

This raises the interesting question of whether Greece ever really became part of the European Union. Or indeed whether there is a European Union at all. I don't mean in the technical sense of course.

Here's another quote from Chernow's biography of Alexander Hamilton:

Governor Clinton argued that the United States covered so vast a territory and possessed such a variety of peoples "that no general free government can suit" all the states. In rebuttal, Hamilton outlined his vision of American nationalism, showing that a true nation, with a unified culture, had been fused from the diverse groups and regions of the original colonies. In all essential matters, "from New Hampshire to Georgia, the people of America are as uniform in their interests and manners as those of any established in Europe." A national interest and a national culture now existed beyond state concerns. This was an assertion pregnant with significance, for if Americans had already constituted a new political culture, they needed a new order to certify that reality. And the Constitution bodied forth that order.

After all, that is why we call it our "constitution." There's lots going on here so let me break it down a little:

• Hamilton in the New York Convention and through the Federalist lays the foundation for "the national interest and national culture" by communicating his vision of it to the individuals who make of the citizens of the confederated states;
• The act of ratification was just what Chernow calls it -- a certification of a constitution that had already been constituted through the aggregation of individual commitments necessary to state ratification;
• The United States is compared by Hamilton with individual European states whereas at present an analogy to the European Union seems more apt;
• The European Union seems never to have had any conflicts that might foster a sense of identify as part of the European Community... until the present financial crisis?
• Even the "the national interest and national culture" were insufficient to head off the conflict among the United States caused by what Gouverneur Morris called "the curse of heaven."

Lots of interesting things happening in the world today.

Munger's Tale

Told in Slate:

But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."

The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."

Via Reflections in Value Investing.

Is Intellectual Arrogance the Reason Why Accounting Rules Have No Theory?

More from Menand's The Marketplace of Ideas:

Accounting is a trade, but the history of accounting is a subject of disinterested history -- a liberal art. And the accountant who knows something about the history of accounting will be a better accountant. That knowledge pays off in the marketplace. Similarly, future lawyers benefit from learning about the philosophical aspects of the law, just as literature majors learn more about poetry by writing poems.

Judge Posner makes a similar point about legal education in The Problematics of Jurisprudence. The context in Menand suggests that accounting may indeed have been neglected as a subject of liberal inquiry (i.e., as a subject of disinterested literary, historical, and/or scientific theory) because of its rep as a trade.

My personal experience suggests this to be an accurate depiction of how accountants are educated. They were even more parochial in their interests and education than the physics and chemistry majors I rubbed elbows with as an undergrad and grad student.

Could this be part of the explanation for the repeated failures of our financial system? Many earlier posts on this blog have addressed the serious weaknesses of financial accounting theory as a basis for measuring and managing our finanical system. But others see the problems, as Northwestern, Chicago, and Stanford Law Schools have begun teaching accounting theory to their students, at least through electives.

It's the unsexy, quotidien words that carry the heavy baggage in language -- a lesson learned early by every patent litigator. Similarly, its the unsexy, quotidien rules of accounting that move the cash-flows that represent the very life blood of our economy.

Click the accounting category at right for earlier posts. A fascinating historical fact, which I believe is not without larger significance, is that both a patent system and double-entry bookeeping were adopted around the same time in Venice in the 15th Century.

Alexander Hamilton on Our Interconnectedness

Although Phil Weiser spoke eloquently, I thought it worth pointing out that the conception of society as a system of interconnected networks has venerable historical antecedents. Consider what Ron Chernow has to say of Alexander Hamilton's address to the the Annapolis Convention of 1786, which led directly to the Constitutional Convention:

The Annapolis address, with its conception of the political system as a finely crafted mechanism, composed of subtly interrelated parts, had a distinctly Hamiltonian ring. It reflected the penchant of systemic solutions, his sense fo the fine interconnectedness of things.

Here's an excerpt of the address to which Chernow seems to refer:

If in expressing this wish, or intimating any further sentiment, your commissioners should seem to exceed the strict bounds of their appointment, they entertain a full confidence that a conduct dictated by an anxiety for the welfare of the United States will not fail to receive a favorable construction. In this persuasion, your commissioners submit an opinion that the idea of extending the powers of their deputies to other subjects than those of commerce, which had been adopted by the State of New Jersey, was an improvement on the original plan, and will deserve to be incorporated into that of a future convention. They are the more naturally led to this conclusion, as, in the course of their reflections on the subject, they have been induced to think that the power of regulating trade is of such comprehensive extent, and will enter so far into the general system of the Federal Government, that to give it efficacy, and to obviate questions and doubts concerning its precise nature and limits, may require a correspondent adjustment of other parts of the Federal system. That there are important defects in the system of the Federal Government is acknowledged by the acts of all those States which have concurred in the present meeting; that the defects upon a closer examination may be found greater and more numerous than even these acts imply, is at least so far probable, from the embarrassments which characterize the present state of our national affairs, foreign and domestic, as may reasonably be supposed to merit a deliberate and candid discussion in some mode which will unite the sentiments and councils of all the States.

You're in good company, Mr. Weiser.

2010 Inductees to the IP Hall of Fame

IAM has announced the 2010 inductees to the IP Hall of Fame. This institution, which began in 2006, is very welcome by those of us who believe, like Lincoln, that the IP system marks a unique new stage in the progress of civilization.

This is also a special year for a colleague at my law firm, Henry Blanco White. Henry's father Thomas was posthumously inducted into the hall of fame this year. Congrats to Henry and his family, and to all of the inductees. They are an inspiration to many of us in the field.

Meditations on Calendar Reforms

From the WSJ:

Creating a calendar is like fitting a lot of round pegs into not quite as many square holes. Western tradition demands a seven-day week. Ancient custom, rooted in moon cycles, calls for a 12-month year. The Earth's tilted axis produces four seasons. But the Earth, uncooperatively, takes 365 days, plus a tad more, to go once around the sun, and 365 is divisible by none of seven, 12 or four. And thanks to the extra bit of time -- about one-fourth of a day -- required for a complete orbit, leap years are needed to keep things on track.

Religious and civil authorities in the past have reformed the calendar in ways not unlike how local and state authorities govern daylight savings time today. Calendar reform is a historical subject that gives us insight into what organizations had true authority over everyday lives at a given moment in history.

Such reforms are also a direct regulation of how people synchronize activities. But unlike the bells of Venice, which lengthened in the summer and shortened in the winter, the intent of reformers now seems to be achieving a more symmetrical match between the frequency of astronomical and human activities.

But why should we prize symmetry with the stars above human needs? Consider the Pythagorean comma. The fact that perfect fifths cannot be made to coincide with octaves does not prevent us from making beautiful music. What a comment on our culture: Calendar reformers seek not to accommodate the human need for stability and consistency, but to measure life out in a more symmetrical (and hence aesthetically pleasing?) increment.

The calendar should be our slave, not we its servant.

R.I.P. Paul Samuelson, the Isaac Newton of Economics

From Ed Glaeser:

Mathematics doesn’t substitute for genuine insight or knowledge of the real world, but it is necessary if economists are going to craft logically coherent models of complex phenomena. While many mathematical models failed to predict the current downturn, plenty of non-mathematical seers also failed. If we ever do come to understand the vicissitudes of asset markets, that understanding will come in the form of formal mathematical analysis, ultimately inspired by Samuelson.

Glaeser's eulogy also hints at how the time may be ripe for a revision to Samuelson's Foundations:

If people can rank outcomes in terms of their desirability, and if they choose one outcome over another, then people have preferences. (Who can disagree with that?) And if, as Samuelson taught us, those preferences follow a few simple rules, then human behavior can be described with a utility function. That conclusion allows economists to turn to Newton and optimization theory.

The principle of revealed preferences results in a mean-field approximation of individual preferences. The incremental step beyond mean-field theory is gauge theory, and this is why the Coase Theorem and New Institutional Economics are more relevant now than neoclassical theory. What NIE has lacked thus far is a theoretical foundation equal in rigor to the foundations Samuelson laid for neoclassical theory.

Samuelson was like Newton also in that he brought his gifts to bear on solving practical problems for his country. Newton completely redesigned the Royal Mint, caught some of the worst counterfeiters, and advised on how to end a 17th century version of the carry trade, which was draining England's royal coffers. Samuelson led the Federal Reserve through several financial crises and advised countless students in high places on economic issues that affected billions of lives.

Not everybody makes this big a dent in history.

Homophily and Mimetic Desire

From Rene Girard:

My work has often been presented as a discussion of archaic religion through comparative anthropology. Its goal is to shed light on the process of hominization: the fascinating passage from animality to humanity that occurred thousands of years ago.

In all of this, my hypothesis has concerned mimesis: Because humans imitate one another, they have had to find a means of dealing with contagious similarity, which could lead to the pure and simple disappearance of their society. The mechanism by which they have done that is sacrifice, which reintroduces difference into a situation in which everyone has come to resemble everyone else.

Seemed topical given the recent post on homophily and influence.

See also this earlier post relating mirror neuron's to Girard's theory of mimesis.