Monday, September 26, 2011

The scientific method versus faith

I have no personal use for religion. While I believe that one valid use of religion is to propagate values from one generation to the next, I have managed to become a moral person without the approbation (or reprobation) of religion and argue that the non-aggression principle championed by libertarians is at least as complete and consistent as any religious system of values. Another valid use is to provide spiritual guidance, to provide direction where none is evident or where a choice seems otherwise arbitrary: this also seems fine to me, as long as an informed choice cannot be made. In this too I have no interest: in the exceedingly rare event in which a choice can be made only arbitrarily, I literally roll the dice.

The other popularly-held role for religion, however, is to provide authoritative answers to questions of fact currently unanswered by science. I absolutely reject this role: I believe it better to say "I don't know" than to assert an answer for which I have no evidence. It is my theory that, however unfortunately, Christianity seems to have become so popular precisely because of how its tenets fit this role.

The scientific method is fundamentally the way I learn about and attempt to understand all phenomena: I generate the simplest hypothesis consistent with the observable facts and use it to inform my choices and my understanding of the world until evidence to the contrary appears that requires me to reconsider the original thesis. The scientific method is a valid system for understanding phenomena precisely because it provides a way to falsify hypotheses: when a statement is said to be falsifiable, the scientific method says that this is equivalent to the existence of an experiment or argument that can disprove the statement if it is in fact false.

Dogma has no place in my philosophy. By employing the scientific method—that is, by rejecting dogma and requiring supporting evidence and a chain of inference rules from evidence to conclusion for any claims—I can avoid asserting obviously false statements and, even more importantly, statements that are not falsifiable. Strictly speaking, avoiding false statements about nature is likely to be impossible—Newton was observably "right", after all, until Einstein came along and showed how unearthly conditions conflicted with Newton's theories—but obviously false ones can be avoided by always questioning one's assumptions in the light of developing evidence.

Avoiding non-falsifiable statements, however, is ridiculously easy: I simply don't make statements that have no credible basis in existing evidence and/or experiment. For instance, while it's certainly possible that the universe was created by a flying spaghetti monster and that I can trivially construct a fascinating narrative consistent both with this theory and with physical reality, doing so involves asserting a lot of unknowns that are completely unsupported by physical evidence. To quote Carl Sagan:
If God created the universe, we must then ask the next logical question: what created God? We might say God came from nothing, or that God always existed. If we say that God came from nothing, why not skip a step and say the universe came from nothing? If we say that God always existed, why not skip a step and say the universe always existed?
This is directly contrary to the Christian notion of "faith", in which a narrative lacking any physical evidence is employed as the basis for an entire belief system. That the resulting system may be consistent with itself (and at 2,000 years exceptionally long lived) is not in any sense evidence of the degree to which it reflects reality: the extent to which fundamentalist believers will go to support their worldview and in doing so reject the scientific method involves, for example, asserting that fossils exist because God put them there and that this is a test of our faith. Attempting to argue with such people about their faith is pointless because there is simply no logic one can employ to convince them otherwise once they have made the assumption that there is an omnipotent God. The omnipotent God is not a falsifiable hypothesis, and so is simply not within the purview of the scientific method. I suspect Christianity has remained so popular for so long precisely because its very structure rejects any possible scientific review of its foundation: it is logically immune to the one attack vector that science uses to obliterate dogma.

[The purpose of this blog entry is not to attack the belief systems of individuals. I happen to be atheist (or agnostic, depending on how you define the terms: I don't assert that God doesn't exist because of the aforementioned property of an omnipotent God, for example), but in my day-to-day life this philosophy manifests itself not as hostility toward religion but complete indifference toward it: I simply don't care. It doesn't come up. Rather than rejecting religious explanations for phenomena, I never consider them in the first place because they don't fit with the scientific method. For the record, I know many intelligent and educated people who are deeply religious, but in general these people use religion to propagate culture and values and to provide spiritual direction rather than to provide answers to questions of fact for which science currently provides no answers.]

Friday, July 29, 2011

What recovery?

Listening to NPR news is infuriating. "The fragile recovery blah blah blah revised downward blah blah blah..." I cannot understand why they persist in not questioning the "recovery" meme. You'd think they would apply a little logic to the GDP and unemployment numbers and conclude that the notion of a recovery is utter horseshit.

The truth is actually very simple: the Fed pumped a bunch of liquidity into the market, hoping the easy money would create another bubble disguised as growth. We got a bubble all right, but not one that can be mistaken for growth: all the liquidity made its way to stocks, driving prices up relative to earnings, and to commodities, making raw materials more expensive and reducing margins for businesses that are heavily reliant on commodities.

What didn't result was any increase in hiring, productive capacity, or wealth: the stock market rising 70% may improve the bottom lines of the banks, but it does not signal an economic recovery. And when dividend yields for businesses that sell primarily to Americans fail to improve as profit margins are squeezed further, even this will reverse course.

It would be nice if there were some news outlet that did not promote economic illiteracy: people need to understand that a return to the halcyon days of consequence-free growth in public and private debt is not going to happen. Sadly, that ain't NPR. But is it disingenuity or ignorance? The latter can be fixed; the former is much harder to deal with because it likely means NPR is telling its audience what it wants to hear to retain listeners, making it not much different from the corporate media.

Saturday, July 9, 2011

Housing bubble impact a function of the local market

Over the past year, I have developed a theory about house prices that helps explain why different local housing markets reacted differently to the burst of the housing bubble.

The non-linearity of supply and demand to price
The key to understanding price action in the housing market is to realize is that price is not a linear function of the change in supply and demand. That is, given a constant multiplier Y, a change in supply of X% will not always result in a -Y*X% change in price. We can see this in an extreme case with the oil market: in the latter half of 2008 the price per barrel dropped from $150 to $30 with less than a 5% reduction in demand relative to supply. Part of this was the rapid disappearance of irrational exuberance among futures traders, but most of it was due to excess inventories resulting from the recession in the west: in the presence of inelastic demand, the price will rise dramatically when demand exceeds supply by even a small amount, and drop just as dramatically when there is any excess supply fighting over dollars.

In the graph to the left, the price of oil at its peak is represented by the points ("3") immediately to the left of the supply=demand line: demand exceeded supply by a small amount. Similarly, the price of oil at its trough is represented by the points ("4") immediately to the right of the supply=demand line: supply exceeded demand by a small amount.

But we know that oil price is not linear to this relationship and can never go negative because there is some cost to digging the stuff out of the ground. So the relationship between supply minus demand and price must look something like the graph below, though I have exaggerated the inflection of the curve to make the point plain.

The red lines in both graphs represent equality of supply and demand: to the left of the red lines, demand exceeds supply and to the right supply exceeds demand. What the green line in the second graph represents is the price for a given difference between supply and demand. The gradual slope of the left tail in this graph represents the inability of the market to support a higher price even as supply is ratcheted down (resulting in shortages and substitution), while the gradual slope of the right tail represents the minimum production cost.

How this applies to housing
In rural areas far from desirable city jobs, supply of available housing always far outstrips demand: these areas are represented by the right side ("2") of each graph. Even if supply decreases or demand increases by a large amount, price doesn't change all that much: it is dominated by production/transfer cost and a small profit margin determined by competition in the local market. Prices in these places did not decrease to any appreciable degree during the bursting of the housing bubble.

Similarly, in desirable cities (think Boston, San Francisco, New York, D.C.), far more people want to live in the city than actually can because there simply aren't enough units to accommodate them all and zoning laws typically restrict the growth in the supply of units. Even if supply decreases or demand increases, the local price is already dominated by the maximum amount that those who want to live there can afford. This can be seen by the small profit potential of renting out a multi-unit house on a 75% or 80% mortgage: most of these houses are barely cash-flow positive, if at all. Furthermore, anecdotal evidence from real estate professionals and prospective buyers monitoring the housing market in Cambridge and Somerville, cities adjoining Boston, is that house prices there have stagnated but (with the exception of damaged/distressed houses) have not dropped to any appreciable degree.

The interesting areas are those near the supply=demand line. Let's break this down to pre- and post-bubble burst in the most extreme case: think of those areas where, in the early 2000's, you thought people were crazy to suffer 2 hour one-way daily commutes. At the time, these places were just to the left of the supply=demand lines ("3"): people who could not afford to live in or near the city but who needed to be within commuting distance of their city jobs built 4000ft² McMansions, and drove up the prices of existing housing stock, out on the edge of the sticks.

Demand did not have to drop much for these areas to move to the other side of the supply=demand line (from "3" to "4"): this resulted in a huge price drop as the supply of houses suddenly exceeded demand. These areas were the first to lose demand, as they are the least convenient locations for commuters who, post-bubble, either no longer had a job to support their underwater mortgage or could now afford to move to a closer suburb or downsize to the city itself. The prices in these places dropped to the greatest degree, but the same is true to a lesser extent in most suburbs except the most desirable ones.

I have been able to find maps of foreclosed mortgages by county, but none showing average sale price percentage changes by city/town to help corroborate this theory. If anyone knows of a source for such information, please post it here.

Friday, July 8, 2011

Independence Day

Is anyone else as annoyed by US Independence Day as I am?

Notwithstanding arguments about the ill-intention of the founders, this is a holiday that is supposed to represent rebellion against unjust authority and coercion, and be a celebration of liberty. Instead, what we get are bread and circuses: barbecue, beer, and red-white-and-blue fireworks, loaded with jingoism for a USA controlled by a government that is unquestionably orders-of-magnitude more authoritarian and intrusive than Great Britain's was in 1776.

What seems even stranger is that we appear to be celebrating a country that is right now going through a depression by any honest measure, and whose legal tender is on the brink of destruction as a result of central bank policies designed to sustain the illusion of participating banks' solvency a day at a time so the politically well-connected can use government power to perpetuate the concentration of wealth in their hands for as long as possible. This does not seem like something worth celebrating.

I spent Independence Day weekend paddling along the border between the United States and Canada in northeastern Maine, taking a respite from the car wreck in slow motion that is the United States political economy. Given how far removed from mainstream American thought I am, this seems fitting.

Thursday, July 7, 2011

Education ≠ credentials

Education ≠ credentials

This is something people need to grok.
Education is how you learn how to do useful things. Credentials get you a job.
Education proceeds naturally from inquisitiveness, interest in the material, and availability of knowledge-building resources. Sometimes those resources are much more easily available in college than they would be otherwise, but the first two (inquisitiveness and interest) are often ground out of students by a decade of top-down schooling making the whole endeavor pointless. Like other posters have said, it's often sufficient (and sometimes necessary, given how bad some professors are) to get a library card and start reading. In most cases, college wastes a lot of time encouraging students to pay for the privilege of pursuing hobbies and creating a social life when the actual training portion of the experience could be completed in much less time.

Credentials are required because most potential employers can't tell jack squat about your abilities simply by talking to you. A diploma is one such credential (and one that can be very lucrative depending on the networking opportunities available through the name at the top), but so are documented experience and references. There is a perception that the diploma bootstraps the process by getting a young, inexperienced person's foot in the door, but there is also a growing realization that spending four years in a college earning a BA in beer guzzling is not sufficient proof of ability to do actual work.

Entrepreneurism is another bootstrapping approach: Thiel wants smart, young people to spend their most imaginative and productive years trying to build a business, which will not only look great on a resume but will provide the young person with valuable experience in trying to create wealth by selling value, even if the business itself fails.

(x-post from blog comments)