- Jordan Schneider and Irene Zhang at ChinaTalk interview Doug O’Laughlin of Fabricated Knowledge and Jon Y of Asianometry. This is partly an interview about semiconductors and the importance of Asian growth to the industry, but it's also a really good look at acquiring and using expertise, and at the vagaries of publishing. There’s a common theme here that’s worth noting: the things that they worked the hardest on and were the most proud of didn't get much attention, and their biggest hits came from quick and easy projects. There's an important phenomenon at work here: many viral explainers communicate something that's fairly common knowledge in an industry, but is suddenly relevant to the rest of the world. Being able to produce a timely explainer fast might require the ability to go much deeper on adjacent topics; it's easier to talk about the basics with confidence and authority if you've moved well beyond them.
- Toby Shorin has a great essay that starts with the existence of lifestyle brands and then leaps in a few other directions. The analysis of DTC brands alone is top-notch: as it turns out, once we've commoditized payments, supply chains, and marketing, the only thing left to do is attach a product to a subculture. And as it turns out, there are forces changing the way subcultures get created, and the way they grow. (Via the Interesting Times newsletter.)
- David C. Brock at the Computer History Museum has a retrospective on the PostScript language. It's notable that some of the important advances in new technologies are the ones that make them backwards-compatible—an important first step in the digitization of office work was making it easy to produce intermediate outputs that looked nice on physical pieces of paper.
- This New Yorker profile of arms dealer Viktor Bout came out in 2014, but obviously recent events have made it more relevant. This is worth reading in part because it's a profile of a powerful and amoral person, and it's good to understand how such people think because their behavior is so consequential. But it's also interesting as a look at a high-friction business: big countries don't want to make it easy for smaller countries, or for rebels, to acquire weapons without permission. And that means the buyers and sellers are scattered, and don't share common languages (Bout says he speaks "five or six" languages fluently and as many as fifteen in total.)
- Dmitriy Muravyeva, Neil Pearson, and Joshua Pollet have a good paper on how many equity market anomalies go away after accounting for the cost of borrowing stocks to short them. There is a sense in which research into equity market anomalies is just an extremely elaborate, roundabout way to find out which stocks are expensive to short. This makes sense in an efficient market sense: people who can turn historical financial data into profitable trading strategies should be working in finance, not academia.1 There's another corollary here: the institutions that can best exploit market anomalies may not be the long/short funds that can lever up to go after them, but the long-only funds with a mandate to correlate with, but beat, the market. If going long the worst 10% of stocks and buying the best 10% mostly means generating revenue for your prime broker rather than alpha for your investors, the way to get a cheap borrow is to have a mandate to replicate 100% of the market, and to buy the best 90% instead. Another way to look at this is that long/short investors are looking for anomalies within anomalies: if there's some trait that makes a given stock likely to underperform by 10% over the next year, but it'll cost an extra 10% annually to short it, the real game is to figure out if there's a single month or day in which most of that underperformance is concentrated. (Via Abnormal Returns.)
- The Ancient Economy: It's hard for someone alive today to have a beginner's mind about economic arrangements. We're so used to the idea of markets, the concept of supply and demand, and the idea of compound interest that we can't easily relate to a world where those concepts didn't really exist. This book is a good look at what economies were like a few millennia before there was anything approaching the study of economics. And it's fascinating! For example, while there were many instances of moneylending in the ancient world, the author is not able to track down a single case where someone borrowed money in order to make a productive investment.2 Ancient authors didn't have an explicit concept of elasticity, but Xenophon did notice that when lots of people got into the business of making shoes, shoemakers didn't earn much on average, whereas when lots of people got into the business of mining silver, prices didn't adjust. So in many cases the ancient world was aware of specific instances of broader abstractions, but didn't have the mental models at hand to generalize from them.
- A History of the Dollar: This book is wonderful! (And old, and hard to find; you may be able to borrow Archive.org's copy here.) It's full of fun trivia: "$" is actually a symbolic shorthand for "Pesos," with the S representing the plural; colonial Virginia had a well-developed system of tobacco-backed loans; New Hampshire's state constitution defined money in terms of shillings until the mid-twentieth century; when Andrew Jackson vetoed the charter renewal for the Bank of the United States, people independently produced their own "hard times cents" with images satirizing him, and they were accepted as currency; at one point, the government stored its hard currency reserves in a somewhat random assortment of government offices, one of which was a bar in Indiana (this was set up so the government official responsible could keep an eye on the safes full of bullion while sitting at the bar).
- Drop in any links or comments of interest to Diff readers.
- We're getting close to the time of year when it's tempting to phone it in by either recapping what happened last year (I think we all remember) or making predictions about next year (which will only be memorable if they happen to be right). So how about this: what's something that you would have predicted to happen in 2022 that didn't? For me, I would have expected emerging markets to be a lot more chaotic this year, between a more expensive dollar and the midyear disruptions in oil and food.
I'm often struck by how much economists and politicians agonize over exactly what a country needs to do to enable economic growth. The fact that so many countries struggle seems like evidence that it's not a matter of building just anything, but stories like [the model that railroads added only a tiny amount of GDP relative to counterfactual canals] counter the idea that economic growth is so path dependent. Sure, you can't build anything, but it's perhaps more important to build more, bigger, faster, than it is to build exactly the right things at the right times.
I'm reminded of the story (maybe from a Malcolm Gladwell book?) about a pottery teacher who tells one class to spend the semester crafting a single, perfect piece, while telling another class to produce as many pieces as they could, without regard to quality. According to the story, the class that goes for volume also ends up producing higher quality pieces. Surely apocryphal, but very plausible.
I'm also reminded of the paradox of choice... An economy has infinite configurations, but people just want more, better stuff in exchange for less of their time.
One part of growth is just having enough savings, and some level of either secure property rights or a strong state, such that it's worth it to build any kind of productive asset. When a country can invest the surplus from agriculture in rich-world assets, they see lots of easy gains (electricity, phones, running water, ports, roads between population centers, etc. all have high returns when they were absent before). The challenge, and one part of escaping the middle income trap, is figuring out what to do when the obvious choices have all already been made.
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This is not at all a knock on financial academics, who are very valuable to me and who do in practice have some overlap with practitioners. It's just a statement about where their skills are most applicable: if the anomalies are real, they represent an inefficiency in asset prices and thus capital allocation, and that's a social problem that can be fixed by exploiting the anomalies rather than publishing on them.
This newsletter has noted before that one common kind of ancient finance, in which politicians borrowed money to party and bribe their way to influential positions, and then used that influence to launch wars whose loot could pay back the loans, does look a bit like venture debt. But invading Gaul doesn't quite fit the mold of a productive investment.