Reality is fractal

Mandelbrot was right. Reality is fractal. Just when you think you've discovered s straight line from A to B, you zoom in a bit and discover the zig-zags and the swirls.

Then you think, aha! within those swirls I've discovered a lower-level A and B, and between these two, anyway, there is a simple straight line. But when you make another zoom, you find it isn't so.

This truth pressed itself upon me recently when, for the sake of a quick paycheck, I agree to write a brief essay on "Accounting for Software Licenses." Can't be too complicated, right? So ... how does one account for software licenses?

Turns out there are swirls. First, do we want to talk about the accounting of the leesor or the lessee? From the point of view of the lessee, the payments it has to make on a regular basis (yearly? quarterly?) are treated, one might naturally suspect, as a liability on its balance sheet.

But maybe not. Is this a "capital lease" or an "operating lease"? If the former, then in general the lease is a liability for the borrower, and an asset for the lender. If it is an operating lease, though, it can be kept off-balance sheet which (many biz management types seem to think) is re-assuring to actual and potential investors. Are they right? Is it really re-assuring, or does the rational expectations theory rightly presume that the market sees through mere formalities?

Never mind all those squiggles and squirrels! What about the lessor's POV? Can't we at least achieve some clarity, some sort of straight line, there? No. Have I mentioned that reality is fractal?

In general, how a lessor treats a productive asset that it has lent out for the use of another will depend on whether the asset is classified as "direct financing" or as a "multiple-element arrangement." (There is a grey zone in between those two possibilities, and further swirls, but for my brief essay I ignored that zone.)

If a financing company buys software for me and lends it to me, and if that is the only thing it does -- if it doesn't promise any upgrades or trouble-shooting services, and it doesn't deliver same -- if in the words of one authority the lessor "has no involvement with the software that is inconsistent with being a lender" -- in that case, the lease is a loan, and my lease payments are a matter of paying off that loan. The accounting proceeds accordingly, with a "Lease Receivable" item on the vendor/lendor's balance sheet.

But if it does promise and deliver upgrades and the like, then this lease contract is a "mutliple-element arrangement," more akin to a sale than to a loan. It becomes necessary to distinguish and value the different elements of the deal. This is true, too, of the loan of tangible equipment (you might lease me a backhoe with servicing promises). But distinguishing the separate elements in a software contract is apparently especially tricky, and auditors will require vendor-specific objective evidence (VSOE) of the value of the different components.

Zoom in further, and try to grapple with what VSOE means, and what are the consequences when VSOE can't be produced, and you get yet further Mandelbrotian swirls within swirls.

And there is the additional complication that software often comes embedded in hardware -- the "appliance" model. So the question of distinguishing among the elements of the arrangement may include the complexity of distinguishing the valuing of the dance and the dancer.

Agawam, Mass.

In recent weeks I have been making regular contributions to a western Massachusetts community newspaper known as the Agawam Advertiser News.

I have long been perplexed and saddened by the fact that when one travels in the US, and picks up different papers along the way, one reads largely the same stories. The various 'local' papers fill most of their papers, and certainly all the ones near the front, with stories from Reuters and AP. Thus, such newspapers find themselves in serious economic difficulties. Anyone with access to the internet can go to Reuters' website. When not cut out the middleman?

I mention that only in order to acknowledge that the Agawam Advertiser doesn't have that problem. Nobody disintermediates it. First, it has no online presence. Unless you are willing to pay the dollar for the dead tree version, you won't read the stories it offers.

Second, and related, there are no wire stories. The stories are local in both topic and conception. The front page of this week's issue includes a story headlined "Council nixes zone change," written by Gregory Scibelli. The lede? "Resident concern and perceived lack of benefit to the community led the Agawam City Council this week to rule against a zone change at the corner of Maple and Spencer Streets."

If you don't know or care about the corner of Maple and Spencer in Agawam, Mass. -- well, you are presumably not the audience for that particular story. You'd rather read about who is going to be the next chair of various important committees of Congress in Washington? Go for it -- but the Agawam Advertiser carries no wares in that overcrowded marketplace. That is the better part of its charm.

What about the back pages? You won't find here reviews of the latest books on the New York Times best seller list. When there are book reviews, they involve local publishers, local authors, and local issues. One of my own recent contributions was a review of a book by an Amherst College professor on slavery in the Connecticut River in Massachusetts in colonial days.

So: the Agawam Advertiser News is an institution for which I believe the people of Agawam and environs have reason to give thanks on this thanksgiving day weekend.

Nasser Saber and Algebra

Last week I had a few thoughts to share about Saber's critique of time preference. My own view, again is that time preference, understood as the philosophical basis for interest-bearing contracts, is perfectly rational and arises both from consumption and from production.

Another recent and closely-related Saber entry discusses a neat algebra word problem. I'll give Saber's words for it: "A father is 48 years old; his son, 18. How many years from now will the father’s age be 3 times the son’s?"

I'm no great shakes as a mathematician, but I can handle this. Like a good student, I'll "show my work."

48 + x = 3(18 + x). Find for x.

48 + x = 54 + 3x

48 = 54 + 2x

-6 = 2x

-3 = x.

So we have learned that our question was badly worded. The two men have passed the point at which the father was three times as old as his son. They did so three years before the moment described in the question. Math corrects the false assumption buried in the wording of the problem.

Saber understands this, but I submit that he draws the wrong conclusion from it, and this again has everything to do with time preference. He seems to think that our intuitive sense of the passing of time is wrong, and math has here corrected it.

I disagree. Our intuition is that time only runs in one direction, so that there is no "negative year." That intuition is correct. It doesn't, and in a deep and true sense there isn't. We create various abstractions, and use those abstractions to do neat things. But if we let our tools tell us who we are, we have created a golem.

The mathematical tools let us write "-3 years," but they don't let us live three years in reverse and reach that younger age. Would that they could!

If you are a regular reader of these entries at all you know that I am about to quote William James. So here goes: "The essence of life is its continuously changing character; but our concepts are all discontinuous and fixed, and the only mode of making them coincide with life is by arbitrarily supposing positions of arrest therein."

Roughly that, I think, is one of Saber's key mistakes.

UConn Beat Syracuse

With all due respects to the Pilgrims, to the traditional sentiments of harvest time, and to expressions of gratitude, both cosmic and local, Thanksgiving Day for some of us constitutes chiefly the center of the football season -- its culmination for high schools, and the college games that serve as a natural lead-in to the wonders of the bowl-game season.

Allow me, then, to express my own gratitude to the fates for bringing Coach Edsall to the helm of the football program of the University of Connecticut.

The Huskies won in convincing fashion against the Orangemen of Syracuse last weekend: 23 to 6. In the Carrier Dome, yet. This makes three wins in a row and puts the Huskies in a tie for second place in the Big East (behind Pitt, even with West Virginia).

Huskies have two more conference games. One is at home, this weekend, Saturday, against Cincinnati. The week after that, they play an away game, vis the South Florida Bulls.

The Huskies are now eligible for a bowl game bid, but still somewhat long-shots to get one, given the shaky start they got this season. But we can hope.

Oddly, there was a fair amount of talk before the UConn-Syracuse game of what great friends the two coaches are. Well, I guess the use of that story line itself reflects the genial biases of this time of year.

Plagiarism Scandal in the Phillippines

The Supreme Court of the Phillippines recently ordered the whole of the faculty of the University of the Phillippines Law School to show cause why they shouldn't be sanctioned. What was this awful thing the facilty did en masse? It criticized a member of that bench -- calling out one of the Justices who had plagiarized from a foreign source in an opinion.

President Benigno Aquino III sensibly has jumped into this debate on the side of the faculty members in a speech at the alumni homecoming of their institution.

"Those in high positions shouldn’t intimidate or threaten persons who only want to freely express their own opinion and come out with the truth. This practice that has already been there from way back should not be used to cover up the sins of those who have wandered into the crooked path,” he said.

Well said.

Since I'm a safe distance away from repurcussions, allow me to say that the plagiarist at issue,. the one hiding behind his friends and official position so no one will call him out on his intellectual laziness, is by name Associate Justice Mariano del Castillo.

Harry Potter

Harry Potter and his world are back in movie theaters.

Here's a short version.

Okay, too short. Here's a more exciting version, including Snape's poetry as read by and to puppets.

Bit of a surprise ending to that one.

Unfortunately, these aren't really "sock puppets." That's a pity because I have a few posts already in which I have used the label "sock puppet" and this would make a neat addition to that already-idiosyncratic collection.

All right. Who's going to mind? Let's call them sock puppets!

Thoughts for Nasser Saber

About five years ago now (how time flies!) I wrote a book review under the headline "Of a Philosophical Difference with Black-Scholes."

I had been asked to review volume three of a series of books by Nasser Saber, his theory of "speculative capital." The themes of the series are broadly Marxist, with some slants of Saber's own.

Volume three, in particular, "Speculative Capital: The Enigma of Options," involved as the subtitle implied the valuation of options to buy or sell stock. That justified the title of my review, because the predominant model of the valuation of stock options among non-Marxist finance theorists is known as the Black-Scholes -- or sometimes more elaborately the Black-Scholes-Merton -- theorem. It seems to maintain its prominence sometimes because it makes a valuable target. Still, it does maintain that status.

Saber, by raising the controversies over Black-Scholes to a philosophical plane, performed a valuable function. As it happens, I think Marxism philosophically corrupt, and all its conceptual applications accordingly suspect, but I was happy for the opportunity to say so with his books as a foil.

Saber wrote me after the appearance of my review, irate over several fairly trivial matters. Most irking of his complaints to me was the charge that I had misquoted him by inserting an exclamation point into a quotation where it didn't belong. I had in fact included the exclamation point there because he had put it there. He had apparently failed to confirm his own memory of his text before writing me an irate inaccurate email.

I wrote him back, citing the page on which he could find the accurately quoted exclamation point, and saying -- anent his somewhat more substantive complaints -- that he might want to respond to me in the course of his projected volume four. He said he would likely do that.

I still await volume four, as does the rest of the world.

In the meantime, Saber has a blog, the "Dialectics of Finance," here

A recent entry in that blog denounced the notion of "time preference." This returns me to the heart of his philosophical dispute with Black-Scholes. The question is whether the preference for immediacy is inherent in the productive process, or simply a matter of consumer impatience.

Think of a two-year old child offered a cookie: now or later? The cookie now will always win out. Even a much bigger cookie, later, will fade into insignificance beside the forces of appetite and the present moment. As humans grow older, we learn to control immediate impulses. But the preference for immediacy remains, however tamed. We have to be bribed to accept a wait for the promise of the bigger cookie.

That's consumer impatience, and it certainly sounds like a reason for the phenomenon of interest payments on loans. If I give you money, I am putting off some possible consumption of my own until you pay me back. I need to be bribed for this.

Saber doesn't disagree that the two year old prefers the cookie now, or that Kim Kardashian and Paris Hilton (his examples) prefer shopping now to shopping later, but he says here in his blog, and in the books, that it doesn't apply to all people everywhere, and where it does apply, it is a variable fact (as consumer preferences notoriously are), and thus not a given for an economist.

"Beyond empty-headed women and mountebanks, what gives rise to the illusion of time preference and helps sustain and institutionalize it is the commodity fetishism of a consumer society," Saber writes.

I commented on this blog entry. Since it is a moderated comment section I don't know yet whether ny comment will ever show up, [NOTE: It has show up there] but I'll explain it here anyway.

I postulated two reasons for the time preference (beyond consumer impatience).
The first is simply that we have lives of limited duration, and during the course of those lives we AGE in something more than a purely nominal sense. Our bodies obey the second law of thermodynamics.

This means, if you are a 20 year old with a chance at a professional athletic contract, it is a good idea (ceteris paribus) to take it now rather than next year. Nobody can predict with certainty the number of years during which your body will be able to play at a competitive level, but anyone can predict that there won't be an unlimited supply of them. So you prefer to get started.

Notice that this example isn't about consumption. It is about a particular employment relationship, and one's suitability for it. It is about production -- though what one is producing in this particular case is a spectacle rather than anything more tangible.

So the first reason for time preference: aging, with all it entails. Or, if you prefer: finitude.

The second reason? The processes of life in our fellow inhabitants of this globe -- in animals, plants, and fermentation-generating bacteria, etc. -- require time, and produce value when given that time. In other words: while we are aging, they are growing. Life succumbs, but it doesn't merely succumb to the second law -- it first, and generation-by-generation -- resists that law.

Henry George developed this idea in the course of his critique of an illustration used by Frédéric Bastiat explaining the nature of interest and profit.
Bastiat wrote of two carpenters. One has built himself an extra plane, a crucial tool in the craft they share, and loans it to his colleague. Will he be satisfied with the return of as good a plane in a year? Surely not! He'd expect, Bastiat suggests, a board along with it, as interest. Never mind Bastiat's reasoning, I'd like to focus on George's reply.

George wrote, "I am inclined to think that if all wealth consisted of such things as planes, and all production was such as that of carpenters -- that is to say, if wealth consisted but of the inert matter of the universe, and production of working up this inert matter into different shapes, that interest would be but the robbery of industry, and could not long exist." But some wealth is inherently fruitful, like a pair of breeding cattle, or a vat of grape juice soon to ferment into wine, or a field of wheat. In each case, the processes of life themselves over time generate value.

Planes and other sorts of inert matter (and the most lent item of all—- money itself) earn interest only indirectly, by being part of the same "circle of exchange" with fruitful forms of wealth such as those, so that tying up these forms of wealth over time incurs a opportunity cost.

Notice that neither Bastiat nor George was discussing the sort of consumer impatience on which Saber would re-build the theory of interest.
So living generates a demand for interest (because organisms decay) and the processes of life also provide the ground for the supply of interest (because organisms resist decay).

Time preference then is a rational reflection of the realities of production. QED.

Random Bit of History

"In a vicious cycle, the Federalists became obstructionists because the Republicans cast any opposition as treasonous. Rejecting the concept of the two-party system, the Republicans insisted that they alone expressed the will of the people. Thomas Jefferson explained to William Duane, 'I will not say our party, the term is false and degrading, but our nation will be undone. For the Republicans are the nation.' If the Republicans were the nation, then the Federalists were traitors.

"While urging unitred support for the war, the Republicans gave the Federalists scant reason to cooperate."

Alan Taylor, "The Civil War of 1812" (2010), p. 180.

Dante and Anarchism

"...over thyself I mitre thee and crown."

That is the (Dorothy Sayers) translation of the moment in Dante's Divine Comedy when Virgil tells the pilgrim that he has become a fully self-responsible, self-aware individual. They have travelled through Hell and Purgatory together. Virgil, as a pagan, can go no further -- can never enter the third Realm -- so he will soon depart.

"Over thyself I mitre thee and crown." In Italian, "per ch'io te sovra te corono e mitrio." You have now within yourself the powers of both state and church.

Obviously, Dante is not taking an anarchistic (or an antinomian) position here. He is simply saying that once one's will has been purged of all the twistings that might lead it astray, it will not be led astray. The institutions of mitre and crown are supposed to contain those twistings during this life, purgatory will cure them in the next.

Still, it does not take much free-associating from that line to associate it with the hope that even in this life, human history will reach a point at which earthly sovereigns and hierarchs will no longer be, or even be thought to be, necessary.

At some point, each of us may seize his own mitre and crown.

Syllogistic Argument

In Yahoo!Answers I encountered the following question, which has me thinking.

Someone calling himself XO Manowar said that his instructor has given him a passage from the writings of Martin Luther King and asked that it be presented formally. The passage is this:

One has a moral responsibility to disobey unjust laws. […] Any law which degrades human personality is unjust. All segregation statutes are unjust because segregation distorts the soul and damages the personality. It gives the segregator a false sense of superiority and the segregated a false sense of inferiority. Segregation, to use the terminology of the Jewish philosopher Martin Buber, substitutes and “I-it” relationship for an “I-thou” relationship and ends up relegating persons to the status of things. […] Thus it is that I can urge men to […] disobey segregation ordinances.

XO Manowar says that his instructor stipulated the passage "has two sub arguments that are the premises of the overall argument. I need help identifying which ones are which...."

My own initial reaction, and my answer to XO, was as follows:

The overall argument seems to be this:

MAJOR PREMISE: (P1) One has a moral obligation to disobey unjust laws.
MINOR PREMISE: (P2) Segregation laws are unjust.
CONCLUSION: One has a moral obligation to disobey segregation laws.

--------------

King doesn't seem, in this passage, to have addressed the question of why people should believe P1. But he did address the question of why we should believe P2. And that is what your instructor was talking about. The sub-arguments can be put formally in this way.

SUBARG. 1

MAJOR PREMISE: (P3) It is unjust to relegate persons to the status of things
MINOR PREMISE: (P4) Segregation laws do relegate persons to the status of things.
CONCLUSION: P2 as stated above.

Another way of getting to P2 is at least hinted at here as well.

SUBARG. 2

MAJOR PREMISE: (P5) It is unjust to distort souls and damage personality (apparently those two phrases essentially are synonymous in this context).
MINOR PREMISE: (P6) Segregation distorts souls and damages personality.
CONCLUSION: P2 as stated above.

I'm reading King here as a Ph.D. in theology (which of course he was -- hence his comfort with quoting Buber), not as an activist and political leader (which of course he also was, though the Venn diagram overlap of those two circles is fairly small).

But now, thinking about it some more, I may have gotten King wrong. I don't think that subarg 1 and subarg 2 are on the same level, each directly supporting the minor premise of the main argument. This is, rather, a three-link chain. There is an argument about what distorts personality. That leads to the CONCLUSION that segregation distorts personality. That conclusion then serves as the minor premise of a second argument, about what kind of laws are unjust. THAT syllogism then establishes the conclusion that segregation is unjust. This then serves as the minor premise of the main argument.

P.S. here is the original source for the passage under discussion.

Gold Standard Links

There is talk -- not fever-swamp debate but serious discussion stimulated by the president of the World Bank --of bringing back the gold standard in some capacity.

Zoellick had a lot of sensible things to say as you can read here for yourself.

Robert Harding, writing for the FT, noted that gold "prices have risen from close to $200 a decade ago to almost $1,400 today. The rapid rise in recent years reflects fears that unconventional central bank policies – such as last week’s move by the US Federal Reserve to expand its balance sheet by another $600bn – could lead to inflation."

For some historical background, you might go here or here.

For the Austrian school's take on the significance of gold, go here.

For informed speculation on where the price of gold is headed, you might look to a Bloomberg story yesterday by Nicholas Larkin.

But back to Zoellick. Who the heck is he? Who was he before he was put in charge of the World Bank? Here'a the official bio.

Or you could listen to this fellow talking about the history of the institution.

And here are some final thoughts specifically on how a return to a gold standard might be accomplished.

Funny Stuff

I would like to thank Anderson Brown, the philosopher behind several blogs and some wonderful Facebook entries, for introducing me to this.

I've never taught in my life, yet I can sufficiently sympathize to find this fantasy funny.

Also, that led me to this one, another YouTube gem using the same generic animation software, and for that matter the same professor character in the same virtual office. Enjoy.

"Can you see where I am teaching? We're in Nowhere, Nebraska."

Nice dis of Harold Bloom, too.

From 1824

"The question of character has always been a staple of presidential elections, but it became an especially prominent issue in 1824 as Jackson's people questioned Clay's and lauded Old Hickory's. The tactic succeeded in planting seeds of doubt about Clay....Clay had earned repute as an effective political broker, but that made it easy to paint him as a backroom dealer. Clay made no secret that he drank spirits, but that made it easy to whisper that he was a drunkard. He was famous for gambling, and that made it easy to depict him as reckless."

David S. Heidler & Jeanne T. Heidler, HENRY CLAY: THE ESSENTIAL AMERICAN (2010) p. 169.

The Blundering Herd

Two fine finance reporters, Bethany McLean and Joe Nocera, collaborated on a Merrill Lynch-centric re-working of the story of the financial crisis of 2008, and the result appears in the November issue of Vanity Fair.

McLean has previously distinguished herself by getting the Enron story right before anyone else. She wrote "Is Enron Overpriced," which ran in FORTUNE on March 2001.

That story began with a meditation on the term "it," as in the It Girl in Hollywood talk, or "the It Stock" for Enron at the turn of the millennium. The story proceeded to this:

And the numbers that Enron does present are often extremely complicated. Even quantitatively minded Wall Streeters who scrutinize the company for a living think so. "If you figure it out, let me know," laughs credit analyst Todd Shipman at S&P. "Do you have a year?" asks Ralph Pellecchia, Fitch's credit analyst, in response to the same question.

Nocera? Well, I wrote of him in this very space quite recently and before I knew anything of his collaboration with McLean.

Anyway, you can use the first link above to click on their Vanity Fair article. Please do.

Failing to Feed the Monster

Overstock held its conference call on Wednesday to discuss third quarter earnings.

You can see the transcript here.

I've also attached their one-year stock chart. As you can see, there was a strong upward move in the early spring of this year. At the vernal equinox, the price was under $15, through May it was repeatedly close to or above $24.

It lost all of that gain over the course of the spring and summer, and was back at $14 in August. Yesterday, November 4, it closed at $13.39.

The stock has also been underperforming the indexes markedly since August, when it reported a second quarter loss of $1.4 million.

On this week's call, OSTK officials discussed another loss, for the 3d quarter, this time of more than $3.3 million, or 15 cents per share.

I maintain some skepticism over the value of Overstock's numbers, a skepticism I explained in posts on my other (now-suspended) blog in February, and before that.

In my humble opinion (and in the opinion of observers who have looked into the matter quite keenly), Overstock created a cookie-jar reserve for itself in 2008. It inflated its 2009 results with the help of that reserve. The problem, though, is that once you start doing that, you'll find it tough to maintain. The cookie jar runs empty, and you have to get ever-more creative.

I suspect that Overstock's creativity has failed, and so it is now reporting the kinds of losses it would have been reporting for some time had it not engaged in trickery. Thus, the hit it has taken on its stock price.

I have no personal position, long or short, on OSTK, by the way. Furthermore, I am not giving financial advice, except to say that if you are going to invest in the stock market in any capacity, you would be an idiot to rely on anything you saw in a blog, including this one. Also, picking stocks for most people is a fool's errand anyway.

Still: there is an empty cookie jar from OSTK's kitchen and a rather bad odor wafting thence.

So I don't have to read the book

I don't plan to read Rattner's recent book on the auto industry bailout and restructuring.

I feel a bit guilty about not reading it. On the basis of its topic and the author's point of view thereof, it surely seems like the sort of thing I should read, to help preserve my own econoblogger cred.

Rattner, you'll all remember, was chosen in the opening days of the Obama administration to superintend the federal restructuring of both General Motors and Chrysler, and this book is his account of his work at that task.

Rattner also got himself into some hot water in a pay-to-play scheme involving New York State's pension funds, but I don't imagine that scandal figures prominently in the book, OVERHAUL.

Anyway, to ease the aforesaid pangs of guilt, I've read Malcolm Gladwell's detailed review of OVERHAUL in The New Yorker, as well as Felix Salmon's reply to Gladwell in Salmon's Reuters-sponsored blog.

Okay, those pangs were never very sharp....