Friday, March 27, 2015

Is It Better For a Capital NOT to be the Largest City?

After an enjoyable blog post about New Zealand at Crooked Timbers, a commenter pointed out how unusual it is for a country's capital not to be the biggest city. (Wellington is New Zealand's third largest.)

I previously investigated another assumption, namely whether it is better for a capital to be located centrally in its district. Using capitals of U.S. states and those states' per capita income as a snapshot indicator of "better", this doesn't matter.

So does it matter if there's life outside the capital in your country? It's easy to make just-so arguments in both directions. Having a smaller capital that is (presumably) separate from the financial life of the country keeps legislators and businesspeople separate, preventing corruption (right?) as well as providing multiple paths to success. But at the same time, it would seem obvious that this creates inefficiencies in allocating human capital (how many petrodollars and attention-minutes have been wasted in airports and train stations between New York and Washington?) So what do the data say?

Only about 18% of world capitals are not also the largest city (I'll call these "smaller-capital" countries). The New World-Old World distribution is not that different (higher in the New World, 24% are smaller-capital). In fact the smaller-capital countries really seem to be the Anglosphere - about half of them (more than random chance since the Commonwealth makes up about a quarter of the world's countries). The other half of the smaller-capital countries are ones that have had revolutions or otherwise gotten their act together enough to deliberately relocate the capital (e.g. Vietnam, Brazil).

And (drumroll), smaller-capital countries do have a median per capita income advantage of about US$800, or almost 10% more than large capital countries. But, we may lose resolution here because the data are broken into categories. That is to say, if we're looking for some effect of capital dominance, we should expect it to be weaker if the population of the capital only barely edges out another city, vs if the capital is obviously the only significant city in the country. Consequently, it might be more informative if we look at the relationship between % of country's population living in the capital, and the per capita income of that country. So I did, and there wasn't one.

So again I turn back to the my homeland, and use data for U.S. states, which are much more homogenous and don't suffer from having been colonized by different countries and have different mixtures of aboriginal vs colonist, recent wars, etc. The majority of U.S. states (33 out of 50) are smaller-capital states. (Why the capitals have not become the largest city is an interesting question for another post.) There didn't seem to be a clear weighting of one area of the country or the other - the big capital states are pretty much scattered around the country. And again, the smaller-capital states had an advantage in median per capita income, $26,929 vs $25,182, a 7% gain relative to large-capital. So again I looked for a relationship between % population in capital, and PCI. Again there was effectively none (very poorly fitting, very slight decrease with increasing % population in the capital). Out of curiosity I looked at effect of % population in the largest city; again, no dice (very poorly fitting, very slight increase with increasing population in the largest city).

So yes, there's a repeated categorical relationship (smaller-capital, lower PCI) that evaporates when looking at it more closely. It probably doesn't matter whether the capital of your state or country is also the largest city. Whether this means political life integrates itself effectively into the economy of a country regardless of human geography, or that government doesn't matter all that much, is difficult to say.

Data notes: I used Wiki tables, and CIA income information. I did not include overseas dependencies (sorry Greenland and Puerto Rico). For countries that divide their branches of government between cities, I added up the branches as one city; the only place this made a difference in whether they counted as smaller-capital was South Africa.

Sunday, February 8, 2015

The Debatable Lands

Of all the cool-sounding names given in fantasy and reality to rough parts of the world (the Bad Lands, Broken Lands, the Burning Lands, etc.), none is as cool as the Debatable Lands.

Friday, January 16, 2015

Best Use of "Whitesplaining" Ever

"[Jacob Canfield] knows all about Islam and racism, [yet] he's neither from a Muslim background nor non-white. Of course neither of those are necessarily germane, but from Canfield's perspective they are...except if you're a social-justice-warrior, and all those issues about 'whitesplaining' go out the window, because you mean well or whatever, and have paid to sit in seminars where you learn to say all the stupid catchphrases that suggest to insiders you are one of them."

- Razib Khan, as usual expressing my thoughts more pithily than I can.

Saturday, November 22, 2014

Examples of Antiquity's Influence on American Founders

Of many, here are two of recent interest:

1) Gibbon's pointing to the increasing power of the Praetorian Guard in the Roman Empire leading to its decline. You might say this is a particularly virulent case of the kinds of special interests internally distorting the priorities of an empire (or over-reactions to those interests), like eunuchs in Ming China or the shepherd lobby in colonial era Spain; particularly virulent, because when the lobby is the people who know how to kill people, their demands are more difficult to ignore, resulting in few natural deaths for emperors.

2) The recognition by both Gibbon and Machiavelli that there may have been a connection, fortuitous though it was, between non-violent succession during the non-inherited Five Good Emperors period, and the prosperity at that time in Rome; hence the installation of regular peaceful power transfers. Good institutions are indeed important.

Relating to #2 above, I would have liked to find some quantitative work with nice graphs on the damage to the Roman economy by civil unrest or governmental inefficiency during turnover/civil wars, but I couldn't find any; there's this article by Bruce Bartlett which is mostly about the damage done by the Roman deep state (deep for that time). Suffice it to say, the Julio-Claudian dynasty marked a period of stability after the civil war between Augustus and Antony, the Five Emperors were a period of peaceful succession, and the Crisis of the Third Century was the opposite. (Note how Bartlett is gunning for the deep state and he skips the Crisis entirely.) Economies grow when credit and capital are available, which requires the world to be predictable. (In other words: risk is okay as long as it can be evaluated.) The Pax Romana and Mongolica are good examples of this; civil wars are obviously bad, but expropriation/nationalization events by otherwise stable states can do just as much damage, because they concentrate the unpredictability in the safety of capital.

Sunday, July 27, 2014

The War on Terroir

FINALLY, people are starting to avail themselves of the pun opportunities given the similarity of terror and terroir.

I for one have long suspected (and our foreign policy similarly ignored) the possibility that a team of suicide vintners from Bordeaux would infiltrate Napa. But for those of us with refined palates, this worry is but one of many crosses to bear.

Monday, June 30, 2014

The Endowment Effect as a Rational Strategy

The endowment effect is well-studied: people assign higher worths to their own possessions than to same things owned by someone else. That is to say: you wouldn't pay more than $30 for that couch on Craigslist, but when you list your own - same model, same condition - for some reason, you ask (and somehow, actually expect!) $75.

To many of us there are two central features of cognitives biases that make them so interesting. The first is that they're cognitive biases, not cognitive stupidities. We aren't just all over the map due to limited brainpower, as bounded cognition models would suggest; we consistently make mistakes in the same "direction". This consistency (even if it's consistent incorrectness) leads to the other interesting aspect of cognitive biases, which is the extent to which they might actually be instrumentally rational shortcuts in disguise, either being seen out of context or profitable only over the long run. That is, perhaps when we were hunter-gatherers, they were useful. For example, hyperactive pattern detection (type I error) is a terrible thing in the modern age when we're looking for incoming nuclear warheads, but during the Pleistocene, we were stupid and it couldn't get us into too much trouble. Sure, maybe you might end up thinking the gods struck the mountain with lightning because your children cursed a lot that morning, and a thousand other strange things, but we couldn't really do too much about our strange beliefs anyway - but if that one time you saw a shape in the grass that looked like a hyena, and it really was a hyena - well, you still came out ahead.

There's a lot in behavior and medicine like this that only makes sense in evolutionary context, for instance fever. Fever is not something that pathogens do to us, it's something that our bodies actively choose to do to them. In the modern age it's really hard for us to understand how fever can be beneficial, until we remember that merely two centuries ago when, without medicine, we could (and often did) die of fevers. But this is a kind of base-rate fallacy. Fever is a way our body shakes off pathogens, and before modern medicine, that cut in your foot might have a 70% chance of going septic and killing you. If the fever only has a 65% chance of killing you, you still come out ahead of any competitor who didn't have a fever response.

So how could a completely judgment-clouding bias like endowment effect ever be helpful? Finding a group of people who don't appear to have it might point us in the right direction. And indeed, Apicella et al found that Hadza hunter-gatherers in contact with markets show the endowment effect just like the rest of us, but Hadza way out in the bush away from markets do not.

This is pretty amazing - there's a difference in a known bias, even within the same group of people. So we've already learned one thing: the endowment effect is a learned behavior. So either we post-agricultural types are stupid, or we're getting something out of this bias. What's the benefit? And what exactly is different about the two groups of people that makes one group adopt this strategy?

A simple model of markets assumes information symmetry between participants. But in reality, specialization of labor means that the person approaching you to buy your possessions will almost always have better information than the aproachee who's selling because the buyer buys (cars, computers, art, etc.) all the time - and if they're initiating the transaction, they are even MORE likely to have better information. Therefore, the endowment effect may be a learned behavior whereby we value our own possessions more highly than is justified on the open market as a defense against information asymmetry.

Here's a concrete example. Imagine you're selling a car. You seek out an offer, and you find another individual buyer. Are you more comfortable that you're getting a fair deal from them than the car dealer? Of course you are. Now imagine you're approached out of the blue by someone who buys cars for a living. Sure, you'd consider it, but only at a very high price where you're sure you're not getting swindled. (This isn't to suggest that the endowment effect occurs consciously, but you can see how when we calculate consciously, we might behave in exactly the way the endowment effect would influence us.)

Consequently, you can imagine the endowment effect as the cushion you need to come out even, when someone with better information than you buys your possessions, especially one who's initiating the deal. And returning to the Hadza hunter-gatherers, we may have identified the relevant difference. Hunter-gatherers are less specialized. If you're a hunter-gatherer, you know just about everybody you could possibly buy or trade something from, and there's not much special knowledge to allow information asymmetry - i.e., everyone is equally smart about the relative value of gazelles and axe heads - so there's no cause to develop such a bias.

This theory makes several testable claims.

1) The more information asymmetry that exists between possession-owner/seller and the buyer, the more the endowment effect gap should be. You think your car is worth more when the car salesman runs up to you on the street initiating and offer to buy it, than when you're selling to someone online with apparently equal knowledge about cars.

2) The endowment effect gap should be larger in markets where there is poorer information, there is less trust, and for goods that are more difficult to value. Complex goods are more difficult to value.

Not central to the theory, but relevant to the fact that this appears to be a learned behavior: children at some arbitrarily young age should not show the endowment effect, because if this differs between humans, it's learned behavior; kids haven't been swindled out of their possessions enough times. (And what is this arbitrarily young age?) Non-hunter-gatherers who nonetheless live in small groups of people with little interchange with other populations should lack this bias. Hunter-gatherers should develop this bias after they come into contact with markets.

There is also a kind of transaction cost argument, separate from the theory. Yes, you might have just gotten a good deal for your used Toyota, but now you have a Nissan and there's a utility cost to you of learning how to operate a new car. If that's ALL the endowment effect is, then each individual's ability to learn new behaviors should completely predict the entire strength of the endowment effect in each individual, at least with complex things like cars.

Saturday, June 21, 2014

Passivity and Usefulness of Information Do Not Positively Correlate

Previously I posted that we shouldn't be surprised that media information that we receive passively isn't necessarily useful to us. It costs money for all the information to get transmitted so broadly, and the reason it happens is because the people on the other end think it is benefiting them, usually financially. This of course doesn't correlate positively with that information being useful to the recipient, and might even correlate negatively. If you put in effort to find information you used to make a decision, it is more likely to be useful to you. Robin Hanson approaches this same idea in his post Why Info Push Dominates.