Nuclear is Green

Writing in The Guardian, George Monbiot has an excellent argument about why the Fukushima disaster has led him to strongly support nuclear power as a green technology. As he explains,

A crappy old plant with inadequate safety features was hit by a monster earthquake and a vast tsunami. The electricity supply failed, knocking out the cooling system. The reactors began to explode and melt down. The disaster exposed a familiar legacy of poor design and corner-cutting. Yet, as far as we know, no one has yet received a lethal dose of radiation.
 
Some greens have wildly exaggerated the dangers of radioactive pollution. For a clearer view, look at the graphic published by xkcd.com. It shows that the average total dose from the Three Mile Island disaster for someone living within 10 miles of the plant was one 625th of the maximum yearly amount permitted for US radiation workers. This, in turn, is half of the lowest one-year dose clearly linked to an increased cancer risk, which, in its turn, is one 80th of an invariably fatal exposure. I'm not proposing complacency here. I am proposing perspective.

[...]

Before coal became widely available, wood was used not just for heating homes but also for industrial processes: if half the land surface of Britain had been covered with woodland, Wrigley shows, we could have made 1.25m tonnes of bar iron a year (a fraction of current consumption) and nothing else. Even with a much lower population than today's, manufactured goods in the land-based economy were the preserve of the elite. Deep green energy production – decentralised, based on the products of the land – is far more damaging to humanity than nuclear meltdown.

But the energy source to which most economies will revert if they shut down their nuclear plants is not wood, water, wind or sun, but fossil fuel. On every measure (climate change, mining impact, local pollution, industrial injury and death, even radioactive discharges) coal is 100 times worse than nuclear power. Thanks to the expansion of shale gas production, the impacts of natural gas are catching up fast.

Yes, I still loathe the liars who run the nuclear industry. Yes, I would prefer to see the entire sector shut down, if there were harmless alternatives. But there are no ideal solutions. Every energy technology carries a cost; so does the absence of energy technologies. Atomic energy has just been subjected to one of the harshest of possible tests, and the impact on people and the planet has been small. The crisis at Fukushima has converted me to the cause of nuclear power.

I also sympathize with a lot of the concerns of the greens, and I strongly believe that we must move to a more sustainable form of energy over the next several decades. To accomplish this lofty goal, we cannot ignore human nature. As Mark Lynas explains in The God Species, human beings evolved to depend fully on external energy sources for protection, comfort and food. Just as uranium serves a distinct purpose within the earth, so do trees, oil and coal. The latter three we burn prodigiously, upsetting the earth's carbon cycle and polluting the planet. These substances play a distinct role in the environment by capturing carbon and toxins beneath the earth. We've clearly upset it.

We can see how toxic petrocarbons are without even getting into global warming. Burning coal, for example, spreads mercury and other toxins all throughout the biosphere. We find fish and other animals all throughout the world who have been deformed and poisoned by the mercury released by coal. If you don't care much about fish, look at China. The country is facing an epidemic of asthma and other respiratory diseases due mostly to its massive reliance on coal.

Given the damage that our energy reliance has already caused, we have little choice. We must accept our flaws as a species and find ways to make our energy reliance less dangerous. While images of atomic explosions would lead you to conclude otherwise, civilian nuclear technology is surprisingly safe. The UN commissioned report on the effects of Chernobyl, the largest nuclear disaster ever, lists the death toll around 9000. Other nuclear events have much lower casualty rates. According to the WHO, not a single person has died from radiation exposure since the Fukushima event, and at most, two people died because of Three-Mile Island. More people die of respiratory diseases related to pollution each week in China than the total number of people that died from these three major accidents combined. That's only one country, which goes to show the massive scale of the problem that we already face.

We need to adopt cleaner technologies, and we need to do it with a clear understanding of the risks. We have been willing to accept terrible costs for energy dependence because of people's inborn laziness to settle for the status quo. Unfortunately, this is a recipe for disaster. People are already contributing to the greatest mass extinction event since the end of the dinosaurs, and our demands from the planet will only grow over the next century.

Yes, nuclear fallout is scary. This is a positive, since it makes us even more wary of the consequences of screwing up. The nuclear power industry has not had a single accident in the 30 years since Three Mile Island. This is a clear sign of diligence and the relatively strong grasp of a still imperfect technology. But even better nuclear technologies are coming very soon, and this includes the ability to recycle spent fuel from older reactors. Like it or not, these technologies will eventually be the key towards ending our dependence on carbon and finding a more healthy and sustainable relationship with our planet.

The Biggest Problem with the Surveillance State is that It Will Never Actually Work

One of the biggest oversights in the ongoing conversation about the surveillance state depends and the generally low level of public knowledge about statistics. Thankfully, Carl Bialik in The Wall Street Journal has taken the effort to help clear this up. As he explains,

Reports about the National Security Agency's program to collect vast amounts of data on personal electronic communications have created an uproar about the implications for privacy. But some statisticians and security experts have raised another objection: As a terror-fighting tool, it is highly inefficient and has some serious downsides.

Their reasoning: Any automated approach to spotting something rare necessarily produces false positives. That means for every correctly identified target, many more alarms that go off will prove to be incorrect. So if there are vastly more innocent people than would-be terrorists whose communications are monitored, even an extremely accurate test would ensnare many non-terrorists.

Kaiser Fung, in his book terrific book Numbers Rule Your World, points out that statisticians tend to be much more interested in variability than actual predictions. Analyzing data based on samples is fundamentally an imprecise science, and statisticians have diligently worked to formalize a system of expression uncertainty. Take an introduction to statistics class, and almost half of your time will be taken up by calculating variance, standard deviations, variance and confidence intervals. All of these are simply ways of saying how much (and how little) you actually know.

This obsession with variance matters because statistical inference is not actually built around binary outcomes. In fact, any projection or estimate contains four possible outcomes: a true positive (correctly guessing something is there), true negative (correctly guessing that something isn't there), false positive (saying something is there when it isn't) and false negative (saying something is there when it isn't). The latter two are labeled type 1 and type 2 errors. While better algorithms and more data can, to an extent, reduce the total number of errors, it is essentially impossible to be perfectly accurate. Instead, a statistician must always accept a trade off between false positives and false negatives. Getting rid of one means accepting the greater prevalence of the other.

Why does this matter? Terrorism is an inherently rare activity and terrorists are very rare among any population. This makes it extremely difficult to establish any robust model for identifying terrorist activity within communication data. Moreover, the incentive system for an NSA agent is badly stacked against false negatives. Let one suspected terrorist go, and you have another 9/11 on your hands (or so they're all trained to think).

In response, the data mining algorithms used by PRISM have to be extremely large. Because reducing false negatives is so important, a basic Bayesian model developed by Corey Chivers estimates that there will be about 10,000 false positives for every successfully identified piece of terrorism-related communication. The government has tried to trot out a handful of terrorist plots that they've interfered with as evidence of the effectiveness of these broad surveillance tactics. For the statistician, this is a tacit admission from the government that hundreds of thousands of Americans have had their constitutionally-protected civil liberties shockingly violated by agents engaged in a hopeless wild goose chase.

The fundamental case against torture, past ethics and human rights, is that it simply does not work. It has never proven to be an effective intelligence gathering tool. Even worse, we have lapsed towards torture despite the fact that much more humane tactics have proven to be incredibly productive.

The case against the surveillance state is exactly the same. Comprehensive data collection accompanied with data mining algorithms is a terrible way to actually investigate and pursue terrorists. Agents will spend most of their time dealing with false positives. At the same time, massive direct costs will be incurred by maintaining such an elaborate system and even larger indirect costs will amount from the systematic violation of civil liberties.

This isn't a particularly novel concept, as the Cato Institute was already tearing apart the fundamentally flawed ideas behind mass surveillance seven years ago. As Jeff Jonas and Jim Harper wrote in 2006,

Though data mining has many valuable uses, it is not well suited to the terrorist discovery problem. It would be unfortunate if data mining for terrorism discovery had currency within national security, law enforcement, and technology circles because pursuing this use of data mining would waste taxpayer dollars, needlessly infringe on privacy and civil liberties, and misdirect the valuable time and energy of the men and women in the national security community.

What the 9/11 story most clearly calls for is a sharper focus on the part of our national security agencies—their focus had undoubtedly sharpened by the end of the day on September 11, 2001—along with the ability to efficiently locate, access, and aggregate information about specific suspects.

Living with terrorism means accepting living in a world that is fundamentally unpredictable and having the courage to face the day knowing that something bad might happen, no matter how hard you try and stop it. There will never be a surveillance system fine tuned enough to actually accomplish what the government wants from PRISM. Instead, a much different approach is necessary: one that modestly accepts our ability to control the world and holds the value of personal sovereignty to the highest degree.

Both at home and abroad, the actions of the US government violate these basic precepts. There is little regard for the well-being of American and foreign citizens, and a hopelessly irrational obsession with trying to control the uncontrollable. A drastically more modest approach has the potential to both reaffirm the importance of human rights and offer the greater opportunity for meaningful security. It's badly needed.

Four Economic Lessons Courtesy of Dorian Electra

Dorian Electra is Youtube pop star who devotes most of her efforts to promoting Austrian Economics. Awhile back, she posted a video called "FA$T CA$H: Easy Credit & the Economic Crash," which unexpectedly turns out to be a useful teaching tool for some fundamental economic theories. You can check it out below.

Dorian seems like a nice enough girl, and I apologize in advance for holding her up as a representative of a whole body of thought. While this isn't very fair (or nice on my part), I think it is very useful to see how her video illustrates public knowledge of economics and the current debate over monetary and fiscal policy. People like Dorian try to create an economic framework based entirely on their (limited) understanding of "economic crashes." This might be because these ideas are inherently sexier than other economics topic (three cheers for AD-AS!!! no one?). But it also has a lot to do with how "nationally screwing up" is a much more relatable story. We can imagine the debtor that gets in over his head. It's harder to understand more specific macroeconomic problems.

But proper economic management is a much broader subject than crashes, and economic recovery has very little to do with what happened before. Even if (and I'm not conceding that point yet) a "fast cash bubble" was the sole cause of the crisis, it should not immediately stop us from doing similar things to encourage a recovery, especially since fiscal and monetary stimulus are proven solutions to a demand-side shock.

Saying "crash, crash, crash" when you want to "cut, cut, cut" is like a doctor who won't treat your cancer because you were a smoker. Fixing the disease and solving its cause are fundamentally independent problems. That's lesson one.

This is lesson two: there is no economic problem so important that it takes precedence over getting back to full employment. To get to that point you need deficit spending and currency devaluation. The latter can come through higher inflation (which I've talked about before, and is more suitable to big economies) or actual exchange-rate manipulation (the Iceland scenario, which you can do if you're small, open and control your own currency). At this point, especially after the Reinhart-Rogoff meltdown, there is almost no debate about this point. There also is no evidence over the last five years of a country returning to macroeconomic stability using any other set of policies.

No matter which monetary path you choose, the end goal is to get people back to work as quick as possible and encourage hard work. The things you could buy before the collapse are harder to get now (especially imports), but you're all working to a solution together. You'll eventually have to pay more taxes too, which sucks. But as long as everyone keeps working, you'll eventually get out of it.

People often  want to make economics into the broad morality play. Even though this is generally a big mistake, there is a bit to think about here. The austerian solution focuses all of the suffering of its policies among the poor and disenfranchised. No rich German is bothered much by the European crisis. On the other hand, a solution that returns to full employment through fiscal and monetary stimulus forces everyone to share the burden of recovery. This is important for the institutions that maintain the long-term well being of a society.

Lesson three is that not all economic problems are the same. A whole bunch of things that led into the crisis, and they continue to plague Europe. This includes the challenges with adopting the Euro, the various housing bubbles, the risk of complex financial instruments (like derivatives), inefficiencies in European labor markets and regulatory challenges facing those countries. Obviously, austerity can't be the solution to all of them. In fact, the euro, for example, has been one of the chief causes of austerity on the periphery. Germany won't accept higher inflation, Greece can't devalue on its own, so they get forced into a debtor's prison version of policy where European bureaucrats decide their budget for them.  

Part of the problem with making broad arguments, as Dorian does, is that it reflects a limited understanding of relevant issues. This is true for most people, no fault there. Nonetheless, even the more informed argument against stimulus-based recovery has fundamental problems. Many conservatives look at something like the economic problems of the 80's and then blindly assume that the actions of the Volcker Fed somehow stop us from using loose monetary policy now. This is obviously absurd. Economic problems can have many sources, just as your car can suffer from many different problems. A solution for one problem might not be the same for the other.

So yes, after Europe gets back to full employment (whenever that will be) there will be other things to address (remember lesson two: full employment comes first). Complex financial instruments need more transparency, as does the actions of mortgage originators and intermediaries (the primary actors in the housing bubble that you cite).

Austrian solutions might be suitable to certain aspects of labor markets and other supply-side problems facing Europe, but they're not alone. More importantly, though, is solving a fundamental Austrian myth when we get to the point of trying to address them. I'll let Matt Yglesias explain:

Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.
 
And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background. 

Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.

It's probably very uncomfortable for people to recognize that the success or failure of a national economy comes down the work of a few bureaucrats. It's probably very uncomfortable to realize the money is fundamentally worthless too. Unfortunately, there's no way to make this more palatable. Economic policy has to be an active and progressive force, since an economy is an inherently managed venture. The Austrians, and more broadly austerity pundits in general, fail to address so many problems because they cannot recognize this fact. And that's lesson four. 

On the Need for Additional Evidence

There is an interesting new report from the University of Waterloo that claims Chlorofluorocarbons (CFCs) are the chief cause of global warming since the 1970s. It was published in the International Journal of Modern Physics B  last week. As phys.org explains,

CFCs are already known to deplete ozone, but in-depth statistical analysis now shows that CFCs are also the key driver in global climate change, rather than carbon dioxide (CO2) emissions.

"Conventional thinking says that the emission of human-made non-CFC gases such as carbon dioxide has mainly contributed to global warming. But we have observed data going back to the Industrial Revolution that convincingly shows that conventional understanding is wrong," said Qing-Bin Lu, a professor of physics and astronomy, biology and chemistry in Waterloo's Faculty of Science. "In fact, the data shows that CFCs conspiring with cosmic rays caused both the polar ozone hole and global warming."

"Most conventional theories expect that global temperatures will continue to increase as CO2 levels continue to rise, as they have done since 1850. What's striking is that since 2002, global temperatures have actually declined – matching a decline in CFCs in the atmosphere," Professor Lu said. "My calculations of CFC greenhouse effect show that there was global warming by about 0.6 °C from 1950 to 2002, but the earth has actually cooled since 2002. The cooling trend is set to continue for the next 50-70 years as the amount of CFCs in the atmosphere continues to decline."

I might not be the most qualified person to criticize Dr. Lu's work, but I do think we should not jump to conclusions right away. The carbon/ temperature record goes back a long time, tens of thousands of years if we are referring to ice cores.With that much data, it's fair to say that the very strong correlation between carbon and temperature can be assumed to continue to the future. But even with that much data, establishing a causal basis can be very difficult. Since we can't run control experiments, we'll almost always have enough uncertainty in the data to keep climate denier websites busy for decades.

The black line represents a three-year moving average. Data from the NOAA, which is available here.

Considering this challenge, I find it very presumptuous to go that far against consensus based on only 10 years' worth of deviation from the original trend. The argument for CFCs is based entirely on the fact that temperatures have not risen as quickly as CO2 levels in the last decade, even though it remains much hotter than any period before it. Considering measurement challenges and the huge number of almost random processes that influence weather (just ask Lorenz about that), it seems presumptuous, to say the least, to claim that CFCs are the only compounds that matter. There's just too much that we don't understand to make that claim with that little of evidence.

To be fair, I'm not claiming that CFCs don't matter in this debate. I only want to recommend caution about extreme claims. A much older report from the US Environmental Protection Agency did say CFCs were responsible for about 15 percent of global warming. They could also play a strong role in the less-than-expected recent rise in temperatures. So could volcanoes, so could a lot of other things.

So what's really going here? Academics have strong incentives to make almost absurd claims, since it helps them get published, and it generates references. While this can be annoying on a case by case basis, the overall scientific discourse benefits from the trolls as it forces people to expand their cases and move the debate forward.  It will take a lot to overturn consensus at this point, since about 97 percent of scientists in a recent survey agree on the mechanism and the effect. As readers of scientific literature, wish should keep this in mind. Prior beliefs should be adjusted only when there is substantial evidence to change course. So far with CFCs and global warming, we're not there yet.

Improving Government

Cass Sunstein, Obama's former regulation czar who was previously best known for his work on nudges with Richard Thaler, is out with a new book. He previews it at the Brookings Institute.

Although Glenn Beck might think otherwise, Sunstein has a very important and very useful philosophy for the effective operation of government. It can be broken apart into a couple of key positions. First, government is necessary and useful, but it is inevitably flawed. Second, citizens' relationship to the government is improved when government's impact is simplified (not necessarily lessened), although that might demand greater organizational complexity. Third, a simple and effective government is exemplified by supporting proper choices and encouraging freedom, instead of applying a heavy hand.

The most important feature of this platform is that it provides for on effective ongoing debate about how government should operate. Active citizens should see flaws in how government operates, and this can be complemented by a wide variety of opinions on how to fix them. Sunstein's commitment to this process is clear in his promotion of "regulatory moneyball," quantitative indicators of the impact of regulatory regimes. Given better assessments of the results of different decisions, we can better debate the appropriate trade offs that we're willing to make.

The only harmful attitude in this debate is an assumption that any active regulatory system will either be perfect or useless. I have my own biases against absenteeism, but I also hate the idea forced on us by current Congressional inaction that we should just pass a couple laws and be done with it. And if passing a law wouldn't immediately solve the problem, we should just abandon trying. It's so intellectually lazy that it's infuriating.

I think this attitude feeds into the stupid myth about the length of bills. Even simple rules might need specific definition, and that takes work. It's much better for everyone than a world filled with ambiguity and confusion because things weren't explained well. To get to something is fundamentally simple for citizens, there might be a ton of complexity in governmental operations.

To make this actually work, we need people constantly pointing out the problems with current regulations and working to revise them for the better. The more libertarian side of the argument (when it's not lazy and just frothing at the mouth over "evil" government), is very useful. To belabor the point, Cass Sunstein is the perfect example here. He, along with co-author Richard Thaler, is a strong proponent of minimalism , but he uses this philosophy to pragmatic ends. This is why their first book together, Nudge, was all about striking the appropriate balance to find "libertarian paternalism."

I would be a lot more interested in the right's arguments about regulation if they were actually focused on improving government. The process of self-governance is always hard and imperfect, especially when a part of society is determined to undermine it. If only we could just get past that, we would all be better. Unfortunately, it seems like we still have a very long way to go.

Oh, and read Simpler. Cass is the boss.

Promoting Marriage is a Conservative Issue. Period.

Rob Portman's recent turn towards supporting gay marriage is further indication of the coming change of the GOP. While there will be bumps along the way, it's obvious that there's already an intellectual framework in place from moderates within the party. Take, for example, Jon Huntsman's recent article in The American Conservative. As he writes,

It’s difficult to get people even to consider your reform ideas if they think, with good reason, you don’t like or respect them. Building a winning coalition to tackle the looming fiscal and trust deficits will be impossible if we continue to alienate broad segments of the population. We must be happy warriors who refuse to tolerate those who want Hispanic votes but not Hispanic neighbors. We should applaud states that lead on reforming drug policy. And, consistent with the Republican Party’s origins, we must demand equality under the law for all Americans.

While serving as governor of Utah, I pushed for civil unions and expanded reciprocal benefits for gay citizens. I did so not because of political pressure—indeed, at the time 70 percent of Utahns were opposed—but because as governor my role was to work for everybody, even those who didn’t have access to a powerful lobby. Civil unions, I believed, were a practical step that would bring all citizens more fully into the fabric of a state they already were—and always had been—a part of.

That was four years ago. Today we have an opportunity to do more: conservatives should start to lead again and push their states to join the nine others that allow all their citizens to marry. I’ve been married for 29 years. My marriage has been the greatest joy of my life. There is nothing conservative about denying other Americans the ability to forge that same relationship with the person they love.

Liberals might scoff at the idea of changing the Republican Party's policies simply for the sake of attracting more votes, but this is much more common than our partisan political landscape when lead us to believe. Fiorini's research, for example, points out that that ideological positions tend to be quite flexible. This shouldn't surprise anyone, since America isn't that ideological to begin with. The members of the two main parties are sorting into more clearly defined groups, not becoming more extreme. While the actual effect on Congress is slightly different, its obvious that the mainstream discussion about "polarization" is clearly off the mark.

I think identity issues could remain separate from this sorting process. We already have a prominent group of gay Republicans in Washington, proving that gayness is not a prohibiting factor for having strong conservative inclinations. Huntsman's gutsy statements deserve accolades because he shows that Republicans can focus on these factors and stop being a party defined by a narrow set minority interests: those of old, religious, wealthy white men. I think our political process will be substantially improved once this happens, and I don't think a wave of moderation is all that far away. Enough influential people (including guys like Karl Rove) have seen that firebrand conservatism is a huge liability for any major election. The process is not all that different from what Democrats did in the 80's.

The agent of all this change is vote chasing. Deride it all you want, but a politician's primary job is to get people to vote for him. They can't stay employed otherwise. Competition has the added benefit of making politicians more responsive to the demands to the public. Political scientists have seen this a lot already. The ideology of parties and politicians can be successfully shaped by forces that can get them elected. In the past, private and public organizations - businesses, unions and advocacy groups - did most of that work. The more participatory system provided by broad-based action committees show the way in the future.

We should obviously be worried when this process begins to favor uncompetitive practices (like gerrymandering) or when diversity of organizations diminishes (when was the last time you heard of an influential American union?). But at the same time, we should be celebrating politicians who are committed to getting as broad a number of supporters as possible, embodying the very best of the democratic process. Even better when they go against the broad positions established by their party, since it can lead to organizational change, increased competition and an even greater number of people included in the political process. And for that, I'm now a huge fan of Jon Huntsman.

Learning to Love the Bubble

I just got back from vacation, where I did a lot of reading. (You can check that out here, if anyone cares)

I've been taking a break from explicit economics and politics books for a little while, since the debate has been feeling a little stale since the election. I think a lot of people are feeling the same way about domestic issues and fiscal issues in particular, and I don't think that it will last very long. But despite my efforts, I keep getting drawn back into that old aphorism: you can talk the boy out of the economics, but you can't take the economics out of the boy.

So, you can't imagine my delight when, after going through books on the evolution of technology and nonlinear systems, I stumbled across this gem, a conversation with "practicing theoretician" Bill Janeway. While the speech covers some liberal standards like the role of government, it also has some wonderful points about financial instability, speculation and complexity.

Here's the basic message: an economy is structured around its technologies.* That technology is supported by basic scientific research. Since much of that research does not show any short- or medium-term economic function (number theory took 55 years to lead to Google), some major institution, either the government of state-supported monopolies, has to provide it. While this kind of research is a public good, it can be considered relatively wasteful from a short-term, profit-oriented economic standpoint. There's not many opportunities for profit-seeking firms in competitive markets to make this investment.

But without these investments in fundamental research, technological growth stalls out.** We're seeing some of that right now, since we've become stingier and stingier about fundamental research since Reagan. During the Bush years, public funding for research universities declined by 20 percent. The current fiscal environment is obviously not helping anything.

Everyone here has heard this argument from me in the past. It's standard liberal boilerplate. But here's where this starts to get interesting.

The process of translating fundamental research to technologies, i.e. the basic economic process, is inherently nonlinear. An apt metaphor is phase transitions in a thermodynamic systems. For example, we can look at a piece of ice and say that it's going to melt, but we have incredible challenges when trying to predict the physical structure of the puddle of water that will emerge once that ice melts. What's more, basic substances exhibit all sorts of surprising behavior during phase transitions. Hydrogen is probably a superhot liquid metal on Jupiter. At certain levels of pressure and temperature, water (normally a non-conductive substance on its own) has incredibly high energy densities and conductive properties.

We can say similar things about entrepreneurship and its role in the greater economy. We know that technology drives economic progress, and we know that technology is essentially the application of fundamental scientific research to solving human problems. But it is nearly impossible to say what form that research will successfully take. It was not possible, in the 1960s, to see how cryptography will translate into America's largest online retailer, but that's exactly what happened.

Because of this fundamental uncertainty, economies must depend on speculation in order to spur the economic process of innovative entrepreneurship. This process is chaotic. Three out of four startups fail. Those that succeed offer returns that follow power laws instead of any sort of normal distribution. As Jack Altman explains, almost all of positive returns in the venture capital industry is concentrated among of very small number of firms. As he writes,

Venture capital is one obvious manifestation of power law distributions, but we see this phenomenon all over. In industries susceptible to the “superstar effect”, such as sports, movies, or politics, the outcomes of top performers tend to follow a power law curve. The best baseball player makes a lot more than than the 100th best player, who makes much more than the 1,000th best player. “A-list” actors do dramatically better than “C-list” actors, who do dramatically better than struggling artists in Manhattan. The president has much more power than senators, who have much more power than local officials, who have much more power than me.

When you take your time to think this concept, one conclusion is inevitable: bubbles are a natural part of financial activity. We've seen that in countless economic experiments already. Anytime there's uncertainty, people will become speculative. When they speculate, group psychology and feedback loops will cause asset prices to dramatically escalate from "fundamental value." People will fixate on their ability to buy and sell with the momentum, "flipping" assets instead of investing in a traditional buy and hold pattern. In fact, the appearance of bubbles are likely a necessary feature of reaching any sort of price equilibrium in the market at large. People need to get burned before they learn.

What's more, bubbles are an important and healthy part of the economy. They encourage innovation, as they flood emerging fields with venture cash. Even after they burst, the innovation they spurred remains in place, and the few companies that win the bubble race become mainstays of the economy for years to come. This includes Amazon and Google from the tech bubble, just as RCA, GE and IBM were important components of the postwar US economy. In both historical cases, speculation helped create the foundation of longterm growth.

Of course, this isn't meant to be an apology for all bubbles, as some clearly threaten the financial system more than others. But the inescapable fact is that speculation is an essential part of all market economies. We should be designing an economic system that embraces shocks instead of one that avoids them. In other words, we should be seeking ways of making economies robust. Recent research from the Fed mines this field, George Soros generated a lot of interest talking about something similar, and there's a field forming around "complexity economics" that essentially advocates the same thing.

Although complexity economics has been mostly hype for awhile, it has a persistent habit of reasserting itself into the national conversation. Maybe conditions are right for a better understanding of the economy as a dynamic system, with policies designed to encourage dynamism instead of surpress it. If not, at least complexity serves as a welcome break from the monotony of the current national economic debate.

*The details of this can be found in The Nature of Technology by W. Brian Arthur.
**This is a riff on Tyler Cowen's argument in The Great Stagnation.