Longreads + Open Thread

Longreads

• Amanda Mull in The Atlantic on the rise of vape shops. There's a whole category of businesses that are capital-light, labor-intensive, and have variable success. They're a great proving ground for anyone whose credentials don't match their abilities. These enterprises can be dubious, but they're also a good way to keep certain parts of the economy dynamic. As the article notes, vape shops tend not to sell cigarettes, so they're partly a way to accelerate the transition away from combustion and towards safer methods of nicotine consumption. The vape shops aren't doing this out of public-spiritedness, any more than the convenience stores are insisting on combustibles because they're big fans of emphysema. Different models have different local maxima.
• Ben Carlson tracks the long evolution of financial advice, and how the market has changed over time. In 1950 it was hard to get financial information, but the market was almost entirely retail investors. Today, retail investors have access to much better data than ever before—but the relative information advantage still lies with institutions.
• Dietrich Vollrath breaks down the sources of slower economic growth in recent decades. It's a high-level overview that looks at a few features of human capital—labor force participation, hours worked, education, age—and measures their impact on the change in growth rates. There are some surprises here: in Germany, for example, if labor force participation and hours worked hadn't changed from their late-20th-century trendline, the country would have gotten poorer over the last twenty years.
• Maria Streshinsky interviews Christopher Nolan in Wired. Topics include existential risk, how a traditional filmmaker thinks about AI, and nihilism. One thing Nolan has adapted from AI already is the warning-as-sales-pitch: "Some people leave the movie absolutely devastated. They can't speak."
• Madoc Cairns on Polish philosopher Leszek Kolakowski, who started his intellectual career as a Marxist atheist and died as an anti-Marxist Catholic. One interesting detail is that it's a live example of Straussianism: he was spied on by Poland's secret police, but most of the people he wanted to converse with were fellow intellectuals, so he could afford to be obscure in his prose. "His editor, Zbigniew Mentzel, once said he planned a novel: after a protest in the spring of 1968, three students were locked in the same cell. All attributed their participation to a lecture by Kolakowski. All three disagreed on what the lecture actually meant."
• In this week's Capital Gains we look at the "Minsky Moment"—sometimes, the financial system stops reflecting fundamentals and starts creating them, but that can't last forever and the end is unpleasant. And "financial systems" are just a subset of the more general category of trustworthy promises, so you can have a Minsky Moment in a community or even a civilization.

Books

• Outsourcing Empire: How Company-States Made the Modern World. OK, many historians like to argue that their particular specialty "made the modern world." (A quick search reveals that the Modern World was single handedly Made by: Europe, Japan, "Six Innovations," Play (by the same author as the Six Innovations book), the car, English-speaking people, Muslims, Christianity, Protestants, Meritocracy (briefly reviewed in The Diff, and of course Freemasons.) But this book makes a solid claim. Company-States like the British and Dutch East India Companies did, in fact, conquer large territories while also creating the only institutions of that time period that look remotely like the modern corporation. They also opened new frontiers in diplomacy: historically, many national leaders insisted on being treated as an absolute ruler of all of humanity. It was a bit awkward for a diplomat representing one self-styled universal monarch to ritually agree to some other self-styled universal monarch's claim of world domination. But it was not at all difficult for businesspeople to ritually abase themselves to the Badshah, Sultan, Emperor, etc. (Would someone really do that? Say plainly untrue things in a humiliation ritual in order to do business with a large country in Asia?) The book is also a reminder that even successful institutions are creatures of a particular set of circumstances. There was a time when the best way to ensure profits was for big trading companies to maintain navies and standing armies, and to defend their market share by waterboarding or decapitating employees of competitors. But eventually a different model prevailed.

Open Thread

• Drop in any links or comments of interest to Diff readers.
• What are some political/economic arrangements that are either due for a comeback or can be expected to get much more common?

Reader Feedback

Søren Fryland Møller had some thoughts on Thursday’s post on hurdle rates. Some highlights:

Shareholders (unless very concentrated ownership) only cares about the systematic risk not the idiosyncratic etc etc.

For management, idiosyncratic risk matters a lot, and getting a single long term investment wrong matters a lot more to them than the average shareholders.

Yes, idiosyncratic risk should be in the cash flow forecast and only systemic risk in the CoC and hurdle rate, etc. - but it's rational for managers to operate with hurdle rates that are much higher than the shareholders' estimate of the company's CoC given this difference in risk exposure. It's "cleaner" and easier to use a high hurdle than a complicated probability weighted cash flow forecast.

This is true, but also seems like an incentive misalignment. Essentially, managers are managing their risk in order to maximize company-level risk-adjusted returns, but shareholders in the aggregate probably want them to maximize portfolio returns. Which raises some interesting possibilities: does this explain some of private equity’s historical excess returns? They might incentivize managers to take risk in a way that benefits the portfolio instead of one company.

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