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July, 2009

  1. Economists don’t know what they’re talking about.

    July 22, 2009 by max

    Classical macroeconomic models are in trouble. They have difficulty predicting even the most basic things. As is apparent to anyone who bothers to go back and check the predictions and forecasts that are made by economists they are mostly just random numbers. Not because of bad faith, but because of bad models.

    In the current economic crisis one major school of economists, the Keynesians, propose massive government spending to stimulate the economy while another major school of economics, the Austrian School, warns that this will inevitably trigger high inflation and should be avoided at all costs. Both schools of thought have an impressive amount of Nobel laureates backing up their respective views, and are well respected for their views and models of the world. So should the government spend massively to regain its footing? Nobody knows.

    In an economic stagmire such as the one we are experiencing now economists look back at similar scenarios of the past to get an idea of how to move forward . What triggered the great depression that started in 1929 and didn’t end until the second world war? The keynesians believe that underconsumption and overinvestment caused it. The Austrian school of economics believe it was caused by the fall of money supply. Or as the Wikipedia article on the causes of the great depression states:  “historians lack consensus in describing the causal relationship between various events and the role of government economic policy in causing the Depression.” In other words: Nobody knows.

    What about housing prices? Since they are at the heart of the crisis there’s a keen interest in knowing whether they have reached the bottom or are still sliding. New numbers have just come out telling us that U.S. house prices rose 0.9% from April to May on a seasonally adjusted basis. Most experts had expected them to fall by 0,2%. Is this a green shot that will soon turn brown, or is it the start of a recovery? Nobody knows.

    These examples are in no way unique. The June edition of the 1993 OECD Economic Outlook may have the best example of just how useless our macroeconomic models really are. The official GDP growth and inflation forecasts of the G7 countries from 1987 -92 were compared with a model that simply predicted that next year will be the exact same as this year. And they were equally good. The inflation forecast was even a little bit better. In other words, guessing that next years inflation will be the same as this years is a good a guess as the one government econmists spend vast resources deriving from complicated models. And these forecasts are the ones we base our econnomic policy on. And they’re random. Nobody knows.

    Why are we still using these models? Probably a combination of several reasons. Tradition is one. These models and their assumptions are the ones we have always used. Career economics is another. It is not unknown in science that the practitioners tend to stick to their models, since they have been using them for all of their careers. Old habits die hard, and it’s hard to teach an old dog new tricks. Thirdly it’s a question of mathematics. Most models assume that all human beings act in a rational way which anyone can tell you is not true. As a matter of fact a famous study has shown that the only two groups of people that act as economically rational beings are economists and psychopaths. Most models also assume that people don’t interact. And that they all have perfect information about the market. Which is obviously not true. But these things are hard to model mathematically, so most economists just stick to their guns. The famous physicist Max Planck once remarked that in early life he had thought of studying economics, but had found it too difficult.

    Where do we go? The problems of classical economics run deep. Macroeconomists can’t agree on the most fundamental of things, give random predictions and advice, and base their models on assumptions that bear no resemblance to real life scenarios. It’s not just the little things that don’t work, it’s the whole thing. What is needed is a fundamentally new way of thinking. People aren’t rational. They don’t have perfect information about the market. Supply doesn’t always follow demand. We need a whole new framework. Behavioral economics, which Vernon L. Smith and Daniel Kahneman won the nobel prize for studying might be one way. Complexity and Chaos theory might be another.

    Will we ever fully understand macro economy?

    I don’t know, but I do know one thing.

    Right now the emperor has no clothes on.

  2. A case for online office apps

    July 12, 2009 by max

    A friend just sent me his thesis on Business angel networks in Denmark as a word document. I promised to read it through and comment on it before he turns it in some time next week. I’ve spent the last two hours trying to open the damn thing.

    The core of the problem is apparently that the document is created in word 2008 and my version of word is 2003. So I get an error message, and a prompt with a Microsoft URL where I can go and download a word converter. Fine, no problem. I try to download the 30mb. program using firefox, but it continually hangs around halfway through the download. After around ten tries I give up, and try an office converter program that is linked from the Microsoft download page. After a few false starts I manage to download the program. When I run it I find out that it doesn’t work with my version of Word for some reason. Back to square one. Maybe the download will work better with Internet explorer, after all Microsoft program have been known to be hostile towards Firefox. No. “The connection was reset”.

    In the end I had to ask my friend to resend the document saved as a word 2003 document.

    If he had used an online office suite such as Google docs or Zoho I wouldn’t have had these problems. Microsoft should really be better at covering one of the areas where they are most vulnerable. Sharing documents in online apps is as simple as sending a link, not a 2 hour ordeal that ends up in failure.

  3. Why Google is making an operating system

    July 8, 2009 by max

    Today Google announced that they are launching an operating system called Chrome OS. This is a strategically very smart move.

    Google makes money off the web, their primary source of revenue is adsense which brings in billions of dollars a year. They are quickly diversifying their offerings with google apps, gmail, analytics and a host of other applications. All of them webbased. They are an Internet company by heart: This is where their soul lies, and this is what they do best. Their back-end technology is unsurpassed and their brand is phenomenal. Their future and financial success depends on the Internet. Or more precisely it depends on having as many people and corporations as possible moving most of their information and work online. Preferably to one of Google’s offerings.

    There are two gatekeeper products between the user and Googles products: The browser and the OS. A user needs an OS and a browser to reach Google’s products, and whoever controls these can put up roadblocks between the user and Google. I’m talking about Microsoft here of course. And since many of their products compete with Google, Office being the prime example, they have have all the incentive in the world to make the users way through the OS and browser as hard a s possible before they can reach Googles products. It’s a good strategic decision, Office is a major cash cow and accounts for a large part of Microsofts revenue. It would be stupid to make it easier to use a competitors products if you can do something about it. Which Microsoft can because they are the gatekeepers.

    Google knows this, and are trying hard to change the status quo. That’s why they have long supported the Mozilla foundation who make the Firefox browser. It’s also why they launched their own browser last year. Microsofts Internet explorer has always been buggy, and not quite up to date. The newest technology often isn’t available in explorer. This isn’t because Microsoft engineers are stupid, it’s because Microsoft management is good at strategy. They want people to use the Internet for browsing news and finding information, not to start undermining the goldmine that is office. And you need a state of the art browser to use the heavy javascript that makes online productivity apps possible. When Google launched a browser it was a jab at the gatekeepers. It was much faster and more responsive than Explorer, and the javascript engine blew them out of the water. This put Microsoft in a strategically bad position, they didn’t want to make the browser so good that online apps could eat away at their core business, but if they didn’t follow suit they would start losing marketshare quickly. Damned if you do, damned if you don’t. Note that Google’s browser doesn’t need to have a large marketshare, indeed that’s not the goal. The goal is to show the world what can be done in a browser, and thereby forcing Microsoft to innovate. And it worked: The newer versions of explorer are faster and have particularly gotten better at executing javascript, the backbone of online apps. Google won the browser war, with the help of Mozilla. The important point here is that Google doesn’t care what browser you use. They don’t make money on browsers, they make money on online offerings and apps so all they care about is that your browser is fast and supports the newest technologies.

    Now they are launching an operating system, and attacking the last gatekeeper technology between the enduser and their offerings. Strategically the situation is exactly the same as the browser war, Google doesn’t care if you use their OS. All they care about is that you can get to their products quickly, and that you start moving your data onto the web instead of keeping it on your own harddrive. And the way to do this is to launch an operating system that shows how easy it is to use the Internet for almost anything. That’s why they have been boasting about ridiculously low startup times. Turn on your computer and 10 seconds later you’ll be at And they’ll use the OS to show how little you actually need to have on your computer, how few programs you need installed, and how much easier it is if you find your information with Google, use Google docs for your work, share your family pictures with picassa, and check your website stats with Google analytics.

    Microsoft will have to adapt, and follow along. If they want to keep their marketshare that is. Of course they’ll be destroying their core business in the process. Damned if you do, damned if you don’t.

    This one will be hard for Microsoft to counter.