Friday, June 23, 2017

Bird Eggs and Wings

A NY Times article caught my attention. Why Do Bird Eggs Have Different Shapes? Look to the Wings. The article relates egg shape to "flight ability," but doesn't explain what that means. Speed? Stamina? Maneuverability? Efficiency?

Having recently returned from New Zealand, it made me wonder about kiwis. Kiwis can't fly and have tiny stubby wings. The article suggested to me a kiwi egg would be more spherical, less elongated, and not pointy. It isn't pointy as I expected, but it is elongated similar to an egg of a wondering albatross, which has great flying ability and huge wings, at least in length, relative to their body size.

By the way, while in New Zealand I was surprised when I saw an x-ray image that showed egg size relative to the mother's body size. Why Is the Kiwi’s Egg So Big?

We also saw an albatross breeding ground on the Otago Peninsula near Dunedin. About the only time they spend on land is for breeding. The rest is in air or on water. They migrate eastward encircling Antarctica in the process. They fly long distances expending very little energy by soaring (using the wind with minimal wing movement).

Wednesday, June 21, 2017

New Zealand

A vacation in New Zealand is mainly why I have not posted here in 2+ weeks. My wife and I did a 14-day escorted tour of the north and south islands. NZ has lots of beautiful scenery, about 4.5 million human inhabitants, 6 million cows, and 56 million sheep. There are 19 breeds of sheep.

We heard about common brushtail possums. Like the link says, NZ has about 30 million of them (about 70 million several years ago), they aren't native but were introduced there, where they have no natural predators (e.g. coyotes). They differ from the Virginia or North American possums in the USA. Many people in NZ regard them as destructive pests. Some blend their fur with merino wool to make very warm and expensive clothing of incomparable quality and durability.

We heard a lot about rugby, the favorite sport in NZ, and the Maori people. We rode a JetBoat. We saw a few places where scenes from the Lord of the Rings trilogy and Hobbit movies were filmed, including Hobbiton. We saw glowworms.

A visit to Rutherford's Den was not part of the tour, but we chanced upon this delightful place walking during free time in Christchurch. Ernest Rutherford was born and grew up in New Zealand.

Saturday, June 3, 2017

Fisher's Theory of Interest #4

Fisher says the rate of interest is based in part on the preference for present versus future goods, or human impatience. The chief other part is an objective element, investment opportunity. Fisher's human impatience is essentially like what other economists have called "time preference" or some similar term. Böhm-Bawerk called it the "perspective undervaluation of the future." It's the marginal want for present goods versus future goods. Indeed, Chapter IV of Fisher's book is titled "Time Preference (Human Impatience)." He treats these terms as synonyms.

Fisher's explanation of time preference differs from others in that he makes income -- rather than, say, goods or wealth -- central. "The degree of impatience varies, of course, with the individual, but when we have selected our individual, the degree of his impatience depends on his entire income stream, beginning at the present instant and stretching indefinitely into the future" (Theory of Interest, p. 66).

I can't remember him specifically addressing the impatience or time preference of many people who "live payday to payday" with all their income coming from labor. Surely they have a very high time preference for immediate income to satisfy their desire to spend, often limited to rent, food, and other essentials. When I posted Interest As Cost Immediacy in April, 2016 I was not aware of Fisher's term impatience, but it it would have been an apt alternative.

Wednesday, May 31, 2017

Fisher's Theory of Interest #3

Fisher makes income central to his theory of capital. The value of capital must be computed from the value of its estimated future net income, not vice-versa. (He isn't clear about which kind of income he means here, but I assume it is money income.)  Income is derived from capital, but it is from capital goods, not the value of capital. The value of capital is derived from the discounted value of income.

The scheme is:  Capital goods ---> Flow of income ---> Income value ---> Capital value.

"It is true that that the wheat crop depends on the land which yields it. But the value of the crop does not depend on the value of the land. On the contrary, the value of the land depends on the expected value of the crops" (The Theory of Interest, p. 15).

Suppose an orchard yields 1000 barrels of apples a year and this annual crop is expected to be worth $5,000 per year. The physical productivity of the orchard does not by itself imply the value of the orchard. It is valued at $100,000 when the annual crop is valued at $5,000 net per year, and the rate of interest is 5 percent. The $100,000 is the discounted value of the expected annual income (The Theory of Interest, p. 54-5).

Fisher regarded that $5,000 as a perpetuity. He could have arrived at the same $100,000 by assuming the orchard could be sold for $100,000 after any number of years. However, that would look like circular reasoning by assuming a future sale value of the orchard itself. Which of the following is a more reasonable assumption? $5,000 per year with no variation forever? $5,000 per year for several years and selling the orchard for $100,000 at the end (which makes the cash flow akin to a bond)? I am inclined toward the latter.

It is clear from this that Fisher's use of "interest" is much broader than explicit interest on a loan or the implied interest rate of a bond. It includes observable market interest rates, but also subjective rates used to discount future values. Observable market interest rates result from market transactions; discount rates used in subjective valuations are not. This dual usage of the term interest is not confined to Fisher. Böhm-Bawerk and other Austrian economists do likewise. Moreover, the more heterogeneous the capital, the more opaque must be subjective discount rates (except possibly to the person doing the discounting).

Saturday, May 27, 2017

Fisher's Theory of Interest #2

As said in my previous post, Irving Fisher regarded income as the central concept of economics. For much of the spending of income, or the cost of living, there is little time difference between expenditure and its enjoyment or use. For example, there is little difference between buying a movie ticket and seeing the movie, paying the monthly rent and having a place to live, buying food and eating it.

The time difference worth noting is that when money is spent not simply for a short-term use, but for all its possible future uses.  If a house is bought, we do not count the purchase price as all spent for this year's shelter. We expect to live in the house for years. Only a portion of the purchase price is regarded as the cost of the current year's use. The same applies to other durable goods such as an automobile, and most furniture and appliances. The true real annual income from such goods is the approximate equivalent of the cost of services they give each year.

Fisher said nothing about a home mortgage, car loan or car lease. This was likely due to their being uncommon when he wrote this more than a century ago. In any case, his focus was on money payments for consumption goods, or money outgo. Money income includes all money received whether spent or not. The part of money income not spent is saved or reinvested.

Several pages later Fisher says capital gains are not income. That seemed odd initially. Maybe he meant unrealized capital gains are not income, and he would have regarded realized capital gains as income. He did not use the italicized words, but they fit an example he gave. It was about a bond, whose price grows with accrued interest between coupon dates. "That growth in its value is not income but increase in capital. Only when the coupon is detached does the bond render, or give off, a service, and so yield income" (The Theory of Interest, p.26). The phrase "the coupon is detached" is archaic (link). Substitute "interest is received" to modernize it.

"If Henry Ford receives $100,000,000 in dividends but reinvests all but $50,000, then his real income is only $50,000, even if his money income is $100,000,000. And if he ...  received no dividends and yet spent $40,000 in that year for living expenses and all other satisfactions, then his real income was this $40,000 even if his money income that year was zero.
   "Thus the income enjoyed in any year is radically different from the ups and down of ones capital value in that year--whether this is caused by savings or the opposite, or by changes in the rate of interest or by so-called chance" (The Theory of Interest, p.27).

Monday, May 22, 2017

Fisher's Theory of Interest #1

American economist Irving Fisher published The Theory of Interest in 1930. The subtitle is as Determined by Impatience to Spend Income and Opportunity to Invest It. These two factors sound very fitting to me for describing the nature of interest. He dedicated the book to the memory of John Rae and Eugen Böhm-Bawerk who laid the foundations upon which he endeavored to build.

The first chapter is a summary of his The Nature of Capital and Income published in 1906. He regarded income as the central idea of his economics. Enjoyment income, real income, and the cost of living are three different stages of income. They run in parallel but are not synchronous in time. Enjoyment income is psychological and can't be measured directly. It can be approximated indirectly by real income. Real income consists of those final physical events in the outer world which give us our inner enjoyments.  Real income includes having shelter, the use of clothes, the eating of food, reading, entertainment, and all those other events that contribute to enjoyment.

Like approximating an individual's enjoyment income by real income, an individual's real income can be approximated by his cost of living, the money measure of real income. "The total cost of living, in the sense of money payments, is a negative item, being outgo rather than income; but it is our best practical measure of the positive items of real income for which these payments are made" (The Theory of Interest, p.7).

Wednesday, May 17, 2017

Pure Time Preference Theory of Interest #6

In my latest post, I claimed there is more to "originary interest" than mere time preference. While in his critique of productivity theories Böhm-Bawerk downplayed the relevance of productivity to interest, at other times he overtly acknowledged it. An example is in his evaluation of the work of John Rae. "For I consider it entirely correct to think of interest as having its ultimate roots in a difference in our estimation of present and future goods. I also consider it quite correct to say that the purely psychological reasons that Rae sets forth for this difference in evaluation are a very material factor. But I consider it equally unquestionable that these reasons cannot supply an exhaustive explanation of the phenomenon of interest as it in fact exists. ... [T]here are also technological methods of production which influence interest. I am referring to those factual experiences which reduced one group of interest theorists which we have already discussed to postulate an independent 'productivity of capital.'" (Capital and Interest, Volume 1, p. 227).