This week on our Masters in Business podcast, we speak with Burton Malkiel, chairman’s professor of economics at Princeton University, and is a two-time chairman of the economics department. Professor Malkiel served as a member of the Council of Economic Advisers (1975–1977), president of the American Finance Association (1978), and Dean of the Yale School of Management (1981–1988). He was a director for the Vanguard Group for 28 years. He is best known for A Random Walk Down Wall Street, now in its 11th edition, with over 1.5 million copies sold.
Malkiel is Chief Investment Officer to software-based financial advisor Wealthfront.
Our conversation range far and wide, and Malkiel discussed everything from how he urged the creation of index funds to why “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.”
Its not that investors are stupid – it’s the opposite! Markets have become so filled with very smart, hard-working and insightful managers with a vast wealth of technology at their fingertips, he says, that Alpha is almost immediately arbitraged away.
Next week we speak with Steven Pinker, Professor of cognitive psychology at Harvard, and author of How the Mind Works.
Live from the Gamma Quadrant: The Big Idea – Whatever: "You’ve got books on the physics of Star Trek...:
...the religions of Star Trek, the philosophy of Star Trek (my favorite: The Wrath of Kant), Trek fandom, Gene Roddenberry William Shatner, Leonard Nimoy, etc, etc. Star Trek is a literary genre in and of itself. I’ve read a lot of these books.... Yet I couldn’t find a book about the economics of Star Trek.... To paraphrase the other franchise, this was the book I was looking for. So there it is. Plumbing. That’s the big idea behind Trekonomics. Plumbing. You can’t see plumbing, you take it for granted, you barely notice it. Yet plumbing is absolutely essential to life in modern society, real or imagined. Economics is the plumbing of Star Trek as much as it is the plumbing of our world. It is what gives them both their unique, distinctive shapes. It is what makes them work.
We all know that there is no money in Star Trek’s 24th century. But it goes far beyond that... neither hunger, poverty nor any of the economic challenges and rewards that make our 21st century lives so interesting... what British economist John Maynard Keynes called the ‘economic problem’... has simply gone the way of the dodo.... I examine three questions: first, how does economics actually function in Star Trek’s universe? Second: is Trekonomics internally consistent? And, thirdly, is it even remotely possible, or is Star Trek just another cheesy SJW communist Kumbaya in space?...
In an over-abundant world such as Star Trek’s, a post-scarcity world, the issue of ownership is moot. It’s very much like Iain Banks’ Culture. Why would you want to own the means of production when the value of the things you produce has converged to zero? Or, in other words, when a replicator can make any gizmo at will, there’s very little point in trying to corner the market on gizmos. Besides, there are much more rewarding things to do with your existence – mapping stellar gaseous anomalies, studying new life and new civilizations, being the captain of the flagship, boldly going etc…. Elements of Star Trek’s speculative political arrangements already exist in our own world – namely, the practice of making some technologies and services free and available to all without restriction, as public goods (think Wikipedia or the GPS). This strongly suggests that post-scarcity is as much a political decision as it is a matter of technological progress. That being said, as Paul Krugman wryly observed at NY Comic Con, what may hold us back on our way to a Trek-like utopia is the human propensity to remain stubbornly unhappy.
Speaking of unhappiness – throughout the years, whenever I got depressed I would usually sit down and watch a few episodes of Star Trek so as to get transported to a better and happier future. Star Trek always had a therapeutic, reparative, function in my life.... This book is a love letter to Trek, if a bit on the wonkish side. It is an attempt to demonstrate that Star Trek’s optimism, so often derided if not summarily dismissed, rests largely on its economic premise; and that said economic premise is the opposite of naive or crazy. I believe that Star Trek truly fulfills philosopher John Rawls’ famous thought experiment on the veil of ignorance: what kind of society would you design if you did not know in advance what would be your place or position in that society? Chances are it would look like the Federation’s utopia, sans the spaceships and the aliens. That is the value of Star Trek in our world. That is why it has endured for 50 years. That is why it still matters today. Live long and prosper, indeed.
Must-Read: Look what they’ve done to my song, Ma: "My discussion of intellectual property inevitably raised questions about my argument that property rights are not natural rights...:
...The ‘moral rights’ of artists over their creative works has been raised as a suggested counterexample. In fact, this example reinforces my original argument.... In France and other European countries, artists have inalienable moral rights over their work... not a property right, but a constraint on property rights.... [If] recognised after the fact, they constitute a taking from the purchaser.... [If] recognised when artists sell rights... they (like any restriction on alienation of property) represent a constraint on the property rights of the artist.... Property rights and (perceived/socially accepted) natural rights... coincide in some ways and conflict in others... both [are] associated with the general feeling of rightful possession, so that a system of property rights is more stable when it coincides with natural rights. On the other hand, natural rights are mostly perceived as inalienable and indivisible...
The year-over-year increase in prices is mostly moving sideways now around 5%. In March, the index was up 5.2% YoY.
In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted). Case-Shiller, CoreLogic and others report nominal house prices. As an example, if a house price was $200,000 in January 2000, the price would be close to $274,000 today adjusted for inflation (37%). That is why the second graph below is important - this shows "real" prices (adjusted for inflation).
It has been almost ten years since the bubble peak. In the Case-Shiller release this morning, the National Index was reported as being 3.0% below the bubble peak. However, in real terms, the National index is still about 17% below the bubble peak.
Nominal House Prices
The first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through March) in nominal terms as reported.
In nominal terms, the Case-Shiller National index (SA) is back to November 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to June 2005 levels, and the CoreLogic index (NSA) is back to August 2005.
Real House Prices
The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.
In real terms, the National index is back to February 2004 levels, the Composite 20 index is back to November 2003, and the CoreLogic index back to February 2004.
In real terms, house prices are back to early 2004 levels.
In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.
Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.
This graph shows the price to rent ratio (January 1998 = 1.0).
On a price-to-rent basis, the Case-Shiller National index is back to August 2003 levels, the Composite 20 index is back to June 2003 levels, and the CoreLogic index is back to October 2003.
In real terms, and as a price-to-rent ratio, prices are back to late 2003 and early 2004 levels - and the price-to-rent ratio maybe moving a little more sideways now.