How mathematical modeling saved money and sped up innovation in 1570

Computer-aided design (CAD) enables engineers to create products much faster and cheaper compared to trial and error.

But did you know that innovators have used abstract modeling long before the existence of computers?

Anton Howes, a historian of innovation, tells the story of Matthew Baker. Baker was a 16th century shipbuilder who improved the construction of carvel ships.

Carvel-built hull versus the previous clinker-built method. Source

As Howes explains:

What Matthew Baker did in the 1570s was to take the design process out of the shipyard, and onto paper. He drew his ships, to scale. And by using pen and paper, with geometry to make such drawings possible, he opened up grand new possibilities for design. […] He drew out new designs for frames, using geometry to work out how any variation would affect the overall shape of the hull, as well as its weight and carrying capacity – all at the cost of only time, ink, and paper, and avoiding the huge potential waste of conducting experiments at full scale in wood. His process allowed him to innovate more easily, and even to design new measuring instruments.

Interestingly, the new methods were not quickly adopted in the rest of Europe:

By the 1580s, new English ships were among the most technically advanced in Europe, and even in the mid-seventeenth century, ship plans were apparently still unknown in France. Having once lagged far behind, geometry began to give English shipbuilding the edge.

It’s still true today that good business practices (a) can save you a lot of money and (b) are hard to copy.

Where do banks make money?

The FRED (Federal Reserve Economic Data) database is a treasure trove for bank geeks.

Bank’s return on assets by nation is one of many statistics that can be visualized with GeoFRED (click this link).

As you scroll through the years, you’ll notice a few patterns.

Return on assets is low in Western and Southern Europe, as well as in Japan.

Banks in the Americas, Africa and Central Europe achieve higher returns.

I’m curious to know what conclusions bank CEOs and regulators draw from these maps.

What are your thoughts?

Further reading:

Where in the world are banks profitable? (FRED blog)

Rethinking bank profitability (FT Alphaville, free but registration needed)

Cross border financial services: Europe’s Cinderella?

New Year’s resolution

This year, I want to (a) increase my writing output and (b) increase my audience.

I plan to release three posts per week:

  • A post on banking (including the ECB) on Monday
  • Wednesdays will be devoted to random topics (research, macroeconomics, book reviews, personal stuff like the current post)
  • You can expect a Dutch language post about personal finance or the Belgian tax system on Friday

I will also share my posts more often on Twitter, Linkedin and Facebook, and submit op-eds to newspapers and other websites.

If you think a post would be useful for your friends, feel free to share it!

Hard work pays off

Remember Actually, lobbyists are good?

I wrote

it seems that the ECB is way ahead of the Federal Reserve when it comes to green central banking

Indeed, new ECB President Christine Lagarde acknowledged her institution’s climate responsibility at the European Parliament…

…and the European Investment Bank (EIB) will stop financing fossil fuel energy projects.

The hard work of the “climate and finance lobbyists” pays off!

Source

‘Banks make money out of thin air’ is a confusing slogan

Banks do not create money out of thin air. That’s the title and argument of an article by Pontus Rendahl and Lukas Freund in VOX.

Unsurprisingly, people on Twitter took issue with the authors’ claim:

I find this polemic boring and unproductive.

Boring, because I explained the misconceptions surrounding “money from thin air” in Bankers are people, too. (If you have a copy of the book, see page 38).

It’s also unproductive, because a slogan is not an insight. VOX claims to provide ‘Research-based policy analysis and commentary from leading economists’. It’s a sad state of affairs if leading economists produce more heat than light by using slogans.

Scientists don’t argue about slogans. Insight follows from identifing the relevant mechanisms or from looking at empirical findings, not from these endless ‘debates’.

That’s why Bankers are people, too contains so many drawings of simple balance sheets and discussions of behavior and incentives. I wanted to be crystal clear, not become yet another vague economics guru.

Do better, economics community…

Is GDP underestimated?

How big is the economy? It’s a crucial question in economics. It’s also the title of a chapter in Bankers are people, too (pages 119-122).

Gross domestic product (GDP) is a measure for economic output based on market prices. This means that unpaid (e.g. domestic) work is not included in GDP, although we find it valuable.

As consumers, we also benefit from free digital services (email, messaging apps, maps, search engines…) that didn’t exist 40 years ago.

But how much do people value these digital services?

In How should we measure the digital economy, Erik Brynjolfsson and Avinash Collis try to measure just that. They introduce ‘GDP-B’, a metric which ‘augments’ GDP with the consumer wellbeing from free stuff. The whole article is worth a read.

For example, they argue that “Facebook alone has created more than $225 billion worth of uncounted value for consumers since 2004” and that “including the consumer surplus value of just one digital good—Facebook—in GDP would have added an average of 0.11 percentage points a year to U.S. GDP growth from 2004 through 2017.”

For more on the difficulties of GDP, read Economics is hard.

Productivity data

Productivity isn’t everything, but in the long run it is almost everything.

Paul Krugman

International datasets on productivity:

EU KLEMS (‘measures of economic growth, productivity, employment, capital formation, and technological change at the industry level for all European Union member states, Japan, and the US’)

WORLD KLEMS

MICROPROD

CompNet (‘micro-based competitiveness dataset for European countries, unprecedented in terms of coverage and cross-country comparability’)

Cross border financial services: Europe’s Cinderella?

The Belgian Financial Forum and SUERF held a colloqium about cross border financial services in Europe.

An impressive line-up of speakers from the public and private sector discussed why European banks don’t sell more services outside their home countries.

Some pointed out that regulation is still fragmented along national borders – despite the banking union.

But the recurring theme of the day was the lack of profitability. There is no business case for mergers and acquisitions. Countries like Germany and Italy have way too many banks.

Chart by Morgan Stanley, via Johannes Borgen

The industry would be better off with fewer players, but nobody wants to take over small banks with wafer-thin margins.

You can read my Twitter thread about the event here.

The slides of the presentations are available here.