Friday, February 17, 2006

academic arbitrage: intertemporal transfer of contrariness

The "business cycle" is a fluctuation of stock inventory, fixed investment, infrastructure investment, and other macroeconomic variables. Aggregate demand gets out of sync from supply, and the reshuffling of capital from less- to more-productive uses occurs painfully. Fiscal and monetary policy can both be used to smooth out these cycles: inflationary and contractionary policies, for example, can be seen as intertemporally transferring investment from boom to bust periods.

Here's one way bloggers function the same way. Concepts also have cycles: the stock-value of a concept can go up as events in the world are interpreted, or as old proponents of these concepts die or are discredited and new generations have new fixations. Concept demand can change as consumer tastes vary. Speculators in the world bid on futures values of concepts, inflating some and deflating others. The spread of investors results in a mean value which fluctuates.

Arbitrage smooths fluctuations in economic markets by allowing those who believe a good is over or undervalued to transfer some of that mismatch from the future to the present, capturing the value. New information technologies do the same thing. The struggle between civil rights and security is one example, and bloggers have sped up the information cycle immeasurably. While two decades ago it may have taken a presidential administration for the pendulum of liberty and security to take a full swing, the concept cycle can now be a week or less, as bloggers make statements, other bloggers counter, and equilibrium is reestablished.

What's interesting is trying to predict the period of these swings. In the same way that academic economists use the properties of markets--depths of inventory, long-term response of short-term fixed costs--to try to model the Juglar and Kuznets cycles, the properties of information can be used to try to give substance to the Feiler Faster Thesis, and generate testable hypotheses of the news media cycle and how fast academic fads take to turn over.

As Ellickson says, there's a paper to be written here. Contrariness can be transferred in time, and the blogger captures the arbitrage: he gets read.


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