Thursday, September 22, 2016

Bryan Caplan VS Friedrich Hayek











Smart assumption: I unequally value creators
Stupid assumption: I equally value a creator's creations

Smart assumption: I unequally value economists
Stupid assumption: I equally value Bryan Caplan's blog entries

Here's one of Caplan's recent entries...   Value-Added and Social Desirability Bias...

What's up?  I once again point my accusatory finger at Social Desirability Bias.  Rewarding good teachers sounds a lot nicer than firing bad teachers.  So when research comes along that potentially recommends both, pundits and politicians don't coolly crunch the numbers.  They leap to the recommendation that's pleasing to the ear.  So what if the original researchers find that firing bad teachers wins with flying colors?  Move along folks, nothing to see here...

Assumption 1: parents equally value schools
Assumption 2: parents equally value teachers

Are these assumptions smart or stupid?  Of course they are stupid.  They are fundamentally stupid.  Yet, does Caplan challenge these fundamentally stupid assumptions?  Clearly he doesn't challenge the second assumption.  Instead, he encourages/enables/empowers it.  He argues that administrators can fire the bad teachers despite the fact that the admins don't actually know how much value the teachers create.  Possible assumptions...

Assumption 1: admins are omniscient, they do know how much value teachers create
Assumption 2: how much value teachers create is a "minor" detail

In my opinion... both these assumptions are stupid.  Are they equally stupid though?

It's actually pretty easy to visualize the basic economics of education.  Here's how the current system looks...





Any given school consists of consumers (ie parents), producers (ie teachers) and an intermediary (ie a principal).  The consumers give their money to the intermediary who gives more or less the same amount of money to each of the producers.

The problem with this system is that teachers are not equally valuable.  Anybody who has ever been taught should thoroughly and completely understand that teachers are not equally valuable.  Just like artists are not equally valuable.  Just like economists are not equally valuable.  As you can see in the diagram, teachers don't all produce the same amount of value.  They aren't all Jaime Escalante.  Except, we obviously don't know how much value he truly created.

The solution is to unbundle teachers...




Parents would be entirely free to decide which teachers they give their money to.  The most valuable teachers would get the most money and the least valuable teachers would get the least money.

We can imagine that this is pretty much how Patreon works.  There's no intermediary to decide how supporters' money is distributed among the creators.  Supporters are entirely free to decide for themselves how much support they give to the creators.  The more money a creator receives... the more value they create.  Supporters are free to use their cash to communicate their perception of a creator's relative scarcity.  

Is this how schools should work?  Or is it more beneficial to bundle teachers together?   Is it beneficial to protect teachers from the valuations of parents?  Is it beneficial to protect teachers from the Invisible Hand?  Would it also be beneficial to bundle schools together in order to protect them from the Invisible Hand?

Would Caplan argue that we should bundle Khan Academy and Marginal University together?







Does Caplan want to argue that he values both these lessons equally?  Does he want to argue that he's just as valuable as Hayek?

The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which gained them the support of the intellectuals and therefore an influence on public opinion which is daily making possible what only recently seemed utterly remote. Those who have concerned themselves exclusively with what seemed practicable in the existing state of opinion have constantly found that even this had rapidly become politically impossible as the result of changes in a public opinion which they have done nothing to guide. Unless we can make the philosophic foundations of a free society once more a living intellectual issue, and its implementation a task which challenges the ingenuity and imagination of our liveliest minds. But if we can regain that belief in the power of ideas which was the mark of liberalism at its best, the battle is not lost. The intellectual revival of liberalism is already underway in many parts of the world. Will it be in time? - Friedrich Hayek, The Intellectuals and Socialism

For example...

Even at the cost of lining up with Friedman, I’d be pleased if the idea that war is a mostly futile waste of lives and money became conventional wisdom. Switching to utopian mode, wouldn’t it be amazing if the urge to “do something” could be channeled into, say, ending hunger in the world or universal literacy (both cheaper than even one Iraq-sized war)? - John Quiggin, War and waste

Yet...

Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least 300 years. - Michael Munger, Unicorn Governance

Switching to utopian mode, wouldn't it be amazing if parents could give their money to any teachers in the world?

Switching to dystopian mode, wouldn't it be terrible if readers around the world couldn't give their money to J. K. Rowling?

We know that Rowling is a superstar.  But we only know that she's a superstar because lots of people around the world were completely free and more than happy to spend their money on her books.

What do we know about teachers?  We know that they are not equally valuable.  And we also know that there's at least a gazillion of them.  Therefore, according to the law of truly large numbers, it's a given that at least one of those teachers should be an algebra superstar.  It's a given that at least one of those teachers should be a geography superstar.  It's a given that each and every significant subject should have at least one superstar teacher.  There should be just as many superstar teachers as there are superstar authors.  Just in case it's not abundantly clear... by "superstar" teachers I mean that they would be as filthy rich as superstar authors.

The manufacturers first supply the neighbourhood, and afterwards, as their work improves and refines, more distant markets. - Adam Smith
When the buyer goes to the market, he wants to find it abundantly supplied. He wants the seasons to be propitious for all the crops; more and more wonderful inventions to bring a greater number of products and satisfactions within his reach; time and labor to be saved; distances to be wiped out; - Frédéric Bastiat 

We've made pretty decent progress at wiping out distances but it's not like any of the teachers who've put their classes online are getting filthy rich.

A while back I e-mailed Alex Tabarrok and suggested that Marginal University create a video about the free-rider problem.  I also suggested that they try and determine the multitude's WTP for potential topics.  I'd certainly be happy to pay $5 in order to try and move the free-rider problem higher up on their list of potential topics.  Wouldn't it be so cool to see a list of their potential topics sorted by the multitude's WTP for them?

In my tweet to Art Carden and Michael Munger I said that the Invisible Hand weeds but rarely plants.  If the Invisible Hand does not do most of the planting then it logically means that the Visible Hand does most of the planting.  Voila!  Here I am!  Planting this blog entry.  My decision to do so wasn't based on the multitude's WTP for this topic...  it was based entirely on my own WTP for this topic.  But it's not like I ignored or disregarded the multitude's WTP for this topic... I don't even vaguely or remotely know what the multitude's WTP for this topic actually is.

After I publish this entry... will it be easy to discern the Invisible Hand's verdict of my product?    Nope.  Thanks to the free-rider problem... ignorance is bliss.  Really?  Ignorance of the Invisible Hand's verdict is bliss?

I'm guessing that Caplan is correct that there's a social desirability bias.  But as far as a bias against markets is concerned... it seems like a really good idea to consider the notable exceptions.  We really don't hear people complain about...

1. artists being supported on Patreon
2. J.K. Rowling being a superstar

Same thing with this guy...

I'm a millionaire, I'm a multi-millionaire. I'm filthy rich. You know why I'm a multi-millionaire? 'Cause multi-millions like what I do. That's pretty good, isn't it? - Michael Moore

How many liberals complain that he's a superstar?

Ok... so... despite the fact that I've done a terrible job of presenting/sharing/organizing the evidence... it should be more than adequate to point us in the right direction.

We'll use all this evidence to think big but start small.  We'll create a website!  At first the website will consist entirely of videos created by Marginal University and videos created by Khan Academy.  Members of this website will each have to pay $1/month... but they'll be free to choose which videos they allocate their pennies to.   Knowing the relative value of the videos would allow...

1. the most valuable videos to be featured on the homepage
2. members to sort the videos by their value

It would actually be the Invisible Hand that would decide which videos were valuable enough to put on the homepage.  And it would actually be the Invisible Hand that would sort the videos by their value.  How cool would that be?

Of course we could also allocate our pennies to potential topics.  This would allow the Invisible Hand to guide the planting.  Which would mean less weeds.

The website would cover its costs and pass the rest of the money onto Marginal University and Khan Academy.

If this utopian model turned out to be possible and practicable in the physical world... then we would gradually add more and more educators and their products.  Bryan Caplan, John Quiggin, Art Carden, Michael Munger and others could add their educational products (blog entries, articles, papers, etc) and we'd be free to allocate our pennies to them.

As the supply of valuable products increased... more people would join the website.  And as more people became members... the most valuable products would get more money.  This would encourage more educators to join the website.  As the supply of valuable products increased... so too would people's WTP and the monthly fee.  It would be a virtuous circle of incentives and education.  It would be an accurate and amazing feedback loop.  

Hmmm... anybody want to argue that the website wouldn't need a monthly fee?  It would just need to give members the ability to...

1. put money into their digital wallets
2. spend their money on their favorite educational products

That wouldn't be a bad argument.  Right now it's not the easiest thing in the world to allocate a quarter to Marginal University's video about prices.  In other words, there's a barrier to payment.  There's an obstacle to spending.  Would eliminating this obstacle facilitate the Invisible Hand?  Of course it would!  If giving the video a quarter was as easy as giving it a "thumbs up"... then I'd sure be happy to do so.  I'd be surprised if I was the only person in this boat.  How cool would it be to see a list of all the people who were willing to allocate some money to the video?

Eliminating the obstacle to spending would eliminate the forced-free-rider problem.  And it's entirely possible that the forced-free-rider problem is a lot larger than anybody realized.  Which means that it's entirely possible that eliminating the barrier to payment would allow the Invisible Hand to turn the most valuable educators into superstars.

In any case, there's more than one way to skin a cat.  We can apply the Invisible Hand to formal education... or we can apply the Invisible Hand to informal education.  I think that applying the Invisible Hand to formal education would be a Herculean task.  It would be far less Herculean to apply the Invisible Hand to informal education.  Even though it would be a lot easier to apply the Invisible Hand to informal education... the potential benefits would be massive.  People would be able to easily see, understand and really appreciate the Invisible Hand.  What happens when everybody really appreciates the Invisible Hand?  Utopia.  Heaven on Earth.

Sunday, September 18, 2016

Bryan Caplan VS Voting Alternatives

I finally got around to reading this blog entry by Bryan Caplan... Why I Don't Vote: The Honest Truth.  To be equally honest, I don't vote either.

Here's what Caplan wrote in his entry...

My honest answer begins with extreme disgust.  When I look at voters, I see human beings at their hysterical, innumerate worst.  

Here's what I wrote in my previous entry...

Everybody perceives that they see society.  But this perception is wrong.  We don't actually see society.  What we actually see is a reflection of society. All we can ever see is a reflection of society. This is because all we can ever know about what's really inside people depends entirely on what they choose to reveal.  People's projections create society's reflection.

There are two main methods for people to reveal/communicate/project their preferences...

1. stated preference = voting, surveys, polls, Facebook "Likes"
2. demonstrated preference = willingness to pay/spend/sacrifice

Do both these methods create an equally accurate reflection of society?  Of course not.  As Nassim Taleb would say... voting doesn't have skin in the game...

Ralph Nader had a heuristic for war. He said that if you are going to vote for war, you should have a member of your family--a descendant, a son or grandson--on the draft. And then you can vote for war. - Nassim Taleb, Skin In The Game

As Alex Tabarrok would say... voting doesn't have a tax on bullshit...

Overall, I am for betting because I am against bullshit. Bullshit is polluting our discourse and drowning the facts. A bet costs the bullshitter more than the non-bullshitter so the willingness to bet signals honest belief. A bet is a tax on bullshit; and it is a just tax, tribute paid by the bullshitters to those with genuine knowledge. - Alex Tabarrok, A Bet is a Tax on Bullshit

Anybody who knows anything about Bryan Caplan knows that he's willing to put his money where his mouth is.  This is how Caplan works.  This is really not how voting works.

Voting doesn't require skin in the game.  Voting doesn't have a tax on bullshit.  This means that the reflection that voting creates of society is bullshit.  Again, with emphasis.... the reflection that voting creates of society is bullshit.

Yet...

My honest answer begins with extreme disgust.  When I look at voters, I see human beings at their hysterical, innumerate worst.  

Don't you get the sense that Caplan is judging humanity by its opinions?  Doesn't it sure sound like he's judging the book by its cover?

Here's another economist doing the same thing...

Is it possible to make progress towards this inclusive state in the United States at the moment? I would’ve said yes 15 years ago, 10 years ago, 5 years ago, but today I do feel more pessimistic than ever about the United States and about the world. Of course, I’m not surprised that there is a huge amount of discontent among some segments of the voting public, and some of this is entangled with fear from and hatred against immigrants and minorities. But the extent of this hatred has been a shock to me. - Daron Acemoglu, Stop Crying About the Size of Government. Start Caring About Who Controls It.

And another economist who did the same thing...


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Historians are mistaken in explaining the rise of Nazism by referring to real or imaginary adversities and hardships of the German people. What made the Germans support almost unanimously the twenty-five points of the "unalterable" Hitler program was not some conditions which they deemed unsatisfactory, but their expectation that the execution of this program would remove their complaints and render them happier. They turned to Nazism because they lacked common sense and intelligence. They were not judicious enough to recognize in time the disasters that Nazism was bound to bring upon them.

The immense majority of the world's population is extremely poor when compared with the average standard of living of the capitalist nations. But this poverty does not explain their propensity to adopt the communist program. They are anti-capitalistic because they are blinded by envy, ignorant, and too dull to appreciate correctly the causes of their distress. There is but one means to improve their material conditions, namely, to convince them that only capitalism can render them more prosperous.  - Ludwig von Mises

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To argue that the Holocaust and WWII accurately reflected the German society is to pretend or assume that voting creates an accurate reflection of society.  Nothing could be further from the truth...

As was noted in Chapter 3, expressions of malice and/or envy no less than expressions of altruism are cheaper in the voting booth than in the market.  A German voter who in 1933 cast a ballot for Hitler was able to indulge his antisemitic sentiments at much less cost than she would have borne by organizing a pogrom. - Loren Lomasky, Democracy and Decision

Mises didn't know better.  Daron Acemoglu doesn't know better.  Bryan Caplan doesn't know better?  That's not true.  Of course Caplan knows better.  Yet, I sure do get the sense that he somehow kinda forgets that the reflection of society that voting creates is bullshit.

We really shouldn't judge society by its bullshit reflection.

So that was one issue that I had with Caplan's entry.  Another issue that I had with his entry was that there was something super strangely absent...  a viable alternative to voting.  Are there any viable alternatives?

Today’s Mandeville is the renowned biologist Thomas D. Seeley, who was part of a team which discovered that colonies of honey bees look for new pollen sources to harvest by sending out scouts who search for the most attractive places. When the scouts return to the hive, they perform complicated dances in front of their comrades. The duration and intensity of these dances vary: bees who have found more attractive sources of pollen dance longer and more excitedly to signal the value of their location. The other bees will fly to the locations that are signified as most attractive and then return and do their own dances if they concur. Eventually a consensus is reached, and the colony concentrates on the new food source.  - Rory Sutherland and Glen Weyl, Humans are doing democracy wrong. Bees are doing it right

Is quadratic voting a viable alternative to regular voting?  A quick google search did not provide Caplan's answer to this really good question.  On the other hand, a quick google search does provide Cowen's answer to this really good question.   Is Caplan's answer the same as Cowen's?  I'd sure like to know.

Personally, I definitely think that quadratic voting is a lot better than regular voting.  With quadratic voting at least there's some skin in the game.  At least there's some tax on bullshit.  At least there's some reflection/communication/projection of preference intensity.  But I'd really love to hear Glen Weyl explain why he thinks that it's better than straight buying and selling votes.  I'd also love to hear him explain whether he thinks that quadratic voting is better than coasianism.

Is coasianism a viable alternative to voting?  Coasianism would replace voting with spending.  Participants would have a certain amount of time to spend as much money as they wanted on their preferred option.  Whichever option received the most money would be the most valuable option.  The "losing" side would get their money back.  Plus, they would get all the money spent by the "winning" side.  So coasianism is actually a win-win situation.  Participants would either get their preferred option... or they would get something that they value even more.  In order to prevent perverse participation... the "market" would be blind.  The totals would only be revealed after the "market" closed.  Would there still be speculators?  If so, then they would quickly learn a fundamentally important lesson the hard way...

It is impossible for anyone, even if he be a statesman of genius, to weigh the whole community's utility and sacrifice against each other. - Knut Wicksell, A New Principle of Just Taxation

As far as I know, coasianism is a recent invention.  So it makes sense that Caplan hasn't already analyzed it.  But will he analyze it now?  Will he compare coasianism to quadratic voting?  Will he compare them both to vote buying/selling?  Will he compare all three of them to regular voting?

Caplan has lots of kids.... I don't have any kids.  So he can correct me if I'm wrong... but if little kids are playing with something that they shouldn't be playing with... generally the best strategy isn't to directly take the item away from them.  The best strategy is to offer them a better item.  Perhaps in some cases this isn't the best strategy.  Like if they are playing with a loaded gun.

Sure it's really reasonable to see see democracy as a loaded gun... but none of us who might perceive it as such are in a position to take it away from citizens.  And even if we were in such a position... would we really want to take advantage of our authority?

Watch "Milton Friedman on Libertarianism (Part 4 of 4)". The interviewer starts to ask him a hypothetical..."if you were dictator for a day" question and Friedman quickly interrupts him and says with great emphasis, "If we can't persuade the public that it's desirable to do these things, then we have no right to impose them even if we had the power to do it!"  Here's the extended version.

Part of the beauty of the free-market is that entrepreneurs, at least in theory, don't have the authority to directly take products away from citizens.  Entrepreneurs have no choice but to provide consumers with better products.  And it's entirely up to consumers to decide for themselves whether the new products are truly better than the old products.  In the multitude of consumers there is safety.

Liberals really don't see the beauty of builderism.  They see that working in a sweatshop is a terrible option but they really do not risk their own resources in order to provide the workers with better options.  Instead they endeavor to get sweatshops shut down.  They also vote for higher minimum wages, stricter regulations and more benefits for workers.  Liberals shoot workers in the feet by skyrocketing the barriers to entry... which makes it far less likely that entrepreneurs will provide workers and consumers with genuinely better options.

Some liberals are somewhat exceptional...

Each of us has a finite number of resources.  So where are you going to put your resources?  Where are you going to put your time and your money?  Are you going to put it into trying to elect somebody into this current system that's broken?  Or are you going to put that into building something? - Margaret Flowers

What's voting?  Voting is an idea.  All ideas are products.  So voting is a product.  And Caplan, probably more than anyone, knows and understands exactly what's wrong with this product.  He knows exactly where there's room for improvement.  And fortunately, in this case, nothing really prevents him from selling/creating a better product.  Ideas don't have artificial barriers to entry.  As far as voting is concerned, nothing technically prevents Caplan from engaging in builderism...

1. explaining why voting is bullshit
2. offering a better alternative

Hmmm... and I suppose that there is a decent amount of division of labor involved.  Specialization does increase productivity.  To use a volleyball analogy... one person sets the ball and another person spikes it.  Caplan sure has done a really wonderful job of setting the ball.  So isn't it unreasonable to expect him to spike it as well?

I don't think that I would have been able to invent coasianism without Coase or Caplan.  But it certainly can't be the case that I can spike the ball on my own.  Replacing voting with a better product will require a multitude of spikers.

In theory, Caplan should be especially interested in products that might be better than voting.  So it seems pretty logical that he would make the effort to review the alternatives to voting and use his considerable energy and expertise to help spike the best ones.

When it comes to Caplan and any given voting alternative... here are four courses of action...

1. He can explain why it's a good alternative
2. He can explain why it's a bad alternative
3. He can ask for explanations
4. He can ignore the alternative

Which course of action is the least beneficial?

Let's say that, thanks in no small part to Caplan, we do manage to creatively destroy voting.  As a result, society's reflection will be a lot less bullshit.  Will Caplan be happy with what he sees?  I'm guessing that he'll be happier... but it's doubtful that he'll be perfectly happy.  It's very likely that he'll spot some flaws.  But at least the flaws will be real.  So if he barks up a tree, the cat that he sees in the tree won't be a mirage cat.  What happens when Caplan and 300 million other citizens are far less likely to bark up the wrong trees?  Progress.  A lot more progress in a lot less time.

I'll finish by sharing some ideas about ideas....


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It is ideas that determine social trends that create or destroy social systems. Therefore, the right ideas, the right philosophy, should be advocated and spread. - Ayn Rand, Playboy Interview

***

It turns out that most of our country is empty for a very good reason: people derive great value from concentrating together in urban areas. First, proximity reduces transportation costs, so producers benefit from being close to their suppliers and customers.  Second, more people living in one place means deeper and more diverse markets for both products and labor. With a large enough urban population, niche markets that appeal to only a small fraction of consumers become profitable to serve. Employers have a better pool of potential workers to draw from, while workers have greater choice in prospective employers.  And third, people living and working close to one another can take advantage of “information spillovers”: cities expand opportunities for exchanging ideas and information, thereby facilitating both innovation and the accumulation of human capital. - Brink Lindsey, Low-Hanging Fruit Guarded By Dragons

***

Here is another critical point. Rarely does a new idea come into existence and cause just one change. Every change creates a new and different situation, potentially creating further opportunities to be taken advantage of by other alert and insightful individuals. In an open competitive system, there is no reason why the process of discovery and adaptation should ever come to an end state in which new insights can no longer be made and change is no longer possible. - David Glasner, In Praise of Israel Kirzner

***

This process by which the new emerges is best understood in the intellectual sphere when the results are new ideas. It is the field in which most of us are aware at least of some of the individual steps of the process, where we necessarily know what is happening and thus generally recognize the necessity of freedom. Most scientists realize that we cannot plan the advance of knowledge, that in the voyage into the unknown — which is what research is— we are in great measure dependent on the vagaries of individual genius and of circumstance, and that scientific advance, like a new idea that will spring up in a single mind, will be the result of a combination of conceptions, habits, and circumstances brought to one person by society, the result as much of lucky accidents as of systematic effort. - Friedrich Hayek, The Case For Freedom

***

The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which gained them the support of the intellectuals and therefore an influence on public opinion which is daily making possible what only recently seemed utterly remote. Those who have concerned themselves exclusively with what seemed practicable in the existing state of opinion have constantly found that even this had rapidly become politically impossible as the result of changes in a public opinion which they have done nothing to guide. Unless we can make the philosophic foundations of a free society once more a living intellectual issue, and its implementation a task which challenges the ingenuity and imagination of our liveliest minds. But if we can regain that belief in the power of ideas which was the mark of liberalism at its best, the battle is not lost. The intellectual revival of liberalism is already underway in many parts of the world. Will it be in time? - Friedrich Hayek, The Intellectuals and Socialism

***

Orthodoxy of any kind, any pretense that a system of ideas is final and must be unquestioningly accepted as a whole, is the one view which of necessity antagonizes all intellectuals, whatever their views on particular issues. Any system which judges men by the completeness of their conformity to a fixed set of opinions, by their "soundness" or the extent to which they can be relied upon to hold approved views on all points, deprives itself of a support without which no set of ideas can maintain its influence in modern society. The ability to criticize accepted views, to explore new vistas and to experience with new conceptions, provides the atmosphere without which the intellectual cannot breathe. A cause which offers no scope for these traits can have no support from him and is thereby doomed in any society which, like ours, rests on his services. - Friedrich Hayek, The Intellectuals and Socialism

***

These intellectuals are the organs which modern society has developed for spreading knowledge and ideas, and it is their convictions and opinions which operate as the sieve through which all new conceptions must pass before they can reach the masses. - Friedrich Hayek, The Intellectuals and Socialism

***

I have already referred to the differences between conservatism and liberalism in the purely intellectual field, but I must return to them because the characteristic conservative attitude here not only is a serious weakness of conservatism but tends to harm any cause which allies itself with it. Conservatives feel instinctively that it is new ideas more than anything else that cause change. But, from its point of view rightly, conservatism fears new ideas because it has no distinctive principles of its own to oppose them; and, by its distrust of theory and its lack of imagination concerning anything except that which experience has already proved, it deprives itself of the weapons needed in the struggle of ideas. Unlike liberalism, with its fundamental belief in the long-range power of ideas, conservatism is bound by the stock of ideas inherited at a given time. And since it does not really believe in the power of argument, its last resort is generally a claim to superior wisdom, based on some self-arrogated superior quality. - Friedrich Hayek, The Constitution of Liberty

***

Every act of competitive entry is an entrepreneurial act; every entrepreneurial action is necessarily competitive (in the dynamic sense of the word). To compete is to act (or to be in a position to act) to offer buyers a more attractive deal, or to offer sellers a more attractive deal, than others are offering. To do so it is necessary to discover situations where incumbent market participants are offering less than the best possible deals, and to move to grasp the profits made possible by filling the gap so created by the incumbents. Such activity is strictly entrepreneurial. To act entrepreneurially is to enter a market with a new idea, with a better product, with a more attractive price, or with a new technique of production. Any such act necessarily competes with others. - Israel Kirzner, How Markets Work

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But unfamiliarity is a disadvantage which, when there is any real value to an idea, it only requires time to remove.  And in these days of discussion, and generally awakened interest in improvement, what formerly was the work of centuries, often requires only years. - J.S. Mill, Representative Government

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But I want to draw your attention to something more, to an aspect that allowed Professor Hayek to endure the lonely years, an aspect that may too readily be overlooked. Hayek’s position was made more tolerable by a few sources of external financial support, a few scattered persons with access to funds who recognized the value and importance of ideas. Hayek was given such support for his research, for The Constitution of Liberty, and for the beginnings of Law, Legislation and Liberty. He was supported indirectly, but importantly, via support of the Mt. Pelerin Society, the international society of market-oriented scholars and leaders, a society that was created and maintained almost single-handedly by Hayek. He was supported by lecture invitations to such as the old Volker Fund conferences, where he could try out his ideas, and where so many of my own generation first came to know both the man and these ideas. I cannot list all of those who supported Hayek in those lean years; I do not know who they were. I only know that they were an extremely small group of men and foundations, and I also know that the Realm-Earhart Foundations were almost unique in sticking to Hayek through the very worst of times.

I think we should draw some lessons from this experience. We should, I think, appreciate that ideas matter, and that financial support for the generation of ideas matters. Those who supported Professor Hayek in the lonely years were courageous in their expressions of confidence in the man and the ideas he represented. They were not demanding of him some immediate relevance to then-topical issues of policy; they were not demanding of him that he try to communicate his ideas to mass audiences; they were not demanding of him that he produce fancy numbers to test self-evident hypotheses. - James Buchanan, Notes on Hayek

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Fourth, while I don’t see much, if any, benefit in engaging with actually existing conservatism, that doesn’t mean that we should ignore conservative, and libertarian, ideas. You don’t have to be an unqualified admirer of writers like Burke, Popper or Hayek to concede that they made valid criticisms of the progressive ideas of their day, and to seek a better way forward. Some examples of the kind of thing I have in mind

Popper’s critique of historicism. After thirty years in which teleological claims of inevitable triumph have been the stock in trade of Fukuyama and his epigones, the left should surely have been cured of such ideas, but their centrality is evident in the very use of terms like “progressive”. It’s important to recognise that beneficial change is not an automatic outcome of “progress”

Burke and his successors on the need for beneficial reform to be “organic”, in the sense that it reflects the actual historical evolution of particular societies, rather than being based on universal truths that are applicable in all times and places

Hayek on the impossibility of comprehensive planning. No planner can possess all relevant information or account for all possible contingencies. We need institutions that respond to local information and that are robust enough to cope with unconsidered possibilities. In some circumstances, but certainly not all, markets fit the bill. - John Quiggin, After the dead horses

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In a totalitarian State or in a field already made into a State monopoly, those dissatisfied with the institutions that they find can seek a remedy only by seeking to change the Government of the country. In a free society and a free field they have a different remedy; discontented individuals with new ideas can make a new institution to meet their needs. The field is open to experiment and success or failure; secession is the midwife of invention. - Lord Beveridge, Voluntary Action

***

This is a reminder that one of my least-favorite sayings about politics is the idea that democracy is the worst form of government except for the alternatives. Not that I favor dictatorship, but this often seems to me to reflect a failure of imagination. There are lots of non-authoritarian modes of governance, including selecting people by lottery (like we do for juries), plebiscites, direct citizen input (as in this tax choice concept), along with different balances between elected officials, appointees, and civil servants. It’s important to actually think about the flaws in our current approach and whether better ideas exist. - Matthew Yglesias, Giving Taxpayers Choice Could Boost Satisfaction With Big Government And Boost Social Spending

***

I was writing a simple teaching post, on ideas and increasing returns to scale, in micro and macro. I wrote down "Ideas are non-rival". Then I thought I had better explain what I meant by that. Then I thought about professors, who do research (thinking up new ideas), and teaching (communicating existing ideas to other people). Then I thought about how some professors like research but don't like teaching. Then I thought about this post.

Sure, two people can use the same idea (ideas are non-rival), but can't eat the same apple (apples are rival). But the second person can't use that idea unless the first person communicates that idea to the second person. The first has to teach it, and the second has to learn it, and teaching and learning are (sometimes) costly. The cost of communicating the idea to the second person might even be greater than the cost of the first person coming up with the new idea in the first place.  Sometimes it might be cheaper to reinvent the wheel than walk to the library. - Nick Rowe, Are ideas really non-rival?


Friday, September 16, 2016

Edward Glaeser VS John Quiggin

Who doesn't love a good juxtapose?

Edward GlaeserIf You Build It...
John Quiggin: Face the facts:

I'm pretty sure that Glaeser wins this round.

Am I biased?  Well yeah.  I'm biased towards markets... but I'm also biased towards Quiggin.  He's my favorite liberal economist.  So my biases cancel each other out.  Yup.  I love markets just as much as I love Quiggin.  Errrr... well...

Sooner or later the advocates of reform will have to answer the Edison-Blair question: “What works?” And what works is traditional public provision. Through all of these failed experiments, the public sector, much-maligned and chronically underfunded, has carried on with the hard work of educating young people, treating the sick and providing the vast range of services needed in a modern society, on a the basis of an ethic of service to the entire community, and not merely those who can pay for premium service. - John Quiggin, Face the facts:

Does public provision really work?

As I’ve argued previously, a serious consequentialist analysis suggests that war usually has more bad consequences than good. In particular, anyone who takes consequentialism seriously must reckon with the fact that war is a negative sum game. This means either that at least one side in a war has miscalculated or that the costs of war are being borne by people who don’t have a say in the matter. In addition, it’s necessary to take account of rule-based concerns about the effect of decisions to go to war in particular cases weakening generally desirable rules to the contrary. - John Quiggin, War and its consequences

In case you missed it...

This means either that at least one side in a war has miscalculated or that the costs of war are being borne by people who don’t have a say in the matter. - John Quiggin, War and its consequences

Which sounds very similar to this...

The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. - Adam Smith, Wealth of Nations

Which sounds a lot like this...

Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. Large-scale federal involvement in transportation means that the people who benefit aren’t the people who pay the costs. The result is too many white-elephant projects and too little innovation and maintenance.  - Edward Glaeser, If You Build It… 

And...

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A second common feature of pro-war analysis is a failure to take account of the opportunity cost of the resources used in war. The $300 billion used in the Iraq war would have been enough to finance several years of the Millennium Development project aimed at ending extreme poverty in the world, and could have saved millions of lives. But even assuming this is politically unrealistic, the money could surely have been spent on improved health care, road safety and so on in the US itself. At a typical marginal cost of $5 million per live saved, 60 000 American lives could have been saved. This is morally relevant, but is commonly ignored. - John Quiggin, War and its consequences

Given the performance of the Bush Administration so far, it is tempting to agree with Harry that any money saved from the Iraq war would have been wasted elsewhere. But I think this is incorrect, in part because there’s no sign that the Bushies recognise a budget constraint. For them, the war is free: it isn’t even included in the regular Budget which is, in any case, massively in deficit with extra items regularly added to the slate. The bills will have to be paid in the end, but there’s no easy way to predict who will pay or in what form. - John Quiggin, Opportunity costs redux

Even at the cost of lining up with Friedman, I’d be pleased if the idea that war is a mostly futile waste of lives and money became conventional wisdom. Switching to utopian mode, wouldn’t it be amazing if the urge to “do something” could be channeled into, say, ending hunger in the world or universal literacy (both cheaper than even one Iraq-sized war)? - John Quiggin, War and waste

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See the part about "switching to utopian mode"?

Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least 300 years. - Michael Munger, Unicorn Governance

I certainly can't blame Quiggin for switching to utopian mode.  Utopian mode is super essential.  I spend lots of time in utopian mode.   It's why I favor government expansion.  But do I imagine a State different from the one possible in the physical world?

Hey Munger... would it be possible in the physical world to have a State where people can choose where their taxes go?  Would it be more or less possible in the physical world to have a libertarian government?

However we spin it, a libertarian government would still be a command economy.  It's certainly true though that a smaller command economy is better than a larger command economy.  But is it possible in the physical world to have a smaller command economy that stays small?  If you're going to trust politicians to determine how much money should be spent on war.... then where, when, why and how do you draw the funding line?

Wartime spending needs are such that the threshold of decision can be crossed with newly imposed taxes or with substantial increases in rate levels of existing taxes. The additional real costs, in opportunity-cost terms, of the expanded spending program are accepted in the emergency setting. Once these needs disappear, however, the bias is shifted in favor of a continued high level of public activity, as opposed to a return to some pre-emergency balance between the public and the private sector. Not having to undergo the apparent sacrifice of real resources generated by new-tax financing, the individual is more willing, in post-emergency periods, to approve spending on the provision of services than he should have been in the pre-emergency fiscal setting. A corollary hypothesis is, of course, that the longer the emergency, the more pronounced this effect will be; that is to say, the older the tax, the more routine the institution, the greater the likelihood that it will be continued in existence. - James Buchanan, Public Finance in Democratic Process

Does a limited government sound like an oxymoron?  If not.... then what about a limited command economy?

The issue is not, in the end, one of public versus private. Rather it is the fact that market competition and the profit motive inevitably associated with it is antithetical to the professional and service orientation that is central to human services of all kinds. - John Quiggin, Face the facts:

Let's say that we created a market in the public sector by allowing people to choose where their taxes go.  Then we'd have a market in the public sector and a market in the private sector.  Wouldn't the issue be, in the end, one of public versus private?

What's the difference between public services and private services?

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Thus, considered in themselves, in their own nature, in their normal state, and apart from all abuses, public services are, like private services, purely and simply acts of exchange.  -  Frédéric Bastiat, Private and Public Services

Public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them.  - Adam Smith, Wealth of Nations

The extent and range of public services are determined by the collective willingness of individuals to purchase them.  Services will be extended as long as the aggregate benefits are held to exceed the costs.  For the total of all public services, aggregate benefits should approximately equal total costs in terms of sacrificed alternatives.  Ideally, the fiscal process represents a quid pro quo transaction between the government and all individuals collectively considered.  The benefit principle must be applied in this sense. - James Buchanan, Fiscal Theory and Political Economy

It is these needs which are essentially deficits in the organism, empty holes, so to speak, which must be filled up for health’s sake, and furthermore must be filled from without by human beings other than the subject, that I shall call deficits or deficiency needs for purposes of this exposition and to set them in contrast to another and very different kind of motivation.  - Abraham Maslow, Toward a Psychology of Being

This means that the terraces of the Champ-de-Mars are ordered first to be built up and then to be torn down. The great Napoleon, it is said, thought he was doing philanthropic work when he had ditches dug and then filled in. He also said: "What difference does the result make? All we need is to see wealth spread among the laboring classes. - Frédéric Bastiat, What Is Seen and What Is Not Seen

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Public services and private services both fill holes.  There are lots of public and private holes that genuinely need to be filled.  Because society's resources are limited, it's a really good idea to prevent the government from filling the wrong holes.

According to Quiggin's Implied Rule of Economics (QIRE)... society's limited resources should be put to more, rather than less, valuable uses.  How do we prevent QIRE from being regularly and massively violated?

If people are willing to pay to use infrastructure, we can assume that that infrastructure provides social value. - Edward Glaeser, If You Build It… 

A. willing to pay to use infrastructure
B. willing to pay for infrastructure

The correct fix for crowded roads is to charge people for the social costs of their choices. Singapore instituted congestion pricing in 1975, and now operates state-of-the-art electronic road pricing, with tolls that vary by usage and time of day. London has now had congestion pricing for a decade. Both cities have eased traffic as a result. Yet America still acts as if charging drivers is a crime. - Edward Glaeser, If You Build It… 

Sure we can charge people for the social costs of their choices... but what are the chances that the charges will accurately reflect the costs?  Super slim.  This is because one price really does not fit all.  A cost, like a benefit, is entirely in the eye/mind/heart of the consumer.

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Simply considered, cost is the obstacle or barrier to choice, that which must be got over before choice is made.  Cost is the underside of the coin, so to speak, cost is the displaced alternative, the rejected opportunity.  Cost is that which the decision-maker sacrifices or gives up when he selects one alternative rather than another.  Cost consists therefore in his own evaluation of the enjoyment or utility that he anticipates having to forgo as a result of choice itself.  There are specific implications to be drawn from this choice-bound definition of opportunity cost:
 
1. Cost must be born exclusively by the person who makes decisions; it is not possible for this cost to be shifted to or imposed on others.
2. Cost is subjective; it exists only in the mind of the decision maker or chooser.
3. Cost is based on anticipations; it is necessarily a forward looking or ex ante concept.
4. Cost can never be realized because of the fact that choice is made; the alternative which is rejected can never itself by enjoyed.
5. Cost cannot be measured by someone other than the chooser since there is no way that subjective mental experiences can be directly observed.

- James Buchanan, Introduction: L.S.E Cost Theory in Retrospect

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Everybody perceives that they see society.  But this perception is wrong.  We don't actually see society.  What we actually see is a reflection of society. All we can ever see is a reflection of society. This is because all we can ever know about what's really inside people depends entirely on what they choose to reveal.  People's projections create society's reflection.

The accuracy of society's reflection is critical.  Command economies fail because the reflection is terribly inaccurate.  Market economies succeed because the reflection is far more accurate.  If we can truly understand why, exactly, there's such a huge disparity in the accuracy of the reflections... then it should be really easy to understand how to improve market economies.

If we have a market in the private sector and a market in the public sector... then we will be able to see two different reflections of society.  Will both reflections be equally accurate?  Of course not.

Under most real-world taxing institutions, the tax price per unit at which collective goods are made available to the individual will depend, at least to some degree, on his own behavior. This element is not, however, important under the major tax institutions such as the personal income tax, the general sales tax, or the real property tax. With such structures, the individual may, by changing his private behavior, modify the tax base (and thus the tax price per unit of collective goods he utilizes), but he need not have any incentive to conceal his "true" preferences for public goods. - James M. Buchanan, The Economics of Earmarked Taxes

In the public sector, people would not have any incentive to conceal their true preferences.  This means that people's public projections would be more honest than their private projections.  As a result, the reflection in the public sector would be more accurate than the reflection in the private sector.  This is why I favor the expansion of government.  To be clear, I favor the expansion of a pragmatarian government.  I definitely don't favor the expansion of the current government.

Let's take a closer look at one-price-fits-all (OPFA).  If we did charge for roads, what could we say about the people who were willing to pay the price?  We could say that their payment (allocation) was equal to, or less than, their perception of relative scarcity (valuation)...

allocation <= valuation

What are the chances though that a user's allocation would be equal to their valuation?  The chances would be super slim.  In most cases the user's allocation would be greater than their valuation.

valuation - allocation = consumer surplus

But what if, rather than charging people to use the road... we gave people the freedom to allocate their taxes to the road and all the other goods in the public sector?  Then people would no longer have an incentive to conceal their true preference for the road.

allocation = valuation

valuation - allocation = $0.00

Would tax choice truly eliminate all the consumer surplus in the public sector?   Let's imagine a two good public sector with tax choice...

1. Roads
2. Education

The tax rate is essentially the amount of money charged for these two goods.  With tax choice, taxpayers would have the freedom to decide how they divvied up their payment between these two goods.  If the tax rate was too low then it would mean that most taxpayers would perceive that at least one of these goods was relatively scarce.

Let's say that Frank has a tax obligation of $3,000 dollars.  He allocates $2,500 to education and $500 to roads.  Does his allocation equal his valuation?  Not if he perceives both goods to be in short supply.  If he perceives both goods to be in short supply then his allocation will be less than his valuation...

allocation < valuation

valuation - allocation = consumer surplus

Perhaps a diagram would help...



In this diagram we can see that, with user fees, Frank pays a lot more for roads than he pays for education.  Which intuitively seems a bit off.  Logically it seems pretty intuitive that the user fee for roads should be a lot lower than the user fee for education.  Right?  But what is the basis for this intuition?  Education is more costly than roads?  Or, education is more valuable than roads?  Or, the demand for education is greater than the demand for roads?  Perhaps the intuition looks like this...

education > roads

Education is greater than roads.  Ok, sure.  But how much, exactly, is it greater?

Thanks to the diagram we can clearly see that Frank's valuation of education is greater than his valuation of roads.  We know that Frank is willing to pay more for education than for roads.  But user fees can never be custom tailored to Frank.  So the user fees he pays for roads and education will never communicate exactly how much he perceives education to be greater than roads.  The same is true of all the other users.  As a result, with user fees, the proportion of funding for roads and education will never ever be optimal.  The balance will always be suboptimal.

With user fees the proportions can only ever be roughly correct.  But with tax choice, the proportions will always be 100% correct.

And I suppose that if I was as good at math as Paul Samuelson was then I'd be able to prove this with a beautiful model.  Unfortunately, I'm not as good at math as Samuelson was.  However, I'm far better at economics than he was.  In the grand scheme of things, being good at economics is far better than being good at math.  Maybe, in fact, there's something about being good at math that prevents a person from being good at economics.  Have any of the seriously good economists been seriously good at math?  Nope.  I don't think so.  So if an economist is good at math then don't trust their economics.

But perhaps I'm seriously overestimating my own econ skills.  It's entirely possible.  But until I'm proven wrong I'm going to continue believing that I'm right.

A. willing to pay to use infrastructure
B. willing to pay for infrastructure

The difference might seem subtle... but it's fundamentally important.

Glaeser is correct that willingness to pay is the only way to accurately measure the social cost/benefit of public services... but Quiggin is correct that public services shouldn't only be available to those able and willing to pay for them.

How cool is that?  They both win!  But Glaeser wins bigger because his article contains a fundamentally important economic truth that Quiggin, in another place and time, acknowledged, or recognized, at least to some extent...

This means either that at least one side in a war has miscalculated or that the costs of war are being borne by people who don’t have a say in the matter. - John Quiggin, War and its consequences
Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. - Edward Glaeser, If You Build It… 
Until people are made to bear the full costs of their decisions, those decisions are unlikely to be socially sound, in this as in other areas of public policy. - Richard Bird, Charging for Public Services: A New Look at an Old Idea 

When it comes to war, we especially want people to make the wisest choices possible.  So it's imperative that we determine people's willingness to pay for war.

Last year Jeremy Corbyn made the wonderful argument that British taxpayers should be free to boycott the military...

Could the Minister consider whether it would be right to introduce such a measure? The Italian Parliament has draft legislation before it that would allow Italian taxpayers to divert a proportion of their tax from the armed services to peace building, and there are three relevant petitions before this House. Given the huge rebuilding costs that will fall to this country and others in Kosovo and elsewhere where there has been conflict, perhaps we should have a peace-building fund that could invest in conflict resolution, reconstruction and trying to prevent terrible wars and civilian conflicts. 
British taxpayers have a right of conscience not to participate in the armed forces in time of conscription and should have a similar right in time of peace to ensure that part of their tax goes to peace, not war. - Jeremy Corbyn, Taxpayers (Conscience)

Willingness to pay is the only way to prevent QIRE from being violated.  So if some people are not willing to pay for war... then they shouldn't be forced to.  Conversely, if other people are very much willing to pay for war.... then they should be free to.

What's so incredibly funny (not "haha" funny) is that liberals and conservatives largely oppose this idea.  How could they both oppose it?!   Ok, it's kinda "haha" funny as well.  Right?  This paradox is super easy to resolve...

It is impossible for anyone, even if he be a statesman of genius, to weigh the whole community's utility and sacrifice against each other. - Knut Wicksell, A New Principle of Just Taxation

Politicians have no clue which side would "win" and which side would "lose".

With the market we really don't think of "sides" winning or losing.  This is simply because there aren't any "sides".

From the economic perspective, is there any benefit to having "sides"?  Do we really need "sides" in the public sector?  Why can't there simply be organizations in the public sector that have the strongest possible incentive to effectively and efficiently serve people?

Public services are not exempt from basic economic truths.  It's a basic economic truth that incentives matter.  It's a basic economic truth that every allocation has an opportunity cost.  It's a basic economic truth that society's limited resources should be put to more, rather than less, valuable uses (QIRE).  It's a basic economic truth that people's willingness to pay the opportunity cost is the only way to prevent QIRE from being regularly and massively violated.  It's a basic economic truth that the pragmatarian model is the best way to reveal people's willingness to pay.  It's a basic economic truth that people's allocations should reflect their valuations.

Ideally, economists should do a really good job of informing everybody of these basic economic truths.  Ideally, the public sector should be based on these basic economic truths.  When it finally is, then society's reflection will be far more accurate and everybody's decisions will be far more beneficial.

Like I said in the beginning, John Quiggin is my favorite liberal economist.  He's my favorite liberal economist because, out of all the liberal economists, he does the best job of acknowledging/addressing basic economic truths...


But does Quiggin really need to be a liberal economist?  Do we really need "sides" in economics?   I really don't want to say that Quiggin is my favorite liberal economist.  I would really prefer to say that he's my favorite living economist.   But I'll only be able to honestly do so when his economic story is more coherent than Tabarrok's economic story.

It's pretty easy to test the coherence of an economist.  First have them explain to you why the free-rider problem is a problem.   And then have them explain to you why consumer surplus is not a problem.

Here's what will happen if they aren't coherent.  First they'll say that a big disparity between allocation and valuation is a bad thing and then they'll say that it's a good thing!



For example...



I think that if economists made the effort to get their story straight then there would be far more interest in tax choice.  In any case, there would be far more concern with the elephant in the room (a command economy in the public sector).

Tuesday, September 13, 2016

You're Filling The Wrong Hole!!!

It is these needs which are essentially deficits in the organism, empty holes, so to speak, which must be filled up for health’s sake, and furthermore must be filled from without by human beings other than the subject, that I shall call deficits or deficiency needs for purposes of this exposition and to set them in contrast to another and very different kind of motivation. — Abraham Maslow, Toward a Psychology of Being

This means that the terraces of the Champ-de-Mars are ordered first to be built up and then to be torn down. The great Napoleon, it is said, thought he was doing philanthropic work when he had ditches dug and then filled in. He also said: "What difference does the result make? All we need is to see wealth spread among the laboring classes. - Frédéric Bastiat, What Is Seen and What Is Not Seen

 Reply toThe Magnitude of Inequality by James Kwak

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Some people’s stories don’t receive any recommendations… other people’s stories receive 1000s of recommendations. That’s infinitely more recommendations. Why do you ignore the massive inequality that’s right under your nose?

Unlike the government, Medium is not way outside your range of effectiveness. You should have no problem persuading Medium to massively reduce recommendation inequality. When it does so, we’ll all be amazed and astounded by how much the stories improve as a result. Right? With such conclusive evidence, the government will no longer be way outside your range of effectiveness.

Fortunately for everybody, Medium is way outside my range of effectiveness. If it wasn’t, then we’d all have the option to allocate our pennies to our favorite stories. Oh man, can you imagine what would happen to penny inequality? For sure it would skyrocket. I wonder though if the most popular stories would also be the most valuable stories…

Seriously though, the primary purpose of paying for things is to reveal and communicate our perception of their relative scarcity. This should be pretty intuitive. If Medium facilitated micropayments then for sure you’d allocate more pennies to rarer stories.

It is these needs which are essentially deficits in the organism, empty holes, so to speak, which must be filled up for health’s sake, and furthermore must be filled from without by human beings other than the subject, that I shall call deficits or deficiency needs for purposes of this exposition and to set them in contrast to another and very different kind of motivation. — Abraham Maslow, Toward a Psychology of Being

We’d all use our pennies to communicate which stories fill our empty holes, so to speak. This fundamental feedback would logically alter everybody’s behavior. The result would be a feedback loop…

It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society. — Adam Smith, Wealth of Nations


Economics is all about behavior optimization. Behavior can only be optimized when our payments accurately reflect our perception of relative scarcity…

allocation = valuation

Is labor an exception to this rule? Should we disregard people’s perception of labor’s relative scarcity? Should we pretend that it’s economically impossible for any given geographic area to ever have a labor surplus? It’s impossible for Seattle to ever have too many waiters? No matter what… Seattle will always have a shortage of waiters? No matter what… students in Seattle should drop out of school and become waiters? No matter what… waiters in Los Angeles and Houston should move to Seattle? But wouldn’t that mean that Seattle’s shortage of waiters is greater than the shortage of waiters in Los Angeles and Houston?

In ants, one such behaviour is the collective food search: ants initially explore at random. If they find food, they lay down pheromone trails on their way back to base which alters the behaviour of ants that subsequently set out to search for food: the trails attract ants to areas where food was previously located. — Jo Michell, The Fable of the Ants, or Why the Representative Agent is No Such Thing


Also…

Today’s Mandeville is the renowned biologist Thomas D. Seeley, who was part of a team which discovered that colonies of honey bees look for new pollen sources to harvest by sending out scouts who search for the most attractive places. When the scouts return to the hive, they perform complicated dances in front of their comrades. The duration and intensity of these dances vary: bees who have found more attractive sources of pollen dance longer and more excitedly to signal the value of their location. The other bees will fly to the locations that are signified as most attractive and then return and do their own dances if they concur. Eventually a consensus is reached, and the colony concentrates on the new food source. — Rory Sutherland and Glen Weyl, Humans are doing democracy wrong. Bees are doing it right


It seems pretty straightforward that there’s some sort of relationship between the accuracy of communication and the benefit of behavior.

From my perspective, you’re never going to make the feedback loop more accurate by disregarding/overruling/overriding/ignoring/diminishing people’s true perceptions of relative scarcity. Of course I might be wrong.

FYI…. I did notice your scarcity. Even though we fundamentally disagree I really don’t think that your absence improved Medium. For sure you’re a liberal… but at least you’ve done some homework. You’ve read at least some Hayek. Like I’ve read at least some Samuelson.

So I’ll definitely appreciate your thoughts on the topic of disregarding people’s perception of relative scarcity. Please ignore my snark/sarcasm and do your best to try and persuade me that I’m barking up the wrong tree! My life is way too short to spend barking up the wrong tree!

Saturday, September 10, 2016

When Nassim Taleb Is A Beautiful Fly On Every Wall

Feel free to use Medium to comment on this story... The Importance Of Accurate Feedback Loops

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In a recent blog entry I had no problem admitting that the economist Paul Romer broke my intellectual heart when he didn't show any interest in solving this pretty puzzle.  *sigh*  Oh well.  It's time to move on and take another risk.  I'm in the mood for intellectual love.

What about Nassim Taleb?  A while back I really enjoyed his book The Black Swan.   Recently I discovered and enjoyed his stories on Medium.   In this story...  How To Legally Own Another Person.... guess what I found?  I found a very pretty puzzle!

After being rejected by Romer... I feel some... errr... performance anxiety as I sit here trying to figure out how I'm going to paint this puzzle for Taleb.  I fear that the puzzle that I paint won't be pretty enough for him to truly appreciate!  So I must dig deep and utilize as much of my crazy creativity as I can capture.

I know that Taleb appreciates a good story.  The problem is that I'm a terrible story teller.  Why am I so terrible at telling stories?  I don't know.  But I'm not going to let this "minor" detail stop me from telling Taleb a story.  Let's see... where to begin...

Tuesday, August 30, 2016

Deaf Guy VS Drowning Girl

Reply to: Balls and Birds by Charles Eke

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Let’s say that Medium implemented the pragmatarian model. Each month we’d have to pay $1 dollar… but we could choose which stories we allocate our pennies to. If my valuation of your story was 2 pennies… then I’d click the penny button twice and 2 pennies would be automatically withdrawn my digital wallet and deposited into your own. The value of your story would increase by 2 cents. When we searched for stories the results would be sorted by their value. The most valuable story would be the first result.

“Values are subjective”

True. Beauty is in the eye of the beholder.  Benefit is in the heart of the buyer.  One person’s trash is another person’s treasure. One person might hate your stories… another person might love them.

“Quite a lot of things humans value can’t be explained in numerical values and we need to accept this.”

False. The depth of love/hate can always be explained in dollar amounts. This is true whether we’re talking about stories or people.

You see a little kid about to wander into a busy street. Do you automatically valuate the situation? Of course you do. Your valuation of the situation is very negative and you allocate your resources accordingly.

What if you’re too far to solve the problem yourself? Let’s say that you’re on a second story balcony. Do you whisper? “yoohoo… folks… we have a problem…” Of course not. You point at the kid and shout “STOP THAT KID!!!” Some people hear you shout and they automatically look to figure out what’s going on. Once they figure out what’s going on… they automatically valuate the situation. Just like you… their valuation of the situation will be negative. Hopefully one of them will be close enough to solve the problem.

Now imagine the super high tech version of this situation. You’re on the balcony and you see the kid wandering towards a busy street. You automatically valuate the situation and mentally hit the “transmit” button. The implant in your brain instantly transmits the relevant data to the implants of all the people who are within the effective range. The relevant data is…
  1. the image of the situation
  2. the exact location of the situation
  3. your exact valuation of the situation
The recipients of this data are notified that they’ve received an incoming transmission. The first thing they look at is the size of valuation. They will be able to see exactly how negative it is. This motivates them to look at your image of the situation and their implant automatically guides them to the exact location of the problem. They then valuate the situation themselves and transmit their data. Whoever rescues the kid gets paid accordingly. If everybody’s valuation of the situation was -$20,000 dollars… then whoever solved the problem would be paid $20,000 dollars.

People aren’t going to trust your valuation if it doesn’t reflect your true willingness to pay. There would probably be some type of escrow that your money goes into automatically. So if your valuation of the situation is -$4,000 dollars… then this amount would be automatically withdrawn from your account and put into escrow. This way, whoever received your transmission would know that your valuation wasn’t BS. After the problem was solved though… we can imagine that the story would be shared and people would positively valuate your essential role. We can reasonably expect that you’d make more than you spent.

Of course, to be consistent with the high-techness… we can imagine that the cars would be within range to receive the transmission as well and they would slow to a stop until the “problem solved” transmission had been sent.

Of course, to be truly consistent with the high-techness… we can imagine that even if nobody noticed the kid wandering into the street… the cars’ sensors would notice the kid. The cars would then correctly valuate the situation and modify their own behavior accordingly.

Anyways, the moral of the story is the benefit of being able to accurately transmit/communicate our valuations to others. Clearly the benefit isn’t understood because Medium hasn’t implemented the pragmatarian model.

Maybe I’m simply imagining the benefit of being able to accurately communicate our valuations to others?

Did you ever see Sympathy for Mr. Vengeance? I hated it… but I loved Oldboy. If you haven’t seen Sympathy… and it sounds like a movie that you might want to watch… then you should skip the rest of this story because I’m going to discuss one of the scenes and share a screenshot.

So in the movie... a deaf guy kidnaps a young girl. They end up at a river. While the deaf guy is very preoccupied… the girl falls into the river. The audience can clearly see that she’s in the river… and they can clearly hear that she’s shouting for help. Personally, while I was watching this scene… I kept trying to somehow will the deaf guy to turn around.  But he never does so and the girl drowns.

Maybe it was my perception but the director really appreciated how incredibly frustrating this scene would be for the audience and he wanted to draw out the frustration and torture for as long as possible.  Or maybe the scene wasn't actually that long... it just felt like it lasted forever.  Here’s a screenshot…




Because the guy was deaf... his ability to be aware of problems was greatly reduced.  Right?  Yeah.  Obviously.  

Guy - hearing = decreased awareness of problem

But what if the writer or director or whoever hadn't removed the guy's hearing?  What if they had removed his ability to valuate the situation?  

Guy - valuation = ?

The guy isn't deaf so he clearly hears the girl.  He turns around and can clearly see that she's drowning.  Does he rescue her?  No.  Is it because he's an inherently bad guy?  No.  It's simply because he doesn't have the ability to valuate the situation.  He understands exactly what's happening... but he can't determine whether his valuation of the situation is negative or positive.  As a result, he does nothing and the girl drowns.

Medium doesn't take away our ability to valuate stories.  It takes away our ability to effectively communicate our valuation of stories.

Reader - valuation communication = ?

If you highly value a story, but can't effectively communicate your valuation, does your valuation matter?  Should your valuation matter?