Thursday, February 19, 2015

Succeeding vs Failing At Other Minds

In the Less Wrong Discussion section I found this post... Making a Rationality-promoting blog post more effective and shareable.  The fellow who created the post, Gleb Tsipursky, was asking for feedback on this blog entry of his... Succeeding at Other Minds.  When I clicked on the link the first thing that grabbed my attention was this wonderful graphic by Cerina Gillilan...







It's quite relevant to economics... and so was the rest of the entry.  So I shared this comment on his Less Wrong post...

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One does not serve the interests of a man who wants a new coat by giving him a pair of shoes or those of a man who wants to hear a Beethoven symphony by giving him admission to a boxing match.  - Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution

Ran across that passage a few days ago and I almost didn't collect it.  But now here I am sharing it.

You're trying to teach rationality and I'm trying to teach economics.  Why are you trying to teach rationality and why am I trying to teach economics?  I'm trying to teach economics so people can understand how their interests are served.

Using your graphic... we can imagine that if the girl had $20 then she would have given it to the guy who correctly guessed that she wanted a baseball bat rather than a vampire bat.  Markets work because consumers reward whichever producers correctly guess their preferences.  To use your terminology... producers that "succeed at other minds" will gain more influence over how society's limited resources are used.  

The producer whose product turns out to have the combination of features that are closest to what the consumers really want may be no wiser than his competitors.  Yet he can grow rich while his competitors who guessed wrong go bankrupt.  But the larger result is that society as a whole gets more benefit from its limited resources by having them directed toward where those resources produce the kind of output that millions of people want, instead of producing things that they don't want. - Thomas Sowell, Basic Economics

If consumers really want baseball bats... then it would be a huge waste to supply them all with vampire bats.  Markets, because they operate on the basis of consumer sovereignty, help prevent this from happening.  Consumers don't give their money to producers who fail at other minds.

With the public sector, on the other hand, people like to believe that producers of public goods succeed at other minds...

For example, the discussion assumes that the community of consumers has a well-functioning, formal state structure.  Like a benevolent dictator, this state somehow guesses the preferences that people have for public goods. - Meghnad Desai, Providing Global Public Goods

But in the absence of consumer sovereignty in the public sector.... how can we be sure that the government supplies the public goods equivalent of baseball bats rather than vampire bats?

Anyways, this is the economic relevance of succeeding vs failing at other minds.

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With markets the supply (baseball bats) follows from the demand (baseball bats).  With command economies however, the supply (vampire bats) really does not follow from the demand (baseball bats).  When the conclusion (the supply) does not follow from the premise (our preferences)... then what you have is non-sequitur economics.  Command economies are based on non-sequitur economics.

I knew that I'd used the term "non-sequitur economics" before but turns out that I never posted the relevant entry to my blog.  Instead, I had posted it to the Nation States forum... Pseudo-demand, Pseudo-supply ... and the xkcd forum... Pseudo-demand, Pseudo-supply.  I wonder how much more effectively I would have communicated my point if I had shared Gillilan's great graphic?

Since I don't have my post "Pseudo-demand, Pseudo-supply" on my blog... and it's relevant enough to the topic of this entry... I might as well copy and paste it here...

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Minimum wages are false values. They do not accurately reflect society's true preferences. In economics "preferences" are the same as "demand". So false values/preferences are the same thing as a false demand. Pseudo-demand will always result in pseudo-supply. Minimum wages (psuedo-demand) prevent us from maximizing the value we derive from our limited resources.

Anybody a fan of Monty Python? Here's a fun clip to illustrate the concept of false values.

If somebody asks you what your favorite color is...why lie? Why risk being cast into the gorge of eternal peril? In other words, why risk having to wear an orange sweater when orange is your least favorite color? If your favorite color is green, then clearly there's going to be a value disparity between wearing a green sweater and wearing an orange sweater.

When we input false values into the impossibly complex equation which determines how society's limited resources are allocated...it's a given that the output will not be accurate. It will be less valuable than the output would have been if true values had been inputted. The size of the value disparity will depend on how false the inputted values were.

In computing, this is known as garbage in, garbage out. It's equally relevant to economics...pseudo-demand, pseudo-supply.

Just like it would be detrimental to lie about how much you value something...it would also be detrimental to have your true values ignored. Here's a funny story from the bible that perfectly illustrates the problem with command economies (our public sector)...

Genesis 29

1 Then Jacob went on his journey, and came into the land of the people of the east.
2 And he looked, and behold a well in the field, and, lo, there were three flocks of sheep lying by it; for out of that well they watered the flocks: and a great stone was upon the well's mouth.
3 And thither were all the flocks gathered: and they rolled the stone from the well's mouth, and watered the sheep, and put the stone again upon the well's mouth in his place.
4 And Jacob said unto them, My brethren, whence be ye? And they said, Of Haran are we.
5 And he said unto them, Know ye Laban the son of Nahor? And they said, We know him.
6 And he said unto them, Is he well? And they said, He is well: and, behold, Rachel his daughter cometh with the sheep.
7 And he said, Lo, it is yet high day, neither is it time that the cattle should be gathered together: water ye the sheep, and go and feed them.
8 And they said, We cannot, until all the flocks be gathered together, and till they roll the stone from the well's mouth; then we water the sheep.
9 And while he yet spake with them, Rachel came with her father's sheep; for she kept them.
10 And it came to pass, when Jacob saw Rachel the daughter of Laban his mother's brother, and the sheep of Laban his mother's brother, that Jacob went near, and rolled the stone from the well's mouth, and watered the flock of Laban his mother's brother.
11 And Jacob kissed Rachel, and lifted up his voice, and wept.
12 And Jacob told Rachel that he was her father's brother, and that he was Rebekah's son: and she ran and told her father.
13 And it came to pass, when Laban heard the tidings of Jacob his sister's son, that he ran to meet him, and embraced him, and kissed him, and brought him to his house. And he told Laban all these things.
14 And Laban said to him, Surely thou art my bone and my flesh. And he abode with him the space of a month.
15 And Laban said unto Jacob, Because thou art my brother, shouldest thou therefore serve me for nought? tell me, what shall thy wages be?
16 And Laban had two daughters: the name of the elder was Leah, and the name of the younger was Rachel.
17 Leah was tender eyed; but Rachel was beautiful and well favoured.
18 And Jacob loved Rachel; and said, I will serve thee seven years for Rachel thy younger daughter.
19 And Laban said, It is better that I give her to thee, than that I should give her to another man: abide with me.
20 And Jacob served seven years for Rachel; and they seemed unto him but a few days, for the love he had to her.
21 And Jacob said unto Laban, Give me my wife, for my days are fulfilled, that I may go in unto her.
22 And Laban gathered together all the men of the place, and made a feast.
23 And it came to pass in the evening, that he took Leah his daughter, and brought her to him; and he went in unto her.
24 And Laban gave unto his daughter Leah Zilpah his maid for an handmaid.
25 And it came to pass, that in the morning, behold, it was Leah: and he said to Laban, What is this thou hast done unto me? did not I serve with thee for Rachel? wherefore then hast thou beguiled me?

LOL...that's a really funny, but messed up story. It's interesting that Jacob only realized the trickery the morning after. Do you think that you would have realized that you were sleeping with the wrong sister? Maybe it was really dark...and/or Jacob must have been really drunk...and Leah didn't say anything before, during or after sex.

Imagine Jacob went to a drive through restaurant. Except, the menu consisted of women (Rachel, Leah, Zilpah, etc.) rather than food. Jacob ordered Rachel, drove up to the cashier and paid 7 years of his life. Unfortunately, it was only after he consumed his "meal" that he realized that he had been given the wrong woman.

Command economies are non-sequitur economies. The conclusion (Leah) did not follow from the premise (Jacob's preferences). As a result, value was destroyed. Pseudo-demand, pseudo-supply.

How much does our society truly value unskilled labor? We really don't know. And that's a problem. If students don't know how much society truly values unskilled labor...then how can they possibly make an informed decision regarding how much effort/time/money (life) to invest in acquiring skills? Why would you want to incentivize your son or daughter to drop out of school? If we say that we value unskilled labor more than we really do...then we're increasing the incentive for unskilled people to immigrate to America. Why lie to poor people in foreign countries? If wages don't truly reflect the demand, then the supply won't truly reflect our preferences.

The immediate consequences of living/minimum wages might be beneficial...but the subsequent consequences will always be far more detrimental. This is because false values prevent resources from being efficiently allocated. If you really don't believe me...then the next time you're at a bar/club...lie about your sexual preferences. Let me know how it goes.

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When we pay producers as a result of their good guesses...




... we help create value signals...




Well... things just got a little tricky here because now we have baseball bats, vampire bats and batman.  Heh.

Anyways, if we want our interests to be better served, then it would behoove us not to distort the value signals that we create through our own personal sacrifice.  In other words, let's not lie to Batman about where the Joker is.

I wonder what's the best way to put all these concepts together in a cohesive illustration...

1. Other minds (consumer preference for baseball bats or vampire bats)
2. Succeeding at other minds (being rewarded for correctly guessing baseball bats)
3. Profits attracting other producers (value signals)
4. Increased competition benefits consumers...
A. decrease in baseball bat prices
B.  increase in baseball bat variety

If people can easily understand how and why markets work... then it will be easier for them to understand how they'll benefit from the creation of a market in the public sector.

In terms of effectively conveying the greatest number of these concepts in the shortest and most accessible video... by far the best (that I know of) was recently created by Tyler Cowen and Alex Tabarrok... A Price is Signal Wrapped Up in an Incentive ...





As wonderful as this video is... I don't think that people who watch it will easily arrive at the conclusion that it's a really excellent idea to replace the command economy in our public sector with a market economy.  For some reason it kinda seems like Gillilan's great graphic might help people arrive a little closer to the correct conclusion.

What Gillilan's graphic has (or strongly suggests), that the video does not, is the logical absurdity of supplying vampire bats when it's baseball bats that consumers actually demand.

So perhaps this would be a better bundle...




Voting and other democratic procedures can help to produce information about the demand for public goods, but these processes are unlikely to work as well at providing the optimal amounts of public goods as do markets at providing the optimal amounts of private goods.  Thus, we have more confidence that the optimal amount of toothpaste is purchased every year ($2.3 billion worth in recent years) than the optimal amount of defense spending ($549 billion) or the optimal amount of asteroid deflection (close to $0).  In some cases, we could get too much of the public good with many people being forced riders and in other cases we could get too little of the public good. - Tyler Cowen, Alex Tabarrok,  Modern Principles of Economics
When the government spends $549 billion on defense... is it succeeding or failing at other minds?  It's easy enough to find out.  All we have to do is allow taxpayers to choose where their taxes go.  If the government is truly succeeding then we'll effectively confirm it.  But if the government is failing, then the greater the size of its failure... the more value we'll create by creating a market in the public sector.  As I explained in Pushing for a Pubmar... China created a lot of value when it created a market in its private sector.  This is because failing at other minds (with private goods) was no longer rewarded.  If it doesn't make sense to reward failing at other minds in terms of private goods... then why would it make sense in terms of public goods?

Well... when it comes to effectively communicating to people how their interests are better served... clearly there's a lot of room for improvement.

3 comments:

  1. Glad you enjoyed the article and graphic from our website! I think economics is indeed a huge area with low-hanging fruits for improvement in our thinking and decision-making. Communicating with others on how their interests are best served is one of the toughest things for both business and customers alike, and hopefully articles like yours can help advance this area.

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  2. You make several good points about the efficiency of free markets, however there are limits.
    A free market is inherently a greedy algorithm and thus requires an optimal substructure to achieve optimal solutions; government intervention is likely required to provide this substructure.
    Tragedy of the Commons is the general term for most examples of such problems. Without a government restriction to prevent over-fishing the oceans and lakes will be depleted by individual tendency to maximize their lot. It is possible minimum wage might be a required restriction as well, but this point is still debatable.

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    Replies
    1. Imagine a cat stuck in a tree. Do you want to argue that it's a problem that the cat is stuck in the tree? Ok, I'm not going to disagree with you. We have a problem.

      Where there's a point of contention is the issue of how to solve this problem.

      Let's say that you want to use the bat signal so that Batman will rescue the cat from the tree. Perhaps you're assuming that Batman has nothing better to do with his time than organize his ties. If this is what you're assuming then I can understand why you perceive that we'd increase the total benefit by having Batman rescue the cat. But if, in reality, Batman was actually coming up with a plan to defeat the Joker once in for all... then we'd greatly decrease the total benefit by having Batman rescue the cat.

      In economic terms, Batman is a limited resource. The opportunity cost is too high if having him rescue a cat requires that we forgo the benefit of having him figure out how to defeat the Joker. One person's small benefit doesn't outweigh an entire city's huge detriment.

      So I have no problem with you wanting the government to intervene. That's not my issue. My issue is that, with the current system... people can see a public problem... and they want the government to do something about it... which is perfectly reasonable... but they can't see where the required resources are taken from and they have no idea how much benefit is lost as a result.

      On the one hand, Batman rescued a cat from a tree. But on the other hand, the Joker destroyed Gotham.

      Markets work because you know that any time spent replying to this comment is time that can't be spent doing other things that you also value. So you endeavor to put your time, a limited resource, to its most valuable use.

      Pragmatarianism would create a market in the public sector by allowing people would choose where their taxes go. This means that if you want more government intervention in one area... then you're going to have to decide whether it's worth it to have less government in other areas. This is the only way to ensure that government intervention truly maximizes society's total benefit.

      For more info please see... Why I Love Your Freedom.

      Let me know if you have any questions.

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