Tuesday, June 30, 2015

Hedge Granularity vs Fiscal Stimulus (Scott Sumner)

In a recent entry... Scott Sumner - Keynesian Imperialist... I failed to adequately explain the problem with fiscal stimulus.   Sumner was kind enough to offer some new material for me to work with... Macroeconomics in small economies.

Here's how he starts off...
Like many American economists, I've learned macroeconomics from an American perspective. But America is a very unusual country. For instance, US RGDP growth has averaged about 3% for the past 120 years, if not more. Most business cycles are fairly small, partly reflecting the fact that our economy is well diversified. If Nevada is in recession, Massachusetts may be growing, or vice versa.
At first glance this doesn't seem unreasonable.  We have around 50 states... and each state helps us hedge our bets... so as a country we're pretty safe.

But at second glance... each state is a collection of counties... and each county is a collection of businesses... so why should we be seeing any cycles?

Sumner is essentially arguing that the country is diversified... but the states are not...

1st tier (country) = diverse
2nd tier (state) = uniform

Nevada only supplies gambling... and Florida only supplies oranges.  If there's a bad freeze in Florida... the entire economy is still ok because Nevada's gambling adequately offsets the loss of Florida's oranges.

Here's some confirmation...

If all the booms and busts of recent years have taught states anything, Muro said, it’s that it is dangerous to rely too much on one industry for economic growth—especially if that industry is as volatile as real estate or oil. After the last time oil prices crashed, in 1986, bringing the Texas economy down with them, the state government made a point to broaden its economy into other areas. In the wake of the recent recession, the governor’s office and others claimed that Texas has successfully expanded into industries outside of the oil sector—especially the kinds of newer, fast-growing ones, such as tech, that have made places like Silicon Valley so successful. The Internet scene in Austin was particularly celebrated. “Texas has made a concerted long-term effort to build a broadly diversified economy that allows job creators from a wide variety of sectors and industries to thrive here,” Lucy Nashed, a press secretary for Perry, told me. She said that “will allow the state economy to weather the inevitable ups and downs of the economic cycle better than less diversified economies.” But, Muro noted, “The question is, given what is happening in oil and gas, how far along has that diversification proceeded in Texas?” - Vauhini Vara, How California Bested Texas

Clearly it's possible for any entity... from individuals to states to countries to the world... to be inadequately diversified.  Back to Sumner...

Other economies don't seem to adhere as closely to a stable trend line. Japan did very poorly in the 1940s, then raced ahead for decades, and has seen little growth since the early 1990s. Even smaller economies such as Latvia, Estonia, Iceland and Greece have seen spectacular booms followed by huge busts.

Ok.  These smaller countries are inadequately diversified.  Therefore, the solution should be to increase their diversification.  Right?  Well...

America would be able to support a public debt equal to 100% of GDP. But unlike Krugman, I believe the Greek situation in 2007 was "wildly irresponsible." Greece needed to run budget surpluses during the boom years, so that it would have the resources to do fiscal stimulus during a depression. Instead they ran a very large budget deficit during the boom period.

Eh?  The solution isn't to increase diversification?  The solution is fiscal stimulus?  Here's more of the same...

I would certainly not believe a 10% over capacity estimate for the US economy in 2007, but I don't find it all that implausible for Greece. Suppose your economy is sucking in lots of foreign workers for a real estate boom. The boom ends and the foreign workers leave. Now your "natural rate of output" is lower, as you have less labor. The outflow of Mexican labor after 2007 was not enough to cause a big drop in the US natural rate, but in a smaller economy like Greece, or Nevada, or Dubai, that sort of shock to capacity output could be much more significant. 
In the 1999-2000 boom the US government did run a budget surplus, and I believe Krugman supported that policy. He once suggested that President Bush made a mistake by cutting taxes and putting us back into a structural deficit. I'd argue the same applies to Greece (and Iceland, Estonia, etc.). Countries with those sorts of wild swings between boom and bust need to run surpluses during the good years. Because Greece did not do so, it is now forced to beg for loans from others. Its creditors know that it is unlikely to be able to repay those loans, and not surprisingly are reluctant to grant even more loans without some pretty strict conditions attached.

Sumner starts off his blog entry by saying that America doesn't have wild swings because we are adequately diversified.  But here he's saying that countries with wild swings need fiscal stimulus.

I find it hard to believe that Sumner is under the impression that Greece is too small to diversify.  Perhaps he's implicitly assuming that diversification isn't, for whatever reasons, tenable?

My hero is Deng Xiaoping... so I'm definitely a huge fan of practical/marginal improvements.  Allowing taxpayers to allocate 1% of their taxes?  Awesome!  A tiny step in the right direction is still a step in the right direction.

Hedging, however, is based on the premise that steps can be in the wrong direction.  Pragmatarianism is a step in the right direction because it increases the quantity of steps and directions.

There's a subtle but important distinction that needs to be made.  The heart of the issue really isn't to increase diversification.  People are already diverse.  Sure we could be more diverse as a species... but the real issue is that our natural diversity is blocked by top down control of the economy... aka "conceit".

Here's what Adam Smith wrote over 200 years ago...

If bankers are restrained from issuing any circulating bank notes, or notes payable to the bearer, for less than a certain sum, and if they are subjected to the obligation of an immediate and unconditional payment of such bank notes as soon as presented, their trade may, with safety to the public, be rendered in all other respects perfectly free. The late multiplication of banking companies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the public. It obliges all of them to be more circumspect in their conduct, and, by not extending their currency beyond its due proportion to their cash, to guard themselves against those malicious runs which the rivalship of so many competitors is always ready to bring upon them. It restrains the circulation of each particular company within a narrower circle, and reduces their circulating notes to a smaller number. By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public. This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so. - Adam Smith, Wealth of Nations

And here's what Jeffrey Friedman wrote a few years ago...

Clearly the regulators were predicting that steering banks’ leverage into highly rated MBS would be prudent. This prediction proved disastrously wrong, but the Recourse Rule heavily tilted the field toward banks that went along with the regulators’ prediction. Heterogeneous behavior among competing enterprises normally spreads society’s bets among the different predictions (about profit and loss) made by various capitalists. Thus, the herd mentality is a danger under capitalism, as under every other system. Yet regulation produces the equivalent of a herd mentality by force of law. The whole point of regulation is to homogenize capitalists’ behavior in a direction the regulators predict will be prudent or otherwise desirable. If the regulators are wrong, the result is a system-wide failure. “Systemic risk regulation” may be a contradiction in terms. 
Neither capitalists nor regulators can use crystal balls to avoid making bad bets. That highly rated mortgage-backed securities would be prudent turned out to be a very bad bet. But we all suffered because this bet was imposed by financial regulators on the whole system. - Jeffrey Friedman, What Caused the Collapse?: An Exchange

... and here's what Joseph Stiglitz wrote...

Centralization is like putting all of one's eggs in one basket: just as we now recognize the greater advantages of portfolio diversification in allocating one's wealth, so, too, there are great advantages of diversification in allocating decision making powers. We need only dwell a few minutes on the evils wrought in this century as a result of the concentration of power in the hands of a few individuals. - Joseph Stiglitz, The Invisible Hand and Modern Welfare Economics

... compare it to what James Gwartney wrote...

A recent survey by the Federal Reserve Board indicated the wealthiest 2 percent of American households own 28 percent of the nation’s physical property. At first glance, this appears to be enormous power in the hands of a few people. However, reflection should cause one to question this view. This wealth, enormous as it is, is in the hands of 1.6 million house­holds, representing diverse political, religious, ethnic, and personal interests. Unless it is used to provide services to others in exchange for income, the wealth of these property owners will shrink. Compare the power of these wealthy households with the power of 536 elected federal office holders. This latter group, comprising just .0000025 percent of our population, determines how one-quarter of our national output is allocated. They tax approximately one-fifth of our national income away from earners and allocate it to nonearners. They set the dollar value of the social security benefits received by thirty-six million Americans. The regulatory power under the jurisdiction of the 536 individuals holds a life or death grip on the economic health of literally millions of businesses. In contrast with private owners, members of Congress have the power to take property, a portion of your earnings for example, without your consent. One could go on and on, but the point is clear. When government ownership is substituted for private property, enormous power over the lives of others is bestowed upon a small handful of political figures. One of the major virtues of private property is its ability to check the excessive concentration of economic power in the hands of the few. Widespread ownership of property is the enemy of tyranny and abusive use of power. This proposition is just as true today as it was a couple of hundred years ago. - James Gwartney, Private Property, Freedom and the West

Back on the topic of frozen oranges...

Farming is inherently risky. Weather, insects and disease, over which you have limited control or none at all, can wipe you out. One of the ways farmers manage risk is to plant variety. Okay, powdery mildew got your strawberries, but the broccoli’s going gangbusters. For farmers, crops that are given guaranteed protection from both losses and price drops are lower-risk propositions. - Brian Stauffer, Farm bill: Why don’t taxpayers subsidize the foods that are better for us?

Back to Adam Smith...

When a great company, or even a great merchant, has twenty or thirty ships at sea, they may, as it were, insure one another. The premium saved upon them all, may more than compensate such losses as they are likely to meet with in the common course of chances. - Adam Smith, Wealth of Nations

Yeah, we're going to need a larger megaphone.

Let's review...

Sumner is saying that fiscal stimulus is necessary because some countries aren't diversified.  I'm saying that if fiscal stimulus is ever necessary... then the solution really isn't fiscal stimulus.  The solution is to decrease government centralization/control.  This will allow inherent diversity to naturally flourish... which will eternally eliminate the need for fiscal stimulus.

Pragmatarianism is the best way to decrease government centralization.  Taxes will still be there... the difference is that a much greater diversity of people will choose where they go.  Hedging bets is just as important in the public sector as it is in the private sector.

Sunday, June 28, 2015

We're going to need a larger megaphone

From a recent Marginal Revolution post... King Cotton and Deadweight Loss...

Farmers use the subsidized water to transform desert into prime agricultural land. But turning a California desert into cropland makes about as much sense as building greenhouses in Alaska! America already has plenty of land on which cotton can be grown cheaply.  Spending billions of dollars to dam rivers and transport water hundreds of miles to grow a crop which can be grown more cheaply in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in San Jose or as drinking water in Los Angeles than it does as irrigation water.

Authors: Alex Tabarrok, Tyler Cowen
BookModern Principles of Economics
Year: 2014

The natural advantages which one country has over another in producing particular commodities are sometimes so great that it is acknowledged by all the world to be in vain to struggle with them. By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expence for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines merely to encourage the making of claret and burgundy in Scotland?

Author: Adam Smith
Book: The Wealth of Nations
Year: 1776

2014 - 1776 = 238 years

Rights vs Results

Reply to: I Agree with Milton Friedman! by James Kwak


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This is kinda a strawman. A “rights” based argument for property ownership is an extremely flimsy argument. Is it even an argument? The bible says, “thou shall not steal”. That’s not an argument… it’s a divine decree.

From the economic perspective… the issue really isn’t “rights”… it’s “results” (aka abundance).

Bob calls himself a “maker”. Should Bob keep his money? From the economic perspective… the answer depends on whether taking his money increases or decreases abundance.

If you want to argue that Bob has skills… then taking his money will decrease abundance. If you want to argue that Bob doesn’t have skills and just got lucky… then why are you also arguing that we should take his money? Perhaps you’re actually arguing that Bob is always lucky?

If you want to argue that Bob is always lucky… then your redistribution argument would have some logical basis. But it sure wouldn’t have any economic basis. Taking money from Lucky Bob would decrease abundance. This is because Lucky Bob consistently manages to invest in beneficial ventures. For example, he invested in Uber from the get go. Did you? I sure didn’t.

Getting back to the bible… the most relevant story is the parable of the talents. Taking gold from the most skilled and giving it to the least skilled would certainly decrease abundance.

In terms of fighting poverty… decreasing poverty depends on increasing opportunity. And increasing opportunity depends on increasing abundance. Abundance is a function of how society’s limited resources are used.

Moreover, what is a resource today may cease to be one tomorrow, while what is a valueless object today may become valuable tomorrow. The resource status of material objects is therefore always problematical and depends to some extent on foresight. An object constitutes wealth only if it is a source of an income stream. The value of the object to the owner, actual or potential, reflects at any moment its expected income-yielding capacity. This, in its turn, will depend on the uses to which the object can be turned. The mere ownership of objects, therefore, does not necessarily confer wealth; it is their successful use which confers it. Not ownership but use of resources is the source of income and wealth. — Ludwig Lachmann, The Market Economy and the Distribution of Wealth

Also…

Taxes upon transfer, besides the mischief of pressing upon capital, are a clog to the circulation of property. But, has the public any interest in its free circulation? So long as the object is in existence, is it not as well placed in one hand as in another? Certainly not. The public has a perpetual interest in the utmost possible freedom of its circulation; because by that means it is most likely to get into the hands of those, that can make the most of it. Why does one man sell his land? But because he thinks he can lay out the value to more advantage in some channel of productive industry. And why does another buy it? But because he wishes to invest a capital, that is lying idle, or less productively vested; or because he thinks it capable of improvement. The transfer tends to augment the national income, because it tends to augment the income of the two contracting parties. If they be deterred by the expenses of the transfer, those expenses will have prevented this probable increase of the national income. — J.B. Say, A Treatise on Political Economy

Markets work because it’s up to consumers to decide how well producers are using society’s limited resources. Consumers, with their infinite variety, preferences and circumstances, are the ultimate judges. Aka “consumer sovereignty”. It’s up to consumers to decide, for themselves, whether Bob has adequately earned their money.

Let’s review…

If Bob is skilled, and you take money from him, then you’re subverting the true will of the people. You’re also decreasing abundance which decreases opportunity which increases poverty. If, on the other hand, Bob just got lucky… then there’s no point in taking money from him. Chances are just as good that his money will circulate soon enough on its own.

So I’m against taxes because I’m for abundance. Actually, I’m not against taxes per se… I’m against the absurdity of allowing congresspeople to allocate them. If 500 government planners were better than an entire nation of people at allocating for abundance… then socialism would have worked. The absolute absurdity of our age is the belief that socialism somehow manages to succeed for the public sector despite the fact that it fails for the entire economy. Socialism fails just as much for public goods as it does for private goods. Taking consumer choice out of the equation will always have logically detrimental consequences.


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Reply to: The False Tradeoff Between Efficiency and Equity by Haynes Goddard


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The heart of efficiency isn’t just opportunity cost… it’s also the choices we make… which depend largely on our preferences and circumstances.

A vegetarian looks at a menu and rules out any dishes that contain meat. Then she looks at the prices and imagines how much value she’d derive from the alternative uses of her money. She also recalls the last time that she had each dish. Perhaps she also counts calories and considers nutritional value… or lack thereoff.

After an immense amount of computation/calculation…most of which occurs as a background process… she filters out all the other options and orders a salad. The waiter brings her a steak. It’s a non sequitur because the conclusion (steak/supply) doesn’t follow from the premise (her vegetarian preference).

It’s an inefficient allocation of resources.

As we can see, efficiency is easily and reasonably defined by the supply’s distance from a consumer’s demonstrated preference.

Except, you’re not defining efficiency in terms of consumer preference. You’re just throwing opportunity cost out there without any recognition or acknowledgement of all the other relevant parts. This vagueness allows you to argue that efficiency is a type of fairness.

Efficiency really isn’t fairness. Efficiency is the most valuable uses of society’s scarce resources. And value is a function of choice, sacrifice, preference, circumstance….which can all be rolled into “demand”. How well supply matches demand is a matter of efficiency.

Fairness disregards demand. Fairness is voters reaching into each other’s pockets. Fairness is an argument made by people who think that abundance is a function of taking rather than trading. Fairness is about diverting scarce resources away from more valuable uses. Fairness is a function of economic ignorance.

There’s nothing false about the tradeoff between efficiency and equity. There’s a very distinct and concrete tradeoff. We either have efficiency and abundance or equity and scarcity. These two things are diametrically opposed.

To be clear… because of the free-rider problem… taxation can increase efficiency… if, and only if…taxpayers are free to choose where their taxes go.

Friday, June 26, 2015

Scott Sumner - Keynesian Imperialist

And I'd say the same about Jose's comments on Keynesians. Lots of Keynesians do favor wealth redistribution, but there isn't any necessary linkage. As I point out in this post, it's perfectly possible to be a conservative Keynesian and favor small government. You can simply use tax cuts as your preferred form of fiscal stimulus. - Scott Sumner, I don't favor an interventionist monetary policy to fix recessions

Ouch, my brain.

This is so many types of weird.

A small government Keynesian (SGK)?  This is perfectly possible?  Like, Big Foot is perfectly possible?  What's the point in telling us that Big Foot is perfectly possible?  I'm not interested in the perfect possibility of his existence... I'm interested in evidence of his existence.  If Sumner knows of a SGK then he should tell us this person's name!  So we can take pictures.  And perform experiments.

Maybe Sumner is a SGK?  If not, then why not?  Let's pretend that he is!

Let's say that Sumner and Henderson both want tax cuts.  However, Sumner is a SGK while Henderson is not.  This is because Sumner wants tax cuts to stimulate the economy while Henderson just wants tax cuts to...uhhhh... not stimulate the economy.

Sumner:  I support tax cuts so that people will have more money to spend!!!
Henderson:  I support tax cuts so that people will have more money to save!!!

I take issue with this idea of needing, for any reason, to stimulate the economy.  If the economy has problems... if it's sluggish...  then it's because resources are inefficiently allocated.

Like, one time, my gf accidentally threw her keys away.  Hey Sumner, how do you translate her action into "econ"?  You know the answer... right?  Yeah?  The answer is... she "inefficiently allocated her keys".  Because she inefficiently allocated her keys, we wasted several hours searching for them.

When Sumner talks about "fiscal stimulus"... then I honestly have to wonder whether he truly grasps what it means for resources to be (in)efficiently allocated.

My second favorite liberal in the whole wide world kinda has this rule...

Quiggin's Implied Rule of Economics (QIRE) - Society's limited resources should be put to more, rather than less, valuable uses

Does Sumner think QIRE is a good rule?  Wouldn't you like to know?  I sure would.

Personally, I think it's an excellent rule!  Society maximizes benefit when it does the most beneficial things with its limited resources.

So where is the role for "fiscal stimulus"?  In theory, it has a role when the economy needs fixing.  But the only reason that the economy should ever need fixing is because QIRE is being violated.  The goal for every economist should be to clarify how, exactly, QIRE is being violated.

Tyler Cowen recently linked to this article in the LA Times about minimum wages...
Garcetti said county adoption of the minimum wage proposal would put the Los Angeles area “past the tipping point.” He predicted other cities would follow suit to avoid losing the most qualified workers to higher-wage areas. 
Some cities, including Santa Monica and West Hollywood, are already considering raising the minimum wage. However, larger cities in the county, including Pasadena and Long Beach, have remained on the sidelines of the debate. - Abby Sewell, Jean Merl, Sarah Parvini, Business concerns stall minimum wage vote by L.A. County board
Eric Garcetti is the mayor of Los Angeles.  Here's his logic...

Cause: LA mandates higher wages
Effect: LA increases its supply of workers

By mandating higher wages, Garcetti is effectively saying, "Hey everybody in the world!  LA has a shortage of workers!!!  So we're increasing your incentive to help us solve this huge problem!!!"

LA has a shortage of workers?  I guess.  Because, why else would Garcetti want to increase the supply of workers?  It sure wouldn't make sense to increase the supply of workers when there's a surplus of workers.  Except, if LA truly does have a shortage of workers... then why in the world would the mayor need to mandate higher wages?  Usually prices automatically increase when supply doesn't meet demand.  Evidently Garcetti is under the impression that prices are broken.  From his lofty vantage, the mayor can clearly see that LA has a shortage of workers... and the price of labor does not accurately communicate this reality.

Who should we trust?  Garcetti?  Or prices?

If we trust prices then, in reality, LA has a surplus of workers.  And raising the minimum wage will only make this problem worse.  It will result in an even more inefficient allocation of unskilled labor.  It will hurt the economy.

And how do we help the economy?  Stimulus!  Uhhhh...no.  In order to help the economy we first have to identify exactly how QIRE is being violated.  When my gf threw her keys away she violated QIRE.  When Garcetti throws workers away he violates QIRE.

Cause: Garbage in
Effect: Garbage out

Society's limited resources are misallocated and the inevitable problems are "solved" with... stimulus.  And what's stimulus?  The misallocation of resources.    

Keynesians really did an excellent job of capturing the narrative.  I'll give them that!  The topic of debate isn't the system... it's stimulus.  Scott Sumner is allocating his scarce resources to help promote this narrative.  The economy isn't my girlfriend and I digging threw the trash to find her keys.  It's not unskilled workers wandering around LA trying to find jobs.  Instead, the economy is some sentient being... completely independent of individuals.  When this being has a problem... then invariably the solution is stimulus.  Just like in the military how Motrin will "solve" any problem.  Sucking chest wound?  Have some Motrin.

Motrin is an easy "fix".  Just like stimulus.  Even the word "stimulus" is easier to write than "inefficient allocation of resources".  The revolution was postponed...yet again, because of semantics.  The other side has all the best word smiths!  And in our superficial system, style always wins over substance.

Monday, June 22, 2015

Elizabeth Bunn vs Builderism

ActionNetwork.org decided to send me this e-mail from the AFL-CIO...

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Friend,

Too many workers fear retaliation from their employer for speaking out about dangerous working conditions. A lot of workers remain silent, but Kimberly King—who worked at the Lear Corp. auto parts plant in Selma, Alabama, where she made seat cushions for Hyundai cars—couldn’t take it anymore.

Kimberly was diagnosed with asthma for the first time in her life and a doctor’s visit found high levels of toxins in her blood that could be from the chemicals she was exposed to at work. Turns out, Lear Corp. had been cited multiple times by the federal government for violating health and safety laws.

Kimberly decided to speak out. She joined a community delegation to ask Hyundai to protect workers who build parts for their cars. But she ended up being fired and sued by Lear Corp. for standing up. Hyundai has the power to step in and require Lear to do the right thing.

Sign the petition now to demand Hyundai take action to ensure safe working conditions and fair wages for Kimberly and other workers who build the parts for their cars. We’ll make sure your petition is added to the others being delivered to Hyundai on the day of action workers are holding next week.

Toluene Diisocyanate, or TDI, is the chemical that may be making workers at the plant ill. The chemical is used to make the foam in many car seats. Researchers say isocyanates like TDI are among the leading causes of workplace-induced asthma.

This is no way for a global auto parts manufacturer to be treating its very own workers. That's why auto parts workers and their families are organizing a day of action on June 25, 2015. We can’t do this without you and working families everywhere.

Click here now to demand that Hyundai protect workers at Lear and other companies that provide parts for their cars.

In Solidarity,

Elizabeth
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Elizabeth Bunn
Director of Organizing, AFL-CIO

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Not exactly sure how I ended up on this list.

After reading the e-mail I immediately searched for and found the "unsubscribe" link.  But... I didn't click it. It's not like I receive daily e-mails from ActionNetwork.  Plus, I suppose I derived some utility from the insight.  At least Elizabeth Bunn gave me a good excuse to share this chart...



Yeah

I'm tempted to sign the petition.  Because... solidarity.  For poor people in developing countries.  Like China.

Except, thanks to unions, China's no longer a developing country!  Right?  The cost of labor in China has skyrocketed.  So this makes it a lot less likely that Lear would move its factory to China.

What about Africa though?  Right now Elizabeth Bunn is doing her hardest to make Africa look more attractive to Lear.  And I could help out by signing the petition.

Maybe this petition will be the tipping point that will send manufacturers to Africa?  Probably not.  I wouldn't be surprised if union participation has to increase a bit more before Africa starts looking good... enough.

In theory, Bunn is supposed to represent the best interests of American union workers.  The question is... what's in their best interest?  Is it for Bunn to petition Lear to move its factory to Africa?  Or is it for Bunn to petition to eliminate barriers to entry?

If barriers to entry are eliminated.... then, logically, workers like Kimberly King would have more employment options.  How many more employment options?  I have no idea.  But it's a given that making it easier to start a business will ensure a larger supply of businesses.  It's also a given that no two employment options will be equally beneficial to workers like King.

Is it really a difficult concept that it's in the best interests of workers that they have more, rather than less, employment options?  When there's a smaller supply of employers... then employers will have the upper hand.  When there's a larger supply of employers... then workers will have the upper hand.

What, if anything, does Elizabeth Bunn do to help ensure that there's a larger supply of employers?  What percentage of its resources does the AFL-CIO allocate to making it easier to start a business?  Imagine if the AFL-CIO allocated 100% of its resources to making it easier to start a business!!  Wow!  How awesome would that be?  What would that e-mail look like?  Maybe something vaguely like this...

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Friend,

There's more than one way to attach an epiphyte to a tree.  Up until now, we've endeavored to improve working conditions and compensation by trying to coerce business owners.  This strategy has backfired because, well, many jobs simply left the country.  Unfortunately, we're not omniscient.  We just don't know where the tipping point is.

It's time for a new strategy.  We're going to endeavor to improve working conditions by trying to make it easier for people to start a business.

Right now it's very difficult and costly to start a business.  The barrier to entry is extremely high.  There are so many regulations designed to benefit workers that every business has to hire an army of lawyers.  As a result of our good intentions, we've inadvertently erected a huge barrier to entry... which has massively reduced employment options.

If we can help tear down the barrier to entry... then workers will have more employment options.  More employment options means more competition for labor.  This will be immensely beneficial for workers.

Not only will this strategy benefit workers... but it will also benefit consumers.  Eliminating the barrier to entry will help ensure that consumers have many more products to choose from.  Businesses will have to compete harder for both workers and consumers.  With our new strategy the interests of workers and consumers will be perfectly aligned.  

Even with consumers firmly on our side though, this will be an uphill battle.  Any preexisting business greatly profits from the reduced competition that results from the existence of a very high barrier to entry.  But, with your help, we can win this battle.  Securing a lasting victory for competition will usher in a new era of prosperity and progress.

In Solidarity,

Elizabeth
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Elizabeth Bunn
Director of Organizing, AFL-CIO

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Perhaps a bit of history will help...

Every colonist gets more land than he can possibly cultivate. He has no rent, and scarce any taxes to pay. No landlord shares with him in its produce, and the share of the sovereign is commonly but a trifle. He has every motive to render as great as possible a produce, which is thus to be almost entirely his own. But his land is commonly so extensive that, with all his own industry, and with all the industry of other people whom he can get to employ, he can seldom make it produce the tenth part of what it is capable of producing. He is eager, therefore, to collect labourers from all quarters, and to reward them with the most liberal wages. But those liberal wages, joined to the plenty and cheapness of land, soon make those labourers leave him, in order to become landlords themselves, and to reward, with equal liberality, other labourers, who soon leave them for the same reason that they left their first master. The liberal reward of labour encourages marriage. The children, during the tender years of infancy, are well fed and properly taken care of, and when they are grown up, the value of their labour greatly overpays their maintenance. When arrived at maturity, the high price of labour, and the low price of land, enable them to establish themselves in the same manner as their fathers did before them. - Adam Smith, Wealth of Nations

America!  With high wages!  Without labor regulations!  It was stupid easy to start a business (farming).  And it was stupid easy to employ people.  The high wages reflected the fact that it was stupid easy to start a business and employ people!  There was a larger supply of employers... which meant that workers had the upper hand.

What about England?

It frequently happens that while high wages are given to the workmen in one manufacture, those in another are obliged to content themselves with bare subsistence. The one is in an advancing state, and has, therefore, a continual demand for new hands: The other is in a declining state, and the super-abundance of hands is continually increasing. Those two manufactures may sometimes be in the same town, and sometimes in the same neighbourhood, without being able to lend the least assistance to one another. The statute of apprenticeship may oppose it in the one case, and both that and an exclusive corporation in the other. In many different manufactures, however, the operations are so much alike, that the workmen could easily change trades with one another, if those absurd laws did not hinder them. - Adam Smith, Wealth of Nations

England!  With absurd laws!

What about America now?  Absurd laws!  If you need some clues here's the most recent/relevant article... 'Employee' Label Would End Uber as We Know It.

I blame people like Elizabeth Bunn.  Good at organizing, bad at understanding.  I can't really blame her though.  Just like Hitler, she's a victim of the system.

Watch...

Politicians aren’t experts, Mr. Laffer said. “They give a speech and if anyone boos, they change their speech,” he explained. “They’re living, breathing polls and that’s the way it should be.” - Patricia Cohen, Nelson D. Schwartz, Matchmaking Season for Republican Presidential Candidates and Economists
In sober truth, whatever homage may be professed, or even paid, to real or supposed mental superiority, the general tendency of things throughout the world is to render mediocrity the ascendant power among mankind. In ancient history, in the middle ages, and in a diminishing degree through the long transition from feudality to the present time, the individual was a power in himself; and if he had either great talents or a high social position, he was a considerable power. At present individuals are lost in the crowd. In politics it is almost a triviality to say that public opinion now rules the world. The only power deserving the name is that of masses, and of governments while they make themselves the organ of the tendencies and instincts of masses. This is as true in the moral and social relations of private life as in public transactions. Those whose opinions go by the name of public opinion, are not always the same sort of public: in America they are the whole white population; in England, chiefly the middle class. But they are always a mass, that is to say, collective mediocrity. And what is a still greater novelty, the mass do not now take their opinions from dignitaries in Church or State, from ostensible leaders, or from books. Their thinking is done for them by men much like themselves, addressing them or speaking in their name, on the spur of the moment, through the newspapers. I am not complaining of all this. I do not assert that anything better is compatible, as a general rule, with the present low state of the human mind. But that does not hinder the government of mediocrity from being mediocre government. - J.S. Mill, On Liberty

Popular/Opinion = Shallow

Elizabeth Bunn is a product of shallowness.  This is because our education system is a product of shallowness.  Elizabeth Bunn did not read either the Wealth of Nations or On Liberty in high school.  She should have.  But she didn't.  As a result, she has a shallow understanding of the true source of prosperity and progress.  And she votes accordingly.  So does the majority.  The logical result is an abundance of absurd laws.

How do we break this vicious cycle?  J.S. Mill's solution was weighted voting...

But (though every one ought to have a voice) that every one should have an equal voice is a totally different proposition. When two persons who have a joint interest in any business, differ in opinion, does justice require that both opinions should be held of exactly equal value? If with equal virtue, one is superior to the other in knowledge and intelligence—or if with equal intelligence, one excels the other in virtue—the opinion, the judgment, of the higher moral or intellectual being, is worth more than that of the inferior: and if the institutions of the country virtually assert that they are of the same value, they assert a thing which is not. - J.S. Mill, Considerations on Representative Government

This is a catch 22 solution though because obviously the majority would not vote for weighted voting.  Tax choice is another catch 22 solution.  It only has 81 likes on facebook.

What are the chances that a solution will be discovered anytime soon?  Can you even imagine what a deep culture would look like?

Wednesday, June 17, 2015

Increasing Total Utility vs Increasing Productivity

Why do I oppose sugar subsidies?  According to Scott Sumner, here are my two options...

1.  They decrease total utility
2.  They violate natural rights

These are my only two options?  Eh, no way man!

When it comes to "natural rights"... I completely agree with Bentham that they are nonsense on stilts.  Increasing total utility, on the other hand, isn't a nonsensical option... but... it really puts the cart before the horse.

The reason that I oppose subsidies is because they decrease productivity.  Decreasing productivity will certainly decrease total utility.  And increasing productivity will certainly increase total utility.  But...increasing total utility does not always increase productivity.

Let's say that we redistributed all the wealth from the rich to the poor.  Would total utility skyrocket?  Sure.  What about productivity though?  It would plummet.  This is because many rich people are rich because they are more productive.  Once productivity plummets... then so too would total utility.

Putting scarce resources in the wrong hands decreases productivity... which decreases total utility.

Of course, with an unknown amount of rich people, their wealth does not accurately reflect their productivity.  With sugar farmers, some unknown percentage of their wealth was not earned by serving consumers.  It was earned by serving politicians.  In other words, it was earned by cheating... aka "plunder".

wealth via consumer sovereignty = earned = fair
wealth via politician sovereignty = plundered = unfair

Sumner, like myself, wants to eliminate plunder... but he puts it strangely....
Ending sugar subsidies would increase the efficiency of the American (and global) economy, boosting real GDP. It would redistribute money from relatively wealthy sugar producers to average Americans.
The first sentence is ok.  The second sentence is where it gets a bit weird.  I take issue with the word "redistribute".

A bad guy steals your wallet.  But as soon as he does so, Batman hits him over the head and returns your wallet to you.  Is this redistribution?  Not so much.

When liberals say, "Let's redistribute!!!" I really don't hear, "Let's eliminate plunder!!!".  What I hear is, "Let's embrace plunder!!!".

With liberals the focus is on total utility... not productivity.  They fail to see the forest for the trees.

Does Sumner fail to see the forest for the trees?  Well... if his blog entry was our only evidence... then the answer would be "yes".  But I'm pretty sure that Sumner grasps that utility follows from productivity.  Pretty sure.  It's just strange that he left it out.

If you're in the mood for strangeness...
I wish people bought fewer luxury goods and gave more. Still, there’s an upside to luxury consumption. GDP/capita in, e.g., South Korea and Taiwan was low in 1970. 45 years later, these are two of the richest countries on Earth. They became rich not because of charity, international aid, or effective altruism, but the way all the other rich countries became rich—they had decent institutions that encouraged markets, and people in those markets produced products other people wanted to buy. Charity is no substitute for, and does little to prompt, sustained economic growth. When we buy luxury goods, we may not thereby intend to feed the poor, but the long-term result is often that we transform the poor into the rich. Don’t take my word for it—go read any standard development economics textbook. - Jason Brennan, Q: Is it OK to have nice things?
Ouch, my brain.

In the first sentence Brennan wishes that people gave more.  Next he goes on to explain that buying more, rather than giving more, has lifted people out of poverty.  And then, in his BHL blog entry... immediately after the above paragraph, he writes, "As promised, I donated my honorarium for this post to GiveDirectly."

Yesterday, Tyler Cowen shared this link... Derek Thompson on effective giving.  Here's how the article did not go...

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Hi, my name is Derek Thompson.  I'm really interested in getting the most development for my dollar.  After I read this...
These improvements have not taken place because well-meaning people in the West have done anything to help--foreign aid, never large, has lately shrunk to virtually nothing. Nor is it the result of the benign policies of national governments, which are as callous and corrupt as ever. It is the indirect and unintended result of the actions of soulless multinationals and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It is not an edifying spectacle; but no matter how base the motives of those involved, the result has been to move hundreds of millions of people from abject poverty to something still awful but nonetheless significantly better. - Paul Krugman, In Praise of Cheap Labor
.... I decided that I wanted to buy things that are made in Africa.  Unfortunately, this wasn't easy to do.  So I started a website just like Amazon.com... but it only carries products made in Africa!

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Again, that's not how the article went.  There wasn't an ounce, or hint, of awareness that the only truly effective altruism is avarice.  Altruism didn't build that... avarice did.

Here's how Thompson ended his article...
In the end, I considered making several different donations. But I kept coming back to something Robert Mather said: Malaria is not merely the greatest killer of children in the world, but also it is the greatest killer of pregnant women. The disease plunders motherhood from both sides of the equation. The loss of a mother must be quantifiable by some measure of creative accounting, but in my experience it is immeasurable. This much I knew: There is the thing that I want, I cannot have it, but I can give it to somebody else. That seemed to honor the etymology and the root of altruism. 
On Thursday, I wired the money: a thousand for every year of life for my mom, who died a few months before her birthday. To honor a family tradition, I also sent an extra thousand to GiveWell—"to grow on,” she would have said.
Nice narrative... but it's defective.  An effective narrative would have involved Thompson spending his money on products that are made by pregnant African women who spend their earned money on mosquito nets.  Or other things.

My second favorite liberal, John Quiggin, recently shared another draft from his upcoming book... To help poor people, give them money (Draft excerpt from Economics in Two Lessons).  Poor people make hard choices... and...then...and... then...?  What happens next?  What happens after people spend money?  Anything?  Well... Quiggin is a liberal.  Liberals are liberals because they have trouble connecting spending decisions with distributional outcomes.  If they could connect two and two together... then they would realize that redistribution (plunder) subverts the true will of the very people that they are ostensibly trying to help.

I was surprised to find Tim Worstall in the comments section.  He shared a link to his article... India's Basic Income, Or, Let's Abolish Food Stamps And Make Everyone Richer.  For some reason I was also a bit surprised to find Worstall on board with a basic income.

With basic income... sure, we'd increase total utility.  But we'd be putting too many resources in the wrong hands.  This would result in a decrease in productivity which would result in a decrease in total utility.

Here's the correct narrative...

Some poor people work.  They earn money.  They have to pay taxes.  They choose where their taxes go.  The distributional outcome does not subvert the will of the people.  It more accurately reflects the will of the people.  Productivity is rewarded... and increased... and so is utility.  Builderism is the source of better options.

How does this narrative sound?  Keep it in mind as we switch back to Africa.  Here's some more insight via Tyler Cowen...
There are not right now many transactions between rich countries and the bottom couple billion people on Earth. Why is that? Is it because these people have nothing of value to sell or is it because we have no way of transacting with them? We are about to find out. - Eli Dourado, Bitcoin as a medium of settlement
"Success" isn't Derek Thompson donating mosquito nets to people in Africa.  "Success" is Thompson buying products made by people in Africa.  "Success" is Thompson shopping in Africa's private sector.  Just like "success" is Thompson shopping in America's public sector.

We're not any closer to success when Thompson donates .01% of his income to Africa but spends 99.99% of his income outside of Africa.

Shopping is the process by which you find and reward people whose productivity benefits you.  Africa's a big place.  There are a lot of productive people in Africa... but they aren't all equally productive.  It stands to reason that one person is producing something that would create more value for Derek Thompson than anybody else in Africa.  The mission is to make it stupid easy for Thompson to find and reward this productive person.

The most recent and relevant story is from Alex Tabarrak...
Working closely with transplant surgeons, Mr. Roth designed a computerized kidney exchange, based on the austere theories he had developed earlier, that would search through large databases of potential donors and recipients to find the series of exchanges that would maximize the number of lives saved. Today such multi-way exchanges are becoming common. Mr. Roth, however, wants to go further. The larger the database, the more lifesaving exchanges can be found. So why not open U.S. transplants to the world? Imagine that A and A´ are Nigerian while B and B´ are American. Nigeria has virtually no transplant surgery or dialysis available, so in Nigeria patient A’ will die for certain. But if we offered a free transplant to him, and received a kidney for an American patient in return, two lives would be saved. 
The plan sounds noble but expensive. Yet remember, Mr. Roth says, “removing an American patient from dialysis saves Medicare a quarter of a million dollars. That’s more than enough to finance two kidney transplants.” So offering a free transplant to the Nigerian patient can save money and lives. It’s hard to think of a better example of gains from trade (or a better PR coup for the U.S. on the world stage). Better matching with computerized markets is saving lives, but more than 100,000 people are still waiting for kidneys in the United States alone. As Mr. Roth acknowledges, we are unlikely to solve the organ shortage completely without compensating organ donors. - Alex Tabarrok, Matchmaker, Make Me a Market
Making (better) markets facilitates trading.  We need to take the narrative of donating to Africa and replace it with the narrative of shopping in Africa.  We need to replace "GiveDirectly" with "BuyDirectly".   Poverty is weeded out by rewarding productivity.  And markets, by facilitating shopping/trading, reward productivity.

A tax choice system would create a market in the public sector.  We'd all have to spend, say, 35% of our income in the public sector...but we could choose which organizations we traded with.  Allowing the public to shop in the public sector would fundamentally improve the variety and quality of public goods.  Why?  Because productivity would be rewarded.

With an Africa choice system, we'd all have to spend, say, 5% of our income in Africa's private sector... but we could choose which organizations we traded with.  The American public shopping in Africa's private sector would fundamentally improve the variety, quantity and quality of Africa's private goods.  Why?  Because productivity would be rewarded.  

I'm not endorsing an Africa choice system.  The point is to help promote an understanding of the transformative process that shopping has on the variety, quantity and quality of goods.

Thursday, June 11, 2015

I still don’t want to be your sex dwarf. Well…

Comment on: The Future of Work is Exciting as Hell But I Still Don’t Want to Be Your Wage Slave

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I still don’t want to be your sex dwarf. Well…

Both people in a relationship can’t have the upper hand. Generally, if you have the upper hand it’s because I need you more than you need me. And this reflects the fact that you have more alternatives than I do.

So if you don’t want to be somebody’s wage slave… then think about how to create an environment where there’s a larger supply of employers and a smaller supply of workers. This can be accomplished by breaking down the barriers to builderism.

Monday, June 8, 2015

The Economics of Sense8

Sense8 is a new series on Netflix.  The following passages might help you better appreciate it...
Among men, on the contrary, the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men's talents he has occasion for. - Adam Smith, Wealth of Nations
The principle that the multitude ought to be supreme rather than the few best is capable of a satisfactory explanation, and, though not free from difficulty, yet seems to contain an element of truth. For the many, of whom each individual is but an ordinary person, when they meet together may very likely be better than the few good, if regarded not individually but collectively, just as a feast to which many contribute is better than a dinner provided out of a single purse. For each individual among the many has a share of virtue and prudence, and when they meet together they become in a manner one man, who has many feet, and hands, and senses; that is a figure of their mind and disposition. Hence the many are better judges than a single man of music and poetry; for some understand one part, and some another, and among them, they understand the whole. There is a similar combination of qualities in good men, who differ from any individual of the many, as the beautiful are said to differ from those who are not beautiful, and works of art from realities, because in them the scattered elements are combined, although, if taken separately, the eye of one person or some other feature in another person would be fairer than in the picture. - Aristotle, The Politics
To recommend the market, in fact, is to recommend letting millions of creative people, each with different perspectives and different bits of knowledge and insights, each voluntarily contribute his own ideas and efforts toward dealing with the problem. It is to recommend not a single solution but, instead, a decentralized process that calls forth many competing experiments and, then, discovers the solutions that work best under the circumstances. - Donald Boudreaux, A Simple Rule for a Complex World
Provided the development coordinator has a communications medium at least as good as the Internet, and knows how to lead without coercion, many heads are inevitably better than one. - Eric Steven Raymond, The Cathedral and the Bazaar
The history of Unix should have prepared us for what we're learning from Linux (and what I've verified experimentally on a smaller scale by deliberately copying Linus's methods [EGCS]). That is, while coding remains an essentially solitary activity, the really great hacks come from harnessing the attention and brainpower of entire communities. The developer who uses only his or her own brain in a closed project is going to fall behind the developer who knows how to create an open, evolutionary context in which feedback exploring the design space, code contributions, bug-spotting, and other improvements come from hundreds (perhaps thousands) of people. - Eric Steven Raymond, The Cathedral and the Bazaar
Perhaps in the end the open-source culture will triumph not because cooperation is morally right or software "hoarding'' is morally wrong (assuming you believe the latter, which neither Linus nor I do), but simply because the closed-source world cannot win an evolutionary arms race with open-source communities that can put orders of magnitude more skilled time into a problem. - Eric Steven Raymond, The Cathedral and the Bazaar
The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world. - Friedrich Hayek, The Use of Knowledge in Society
It is the extensive cooperation among highly specialized workers that enables advanced economies to utilize a vast amount of knowledge. This is why Hayek's emphasis on the role of prices and markets in combining efficiently the specialized knowledge of different workers is so important in appreciating the performance of rich and complex economies. - Gary S. Becker, Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education
In other words, opportunities for profitable team production by inputs already within the firm may be ascertained more economically and accurately than for resources outside the firm. Superior combinations of inputs can be more economically identified and formed from resources already used in the organization than by obtaining new resources (and knowledge of them) from the outside. Promotion and revision of employee assignments (contracts) will be preferred by a firm to the hiring of new inputs. To the extent that this occurs there is reason to expect the firm to be able to operate as a conglomerate rather than persist in producing a single product. Efficient production with heterogeneous resources is a result not of having better resources but in knowing more accurately the relative productive performances of those resources. Poorer resources can be paid less in accord with their inferiority; greater accuracy of knowledge of the potential and actual productive actions of inputs rather than having high productivity resources makes a firm (or an assignment of inputs) profitable. - Harold Demsetz, Armen Alchian, Production, Information Costs, and Economic Organization
It must be remembered, besides, that even if a government were superior in intelligence and knowledge to any single individual in the nation, it must be inferior to all the individuals of the nation taken together. It can neither possess in itself, nor enlist in its service, more than a portion of the acquirements and capacities which the country contains, applicable to any given purpose. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy
Information isn’t in the hands of one person. It’s dispersed across many people. So relying on only your private information to make a decision guarantees that it will be less informed than it could be. - James Surowiecki, The Wisdom of Crowds
...there's no real evidence that one can become expert in something as broad as "decision making" or "policy" or "strategy." Auto repair, piloting, skiing, perhaps even management: these are skills that yield to application, hard work, and native talent. But forecasting an uncertain future and deciding the best course of action in the face of that future are much less likely to do so. And much of what we've seen so far suggests that a large group of diverse individuals will come up with better and more robust forecasts and make more intelligent decisions than even the most skilled "decision maker." - James Surowiecki, Wisdom of Crowds
as soon as a general problem enjoys a sufficiently wide interest, the means and the methods of its solution will not be lacking … - Knut Wicksell
We've gone beyond the capacity of the human mind to an extraordinary degree. And by the way, that's one of the reasons that I'm not interested in the debate about I.Q., about whether some groups have higher I.Q.s than other groups. It's completely irrelevant. What's relevant to a society is how well people are communicating their ideas, and how well they're cooperating, not how clever the individuals are. So we've created something called the collective brain. We're just the nodes in the network. We're the neurons in this brain. It's the interchange of ideas, the meeting and mating of ideas between them, that is causing technological progress, incrementally, bit by bit. However, bad things happen. And in the future, as we go forward, we will, of course, experience terrible things. There will be wars; there will be depressions; there will be natural disasters. Awful things will happen in this century, I'm absolutely sure. But I'm also sure that, because of the connections people are making, and the ability of ideas to meet and to mate as never before, I'm also sure that technology will advance, and therefore living standards will advance. Because through the cloud, through crowd sourcing, through the bottom-up world that we've created, where not just the elites but everybody is able to have their ideas and make them meet and mate, we are surely accelerating the rate of innovation. - Matt Ridley, When ideas have sex
I have suggested a different model and metaphor. The world is not a single machine. It is a complex, interactive ecology in which diversity -- biological, personal, cultural and religious -- is of the essence. Any proposed reduction of that diversity through the many forms of fundamentalism that exist today -- market, scientific or religious -- would result in a diminution of the rich texture of our shared life, a potentially disastrous narrowing of the horizons of possibility. Nature, and humanly constructed societies, economies and polities, are systems of ordered complexity. That is what makes them creative and unpredictable. Any attempt to impose on them an artificial uniformity in the name of a single culture or faith, represents a tragic misunderstanding of what it takes for a system to flourish. Because we are different, we each have something unique to contribute, and every contribution counts. A primordial instinct going back to humanity's tribal past makes us see difference as a threat. That instinct is massively dysfunctional in an age in which our several destinies are interlinked. Oddly enough, it is the market -- the least overtly spiritual of concepts -- that delivers a profoundly spiritual message: that it is through exchange that difference becomes a blessing, not a curse. When difference leads to war, both sides lose. When it leads to mutual enrichment, both sides gain. - Rabbi Jonathan Sacks, The Dignity of Difference
None of the modes by which a magistrate is appointed, popular election, the accident of the lot, or the accident of birth, affords, as far as we can perceive, much security for his being wiser than any of his neighbours. The chance of his being wiser than all his neighbours together is still smaller. - Thomas Macaulay, Southey's Colloquies on Society
See also: What Do Coywolves, Mr. Nobody, Plants And Fungi All Have In Common?

Love is a function of sacrifice

Comment on: David Henderson Doubles Down on a Calculated Love

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Forgetting about the alternative uses of your limited resources sounds more like infatuation than love. Love is a function of sacrifice. And sacrifice is only meaningful when there’s choice involved. And there’s no choice involved if there are no alternatives and/or you’ve simply forgotten about them.

Buchanan’s point was a rebuttal to Samuelson’s mathiness belief that utility functions could be derived and are fixed. The more you appreciate the soundness of Buchanan’s belief and the absurdity of Samuelson’s belief the more you support the conclusion that taxpayers should be free to choose where their taxes go.

If Lilith the liberal allocates all her taxes to the EPA… then this is meaningful if, and only if, she deliberately and knowingly chose to sacrifice the alternative uses of her tax dollars. It’s not meaningful if…

A. there are no alternatives

or

B. she forgot about the alternatives

Not sure if you saw the movie “Mr. Nobody” but it’s quite excellent in how it clarifies the alternatives. Here’s a clip…


Saturday, June 6, 2015

Beautiful = Very Efficient Allocation Of Resources

Reply to comment:  Economic arguments as stalking horses

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Jumble of words? I inefficiently allocate words? Are you accusing me of violating Quiggin's Implied Rule of Economics?

QIRE = Society's resources (ie "words") should be put to more, rather than less, valuable uses

QIRE = Society's resources (ie "sounds") should be put to more, rather than less, valuable uses.

My gf was loudly chewing and I was unable to concentrate. I was like, "Hey! Would you mind not violating QIRE?!"

She ignored me... as usual. So I started playing this song... Peacock Tail by Boards of Canada.

Oh shit. It's so beautiful.

Beautiful = very efficient allocation of resources

Would you agree that Peacock Tail is so beautiful? Or do you think it's a jumble of sounds? Do you want to argue that Boards of Canada violate QIRE?

For me, Peacock Tail is heaven. But the rest of life... not so much. There's a big disparity.

You know where BoC are from? Scotland. You know who else was from Scotland? Adam Smith. Adam Smith allocated words like BoC allocates sounds.

The Wealth of Nations = Peacock Tail

Unfortunately, I'm not from Scotland. I'm from California. This is my excuse for jumbling words.

Does Noah Smith jumble words? Well... he's written quite a few blog entries. But I sure don't see heaven in them. He wants the government to do a lot... but there's no assurance that the government will put society's resources to their most valuable uses.

Either Noah's hiding a huge assumption... or he's hiding a huge answer. But why would he hide a huge answer?

Here's Adam Smith's answer...

"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."

Oh shit! So beautiful!

Hey Noah Smith! What about the government? Is there ever a faulty distribution? If so, then how is it altered? By voting? We should trust people's words? Even Paul Samuelson realized that we can't trust people's words.

After 911... what was the demand for war? Do you know? If so, how? If not, then why don't you care that you don't know?

The world will be a lot closer to heaven when enough people understand the problem with not knowing the demand for war.

Friday, June 5, 2015

The Opportunity Cost Of Love

David Henderson just posted this excellent entry... Thaler Rediscovers Hayek?...

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Thaler: Well the theory is really quite simple, at least in principle. If you are considering some risky option, look at the probabilities, compute the utilities, and calculate and pick the best thing.
Rosalsky: So Professor Thaler, relationships are big investments. And, umm...
Thaler: Yeah.
Rosalsky: Yeah. And I've been dating this girl for a few weeks now, and I'm thinking about using expected utility theory in order to decide whether or not to ask her to be my girlfriend. How would an econ go about making this decision?
Thaler: Well, now the first thing you would have to do is-econs always think about opportunity costs. So you have to compare this girlfriend to all the possible other girl friends. Now, you do have training in economics, right?
Rosalsky: Yeah, I do.
Thaler: So that may be a limited set because-right? Because this has to be a girlfriend that presumably wants to reciprocate this relationship. So there's a set of possible girlfriends, not all of whom you know. Economists have written down models about how you should search in a situation like this. So, you know, you've had other girlfriends in the past, and either you or they have rejected you. So the question of whether this is the right one depends on how likely it is you'd find somebody better. That's the first thing an economist would do.
Rosalsky: Right. And there's also other probabilities, right? I mean, you know, some day I want to get married, someday I want to have kids. And, you know, so that sort of- that upfront investment in her being my girlfriend, I have to have some sort of knowledge of the probabilities that, you know, I'm making the right investment here.
Thaler: Right, and presumably if you decide that this is your girlfriend and behave responsibly then you're going to be missing out on all kinds of opportunities for searching for better alternatives. And that will be another opportunity cost.
Rosalsky: Right, single life.
Thaler: That homo economicus will be considering every day. Each day will be another decision about whether to stick with this girlfriend or resume searching. I recommend strongly not playing this particular part of the interview to this prospective girlfriend.

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It's kinda funny.  And it's about opportunity cost!

econs always think about opportunity costs

Yet... how many econs favor tax choice?  Clearly, when it comes to public finance... the opportunity cost concept is inadequate!

So you have to compare this girlfriend to all the possible other girl friends

All the other possible girlfriends?  How many is that?

Let's say that there's a pool of five potential girlfriends.  It stands to reason that, given that they are all different, they won't create the same amount of value for you.  One will create more value for you than the other four.

According to superstar theory though... larger pools increase the chances of finding a superstar.  The one in five girlfriend will be a pretty small superstar compared to the one in three billion girlfriend.

Finding the one in three billion girlfriend would be like winning the lottery!  Except... can you imagine what would happen to your productivity?  Winning the girlfriend lottery would significantly alter how you allocated your time.
Every animal, including the bête philosophe, instinctively strives for an optimum of favorable conditions under which it can expend all its strength and achieve its maximal feeling of power; every animal abhors, just as instinctively and with a subtlety of discernment that is "higher than all reason," every kind of intrusion or hindrance that obstructs or could obstruct his path to the optimum (– it is not his path to ‘happiness’ I am talking about, but the path to power, action, the mightiest deeds, and in most cases, actually, his path to misery). Thus the philosopher abhors marriage, together with all that might persuade him to it, – marriage as hindrance and catastrophe on his path to the optimum. Which great philosopher, so far, has been married? Heraclitus, Plato, Descartes, Spinoza, Leibniz, Kant, Schopenhauer – were not; indeed it is impossible to even think about them as married. A married philosopher belongs to comedy, that is my proposition: and that exception, Socrates, the mischievous Socrates, appears to have married ironice, simply in order to demonstrate this proposition. Every philosopher would say what Buddha said when he was told of the birth of a son: ‘Râhula is born to me, a fetter is forged for me’ (Râhula means here ‘a little demon’); every ‘free spirit' ought to have a thoughtful moment, assuming he has previously had a thoughtless one, like the moment experienced by that same Buddha – he thought to himself, ‘living in a house, that unclean place, is cramped; freedom is in leaving the house’: so saying, he left the house. The ascetic ideal points the way to so many bridges to independence that no philosopher can refrain from inwardly rejoicing and clapping hands on hearing the story of all those who, one fine day, decided to say ‘no’ to any curtailment of their liberty, and go off into the desert: even granted they were just strong asses and the complete opposite of a strong spirit. Consequently, what does the ascetic ideal mean for a philosopher? My answer is – you will have guessed ages ago: on seeing an ascetic ideal, the philosopher smiles because he sees an optimum condition of the highest and boldest intellectuality [Geistigkeit], – he does not deny ‘existence’ by doing so, but rather affirms his existence and only his existence, and possibly does this to the point where he is not far from making the outrageous wish: pereat mundus, fiat philosophia, fiat philosophus, fiam!… - Friedrich Nietzsche
Was Derrida a great philosopher?
By preferring my work, simply by giving it my time, my attention, by preferring my activity as a citizen or as a professional philosopher, writing and speaking here in a public language, French in my case, I am perhaps fulfilling my duty.  But I am sacrificing and betraying at every moment all my other obligations: my obligation to the other others whom I know or don’t know, the billions of my fellows (without mentioning the animals that are even more other others than my fellows), my fellows who are dying of starvation or sickness. I betray my fidelity or my obligations to other citizens, to those who don't speak my language and to whom I neither speak or respond, to each of those who listen or read, and to whom I neither respond nor address myself in the proper manner, that is, in a singular manner (this is for the so-called public space to which I sacrifice my so-called private space), thus also to those I love in private, my own, my family, my son, each of whom is the only son I sacrifice to the other, every one being sacrificed to every one else in this land of Moriah that is our habitat every second of every day. - Jacques Derrida
What about Erich Fromm?
If a woman told us that she loved flowers, and we saw that she forgot to water them, we would not believe in her "love" for flowers.  Love is the active concern for the life and the growth of that which we love.  Where this active concern is lacking, there is no love. - Erich Fromm, The Art of Loving
You can either love your greatness... or your girlfriend... but not both!

Why Would Anybody Want To Shrink The Government?

Comment on: Economic arguments as stalking horses

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Basically, he's saying that he adopts an anti-Keynesian stance not because be thinks stimulus actually fails to fight recessions, but because he wants to shrink the size of the government in the long term.

Why does he want to shrink the government though? It's because he doesn't trust the government's allocation decisions. But what's stimulus? Just another allocation decision by the government.

If the government is good at fighting recessions... then it's good at allocating resources. And if the government is good at allocating resources... then why would anybody want to shrink it?

Might want to read the parable of the talents again.

Would crucifying liberals stimulate the economy? Sure. But it would also massively violate Quiggin's Implied Rule of Economics (QIRE).

Pay attention. Violating QIRE is the cause of recessions/depressions. Stop violating QIRE and there will never be any need to stimulate the economy.