Monday, November 27, 2017

The Demand For David Friedman

My comment on Keynes on Newton--and some ideas for fantasy by David Friedman

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Have you read Adam Smith's book of essays? I was surprised that he wrote a 100 page essay on the history of astronomy. Especially since he is largely responsible for the idea of the division of labor. I think it's possible for labor to be overly divided. Take the handicap principle for example. Nowhere in the Wikipedia entry does it mention the fact that spending money is a costly signal. Smith also shared some enjoyable thoughts on music. Basically the main theme is on how things are ordered.

In the book's intro is this interesting bit...

The change in his habits which his removal to Edinburgh produced, was not equally favourable to his literary pursuits. The duties of his office, though they required but little exertion of thought, were yet sufficient to waste his spirits and to dissipate his attention; and now that his career is closed, it is impossible to reflect on the time they consumed, without lamenting, that it had not been employed in labours more profitable to the world, and more equal to his mind. - Dugald Stewart, An Account of the Life and Writings of Adam Smith

Imagine seeing Smith or Newton waiting in a line. You'd think, "Yikes! The opportunity cost is too high!" Or, "Something is really preventing the Invisible Hand from doing its job!"

While I'm here, I hope you don't mind if I share some ideas that I'd appreciate your thoughts on.

1. What if everybody had to do 100 push-ups before they purchased anything? The cost of trade would increase, so the quantity of trade would decrease, and so would the rate of progress. The reverse is true if the earliest native Americans had used horses. Horses would have reduced the cost of allocating resources, trading would have been less costly, the quantity of trade would have increased, and more progress would have been made.

2. Becoming bipedal reduced our ancestors' allocation costs. This increased the frequency of allocation, but it also meant having to more frequently solve allocation problems, which meant greater selection pressure on intelligence. The invention of bags and using other animals to carry things made the allocation problems even harder. Nowadays the allocation problems are even harder still, but good or bad allocation decisions rarely impact our reproduction. Therefore, we've reached peak intelligence.

3. Markets with prices work much better than socialism because prices transmit at least some information about people’s perception of importance. This would mean that the efficiency of allocation depends on the quantity of information about importance. Prices can never be optimal because they almost always fail to transmit all the information about importance. The economic term for the hidden information is of course “consumer surplus”. In theory, pragma-socialism would be the optimal economic system because it would entirely eliminate consumer surplus.

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