Satt's Paradox

Posted in various forums...

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Satt's Paradox (SP) - smarter people have more money to spend than dumber people... yet... the vast majority of movies/shows on Netflix are dumber rather than smarter.

This economic paradox is "fun" on so many different levels...

1. Is SP even real?  If it isn't, then there's no paradox.  And you can't resolve a paradox that doesn't exist.

1a. How is smartness being defined?

1b. Is it even true that smarter people have more money to spend?  Kinda maybe?   The huge debate/concern regarding increasing income inequality seems somewhat relevant.

1c. Is it even true that the vast majority of shows/movies on Netflix are dumber rather than smarter?  Personally, I consider The Man From Earth, which I saw on Netflix, to be a good example of a smarter movie.  It was full of history, science, philosophy and thoughtful discussion on religion.  From my perspective... it was the best (that I know of) mix of entertainment and education.  And it seems like there's a real shortage of shows/movies in this category.  If you know of any others... then please don't hesitate to mention them!  Given enough eyeballs, all Easter Eggs are shallow.

2. If SP is real, more or less, then how would you explain/resolve it?

2a.  Perhaps smarter people demand far less entertainment than dumber people do?  The opportunity cost of spending 2 hours watching a movie is far higher for a brain surgeon than it is for somebody who earns the minimum wage.  

2b.  Perhaps smarter people prefer dumber entertainment?  If you get paid to use your brain all day, then maybe you prefer your entertainment to be mindless rather than mindful.

2c.  Perhaps smarter people prefer nonfiction to fiction?

2d.  "I'm not saying that television is vulgar and dumb because the people who compose the Audience are vulgar and dumb.  Television is the way it is simply because people tend to be extremely similar in their vulgar and prurient and dumb interests and wildly different in their refined and aesthetic and noble interests." - David Foster Wallace

3. Assuming that the supply of smarter entertainment does indeed fall considerably short of demand... and assuming that this is a problem... then how could this problem be solved?

I think I might have resolved SP and come up with the logical explanation/solution (verdict)... but if I share it... then maybe it will influence your own verdict?  Of course I'd like to hear your thoughts on my verdict... but I'd also like to know what you come up with on your own.  It's entirely possible that yours will be better than mine!  This means that I'd prefer it if you allocated (at least initially) your intelligence to coming up with your own verdict.

So I'll use the spoiler feature to hide my verdict.  This way, if you're so inclined, you can post your own verdict and then come back and see how it compares to mine.  You might have to ignore the replies at first as well... just in case anybody addresses my verdict.

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Nobody's omniscient.  In both market economies and command economies, producers make educated guesses about what to supply.  The most important difference between these two types of economic systems is that, in market economies, consumers use their money to communicate which producers have made the best guesses.

When Henry Ford decided to produce cars... he couldn't truly know how consumers would respond.  Obviously he had good enough reason to suspect that the demand was there but, because he wasn't omniscient, there was no way he could know, for a fact, that it truly was there.  With perfect hindsight we can clearly see that Ford's guess was really good.

These days, there's a huge variety of cars.  There's also a very large price range.  A new car can cost anywhere from several thousand dollars to over a million dollars.  According to a quick Google search... a Lamborghini Veneno Roadster would cost you $4.5 million dollars.  At some point in car making history... some producers correctly guessed that there was a demand for nicer cars.  If anybody doubted the business model, then they no longer do so.

The question is... why isn't there a similarly large price range when it comes to movies?  The answer is because, unlike the producers of cars, movie producers can't charge more for a superior product.  If it cost $1500 to see The Man From Earth in a theater... then even if you could easily afford it... the chances would be extremely good that it would be way too easy to get an illegal copy of the movie for a lot less money.  It costs far less to create a perfect copy of a movie than it does to create a perfect copy of a Lamborghini.  

So cars and movies aren't just different goods... they are different types of goods.  A car is a private good  and a movie is a... ________ ?   Economic terminology goes *bonk*.   Is it a public good?  To be honest... I just googled the topic for inspiration and found this... Why Content Is a Public Good.

Movies can be digitized and shared for free.  Songs can be digitized and shared for free.  Books can be digitized and shared for free.  A Lamborghini cannot be digitized and shared for free.  For lack of a better term, I'm going to use the word "linvoid" to refer to anything that can be digitized and shared for free.

As we all know, in many cases it's illegal to share linvoids.  We've all heard stories of people who've been punished for breaking the relevant laws.  But whatever measures the big linvoid producers take to protect their financial interests... it doesn't change the fact that linvoids have a fundamentally different nature.  If we want the supply of linvoids to accurately reflect the demand for linvoids... then we can't treat linvoids like private goods.

One possible solution would be to create a linvoid sector.  Everybody would be required to spend 10% of their income on linvoids... but they could choose which linvoids they spent their money on.  If there truly is a demand for smarter movies... then whoever correctly guesses this and produces movies accordingly will be rewarded by smarter/richer consumers for doing so.   And with such a system there'd be absolutely no need to prosecute people for sharing linvoids.  We could freely share all our favorite books, movies and songs with all our family and friends.  In terms of logistics... whenever you spent your money on a linvoid, you'd save your receipt and submit them annually to whichever agency was responsible for ensuring that you did indeed spend 10% of your income on linvoids.

The problem with this solution is... why 10%?  Why not 40% or 1%?  Clearly we'd be screwed if we were required to spend too much money on linvoids.  We wouldn't have enough money left over to spend on more important things.  But if we spend too little on linvoids... then the supply would fall short of the demand.

The thing is, we already have a sector that's responsible for supplying the optimal amounts of public goods.... the public sector.  So why don't we just put the government in charge of supplying linvoids just like it's in charge of supplying defense, education and healthcare?  Taxes would be raised accordingly and voila!  Problem solved!  In theory, anybody who thinks that the government is competent enough to supply defense, education and healthcare should strongly support the idea of the government also supplying linvoids.  Because there's a problem if somebody thinks that the government will fail at supplying linvoids but succeed at supplying far more important things.

I'm pretty sure that to truly resolve Satt's Paradox... you have to score really high on The Satt

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See also...

Amanda Palmer vs Public Finance
Rescuing Robin Hanson From Unmet Demand

The Interests of Consumers are the Interests of the Human Race

A lunch lady over in a Swedish public school was reprimanded for doing her job too well.  But not only did she have the audacity to do her job too well...she also had the audacity to summarize the value of capitalism too well...

The food on offer does not always suit all pupils, she explained, and therefore she makes sure there are plenty of vegetables to choose from as well as proteins in the form of chicken, shrimp, or beef patties.

Right now the schools on offer do not suit all pupils...just like the books on offer do not suit all readers...just like the movies on offer do not suit all watchers...just like the musicians on offer do not suit all listeners...just like the clothes on offer do not suit all the fashionistas...just like the medications on offer do not suit all patients...just like the plants on offer do not suit all horticulturalists...and so on and so on. 

As consumers we never want less options.  Instead, we always want a larger selection of different things.  Why do we want different things?  Because we are an extremely heterogeneous bunch.  We are a melting pot of diverse perspectives, cultures, preferences, tastes, values, interests, concerns, hopes and dreams.  Our amazing diversity is our greatest strength because it leads to a greater abundance of the things we value.  

Over 100 years ago Bastiat explained this concept too well...

If we now turn to consider the immediate self-interest of the consumer, we shall find that it is in perfect harmony with the general interest, i.e., with what the well-being of mankind requires. When the buyer goes to the market, he wants to find it abundantly supplied. He wants the seasons to be propitious for all the crops; more and more wonderful inventions to bring a greater number of products and satisfactions within his reach; time and labor to be saved; distances to be wiped out; the spirit of peace and justice to permit lessening the burden of taxes; and tariff walls of every sort to fall. In all these respects, the immediate self-interest of the consumer follows a line parallel to that of the public interest. He may extend his secret wishes to fantastic or absurd lengths; yet they will not cease to be in conformity with the interests of his fellow man. He may wish that food and shelter, roof and hearth, education and morality, security and peace, strength and health, all be his without effort, without toil, and without limit, like the dust of the roads, the water of the stream, the air that surrounds us, and the sunlight that bathes us; and yet the realization of these wishes would in no way conflict with the good of society. - Bastiat, Abundance and Scarcity

The problem is...just like superman...our diversity has a kryptonite.  If somebody takes away our freedom to choose...then they'll render our diversity powerless.  Without being able to choose how we spend our money...then how can producers know when they are producing something that we find suitable?  Without an accurate feedback mechanism then limited resources will be wasted.  This is the problem with representative economics.

Right now we elect 538 people to represent the economic interests of 150 million taxpayers in the public sector.  In other words...we permit 538 people to spend 1/4 of our nation's revenue in the public sector.  That's over $3.5 trillion dollars being spent without an accurate feedback mechanism.

Clearly we don't all agree on how that $3.5 trillion dollars should be spent in the public sector...but that's a good thing.  Yet...people think it's a good thing when conservative and liberal representatives set aside their differences to solve the problems that our country faces.  Eh?  It's a good thing when we force 538 representative to agree on how they spend our money in the public sector?

If our diversity is our greatest strength in the private sector...then why is it a good thing to demolish our diversity in the public sector?   How does forcing people, who have very different perspectives, to tackle the same problem from the same angle help anybody?  It doesn't.  It hurts us all.  We all benefit from multiple approaches because it increases the probability that one approach will be successful.

The value of heterogeneous activity...aka hedging our bets...aka not putting all our eggs in the same basket...helps us understand why it would be an improvement to allow taxpayers to choose which congressperson they gave their taxes to and why it would be an exponentially greater improvement to allow taxpayers to choose which government organizations they gave their taxes to.

Bastiat offers an excellent overview...

1. Our economic representatives aren't superior enough to override our choices
2. Public goods, like private goods, are simply acts of exchange
3. The choices of consumers are the driving force behind abundance

1. Economic representatives aren't that superior...

Apparently, then, the legislators and the organizers have received from Heaven an intelligence and virtue that place them beyond and above mankind; if so, let them show their titles to this superiority. - Bastiat

If our economic representatives were truly superior enough to know better than millions and millions of consumers...then this would be as true in the private sector as it is in the public sector.  But if you value the options you do have...then you should know for a fact that this is not true.  The options that we have in the private sector are a direct result of our freedom to choose how we spend our money.  Take away our spending decisions and our diversity, which is our greatest strength, will be as useless as superman swimming in kryptonite.

2.  It doesn't matter whether a good is public or private...it's either worth exchanging your money for...or it isn't...

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

Public goods are only different from private goods because we want more of them than we believe that the private sector would be able to supply on its own.  It's not that a non-profit militia couldn't provide national defense...it's just that most people are relatively certain that it wouldn't provide enough defense.  It's not that the non-profit sector doesn't provide welfare...it's just that liberals are relatively certain that it doesn't provide enough welfare.  This just proves that the demand for public goods exists.  Therefore, the problem is on the supply side.  More specifically...the supply would be inadequate because people can free-ride off of other people's contributions to non-profits.  We solve this problem by forcing people to pay taxes and by allowing government organizations to produce public goods.  But once these steps are taken...it's completely unnecessary and extremely counterproductive to take the additional step of demolishing our diversity by allowing representatives to determine how our taxes should be spent in the public sector.    

3.  Human flourishing absolutely depends on protecting the interests of consumers...

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race. - Bastiat

Taxpayers bear the cost of public goods which is why they alone are capable of determining which public goods are worth the cost.  Will they find all their options in the public sector to be perfectly suitable?  No...of course not.  This basic fact will guarantee that taxpayers will support the audacious lunch ladies of the public sector.  It will ensure that the most successful approaches will gain funding and failed approaches will lose funding.  

Diversity + choice = progress.

The Danger of Homogeneous Activity in the Public Sector

My response to PrometheeFeu from our discussion over on Daniel Kuehn's blog entry...A Quick Thought on Voting...

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Scenario 1, I send money to the EPA. Scenario 2, I do not send money to the EPA. What is different between the two scenarios? Nothing of consequence.

Scenario 1, you buy asparagus.  Scenario 2, you do not buy asparagus.  What is different between the two scenarios?  Nothing of consequence.  Nothing of consequence?  Somebody prevented you from buying asparagus...and you would consider it to be inconsequential?  I thought you liked asparagus?  What if they did the same thing to me and everybody else who wanted to buy asparagus?  The little consequences would add up to the big consequence that the demand for asparagus would not determine the supply of asparagus.  Therefore, there would be a significant disparity between supply and demand.

My whole tax bill could not pay an extra secretary at the EPA, much less significant regulatory activity.

Just like your entire income could not pay for a new field of asparagus.  Or maybe it could?  Could you really eat that much asparagus though?  What about the opportunity cost?

So your scheme suffers from the same weakness as voting: your incentive is not to reveal your policy preferences.

But here's what you wrote earlier.

If a socialist came to me and argued that my purchases don't count because my single purchase can't possibly affect the price level, I would not respond that I have a duty to keep markets working. I would point out that I wanted chicken and asparagus for dinner and that's why I went to buy them and that's why my true preferences were aggregated.

Why would buying asparagus and chicken be any different from donating to the Red Cross or the World Wildlife Fund or paying taxes to the EPA or the Dept of Education?  You either want more of those things...or you don't.  The supply of those things is either determined by demand...or it isn't.  If it isn't determined by demand...then clearly there's going to be a disparity between supply and demand which represents a misallocation of scarce resources.  We'd be getting too much of one thing and not enough of another.  Without consumer's opportunity cost decisions the allocation would not even be close to being Pareto Optimal.

I support giving tax-payers having the freedom to choose which government organizations they give their taxes to because it is more morally correct and it would make me feel good to not send money to certain programs.

We currently allow 538 congresspeople to spend 1/4 of our nation's revenue which comes out to roughly $3.5 trillion dollars...yet you support applying market principles to the public sector for moral reasons?  Well...it's kinda hard to complain when most people don't support the idea for any reasons.

But surely there have to be some significant economic consequences for allowing 538 congresspeople to spend 1/4 of our nation's revenue?  As far as I can tell it's the primary cause of recessions/depressions.

On the individual level you will experience a severe recession/depression if you gamble your home on a failed business idea...right?  You misallocated a significant portion of your limited resources.  That's why most entrepreneurs pitch their ideas to venture capitalists.  And what do venture capitalists do?  They hedge their "bets".  Every decision to spend your money/time is a gamble...which is why VCs don't put all their eggs in one basket.  They spread their capital over numerous start-ups.  If they are good at picking winners then they'll increase their capital.  But they certainly don't ultimately determine whether a start-up is a winner or loser...we do.  We use our wallets to indicate whether a VC's allocation was a misallocation or a profitable allocation.

If heterogeneous activity makes sense on a smaller scale...then it should make even more sense on a larger scale.  And every single socialist experiment provides empirical evidence that this is the case.  If heterogeneous activity makes sense for a small amount of resources...and it makes sense for an entire nation's resources...then please explain why it doesn't indicate that there's a clear and present danger to allowing 538 congresspeople to allocate 1/4 of our nation's revenue among government organizations.  It would be one thing if taxpayers were able to choose exactly which congressperson they gave their taxes to...and that congressperson would have sole discretion how they spent "their" taxes in the public sector...but all 538 congresspeople have to agree on how 1/4 of our nation's revenue is spent.  Spending activity doesn't get more homogeneous than that.  

If there truly are winners in the public sector...which we can only guess at...then the tax allocation decisions of 150 million taxpayers who all want more for less will reveal exactly who the winners are.  These public sector winners will help offset any possible shortage of private sector winners.  This will help hedge our bets against recessions/depressions.  If, on the other hand, it turns out that there are very few winners in the public sector...and assuming the losers fail to adapt...then the scope of government will shrink...the tax rate will decrease accordingly...and resources will be freed-up for winners in the private sector.

Giving people the freedom to choose how they spend their money guarantees heterogeneous activity because we have extremely diverse interests, values, tastes, preferences, concerns, hopes and dreams.  Our diversity is our greatest strength...which is why failing to apply this fundamental fact to the public sector is our Achilles Heel.

Our Mixed Economy - Capitalism vs Socialism

Here in America we have a mixed economy. We have capitalism in the private sector and socialism in the public sector. In other words...resources are allocated by the invisible hand in the private sector and by the visible hand in the public sector...

In this diagram I've illustrated that the invisible hand determines how $11 trillion dollars are spent in the private sector.  This is also known as a market economy and is best illustrated by Deng Xiaoping.  On the other side I've illustrated that the visible hand determines how more than $3 trillion dollars are spent in the public sector.  This is also known as a command economy and is best illustrated by Mao Zedong.

Deng Xiaoping represents humility while Mao Zedong represents conceit (see The Dialectic of Unintended Consequences). Here's how Hayek described the idea of conceit..."The curious task of economics is to demonstrate to men how little they really know about what they can imagine they can design." The idea of conceit can be traced back to the founder of modern economics...Adam Smith...

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. - Adam Smith, 1759

The idea of conceit is much older though.  For example...it was the point of Buddha's parable of the blind men touching different parts of an elephant.  Somebody who suffers from conceit fails to appreciate just how limited their perspective truly is.  As a result...they have no problem resorting to taking rather than solely relying on trading.  Taking forms the basis of the visible hand while trading forms the basis of the invisible hand.

The invisible hand works because it incorporates the perspectives of the individuals who engage in trade.  The buyer wants to purchase a product/service at the lowest possible price while the seller wants to sell a product/service at the highest possible price.  They both want to maximize the return on their labor so they engage in a bargaining process...which incorporates their unique perspectives.  If they can find a price that is worth their labor...then they will trade.

The visible hand does not work because it fails to incorporate the perspectives of all the members in a society.  If I resort to taking your resources...then I prevent you from applying your unique perspective to them.  Here's a diagram I created to help illustrate this concept...

How we use resources depends on our perspectives...which is why our perspectives are our most valuable resource.

When economists say, “We will never run out of resources,” what they often mean is that faced with increasing scarcity of one resource, we will always find new solutions to the problem that that resource originally solved. In an important sense, the actual economic resource was not copper but “the ability to convey voice and data.” And that resource has become “less scarce” by the substitution of sand. This illustrates Simon’s point that the “ultimate resource” is the human ingenuity that finds new and better ways of using physical resources. - Steven Horwitz, Economists and Scarcity

In the past we allowed the perspective of one king to shape the public sector.  Now we allow the perspectives of 538 congresspeople to shape the public sector.  But in the future we will allow the perspectives of millions and millions of taxpayers to shape the public sector.

What will the outcome be of allowing millions and millions of taxpayers to choose which government organizations they give their taxes to?  We can't know the specifics.  All we can know is that wasting limited resources has negative consequences.  Allowing 538 congresspeople to prevent 150 million taxpayers from trading their taxes in the public sector has negative consequences because it partially destroys the perspectives of 150 million of our most productive citizens.

We all understand this concept on the individual level...because we all inherently understand that a mind is a terrible thing to waste.  All the invisible hand says is that, if it's a terrible thing to waste one mind, then it's a catastrophic thing to waste millions of them.  We can avoid this catastrophic waste by allowing the people who labored, toiled and sweated to earn their money to choose which public goods are worth their effort.

If the socialists mean that under extraordinary circumstances, for urgent cases, the state should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions, we will, of course, agree. This is done now; we desire that it be done better. There is, however, a point on this road that must not be passed; it is the point where governmental foresight would step in to replace individual foresight and thus destroy it. It is quite evident that organized charity would, in this case, do much more permanent harm than temporary good. - Bastiat 

Apparently, then, the legislators and the organizers have received from Heaven an intelligence and virtue that place them beyond and above mankind; if so, let them show their titles to this superiority. - Bastiat 

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

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race. - Bastiat