The marginal utility trap

I think the idea of marginal utility of income is misused to inappropriately ignore property rights.

Using the Golden Rule, if you are concerned about someone taking dollars from you to give to those they believe have higher utility, then you should not advocate that it be done to others.

That should be enough to stop this bad idea from becoming policy and corrupting the incentives and feedbacks that happen to produce improving standards of living for everyone.

But it’s also worth knowing how it corrupts those incentives and feedbacks.

What marginal utility a third-party thinks another person has with one extra dollar isn’t nearly as important as what that person does to get the dollar.

If the person does nothing to get the dollar, their incentive to do something of value to earn it is subverted.

On occasion, the person’s dignity overrides and they refuse the handout. The typical response, it’s okay. You don’t understand. You see, I’m educated. Let me explain this to you. We’re not giving you the dollar just for you, Silly. See, you help the economy simply by spending that dollar. So, have at it.

Now dignity and shame are removed from the feedbacks that would typically encourage folks to want to do something in return. Now, good luck even getting a thank you card. Wouldn’t that be interesting? Require recipients of taxpayer money to write thank you cards to their fellow citizens.

I just read an article in Bicycling magazine about mountain bike racer, Heidi Swift’s, experience in a race in Haiti (I’ll post a link when it becomes available). Tired and pushing a bike up a steep road with big boulders as pavement (very tough to negotiate in cycling shoes), the author meets an 11-year-old boy who was eager to push for her. He dutifully sticks by her side until he’s sure she can handle it.

For his efforts he scores a Clif bar, a chocolate bar and some cash. Here’s here final words:

He turns to go, and as he does, he smiles at me again. It’s probably nothing more than a polite thanks for cash, and admittedly I am exhausted, but this smile seems to exist outside the bound of our transaction: proud, approving, satisfied and reliable — just kind of thing that could help a girl get to the top of an unclimbable mountain.

Yes. That’s the dignity and pride of someone who earned his keep by producing value. Many in our society have shamed ‘the transaction’ because they view it as a manifestation of greed. They forget the part where value was created for someone else and pride and dignity were also earned in doing the job well.

Contrast her experience in Haiti with the creep in this Judge Judy video that demonstrates that greed exists outside the bounds of mutually beneficial transactions (thanks to Mike M for the video):

We could use more of the ‘proud, approving, satisfied and reliable’ smile from someone who earns his keep and less of the snickering, entitled, disingenuous, scamming attitude that smart people think are helping the economy by spending other people’s money.

Signals v Causes: Preschool

Harry Jackson Jr. agrees with me that supporters of universal preschool may be mistaking signals for causes.

Perhaps creators of programs like Head Start did not consider another possible explanation for the reason elementary school performance so accurately predicts later academic achievement. What if children who typically do well in elementary school tend to have attentive parents who read to them, serve them nutritious meals, and limit their time in front of the television? What if these parents also tend to ensure their children get enough sleep, fresh air and exercise?

I also like this H.L. Menken quote that Jackson provides in his piece:

For every complex problem there is an answer that is clear, simple, and wrong.

So true.

The universal preschool discussion also reminds me of my government begets more government thread.

Previous government interventions have discouraged family formation and responsible parenting for a portion of the population. That is what is causing under achievement in that portion. Instead of reversing the maligned incentives discouraging good parenting, let’s fix it with the clear, simple and wrong answer: more government in the form of universal preschool.

 

State your case

In response to this post about rent-seeking, Z A employs a few rant tactics that I think are common barriers to productive discussions. He (assuming Z A is a he) starts with a straw man fallacy.

Economics being the dismal science that it is, I still do not ascribe to the notion that all points are valid and that any moron on the street that tries to form a thought or opinion about the macro-economy has a valid or sound point.

No one, but Z A, has made this argument.

However, if ‘any moron on the street’ expresses an unsound thought or opinion about the macro-economy (or anything), I think it is more productive and compelling to explain why their point is unsound rather than discounting it because of who they are.

As my Mom would say, if you can’t say anything nice, it’s best not to say anything at all. That’s a good rule. I’ll modify to promote productive discussion. If you can’t or are unwilling to show why a point is unsound, don’t say anything at all.

Z A then moved on to explain why he values credentials:

Knowing what someones credentials are in most any case does help in knowing how much they have actually studied that subject.

However, it does determine whether their reasoning is sound or not.

I’ve been in my share of discussions that degraded to a battle of finding credentialed folks who agree with your position, then onto the crediting and discrediting of those credentials. That’s simply not productive.

I agree with what commenter, Grant Davies wrote in response to Z A:

I have always found it more important to weigh the value and the validity of what is presented…

An argument from authority or appeal to authority is a common fallacy (something where the conclusion does not necessarily follow from the premises).

The key form of this fallacy is assuming something is right because an expert says so, but the expert isn’t really an expert in that field.

A second form of this fallacy is assuming something is right because an expert says so, but the topic is something where there is not a great deal of consensus. This is where you get into the ‘battle of experts’ on issues that have experts on all sides.

I believe there is a third form of this fallacy, as well. Experts can be wrong. Experts, after all, are people, so they are subject to the same biases, preferences, simplifications and groupthink as the rest of us.

Experts may well be right about something. I don’t discount what they say just because they are experts. However, I have enough experience with experts being wrong that I have learned that skepticism is useful.

If something is true, I want to know why it’s true, not who believes it’s true or what credentials they have. What’s wrong with that?

Later, Z A wrote:

I could write for hours about the incorrect assumptions and arguments on here but what good would it do if the people I am writing to do not have clue one about real economic theory and thought or the history of those things?

Z A chose to write nine similar paragraphs on my blog about this subject. How did it advance the discussion on the topic?

Why not simply choose just one of these incorrect assumptions, state his case on why he thinks it’s incorrect and perhaps teach us a few things. Or, perhaps, maybe someone would respond to his points and he could learn something. My guess is that the latter is what Z A fears the most.

 

Straw man army

Much political debate nowadays is one side putting up a straw man fallacy while the other side tries to dismantle it — all of which takes away from productive discourse.

A straw man fallacy is usually an absurdly inaccurate representation your opponent’s position — so absurd that it’s easy to defeat, or knock down, like a ‘man made of straw’.

We begin using straw men right about the time we start talking.

“Mom! Brother called me a booger!”

“Brother, quit calling your sister a booger.”

“I didn’t. I told her she’s a selfish snot, because she will not share her toys with me.”

“Sis, we’ve discussed this. Share.”

Sis, won’t tell Mom what her brother actually said. She intuitively knows that her selfishness will not gain her much sympathy from Mom. Best leave that part out and turn make it seem her brother made an unprovoked malicious comment.

Using a straw seems to imply one of three things.

1. You know, like Sis, that your opponent’s position is stronger than you’d like it to be, so you carefully avoid the truth and construct the straw man.

2. You expect your target audience to be dumb and not recognize the straw man.

3. You’re dumb.

Most political ads are straw men. “My opponent wants to destroy something or the other! Don’t vote for him.”

These campaigners hope that you’re dumb and that the army of straw men they construct will sway your vote their way.

It must work to some degree. Straw men still exist. Unlike Mom, enough of us don’t call BS and request that the campaigners address the real positions.

Keep your eye out for straw men in this election season.

Red Herring Alert

Last week, I heard a local liberal radio talk show host repeat, with gusto, the claim that President Obama has the lowest spending growth since Eisenhower.

Several places have addressed this claim. Here’s one and another. They raise some good points.

But I think spending growth is a red herring. The issue is actual government spending, not spending growth.

As Arthur Laffer and Steve Moore pointed out in the Wall Street Journal, President Obama took over after the grandest public spending binges of all times, one that was supposed to be temporary.

Claiming that locking that temporary spending binge into the budget going forward is a sign of conservative fiscal management is spin.

Consider a CEO who gives himself a $300 million bonus and draws the ire of the Occupy Wall Street types. He gets fired and the next CEO gives himself a $301 million bonus and tells Occupy friends not to worry because the growth in his salary is the lowest in recent history. I don’t think many people would fall for that.

Red herring society

I agree with what Newark Mayor Cory Booker said yesterday on Meet the Press. Issues like Bain Capital and Jermiah Wright are red herrings, or as Booker says, “a distraction from the real issues.”

I’m not sure who’s to blame for the proliferation of red herrings in society.

The media? I imagine they push the stories that produce responses.

Society? Probably the most to blame. We do like our red herrings.

Education? I would put some blame here, too. Many of my college educated friends can’t explain to me what red herring means. Every sixth grader should know this and be able to spot them.

For those of you who don’t know, red herrings are distractions from the real issue.

You tell me that my gum chomping annoys you. I respond that your yawning bugs me. Not only did I not address my gum chomping, but I attempted to distract you from that issue by introducing a new, unrelated topic — your yawning — and I put you on the defensive hoping you will begin to discuss that or something else (maybe my throat clearing) rather than my gum chomping.

According to Wikipedia, William Corbett first used “red herring” in his weekly newspaper in the early 1800s as a metaphor for a political maneuver to distract people from the issue at hand. A red herring is a cured and pungent fish. Corbett wrote that hounds can be distracted from the scent of their mark by dragging a red herring across the trail.

The forgotten viewpoint

Mark Perry, at Carpe Diem, reminds us of some good advice from French economist, Frederic Bastiat:

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

Let’s apply this advice to some common situations.

Minimum wage.  Here’s a good story about how consumers pay for higher minimum wages (HT: Don Boudreaux, Cafe Hayek). The costs to the consumer includes higher prices and fewer options. Some of the cost is also born by low-skilled workers who will have fewer employment opportunities.

Credit card regulations: Don Boudreaux does a nice job in his Pittsburgh Tribune column, Help That Hurts, of looking at the credit card regulations from the viewpoint of consumers.  Here’s an excerpt:

Congress, the White House and most of the news media describe CARD [Credit Card Accountability, Responsibility and Disclosure Act of 2009] as “pro-consumer.” At first glance this description seems accurate. After all, don’t consumers benefit when the fees and interest rates they must pay are reduced?

Although the answer to this question is “yes,” this isn’t the correct question.

The correct question is, “Don’t consumers prefer to have the option of paying higher fees and interest rates if the alternative is having no access to credit at all?”

Not everyone is financially careful or responsible. Traditionally, credit-card issuers dealt with this fact not by refusing to lend to consumers with poor credit scores but, instead, by using an ingenious approach that helps both those consumers with poor credit scores as well as the banks that lend to them. That approach is to charge delinquent customers significant fees for late payments and to raise interest rates on delinquent balances.

Here are a couple more things where the consumer viewpoint is usually ignored:

  • Foreign trade – Who would be hurt by restricting access to foreign goods? Consumers.
  • Labor unions – Who funds the generous wages and benefit packages of unions? Consumers.

I’ve added a new category to my blog, Consumer Viewpoint, to remind me to continue to apply Bastiat’s advice as I encounter various situations.

Will donations create jobs?

I picked up the brochure on Starbucks new job creation donation project.

The brochure explains that donations will be used to give grants to community development organizations that loan money to community oriented businesses.  For a $5 donation, a community development organization can lend $35 to a business.  And you get a bracelet that says “Indivisible”.

Hmmmm…

The project sounds great.

It took me a little bit to figure out the logical flaw.

But, it occurred to me that this is a version of the Broken Window Fallacy.

It took me a little bit to recognize it since there is no destruction (breaking of windows) here.  But the Broken Window Fallacy isn’t about breaking windows.  The fallacy lies in not considering what would have happened anyway.

What would have happened if I spent the $5 on something else, like more coffee beans? How many jobs would have been created from that?

Probably about the same, or more, as what’s created from the $5 donation.

Starbucks’ efforts isn’t really about creating jobs.  Starbucks’ efforts are about creating seen jobs so it can tell you stories about them to make you feel like you are doing something good.  Their efforts ignore that you are doing just as good by spending or otherwise investing that $5, but the problem is that good is unseen and harder to tell a story about.

So, technically, yes, donations will create jobs.  It’s just not clear if they create any more jobs than if the money been used for something else.

Be leery of big words

During the education forum that I wrote about here, I noticed that the administrators of the failing public school district referred to students as scholars.   They also used ‘our scholars‘.

What’s wrong with the word student?

I find using scholar instead of student annoying because it reminds me of how business consultants use big words — often incorrectly — to impress and bamboozle incompetent managers.

In his book, Crimes Against Logic, Jamie Whyte addresses this very issue (p. 66):

Management consultants sell advice for large sums of money.  The advice can be useful, which, hopefully, explains the fees.  But, there is a certain insecurity in the young men and women who prepare the presentations of management consultancy firms.  The advice, however good, often seems too simple.  Your company has an over-capacity problem.  Then you had better increase sales volumes or cut capacity.  How might you increase sales volumes?  Lower your prices, perhaps, or open new sales outlets, or something else.  How likely to work are these options? New sales outlets would be too expensive because customers for your type of product are very price-sensitive.  Then lowering prices is the best bet.

That’s the sort of idea involved.  It’s fine…but it just doesn’t sound clever enough from Ivy-League and business-school graduates charging $5,000 day.  It needs sexing up with some jargon.

Jargon in management consulting involves the substitution of bizarre, large, and opaque words for ordinary, small, and well-understood words.  The substitution is no more than that.  Consultantese brings no extra rigor, no measurement precision lacking in the ordinary language it replaces.  Where terminology in the sciences aids clarity and testability, consulting jargon shrouds quite plain statements in chaotic verbiage.

Though few of you readers will be management consultants, many will have been exposed to their language, because it now permeates the business world and, increasingly, journalism and politics.  Certain words must be included wherever grammar permits, and sometimes even where it doesn’t.  Fashions change, but “leverage”, “intellectual capital,” “benchmark,” and “moving forward” are perennial favorites.   Suppose, for example, that the way your company is run means that the good ideas of the staff are not heard by the managers, and that other companies do better in this respect.  This becomes:

Benchmarked against best-in-class peers, intellectual capital leverage reveals significant upward potential moving forward.

I agree with most of this.  I don’t agree, however, that consultantese is a result of consultant insecurity.  Rather, it’s part of the con to get incompetent managers to believe that the consultants actually wield some sort of scientific business knowledge and proven approach to business success that the managers somehow missed when they went through business school.

But, the con often goes both ways.  While, consultants collect large fees to sex up ordinary business thinking, incompetent business managers get scapegoats when the sexed up, yet ordinary, business strategies fail to improve, or even hurt, the business’s performance.  They get to say to the Board, but the strategy came from [insert prestigious consulting firm name here], it’s not my fault.  That strategy often works to get the incompetent managers at least one more shot.  And, ugh, they often bring back the consulting firm to do more work.

As a side note: Can you imagine what the owner of an NFL team would do if his head coach hired a consultant to tell him what strategy his team should use to win games?  That’s right.  And that’s what Boards of Directors should do to managers who do that in business.

Anyway, the point is, be careful when folks use a lot of big words and stretch their meanings.  They are quite likely trying to deceive you.

Also, I recommend reading Crimes Against Logic.  It’s short, easy-to-read and now that I think about it, provided a really good foundation for me to help spot the logical foolishness we encounter everyday.

Finally, I am aware that the failing administrators would likely defend their use of the word scholar as showing respect to students and elevating what they are trying to accomplish.  To which I would reply, you could show the students the utmost respect by educating and disciplining them.

What is fallacy?

In a conversation this evening, I mentioned that one motivation for this blog was to combat fallacy.  My counterpart said that I was the first person, besides himself, in years he has heard use that word.

That caused other conversations where I pointed out fallacies to flash through my mind.  I often receive bewildered looks when I say that word.   I assumed the looks reflected disagreement.  But, maybe they simply didn’t know what I meant and they didn’t want to ask.

I admit, before I became familiar with the term I would not have known.  I think the non-intuitive nature of the meaning of fallacy may be on par with economic rent.   Neither term is used enough in everyday language to have gained an intuitive understanding.

For example, most people intuitively know that profits can be made in capitalism.   They do not intuitively know that profits can also be made from economic rent.  Economic rent is such a blind spot, in fact, that most folks commonly mistake profits from economic rent as profits from capitalism.

They also mistake fallacy for legitimate argument.

So, what is a fallacy?

A fallacy is faulty reasoning where the conclusion doesn’t follow from the premises given.  A fallacy doesn’t necessarily say the conclusion is wrong, just that the conclusion can’t be made from the premises given.

Here’s an example of a fallacy:

It rained here today, so it will not rain tomorrow.

My premise is that it rained today.  My conclusion, based on that premise, is that it will not rain tomorrow.   But, rain today usually has no bearing on whether it will rain tomorrow.

Notice, my conclusion may be correct.  It may not rain tomorrow.  But most people will agree that the logic I used to arrive at my conclusion is not correct.

Fallacies come in many varieties.   There are common fallacies that you have probably heard of like ad hominem attacks or red herrings and many more.

Over the years, I have found the list of informal fallacies at the Nizkor Project website to be a handy and valuable resource for checking and re-checking to help me identify fallacy.

Being able to spot and identify fallacies is like the Jujitsu of discussion allowing you to make progress without having to state and defend a case of your own.  Simply pointing out incorrect reasoning turns the argument back on your discussion partner and causes them to rethink their logic.

Most important, it often focuses the discussion on the root cause of the disagreement — the faulty reasoning on which the conclusions are based.