Socially wasteful?

As a long-time debate aficionado, it seems to become rarer and rarer that I come across a debate that I haven’t heard yet and makes me think. I came across such a debate between Steve Landsburg and Don Boudreaux about socially wasteful spending.

It goes something like this:

Company A has a product that produces value for society, let’s say $100. Company B faces a decision to make a competing product that is slightly better and would add marginally to the overall value for society, let’s say $10. So, Company B’s product would produce value of $110.

Company B faces an incentive to invest more than the marginal improvement in societal value, $10 in this case, because it can also attract Company A’s customers.

So, maybe Company B invests $50 to produce $10 more in value for society, because it can attract the some or all of the $100 of value already served by Company A’s product.

On net, society is worse off because a $50 investment has been made to produce $10 of value, for a net loss of $40. Landsburg says the $50 is socially wasteful spending, though he admits that the simple example doesn’t capture all the complexities of the real world, like the possibility that the $50 investment accidentally produces more than $50 of value.

But, I think his main point is that this incentive to make socially wasteful investments is, perhaps, one weakness in the normal feedbacks of capitalism.

I’m having a hard time fitting the real world onto the simple example, where there is uncertainty, risk, prudence, competition, different value propositions for different people and such.

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If we can get a living wage for flipping burgers, why do we need to graduate 12th grade?

Don Boudreaux points to a comment from Maureen on Steven Landsburg’s blog post about the minimum wage.

Here’s some of her comment:

The bigger issue that I have is the assumption that somehow minimum wage is the start and end to a career. Minimum wage is a start, but if it is seen as an end, then we can revise a bunch of government budget items that will no longer be needed – starting first with money for the k-12 education system and the post secondary education systems. If unskilled labour is all that, as a society, we are willing to support with higher and higher minimum/living wages, then no one needs to graduate high school and we can stop at Grade 10 (or even maybe Grade 8). We can shrink that whole system down and get rid of vast amounts of government departments and the costs that go with them.

Good points.

Disagreement and compassion

Seth Godin on ways to disagree with people. He identifies a marketing problem, a political problem and a filtering problem.

I think there is also an identification problem: When someone agrees with you, but won’t admit it because it doesn’t fit in with how they self-identify. But, if I admit that I wouldn’t be in the compassionate crowd, for example.

Steven Landsburg has help for such people. Here’s his response to a commentator on his blog who cares about coffee shop owners on Capitol Hill who are being hurt by the

coffee and tee

In DC or Nebraska? (Photo credit: Wikipedia)

shutdown but who must be…

…apparently oblivious to the fact that taxpayers also visit coffee shops, and that for every dime not being spent by a DC bureaucrat, there’s an extra dime available to be spent by a Nebraska farmer or a New York cab driver. Our commenter apparently remembered to care about the guys selling coffee in DC but forgot to care about the guys selling coffee in Nebraska.

The single biggest lesson that economists have to teach is that it’s important to care about everyone, not just about the people who happen to cross your path.

Fallacies, Hokum and Contradiction

Commenter breedm asked what I thought of this TED Talk presentation about job creators from Nick Hanauer.

I think it provides some good examples of fallacies, hokum and an argument that contradicts itself.

At the 42 second mark, Hanauer presents this straw man:

…a policymaker who believes that the rich are job creators and therefore should not be taxed will do equally terrible policy  [as an astronomer who believes the Earth is the center of universe] .

The straw man is in bold. I know of no one who believes the rich should not be taxed. Comparing these fictional policymakers to fictional astronomers (that’s hokum) doesn’t make either group any more real.

Right after that, Hanauer enters the wealth discussion “in the middle” by claiming that job creation comes from the people who can afford to buy products, consumers. Without them, “all of those jobs would have evaporated,” claims Hanauer.

David Mamet and Thomas Sowell explain here that the “a priori question left unasked and unanswered” by folks like Hanauer is, where did the wealth of these people who can afford to buy products come from?

Wealth was not “descended from the heavens, like manna, and spread evenly over the ground,” Sowell writes. “It was created by individual expenditure of effort and individual willingness to undertake risk.”

At about the 1:15 mark, Hanauer says something I agree with:

Jobs are a consequence of a circle of life-like feedback loop between customers and businesses.

Sure. Customers buy products they value. Those purchases send signals to businesses about what consumers value and businesses make more of that stuff.

But, as Sowell pointed out, customers had to first acquire enough wealth to purchase these things in the first place.

This was done in the same “circle of life-like feedback loop” that Hanauer mentioned. Consumers acquired their wealth as workers or business owners that produced something of value for others.

Or, they somehow got their hands on a piece of the wealth these folks created. For example, children who spend their parents’ money got their hands on some of the wealth their parents created. Recipients of charity or government transfer payments, get a piece of wealth — either voluntarily or forcefully — from someone else.

But, I disagree with Hanauer’s very next sentence. I also think this sentence contradicts his previous and is the fundamental lapse in Hanauer’s thinking.

And only consumers can set in motion this virtuous cycle of increasing demand and hiring.

It’s not much of a “virtuous cycle” if only one player in that cycle can set it in motion, is it? Again, Hanauer’s basic flaw is not tracing back where those consumers acquired their wealth.

The next few minutes of Hanauer’s speech is filled with hokum. For example, he argues that when business people take credit for creating jobs, it’s like squirrels taking credit for evolution.

I wonder what Nick would say about politicians taking credit for job creation. Either way, it’s a hokum comparison. It’s more like squirrels taking credit for finding a good place to store nuts for the winter. Evolution may have favored the squirrels who do that, but that doesn’t mean that those squirrels aren’t working hard to make sure their families have enough food for the winter.

Hanauer really stretches the straw man and hokum meter at the 4 minute mark, claiming that the word ‘creator’ is an attempt to deify job creators.

It’s a small jump from ‘job creator’ to ‘the Creator’. It was, like, not chosen by accident. When someone like me calls himself a job creator, we’re not just describing how the economy works…we’re making a claim on status and privileges we deserve.

Or, maybe not.

Next, Hanauer claims that the 15% tax rate paid by ‘capitalists’ on dividends and carried interest, compared with the 35% top rate on work, is a privilege and hard to justify without deification.

That’s only if you don’t understand the difference and neglect that the ‘capitalists’, for the most part, had to pay that ‘35% top rate’ on the income that was used to acquire the capital that is now producing dividends, as economist Steven Landsburg explains here. Landsburg’s conclusion:

Why is this so terribly hard for so many intelligent people to understand? Here, I think, is why. They see a guy with a million dollar capital gain on his investment, and they forget that in the absence of wage taxes, he’d have invested twice as much and earned a two million dollar capital gain. In that sense, the capital gain is taxed in advance.

Hanauer concludes that a strong middle class is the real driver of job creation and:

…that’s why taxing the rich to pay for investments that benefit all is such a fantastic deal.

Except that kills the consumer-business feedback loop ecosystem that Hanauer praised earlier in his speech, because the “investors” are no longer investors and consumer purchasing signals no longer matter.

That is, “investors” in Hanauer’s model do not have to respond to what consumers want. Investors in the “ecosystem” go out of business when they make something consumers are unwilling to buy, as they should. That’s the feedback part of his consumer-business feedback ecosystem.

When government “investors” (i.e. spenders) make something consumers are unwilling to buy, they don’t necessarily go out of business because the tax dollars are not directly dependent on whether their projects are consumers successes or not.

To sum up, Hanauer first argues that the economy is an emergent order, like evolution, that is not dependent on a centralized investment function. But, then argues that we should centralize it, which removes the emergent order aspect of it.

breedm, Does that help?

Much ado about rubbers?

In this post, I wrote why I think cost benefit analyses suck.  Here HHS bureaucrat Kathleen Sebelius gives a great example of a bad cost benefit analysis.

She explains:

The reduction in the number of pregnancies [from forced contraceptive coverage] compensates for the cost of contraception.

First, I think it’s silly that we are fighting over rubbers. Seems like we have more important things to concern ourselves with than whether Georgetown law students can afford their apparently rich tastes in contraception.

Rubbers are cheap and effective. If you can afford to buy a drink and McDonald’s you can afford a rubber.

But, that’s not why Sebelius’ CBA is bad.  It’s bad for a few other reasons.

First, she doesn’t appear to offer any evidence. Last I checked, a large majority of sex-having-folks in our country already have figured out arrangements for their birth control. If they don’t want pregnancies and want to have sex, they have strong incentives to figure this out.

It’s not clear that government-mandate-health-insurance-contraceptive coverage will increase the number of people who actually use contraception properly. I’d venture to guess that a big portion of unwanted pregnancies stem from contraceptive mistakes like forgetting to take the pill or improperly mounting the rubber, which government-mandated coverage will not solve.

Second, no alternatives are considered. A good CBA always consider alternatives so you can at least get some idea of opportunity costs.

For example, if there are some poor people who do not get contraception because they are poor, why not try a more targeted approach, like having an organization that addresses their needs? One is called Planned Parenthood. I heard a caller on a radio show this evening that works at a clinic that offers a range of contraceptive methods, free.

So, one alternative is a more targeted approach to address the folks, apparently like Georgetown law students, who can’t afford rubbers.

A third reason I don’t like this CBA is that it doesn’t consider potential unintended consequences. There are ways this could lead to more unwanted pregnancies and/or sexually transmitted disease.

I’ll mention one.

Perhaps, contraceptive coverage enables budget constrained folks to trade-up from condoms to the pill, which leads to more unprotected sex and spreads more VD’s.

Also, it’s probably a bit easier to forget to take a pill than it is to forget to put a condom on.

The fourth reason I don’t like it is because it presumes such low expectations of us to not be able to take care of basic functions. Folks, there are some things we should be expected to do on our own. Take out the trash. Pay our bills. And buy rubbers. They cost about as much as hand sanitizer.

Are we going to mandate that health insurance buy hand sanitizers and soaps too? How about tap water? Think about how much money insurance companies could save from reduced disease and sickness transmission if they did that.

How about toothpaste, floss and toothbrushes? These have the same CBA’s. And they’re silly because ultimately we should be smart enough to decide for ourselves that the personal benefits of these things are well worth the price, so we choose to buy them.

And those who don’t buy them probably won’t use them even its free.

Take note. Obamacare is not in full effect and we’re already fighting over rubbers as if not having to pay a buck for one directly is an inalienable right. I didn’t expect it would get this silly, this fast.

Steven Landsburg also has a good post on the subject.

Update:  Commenter Mike M asks (and was mentioned on W.H. Heasley’s blog, The Last Embassy):

 If the Obama administration sees “access” to (which they have defined as having in place a mandate that someone else has to pay for it) contraceptives as a “basic human right”, why do they prohibit me from using money from my Health Savings Account to purchase condoms?

Mike, I’m sure if you get Donna Fluke to argue for your case, the administration will grant you an exception soon.

Jacob Marley is a good salesman

So was Charles Dickens.

Ebenezer Scrooge's gravestone, Shrewsbury

The thought of being forgotten sealed the deal

I agree with Charles Rowley that Jacob Marley simply re-framed generosity for Ebenezer so that it appealed to his self-interest.  And it seems that Dickens’ story has lived for over 150 years, retold in many different variations, with very few people recognizing that.

Here’s another interesting piece on A Christmas Carol from Steven Landsburg.




Third time’s a charm

I had one of those third time’s a charm moments this week.

1st Time: On his blog, Idiot’s Collective, Aaron McKenzie asks What Would It Take to Change Your Mind?

I started this blog to catalog the things that changed my mind over the years.  I soon learned that was too narrow of a scope for a blog to hold my interest, but it is still a question and topic that intrigues me.

I suggested that changing your mind takes a willingness to consider that you may be wrong.  That allows you to more fairly consider the merits of the conflicting evidence.

Aaron wrote in response:

…it helps if we don’t go around expecting to always convert others to our way of thinking. Rather, if we try to understand more deeply why others believe what they believe, we might find ourselves persuaded…

I agree.  I have found it to be productive to approach a subject by trying to prove myself wrong.  In the process, I learn a great deal.  Aaron also wrote:

The strident evangelist in all of us has a way of coming out when our views are challenged.

I agree with that too.  It takes practice and patience to contain that.

2nd Time: On February 9th, Aaron asked in regards to her position on vaccinations, What Would Change Jenny McCarthy’s Mind? He posted a video of Penn Jillette discussing Ms. McCarthy’s belief that vaccinations cause autism given evidence that one of the key studies that supported this link was fraudulent.  As Jillette describes, rather than admit that she needs to reconsider her position, “she doubles down.

For more on the story about the fraudulent vaccination study, I recommend this EconTalk podcast (whose host is exceptional at taking the non-evangelical approach) from January 31.

When I’m having a hard time changing my mind in the face of evidence that runs counter to my mental model, I try to remember Steven Landsburg’s advice.   It’s helpful.

3rd Time: I found validation for Penn, Aaron and myself in a Harvard Business Review Ideacast (i.e. podcast) called The Persuasive Power of Uncertainty.  Guest Zachary Tormala discusses research into how folks respond to people who display some uncertainty in their positions and those that display confidence.

They believe they found that experts with some self-expressed uncertainty in their position are more persuasive.   This finding lines up with my experience.

They also believe that they found that non-experts with high certainty are more persuasive.  I’m not so sure about that one.  I think there are other factors to consider.

On both findings though, I’m always skeptical of research — even the research that supports my beliefs.  I’ve seen too many false positives in my day.

But, I found the podcast interesting, worth a listen and coincidentally tied in with my other two encounters with the subject of changing minds this week — rounding out my third time’s a charm.

Who controls the capital?

As I wrote here, this isn’t a blog about Ronald Reagan.  It’s a blog inspired by a quote from Reagan.

But, chapter seven in F.A. Hayek’s The Fatal Conceit, entitled Our Poisoned Language, reminded me of my second favorite quote from Reagan (my first favorite is at the top of this page).

All systems are capitalist.  It’s just a matter of who owns and controls the capital – ancient king, dictator or private individual.

I try to avoid discussion about whether society is socialist, capitalist, communist, fascist or some other common label.  I find those discussions to be unproductive red herrings that avoid getting to the root of the matter.  Each word has textbook definitions and also has much baggage attached.  I find that most discussions about these terms equivocate between the text book definitions and the baggage and rarely apply exactly to any specific group of people.

In his quote, Reagan drops the textbook definition of capitalism and all its baggage to get to the heart of what truly differentiates large groups of people that form political economies — who owns and controls the capital.

In chapter seven of The Fatal Conceit, Hayek explains that the words we use to describe the actions of individuals interacting with each other, words like markets or society, give the impression that these groups of individuals are something they are not — a single unit with a centralized mind or central goal.  And this gives rise to some people using that image to convince others that this single unit should have their overall goals.

Steven Landsburg expressed this idea well in his book The Big Questions, which I quoted here, by explaining that folks  imagine that organizing an economy is like organizing a birthday party, which it is not.

Here’s Hayek’s words to explain the phenomenon (p. 113):

Thus the word ‘society’ has become a convenient label denoting almost any group of people, a group about whose structure or reason for coherence nothing need be known — a makeshift phrase people resort to when they do not quite know what they are talking about.  Apparently a people, a nation, a population, a company, an association, a group, a horde, a band, a tribe, the members of a race, of a religion, sport, entertainment, and inhabitants of any particular place, all are, or constitute societies.

To call by the same name such completely different formations as the companionship of individuals in constant personal contact and the structure formed by millions who are connected only by signals resulting from long and infinitely ramified chains of trade is not only factually misleading but also almost always to model this extended order on the intimate fellowship for which our emotions long.

The crucial difference overlooked in this confusion is that the small group can be led in its activities by agreed aims or the will of its members, while the extended order that is also a ‘society’ is formed into a concordant structure by its members’ observance of similar rules of conduct is the pursuit of different individual perspectives.

Great Explanation of QE2

Here’s the best explanation I’ve seen on Quantitative Easing from Steven Landsburg.   I recommend reading the whole post, but if you are curious about what exactly QE is, here it is in a nutshell:

They’re creating 600 billion new dollars and using those dollars to pay down the government’s debt.

The rest of Landsburg’s post does a great job of explaining potential results of this action.

If I understand it correctly, the net effect will likely be the transfer of wealth from those who are holding to dollars to the folks who sold their bonds back to the government.

Thanks to Steven Landsburg for taking the time to explain this.

Restore Sanity? II

At about the 8:30 mark in John Stewart’s closing speech at his rally last Saturday, he starts a segment with:

We do impossible things, only made possible by the little, reasonable compromises we all make.

He then shows video of cars in traffic and describes the individuals in each car.  For example, “that car has a lady who’s in the NRA, loves Oprah.”  He describes several more individuals like that and then the video pans out to show the traffic merging into a couple lanes to get through a tunnel carved under a river, “carved, I’m sure, by people who had their differences.”

Back to the merging cars…

…and they do it concession by concession.  You go, I go.  You go, I go.  Sure, there’s some selfish jerk that comes along and cuts in, but that individual is rare and is scorned…

I found this segment interesting for a few reasons.

1.  It shows an example of a zero sum game.

I won’t pick on this point too much.  I know the idea was to show an easy visual of people cooperating.  But, I think the visual happens to represent how folks like Stewart view things — as a zero sum game.  There are only so many lanes in the tunnel and we just all have to share.

However, a broader visual with a time series would provide a truer example of how our getting along results not in a zero sum game, but a positive sum game where things can get better for everyone.

For example, a time series video may have shown how folks crossed the river before the tunnel was made and how the tunnel improved things by adding to the existing options of crossing the river.

Also, a broader picture might have included technology or new construction that saves people from ever entering the traffic jam, like a telecommuter working from home over a high speed internet connection or new apartments on the side of the river everyone wants to get to.

2. Stewart recognizes that people who disagree on some things generally get along for some reason, though I’m not sure he knows that reason.

Number 2 occurred to me when he made the remark about the workers coming together to carve a tunnel under a river, “even though they may have had their differences.”

This strikes at what I think is one of the most fundamental attributes of free markets and is overlooked or discounted by free market skeptics: the mutually beneficial, voluntary trade.  That mutually beneficial trade is the most effective way to align our “differences”  so that something good for everyone results.

For example, I buy my coffee from a dude who I may not agree with politically, because I want my coffee and he wants his paycheck.  To Stewart’s point, I compromised and he compromised.  I didn’t try to convert him to my way of thinking before I bought a cup and he didn’t qualify the sale of the coffee on my politics.  And we both came out ahead in the trade.

So, why do people with differences work together to carve a tunnel beneath a river?  Adam Smith explained it in this quote:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

The people working on the tunnel didn’t build the tunnel out of kindness.  Nor did they refrain from imposing their beliefs on their co-workers because they’re nice people.  They wanted a paycheck and they wanted to remain employed, so they supplied their labor and got along with their co-workers.  There’s nothing wrong with that and something good and useful resulted.

The problem is so few people understand the underpinnings of the human interactions that brought about many of the things that make our lives better.

3.  Stewart recognizes why people make concessions in traffic and why jerks on the road are rare:  accurate, clear and direct feedback.

One of my pet theories is that any problem can be traced to problem in the feedback loops.  There are few jerks on the road because we have several methods of providing clear and direct negative feedback.  One  feedback, as Stewart points out, is scorn (btw, Don Boudreaux mentions this in the video of his I posted recently on the law).  That might show up as honking horns, finger signals, yelling, shaking heads, risk of road rage or not receiving favorable treatment by other motorists at the next merge.

Even the most stubborn jerks have a difficult time not modifying their behavior with all of that clear and direct feedback, so jerkish flare-ups are usually squelched quickly.

The leap in the thinking that Stewart doesn’t seem to have made yet is why these concessions that are so clear and direct in traffic are not so apparent or strong in political discourse.  If he made that leap, he might better understand why the “24/7 politico conflictinator” exists.

Let’s go back to my feedback theory of everything.

Correct feedback on political ideology is unclear and indirect.  When I accidentally cut someone off in traffic I know right away by the accurate feedback I receive.  I learn and take care not to do it again.

Consider a political ideology that supports policy touted at helping poor people.  What feedback do I receive if the policy works or not?  It’s unclear and it may not be accurate.  It’s certainly not as clear as someone giving me the one-finger salute in traffic.

If I question the effectiveness of the program, I might receive clear feedback.  “You’re stupid and heartless if you think this great program hurts!” But, that may not be accurate feedback.  Notice, that’s a name-call and it doesn’t give me any information as to whether the program works or not.

Stewart himself is guilty of feeding this monster. He has the sanctimonious, authoritative, thou-shalt-not-question-my-superior-judgment, let’s-all-just-get-along (as long as it matches what I think) act down pat.  It puts food on his table.  It also prevents him from learning that he might be wrong.

If I question a policy’s effectiveness, I might also get  feedback from less biased sources.  A group of economists might tell me why it helps and another group may tell me why it hurts, and I’m left sorting out which group I think is right and why.  I think that’s better than being bullied into not questioning the policy, but it’s still not as clear and accurate as traffic signals.

4.  After listening to Stewart’s rally closing and also to Beck’s, I think there’s one big message missing from each: It’s okay to not know, to ask questions, to be wrong and to learn.

I’m reminded of Steven Landsburg’s advice, delight in losing arguments because you’ve learned something.

Somehow, somewhere in our society we’ve lost the idea that it’s possible that we could be wrong and that it’s okay to lose an argument.  I can empathize.  It took me a long time to get past that and sometimes it still gets in the way.

But our betters tell us to get out, vote and let our voices be heard.  They should know better.  Instead they should encourage us to get out and lose some arguments so that we’ll be better informed. And when you lose an argument, say thank you.

We’re not afraid to ask an electrician for help in wiring stuff up.  We know that if we do it ourselves and screw up, the consequences can be deadly.  So why are we afraid to let people know that we don’t know much when it comes to politics?

Is it because politics is a bit more like a religion than wiring skills?