"Through the development of the mathematics necessary to understand the facts of neural physiology and the electro-chemistry of the nervous system, which themselves had to be, had to be, traced down to nuclear forces, it first became possible to truly develop psychology. And through the generalization of psychological knowledge from the individual to the group, sociology was also mathematicized." Isaac Asimov, Second Foundation, pg 84
The above quote is taken from the third book in famed science fiction writer Isaac Asimov's Foundation trilogy (later expanded to an immense and all encompassing series until you eventually discover that all of human history for 20,000 years was controlled by a former detective humanoid robot obeying his own special interpretation of Asimov's Laws of Robots, the Zeroth Law. Let's stay on track and only worry about the original trilogy). In it, in one succinct paragraph, is the entire aim of neuroeconomics.
Recently, I attended the Society for Neuroscience's 2011 conference. It is the largest conference dedicated to Neuroscience in the world. Some 31,000+ attended from around the world to present and discuss the most recent findings and the frontiers of neuroscience. The Keynote speech and panel of the event was the Yale economist Robert Shiller's attempt to bridge the gap between neuroscience and economics, followed by a panel discussion involving him, the Caltech neuroeconomist Antonio Rangel (probably the best in the field, or, as my professor described him, "your intellectual daddy"), SfN president Susan Amara, and esteemed Cambridge neuroscientist Wolfram Schultz.
Fortunately, it was forgettable and thousands walked out during the talk. I say fortunately, because it was an absolute disaster and the neuroscientists who remained must have only been further convinced that at best, economists were shoddy scientists, and at worse, idiots and charlatans. The best part of it, in my opinion, was Rangel desperately trying to explain how an economy, made of millions and billions of people each making independent decisions, was orders of magnitude more complex than the human brain and that analyzing human behavior on such large scales was extraordinarily more difficult than it might at first appear. All that the neuroscientists heard was that economists can't do controlled experiments, which, while true, was not the intended take away.
This is immensely unfortunate, because it was a wasted opportunity to make a couple good points. The first good point to be made is the one Isaac Asimov made 60 years ago in the above quote. Once we are able to understand human behavior on a neuroscientific level, we can make models about how individuals make decisions and choices. Once that is done, we can argue against the Von Neumann Morgernstern Utility Theory, the basic underlying theory of all of economics, and replace its axioms with models on human behavior.
These are the four VNM axioms:
Axiom 1 (Completeness)
For any two choices (A and B), either A is preferred to B, B is preferred to A, or there is equal preference.
Axiom 2 (Transitivity)
For any three choices (A, B, and C), if A is preferred to B, and B is preferred to C, A is preferred to C.
Axiom 3 (Continuity)
For any three choices (A, B, and C), where A > B > C and there exists probability p (where p is between 0 and 1), then pC + (1-p)A = B.
Axiom 4 (Independence)
For any three choices (A, B, and C), if A > B, then for any C and p (where p is between 0 and 1),
pA + (1-p)C > pB + (1-p)C.
Now, the trouble is that human behavior has and does violate these axioms. A replacement with models that do work (and there are several outlined in a paper entitled "Does the brain calculate value?" written by Vlaev et al, a copy of which I have on my computer but no link to online) can fundamentally alter several economics models and practically everything on risk aversion.
That list bit is critical. The question can be raised, even if these axioms are violated by individuals, might they not hold across aggregated decisions made by large numbers of people? If so, do we really need to worry about retooling economic models?
The answer is no. Small things, like how individuals consider risk, do not get smoothed over across the aggregate. Instead, risk preferences are constantly shifted by the context in which they're made. This is an oversimplification, but the general result is that where you would usually expect a sort of average risk to be taken by a large group of people, the amount of risk people are willing to take on escalates as they view others taking on increasing amounts of risk. A very small change in the way people think thus has huge macro implications. Models would then need to be altered.
The second good point that should have been made, that could have been made, is what economics bring to neuroscience. It brings a mathematical rigor found outside few disciplines besides higher math, physics, and computer science. It brings a host of statistical and surveying techniques designed for examining hundreds of interlocking, interdependent variables. Finally, it brings a certain humbleness to our model making. Our models will never be perfectly accurate, precise, or computationally efficient, and often times we will find ourselves having to sacrifice one of those virtues for another.
"[A model] is neither complete or correct. Instead, it is merely the best that could be done at the time. Over a dozen generation of men have poured over these equations, worked at them, taken them apart to the last decimal place, and put them together again. They've done more than that. They've watched nearly four hundred years past and against the predictions and equations, they've checked reality, and they have learned." Isaac Asimov, Second Foundation, pg 86
These two quotes outline the two fundamental foundations, the twin axioms, of neuroeconomics. The first, that there is a continuity from physics to economics, and the precision in the latter depends on understanding of the former and all the intervening steps. The second, that are models are always to be improved upon, to be experimented on, and to be tested time and time again.
Saturday, November 26, 2011
Saturday, October 1, 2011
Some thoughts on Depressions and Recessions
I recently read Garraty's book on the Great Depression, as well as a few papers on the subject, and a book called "The Great Leap Forward" by Alexander Field.
To sum up Garraty's book in one sentence: Fuck if we know what caused the Depression, but it was probably low interest rates. Fuck if we know what ended the Depression, but it was probably inflation.
Let's start at the basic assumptions available:
First, expected utility theory holds throughout.
The strength of the economy is summed value of goods produced, exchanged, and consumed. We do not have an objective, empirical measure of value, so we use currency as our subjective of measure, with units like dollars or pesos.
Generally, GDP is thought to be a good measure of the strength of the economy, as it is the net aggregate of the monetary value of all production, trade, and consumption. So far, none of this is controversial.
But here's a hypothesis I'd like to put forward that might be somewhat controversial: the more evenly distributed income and wealth are, the faster the economy will grow and that periods of recession and depression occur when the majority of wealth is concentrated in too few hands.
Here's my logic, disguised as a story:
Two men are laid off from two different factories where they each had worked. For the past 10 years, one has consistently received a 3% raise annually, the other received a 1% raise annually. As a result, the first man, we'll call him Al, is significantly better off then the second, who we'll call Ben. Al has a higher net worth, maybe a nicer house, some set aside in savings. Ben's house isn't as nice, he doesn't have much in savings.
The factories where they worked have been outsourced overseas. Both Al and Ben, equally smart and talented men, realize that they need retraining in order to get a similar paying job. Al doesn't have enough money to cover his tuition, but between his house and the money he does have, he has enough padding to take out a loan to cover tuition and pay his expenses until he finishes school. He finishes, graduates, and goes to get a job that paid the same as before, maybe a bit more.
Ben doesn't have enough money for school, and not enough assets to get a loan. He ends up getting a worse job, perhaps as a janitor.
I wold posit that Ben's fate is worse than Al's, and that overall it's a slightly worse world where Ben's fate happens instead of Al's.
But wait! Why did Ben's factory pay less that Al's? Was it less productive? Let's assume that both factories produced the same thing, but Al's factory spent more on wages and Ben's spent more on CEO compensation. Alright then, if they existed in the same region why didn't Ben work at Al's factory where he would be paid more? Well, they must have existed in different circumstances, a different place in space and time. Fine then. If Ben's CEO was significantly wealthier, he would have put his money into the bank, driving interest rates down, allowing Ben to have borrowed the money necessary for his education.
But turns out, that's misleading, because the money Ben and Al are paid also end up in the bank. Either way, the interest rates in Ben's and Al's worlds remain the same.
Here are two counters from the CEO's perspective. The first is that more pay for a CEO results in a better CEO, resulting in a better company, and better chances for all. The counter is that this argument runs both ways, more pay for workers results in better workers.
The second counter is that more pay for a CEO results in a CEO is better positioned to start a new company when the first one goes under. First, that's questionable. The same money is in the economy either way, a lesser paid CEO will simply have to rely on more investment from folks like Ben and Al. Second, a better paid CEO will have less impetus to start a new company as his utility's marginal rate of return will be lower than a lesser paid, poorer CEO.
How does this hypothesis dovetail with Garraty's?
Simple. During the 1920's low interest rates resulted in wealth being concentrated in the hands of the few.
During the 1930's massive inflation with government spending resulted in a huge spreading around of the wealth.
At this point, just about every other economist in the room wants to shoot me, so I'll leave it here and hide under the table.
To sum up Garraty's book in one sentence: Fuck if we know what caused the Depression, but it was probably low interest rates. Fuck if we know what ended the Depression, but it was probably inflation.
Let's start at the basic assumptions available:
First, expected utility theory holds throughout.
The strength of the economy is summed value of goods produced, exchanged, and consumed. We do not have an objective, empirical measure of value, so we use currency as our subjective of measure, with units like dollars or pesos.
Generally, GDP is thought to be a good measure of the strength of the economy, as it is the net aggregate of the monetary value of all production, trade, and consumption. So far, none of this is controversial.
But here's a hypothesis I'd like to put forward that might be somewhat controversial: the more evenly distributed income and wealth are, the faster the economy will grow and that periods of recession and depression occur when the majority of wealth is concentrated in too few hands.
Here's my logic, disguised as a story:
Two men are laid off from two different factories where they each had worked. For the past 10 years, one has consistently received a 3% raise annually, the other received a 1% raise annually. As a result, the first man, we'll call him Al, is significantly better off then the second, who we'll call Ben. Al has a higher net worth, maybe a nicer house, some set aside in savings. Ben's house isn't as nice, he doesn't have much in savings.
The factories where they worked have been outsourced overseas. Both Al and Ben, equally smart and talented men, realize that they need retraining in order to get a similar paying job. Al doesn't have enough money to cover his tuition, but between his house and the money he does have, he has enough padding to take out a loan to cover tuition and pay his expenses until he finishes school. He finishes, graduates, and goes to get a job that paid the same as before, maybe a bit more.
Ben doesn't have enough money for school, and not enough assets to get a loan. He ends up getting a worse job, perhaps as a janitor.
I wold posit that Ben's fate is worse than Al's, and that overall it's a slightly worse world where Ben's fate happens instead of Al's.
But wait! Why did Ben's factory pay less that Al's? Was it less productive? Let's assume that both factories produced the same thing, but Al's factory spent more on wages and Ben's spent more on CEO compensation. Alright then, if they existed in the same region why didn't Ben work at Al's factory where he would be paid more? Well, they must have existed in different circumstances, a different place in space and time. Fine then. If Ben's CEO was significantly wealthier, he would have put his money into the bank, driving interest rates down, allowing Ben to have borrowed the money necessary for his education.
But turns out, that's misleading, because the money Ben and Al are paid also end up in the bank. Either way, the interest rates in Ben's and Al's worlds remain the same.
Here are two counters from the CEO's perspective. The first is that more pay for a CEO results in a better CEO, resulting in a better company, and better chances for all. The counter is that this argument runs both ways, more pay for workers results in better workers.
The second counter is that more pay for a CEO results in a CEO is better positioned to start a new company when the first one goes under. First, that's questionable. The same money is in the economy either way, a lesser paid CEO will simply have to rely on more investment from folks like Ben and Al. Second, a better paid CEO will have less impetus to start a new company as his utility's marginal rate of return will be lower than a lesser paid, poorer CEO.
How does this hypothesis dovetail with Garraty's?
Simple. During the 1920's low interest rates resulted in wealth being concentrated in the hands of the few.
During the 1930's massive inflation with government spending resulted in a huge spreading around of the wealth.
At this point, just about every other economist in the room wants to shoot me, so I'll leave it here and hide under the table.
Friday, September 30, 2011
Retooling the Economy
A common argument against free trade is that when companies find it more profitable to move production overseas, they do, resulting in closed factories and unemployment at home. Economists have argued constantly, and accurately, that this is a good thing. More efficient production of goods means lower relative prices which means that everyone is a little bit richer in the long run. The unemployed can then go on to work in fields where they are more efficient producers.
This argument doesn't really ring true with the common laid off employee though. The sudden loss of income doesn't really led itself to the idea of "Congratulations! You're now richer and able to produce more efficiently!" What would be ideal is immediately after being laid off, the now unemployed worker would be either directed to a new job, or directed to new training for a different field while still being fiscally supported.
To a certain extent, this already happens. Many unemployed, especially in good times, quickly find new jobs, and unemployment insurance helps the rest get by while they're going through training or until they get reemployed.
However, in times like these, it's easy to notice that our system doesn't go far enough. Some individuals find their unemployment insurance lacking or even nonexistant, and many qualified indivuals don't bounce back as readily when unemployment is at 12% than they did when it was at 6%.
Having thought about this problem for roughly five seconds, I suggest that when a factory closes down and it's employees are laid off, a guidance counselor of sorts is sent with the resources to help the newly unemployed either find new jobs or direct them to the most beneficial training while simultaneously helping them make ends meet until they are reemployed.
The trouble that comes to mind is who will pay for it? If each company does it on a voluntary basis, then the practice will die out as soon as it begins, as the companies that do it find themselves at a disadvantage compared to the companies that don't.
Likewise, making it compulsory but still funded by the companies who are laying off the employees sounds tempting, but it perverts the incentives of the free market by making it more costly to move production overseas and therefore making US companies less competitive globally.
Asking the individual employees to take out loans to foot the bill seems unreasonable, but doable. Even assuming that banks would be willing to make reasonable loans to the unemployed, it ignores the psychological but real toll of going heavily into debt - something that most people would rather enjoy.
Asking local governments to foot the bill also seems counterproductive - the program would be expensive so local taxes would have to rise, scaring away more companies, adding to the cost, forcing taxes to rise even more, and the cycle continues.
Finally then, we are left with making the program part of federal policy. In theory, I'm not opposed. We can toss the cost on the deficit, and as long as it pays off at a higher rate than our debt (which overall, it will), than it will be worth it (see my previous post on deficits). The danger is in its becoming a bloated bureaucracy.
Perhaps the ideal compromise would be that unemployed individuals could take out the loans from the federal government at low rates (say, what the government's current interest rate is). That way, the individuals get reeducated and their ends are met, our economy improves, and the government doesn't lose any money (except for those who default on their loans).
This argument doesn't really ring true with the common laid off employee though. The sudden loss of income doesn't really led itself to the idea of "Congratulations! You're now richer and able to produce more efficiently!" What would be ideal is immediately after being laid off, the now unemployed worker would be either directed to a new job, or directed to new training for a different field while still being fiscally supported.
To a certain extent, this already happens. Many unemployed, especially in good times, quickly find new jobs, and unemployment insurance helps the rest get by while they're going through training or until they get reemployed.
However, in times like these, it's easy to notice that our system doesn't go far enough. Some individuals find their unemployment insurance lacking or even nonexistant, and many qualified indivuals don't bounce back as readily when unemployment is at 12% than they did when it was at 6%.
Having thought about this problem for roughly five seconds, I suggest that when a factory closes down and it's employees are laid off, a guidance counselor of sorts is sent with the resources to help the newly unemployed either find new jobs or direct them to the most beneficial training while simultaneously helping them make ends meet until they are reemployed.
The trouble that comes to mind is who will pay for it? If each company does it on a voluntary basis, then the practice will die out as soon as it begins, as the companies that do it find themselves at a disadvantage compared to the companies that don't.
Likewise, making it compulsory but still funded by the companies who are laying off the employees sounds tempting, but it perverts the incentives of the free market by making it more costly to move production overseas and therefore making US companies less competitive globally.
Asking the individual employees to take out loans to foot the bill seems unreasonable, but doable. Even assuming that banks would be willing to make reasonable loans to the unemployed, it ignores the psychological but real toll of going heavily into debt - something that most people would rather enjoy.
Asking local governments to foot the bill also seems counterproductive - the program would be expensive so local taxes would have to rise, scaring away more companies, adding to the cost, forcing taxes to rise even more, and the cycle continues.
Finally then, we are left with making the program part of federal policy. In theory, I'm not opposed. We can toss the cost on the deficit, and as long as it pays off at a higher rate than our debt (which overall, it will), than it will be worth it (see my previous post on deficits). The danger is in its becoming a bloated bureaucracy.
Perhaps the ideal compromise would be that unemployed individuals could take out the loans from the federal government at low rates (say, what the government's current interest rate is). That way, the individuals get reeducated and their ends are met, our economy improves, and the government doesn't lose any money (except for those who default on their loans).
Wednesday, September 7, 2011
Giffen Goods, Production, and the Great Depression
"They increased their output in an effort to make up for lower prices..." - John Garraty, The Great Depression, pg 60
Two of the fundamental laws of microeconomics are the law of demand and the law of supply. The law of demand simply states that ceter paribus (all things being equal), an increase in price leads to a decrease in the amount purchased and that a decrease in prices leads to an increase in the amount purchased. Similarly, the law of supply states that an increase in price leads to more of that good being produced and a decrease in price leads to less of that good being produced.
The concept of a Giffen Good, a good that violates the law of demand by having an increase in the price lead to an increase in the amount purchased, was first stated by Alfred Marshall in the 3rd edition (1895) of Principles of Economics: As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.
Despite the reference, we have no other evidence that Robert Giffen actually wrote or said that idea at any point. The funny thing about Giffen Goods is that even though they are mathematically possible and intuitively they make some sense, there's little evidence that they actually exist.
For a good to be a Giffen Good, it must meet the following conditions. First, it must be an inferior good. An inferior good is any good the consumption of which decreases as income increases. A good example is Ramen. Grad students eat it by the truckload when they're poor, but when they become tenured professors, they never touch the stuff again. Second, there must be no easy substitutes for that good, so, if we assume Ramen is a Giffen Good, there can't be, say, Easy Mac as another option. Third, expenditure must be a significant portion of income, but not so significant that normal goods aren't consumed. So, imagine this scenario. A grad student can only buy steaks or ramen to survive. He has $100 a month to spend on food. He needs a combined total of 10 steaks or ramen to eat. If Ramen is $5 and steaks are $15, then he can buy 5 of each. However, if Ramen goes up to $10, he ends up buying 10 Ramen, as he needs to eat. Despite the price increasing, he has spent more on Ramen.
Again, both intuitively and mathematically, this works. Finding real world examples, however, is much more difficult. Largely, this is because most real world data deals with aggregates, and aggregates tend to average out income inbalances, whereas Giffen Goods largely describe specific situations of poor individuals. The important point to hammer home is that we have a way to violate the law of demand, even if it only works in very specific situations.
Switching gears a bit, nearly every account of agriculture during the Great Depression includes a line similar to the quote at the top of the page. Whether it be rubber farmers in Indonesia or wheat famers in the Great Plains, almost all accounts agree farmers, when faced with lower prices for their crops, increased output. Again, intuitively, this makes sense. A farmer has bills, he pays his bills by selling crops, if his crops sell for less, he needs to grow more.
Economically though, this makes no sense at all. In economics, it is assumed that someone continues producing until the marginal cost equals the marginal benefit. If the costs remain the same, and the benefit is decreased, then the worker will produce fewer goods until marginal cost equals marginal benefit again.
So, if farmers really did produce more during the Great Depression as prices fell, either farms became vastly more efficient during the depression and costs fell dramatically, or the laws of economics quietly snuck out the back door and shot themselves.
Two of the fundamental laws of microeconomics are the law of demand and the law of supply. The law of demand simply states that ceter paribus (all things being equal), an increase in price leads to a decrease in the amount purchased and that a decrease in prices leads to an increase in the amount purchased. Similarly, the law of supply states that an increase in price leads to more of that good being produced and a decrease in price leads to less of that good being produced.
The concept of a Giffen Good, a good that violates the law of demand by having an increase in the price lead to an increase in the amount purchased, was first stated by Alfred Marshall in the 3rd edition (1895) of Principles of Economics: As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.
Despite the reference, we have no other evidence that Robert Giffen actually wrote or said that idea at any point. The funny thing about Giffen Goods is that even though they are mathematically possible and intuitively they make some sense, there's little evidence that they actually exist.
For a good to be a Giffen Good, it must meet the following conditions. First, it must be an inferior good. An inferior good is any good the consumption of which decreases as income increases. A good example is Ramen. Grad students eat it by the truckload when they're poor, but when they become tenured professors, they never touch the stuff again. Second, there must be no easy substitutes for that good, so, if we assume Ramen is a Giffen Good, there can't be, say, Easy Mac as another option. Third, expenditure must be a significant portion of income, but not so significant that normal goods aren't consumed. So, imagine this scenario. A grad student can only buy steaks or ramen to survive. He has $100 a month to spend on food. He needs a combined total of 10 steaks or ramen to eat. If Ramen is $5 and steaks are $15, then he can buy 5 of each. However, if Ramen goes up to $10, he ends up buying 10 Ramen, as he needs to eat. Despite the price increasing, he has spent more on Ramen.
Again, both intuitively and mathematically, this works. Finding real world examples, however, is much more difficult. Largely, this is because most real world data deals with aggregates, and aggregates tend to average out income inbalances, whereas Giffen Goods largely describe specific situations of poor individuals. The important point to hammer home is that we have a way to violate the law of demand, even if it only works in very specific situations.
Switching gears a bit, nearly every account of agriculture during the Great Depression includes a line similar to the quote at the top of the page. Whether it be rubber farmers in Indonesia or wheat famers in the Great Plains, almost all accounts agree farmers, when faced with lower prices for their crops, increased output. Again, intuitively, this makes sense. A farmer has bills, he pays his bills by selling crops, if his crops sell for less, he needs to grow more.
Economically though, this makes no sense at all. In economics, it is assumed that someone continues producing until the marginal cost equals the marginal benefit. If the costs remain the same, and the benefit is decreased, then the worker will produce fewer goods until marginal cost equals marginal benefit again.
So, if farmers really did produce more during the Great Depression as prices fell, either farms became vastly more efficient during the depression and costs fell dramatically, or the laws of economics quietly snuck out the back door and shot themselves.
Monday, July 11, 2011
Billings Learned Hand
If you know who this man is, then chances are you're either in law school or you're a lawyer. Good for you.
For everyone else, Learned Hand is widely regarded as probably the most important American jurist never named to the Supreme Court.
He achieved a modicum of fame late in life after giving a rather inspirational speech in 1944 on "The Spirit of Liberty." Here it is, reprinted in full:
"“We have gathered here to affirm a faith, a faith in a common purpose, a common conviction, a common devotion. Some of us have chosen America as the land of our adoption; the rest have come from those who did the same. For this reason we have some right to consider ourselves a picked group, a group of those who had the courage to break from the past and brave the dangers and the loneliness of a strange land. What was the object that nerved us, or those who went before us, to this choice? We sought liberty; freedom from oppression, freedom from want, freedom to be ourselves. This we then sought; this we now believe that we are by way of winning. What do we mean when we say that first of all we seek liberty? I often wonder whether we do not rest our hopes too much upon constitutions, upon laws and upon courts. These are false hopes; believe me, these are false hopes. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can even do much to help it. While it lies there it needs no constitution, no law, no court to save it. And what is this liberty which must lie in the hearts of men and women? It is not the ruthless, the unbridled will; it is not freedom to do as one likes. That is the denial of liberty, and leads straight to its overthrow. A society in which men recognize no check upon their freedom soon becomes a society where freedom is the possession of only a savage few; as we have learned to our sorrow.
"What then is the spirit of liberty? I cannot define it; I can only tell you my own faith. The spirit of liberty is the spirit which is not too sure that it is right; the spirit of liberty is the spirit which seeks to understand the mind of other men and women; the spirit of liberty is the spirit which weighs their interests alongside its own without bias; the spirit of liberty remembers that not even a sparrow falls to earth unheeded; the spirit of liberty is the spirit of Him who, near two thousand years ago, taught mankind that lesson it has never learned but never quite forgotten; that there may be a kingdom where the least shall be heard and considered side by side with the greatest. And now in that spirit, that spirit of an America which has never been, and which may never be; nay, which never will be except as the conscience and courage of Americans create it; yet in the spirit of that America which lies hidden in some form in the aspirations of us all; in the spirit of that America for which our young men are at this moment fighting and dying; in that spirit of liberty and of America I ask you to rise and with me pledge our faith in the glorious destiny of our beloved country.”
For everyone else, Learned Hand is widely regarded as probably the most important American jurist never named to the Supreme Court.
 |
| As well as being the inspiration for Groucho Marx's eyebrows. I kid. I think. |
He achieved a modicum of fame late in life after giving a rather inspirational speech in 1944 on "The Spirit of Liberty." Here it is, reprinted in full:
"“We have gathered here to affirm a faith, a faith in a common purpose, a common conviction, a common devotion. Some of us have chosen America as the land of our adoption; the rest have come from those who did the same. For this reason we have some right to consider ourselves a picked group, a group of those who had the courage to break from the past and brave the dangers and the loneliness of a strange land. What was the object that nerved us, or those who went before us, to this choice? We sought liberty; freedom from oppression, freedom from want, freedom to be ourselves. This we then sought; this we now believe that we are by way of winning. What do we mean when we say that first of all we seek liberty? I often wonder whether we do not rest our hopes too much upon constitutions, upon laws and upon courts. These are false hopes; believe me, these are false hopes. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can even do much to help it. While it lies there it needs no constitution, no law, no court to save it. And what is this liberty which must lie in the hearts of men and women? It is not the ruthless, the unbridled will; it is not freedom to do as one likes. That is the denial of liberty, and leads straight to its overthrow. A society in which men recognize no check upon their freedom soon becomes a society where freedom is the possession of only a savage few; as we have learned to our sorrow.
"What then is the spirit of liberty? I cannot define it; I can only tell you my own faith. The spirit of liberty is the spirit which is not too sure that it is right; the spirit of liberty is the spirit which seeks to understand the mind of other men and women; the spirit of liberty is the spirit which weighs their interests alongside its own without bias; the spirit of liberty remembers that not even a sparrow falls to earth unheeded; the spirit of liberty is the spirit of Him who, near two thousand years ago, taught mankind that lesson it has never learned but never quite forgotten; that there may be a kingdom where the least shall be heard and considered side by side with the greatest. And now in that spirit, that spirit of an America which has never been, and which may never be; nay, which never will be except as the conscience and courage of Americans create it; yet in the spirit of that America which lies hidden in some form in the aspirations of us all; in the spirit of that America for which our young men are at this moment fighting and dying; in that spirit of liberty and of America I ask you to rise and with me pledge our faith in the glorious destiny of our beloved country.”
Learned Hand considered becoming a philosopher after college, before deciding on law school. I feel this is important to note because I consider Hand to be the foremost practical American political philosopher of his age. Originally, I was going to write on Hand's views and his influence on American Democracy and 20th century values and politics. I then realized that was a task far beyond the scope of this blog and my ability as a writer.
Go forth and read his works, read his cases, and reflect on his impact.
Go forth and read his works, read his cases, and reflect on his impact.
Thursday, July 7, 2011
Short, but Important
This blog is excellent and updated much more frequently than mine. Go, read:
http://www.psychologytoday.com/blog/the-decision-tree
http://www.psychologytoday.com/blog/the-decision-tree
Tuesday, June 14, 2011
Newport Beach Lifeguards
For those of you who don't watch the clip, it's pretty much saying that lifeguards are being paid $200,000 and isn't that outrageous.
The video is a bit misleading.
First, from the associated press, in regards to pay, "Base salaries for Newport Beach lifeguards range from $58,000 for the lowest-paid officer to $108,492 for the top-paid battalion chief, according to a 2010 city report on lifeguard pay. Adding in overtime, special compensation, pension, medical benefits, life insurance and other pay, two battalion chiefs cleared more than $200,000 in 2010, while the lowest-paid officer made more than $98,000."
Which isn't too outrageous for Newport, where, according to wikipedia "Males had a median income of $73,425 versus $45,409 for females. The per capita income for the city was $63,015." $58,000 to $108,000 lies fairly across this range. So, their pay is roughly average.
On top of that, these aren't the guys in the towers. Again from the associated press: "Those whose salaries are in question point out that they hold management roles, have decades of service and are considered public safety employees under the fire department, the same as fire captains and battalion chiefs. The fulltime guards train more than 200 seasonal lifeguards who make between $16 and $22 an hour, run a junior lifeguard program that brings in $1 million a year and oversee safety on nearly seven miles of sand.
Many began as seasonal guards and worked their way into management roles and must stay certified as instructors in an array of advanced emergency, scuba and rescue techniques, said Brent Jacobsen, president of the Lifeguard Management Association, the lifeguards' union."
So, what we have is 13 professionals who manage 200 lifeguards being paid comparably similar wages to those in similar positions (firemen and policemen) and average wages for the city they live in while working over 40 hour weeks. That sounds... pretty standard and reasonable.
Sources:
Associated Press: http://www.google.com/host
Wikipedia: http://en.wikipedia.org/wi
The video is a bit misleading.
First, from the associated press, in regards to pay, "Base salaries for Newport Beach lifeguards range from $58,000 for the lowest-paid officer to $108,492 for the top-paid battalion chief, according to a 2010 city report on lifeguard pay. Adding in overtime, special compensation, pension, medical benefits, life insurance and other pay, two battalion chiefs cleared more than $200,000 in 2010, while the lowest-paid officer made more than $98,000."
Which isn't too outrageous for Newport, where, according to wikipedia "Males had a median income of $73,425 versus $45,409 for females. The per capita income for the city was $63,015." $58,000 to $108,000 lies fairly across this range. So, their pay is roughly average.
On top of that, these aren't the guys in the towers. Again from the associated press: "Those whose salaries are in question point out that they hold management roles, have decades of service and are considered public safety employees under the fire department, the same as fire captains and battalion chiefs. The fulltime guards train more than 200 seasonal lifeguards who make between $16 and $22 an hour, run a junior lifeguard program that brings in $1 million a year and oversee safety on nearly seven miles of sand.
Many began as seasonal guards and worked their way into management roles and must stay certified as instructors in an array of advanced emergency, scuba and rescue techniques, said Brent Jacobsen, president of the Lifeguard Management Association, the lifeguards' union."
So, what we have is 13 professionals who manage 200 lifeguards being paid comparably similar wages to those in similar positions (firemen and policemen) and average wages for the city they live in while working over 40 hour weeks. That sounds... pretty standard and reasonable.
Sources:
Associated Press: http://www.google.com/host
Wikipedia: http://en.wikipedia.org/wi
Wednesday, April 13, 2011
Debt
I do not have any debt, which is nice. My tuition is... well, let's not get into how it's paid for, but it is paid for without my having to take out any student loans.
But, if I did have to take out loans, I would. The reason being is such: the investment in my education would like give out greater returns than the debt I incurred, interest included. The result would be a net gain in my total wealth.
This, in general, is the proper way to consider debt. It's a kind of inverse investment. As long as the money you borrow goes to purchasing you something of greater value, than you should take out the loan. As a concrete example, imagine we have a company named Firm A. Firm A does one thing and one thing only. It borrows money from individuals or banks who wish to save and it invests that money. Because Firm A is rather large, it's portfolio is diversified and every year it averages returns of about 4-5%. It borrows money at an interest rate of about 2-3%. How much money should Firm A borrow?
As much as it can possibly invest. Let's say it can only borrow $100 and it invests that $100 for a year. At the end of the year, it owes $102 - $103 and has $104-$105. It's made a net profit of $1-$3. If it borrows twice that, it doubles the amount it earns. Clearly, the way to maximize profit is to borrow as much money at that rate as the Firm can invest.
Let us assume we have a small country called Country A. Country A's economy grows at a rate of 4%. Its government offers bonds at a rate of 2%. How much money should Country A's government borrow?
As much as it can pour into its economy and still have its economy grow at a rate greater than 2%.
Let's assume Country A has $100 in its economy (total GDP). Tax rate is 10%. So, the government collects $10, which it then spends right back in the economy. GDP is still $100. The government borrows $20, then spends it. Total GDP is still $100 (total assets minus liabilities, $120 - $20). Government borrowed at 2% interest rate. Economy grows at 4%. Next year, the government owes $20.40, and the economy has assets of $124.80. "Fiscal conservatives" enter office, and all taxes now go to paying back the debt. They even raise taxes to 16.35% (roughly) to pay off the debt. All $20.40 has been paid off, and the total GDP is $104.40.
What would have happened if the government had never borrowed money at all? Then the total GDP would have been $104. The country is richer because it went into debt.
What happens if the fiscal conservatives don't enter office? The government, instead of paying off the debt, borrows another $20 and pays off the interest. So, debt stands at $40 and total GDP stands at $144.80. Another year passes. The national debt is at $40.80 and assets are at $150.592 (we'll round to $150.60 to make it easier). As a percentage of GDP, the debt has gone from 0% (first year) to 19.5% (second year) to 37.15% (third). And yet the total GDP, the wealth of the nation, has grown at a faster rate than it would have if there was no debt at all.
What the hell is going on?
What you are witnessing is two different compound interests battling each other. And much like sumo wrestling, real wrestling, rugby scrums, and black hole collisions, the larger one always wins. As long as the GDP growth rate remains above the interest rate, as long as assets exist to pay off the debt, and as long as lenders believe the first two are true, then a country can borrow money until the sun explodes and the universe either collapses into another Big Bang or entropies itself into heat death. Interestingly enough, current physics seems to indicate the latter is more likely.
Guess what the GDP growth rate for the last quarter of 2010 in the US was? 3.10%
Guess what the interest rate on the national debt for the last quarter of 2010 is? 0.25%
Guess how much I'm concerned about deficits? Not at all.
[1] - Data taken from Trading Economics. I have no knowledge of their possible biases.
But, if I did have to take out loans, I would. The reason being is such: the investment in my education would like give out greater returns than the debt I incurred, interest included. The result would be a net gain in my total wealth.
This, in general, is the proper way to consider debt. It's a kind of inverse investment. As long as the money you borrow goes to purchasing you something of greater value, than you should take out the loan. As a concrete example, imagine we have a company named Firm A. Firm A does one thing and one thing only. It borrows money from individuals or banks who wish to save and it invests that money. Because Firm A is rather large, it's portfolio is diversified and every year it averages returns of about 4-5%. It borrows money at an interest rate of about 2-3%. How much money should Firm A borrow?
As much as it can possibly invest. Let's say it can only borrow $100 and it invests that $100 for a year. At the end of the year, it owes $102 - $103 and has $104-$105. It's made a net profit of $1-$3. If it borrows twice that, it doubles the amount it earns. Clearly, the way to maximize profit is to borrow as much money at that rate as the Firm can invest.
Let us assume we have a small country called Country A. Country A's economy grows at a rate of 4%. Its government offers bonds at a rate of 2%. How much money should Country A's government borrow?
As much as it can pour into its economy and still have its economy grow at a rate greater than 2%.
Let's assume Country A has $100 in its economy (total GDP). Tax rate is 10%. So, the government collects $10, which it then spends right back in the economy. GDP is still $100. The government borrows $20, then spends it. Total GDP is still $100 (total assets minus liabilities, $120 - $20). Government borrowed at 2% interest rate. Economy grows at 4%. Next year, the government owes $20.40, and the economy has assets of $124.80. "Fiscal conservatives" enter office, and all taxes now go to paying back the debt. They even raise taxes to 16.35% (roughly) to pay off the debt. All $20.40 has been paid off, and the total GDP is $104.40.
What would have happened if the government had never borrowed money at all? Then the total GDP would have been $104. The country is richer because it went into debt.
What happens if the fiscal conservatives don't enter office? The government, instead of paying off the debt, borrows another $20 and pays off the interest. So, debt stands at $40 and total GDP stands at $144.80. Another year passes. The national debt is at $40.80 and assets are at $150.592 (we'll round to $150.60 to make it easier). As a percentage of GDP, the debt has gone from 0% (first year) to 19.5% (second year) to 37.15% (third). And yet the total GDP, the wealth of the nation, has grown at a faster rate than it would have if there was no debt at all.
What the hell is going on?
What you are witnessing is two different compound interests battling each other. And much like sumo wrestling, real wrestling, rugby scrums, and black hole collisions, the larger one always wins. As long as the GDP growth rate remains above the interest rate, as long as assets exist to pay off the debt, and as long as lenders believe the first two are true, then a country can borrow money until the sun explodes and the universe either collapses into another Big Bang or entropies itself into heat death. Interestingly enough, current physics seems to indicate the latter is more likely.
Guess what the GDP growth rate for the last quarter of 2010 in the US was? 3.10%
Guess what the interest rate on the national debt for the last quarter of 2010 is? 0.25%
Guess how much I'm concerned about deficits? Not at all.
[1] - Data taken from Trading Economics. I have no knowledge of their possible biases.
Friday, April 1, 2011
Simpson's Paradox
Simpson's Paradox is a particularly well known statistical paradox. At least, it's well known among statisticians. It is less well known among everyone else.
A layman's version goes something like this: imagine there are two ways of transporting emergency patients to the hospital. One is by helicopter, the other is by ambulance. 50% of patients who go to the hospital by helicopter die, while only about 21% of patients who go by ambulance die. Clearly, there is something wrong with helicopters, we should make all patients go the hospital by ambulance.
But wait! There are two categories of emergency patients at this hospital, those in normal condition and those who are in critical condition. Of those who travel to the hospital in normal condition by ambulance, 12.5% die while only 10% of normal patients who by helicopter die. Likewise, of those who travel to the hospital by ambulance in critical condition, 75% of them die while only 70% of critical patients who by helicopter die. What's going on?
What happens is that two thirds of critical patients go by helicopter while only one seventh of normal patients do. Since normal patients die at a much lower rate than critical patients (roughly 12% as compared to roughly 72%), this skews the data to make ambulance looks much safer than helicopters, even though helicopters are way safer.
The fascinating moral of this story: don't immediately assume a relation based on a single correlation. Look deeper for causes.
A layman's version goes something like this: imagine there are two ways of transporting emergency patients to the hospital. One is by helicopter, the other is by ambulance. 50% of patients who go to the hospital by helicopter die, while only about 21% of patients who go by ambulance die. Clearly, there is something wrong with helicopters, we should make all patients go the hospital by ambulance.
But wait! There are two categories of emergency patients at this hospital, those in normal condition and those who are in critical condition. Of those who travel to the hospital in normal condition by ambulance, 12.5% die while only 10% of normal patients who by helicopter die. Likewise, of those who travel to the hospital by ambulance in critical condition, 75% of them die while only 70% of critical patients who by helicopter die. What's going on?
| Normal | Normal died | Critical | Critical died | Total | Total died | |
| Helicopter | 100 | 10 | 200 | 140 | 300 | 150 |
| Ambulance | 600 | 75 | 100 | 75 | 700 | 150 |
| Total | 700 | 85 | 300 | 215 | 1000 | 200 |
What happens is that two thirds of critical patients go by helicopter while only one seventh of normal patients do. Since normal patients die at a much lower rate than critical patients (roughly 12% as compared to roughly 72%), this skews the data to make ambulance looks much safer than helicopters, even though helicopters are way safer.
 |
| Most of the time, that is. |
The fascinating moral of this story: don't immediately assume a relation based on a single correlation. Look deeper for causes.
Monday, March 14, 2011
Morality
I define morality as the collection of acceptable behavior, or morals, that a society largely agrees upon. A society, for this discussion, is any group of people who have to interact with each other on a regular basis. People, in this context, consist of anyone who can intelligently voice an opinion. A moral code, however, is an individual's set of beliefs that determines their morals. Two people can have entirely different moral codes while having the same set morals, in the same way that two entirely different function can still produce the same output.
That raises the question: are some moral codes objectively better than others? I find it hard to answer. Intuitively, the response would be yes. Morality is objective. Some things are clearly wrong. "Murder," a friend of mine once argued, "is always morally wrong." But murder is, by definition, the immoral (or unjust, but in this case the adjectives are synonyms) killing of another creature. Saying "an immoral killing is immoral" is a tautology. But killing someone can be justified. It can be considered morally correct depending upon the circumstances under which it happens and, more importantly, depending on who's judging it to be moral or immoral. Self-defense, punishment, vengeance, casualty of war, etc have all been used as justifications for why a killing may be considered to be just or moral instead of murder.
But surely some overall moral codes, the collection of morals held together by a unifying theme, can be shown to be better than others. How would we even show this? How can we define better? Is it the code that results in one society having the largest possible population, or another society having the happiest population? Perhaps it's the code that allows one society's population the most "freedom," however you wish to define that word. Regardless, for one code to be objectively better than another, it must have some empirically testable dependent variable. As I have not been able to identify such a variable, nor have I yet seen an argument which strongly defends one that I can agree with, I tentatively conclude that no such variable exists.
The disturbing question is then raised: if all morality is equal, then how do we justify punishing those who do things we morally disagree with? All moral codes are equal, but only the morals which are widely agreed upon are enforceable. Therefore, even if your moral code found a killing you committed to be acceptable, if everyone else (or really, a sufficiently large number of people) found your action to be immoral, you would be considered to be a murderer, with all the weights and punishments attached.
Similarly, multiple people with very different moral codes could (and do) live harmoniously together as long as their moral codes produce similar outputs. One person's moral code could be defined as "what Jesus said in the New Testament," another could be "the ten commandments," and a third could be "do not harm another living person," and all three would probably agree on a wide variety of issues that would come up on whether or not an action that was taken was morally right or wrong.
As a final note, I used to believe that a moral code should be logically derived from a few axioms and be as thoroughly consistent as possible. I can think of no reason to defend that view, unless you believe hypocrisy is morally wrong (which, for the record, I do). However, at this point, society does seem to consider hypocrisy morally wrong, so I do think that any argument that relies on morality at this point should be internally consistent.
Over time, morality will continue to evolve and change. Things that we would regard as innocuous now will one day be considered reprehensible, and vice versa. For this reason, all laws need to be passed in such a way that they can be eventually discarded or abandoned.
The structure and style of this post's prose frustrates me. Though thematically, the ideas here are related, I seem to be making several arguments at once, and all of them poorly. I'll edit this later.
Sunday, February 20, 2011
Revisiting Quantum Mechanics and Free Will
In my last post, I made some rather broad claims regarding the nature of the universe and determinism. I'd like to go into a little bit of that more deeply.
From Quantum Mechanics, we know that with all of the smallest particles, we cannot determine their location and velocity exactly. Instead, we can only say with what probability they will be in a location or have such a velocity.
For the purposes of this argument, let's presuppose that there are no hidden variables that determine location that we can't identify. Instead, let's assume at the most basic level, this universe is inherently probilistic.
Now, let's recover Laplace's Demon. Remember that the demon is defined as some extra-universal entity which has perfect knowledge of every particle in the universe at a single moment in time. Also, the demon has unlimited computing power and our current level of knowledge of quantum mechanics.
In this case, the Demon cannot say what the universe will look like in the next period of time. Instead, he can calculate all of the infinitely possible next states of the universe, and the probablitity of each of them occurring. Now suppose that he calculates the next states of the universe from that set of states, and so on until the end of time. Here is the essential question: can anything happen in the universe that would not appear in the Demon's model of the universe?
I do not see how it could. But how does this apply to Free Will?
Let us suppose that our theory of the mind is physicalism and functionalism (note: they are not mutually exclusive). Physicalism is the philosophy that only physical things exist. In Philosophy of Mind, it states that a mind is a physical thing in all aspects. For humans, this means that a mind is solely the brain and whatever other neural connections attached to it. Functionalism is the idea that minds are defined by their functional roles, e.g. if some computer's circuitry mimics human vision processing perfectly, on a mental level, there is no way to distinguish the two.
From these definitions and my previous assertion that only things calculated by my expanded Laplace's Demon can happen in this universe, the only viable conclusion is that every mental action, every thought, can be predicted by the Demon. Which means everything is determined, free will cannot exist.
When I say "free will,"I mean the ability to make choices free from constraints. But since all mental thoughts are constrained by the physical, and the physical is determined (or at the very least, predictable, which amounts to the same thing), then our entire mental lives are determined.
Of course, Laplace's Demon cannot exist due to the boundary constraints of the universe. Quite simply, any machine with its predictive power would require more particles than the entire universe and it would take longer to compute than the age of the universe.
Free will could only exist if mental activity was immaterial or in a separate universe from this one where physics works differently. To illustrate this concept, imagine a game of World of Warcraft. Even if you knew the entire programming code of the game, you would not be able to predict the actions of the players' avatars because their actions are dependent on what the players do, and the players are entities not described or constrained by the programming.
So should we check out now because everything that can happen, will happen, and that's that? Not quite. Because we know that Laplace's Demon cannot exist, any predictive models we develop will have a certain inherent inaccuracy. To extend the metaphor used above, even if our model is the game's programming, there are still the elements(the players at home) that we can't know.
This means that when we construct models on decision making and behavior (and from that, some of cognitive science, all of economics, and all of political philosophy), we need to try to account for as man variables as possible while still acknowledging that there are errors being made. We need to assume everyone has free will while simultaneously acknowledging that they don't.
Due to the obvious contradiction above, I foresee numerous debates involving which variables can be accurately measured and predicted (and with what precision and accuracy), and from those debates, the relative strengths and weaknesses of different models. However, as long as everyone involved in those debates is relying on this same philosophical framework, I think the disagreements that will arise can be handled amicably and with careful acknowledgement of where the differing viewpoints come from.
Hopefully, these past two posts help place all of my other posts in a more understandable framework, and my intention is for all claims I make on this blog in regards to economics and political philosophy to be in basic accordance with this structure.
From Quantum Mechanics, we know that with all of the smallest particles, we cannot determine their location and velocity exactly. Instead, we can only say with what probability they will be in a location or have such a velocity.
For the purposes of this argument, let's presuppose that there are no hidden variables that determine location that we can't identify. Instead, let's assume at the most basic level, this universe is inherently probilistic.
Now, let's recover Laplace's Demon. Remember that the demon is defined as some extra-universal entity which has perfect knowledge of every particle in the universe at a single moment in time. Also, the demon has unlimited computing power and our current level of knowledge of quantum mechanics.
In this case, the Demon cannot say what the universe will look like in the next period of time. Instead, he can calculate all of the infinitely possible next states of the universe, and the probablitity of each of them occurring. Now suppose that he calculates the next states of the universe from that set of states, and so on until the end of time. Here is the essential question: can anything happen in the universe that would not appear in the Demon's model of the universe?
I do not see how it could. But how does this apply to Free Will?
Let us suppose that our theory of the mind is physicalism and functionalism (note: they are not mutually exclusive). Physicalism is the philosophy that only physical things exist. In Philosophy of Mind, it states that a mind is a physical thing in all aspects. For humans, this means that a mind is solely the brain and whatever other neural connections attached to it. Functionalism is the idea that minds are defined by their functional roles, e.g. if some computer's circuitry mimics human vision processing perfectly, on a mental level, there is no way to distinguish the two.
From these definitions and my previous assertion that only things calculated by my expanded Laplace's Demon can happen in this universe, the only viable conclusion is that every mental action, every thought, can be predicted by the Demon. Which means everything is determined, free will cannot exist.
When I say "free will,"I mean the ability to make choices free from constraints. But since all mental thoughts are constrained by the physical, and the physical is determined (or at the very least, predictable, which amounts to the same thing), then our entire mental lives are determined.
Of course, Laplace's Demon cannot exist due to the boundary constraints of the universe. Quite simply, any machine with its predictive power would require more particles than the entire universe and it would take longer to compute than the age of the universe.
 |
| Yes, Zach Weiner not only can make the same argument I can in a more concise form, but can also make it into a sex joke at the same time. Go read his comic. SMBC-Comics.com |
So should we check out now because everything that can happen, will happen, and that's that? Not quite. Because we know that Laplace's Demon cannot exist, any predictive models we develop will have a certain inherent inaccuracy. To extend the metaphor used above, even if our model is the game's programming, there are still the elements(the players at home) that we can't know.
This means that when we construct models on decision making and behavior (and from that, some of cognitive science, all of economics, and all of political philosophy), we need to try to account for as man variables as possible while still acknowledging that there are errors being made. We need to assume everyone has free will while simultaneously acknowledging that they don't.
Due to the obvious contradiction above, I foresee numerous debates involving which variables can be accurately measured and predicted (and with what precision and accuracy), and from those debates, the relative strengths and weaknesses of different models. However, as long as everyone involved in those debates is relying on this same philosophical framework, I think the disagreements that will arise can be handled amicably and with careful acknowledgement of where the differing viewpoints come from.
Hopefully, these past two posts help place all of my other posts in a more understandable framework, and my intention is for all claims I make on this blog in regards to economics and political philosophy to be in basic accordance with this structure.
Tuesday, February 15, 2011
A Philosophical Overview: Rationalism to Empiricism to Determinism to the Lack of Free Will and Back Again
This post marks an attempt at explaining my underlying philosophical view. As the title implies, it will set forth a logical progression from Cartesian rationalism to the currently accepted view of empiricism to determinism (or a variant thereof) to my belief that free will does not exist, explaining along the way why I believe what I do.
From the very beginning, the only thing I can know with any certainty is that I exist. I think, therefore I am (Cogito, ergo sum - Descartes). But in what way do I exist? Am I a brain inside a human body? Am I, like in the movie the Matrix, floating inside a machine, this entire universe an illusion electrically fed into my brain? Am I a lunatic locked in an asylum, completely unaware that this entire universe is a figment of my imagination?
All of these are possibilities, and there is no way for me to determine with any certainty which is true. What is true, though, is that the physical laws in this universe/matrix/my imagination are consistent. I pick up my book, let go, and it falls to my desk. Gravity constantly pulls on me, and I cannot deny it. Water boils in strict accordance with temperature and air pressure.
Therefore, as long as this universe (or matrix or imagination) continues to exist in this form, I am willing to accept all things that can be empirically shown as true for this universe. But which hypotheses should I accept and reject when it comes to explaining this universe? Is gravity some force that drags all masses together, or is it a secret army of leprechauns that runs around holding everything down? Fucking magnets, how do they work? Here is where I apply Occam's Razor. The simplest hypothesis that accounts for all results is the one that I'll accept as true.
Granted, I cannot perform every single experiment and rediscover all of science just to satisfy my own questions on truth and certainty, so I also accept as true discoveries that are made and presented to me with sufficient evidence. If a peer reviewed paper says it, I'll consider it. If nearly everyone is in agreement with it, I'll accept it. For a lack of a better way of saying it, I'll accept the status quo unless I have very strong evidence not to.
My physics is a bit dodgy, so humor any mistakes I make in this next paragraph. From this view, I believe the universe is composed of matter and energy. Let us assume that Laplace's Demon can exist.
For those of you unaware of Laplace's Demon, read the following illustration. Imagine a tiny box. Imagine that, just for an instant, you know with perfect certainty the exact location and velocity of every particle in that box (this violates Heisenberg's Uncertainty Principle, but just make the assumption for the purposes of this experiment). Furthermore, you know there is no way for anything to enter or escape the box: no light, no heat, no tunneling little mouse, nothing. With the knowledge you have and sufficient computing power, can you extrapolate from the data you have of that one instant the location and velocity of every particle from then until the end of time? Now imagine this box contains the entire universe, wouldn't that imply that the entire universe is predictable?
The counter to this is that the at a very small level, particles are not deterministic, but probabilistic. That there is a 90% chance a particle may be in one spot and 10% chance in another, and there is no way to know, even with perfect knowledge, which is true. Even then, with sufficient computing power (exponentially more than required in the example above), Laplace's Demon could calculate every single one of the quickly growing towards infinite possibilities.
If every conceivable possibility for the universe could be thus calculated, that has some interesting implications. The first is that nothing happens at random: everything has a clear precedent and cause. From that, we can conclude that as our science advances, we can create predictive models with more and more precision, though never with perfect certainty (again, it's impossible to know the exact location and energy of every particle).
The second, and in my opinion, more interesting implication is that there is no free will. If every possible universe can be calculated complete with all of their particles and energies, then all possible compositions of thinking matter can be calculated. Since our minds are physical objects (yes, yes, I know Philosophy of the Mind is an entire field of philosophy. So is epistemology, yet I'm going to skim over those entire fields with just a few words), we can conclude that all thoughts are a result of physical interactions.
Your mind is the firing and functioning of a set of neurons. These neurons are activated by a series of physical events; the chemistry of your brain, the input coming in from various external factors, etc. Change just some of these factors, and your thoughts will be different. The end result is that we have no actual control over our thoughts, they are all result of our initial state and all of the experiences we have had since then.
The result of this is that economics, psychology, cognitive science, etc eventually all belong in the natural sciences, and that once they are developed to a certain point, they will be.
But this lack of free will has the implication that my original premise, the fundamental axiom of my entire philosophy, "I think, therefore I am," is instead "I am, therefore I am."
Short version of this entire post: the universe exists. Unless it doesn't.
From the very beginning, the only thing I can know with any certainty is that I exist. I think, therefore I am (Cogito, ergo sum - Descartes). But in what way do I exist? Am I a brain inside a human body? Am I, like in the movie the Matrix, floating inside a machine, this entire universe an illusion electrically fed into my brain? Am I a lunatic locked in an asylum, completely unaware that this entire universe is a figment of my imagination?
All of these are possibilities, and there is no way for me to determine with any certainty which is true. What is true, though, is that the physical laws in this universe/matrix/my imagination are consistent. I pick up my book, let go, and it falls to my desk. Gravity constantly pulls on me, and I cannot deny it. Water boils in strict accordance with temperature and air pressure.
Therefore, as long as this universe (or matrix or imagination) continues to exist in this form, I am willing to accept all things that can be empirically shown as true for this universe. But which hypotheses should I accept and reject when it comes to explaining this universe? Is gravity some force that drags all masses together, or is it a secret army of leprechauns that runs around holding everything down? Fucking magnets, how do they work? Here is where I apply Occam's Razor. The simplest hypothesis that accounts for all results is the one that I'll accept as true.
Granted, I cannot perform every single experiment and rediscover all of science just to satisfy my own questions on truth and certainty, so I also accept as true discoveries that are made and presented to me with sufficient evidence. If a peer reviewed paper says it, I'll consider it. If nearly everyone is in agreement with it, I'll accept it. For a lack of a better way of saying it, I'll accept the status quo unless I have very strong evidence not to.
My physics is a bit dodgy, so humor any mistakes I make in this next paragraph. From this view, I believe the universe is composed of matter and energy. Let us assume that Laplace's Demon can exist.
For those of you unaware of Laplace's Demon, read the following illustration. Imagine a tiny box. Imagine that, just for an instant, you know with perfect certainty the exact location and velocity of every particle in that box (this violates Heisenberg's Uncertainty Principle, but just make the assumption for the purposes of this experiment). Furthermore, you know there is no way for anything to enter or escape the box: no light, no heat, no tunneling little mouse, nothing. With the knowledge you have and sufficient computing power, can you extrapolate from the data you have of that one instant the location and velocity of every particle from then until the end of time? Now imagine this box contains the entire universe, wouldn't that imply that the entire universe is predictable?
The counter to this is that the at a very small level, particles are not deterministic, but probabilistic. That there is a 90% chance a particle may be in one spot and 10% chance in another, and there is no way to know, even with perfect knowledge, which is true. Even then, with sufficient computing power (exponentially more than required in the example above), Laplace's Demon could calculate every single one of the quickly growing towards infinite possibilities.
If every conceivable possibility for the universe could be thus calculated, that has some interesting implications. The first is that nothing happens at random: everything has a clear precedent and cause. From that, we can conclude that as our science advances, we can create predictive models with more and more precision, though never with perfect certainty (again, it's impossible to know the exact location and energy of every particle).
The second, and in my opinion, more interesting implication is that there is no free will. If every possible universe can be calculated complete with all of their particles and energies, then all possible compositions of thinking matter can be calculated. Since our minds are physical objects (yes, yes, I know Philosophy of the Mind is an entire field of philosophy. So is epistemology, yet I'm going to skim over those entire fields with just a few words), we can conclude that all thoughts are a result of physical interactions.
Your mind is the firing and functioning of a set of neurons. These neurons are activated by a series of physical events; the chemistry of your brain, the input coming in from various external factors, etc. Change just some of these factors, and your thoughts will be different. The end result is that we have no actual control over our thoughts, they are all result of our initial state and all of the experiences we have had since then.
The result of this is that economics, psychology, cognitive science, etc eventually all belong in the natural sciences, and that once they are developed to a certain point, they will be.
But this lack of free will has the implication that my original premise, the fundamental axiom of my entire philosophy, "I think, therefore I am," is instead "I am, therefore I am."
Short version of this entire post: the universe exists. Unless it doesn't.
Sunday, February 13, 2011
Inevitability of Regulation
Yesterday, I was playing rugby in a tournament held a couple hours away. The tournament was organized from the ground up by the players who were there. Teams paid a few hundred bucks to the club organizing it for the tent and the permit to play and all that fun stuff.
On the field, the games were refereed by former players. All the players knew the rules and deferred to whichever call the refs made, even if the refs were particularly bad. Watching this, and playing in it as well, the thought occurred to me how regulation is inevitable.
Let me take a step back. There is a lot of political rhetoric these days about how the government is infringing on the free market and how there should be less regulation or, coming from the other end, how the free market is screwing the common joe and there should be more regulation. I'd like to present the idea that current government regulation, and whatever minute changes in it occur, are the products of the free market.
To illustrate this example, let us imagine a single industry: the food processing industry. Let us all imagine, for our purposes, that we live in a libertarian paradise and there is no government regulation or FDA or any of that. There are solely the food processing companies, competing against one another, and the consumers. Now, the food processing companies wish to make as much money as possible doing as little work as possible (as we all do). Therefore, they will take whatever options they can to make their production cheaper.
Likewise, the consumers want as much as possible for as little as possible. Let's say that all companies currently have equal market share, and all produce one product, Food, which they all produce and sell for the same price. Let's say Company A realizes that if they add a little sawdust to Food, they can sell it for less while still making more money than Company B. Unfortunately, sawdust in Food causes roughly one in a thousand consumers to have horribly scratchy throats and start coughing blood.
Company A doesn't want their consumers to know this, rightly assuming that it may scare some consumers off. So, they don't anyone, but they do lower their price. Company A starts gaining market share. As it happens, 0.01% of their consumers get pissed off when they start coughing blood, and they start buying from Company B. However, this is not enough to stem the tide of consumers heading to Company A, so Company B starts a marketing campaign, accusing Company A of child slavery through television ads, radio ads, and well-funded whisper campaigns, while at the same time finding that they can totally cost cuts by reducing work place safety. Company A retaliates through their own combination of cutting costs and marketing, and meanwhile the quality of Food is going down this whole time.
Consumers, fed up with the lying bullshit being fed to them, as well as the actual bullshit that both companies now include in Food to make it cheaper, decide they're going to form a consumer coalition that looks into the production of Food done by both companies as well as how they treat their workers. Of course, there's the trouble of financing this coalition, and at first it's done by whoever has signed up for this group, but as the group grows in size, and the information it produces starts leaking out to everyone anyways, people find they can still benefit without paying their dues.
At this point, the consumers have a regulatory body without any funding, so the next step is pretty natural. Everyone pays their share for this coalition, or they face the wrath of an angry mob. And now we have a de-facto government complete with taxes and an army (in this case a lynch mob).
Society and people crave a certain amount of order within their lives. It's a good that everyone is willing to pay for, as evidenced by the fact that we do. It is similar to a rugby game. Sure, it can be played without a ref, but there's a certain point where it gets so messy with players policing themselves that a ref is decided upon and all defer to his decisions, even when they might be wrong, because slightly unfair play is better than anarchic play.
As a corollary, when the ref sucks and everyone on the field agrees (or even just a significant number agrees), we get rid of the ref and replace him. Same should be so with government, hence the attraction(though not always the result) of democracy.
When the play gets messy, the field selects a ref. When trade gets messy, the market creates a government.
On the field, the games were refereed by former players. All the players knew the rules and deferred to whichever call the refs made, even if the refs were particularly bad. Watching this, and playing in it as well, the thought occurred to me how regulation is inevitable.
Let me take a step back. There is a lot of political rhetoric these days about how the government is infringing on the free market and how there should be less regulation or, coming from the other end, how the free market is screwing the common joe and there should be more regulation. I'd like to present the idea that current government regulation, and whatever minute changes in it occur, are the products of the free market.
To illustrate this example, let us imagine a single industry: the food processing industry. Let us all imagine, for our purposes, that we live in a libertarian paradise and there is no government regulation or FDA or any of that. There are solely the food processing companies, competing against one another, and the consumers. Now, the food processing companies wish to make as much money as possible doing as little work as possible (as we all do). Therefore, they will take whatever options they can to make their production cheaper.
Likewise, the consumers want as much as possible for as little as possible. Let's say that all companies currently have equal market share, and all produce one product, Food, which they all produce and sell for the same price. Let's say Company A realizes that if they add a little sawdust to Food, they can sell it for less while still making more money than Company B. Unfortunately, sawdust in Food causes roughly one in a thousand consumers to have horribly scratchy throats and start coughing blood.
Company A doesn't want their consumers to know this, rightly assuming that it may scare some consumers off. So, they don't anyone, but they do lower their price. Company A starts gaining market share. As it happens, 0.01% of their consumers get pissed off when they start coughing blood, and they start buying from Company B. However, this is not enough to stem the tide of consumers heading to Company A, so Company B starts a marketing campaign, accusing Company A of child slavery through television ads, radio ads, and well-funded whisper campaigns, while at the same time finding that they can totally cost cuts by reducing work place safety. Company A retaliates through their own combination of cutting costs and marketing, and meanwhile the quality of Food is going down this whole time.
Consumers, fed up with the lying bullshit being fed to them, as well as the actual bullshit that both companies now include in Food to make it cheaper, decide they're going to form a consumer coalition that looks into the production of Food done by both companies as well as how they treat their workers. Of course, there's the trouble of financing this coalition, and at first it's done by whoever has signed up for this group, but as the group grows in size, and the information it produces starts leaking out to everyone anyways, people find they can still benefit without paying their dues.
At this point, the consumers have a regulatory body without any funding, so the next step is pretty natural. Everyone pays their share for this coalition, or they face the wrath of an angry mob. And now we have a de-facto government complete with taxes and an army (in this case a lynch mob).
Society and people crave a certain amount of order within their lives. It's a good that everyone is willing to pay for, as evidenced by the fact that we do. It is similar to a rugby game. Sure, it can be played without a ref, but there's a certain point where it gets so messy with players policing themselves that a ref is decided upon and all defer to his decisions, even when they might be wrong, because slightly unfair play is better than anarchic play.
As a corollary, when the ref sucks and everyone on the field agrees (or even just a significant number agrees), we get rid of the ref and replace him. Same should be so with government, hence the attraction(though not always the result) of democracy.
When the play gets messy, the field selects a ref. When trade gets messy, the market creates a government.
Thursday, January 27, 2011
Opium, Video Games, Optimality
Yesterday, I was eating lunch with a friend when he brought up this question: "Are video games destroying our economy?"
His argument was such. Premise 1: video games tend to be addictive. Premise 2: when people purchase a video game, they tend to remove themselves from society, production, and consumption. Premise 3: that such a removal from society has negative effects on the economy. Premise 4: that the addictive-ness (is that a real word?) of video games means people will consume more and more of them at an ever increasing rate. Conclusion: Video games are destroying our economy.
I thought for a second, and said of course not. People tend to make decisions to maximize their utility. If they get more satisfaction from playing video games then, say, playing soccer or shopping, than they are better off by playing video games. His concern has to deal with the externalities that are produced by people participating in society. However, each of the externalities produced (extra guy playing soccer, extra girl shopping) can be reduced to yet another market good for a different individual (the person who wants to put together a soccer team, the store trying to sell goods). As long as people are left to their own decisions, the optimal economic situation will occur. That's pretty much Austrian Economics 101.
Then I paused and thought a little bit more. That relied on the assumption that people do rationally make decisions that maximize their utility. And this is where Premises 1 and 4 raise their ugly heads. Addiction is probably the most obvious case of human rationality failing completely. You cannot argue successfully that a heroin addict is maximizing his utility when he is doing anything he can to satisfy his fix. It short circuits the decision making process. So, a video game player may be choosing to play a video game because it's the most profitable activity he could be doing at that moment OR he could be playing to satisfy a fix, in which case he is overall experiencing a net loss of utility (when opportunity costs are taken into account).
Thus, the question stops being a theoretical question and starts becoming an empirical question. Are video game players happier than non video game players, with all other variables accounted for and controlled for? To that, I have no answer.
His argument was such. Premise 1: video games tend to be addictive. Premise 2: when people purchase a video game, they tend to remove themselves from society, production, and consumption. Premise 3: that such a removal from society has negative effects on the economy. Premise 4: that the addictive-ness (is that a real word?) of video games means people will consume more and more of them at an ever increasing rate. Conclusion: Video games are destroying our economy.
I thought for a second, and said of course not. People tend to make decisions to maximize their utility. If they get more satisfaction from playing video games then, say, playing soccer or shopping, than they are better off by playing video games. His concern has to deal with the externalities that are produced by people participating in society. However, each of the externalities produced (extra guy playing soccer, extra girl shopping) can be reduced to yet another market good for a different individual (the person who wants to put together a soccer team, the store trying to sell goods). As long as people are left to their own decisions, the optimal economic situation will occur. That's pretty much Austrian Economics 101.
Then I paused and thought a little bit more. That relied on the assumption that people do rationally make decisions that maximize their utility. And this is where Premises 1 and 4 raise their ugly heads. Addiction is probably the most obvious case of human rationality failing completely. You cannot argue successfully that a heroin addict is maximizing his utility when he is doing anything he can to satisfy his fix. It short circuits the decision making process. So, a video game player may be choosing to play a video game because it's the most profitable activity he could be doing at that moment OR he could be playing to satisfy a fix, in which case he is overall experiencing a net loss of utility (when opportunity costs are taken into account).
Thus, the question stops being a theoretical question and starts becoming an empirical question. Are video game players happier than non video game players, with all other variables accounted for and controlled for? To that, I have no answer.
Monday, January 17, 2011
Context Matters
"Past ideas may be tendentiously misrepresented. This may be done by stating/implying that earlier thinkers were trying to solve our problems, and/or by using today's terminology in describing their work. It's all too easy to project our own concerns onto ancient writings that bear some superficial resemblance to ours, in order to make a progressivist story appear more plausible." Margaret Boden, "Mind as Machine" pg 19
Any good argument will have three main parts to it: a logical structure, relevant data, and a conclusion that follows from the first two. Far too often, people tend to concentrate on the conclusion and ignore the other parts. Obviously, that is flawed. If you disagree with another person's conclusion, that means you either disagree with that person's logic or that person's data. If you wish to change someone's conclusion, then you need to change either that person's logic or that person's data. Either way, you'll need to examine both.
The logical structure of an argument tends to be straightforward. A causes B, B causes C, therefore A causes C. I do not feel any pressing need to go into logic at this time, though I may under a different occasion. If you do feel an urge to reexamine how logic works, I suggest Richard Feldman's Reason and Argument. It's an excellent introductory text.
On the other hand, data and the context we find it in is something I'd like to explore in this post. A little over two weeks ago, my friend Andrew posted this on his Facebook wall under the headline "Welcome to America":
The implication was, of course, that it is unfair that the top 1% of taxpayers pay as much in taxes as the bottom 95%. A surprisingly large number of my friends ended up posting comments, usually along the lines of: "Just cause your successful does not mean you should pay a ridiculous amount... fucking liberals" and "Such garbage."
According to the data Andrew published, 1% of the population was hauling as much weight as 95% of the population. According to my friends, that's ridiculously unfair and just another example of how the rich are being punished by our government. That's not exactly true, though.
My reply was a little different. My first comment ran at two paragraphs. I'll divide it into parts here and go into greater depth just for excessive clarification.
The first paragraph: "So... you're saying that the same people who own 58.9% of the total wealth in America (top 5%, see link below, also note, my data is 6 years old, since then the gaps have grown wider) pay roughly 55-60% of the taxes?"
Followed immediately by: "That strikes me as... actually, completely reasonable."
My data in this case comes from Fairfield University. According to that data, in 2004 the top 1% owned 34.3% of total wealth and the next 4% owned 24.6% of total wealth for a combined top 5% owning 58.9% of total wealth. According to the data Andrew himself posted, that same group paid roughly 55%-60% of taxes in 2010. A group paying taxes in proportion to what they own does seem reasonable. However, a debate could arise over whether it is fairer to tax people in accordance with their wealth or their income. In order to head off this debate, I included this second paragraph in my first comment:
"And just to preempt the inevitable wealth v. income debate, I turn to Alan Greenspan, former chairman of the Federal Reserve Bank, making the case for wealth:
"Ultimately, we are interested in the question of relative standards of living and economic well-being. We need to examine trends in the distribution of wealth, which, more fundamentally than earnings or income, represents a measure of the ability of households to consume."
Context, bitches. It matters."
My friend Ethan was the next to reply, posting this:
"I actually think Jack has a point. Most of those sort of websites are propoganda for one political part or another. You rarely see a comparason of tax burden relative to overall income. Though I do think some sort of flat tax would be the best solution."
To which I replied:
"I'd have to disagree, Ethan. The flat tax is inherently regressive because the marginal dollar is worth more to the low income household than the high income.
I propose a graduated sales tax, where the most expensive items (e.g., a $20 mil. yacht) are taxed at high rates, and the cheapest, most necessary items (ramen noodles and other food stuffs), are taxed at either nothing or something close to it.
I'd feel really clever right now, except that it turns out Prof. Steven Landsburg proposed the same damn thing nearly three years ago:
http://www.slate.com/id/2181833/"
At this point, Andrew weighed in again:
"[...] flat taxes are not a good idea. A non-graduated consumption tax would be my vote. It still would end up being progressive, but not nearly as severe as today's setup. It's nice because if you should decide to spend more money, you'll be taxed more."
Before I allow his quote to continue, I have to point out the above comment is fallacious. A non-graduated consumption tax implies just a flat sales tax on both goods and services. A flat tax is almost always regressive (meaning that it tends to have the poorer pay proportionally more than the wealthy). The reason is that every person usually has to spend a certain lump sum every period just in order to live. This is the cost of living, and it's almost the same from person to person. We all consume roughly the same amount of food, electricity, and water per person just for our basic needs. Everything above and beyond that is to satisfy a luxury. But what this means is that the basic cost of living is a significantly larger percentage of a person's total wealth the poorer that person is. With no taxes at all, the system is inherently regressive. The wealthier a person is, the larger the wealth percentage will be that that person is able to reinvest, making that person even wealthier. The flat tax increases the proportion that everyone spends by the same percentage, or looking at it from a different angle, decreases the proportion that everyone saves by the same percentage. This means that there is no difference between a flat tax and no taxes when it comes to a re-appropriation of wealth.
Now, in the interest of covering my ass so that this post won't come back to haunt me later, I have heard arguments on the graduated income tax that state: " I’d be curious as to what grounds one might use to support a graduated tax? It fails on economic efficiency grounds. It fails on moral grounds. It fails on the principles of liberty. It certainly fails on property rights grounds. It has failed (certainly with steep escalation) to even achieve any of its distributional goals, so that even if liberty were not important, or morals were not important or efficiency were not important, it has been demonstrated time and again to not achieve its stated objective" - my Economics Professor
I have not read the data behind those claims, so I'm unable to say what my opinion is on them. Which brings me to a critical point on context and data: If you don't know anything about the data at hand, stick to what you do and admit what you don't. But at the same time, that has little to do with the thrust of this debate, which is: Is our current tax system unfair to the wealthy?
Unfortunately, Andrew seems to have not bothered to read what I wrote before, especially when he commented:
"Jack, your argument is interesting... looking at taxes based on wealth instead of income could almost be seen as wanting to unfairly tax those who save their money."
Technically, this is true, but I refer back to my Alan Greenspan quote for why it makes more sense to base taxes on overall wealth than on income.
"Yes, most would be in the top income brackets, but the system currently in place almost incentivizes spending every dime..."
Again, also true. The capital gains tax does decrease the marginal benefit of saving, which is why I suggested switching to a sales tax. The sales tax would incentivize saving over spending.
Andrew ended our argument on this note:
"Maybe this is simply America becoming ever more uncompetitive globally and only those who are extremely hard-working & intelligent can expect to command more of the wealth in the U.S.. Those who can't keep up are simply left behind on welfare, which is then paid for by those who became successful... Did you know for every $1 earned with income below $24,000, they get back $8.21 in benefits? Above $100,000 income you are receiving $0.41 back per year. The message to America? Don't earn more than $100,000 because you don't deserve it. "
My first reaction was to dismiss the first line. To assume "this is simply America becoming ever more uncompetitive globally" is a huge assumption, especially without any data on hand. First, what does he mean by uncompetitive? Does he mean by standard of living? By GDP? By manufacturing output? By Olympic Gold Medal wins?
Second, how is that tied in with our argument on taxes? Is he saying that our tax rate makes us more uncompetitive? Since that’s what he’s been arguing the entire time, his opening line doesn’t provide any new information. It only exists to rhetorically color the debate to make his ideas seem more sympathetic.
So, I dismiss the line as being irrelevant.
But then the second part emerges. I was aware that people who paid less in taxes tended to get back more in benefits per dollar paid than people who paid more. In fact, I assumed it was logical. Assume that benefits are uniformly distributed (this might not be exactly true, but it's probably close enough). Everyone has roughly the same access to roads, fire departments, police and military protection, justice under the law, voting, etc as everyone else. So, the government probably spends roughly the same amount providing benefits for every person. But, as heavily debated above, different people spend wildly different amounts in taxes. All that Andrew is showing by that statement is that the wealthier pay more in taxes than the poor.
So where do I stand on Andrew's conclusion? His belief is that the wealthy are unfairly punished by our current tax system. My analysis of the data that he presented, and further exploration into its context, indicates to me that the wealthy are taxed in rough proportion with their own wealth, which is about as fair of a tax system as I can think of. Does that mean that I think the tax system is perfect, or that there aren't other systems that might work better? No, and on top of that, I did briefly outline one above that I think would be better.
The trouble, I feel, is that Andrew relied very heavily on assumptions that he didn't realize he was making. Assumptions that he used in place of data and that have been handed down to him through previous sources. There were other times in American history when the tax system did unfairly punish the wealthy, and during those times, many excellent arguments were presented against them. These arguments, Andrew probably read, or read accounts of them, and assuming the conclusions for them were still correct, substituted them for his own conclusion and then cherry picked data to support it.
This is not meant to be too critical of Andrew. He is a good friend, and I'm sure that I make the mistake many times myself, and probably have a couple times in this post. But, I hope this example does illustrate the necessity of examining the conclusions we hold and the arguments that support them.
Finally, how does this all tie in with the quote by Margaret Boden that graces the top of this post? It is, I admit, a bit out of place, but it does tie in well with the overreaching thought. Too often, we borrow conclusions from others and fit them into our own prearranged patterns without examining how well those conclusions apply to our current situation. The superficial similarities between our problems and problems people have had in the past makes it all too tempting to assume they are the same, and as my little discussion with Andrew shows, will occasionally lead to fallacious claims.
The context of the data we choose is often as important as the data itself. Failing to properly examine not only the logical structure of another person's or our own arguments but the data presented and the context it is presented in undermines debate and makes rational argument impossible.
Saturday, January 8, 2011
The Paradoxes of Rational Choice Theory
Rational Choice Theory is the current basis for most of microeconomics. Its major feature is rationality, the idea that people want more than less and when given a choice between options, will inevitably choose the option that satisfies more of their preferences than the other available options. Intuitively, the theory makes a great deal of sense.
The obvious objection is that people don't bother to calculate all the costs and benefits of every situation. This is explained away by the "pool table idea;" in the same way that you don't need to be a physicist to play pool yet the balls will still follow the laws of physics, you don't need to be an economist to make rational choices.
The other typical objection is that some people seem to make decisions that, no matter how you cut it, goes against their best wishes. The explanation for this is that since we can't possibly know a person's individual preferences, we must assume that they are rationally pursuing them. By this point, Rational Choice Theory becomes a tautology - after all, if people are all rationally pursuing their own preferences, preferences which can't be known, it's impossible to empirically test whether or not they are actually doing so, and Rational Choice Theory is therefore true because it's defined to be.
That said, there are a few paradoxes which point us towards weaknesses in Rational Choice Theory.
St. Petersburg Paradox
Imagine you are offered the following bet: A coin will be flipped. If it is heads, you get nothing. If it is tails, you get $2 and the opportunity to flip again. If on the second flip, you get a heads, you keep the $2. If you get tails, you get $4. Next flip, $8, then $16, then $32, and so on.
How much pay to take part in this gamble?
According to Rational Choice Theory, you would pay anything less than the expected value of the gamble. After all, everyone desires more than less and if you keep playing the game over and over again, your average winnings will be the expected value.
To calculate the expected value, all you need to do is multiply the percentage chance of winning a certain amount by that amount and then sum all possibilities. The result will be your average winnings.
So, we know we have a a 50% chance of getting heads on the first flip. So that's 50% times nothing. Easy so far. 50% chance of getting tails. But wait. 50% of the times you get tails, you'll go on to win again, so, we can only add 50% of that initial 50% times the $2 winnings. Easy enough, .5 x .5 x $2 = $0.50. But then there's the next set:
.5 x .5 x .5 x $4 = .125 x $4 = $0.50
and the next:
.5 x .5 x .5 x .5 x $8 = .0625 x $8 = $0.50
and so on:
5 x .5 x .5 x .5 x .5 x $16 = .03125 x $16 = $0.50
5 x .5 x .5 x .5 x .5 x .5 x $32 = .015625 x $32 = $0.50
5 x .5 x .5 x .5 x .5 x .5 x .5 x $64 = .00778125 x $64 = $0.50
and so on ad infinitum. The series diverges. The expected value equals infinity x $0.50.
So, the rational person would bet literally any amount of money to take part in this gamble.
But people don't bet any amount of money on this. They bet quite a bit less.
There are several other explanations for this, among them utility curves, risk aversion, people's awareness that there is a limited amount of money in the world, etc.
Perhaps the most convincing theory I've read that explains this paradox is this paper by Benjamin Hayden on the "median heuristic." The paper sets forth the idea that people don't always rely on Rational Choice Theory (or perhaps never rely on it) and instead suggests that people make their decision in this particular paradox by picking a bet close to what the median return from the bet is. This is very different from betting on the expected value. The expected value is roughly the mean return from the bet and is significantly larger than the median due to the skew created by the occasional absurdly long streak of tails. The other noticeable thing about the median is that it is far easier to accurately estimate. Finding the mean requires to sum all results and then divide by the total count. Finding the median just requires taking a stab at the middle number, and with larger samples, if you're off, it's not by much. Considering that the mind often seems to prize efficiency over accuracy and precision, this heuristic seems especially likely.
This new median heuristic predicts that people will make a bet of about $1.70 some odd, which they found widely predicts what people actually do.
Allais Paradox
Now, having lost all of your money making bad bets on the St. Petersburg Paradox, you are offered a new game.
There are two urns, A and B.
A contains 99 black marbles and 1 red marble.
B contains 90 black marbles, 5 white marbles, and 5 red marbles.
If you pull a black marble, you get $1 million. If you pull a white marble, you get $5 million. If you pull a red marble, you get nothing.
You can only play once, so going for the expected value doesn't make sense in this case. It's solely a matter of personal preference. Which do you choose?
Now, onto a completely new game.
There are two new urns, C and D.
C contains 9 black marbles and 91 red marbles.
D contains 5 white marbles and 95 red marbles.
Again, if you pull a black marble, you get $1 million. If you pull a white marble, you get $5 million. If you pull a red marble, you get nothing.
Which do you choose?
One of my economics professors posed this question for a class I was in. If I remember correctly, A and D was the most popular choice, followed by B and D and B and C. A and C was the least popular.
But Rational Choice Theory predicts that everyone will choose A and C or B and D, and that no one will choose A and D or B and C. Let me show why.
90% of A and B are identical. In both cases, 90% of the time you get $1 million. The only real question is: for the remaining 10%, do you want a 50% chance of $5 million or a 90% chance of $1 million?
Likewise, 90% of C and D are identical. In both cases, 90% of the time you get nothing. The only real question is: for the remaining 10%, do you want a 50% chance of $5 million or a 90% chance of $1 million?
If you prefer a 50% chance of $5 million, you should always prefer a 50% chance of $5 million. If you prefer a 90% chance of $1 million, you should always prefer a 90% chance of $1 million. The fact that these preferences don't hold shows that Rational Choice Theory is flawed some way.
I haven't read an explanation for this paradox that I have found satisfactory. One idea that I think might explain it somewhat is that people think less in terms of probabilities and more in terms of "is or is not." Under that hypothesis, people would choose A over B, because A is a sure a thing while B is less sure. Meanwhile, people would choose D over C, because while both are almost certain not to happen, D gives a larger benefit if it actually does happen. For those of you who pointed out that this is really similar to rank-dependent expected utility, please hold your fire until after the end of the Ellsberg Paradox, where I readdress this issue.
I would like to emphasize that the above stated hypothesis is completely untested.
Ellsberg Paradox
Interesting side note: the Ellsberg Paradox is named after Daniel Ellsberg, who wrote about it in his Economics Phd dissertation. Ellsberg is far more famously known, however, for being the military analyst who released the Pentagon Papers in 1971.
For this example, imagine an urn. The urn contains 90 marbles, 30 marbles are black and the other 60 are yellow and red, but the ratio between the two is unknown. You can choose one of two wagers. Either a million dollars if a black marble is pulled or a million dollars if a yellow marble is pulled.
Now imagine the same urn. 90 marbles, 30 black, other 60 red and yellow. You still don't know the proportion, but it's the same as the time before. You can choose of two wagers. Either a million dollars if a black or red is pulled or a million dollars if yellow or red is pulled.
Which did you choose?
As you can probably imagine by now, what people usually choose does not reflect what rational choice theory predicts. Rational Choice Theory* says that if you pick black in the first example, then you must think there are fewer than 30 yellow marbles, so that in the next example you would pick black or red. Likewise, if you picked yellow, you must think there are more than 30 yellow marbles, and so you'd pick yellow or red.
*Technically, it's Expected Utility Theory. That said, they operate under the same basic considerations, and for the purposes of this blog post, will be assumed to be the same. Real economists, please don't chew my head off for this.
What you would not pick is black for the first choice and yellow and red for the second choice, since that assumes that there are more red than yellow in the first instance but more yellow than red in the second.
Here's the explanation I have: People prefer the sure choice against the unknown. So, most people will choose black in the first set because they know that the chances of getting one million dollars is exactly 1 in 3, while if they choose yellow it could be anywhere between zero and 2 in 3.
Likewise, if people choose yellow and red in the second set, then they have a 2 in 3 chance, while if they choose black and red it could be anywhere between 1 in 3 and certain.
The trouble is then, why do people sometimes not choose black for the first instance and yellow and red for the second instance? I'm stumped. I guess there is some compromise between the risk aversion and the desire for optimal output (what Rational Choice Theory) predicts, but I can't think of anything that would accurately predict what people do.
Note: the following is information poorly understood by the author. It's validity and accuracy is questionable.
Now, there was a paper written in 1986 that attempts to explain the Ellsberg Paradox and, less directly, the Allais Paradox by Uzi Segal, then an Assistant Professor at the University of Toronto, now a Professor at Boston College.
I have read the paper, entitled "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," but I must admit that I don't yet understand the math behind it. Therefore, I apologize in advance for the inevitable mistakes that follow. The layman's version goes something like this:
Risk aversion is where people prefer a certain value, even if it is lower than an expected value, to a higher expected, but uncertain value. Ambiguity aversion is the preference for known risks to unknown risks. According to Segal, ambiguity aversion and risk aversion are essentially the same thing within the realm of Anticipated Utility Theory*.
From my understanding of the paper, the theory is not dissimilar to my poorly stated hypothesis for the Allais Paradox and the other hypothesis I gave for the Ellsberg Paradox. Simply put, people tend to regard chance less in terms of probability and more in terms of certain and uncertain. I realize this is something of a cop out, and sometime in the future after I have had understood the math behind Segal's paper, I intend to write another post outlining rank-dependent expected utility. Until then, I hope this post has done an adequate job of outlining some of the sketchy parts of Rational Choice Theory.
*Anticipated Utility Theory, now known as rank-dependent expected utility, provides an explanation for why people engage in the seemingly contradictory behavior shown above in the Allais Paradox and in the Ellsberg Paradox. Its addition to Prospect Theory resulted in Tsverky's and Kahneman's 1992 paper on Cumulative Prospect Theory. The development of the theory, an important advancement in Behavioral Economics and a strong alternative to Rational Choice Theory, resulted in Kahneman winning the 2002 Nobel Prize. Tsverky would likely have also won had he not died in 1996. If you ever get the chance, watch his nobel lecture.
The obvious objection is that people don't bother to calculate all the costs and benefits of every situation. This is explained away by the "pool table idea;" in the same way that you don't need to be a physicist to play pool yet the balls will still follow the laws of physics, you don't need to be an economist to make rational choices.
The other typical objection is that some people seem to make decisions that, no matter how you cut it, goes against their best wishes. The explanation for this is that since we can't possibly know a person's individual preferences, we must assume that they are rationally pursuing them. By this point, Rational Choice Theory becomes a tautology - after all, if people are all rationally pursuing their own preferences, preferences which can't be known, it's impossible to empirically test whether or not they are actually doing so, and Rational Choice Theory is therefore true because it's defined to be.
That said, there are a few paradoxes which point us towards weaknesses in Rational Choice Theory.
St. Petersburg Paradox
Imagine you are offered the following bet: A coin will be flipped. If it is heads, you get nothing. If it is tails, you get $2 and the opportunity to flip again. If on the second flip, you get a heads, you keep the $2. If you get tails, you get $4. Next flip, $8, then $16, then $32, and so on.
How much pay to take part in this gamble?
According to Rational Choice Theory, you would pay anything less than the expected value of the gamble. After all, everyone desires more than less and if you keep playing the game over and over again, your average winnings will be the expected value.
To calculate the expected value, all you need to do is multiply the percentage chance of winning a certain amount by that amount and then sum all possibilities. The result will be your average winnings.
So, we know we have a a 50% chance of getting heads on the first flip. So that's 50% times nothing. Easy so far. 50% chance of getting tails. But wait. 50% of the times you get tails, you'll go on to win again, so, we can only add 50% of that initial 50% times the $2 winnings. Easy enough, .5 x .5 x $2 = $0.50. But then there's the next set:
.5 x .5 x .5 x $4 = .125 x $4 = $0.50
and the next:
.5 x .5 x .5 x .5 x $8 = .0625 x $8 = $0.50
and so on:
5 x .5 x .5 x .5 x .5 x $16 = .03125 x $16 = $0.50
5 x .5 x .5 x .5 x .5 x .5 x $32 = .015625 x $32 = $0.50
5 x .5 x .5 x .5 x .5 x .5 x .5 x $64 = .00778125 x $64 = $0.50
and so on ad infinitum. The series diverges. The expected value equals infinity x $0.50.
So, the rational person would bet literally any amount of money to take part in this gamble.
But people don't bet any amount of money on this. They bet quite a bit less.
There are several other explanations for this, among them utility curves, risk aversion, people's awareness that there is a limited amount of money in the world, etc.
Perhaps the most convincing theory I've read that explains this paradox is this paper by Benjamin Hayden on the "median heuristic." The paper sets forth the idea that people don't always rely on Rational Choice Theory (or perhaps never rely on it) and instead suggests that people make their decision in this particular paradox by picking a bet close to what the median return from the bet is. This is very different from betting on the expected value. The expected value is roughly the mean return from the bet and is significantly larger than the median due to the skew created by the occasional absurdly long streak of tails. The other noticeable thing about the median is that it is far easier to accurately estimate. Finding the mean requires to sum all results and then divide by the total count. Finding the median just requires taking a stab at the middle number, and with larger samples, if you're off, it's not by much. Considering that the mind often seems to prize efficiency over accuracy and precision, this heuristic seems especially likely.
This new median heuristic predicts that people will make a bet of about $1.70 some odd, which they found widely predicts what people actually do.
Allais Paradox
Now, having lost all of your money making bad bets on the St. Petersburg Paradox, you are offered a new game.
There are two urns, A and B.
A contains 99 black marbles and 1 red marble.
B contains 90 black marbles, 5 white marbles, and 5 red marbles.
If you pull a black marble, you get $1 million. If you pull a white marble, you get $5 million. If you pull a red marble, you get nothing.
You can only play once, so going for the expected value doesn't make sense in this case. It's solely a matter of personal preference. Which do you choose?
Now, onto a completely new game.
There are two new urns, C and D.
C contains 9 black marbles and 91 red marbles.
D contains 5 white marbles and 95 red marbles.
Again, if you pull a black marble, you get $1 million. If you pull a white marble, you get $5 million. If you pull a red marble, you get nothing.
Which do you choose?
One of my economics professors posed this question for a class I was in. If I remember correctly, A and D was the most popular choice, followed by B and D and B and C. A and C was the least popular.
But Rational Choice Theory predicts that everyone will choose A and C or B and D, and that no one will choose A and D or B and C. Let me show why.
90% of A and B are identical. In both cases, 90% of the time you get $1 million. The only real question is: for the remaining 10%, do you want a 50% chance of $5 million or a 90% chance of $1 million?
Likewise, 90% of C and D are identical. In both cases, 90% of the time you get nothing. The only real question is: for the remaining 10%, do you want a 50% chance of $5 million or a 90% chance of $1 million?
If you prefer a 50% chance of $5 million, you should always prefer a 50% chance of $5 million. If you prefer a 90% chance of $1 million, you should always prefer a 90% chance of $1 million. The fact that these preferences don't hold shows that Rational Choice Theory is flawed some way.
I haven't read an explanation for this paradox that I have found satisfactory. One idea that I think might explain it somewhat is that people think less in terms of probabilities and more in terms of "is or is not." Under that hypothesis, people would choose A over B, because A is a sure a thing while B is less sure. Meanwhile, people would choose D over C, because while both are almost certain not to happen, D gives a larger benefit if it actually does happen. For those of you who pointed out that this is really similar to rank-dependent expected utility, please hold your fire until after the end of the Ellsberg Paradox, where I readdress this issue.
I would like to emphasize that the above stated hypothesis is completely untested.
Ellsberg Paradox
Interesting side note: the Ellsberg Paradox is named after Daniel Ellsberg, who wrote about it in his Economics Phd dissertation. Ellsberg is far more famously known, however, for being the military analyst who released the Pentagon Papers in 1971.
For this example, imagine an urn. The urn contains 90 marbles, 30 marbles are black and the other 60 are yellow and red, but the ratio between the two is unknown. You can choose one of two wagers. Either a million dollars if a black marble is pulled or a million dollars if a yellow marble is pulled.
Now imagine the same urn. 90 marbles, 30 black, other 60 red and yellow. You still don't know the proportion, but it's the same as the time before. You can choose of two wagers. Either a million dollars if a black or red is pulled or a million dollars if yellow or red is pulled.
Which did you choose?
As you can probably imagine by now, what people usually choose does not reflect what rational choice theory predicts. Rational Choice Theory* says that if you pick black in the first example, then you must think there are fewer than 30 yellow marbles, so that in the next example you would pick black or red. Likewise, if you picked yellow, you must think there are more than 30 yellow marbles, and so you'd pick yellow or red.
*Technically, it's Expected Utility Theory. That said, they operate under the same basic considerations, and for the purposes of this blog post, will be assumed to be the same. Real economists, please don't chew my head off for this.
What you would not pick is black for the first choice and yellow and red for the second choice, since that assumes that there are more red than yellow in the first instance but more yellow than red in the second.
Here's the explanation I have: People prefer the sure choice against the unknown. So, most people will choose black in the first set because they know that the chances of getting one million dollars is exactly 1 in 3, while if they choose yellow it could be anywhere between zero and 2 in 3.
Likewise, if people choose yellow and red in the second set, then they have a 2 in 3 chance, while if they choose black and red it could be anywhere between 1 in 3 and certain.
The trouble is then, why do people sometimes not choose black for the first instance and yellow and red for the second instance? I'm stumped. I guess there is some compromise between the risk aversion and the desire for optimal output (what Rational Choice Theory) predicts, but I can't think of anything that would accurately predict what people do.
Note: the following is information poorly understood by the author. It's validity and accuracy is questionable.
Now, there was a paper written in 1986 that attempts to explain the Ellsberg Paradox and, less directly, the Allais Paradox by Uzi Segal, then an Assistant Professor at the University of Toronto, now a Professor at Boston College.
I have read the paper, entitled "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," but I must admit that I don't yet understand the math behind it. Therefore, I apologize in advance for the inevitable mistakes that follow. The layman's version goes something like this:
Risk aversion is where people prefer a certain value, even if it is lower than an expected value, to a higher expected, but uncertain value. Ambiguity aversion is the preference for known risks to unknown risks. According to Segal, ambiguity aversion and risk aversion are essentially the same thing within the realm of Anticipated Utility Theory*.
From my understanding of the paper, the theory is not dissimilar to my poorly stated hypothesis for the Allais Paradox and the other hypothesis I gave for the Ellsberg Paradox. Simply put, people tend to regard chance less in terms of probability and more in terms of certain and uncertain. I realize this is something of a cop out, and sometime in the future after I have had understood the math behind Segal's paper, I intend to write another post outlining rank-dependent expected utility. Until then, I hope this post has done an adequate job of outlining some of the sketchy parts of Rational Choice Theory.
*Anticipated Utility Theory, now known as rank-dependent expected utility, provides an explanation for why people engage in the seemingly contradictory behavior shown above in the Allais Paradox and in the Ellsberg Paradox. Its addition to Prospect Theory resulted in Tsverky's and Kahneman's 1992 paper on Cumulative Prospect Theory. The development of the theory, an important advancement in Behavioral Economics and a strong alternative to Rational Choice Theory, resulted in Kahneman winning the 2002 Nobel Prize. Tsverky would likely have also won had he not died in 1996. If you ever get the chance, watch his nobel lecture.
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