Reason for a New Age

Posts Tagged ‘self-fulfilling prophecy’

Issues of the Free Market

Posted by publius2point0 on 2010/02/14


As I stated at the beginning of my earlier overview of the free market, there is no reason to assume that a perfect solution for best bettering the life of humanity has been achieved. To toss it away because it is not perfect, however, would certainly be folly. Assuming that there must be a solution which doesn’t require some amount of compromise is likely an unrealistic expectation. But just like we must, for example, compromise our desire to be an actor and instead work where at whatever our second or third choice is because the market isn’t large enough for us to enter, we must also expect the ideal of the free market to be compromised, if it is not achieving its key aim.

The following list are simply some of the larger issues that can clog up or even break the free market. I do not expect it to be exhaustive.

Monopoly

In my overview of the free market, I gave the example of Damon and his machine that he is selling. As the sole provider of a machine that can increase production in the entirety of the universe, he becomes quite free to charge just as much for his product as he believes he can force someone to pay.

The result is that Damon becomes very very rich, and also that everyone else goes into debt. All profit that they earn from their use of Damon’s machine ends up getting funneled back into the central bank, while as they live quite stingily. We would much rather that they not be stingy, and in fact feel quite free to incur new debt as soon as possible. The market ideal would be that no one had to pay anything more than the actual cost of production. If Damon wanted to build a second machine, we would rather than he go into debt to do so than used profit from his old machine to finance it.

We also do not want to give Damon a significantly greater economic power than anyone else. He might hire the most talented minds but then simply have them goof off all day as this is cheaper than having them do R&D and more profitable than letting a competitor hire them and introduce a rival product. He might form deals with retailers that forbid them from selling the competitor’s products. Or he might simply bribe government officials to continuously hassle and delay the competitor. From out standpoint, the more even a position Damon has to battle from with his competitors, the more effort he must put into making his product as good as it can be and the less chance he has to act to rival products. So again, our ideal would be that he take on debt to advance rather than charging profit.

But of course we know that people are greedy and don’t exert themselves unless they can personally profit from their labor. Regardless of what the theoretical ideal might be, it is the real world in which we must work, and so we must allow Damon to profit and become rich.

The alternate solution, then, is to at least make sure that Damon does have competitors or to otherwise make sure that he is not abusing his position.

False Advertising & Trademark

If you watch old episodes of Mission: Impossible, you’ll see several instances of some shady organization manufacturing identically labeled pharmaceuticals–which are actually not medicine at all, just corn starch or whatever–and selling them as the real thing. A modern equivalent of this might be the various cases of China selling cellphone batteries that are actually of shoddy manufacture and either don’t work or destroy your phone, or the more explosive phenomenon where they used chemical waste to bulk out dog food.

A customer can’t be expected to know what’s in a product, whether it’s safe, whether it’s been properly manufactured, nor whether it’s a legitimate product that does exactly what it says on the box. But for every product that he purchases where he discovers that it does not live up to expectations or is even harmful, he loses confidence in the market, and he ceases buying.

To examine what happens when people stop buying, consider that Damon has just invented his machine and prepared 80 units to be sold. Without buyers, he is in terrible debt. Most of the money in the market is based on Damon’s debt, and hence is worthless since it isn’t backed by physical wealth. The end result being that everyone runs around shouting that the sky is falling and generally bad things happen.

Standards

This isn’t a failing of the market, this is a solution that is related to both false advertising and monopolies (and also to the role of infrastructure in economic growth). It is a weapon that tends to be forgotten, in modern day.

A simple example of a standard is building codes. These are the various regulations crafted by local government to make sure that a building is safe, according to prevalence of whatever regional hazards there are. Since these are mandated and enforced by the government, a person may go to any contractor he wishes and be certain that he will get a building which performs up to at least a certain minimum. He has buyer confidence, and so we are safe from issues of false advertising. It also means that wires of certain gauges and manufacture are more prevalent. The market can become more efficient because it knows precisely what is wanted, and it can give exactly that.

Another example would be laws which state that a person must always be able to transfer his phone number from one provider to another. While, theoretically, there’s nothing stopping people from switching providers, we have a strong enough desire to keep our contact info unchanged that we do end up staying with our provider so as to keep it. This gives them a veritable monopoly on subscribers. Given a friendly entry plan, a company can afterward raise your prices more or less freely because you are stuck with them. But by the government simply saying that phone numbers are part of a public pool that is independent of organization–by establishing that standard, the market was improved.

Personally, I would rather have seen greater standardization of OS structure when Microsoft was taken to court for monopolistic tendencies than to have them fined or forced to cripple their products.

The only issue with standardization is that it can also hold back inventiveness since this always moves away from the standard. One must make sure that a standards organization is able to be freely interacted with, decently speedy with its answers and revisions, and good at making sure that rules can be wisely expanded and deprecated.

Patents & Copyright

Say that Damon takes on debt to produce his machine. He sells the first one to Elaine. She looks it over, determines how it works, and begins to produce a copy of it. She might have to take on some debt to manufacture the product, but she did at least skip over the R&D process which saves money. Hence, Elaine is able to charge less for her product, and ends up with all of the business, leaving Damon destitute and in debt.

One could simplistically argue that society got the product for a lower cost, but the end result of such a process as this is simply that Damon has no incentive to create his product in the first place, and even if he proceeds to do so anyways, society ends up paying for Damon’s R&D and both of their manufacturing costs after Damon’s debt eventually gets passed on to the rest of society to deal with–since he cannot pay it.

The Race to the Bottom

When there is competition, one is in the unenviable position that he must stay competitive. The alternative is shutting down your business and laying off all of your workers.

A simplistic argument would be that this is alright since the better product won and we don’t need the old one; we are better to free the workers up to move on to successful companies. In truth, though, it’s more often a loss for society. Firstly, you have several months where those workers are simply not working at all–looking for a new job–and of course you are out a competitor, possibly leaving a monopoly behind.

And of course, most CEOs don’t think in such macroeconomic terms. They want to win. They don’t want to have to fire people. CEOs also have investors and stock holders all telling them to do whatever it takes to win.

What this means is that if, say, the farmer across the street hires illegal immigrants to work for half the wage, as soon as he starts to charge half as much for his produce, you are stuck hiring illegal immigrants or shutting down the farm. If your competitor releases toxic waste into the local river, saving 10% of his budget, you are forced to release toxic waste as well.

From a market standpoint, this is all and well. There was a way to increase efficiency, and the market became more efficient. But that’s a paper and pencil world, without the greater ramifications of the real world. Sometimes this is quite possibly an economic good, for instance off-shoring factory work to China because it helps to lead a large section of the population of the world into modernity. But just as often it is not. Ultimately, it’s not a decision that can be left to the least scrupulous member of the market. It needs to be something that is monitored and made to correspond with the better interest of humanity.

The Push for Immediate Results

In my estimation, at least, there is much too great a focus on immediate results among our race. Anything further out than a year or two is really beyond our ability to take seriously. Whatever is happening today, on the other hand, is of vital importance.

An intelligent leader of a corporation might not suffer this particular handicap, having perfect ability to see the direction he would like to take the company over the next several decades, and why doing so would be a certain winner. His investors, and particularly his stock holders, however, are more likely to be interested in what the business will be doing this quarter, not in the next decade. Being somewhat the puppet of the stockholders, the CEO is forced to think quarter to quarter, with nary the time nor ability to think of more long-range goals.

Of course, one could also argue that this trait of humanity’s is based on practical reality. Left to speculate too far ahead, we might end up like Leonardo da Vinci, doodling amazing and fanciful things that are nevertheless impractical for our times.

Arguing the other side, one could say that you need the freedom to be fanciful if you want to do meaningful R&D, which is ultimately the primary apparatus for social good of the free market.

There is almost certainly an ideal ratio in one direction or the other. Achieving that is something that would be an issue for government.

Positive Feedback

See the section on Self-Fulfilling Prophecies here.

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Evolution, Instinct, and People – Part 4

Posted by publius2point0 on 2010/01/24


This will be the final segment of this series, though I presume that I will bring up further thoughts in future blogs.

Bootstrapping and the Flynn Effect

There’s a fairly interesting thing. Through history there has been some small number of babies who actually were brought up by animals and survived into adulthood.  Despite what the Tarzan stories might lead you to believe, such feral children don’t end up as likable, sociable ruffians. Instead, for lack of a better description, they end up as poo-flinging monkeys. They can’t learn to read, write, nor speak, let alone mingle and socialize with people in any more meaningful way than an animal might.

Obviously humans can learn to do these things, but it isn’t something that can be achieved as an adult. Quite likely there are particular stages of development which each have a window of time during which they can be taught. If you miss that window, you have likely impaired the child’s abilities. You might be able to teach them later, but it’s a much harder path and of course eats time away from the things that should be being taught at that time. Work with aboriginal peoples has indicated to a large extent that even when one does receive training from human parents, you are largely limited to whatever the level of abstract thinking is of your group (though the precise level of this is still debated). Other research seems to indicate that based on the way ones language refers to things can change the methods by which people think.

In total, the amazing difference between people who receive the training of how to be a modern human by their modern humans and those who have received none, and the differences in ability based on various minutiae is terribly interesting.

But so then there was a thing discovered that is referred to as the Flynn Effect, which noted that IQ rates seem to continue to rise from generation to generation in the modern world. When, generally, people of lower IQ have more children than those of higher IQ, one might expect that if anything the general intelligence of modern communities would lower as the upper classes start having only single children or whatever.

One possible explanation that is put forth is that this is largely a matter of continuing development in nutrition. People who have healthy, nutritious diets growing up have a healthier and more powerful brain.

Another explanation though, and much more interesting, is the thought that the human brain hasn’t reached the peak of its ability yet, just like the aboriginal may have improved over the feral human, but not yet gained all the ideas that modern man has. People theorize that with TV and internet and an ever-widening source of information coming at each of us, and doing so in a more rapid-fire way, that it is spurring our youthful brains to adapt to a faster, more intensive world.

Assuming this latter theory to be true, it suggests that the method by which children are taught could use a fairly impressive overhaul.

People Fear Conflict

By the word conflict, I mean debate or otherwise being challenged upon some point. People, of course, love sports, games, and other sorts of non-cerebral conflict.

The reasons why people do things are usually quite shallow. We’re religious because, 90% of the time, our parents were. With 99% certainty, I could determine your political affiliation based on the region you live in, your skin color, your religion, and your income–of course that will match up almost exactly with the type of people that you socialize with regularly. Essentially you believe in your politics because the people in your social group are being promised more by party X than party Y. There is almost no one who self-sacrifices for the sake of the greater good, based on reasoned debate.

Going against your peers–aka the pack–going against your self-interest, is hard. Educating yourself on the issues is laborious. And even when you are more aware of the specifics of any one topic than 90% of everyone, you can still get slapped down like you don’t know anything by the guy who knows 92% more than everyone. For instance, I can point at socialism and say that it’s a failure, but a die-hard socialist who has studied every ounce of data on the subject can make me look like I have no idea what I’m talking about. If I knew as much about the subject as he, I’m quite certain that I could readily debate and come out ahead. I don’t though. Similarly, I can make most people look like they’re idiots when they bring up some particular issues that I know more about than most, and yet still know that I’m just as likely wrong given how passing my knowledge truly is.

All of this takes energy and time, and to do it all when deep down in your subconscious you’re fairly certain that you’re either acceding to something not in your best interest or to something that will be disruptive to your ability to continue socializing with the pack, that’s just more than can be expected for most people. But then getting right in their face and making them feel bad about their lack of willingness to consider greater or finer points, this is active antagonism, regardless of best intentions.

And all this makes sense, again, from an evolutionary standpoint. If there is, for example, a leader of the pack and then one rogue wolf who is trying to usurp control, if people are easily willing to convert to any side, the battle between the two leaders has the pack in chaos for lengthy periods of time and nothing gets done. A certain amount of pigheadedness and inertia is necessary. The rogue wolf has to make very good points, so good that the chance of splitting the whole pack in two is possibly worth it. Otherwise, regardless of whether his way might be somewhat more efficient, it’s not worth the conflict.

There are very few things in life which are all that important.

In many countries though, for instance Japan or China, the idea of popular interest in political affairs is fairly non-existent. Everything is done within the realm of those who enjoy or are not fearful of conflict. And honestly, so long as the people are able to continue to eat and raise babies, they’re quite happy to leave all that hassle up to the politicians. Even within the US, political battles between the parties are to most people little more than sports games. Red team versus Blue. If their team loses, the ire is that of having lost, not due to any particular understanding of what implications it actually has. They go home and make food and raise babies. If the economy gets bad, a few of them switch teams.

Self-Fulfilling Prophecy

As I pointed out in Failure in the Information Age, the cause of the recent recession was nothing more than everyone knowing that a recession was coming. Rather than be the person left with his pants down, everyone pulled out of the economy and thus tanked it.

People have a tendency to make what they think is going to happen, happen. When they think the world will be good, they buy things, great others with open arms, trade, invest, etc. With everyone doing this, everything becomes good. If I think that, if I go on that cruise vacation, I’ll meet people, I’m likely to go and join all the outings, talk to people, and end up meeting people. If I think I’ll be hated and ridiculed for being overweight and looking bad in my swimwear, I’ll hide in my room, wear clothing that is bland and reeks of reclusiveness, and end up not meeting anyone.

I suppose that this isn’t so much a human trait as “just one of those things.”

But it bears mentioning in a blog about politics because “managing expectations” becomes a significant factor in doing the job well. If you wrestle for a trillion dollars to stimulate the economy but then tell everyone that we really needed 2 trillion and what we have now will only go towards paying off interest on our debts, you’ve just killed your entire stimulus package. People will receive their bonus check, and put it straight into savings, waiting for when things will improve.

For issues such as this, the amount of the stimulus isn’t as important as how well you can sell whatever dollar amount it was that you decided on.

And when you talk about a “housing crisis”, you need to make sure that people understand how small a crisis it really is, lest they all sell their stocks and hunker down for a recession.

It may seem silly, but economics and politics are still more about psychology and philosophy than math.

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