Yes, it makes sense not to have diner parties while the schools are still open. Think of it as a Corona contact budget.

 

Can the kids go to school in restaurants

Jessica Winter, editor New Yorker

 

Analogies can be enlightening. Bad faith actors will always find something to nit pick, but for those interested in understanding analogies can help to open a toolbox of existing ideas and argumentative structures.

I wondered whether it may be useful to talk about Corona contacts as a budget.

It would avoid arguments like "if churches can be open, why can't we have concerts under similar conditions". "If you cannot meet indoors with more than 15 people, then why are schools open? Math!" 

One would never argue "if we just bought his flat, why can't we buy a summer house?" Maybe you have the budget to buy a summer house, but buying a flat does not mean you can also afford the summer house.

Similarly in the political realm: "if we can have social security, why can't we have a basic income (social security for all)?" For me a basic income is freedom, fulfilment of human potential and prosperity, but you will have to find the money. "If we can spend 10% of our GDP on healthcare as an average OECD country, why can't we spend 20%?" You can, and America does, but it will still be hard to find the funding for the additional 10% if countries with universal health care wanted to destroy their system and adopt the American partial system.

When it comes to budgets it is immediately clear that you have to set priorities and invest wisely.

The reproduction number of the SARS-CoV-2 virus is between two and three. Let's assume for this article that it is two to get easier numbers. This means that one infected person on average infects two other people. If we reduce number of infectious contacts by more than half the virus would decline.

The "on average" does a lot of work. How many people one person infects varies widely. As a rule of the thumb for SARS2: Four of five infected people only infect one other person or none, while one in five infects many people. It is only two on average.

And you have to average over a population that is in contact with each other. When in France no one has any contacts, while in Germany life continues as normal, the virus will spread like wildfire in Germany. But if inside the city of Bonn half of the people disappear, the remaining people have less contacts than before. The remaining half should not especially seek each out for the analogy to hold.

How does this analogy help? If we look at the budget of a country like Germany, it makes clear that we should look for reductions where we spend a lot. Work, school, free time. I am as annoyed by the anti-Corona protests as many complaining about them, but compared to 80 million inhabitants that see each other at work and school (indoors) every day, these protests, even if they were really big, are a completely insignificant number of contacts. And the right to protest is a foundation of our societies and should thus have a high priority. I think it is fine to mandate masks at protests and if you do so you should uphold the rule of law.

Less than 20% of Germany is younger than 20. So we could afford to spend our contacts there and ask the other 80% to do more. People often argue that children not going to school is disruptive for the economy. I would also argue a pandemic last one year is a large part of their lives, while additionally young people mostly do this to protect others. There is naturally no need to squander our budget, we could  require older kids to wear masks to reduce the effective number of contacts, install air filters or far UC-V lights in class rooms or reduce the number of days children go to school.

Some feel we should close the schools to protect teachers, but the main reason to care about avoiding contacts is, even now, not about the people being infected today, but about the spreading the virus and all the people who will die because of that. 

If we life above our contact budget most of the dying happens after several links in the chain of infection and no longer close to the school: The teacher or student infects 2 others, they infect 4 other, 8, 16, 32, 64, 128, ... Those 128 will reside all over the city/county, if not state and have many different professions. If we would life within our Corona budget and the level of infection would be and stay low, the entire community, including teachers, would be safe.

The exponential growth of a virus also nicely fits to the exponential growth of money in your [[savings account]]. I added a link for young people. A savings account used to be a place where you would keep you money and the bank would give you a percentage of the amount as a thank you, which they called "interest". People who are into money and budgets likely still remember this and how it was normal to "invest" money to have more money later. 

When the press talks about exponential growth, I tend to worry they simply mean fast growth. Economic growth is much slower than the pandemic, but when it comes to money people get glowing eyes and talk enthusiastically about compound interest and putting something aside for later.

Similarly when a society invests in less contacts, we can have more freedom later.  Even more so because once the number of infections is low enough track and trace becomes much more efficiently and you get double returns on investment. Like an investment banker who has to pay less taxes because ... reasons.

At least the financial press should know the famous example of exponential growth: the craftsman who "only" asks the king for rice as payment for his chessboard: one grain on the first square, two on the second, four on the third square and so on. 

 

What is true for infections is also true for hospital beds and ICU beds. Once half of your patients are COVID-19 patient, it is only a matter of one more doubling time and the capacity is filled. Exponential growth is not just fast, it overwhelms linear systems like hospitals where you cannot keep on doubling the number of beds. 

 

If we let it get this far we are forcing doctors to choose who lives. Who is in the ICU too long and would likely stay there a long time while this capacity could be used for multiple new patients. Who is removed for the ICU to die. A healthy society does not put doctors in such a position.

With good care around 1 percent of people die in the West (in young societies in Africa less). Supporters of the virus tend to use this number or even much lower fantasy numbers. However, if we let it get out of control like this, ignore the exponential growth and the delay between infections and deaths, the hospital care would collapse and a few percent would die.

Many more people need to got the hospital. In Germany this is 17%. A recent French study reported that after 110 day most patients are still tired and have trouble breathing, many did not yet work again.

 

At the latest when the hospitals collapse people will reduce contacts, even if not mandated. It is much smarter make an investment earlier, to reduce our number of infectious contacts earlier. 

 

A well-know American president said it is smart to go bankrupt. It is smarter to make money.

 

Investing early pays of even more because then more subtle measures are still possible, while in an emergency a much more invasive lockdown will be necessary and, for those that only care about money, more damage to the economy will be done.

(As many of my readers are interested in climate change, let me add that I find it weird that when it comes to protecting the climate people often talk about it as a cost and not as an investment that will pay good dividends in the future, just like any other investment. If you mind that our kids will thus have it better than we have it, you can finance the investments with loans, like any business would.)

Related reading

A primer on herd immunity for Social Darwinists

 

Opening up Germany in a Randomized Controlled Trial

 

Translations of a popular scientific podcast: Leading German virologist Prof. Dr. Christian Drosten goes viral (intro & part 18)

 

* The photo of the injured piggy bank by Ken Teegardin is licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license.

Politics is not rational

Hillary Clinton lost the presidential election because people are not rational. Except for racists and millionaires it would have been in the best interest of everyone to have voted for Clinton. But we are not rational, we do not always look at our best interests. Real humans are not homo economii.

That includes me. As a scientist it is my job to keep a cool head. I hope you will excuse me for thinking I do my job reasonably well. I like to see myself as rational, but naturally I am not, especially learning about the ultimatum game shocked my self-perception.

It is a very simple and pure economic game. Reducing a problem to its essence like this has the elegance my inner physicist loves. In the ultimatum game, two players must divide a sum of money. The first player has to propose a certain division. The second player can accept this division or reject it. If the offer is rejected both players do not receive any money. In its purest form, the experiment is played only once and anonymously with players that do not know each other.

Time for a short thinking pause: What would you do? How much would you offer as player one? Below which percentage would you reject the offer?


Initially, I wondered why economists would play this game. Surely player one would would offer 50/50 and player two would accept. But that was my irrational side and my missing economic eduction. A good economist would expect that player two would accept any non-zero offer: it is better to get something than nothing, and that thus player one will make the smallest possible offer. Reality is in between. Many people offer 50%, but many also do not. These offers below 50% are, however, also regularly rejected. Player two is apparently willing to hurt himself to punish unfair behavior. This game and many variations and similar games lead to the conclusion: humans are not purely selfish, but have a sense of fairness.

As a student of variability, for me the key aspect of the ultimatum game is its non-linearity. You either get something or nothing. In case of nonlinear processes, such as radiation flowing through clouds, variability is important. A smooth cloud field reflects more solar radiation than a bumpy cloud field with the same amount of water. The variability of the cloud water is important because the flow of radiation through clouds is a non-linear process.

By sometimes rejecting low offers, player two gets better offers from player one. This is especially clear when the game is played multiple times with the same players. In the beginning quite large offers are rejected to entice larger offers later in the game. How humans evolved a sense of fairness to be able to also benefit from this in one-off games is not yet understood. Fairness is surprising because a cartoon version of evolutionary theory would predict that altruism is only possible among kin. But the empirical evidence clearly shows that fairness belongs to being human. (Just like competition.)

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Knowledge will come only if economics can be reoriented to the study of man as he is and the economic system as it actually exists.
Ronald Coase

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Fairness is but one emotion that it not rational, not "productive". It offers some protection against unfairness, such as wages going lower and lower. Offering and accepting jobs are yes-no decisions under uncertainty for both parties. If there is one term that is often used in labor conflicts it is "unfair wages" or "unfair labor conditions". All the while economists wonder why unemployment is higher than the friction unemployment of rational actors and blame anything but their faulty assumptions.

Anger is also not productive, but fear of anger forces the haves to make better offers to the have-nots. Amok runs are not productive, mass shootings are not productive, suicide attacks are not productive. I would venture that independent of the proclaimed rationalizations, they signal a lack of justice and fairness.



The American election was also seen as unfair by many. The two parties had both selected historically unpopular candidates. Had the historically unpopular Trump not run, Clinton would have been the least popular candidate since polling started on this question. The main reason to vote was not to get other candidate.

With both candidates and parties so unpopular, with the historical unpopularity ratings of Congress and Washington the enormous partisan tribalism in America is surprising. The main pride of both tribes seems to be that they are at least not members of the other tribe. The lizard people have managed to pit the population against each other, while they loot the country and drag the world down. Do help me in the comments how "they" did this.



Many felt the election was a trap. In such a case one can expect irrational behavior. Or as Michael Moore elegantly said: Trump is the human Molotov cocktail they could throw through the window of the establishment. I am afraid the voters will find it was the window of their own house.

One mistake the Democratic establishment made in their support for Clinton was to expect rational behavior. They learned about economics and its political counterpart [[public choice theory]]. Both theories assume rational behavior. The Democrat establishment assumed that the working class had no other options than to vote for them because the Republicans would make their lives even worse.




Nic Smith, a self-described "white trash hillbilly from the holler" from coal country, on Trump voters: They are desperate to believe in something.

In a rational world the establishment would be right and player two would take the non-zero Clinton offer, in the real world people are fed up with begin treated unfairly and seeing inequality and corruption jointly grow for decades. In the real world having to choose the lesser evil, election after election, over and over again, makes it ever more likely the voters will sulk. That the Democrat establishment had just put up their middle finger to half of their party during the primaries likely also did not help putting people in a more rational mood.



Last year's presidential election was an extreme example, but a two-party system invariably mean that many people do not feel represented and are dissatisfied. [[A transferable vote]] would do a lot to fix this and gives the voters the possibility to vote for their candidate of choice without losing their vote.

A two-party system is also much more prone to corruption. A large part of the politicians will be in save districts and do not have to fear the wrath of their voters. Where the voters do have some choice, the corporations only have to convince politician D that they will also bribe politician R and both can do so with impunity.

A corrupt two-party system is not much better than a one-party system. In a representative democracy with more than two parties there would be real competition and the voters could vote for another politician.



What can we do to break this ultimatum game? The rhetoric and tribalism in America is unique. Humans are social animals and our group is important to us, but the US tribalism in beyond normal. For example, 34% of Trump voters being willing to say Trump's inauguration was the biggest ever is not normal.

Tribalism and emotions are not good for clear thinking and needs to be fought. The only thing we can change is how we act ourselves, we should try to reduce unnecessarily antagonizing people. When you have to say something bad about the corrupt Republican politicians in Washington make clear you mean them and do not use the term Republicans, which also means every single member of the group, most of whom also reject corruption.

I am only talking about who you address. Please stand your ground, there is no need to keep on moving our position in the direction of corrupt unreasonable politics. That only signals you do not believe in your ideas. If there is one thing frustrating about US politics it is weak corporate Democrats continually moving in the direction of ever more corrupt Republican politicians in the name of appeasement and in reality because they have the same donors.

Given the lack of a real choice one can also not blame the voters for every character error of their candidate and for all policies. For fashion icon Ken Bone the election was a choice between his personal benefit as coal worker and the greater good. Many Trump voters voted for Obama before. Some people say they voted Trump expecting him not to be able to execute his racist plans because they are unconstitutional. That may be a rationalization and for me Trump's overt racism would be a deal breaker, but not all of his voters are automatically bigots, even if many clearly are.

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Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that.
Martin Luther King, Jr

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Most people simply voted the party they always voted. There are people who have their health insurance via the Affordable Care Act who voted Republican and are likely to lose coverage. They thought the Republicans would not do something as barbaric as repealing the ACA without replacement. Thousand of people will die every year when that happens, but the repeal means that billionaires will have to pay less for healthcare and they own the Republican politicians, so I am less optimistic they will not do it.

Do not go around calling every Trump voter a personalized Donald Trump, make them an offer they cannot refuse. Especially the Democratic establishment should stop blaming everyone but themselves for not voting for their inevitable candidate. Rather than scolding their voters, they should make the left an offer they cannot refuse.

That offer would be a non-corrupt candidate. That would be an offer Democrat and Republican voters alike would find it hard to refuse. It is, unfortunately, the one compromise the Democratic establishment is least willing to make. The people in power are in power because they are good at selling out to corporations.

This video gives a good overview of the corruption in America and how it impacts normal people via politics and the media. Since corruption became worse the workers no longer shared in the increases in productivity and the politicians respond to the wishes of the donor class and not the working class. Readers from the USA may think political corruption is normal because it slowly and imperceptibly grew, but in its enormity it is not normal. It was much better before the 1970s it is much better in other advanced nations.



Fortunately several initiatives have sprung up after the Trump election debacle and after Sanders showing it is possible to campaign for the presidency without taking donor money. As an offspring of the Sanders campaign Our Revolution will run a large number of candidates under one political and organizational platform. Similar, but very clear in their wish to primary and get rid of corporate Democrats, are the Justice Democrats.

The non-partisan group Brand New Congress also wants to help (Tea Party) Republicans that do not accept money into Congress. I would love to see more of this on the Republican side. In Europe conservative parties are conservative, but not corrupt and not bat shit crazy. They are people you can have an adult conversation with and negotiate. They may prioritize the environment less, but do not childishly claim climate change does not exist. Getting non-corrupt Republicans into office may even be worth the time of US liberals.

The group 314 Action (inspired by π) work to get more Science, Technology, Engineering and Math (STEM) people into politics. If you love money and power, science is the weirdest career choice you can make. Thus I would expect the scientists that run for office to be mostly clean. The climate "debate" shows that nearly all climatologists are not touched by corporate corruption, while there are strong incentives for coal and oil companies to bribe them.

Let's work to end corporate rule, get the corporation out of politics and send them back to take care of the economy.


Following The Ninth: In The Footsteps of Beethoven's Final Symphony.

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The big lesson of Trump's first 2 weeks: resistance works

The magazine Correspondent: This is how we can fight Donald Trump’s attack on democracy. Focuses on how to change the media, which has become more pressing in the Age of Trump

Chris Hedges: We Are All Deplorables. "My relatives in Maine are deplorables. I cannot write on their behalf. I can write in their defense. ... I see the Christian right as a serious threat to an open society. But I do not hate those who desperately cling to this emotional life raft"

Thomas Frank in The Guardian: How the Democrats could win again, if they wanted

CNN Money: U.S. inequality keeps getting uglier

David Roberts of Vox: Everything mattered: lessons from 2016's bizarre presidential election - WTF just happened?

Political Polarization in the American Public - How Increasing Ideological Uniformity and Partisan Antipathy Affect Politics, Compromise and Everyday Life

North Carolina is no longer classified as a democracy by Andrew Reynolds, Professor of Political Science at the University of North Carolina at Chapel Hill.

A law professor's warning: we are closer to oligopoly than at any point in 100 years. Economically. The political power of the corporations is also increasing

The first days inside Trump’s White House: Fury, tumult and a reboot. "Trump has been resentful, even furious, at what he views as the media’s failure to reflect the magnitude of his achievements, and he feels demoralized that the public’s perception of his presidency so far does not necessarily align with his own sense of accomplishment."

An important piece for poll nerds by Nate Silver: Why Polls Differ On Trump’s Popularity?

Variable Variability: The ultimatum game, a key experiment showing intrinsic fairness and altruism among strangers


* Photo at the top, Be Human, is by ModernDope and has a creative commons CC BY-SA 2.0 license.

Climate myths translated into econ talk

Yesterday, I was at an amazing meeting. The three public lectures about climatology were not that eventful, although it was interesting to see how you can present the main climatological findings in a clear way.

The amazing part was the Q&A afterwards. I was already surprised to see that I was one of the youngest ones, but had not anticipated that most of these people were engineers and economists, that is climate ostriches. As far as I remember, not one public question was interesting! All were trivially nonsense, I am sorry to have to write.

One of the ostriches showed me some graphs from a book by Fred Singer. Maybe I should go to an economics conference and cite some mercantile theorems of Colbert. I wonder how they would respond.

Afterwards I wondered whether translating their "arguments" against climatology to economy would help non-climatologists to see the weakness of the simplistic arguments. This post is a first attempt.

Seven translations

#1. That there is and always have been natural variability is not an argument again anthropogenic warming just like the pork cycle does not preclude economic growth.

#2. One of our economist ostriches thought that there was no climate change in Germany because one mountain station shows cooling. That is about as stupid as claiming that there is no economic growth because one of your uncles had a decline in his salary.

#3. The claim that the temperature did not increase or that it was even cooling in the last century, that it is all a hoax of climatologists (read the evil Phil Jones) can be compared to a claim that the world did not get wealthier in the last century and that all statistics showing otherwise are a government cover-up. In both cases there are so many independent lines of research showing increases.

#4. The idea that CO₂ is not a greenhouse gas and that increases in CO₂ cannot warm the atmosphere is comparable to people claiming that their car does not need energy and that they will not drive less if gasoline becomes more expensive. Okay maybe this is not the best example, most readers will likely claim that gas prices have no influence on them, they have no choice and have to drive, but I would hope that economists know better. The strength of both effects needs study, but to suggest that there is no effect is beyond reason.

#5. Which climate change are you talking about, it stopped in 1998. That would be similar to the claim that since the banking crisis in 2008 markets are no longer efficient. Both arguments ignore the previous increases and deny the existence of variability.

#6. The science isn't settled. Both science have foundations that are broadly accepted in the profession (consensus) and problems that are not clear yet and that are a topic of research.

#7. The curve fitting exercises without any physics by the ostriches are similar to "technical analyses" of stock ratings.

[UPDATE. Inspired by a comment of David in the comments of Judith Curry on Climate Change (EconTalk)
#8 The year 1998 was a strong El Nino year and way above trend, well above nearby years. Choosing that window is similar to saying that stocks are a horrible investment because the market collapsed during the Great Depression.]

[UPDATE. Found a nice one.
Daniel Barkalow writes:

Looking at the global average surface temperature (which is what those graphs tend to show), is a bit like looking at someone's bank account. It's a pretty good approximation of how much money they have, but there's going to be a lot of variability, based on not knowing what outstanding bills the person has, and the person is presumably earning income continuously, but only getting paychecks at particular times. This mostly averages out, but there's the risk in looking at any particular moment that it's a really uncharacteristic moment.

In particular, it seems to me that the "pause" idea is based on the fact that 1998 was warmer than nearly every year since, while neglecting that 1998 was warmer than 1997 or any previous year by more than 15 years of predicted warming. If this were someone's bank account, we'd guess that it reflected an event like having their home purchase fall through after selling their old home: some huge asset not usually included ended up in their bank account for a certain period before going back to wherever it was. You wouldn't then think the person had stopped saving, just because they hadn't saved up to a level that matches when their house money was in their bank account. You'd say that there was weird accounting in 1998, rather than an incredible gain followed by a mysterious loss.

]

One interesting question

The engineers and economists were wearing suits and the scientists were dressed more casually. Thus it was easy to find each other. One had an interesting challenge, which was at least new to me, he argued that the Fahrenheit scale, which was used a lot in the past is uncertain because it depends on the melting point of brine and the amount of salt put in the brine will vary.

One would have to make quite an error with the brine to get rid of global warming, however. Furthermore, everyone would have had to make the same error, because a random errors would average out. And if there were a bias, this would be reduced by homogenization. And almost all of the anthropogenic warming was after the 1950-ies, where this problem no longer existed.

A related problem is that the definition of the Fahrenheit scale has changed and also that there are many temperature scales and in old documents it is not always clear which unit was used. Wikipedia lists these scales: Celsius, Delisle, Fahrenheit, Kelvin, Newton, Rankine, Réaumur and Rømer. Such questions are interesting to get the last decimal right, but no reason to become an ostrich.

Disturbing

I find it a bit disturbing that so many economists come up with so simple counter "arguments". They basically assume that climatologists are stupid or are conspiring against humanity. Expecting that for anther field of study makes one wonder where they got that expectation from and shines a bad light on economics.

This was just a quick post, I would welcome ideas for improvements and additions in the comments. Did I miss any interesting analogies?

Changing the political dynamics of greenhouse gas reductions

Photo by Caveman Chuck Coker, Creative Commons by-nd licence

Another climate conference failed miserably. Maybe we need a completely different system, a system in which forerunners are rewarded and not punished.

A stable, predictable climate is a common good. Climate change is one of the most difficult tragedies of the commons. There are great benefits to using energy and the climate costs are spread almost perfectly to everyone. No single industry or country contributes much to the problem, but some industries and countries do benefit strongly and have a large incentive to halt the negotiations and to spread doubt. This makes greenhouse gas mitigation arguably the most difficult tragedy of the commons.

It is possible to solve such tragedies, the Montreal protocol to curb emissions of chlorofluorocarbons (CFC) to protect the ozone layer seems to work well. The ozone layer is now at its thinnest, but scientists expect that is will start to become thicker soon and return to almost normal levels in several decades. However, in case of the Montreal protocol only the producers of fridges, air conditionings and spray cans were affected. Greenhouse gasses are emitted by the energy, agricultural and building sectors. These are powerful parties and this makes a global treaty difficult. Maybe it is better to solve the tragedy of the commons by allowing countries and regions that want to reduce their CO₂ emissions to protect themselves against unfair competition.

Plan B for our planet

The Kyoto protocol is running out and the climate conference in Durban will likely end without a new stronger protocol to reduce (the growth) green house gas emissions. Maybe we need a plan B.

Under the Kyoto protocol a cap on the greenhouse gas emissions for the participating industrialized countries is set. Within this group emission rights can be traded, so that emissions are cut in the most efficient way. With a similar aim, emission can also be reduced by financing emission reductions in emerging economies and developing countries.

The problem of the Kyoto protocol is that the cap on the greenhouse emissions only makes sense if everyone is participating, or at least will participate as soon as they are rich enough. It is possible to do so, the Montreal protocol to curb emissions of chlorofluorocarbons (CFC) to protect the ozone layer works well. In case of the Montreal protocol only the producers of fridges, air conditionings and spray cans were affected. Greenhouse gasses are emitted by the energy, agricultural and building sectors. These are very powerful agents with an interest in the status quo. With propaganda and by encouraging conflicts, they can makes sure that there are always some large greenhouse gas producers not participating.

Maybe a global cap is not needed. Maybe we can see the problem as a dynamical one. How can we develop cost efficient technologies to reduce green house gas emissions. These technologies will be developed if there is a clear price signal; emitting CO2, wasting energy should be costly. Furthermore, economies of scale will be important to reduce the price and the increase competition.

For this, all we need are higher prices for greenhouse gas emissions (for non-renewable energy, etc.) in a large part of the world, but not necessarily all of the world. This part of the world should be allowed to protect itself against imports produced with cheap energy. That is all that the world would need to agree upon.

I expect that Europe would be the region that would start working this way. Due to the import levies, the playing field would be levelled and Europe's industry would be able to compete in the here and now with industries from the outside. In the long run, the Europe's industry would be come more efficient and would be world leader in green technologies. Technologies that will be needed everywhere once the prices of energy, concrete and fertilizer will start to rise due to shortages.

This is a quite attractive position. No disadvantage now, due to the levy, and likely advantages later, due to a technological leading role. It might well be that many countries would like to cooperate, get into this green region to be able to export without levies and to be part of the future.

An agreement that climate import levies are allowed may be easier to achieve as a global cap on greenhouse emissions.

Further reading

More posts on economics.

Darwinian or Smithian competition

Econtalk recently held an interview with Robert Frank, author of the book "The Darwin Economy".
The most interesting part starts with the statement:

"I start with a prediction that I won't live to see whether it comes true or not: I predict that if we were to poll professional economists a century from now about who is the intellectual founder of the discipline, I say we'd get a majority responding by naming Charles Darwin, not Adam Smith. Smith, of course, would be the name out of 99% of economists if you asked the same question today. My claim behind that prediction is that in time, not next year, we'll recognize that Darwin's vision of the competitive process was just a lot more accurate and descriptive than Smith's was."

I think he is right, but am hopeful we do not have to wait an entire century.

The competition of Adam Smith is the competition between lion and gazelle. It makes both fast and strong. You could say, it also makes the group better of, on evolutionary time scales. Charles Darwin was aware that this is not always the case, competition between males can lead to aggressive and too strong males, competition between trees for the sun makes them tall (inefficient) and fragile (storm damage). In these cases collaboration between members of a species would make everyone better of.

The irony for economics, the study of how humans allocate their resources, is that humans are one of the most cooperative species on earth (we are strong reciprocators). You can see this everywhere, if you have an eye for it. You can see it in its most distilled form in economic games performed in laboratories, such as the ultimatum game and the common goods game.

Productivity and context

Just listened to Econtalk with Bob Lucas, Nobel Laureate and professor of economics at the University of Chicago, on economic growth. Naturally they also touched on productivity. It was almost funny how they avoided one conclusion. It was on the tip of my tongue as the ending of many sentences.

They talked about a person raising chickens in Indonesia, producing about 50 eggs per chicken per year and having to pick them himself. They asked themselves the question why he did not use modern technology to produce 300 eggs a year. Lucas answer was the lower cost of labor in Indonesia and he stated that this cost is determined by people working in factories in the cities. Lucas: "Economic growth is always associated by a move out of agriculture and into the city environment."

Then the host Russ Roberts asked Bod Lucas why an unskilled immigrant makes so much more money as soon as he (illegally) crosses the US border. Or in other words why he suddenly becomes more productive, while his human capital did not change. Lucas said that it is about cooperation with other people, how productive you are, e.g. as a busboy, depends on the quality of the waiters and of the cooks. Furthermore, the richer people in America are willing to pay more for a dinner.

Roberts then notes that it is a beautiful and interesting problem, that he is probably not more intelligent than his dad, but his standard of living is much higher. Lucas avoids answering, but states: "The other thing is: How many people are competing with you at your level?" "Don't drop out of high school!"

The answers hint at the following: Context is very important in determining productivity and wages. In the two examples, the farmer and the immigrant, context determines their wage, not their skill, not their education, not their human capital. For the farmer it is important that other people get better wages in the city, for the immigrant is is important where he works.

Productivity thus cannot be determined by looking at a person, it is not defined at the level of a person. Scientifically put: it is a nonlinear computation, not a linear one. In the latter case you could isolate one element, one person. Strictly speaking productivity is only defined at the global level. It is still reasonably well defined for nations and probably for large companies. (Even the productivity of companies is determined strongly by their network of partners and institutional factors.) Thus it is also not possible to compute how much a worker should earn. It is up for negotiation. And you certainly cannot claim that someone deserves to earn a certain amount.

Of course, the employee does need to work and often needs skills. Lets not start a nature-versus-nurture-type debate. Productivity is determined (almost) 100% by context and 100% effort. Just as an organism is determined 100% by nature (genes) and 100% by nurture (environment; context) and you can only split these two factors for a given variability in the environment.

It is thus very well possible that top managers get better salaries because they have a better bargaining position, not because they are more productive as it often stated in the media. Doubling the salary of all workers would be a problem to a company. However, a company does not go bankrupt because their CEO gets a double salary; there is only one CEO and there are basically no market forces to reduce it until it becomes extremely excessive. That may be an important reason for the differences in salaries, rather than skills.

Further reading

More posts on economics.

Good ideas, motivation and economics

Steven Johnson recently wrote the book Where Good Ideas Come From: The Natural History Of Innovation. In this book he argues that good ideas mostly do not come as a sudden spark out of the blue, an epiphany, but rather grow slowly over time by combining ideas. His recommendation for finding good ideas is to create a diverse network with people with very different interests to increase the chance of seeing a new combination. The latter is similar to recommendations from creativity books to read broadly. Also personally, I like to read about a broad range of topics; reading just meteorology papers, it is highly unlikely that I will get an idea a colleague did not yet have. On the other hand, you do need to know your field to know what contribution is needed. Johnson also advices to write up your ideas and ideas of others and to discus them freely. Another advice from Johnson to organizations is to give employees the freedom to explore wild ideas in part of their time.

In the last chapter of the book and in an article for the New York Times, he answers the question why most good ideas come from amateurs and academics rather than solo entrepreneurs or private corporations. His answer is that the commercial guys are handicapped by keeping their ideas secret.

That may be part of the answer. Another is likely that people are not that much motivated by money when it comes to such complex cognitive tasks. As Daniel Pink explains in a talk at TED and in a beautifully made animation, offering people more money will increase their productivity for simple manual tasks. However, for tasks needing only a little cognitive skill people actually often perform worse if they are given a large monetary reward. Daniel Pinks equation: Motivation = autonomy + mastery + purpose.

Another indication that people are not solely motived by money, but also by concepts such as fairness comes from academic economics, from experimental micro-economics. The deviation from mainsteam economics (the neoclassical synthesis), with its concept of a homo economicus, who only cares about monetary gain, is beautifully distilled in a classic simple economic game, the ultimatum game.

In the ultimatum game, person A get to divide a sum of money. Person B has to agree with this division. If B doesn't, no one gets any money. When I first read about this game, I was wondering why it was interesting; people would simply split 50/50, wouldn't they. However, then it was explained that if B would be a good homo economicus, he would accept any offer, because it is better to receive something as getting nothing. Person A knows this and will only offer the smallest possible amount. As expected, reality looks very different. If Person A does not offer at least 30 to 40 percent, it is quite likely that B rejects the offer. Typically A offers 50 percent. This also happens if A and B do not know each other, if the game is only played once, and the results is similar in any culture or group. This game and many similar ones have led to the conclusion that humans have a innate sense of fairness.

This is a combination of three ideas. It is not yet sufficient to derive a new economic theory, but it might be a start. Do you have any ideas that together may make this network of ideas more fruitful?

Further reading

More posts on economics.

More posts on creativity.