Wednesday, February 24, 2010

Efficiency Matters

I’m uncomfortable starting any conversation with a disagreement, but it is a menial one that leads to a broader agreement, so I’ll try it. In a footnote on page 66 in “The Armchair Economist”, Landsburg argues that a high paid politician makes for a better politician, and I flatly disagree for a number of economically motivated reasons. Foremost among my disagreements comes from observation, as politicians move up the political hierarchy, from say a commissioner to a Senator and beyond, there tends to be a correlating decline in general scruples. Even the same politician seems to be subject to the function of, “x more dollars in income = y fewer units of honesty and usefulness”. It is a speculative observation, but an observation nonetheless. Moving on, as an office becomes more competitive a public servant must spend more time, money and resources competing, therefore spending less time performing their actual function. The officer must serve the public less and herself more (that pronoun goes out to you Camilla).

Eventually if rising political salaries were to lead to thier inevitable conclusion, public servants might spend the majority of their time on political survival and reelection and the vast minority on accomplishing anything. Now, Landsburg and I might agree this scenario is wildly inefficient, but Mises and I might agree this scenario is much more efficient than having a public servant actually pass legislation. In fact Mises and Landsberg might both argue the cost of paying a politician $200 thousand per year and having her work tirelessly to pass market reforms and legislation might equate to millions, possibly billions in additional costs and inefficiencies to businesses. Therefore, maybe it is worth paying every member of congress $1 million to have them compete tirelessly for a position whose purpose has become simply to compete tirelessly. Well, maybe rather than disagree with Landsberg, I should seek to agree and better understand the word ‘better’.

Mises believes the corporate model to the pinnacle of efficiency and function. The corporation embodies the determinism of the market and the fluidity of success and failure, and it is adaptable; without government intervention it is the organism to best suit societies’ ends and means, it is efficient because it is subject to loss and gain. On some level, Mises is completely correct, an organization not subject to clear loss and gain is doomed to become a bureaucracy, who is subject only to the status quo. However, I question whether the modern corporation is the most efficient embodiment of the market. Most companies are floated on someone else’s investment in the form of corporate bonds and shares, therefore the vast majority of employees will never realize the true extent of loss (I’m glossing over bankruptcy and the fact that a bank’s bad loan loss only needs to be huge to be socialized). Sure shareholders put plenty of pressure on their investments, but many often seek a short term, speculative gain rather than a long-term value, i.e. anything useful—which may or may not be efficient. Furthermore, modern corporations are full of jargon spewing MBAs who perform very strange rituals and functions, like mission statements and webinars. Here is what I am getting at, the most efficient incarnation of a corporation would be something more like an employee owned collective, like a law firm or a consultancy. The partners experience the loss of bad decisions directly, as well as the success of good ones, there is no need for a giant class of managers (the bulk of a corporate pyramid) as all the partners know their function and see the direct benefits of hard work and efficiency. The partners police themselves and each other, people are bought out rather than fired, therefore hiring (buy-in) decisions are a little more thought out. This model maximises loss and gain... So this is probably not really a viable corporate solution, but more a way to further Mises ideas on how to keep out bureaucracies. Though, I feel like if this were a good idea there would be more real world examples, but their aren’t, so that may say all I need to hear.

Tuesday, February 23, 2010

The Logic of Efficiency

Reading this chapter gave me a firmer grasp of the concepts it was exploring such as obviously efficiency and a term i hadn't so much, deadweight loss. The shirt example laid it all out nice and easy i thought. you buy a shirt for less then ud be willing to pay, that makes you and thusly the world richer...however if that same product is taxed so much you are now completely unwilling to consider its purchase, that is the definition of a deadweight loss.

I didnt quite understand the more elaborate example of the exxon vs. mineral rights ppl though. I git the idea that its the willingness to pay that counts as a vote for the respective party but i thought the example lacked credibility. The end result seemed as though if the exxon ppl want to drill they'd have to settle outta court with the activist and GIVE them money for whinning the most and getting sympathy. That example annoyed my for that reason alone, he shoulda just used the ANWR because thats what it sounded like.

At the end of this chapter after all the explantions the author has given about being efficient and using a certain criterion to deciphor what is good and bad. he still says he runs after the dollar and doesnt know why. I think as this chapter suggests the logic of efficiency is a adaptable idea to human situations not every event can be calculated examinied and analyzed before reaching a finall decision. Somethings you just know you can live with or without and there fore it isnt necessary to put more resources towards pondering then needed.

What does this efficiency stuff mean anyways?

For the past two summers I've worked the weirdest hours ever for a tour company working from 3:00AM-11:30PM. Because of this I've gotten the question "What do you at 3AM?" sooo many times now I just kinda of throw it off and ignore whom ever asked it. However, the reality is what you do when you work crazy hours if your Camilla is everyday near the end of the your shift you exert some flaming economic justice to your environment and watch your co-workers mouths drop open dumbfounded by your explanation of why you should leave (as the marginal labor productivity curve has began to bend backward because too many additional units were added at once)or get a weak smile and head shake as you say something stupid that is economical-comical. What I mean by economical-comical ties to all the weird things economists do and say in the name of "efficiency" like not rescuing a dollar. For me this at work is inventing new-fanguled-devices to clean things i.e. like my swifter pad staple mittens. After I made that particular device I exclaimed "I am an economist, hence I am efficient!"

My view of efficiency however is one that is built off of my inner nerdy gut feelings. These feelings allow me to resonate with Landsburg's statement that "Economist's know efficiency when they see it". I think though that even though efficient systems are easy to see they must be 1.)too difficult or 2.)too boring to explain and for this reason most of the Landsburg types are giddy to pick at "inefficient" systems rather than examining efficient ones. However when Landsburg gives examples of how a system (drafts/taxes) could be made efficient like other blogger's have noted he seems to be missing something. Typically the concept of efficiency often gets muddled with the concept of resourcefulness which I believe to be two different concepts. Landburg himself implies that efficiency is the avoidance of deadweight loss and the attainment of a situation where neither side is a loser.Even in Landburg's examples of what is efficient there is a visible loser(example even though his neighbor would pay $20 to get his lawn mowed he won't do it because he feels it would cost $30 to him). To me I feel at loss with this implication of the meaning of efficiency shouldn't be more multifaceted?

I think to Landsburg makes progress though at getting at what efficiency is in the next chapter of our reading when he gives the examples of the male birds of paradise, cows, and college students. In each of these examples Landsburg provides an example of an outcome that would be the most beneficial to all parties but then how the "cheaters" see what could be gained for them personally if they externalize some of the costs to others. When I read this part of the reading it was like a light bulb went off in my head except the light bulb looked exactly like a four-square court as I though "waha...the Nash equilibrium!!!!" I think the holes I have in fully being able to figure out what exactly is efficient and why we as individuals don't get to see enough of it can be investigated by moving to game theory and thinking about the woes of the Prison's Dilemma. When you have four outcomes you can "see" which one is the most "efficient" but this is not obtained as the players of the game chose the ti for tat option and everyone loses.
at this point......
I feel now though like I'm starting to run around in circles and if I go any further my nerdy gut feeling for efficiency tells me that I would be making a choice which would be inefficient with my time as I could be doing other things besides repeating myself and also inefficient with your time as well (if your even still really reading this). So the best option to me seems to be in to asking the group a couple of questions: Can a blanket statement as to what efficiency really is be made? (for the sake of efficiency!!!) and if so does anyone have any ideas as to what this would be?

Outsourcing the Guns

In the reading from "Bureaucracy", Mises uses the military as an example of the "perfect bureaucratic organization". Mired in the past, reluctant to change it is an institution that shuts down and ostracizes the enterprising individual:

"Let us take as an example the conditions of army life. Armies are certainly the most ideal and perfect bureaucratic organizations. In most countries they are commanded by 'Bureaucratic Management of Private enterprises officers who are sincerely dedicated to one goal only: to
make their own nation's armed forces as efficient as possible. Nevertheless the conduct of military affairs is characterized by a stubborn hostility to every attempt toward improvement. I t has been said that the general staffs are always preparing for the last war, never for the future war. Every new idea always meets with adamant opposition on the part of those in charge of the management. The champions of progress have had most unpleasant experiences. There is no need to insist upon these facts; they are familiar to everybody."

I have plenty of friends and family in the Armed Forces who will confirm this analysis. My muse is whether or not this should be different. Can the system of free enterprise be safely applied to the armed forces? Our government is already contracting out a lot of military endeavors in Iraq to private corporations, or rather, to describe them more accurately, mercenary companies. What I wonder is if the system of free enterprise would lead to a more effective, robust military, or if that sphere is one of the few that is best left to the government's domain.

Some time ago I read a book called "Outsourced" by RJ Hillhouse which explores this concept. A blend of fact and fiction, the author navigates through the war in Iraq, warning of the danger of the privatization of our military. I recommend the read for anyone who wants to know more about the situation as the author has certainly done her research. It is not the most believable of plots, but the appendix to the book entitled "The Facts Behind the Fiction" and which details how much of the story is based on actual facts, makes up for that. A scarily large portion is based on actual facts.

Now that I've presented this interesting concept, I'm going to say that I don't favor it. I don't think privatization of the Armed Forces is an example of free enterprise as the only consumer is the government. It's more of a throwback to the days of war lords dominated by the single mega-war lord. Also, as these private companies offer much higher pay than the traditional Armed Forces, they entice the experienced soldiers and generals away from the military. Which can't be a good thing, either.

Efficiency vs A larger outlook

In Landsburg's argument against taxes he talks about the logic of efficiency. His outlook seems a little short sighted to me. In his example about prodrillers and anti drillers he only takes into account the present situation. He does not talk about costs that may have to be dealt with in the long run, only the ones in the present. For example, (since he took Exxon as an example) there may be an oil spill and that could increase the costs on both sides by millions of dollars.
A better example of how Mr Landsburg refuses to see beyond the obvious is his example of flight tickets. He talks about how he would not spend $1000 dollars more for a ticket than it is worth to him. What is this worth eh talks about? If he is travelling for business, is it not worth $1000 if you go to talk to publishers and you sign a book deal. (Landsburg certainly did well in terms of book sales and reviews.) Or if you are travelling to go on vacation is all the rest, sunshine, relaxation, rejuvenation not worth $1000, especially if you earn around $100,000 (Landburg im sure makes a lot more), and you spend 1% of your income on a flight for your holiday! Bottomline- I dont think Landsburg knows understands the worth of most things, and sometimes fails to understand that efficiency may not always be the solution for everything.
For example- using high fructose corn syrup has been very effiecient for the food industry, it helps them lower costs of drinks. Which seems really nice, because if a coke if worth 50 cents to a person, they end up spending 40 cents and saving 10 cents. But, in the long run this efficiency does no good for the larger population and leads to obesity, heart disease, and higher mdeical bills. Therefore, I do not agree with the author- efficiency is not the best route for all problems, and other less efficient factors in most cases produce long term beneficial results.

Slime Molds, Economic Efficiency & Market Failure in Haiti

Let's Start with Steven Landsburg's bogus claim that in biology there is no equivalent of an invisible hand. In Chapter 8 of his book, The Armchair Economist, Landsburg says the following: "In biology, there is no equivalent of the Invisible Hand. Survival of the fittest is a different thing altogether. Nothing in the evolutionary theory either promises or delivers the spectacular efficiency of the competitive marketplace."

Landsburg goes on do describe in detail the inefficient biological consequences of sexual selection as exemplified by the male bird of paradise and his ridiculously long tail. Sadly, there's nothing natural about sexual selection. (I'm slightly exaggerating; unless you are in to some really kinky stuff sex is both beautiful and natural. It's the selection part that can seem unnatural at times.) Sexual selection is a slightly different beast than natural selection. I'm not going to attempt to clarify or defend my previous statement other than refer the skeptical to Richard Dawkins' The Selfish Gene.

Sexual selection, however is only one facet of evolution as a whole, and while it can be notoriously inefficient, natural selection is mercilessly efficient. If an organism wastes even a small amount of energy pursuing strategies that aren't optimized toward efficient survival and reproduction, it wont either. (Survive or reproduce.) As a matter of fact, economists and other scientists can use the fruits of natural selection to optimize human organizations toward greater efficiency. Consider the area of planning public transportation networks. At the very least, slime molds are as 'smart' as we are.

As reported in Wired Magazine:

"Talented and dedicated engineers spent countless hours designing Japan’s rail system to be one of the world’s most efficient. Could have just asked a slime mold.

When presented with oat flakes arranged in the pattern of Japanese cities around Tokyo, brainless, single-celled slime molds construct networks of nutrient-channeling tubes that are strikingly similar to the layout of the Japanese rail system, researchers from Japan and England report Jan. 22 in Science. A new model based on the simple rules of the slime mold’s behavior may lead to the design of more efficient, adaptable networks, the team contends."

Read More

The primordial ancestors of this particular slime mold that weren't efficiently searching for food didn't make the cut. Due to the bias toward 'economic' efficiency imposed by natural selection, slime molds have a lot to teach us. (One quick aside: there is a growing number of evolutionary biologists who theorize that the evolutionary development of the large 'inefficient' human brain is a result of sexual selection. That, however, is a story for another time.)

Now on to market failure in Haiti. In Landsburg's chapter on why prices are good, he says: "Even when we consider a complete economy, with many goods and many activities, all of which interact with one another in complicated ways, the existence of competitive markets and market prices is exactly what is required to guarantee efficient outcomes."

Enter Haiti. The recent disaster in Haiti has highlighted one of the failures of the market economy when it comes to allocating scarce resources via the price system. I've read that the price system functions because it gets scarce resources to where they are valued most. We can tell who values these resources by who is willing to pay the most for them. I'm not going to explain any further on how this works or why it works, but I will mention a case where it doesn't.

The price system only funnels goods to those that value them most when those that value them most have the money to pay for them. I'm pretty sure a starving earthquake victim values a granola bar more than an overweight American journalist would, but according to the market, the journalist wins. (It's entirely possible that misrepresenting the price system, and our resident White Knight will ride to the rescue of this economic damsel in distress by posting in the comments of this thread. Hopefully this little parenthetical attack will preempt him from doing so.) Anyway, on to a better description of the problem, and it's non-market solution, given by Noam Scheiber, a senior editor at The New Republic:

Interviewed by Bob Garfield, from NPR's On the Media

NOAM SCHEIBER: A few days after the earthquake you had hundreds of journalists there, and it was just hard to believe that they weren't taxing an already fairly weak infrastructure there. There were constant streams of stories about teams of nurses and rescue workers who were marooned at airports and military bases because of the clogging and congestion at the Port-au Prince-airport.

Once they got into the country, obviously the journalists had to have places to stay, food to eat, flashlights, batteries. Even if they did not think of themselves as directly taking food out of the mouths of Haitians, clearly they were bidding up the prices of these things and making it more difficult for people on the ground there to get access to them. In fairness, some news organizations actually shipped in their own supplies, but then the question arises, well why not ship in supplies for relief, rather than to serve journalists who are on the ground.

BOB GARFIELD: All right, so a major news story, unspeakable tragedy. News organizations have to report on it for their readers, listeners and viewers. What’s the solution?

NOAM SCHEIBER: Well, my thought is a solution that we journalists use in other contexts, which is the idea of a pool. And I think it’s most commonly used in coverage of the White House. There are dozens of news organizations and probably hundreds of journalists who are responsible for reporting on the daily comings and goings of the President. Obviously, those hundreds of journalists can't be in earshot and have a straight line view of the President at every moment. So the arrangement that we as a press corps have arrived at is the pool. And the person who is the pool representative at that particular moment writes up a dispatch, a very literal take on what the President has done. It gets distributed through the White House press operation to the rest of the White House press corps.

It’s very easy to imagine something similar working in Haiti or in disaster zones generally, so that you would have only a fraction of the reporters on the ground at any moment.

BOB GARFIELD: Apart from their missions to serve their own audiences, news organizations are also businesses and in many cases in competition with one another. I don't know if any executive producer of any news show saw your piece and rolled his eyes and made a vulgar gesture, but I can certainly imagine him doing that – like, yeah, nice piece, Noam. What reality are you living in?

NOAM SCHEIBER: Frankly, I think that competition generally serves us well. I mean, we want dozens of news organizations reporting on the presidential administration because it’s the most important institution in the world, so the average citizen and the social good is very well served, even if there’s a bit of redundancy.

But I think this is a unique circumstance, and there are other unique circumstances in which we set aside the brutal logic of competition and agree to some syndicate that a bunch of news organizations pitch in for a kind of common product.

Just because you’re working from common raw data does not mean that all of your stories have to be identical and then you can't subsequently compete the same way that news organizations do for elections by using the same exit polls.

(Listen to the interview, or hear the rest of the story at

Markets are efficient, except when they aren't, and the price system is awesome, except when it's not.

(What's that I hear, the galloping hoof beats of a noble steed? Onward to the comments!)

Friday, February 19, 2010

The Uncomfortable Truth Behind Fiat Currency?

WASHINGTON—The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct.

"Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…" said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all."

"It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless."

According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, "Oh my God, he's right. It's all a mirage. All of it—the money, our whole economy—it's all a lie!"

Don't panic

Thought the blog was well overdue for a makeover. Hope you enjoy the new look. Aside from the aesthetic improvements the posting client has been updated to allow you more control and customization. Go nuts.

Tuesday, February 16, 2010

Polanyi : world's worst soothsayer

Polanyi's article had a lot of excellent points especially about spontaneous order. However, when it came to pointing out the direction science would take in the near future Polanyi just did not see it coming!
I refer to the section where Polanyi discusses his views on scientific results for social guidance. Polanyi decides that " any attempt at guiding scientific research towards a purpose other than its own is an attempt to deflect it from the advancement of science". He also shockingly that you "cannot shape the advance of science." This ofcourse is written in the time of the cold war. If Kennedy did not shape the advance of science by challenging to put a man (this goes out to you Mr Polanyi)on the moon, I don't know what is. I will discuss the morality of this later. However, the very face of science today contradicts what Polanyi thinks science should be. Polanyi thinks that voters must be urged to give tax payer dollars to support science for the purpose of exploring the nature of things. He feels that the electorate would be ok with this. However, most research that is conducted in universities today is funded by organizatons such as NIH, NSF etc. All these governmental or even private organizations give grants only if they see there is a potential for the research to help out humans in someway. A scientist cannot fund his/ her own research and must rely on other companies to do so. This is completely contrasts what Polanyi says. Our Politicians too have spoken about the waste of tax payer dollars on science. I remember McCain criticized the government for spending 2 million dollars in research on bears in montana. This shows the mindset of the electorate, which is very different from what Polanyi thinks it is!
The next question that arises is whether guiding sceince is morally correct? Is it wrong for us to want to understand to great mysteries behind life with a motive in mind? I do not think so. Sceince will be shaped with what we place value on, therefore it does act like the free market. Carrying out research with a specific goal in mind is not wrong but just more economically sound!

The Republic of Science: Is it pure or applied?

“I know I waste half my advertising dollars…I just wish I knew what half.” Henry Proctor of Proctor and Gamble, 1895.

Well, the goings on at Royal Society in 1947 aside, Micheal Polanyi in his discussion on the spontaneous institute of science brings up a very touchy issue: should science be publicly funded? To what extent? And how will that affect spontaneity? These are the issues I feel most relevant today. It is clear the balance must be set to maximize innovation, but who is to set the balance and how? The only assumption that can be counted on is that economies benefit when science advances, so long as those advances get to markets.

I have heard the institution of science (assuming you really can lump it all together) best described as a herd of cats; imagine a mob of anti-social, self-interested, and an otherwise disinterested scatter shot of animals pursing only their own curiosity, stopping intermittently to cat-fight and scratch. It is often serendipity that disparate findings come together to make anything useful. There have been certain instances where mega-projects set out to discover a ‘known’ unknown, like the Large Hadron Super Collider, or Intel pursuing the ever faster chip, but these comprise the minority of total science research. The majority of research is low budget with only a few scientists working on a project.

As expected both the private and public sector spend lots on research and science, but not all science is the same. Unlike in Polanyi’s time, science is seen today as either pure or applied. Pure science is science for science’s sake, like an entomologist researching a rare beetle’s excretion habits, while applied would is more like a scientist trying to find a brighter, more efficient LCD screen. Businesses will surely invest in applied research, much to their benefit. Government and academia will support pure as well as applied science, but for the general benefit. Both branches of science are indispensable, yet it is pure research that may suffer the most when government funding declines. Does business spend less on pure science because they know government will pick up the slack? Would the private sector spend more on pure science if it knew that government was not going to? Well, probably not, one caveat of pure science is that its value lies in the fact that it’s freely shared. Most privately funded science is only shared after its commercial potential has been exhausted. It is pure science that stand to loose the most without government funding. Well, naturally as economists we must question the purity of ‘pure’ science.

Scientists, despite the anit-social cat allusion, still must answer to someone, whether it is the National Science Foundation, NOAA, NASA, or whatever. Funding comes from somewhere and grants tend to land in the coffers of those who agree with whichever agency is doing the funding, or those that can garner the most attention for the agency doing the funding. This calls into question purity of ‘pure’ science, particularly when the topic is very politically charged like health care, or climate change. I am not at all calling the majority of scientists data manipulators, but simply natural extensions of the way systems work, spontaneous or otherwise. People in charge will instinctively, whether consciously or unconsciously, fund those who agree with them. It is incentivized (is that a word?) behavior and it is completely rational. With that said, private industry research cannot create its own weather so to speak, it must answer to a higher burden of proof and viability: the market.

I am hesitant to draw too strong of conclusions about science and the market, I feel the market can and should play a larger role in science, but that would come with some heavy drawbacks, perhaps outweighed by the benefits, perhaps not. There is a strong consensus that all science is good, and more is better, and i'm inclined to agree. Yet what are the mechanisms to weed out bad science, or eniefficient and useless science? Roayal societies, journals and pannels? Sure they work, and plenty of incentives for good science are out there, but who really benifits from a piece of obscure 'good' science that stays locked up in some herpatologists file cabinet in an obscure windowless office of a small univeristy? Often 'pure' scientiests are hostile to commercial and market interests, yet what they don't realize is that for society to benifit from their research, findings must be brought to the market.

With that said, Micheal Polanyi, mentions how critical it is to have a ‘policing body’ of sorts. A panel of experts that rejects abnormal results, or results that disagree with the panel’s findings. However, “health care legislation recently passed by the United States Senate would allow federal agencies to punish organizations whose researchers publish results that conflict with what the agency feels is appropriate.” (George Avery). Mr. Avery, in an opinion piece for the Cato Institute, February 8th (link below), sees this as an open invitation for federal agencies to abuse and manipulate findings, to cook data, naturally in their favor. I thought it an interesting counter to Mr. Polanyi’s suggested method of policing the ‘Republic of Science’.

Scientific Misconduct: The Manipulation of Evidence for Political Advocacy in Health Care and Climate Policy:

Market Phobia

There seemed to be some confusion over my parting shot about why people fear the market last week. I was just trying to offer one of many conceivable explanations for why markets are viewed with fear and confusion by the general public. The fundamentalism analogy seemed apt at the time but for some reason appears to have been misconstrued as an attack on some. Allow me to try and clarify/elaborate on the point I was trying to make while I was running out.

Let's start with a thought experiment.

Say the supply of wheat suddenly declines dramatically and the price sky-rockets. Basic foodstuffs like bread vanish from the shelves triggering famine and starvation all over the world. We can predict with reasonable certainty that countless pundits will immediately take to the airwaves with declarations such as "the market has failed", "capitalism is dead", or something equally inane. They all need something to blame and the market is a ripe scapegoat largely incapable of defending itself.

Now say a passenger plane malfunctions mid-flight sending all its occupants crashing into the ocean. There are no survivors. Will those same critics then flock to the airwaves with condemnations about how "physics has failed" or how "aviation is dead"? Do they place blame on the gravitational pull of the earth? Of course not.

Why is the market singled out for condemnation?

I suspect because the vast majority of people are completely (albeit often rationally) ignorant of how basic economics (or really any science) works. They don't think of the market as a model showing the intersection of upward and downward slopping curves, or as mechanism for transmitting information about price and relative scarcity like economists do.

People have a natural compulsion to anthropomorphize "the market". They imbue a scientific framework with human characteristics to try and make sense of its formless, ambiguous, intangible complexity. Open the business section of any daily newspaper for countless examples of how people try to put faces on economic models with characterizations of how this market is "strong", or this market is "weak". When the price of bread, or oil or any other commodity jumps too high, or is not delivered in the quantity desired than people will say the market has "failed". When viewed through anthropomorhized lenses this failure is seen as an attack on they layman's way of life by some sort of malicious "market" bogeyman entity and non-economist critics with no basic understanding of the forces at work will flock from the woodwork with damning condemnations of the villainous market that wronged them.

In reality we know that the market itself is benign. It's not out to get us. It doesn't care about any of us. It can't. It's just a name economists came up with for the complex system of interactions between countless individuals, who themselves are all driven by natural forces, and who usually don't know or care about us either.

The market isn't an enemy. The market is amoral. There are markets for bubble gum and lollipops and there are markets for drugs and slaves. It's not "the market's" fault that there's a supply or a demand for drugs or slaves, nor that if the supply of either falls suddenly for some reason, ceteris paribus, the price will increase. The idea of this market-as-entity exists only in the popular imagination of non-economists. The market is no more to blame for a sudden fall in supply than the gravitational pull of the earth is when a plane falls suddenly.

Yet still, the perception that "the market" IS to blame still exists in the overwhelming majority of the electorate. As a result our anthropomorhizing psychology the market is looked at with fear and misunderstanding by many otherwise intelligent and reasonable people.

Now it's perfectly understandable to approach such an unforgiving, uncontrollable phenomena with fear. I'd be the first to admit that I'm afraid how forces beyond anyone's control can, at any moment, bring the flow of goods and services to a standstill, trigger shortages, high prices, famines, and all sorts of nasty effects. If anyone isn't frightened by that possibility they're probably lying. Nobody likes the feeling of not being able to control their own destiny. Contrary to what I'm afraid Sam thought I was saying when I invoked the religious fundamentalist analogy, I'm not saying that the reasons for this market phobia makes people stupid or gullible or whatever. It just makes them human.

The truth is no one, economists included, fully understand how markets behave. That lack of understanding and that lack of control combined with the fear it inspires can easily translate into misguided economic legislation like price controls, forced rationing, or full-blown central planning. Anyone with an iota of good sense or a background in economics and history could tell you that such attempts will probably fail and only exacerbate the problem. We can't allow our economic policy to be driven by fear of the market.

We may not ever have the control over the market that we would desire, but through our studies of economics we can at least come to better understand how incentives, scarcity and other natural forces shape the way markets emerge and behave.

Merit Based Research Allocation

Polanyi's The Republic of Science: Its Political and Economic Theory is an example of spontaneous order and has some excellent points.I really was interested in the merit based system which has evolved in regards to how scientist decide what they research. It is indeed interesting to compare this to a priced based system. In a sense they are very similar as the concept of value is key to both systems. Value is is subjective, but it is what the demand curved is based on if there is less of something we value it more and hence the price is pushed upward. Though this basic concept of a demand curve is not in present in Polanyi's explanation as to how the scientific system of order is obtained as research on the Fairbanks inebriates that poop in Josh's walkway is scarce but not considered to be highly valuable in the scientific world. According to Polanyi the allocation is still based on a subjective value but this is the value that other scientists put upon researchers based on according to Polanyi the following: plausibility, scientific value "a value that is composed of the following three coefficients: (a) its accuracy (b) its systematic importance" and originality of a discovery which "is assessed by the degree of surprise which its communication should arouse among scientists." In a sense it is very ironic that so much subjectivity is involved in determining the value of the research in a field which is praised for looking at the world objectivity. I think though that this shows how economics is indeed connected to everything.

As I was reading the article I thought about how one involved in this system would react to the concept of sunk costs in regards to their own research. It is hard enough to look at decisions in the present and realize that the money and time spent on it(whatever your deciding to do or not)can not gotten back and hence is a sunk cost, but how is this issue approached when your reputation as a scientist is lost? This to me seems like it would be hard to shake off as just another "sunk cost." especially in a merit based system where one's research value is determined by how the collective "science force" (te he he this is the best term ever!) view it. I know that I am just a "soft" scientist so maybe I am completely off on this point so maybe some of you can offer some input on this thought.

P.S. Was I the only one disturbed by the fact that Polanyi only refers to scientists of the male gender with all of his pronoun use revolving around him, he, his (unless he is talking about women shelling peas)? Sorry I mean not go all fem-o-nazi on you all I just expected more as it was written in the 1960's after all.

The Invisible Beaker of the Laboratory

I, as usual, have three dozen problems with this article, but I'll narrow my objections down to one item. In the article, the author states:

"Yet in a wider sense of the term, the decisions of a scientist choosing a problem and pursuing it to the exclusion of other possible avenues of inquiry may be said to have an economic character. For his decisions are designed to produce the highest possible result by the use of a limited stock of intellectual and material resources. The scientist fulfils this purpose by choosing a problem that is neither too hard nor too easy for him. For to apply himself to a problem that does not tax his faculties to the full is to waste some of his faculties; while to attack a problem that is too hard for him would waste his faculties altogether. The psychologist K. Lewin has observed that one's person never becomes fully involved either in a problem that is much too hard, nor in one that is much too easy. The line the scientist must choose turns out, therefore, to be that of greatest ego-involvement; it is the line of greatest excitement, sustaining the most intense attention and effort of thought. The choice will be conditioned to some extent by the resources available to the scientist in terms of materials and assistants, but he will be ill-advised to choose his, problem with a view to guaranteeing that none of these resource be wasted. He should not hesitate to incur such a loss, if it leads him to deeper and more important problems."

The author earlier used the example of a giant puzzle that all scientists were trying to solve. The method the author claimed that science used was as follows: each scientist following their comparative advantage in particular puzzle piece preparation and permutation. But science isn't like that!

We don't know if the universe even has a solvable puzzle. Physicists are currently searching for a 'theory of everything'. This ToE, if it exists, will combine quantum mechanics and general relativity into one giant 'solved puzzle'. This understanding will enable us to peer into the early nanoseconds of the universe and understand why things are the way they are. But it is possible that there isn't a theory of everything. It is possible that we won't be able to find all of the pieces because there isn't a complete puzzle that exists. It's possible that the best humanity can do is to get a practical, workable, fuzzy, general understanding of the nature of things. This might be enough for our continued survival as a species.

The author acts like each individual scientist has the ability to choose from a number of unsolved scientific problems, and that the scientist will know in advance which might be too easy or too hard. The scientist will then choose the goldilocks problem, the one that is just right. BOGUS. It implies that a scientist knows the level of difficulty of each problem before he or she begins to solve it. It also implies that scientific problems can be broken into solvable chunks like puzzle pieces.

You know what you call a problem that is too easy? You call that problem solved. Too easy... BAH. The only reason that the problem exists is that someone hasn't figured it out yet. It's possible that no one has tried. A scientist won't look at it and think, I can solve this one in two weeks, so I won't even try. Every time a scientist discovers something it's an opportunity to publish his or her findings in a peer reviewed journal, and publishing is a major motivation for the scientist to figure things out. If anything an ambitious scientist will be motivated to find the 'too easiest' problems out there and solve them and publish the results.

Also not every puzzle piece is available to every scientist. The fields of specialization are so narrow that at the frontiers of scientific discovery there may be only a few people qualified to even know where the particular pieces are. In those cases those small groups of specialized scientists are actually working in 'isolation' like the author mentioned in the beginning of the essay. Anyway, I can't wait for our meeting this Thursday.

Mundus Vult Decipi

I thought it was interesting how Polanyi pointed out that free markets are only one of many systems of self-organization or spontaneous order as we discussed last week. His discussion of science as a spontaneous order emanating from the individual and not a central organization, though lengthy and dry to read, was very pertinent to the theme we've been discussing as a group.

Growing board with 1945 Royal Society issues my mind wandered back to the issue of "rationality". [Sherri cringes here] In my meanderings I seem to have found a consensus that in economics the term "rationality" is related to optimization. A "rational" choice is one that optimizes in pursuit of a goal. This from wikipedia:

However, there seems to be strong dissent out there about the perfection of the economic assumption of human beings as rational. Last week Josh and I argued in favor of caution in whole-heartedly accepting the notion that human beings act rationally. My view was that you can't apply the theory across the board but that the exceptions are few enough that the general theory holds.

In a sociological journal Milan Zafirovski from the University of North Texas argues somewhat persuasively against the economic theory of rationality, making an interesting observation about utility. We economists (am I allowed to place myself in such a group?) use the concept of utility to explain away people's deviation from rationality. A person who makes a choice that makes them poorer values something other than money and so they maximize their utility for whatever they value more than money by becoming poorer (Camilla will doubtless correct me if I used "utility" wrong). However, we expand the concept of utility to include everything, so therefore it explains nothing, says Zafirovski. You can read the article here:

Note: those who don't want to wade through the entire article see section I. "Are Human Purposes Instrumental?" for the content I referred to.

Now hold on everyone, before you sacrifice me to the gods of the Free Market. I am not repudiating my strong beliefs in the free markets and the emergent order of kosmos, I just think it's valuable to explore alternate views and search for valid arguments with which you might be able to balance or improve your views with.

But what would I know about such things? According to Rich's kind, departing words from last week, people of my persuasion are terrified of things they don't believe in and can't control. We are stumbling around in a dark stupor mortified that someone might come along and present to us an alternate theory that we can't repudiate. Did someone just turn on the Discovery channel? My palms are getting clammy. Was Richard Dawkins mentioned in that newspaper article? Time to hide in my religious fundamentalist cave. And look, I realize insults flow both ways over the fence, but I've made a personal decision to approach the issue with respect and tolerance. Yet all I'm ever met with is derision and insults.

And that's probably enough deviation from economics for one week. :) Cheers everyone. Bring your nails to discussion on Thursday, for I'm sure to be crucified.

Tuesday, February 9, 2010

Hayeks “Cosmos and Taxis” illuminates the dichotomy between the two systems we all must answer to, cosmos and taxis, the self-made system and the artificial system respectively. Let’s call cosmos the free market, and taxis the organizations we contrive inside and outside the market. Some contrived organizations contribute to the market, such as corporations, and some exist to contain it, such as governments; tonight it is the containers that interest me.

Just how does one regulate a system that can only be understood by analogy, or at best by the side effects, the residue, it produces on the outskirts? Limitations are often the only frame of reference available to grasp very complex orders, orders that greatly exceed our capacity to wholly understand them. With that premise in mind, consider Hayek’s belief that a grown order will be limited by our ability to understand it (rationalize it), yet a spontaneous order will limit itself within the confines of its natural boundaries, such as available energy and resources. However, within the market’s natural parameters, governments place artificial boundaries meant to further contain and control the market; sometimes the rules can benefit the market (such as transparent accounting), though most often it does not (as in nearly every government intervention). And this I believe is the primary conclusion towards which Hayek is building: That economic rules cannot possibly target and control individual functions of the market.

The global economic system is too complex, too dynamic and too reactive for a targeted action to be genuinely effective. The only effective means of control is to manage and regulate what we actually control, such as corporate governance or transparency. Furthermore, if governments must wade into the system with market initiatives, it should only be with light, broad strokes. A narrowly focused incursion into the system will probably “miss” the target and result in an unintentional and equal reaction, like a bubble somewhere else in the economy. Often this anomaly will not be where we expect it, it’s possible that it will bulge out anywhere and at any time. Market anomalies do not have one cause, nor do they have one specific origin, but wherever there is a market failure, there is a nearby traceable government incursion. Therefore the only non-disastrous way to regulate the global economy, to control a system we cannot possibly understand, is with the broadest response available, such as monetary policy. It is the response that applies pressure to the cosmos most equally and most gently that will be the most effective at controlling our global economy.

Order is for the Birds

It is tempting to think of the global economy as an incredibly complex system that over the years has been designed and built from the top down by the world’s best and brightest politicians, businessmen, scientists and economists. Actually, the global economy was built almost completely from the ground up, not by an elite few, but by the actions of the many individuals involved.

The concept of complex systems, such as the modern globalized economy, arising from the interactions of a few simple rules played out in large numbers over time is called emergence. Hayek uses the Greek word Kosmos. Kosmos, or emerging complexity as it is also known, sounds very complicated, but it is actually quite simple. Take for example the flocking behavior of starlings. Groups of thousands and thousands of birds flock together in dense, fast moving groups. They wheel and dive through the sky in an amazing avian dance. Each bird is flying fast and very close to its neighbors. Any wrong move would be hazardous for an individual starling if it were to collide with another bird or get separated from the flock.

Biologist Richard Dawkins describes this phenomenon as beautiful, balletic, and almost miraculous. Dawkins goes on to say that “despite all appearances, there is no choreographer, and as far as we know, no leader. Each individual bird is just following local rules.” (The Greatest Show On Earth p 218). These flocks are a result of this emerging complexity. Each bird is following a set of simple rules such as: don’t fly too close to your neighbor, try and keep the same speed as your neighbor, and turn when your neighbors turn. Dawkins again makes the point that this complex structure arises through the interaction of simple rules on a large scale: “The key point is that there is no choreographer and no leader. Order, organization, structure – these all emerge as by-products of rules which are obeyed locally and many times over, not globally… It is all done by local rules… No choreographer. No conductor of the orchestra. No central planning. No architect” (220). A vast and complex system such as the global economy came into being as a result of millions and millions of individuals acting on basic rules. Things go well or poorly as a result of the emerging complexity of this system.

Those who cannot possibly live in a world without top down design might argue that the birds were designed to fly in such complex flocks. If that's true it's possible that humans were designed to have such poor economic systems.

Cosmos and Taxis

First let me start by saying that when I first saw the title of the article my super-saturated-by pop-culture brain thought it referred to cosmo's and taxi's (cabs) a.k.a any episode of Sex and the City!
Upon further investigation and after the realization that Hayek was probably not into Louboutins and Blahniks, but very dazzled by Greek I found one phrase of his very striking. Hayek stated that it is not always that authoritarian orders come in being. He spoke about a "new" type of thought- that self organizing orders are also created. I found this very interesting, and found that when I applied it to polities it gave me a surprising new way of thinking. First a few questions arose-
When does authoritarian order come about? Or rather why does it come about?
I think that self governing orders do exist. And I think that no one can really judge and state accuratley which type of self governing order is correct and which os wrong. Therefore, if one type of self governing order existed, everyone would follow it and no ideology clashes would exist. But what if this self governing order isint the only one of its kind. What if in a certain polity another governing order arises. This means that now there are two factions, or two ideologies.
I feel that this situtation would naturally lead to an authoritarian order, as a clash between the two self governing orders would break out to choose the stronger one.
This new authoritarian order may last till another type of order is developed. This may again lead to a self governing order. Therefore, I feel like this could be a never ending cycle!
I think I have just gone down the rabbit hole!
However I do feel like an equilibrium needs to exist in order to have a balance of cosmos and taxis.

Cosmos and Taxis the Economics of Superheroes

For some reason Hayek's work on spontaneous order is reminiscent to the view that comic book characters have on the subject (I know I know....Hayek came before these guys and is like the ol' school Superman of Economic thought)but just follow along with me here. Feel free to go ahead and laugh at me in a patronizing way at our next meeting (I give you my permission)but if I were to summarize "Cosmos and Taxis" for my peers in an interesting yet accurate manner I would do so through the use of Superheroes. Here goes.....

Batman vs. X-Men

Order can be grown like it is in Batman's case or made like it is for the X-men

Batman who lives by day as a rich business proprietor Bruce Lee lives by night as a
winged Superhero who operates on a system of cosmos (grown order). Batman has an internal focus on self organization as puts his resources to use by making sure he develops the best armor, weapons, and vehicles to take on the daily responsibilities that a normal super undertakes. He responds to a simple set of rules which he generates from his environment.

The X-men however in Hayek's words could be considered as an "organization". As they mutants that are adopted in to Xavier school and are molded in to superheroes that follow the code that is devised by Xavier. However the rules in which Xavier forms are flawed in the sense that the rules are those that cannot be know solely by one individual. This in my opinion is the reasoning why the X-men had so much inter strife and have focused so much on taking each other out rather than doing things that superheroes are supposed to do (you know save babies and stop bank robberies and all that junk) if you ask me it's all Patrick Stewards fault because of his bossy do this do that attitude that really makes the X-men as a whole inefficient. If Storm, Cyclops, Rouge, and the gang were aloud to make spontaneous decisions like Batman society itself would enjoy the net benefit of more productive superhero action.

In the words of Hayek “…the only possibility of transcending the capacity of individual minds is to rely on those super-personal ‘self-organizing’ forces which create spontaneous orders”

*Note that I am not a Superhero expert so feel free to correct me if I'm wrong here...just trying to think of a new application to define the point.
This week's reading ought to be familiar to veteran SWEET scholars. Once again were back to Hayek's ideas on spontaneous organization of markets. The key insight I find from his distinction between two types of order - taxis and kosmos - is that systems like markets need not arise from the direction of any intelligent design, it can simply arise as an unintended consequence of our natural actions.

I wont waste time regurgitating previous posts on the subject so let me just pose a question:

Why do you think it took economists until Hayek to finally articulate the same, seemingly obvious, conclusion that biologists have had a consensus on since Darwin?

Wednesday, February 3, 2010

The Superhighway to Serfdom

Hayek’s point is not a new one and did not reveal any great revelations as far as economic thought is concerned. Clearly it is easy to lose all the small pieces when we get too caught up in watching the big picture. As many have pointed out a computer and the vast networks which we have created using them could possibly both watch the availability of resources and their most efficient uses; ensuring that the economy is running at its most optimal. Making corrections when necessary. Unfortunately, those computers would still have to be programmed to know what to look for and what to do when the price of good x changes. Its programming would have to be adaptive to keep up with the changes in our very dynamic economy. It would have to be aware of every possible change in every aspect of individual choice before it was made. It would have to be aware of how many people would want a cup of coffee a year in advance to ensure that just the correct amount of coffee was grown and roasted and shipped to Fairbanks so that all those who demanded coffee tomorrow could have their wants satisfied.

Since the computer could not be given the level of precognition required to effectively manage the economy through time it would have to take on risk. Risks that it would allocate too much effort to coffee production and not enough to ranching, for example. Its programmers would have to uses statistics to try and reduce the level of risk which would be associated with these temporal decisions but each of those would have a limited level of certainty. Perhaps the computer would only be 65% certainty that 10,000 people in the interior would want a coffee in the morning. How would we tell the computer to account for that? If we are wrong we would have people angrily exclaiming their unsatisfied demands for coffee in the streets. In the Great Coffee Riots of 2023. Clearly, this computer or any organization attempting to manage the economy would have to become comfortable with the idea that it will be doing a poor job. And more than likely find that as it more tightly tried to control markets the more they did not conform to its preconceptions of their function.

It would be possible to manage the economy perfectly. But no one is willing to propose what is necessary to have that level of control. A level of control that would remove our basic freedoms and tell us (not ask) our preferences. If every aspect was controlled from the moment we were born to who we married, to how many children we could have, were we could live and what type of work we did. Then every event in the economy would no longer have to be predicted from inaccurate aggregates. It would be a known fact. Then our computer could just ensure the XY and XX got married and XY junior would be a plumber like his father. They would all drink exactly one cup of coffee in the morning or be shot. It would be the perfectly controlled economy. Innovation and anything that would be seen as advancement would have to be stamped out as the economy could not accommodate any change in the allocation of resources. You could not have an Ipod because it would kill the CD industry. In the end it is clear to see how trying to control markets puts us on the superhighway to serfdom.

Tuesday, February 2, 2010

Attention To Detail

In section VI or 4 Hayek tackles the question of when to pay attention to the detail. When should the people that watch over the economy stop trying to look into the future and SEE what is happening right before their eyes. I am under the impression for the most part that ecomonics is in seeing the big picture, but it also makes since too look at what is happen at the ground floor level and finding out if what is happening there reflects what ecomonics says should be happening. In H-2 of section for I found a section the sumed up to me one of the failures that took place to cause our current recession...

"The belief that changes, or at least day-to-day adjustments, have become less important in modern times implies the contention that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge."
Our recent recession as many of you would probably agree was a long time coming and in the last 20 years our technilogical dependence has increased so exponentially and still climbing! Where were the people that were keeping our machine of an economy in check!?
Many this Knowledge of detail isnt the kind of knowledge that can be protrayed in statistical form its out side the bounds of numbers so there is no way an economist can use it in their field.


Hayek begins with a question: What is the problem we wish to solve when we try to construct a rational economic order?

Let me counter with a question of my own: What is the problem we wish to solve when we try to construct a work of art?

I am sick and tired of economists pretending that people act in their own rational self interest. We are living in a time when we are beginning to understand what goes on in our brains when we make decisions. Forget about whether or not it's possible, should we even try to design a 'rational' economy?

The brain is often likened to a computer. In this metaphor, visual data is collected by the eyes, then travels through the optic nerve, is processed by the visual cortex, and finally sent on to the frontal cortex, which takes the processed visual information and tells us what to do with it. For example, light bounces off of a baseball and on into the eyes. An image of a baseball is formed on the retina and the information of that image is sent up the optic nerve and into the visual cortex. That information is then processed and sent up to the frontal cortex, which makes a determination that the image has been getting bigger and bigger, it might be a good idea to duck. The frontal cortex then sends the appropriate signals to the different parts of the brain which control movement. The end result is that the person sees the baseball moving toward them, thinks about why that might be a bad thing, and decides to flinch, throw up their hands and duck. Unfortunately this metaphor is almost entirely incorrect.

Anyone who’s ever been scared or startled and flinched or jumped at seeing something has experienced an instance where the brain is operating on autopilot, or below the level of consciousness. Go back to the example of the fast moving baseball. According to Dan Dennett in his book Consciousness Explained, “There is a substantial delay before cerebral activities, initiated by a sensory stimulus, achieve ‘neuronal adequacy’ for eliciting any resulting conscious sensory experience.” In other words the frontal cortex, and by extension our conscious mind, isn’t even aware of the decision to duck until we’ve already started ducking. The visual information about the fast moving baseball is sent by the eyes to the visual cortex where it is processed and distributed to other modules in the brain that ultimately control the reaction. It’s only after the ducking procedure has started that the frontal cortex is notified, and our conscious mind is allowed into the decision making process. If you’ve ever burned your hand on a hot stove, you’ve experienced the fact that your brain is quite capable of getting you to move without asking for ‘your’ permission first.

In many respects the human brain is like an argumentative group of people in a corporate business meeting (or the SWEET Scholars) rather than a computer. The decision making pathways are often ‘loud and messy’ like a group of emotional people with differing opinions rather than linear and calculated like a computer crunching the numbers. Consider the following experiment designed by Brian Knutson and George Loewenstein. The scientists wanted to investigate what happens inside the brain when a person makes typical consumer choices. Think about a situation where you are trying to decide which bottle of jelly or jam to add to your shopping cart. In the experiment people were given a substantial amount of spending money and then offered the chance to buy dozens of different objects. The items up for purchase ranged from the latest Harry Potter book, to gourmet chocolate or even a digital voice recorder.

The experimental subjects brains were being scanned by a functional MRI machine which allowed the scientists to see in real time which parts of the brain were most active. After staring at the object for several seconds, the subject was then shown the cost of the item and then asked to decide if they wished to purchase it. The scientists discovered that when a subject was first shown an object, his nucleus accumbens was turned on. According to Jonah Lehrer, in his book How We Decide, the nucleus accumbens (NAcc) “is a crucial part of the dopamine reward pathway, and the intensity of its activation was a reflection of the desire for the item.” For example, if a person didn’t really like chocolate, then their NAcc didn’t get too excited when they were shown gourmet chocolate candy.

When the subjects were shown the price tag of the item, the researchers determined that the insula and the prefrontal cortex showed a heightened activity. According to Lehrer, “The insula produces aversive feelings and is triggered by things like nicotine withdrawal and pictures of people in pain. In general, we try to avoid anything that makes our insulas excited. This includes spending money.” According to this section of the brain, spending money can be a painful experience. Knutson and his colleagues speculate that these areas of the brain were computing the cost of the item and trying to find out if it was a good deal. The prefrontal cortex became the most stimulated when the cost of the item was significantly lower than normal.

As a result of seeing all of this brain activity in real time, the researchers were able to accurately predict whether or not the subjects would purchase the item. The scientists and researchers knew which products would be purchased before the people making the decisions themselves did. According to this research shopping can be an intensely emotional experience with decisions being made below the conscious level. In situations where the shopper experiences difficulty making decisions, it can be a result of the consciousness, through the frontal cortex trying to impose a top down solution on the rest of the brain’s decision making modules. In another study conducted by Timothy Wilson, at the University of Virginia found that the more people thought about a purchase the less likely they would be satisfied with it in the long run. Wilson also made the determination that when a person was asked to analyze the reasons for their specific shopping preferences they were more likely to purchase something they didn’t like and in one instance over 75% of the subjects regretted their selections.

In situations where we are overwhelmed by an enormity of choice it is possible to be almost paralyzed with indecision. We may feel like choosing one option, but then we try to ‘talk ourselves out of it’ for one reason or another. Recently it has come to light that this is a function of the way our brains process information. Often times different parts of the brain that are responsible for different types of calculations send signals that are usually just below the level of consciousness. This means that we are thinking without being aware of exactly what. Common wisdom would tell us that the key to making a decision that we’ll be happy with in the long run is to gather more information about our choices and spend more time in thought, when in actuality the opposite is true. Would rational, efficient thought work like that?

Hayek wrote his article in what? 1945? We hadn’t even developed the technology to even begin to understand how we behave when we think we are acting rationally. Our problem isn’t lack of information, or improper information collection techniques.

Our problem is that we make our ‘best’ decisions (the ones we regret the least) when our information is limited, or at the very least collected by our subconscious.

And finally, who the hell cares about efficiency anyway. I don’t think I’ve ever been complimented for being an ‘efficient’ lover. I'm inefficient. The begging to actual action ratio is way off!

(Parts of this post came from a paper I wrote last semester... I can't remember if I tried these arguments out on this blog or with the scholars before. Let me know if I get to repeating myself.)

Time Judgement

Alas I feel horrible a task that I thought would take two more hours is apt to take four or more. I feel like a very poor example I have only read part of the article (I will have it read in totality before the meeting). My internet connection ends here at the closing of the coffee house and I realize that I must get back to my calculus in before 12am as well. I have fallen victim to poor time management (I have been working on item from to item since Monday but now realize that I need to manage my time weeks out now and this post has caught me off guard. Perhaps this is the best argument from my own life to apply to the use of the Austrian Economic system if I can't manage my time reasonably due to misjudgments how awful would it be if I regulated how others were to spend there time....ek like a said an awful example and post feel free to make fun of me.

Ipso Facto

Ipso facto--Latin, "by the fact itself". A wonderful language, used by a great civilization, the basis of all the romantic languages and still relevant to the modern English language. In my mind Hayek's argument is boiled down to that single phrase, "by the fact itself".

The basis of this paper is that central economic planning cannot succeed because it's impossible to achieve perfect information by a single entity. The reason for this is that time and space knowledge, to borrow Hayek's definition, is distributed to all the individuals in a society and not initially known by a single individual or entity. If this knowledge were to remain fairly constant it might be possible, theoretically, to acummulate it over a period of time and feed it to some Central Planning Committtee, or Mega Super Computer, or All-Knowing Benevolent Economist, from whence informed and perfect economic decisions could then be dispersed. However, in reality, all this particular knowledge is constantly changing as the decisions of individuals interact with each other and their environment creating a shifting, changing fabric of economic processes. Because of this it is impossible to completely know the economic situation of a society, and because of imperfect knowledge, perfect economic decisions cannot be made.

However, Hayek states that ".....the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer." [Section III, Paragraph 10] So to play the devil's advocate, if a system could be devised that shares all this knowledge with essentially no limits, could a centrally planned economy then happen?

We have such an institution in our society for spreading information with virtually no constraints. The internet. So then, if we combined the endless processing power of numerous super-computers and the incredible data sharing device known as the internet, could we then achieve a planned economy?

I would argue no. I think the breakdown occurs when you consider that the internet is primarly an input device. You must input information into it. It doesn't go out and retrieve the information itself. And yes there are circumstances when it actually does, as I'm sure some antagonist will point out: viruses, cookies, Evil Government Internet Conspiracies, etc. But they still have to access that information from another input device--your computer.

My long-winded point is simply that individuals still hold all the bits and pieces of information and data needed by an economic system, and even though they could input all that data into some mega-information system such as the internet, it would be a horribly inefficient way to operate as it would consume many inviduals constant attention to update the changing data. Knowledge is distributed among all individuals, and, ipso facto, by that very fact itself, the price system stands as the only system that is an answer to modern society. Or better yet, as Hayek postulates, it is the cause of modern society. Ab uno disces omnes.

It takes a leap of imagination, or at least a suspension of disbelief, to consider that knowledge passes most freely when unstructured and decentralized. It’s gratifying to think of knowledge as a triumph of structure, organization and canon; the traditional exchange between student and teacher. Yet the astounding majority of our knowledge is not stored in hallowed institutions, it is in the dirty palms of a customer or in the profit margins of a balance sheet, these anti-institutions are the true sum of our parts.

To calculate the price of a good or service is to account for every bit of knowledge that was applied to its existence, from the machines that mined the metal to the factory that stamps the cup, this addition of value is knowledge exchange at its most basic. Hayek pushes this concept further by arguing that supply and demand is in itself a conduit of knowledge, we inherently respond to a changes in price, and thus communication has occurred. As an analogy, Hayek explains that a consumer of tin may see a rise in price, letting her know it has become scarcer or it has found a better use elsewhere, so she must therefore use tin more economically. Even the plainest English could not make it clearer. The exchange of information does not stop there, it spreads through the entire system affecting all the consumers and suppliers of the commodity, and furthermore affects the substitutes, and the substitutes of substitutes. Economic exchanges are communicative, currency and value the universal language.

It is only human nature to want to harness this phenomenal system, to direct it, edify it and wield it. Yet, I can only agree with Hayek, and other free market fanatics that this would simply undo the very stitching holding this radical system together. Peer to peer exchanges (i.e. consumer to producer) decline in efficiency as their path of exchange becomes less direct. In healthy systems, transmission occurs in a series of horizontal exchanges—the most direct path. When the forces of centralization wedge themselves into an exchange, the transmission of knowledge (money or goods and services) no longer travels in a horizontal path, but must travel vertically, up the hierarchy and towards the center axis before trickling back down, and only then is the exchange complete. Additionally, a decentralized system ebbs and flows. New more efficient paths are constantly being formed while less efficient paths are abandoned, this natural selection is something highly centralized, planned and controlled economies cannot replicate. The robust dynamism of the world economic order exists because of, not in spite of, its decentralized nature.

The use of knowledge in society

In my opinion this article seems to have been written very awkwardly. For example in the author's analysis he seems to have forgotten or maybe left out a a whole faction of how I think economic decisions are made. Referring to paragraph 19, the author states that, "it does not matter for him (the decision maker) why at the particular moment more screws are of one size than the other, why paper bags are more readily available than canvas bags....or why skilled labor ...have for the moment become more difficult to obtain. All that is significant for him is how much more or less difficult to procure they have become compared to other things..." The author also mentions that the causes for why these items are not available are not important to the decision maker. I think this is very fastidious thinking on the authors part. How often do we make decisions solely based on mathematical formulas? An example of this can be seen when an individual perhaps pays a dollar more to buy an "eco friendly" tote or free trade coffee and has to go out of their way to find a store that sells these items. This individual is obviously concerned about the reason behind the cost of the item he/she is purchasing. However, it is important to note that not all individuals would make the same economic decision; someone else may not be willing to pay extra for free trade coffee, or a third individual may be willing to pay extra but he/she may not be willing to go the extra mile to find a coffee shop that sells free trade coffee. Therefore, I feel like the author was generalizing when discussing how he thought these decisions were made.