Monday, June 30, 2008

Minding the Gap (follow-up)

"Anonymous" had a comment on my gap posting. I think it's funny, because I'm pretty sure I know who "anonymous" is. There are really only 3 people who read this blog (as far as I know). Anyway, he says:
My biggest concern about the gap is that it allows the rich to fund injustice.
While I think that this is possible, I'm skeptical that this is a prevalant problem. Can you give me some examples of when the wealthy fund injustice?

Anonymous continues...
That said, I don't have a solution. I don't believe in legislating morality
Personally, I don't have a problem when laws are created that prevent people from infringing on the rights of others. That is exactly the purpose of the government, to protect individual rights. Whether the government is the most effective protector of rights is up for debate. But it's certainly a whole bunch better than what it does most of the time, which is to take money from an unfavored group and give it to a favored group.

Maybe that's the example: the wealthy buy politicians. But I don't consider the problem to be with the wealth gap. I consider that to be a problem with the politicians. I don't think the solution to corrupt politicians is to reduce the size of the wealth gap. To me, that's roughly equivalent to saying that sex should be outlawed because some men aren't faithful.

In my opinion, the problem of corrupt politicians is a problem of a small number of people having too much unchecked power. Politicians wield a gun. You have to follow whatever laws they create or the police come get you. It doesn't matter if the laws are valid or not. The process of fighting corrupt laws is incredibly difficult.

I'd very much like to see the government's power greatly curtailed. But I worry that any such reduction would be a short term thing, only to be reasserted later. That seems to be the way our current government is going.

Given that, I'm curious about the idea of removing all government power, e.g. anarcho-capitalism. I don't know whether or not it would work, and what would prevent anyone w/in that framework from turning around and agreeing to form a government. This would, of course, put us (eventually) right back where we are. Still, it's compelling enough to at least be tried as a small scale experiment. I'd be interested in how it turned out.

Anonymous continues...
and I don't believe in redistributing wealth.
I have no problem with voluntary redistribution of wealth. I have a big problem with it when it's forced.

I've said this before, but I see very little difference between the government forcing me (at the point of a gun) to give up my money to be used for the government's purposes, and a thief forcing me (at the point of a gun) to give up my money to be used for the thief's purposes.

Friday, June 27, 2008

Battle of the Bills

Bill Easterly speaks sense in response to Bill Gates' call for creative capitalism.

The creative capitalism blog is an interesting blog. It's basically a bunch of superstar economists (on both sides of the econo political spectrum) reacting to a speech Bill Gates gave on transforming capitalism to better attack poverty. Apparently they plan on turning this into a book. (HT: Megan McArdle.)

Easterly's comments align well with what I'm hoping to communicate w.r.t. Brian McLaren's views of rich & poor.
The false accusation was that traditional capitalism fails to help the poor. It is certainly true that firms have much more incentive to meet the needs of rich people with money than to meet the needs of poor people without money. What Mr. Gates forgot was that as firms expand their production to meet more of rich people’s needs, they hire more unskilled labor to do so—driving up the incomes of poor people.
Just add this to my list of the ways that the rich, unknowingly help the poor as a result of a gap between the rich and the poor.

Steven Landsburg's comments also resonate:
You can’t end poverty without capitalism. (And indeed, prior to capitalism---more precisely, prior to the Industrial Revolution---the entire world was poor.) ... Bottom line re eradicating poverty: Capitalism is indispensable; health and education measures can help.
Not that I can add anything to something these guys have written, but I would also add that institutions matter, too.

Thursday, June 26, 2008

Everything Must Change (Part 1): Minding the gap

My friend posted a review of book that I've been wanting to read. My friend makes this comment:
[Author Brian McLaren] deals with our over consumption of the world’s resources, the growing gap between the rich and poor, our war-prone proclivities, and the failure of the Church (and even other religions) to provide a different “framing story” from which to act upon. Solving this last one is the key to solving the other three.
The book may identify more issues than just these four. And the book may very well give good reasons for why these problems are problems worth solving. But, for the first three, my guess is that it assumes that these problems are agreed upon by the reader. For two of the problems listed, I'm not sure that I think they're problems worth trying to solve. Specifically, I am not worried about:
  1. the growing gap between the rich and the poor
  2. our overconsumption of the world's resources
I initially started this as a comment directly on his blog. But it quickly got way too long to be a comment. So I'm posting my reply as blog post. In fact, even my reply is too long to be just one blog post. I think I need at least two (maybe three). In this post I'm going to talk about the gap between the rich and the poor. In my next post, I'll share my opinions on overconsumption. But first, minding the gap...

I don't consider the fact that there's a gap between the rich and poor to be a problem worth solving. A "solution" to this problem has a few problems of it's own:
  1. It ignores what the real goal of poverty reduction should be.
  2. It ignores the benefits that come to the poor as a result of the gap
First, what is the real goal of poverty reduction? Increasing the wealth of the poor. The size of the gap between the rich and the poor is not the source of poverty. Imagine a country in which the poorest person earns $1 million annually, and the richest person earns $100 billion annually. That is a huge gap. The richest person earns 100,000 times as much as the poorest person, or $99.999 billion more per year. But in that country, the poorest person still incredibly wealthy. Now, consider a different country in which the richest person earns $100,000 per year and the poorest person less than $100 per year. The gap is smaller. The richest person earns 1000 times as much as the poorest person, or $99,900 more. The gap between the rich and the poor in the 2nd country is much much smaller. But the poorest person is much worse off in the 2nd country. Reducing the gap does not necessarily make the poor better off.

I think that an assumption in the problem is that the amount of wealth available is a fixed pie, like a pizza. If my slice gets bigger, then someone else's slice must get smaller, and it doesn't matter if my slice is the smallest slice or the largest slice. The goal, if wealth is fixed, is to make sure that everyone gets the same size slice. If there's a gap between the biggest slice and the smallest slice, that's a problem.

But the assumption is wrong. Wealth is not fixed. It can, and does, grow. Here's a thought experiment. Imagine a group of 10 people. And in this group, is a single dollar, and nothing else. The wealth of that group in total is $1. The guy who happens to be lucky enough to be holding the dollar can purchase from others whatever he wants. No one else has any purchasing power. But they have talents. And they can use those talents to create things. Things that sold for the dollar, or bartered for things. But getting the dollar gives them a lot of purchasing power. Much more so than bartering. So they all want the dollar, and use their talents to make things for the dollar.

Eventually someone makes something that the dollar holder will trade for, and does. At this point, what is the wealth of the group? It's risen. It used to be $1. Now it's $2. One guy has a dollar, and another guy has something that's worth $1. Every time anyone makes something worth trading for the dollar, the wealth of the group grows. After 10 trades, that group no longer has to worry about dividing up a $1 pie. The pie has now grown to $10. This is, of course, true in the US, too. Wealth here is not fixed. So when the pie grows, knowing how much the rich have, tells you nothing about how much the poor have. Worrying about the gap ignores the problem: figuring out how to help the poor.

Since I'm no longer worrying about how big the gap is, and only worrying about how the poor are doing. I want to talk about the purpose that the gap serves in making the poor wealthier.

In the early 1800's almost nobody had a flush toilet. Everyone had to figure out a way of dealing with human biological waste. And the mechanisms that were employed were unsanitary, to say the least. Disease was a problem as a result of not being able to easily dispose of waste. Everyone in that world was poorer than everyone in today's world where running water and flush toilets are the norm. But how did we get from there to here? How did we all get richer? The answer is that there was a gap between the rich and the poor.

Initially, running water and flush toilets were exclusive options in only the wealthiest households. And rightly so. Installing the required plumbing system is expensive, especially when the knowledge of how to do it is brand new. Things have to be figured out or the problem that's being solved (dealing with human waste) is replaced with a worse problem (dealing with human waste and leaky plumbing). So, it cost a lot of money to figure those things out. And only the rich could afford to pay for the figuring.

But once it was figured out, it became highly profitable to sell the products of this knowledge. The first guy to have a toilet paid handsomely for it because the guy selling it had to do so much work. But the 2nd installation was a *LOT* more profitable for the seller than the first one., since the seller had already figured some things out. Other people noticed this profit and wanted in on it. So the number of toilet sellers increased. But to win a share of the people who wanted toilets, the toilet sellers had to offer something more. And the easiest way was to cut a bit into their profit margin. A huge profit margin cut by a few percent was still a big profit margin. Multiply by millions of installations and thousands of sellers, and the cost of getting a toilet is now a tiny fraction of what it used to cost. And because toilet sellers and plumbers have been incessantly improving their products over time, what we have now works much better than what they had then. Not only is it dramatically cheaper. It's better. And nearly everyone has at least one. This is just one example of how the poor today are wealthier than than rich of 150 years ago. Compared to 150 years ago, we live in the wealthy world that I mentioned above.

Notice that the toilet, and all of its health benefits, came because it was developed at the exclusive expense of the rich. The rich paid for *all* of the development costs. And the poor paid for none of them. Had there been no rich with sufficient funds to cover the expense, the toilet would never have been developed. No one would do all the figuring out for free. It required that someone be wealthy enough, and have sufficient excess money to fund the development. Had no one been wealthy enough, we'd all today be poorer.

This example is not just true for the toilet. It's true for cars, for televisions, for VCRs, for cell phones, for houses, for aspirin, for computers, and for most of what we take for granted as basic necessities in our modern society. All of those things have made us all a *LOT* wealthier. And *all* of those things exist specifically because there's a gap between the rich and the poor. A gap that allows the rich to fund the R&D of things that competition over time brings to the poor. The gap enriches the poor.

So if you want to help the poor - as I do - try to focus on the poor. Try not to worry about the rich. Wealth is not a pie, such that if one piece is bigger, some other piece must be smaller. Additionally, the gap between the rich and the poor results in a natural, and voluntary wealth redistribution from the rich to the poor. The gap is good news. It's not a problem to try and solve.

In my next post, I'll talk about how to deal with resource constraints. And in a post after that, I hope to talk about how I think that the free market is part of God's plan, not in opposition to it.

Gmail? I'm not scared.

A friend of mine is having spam problems. He commented that he'd consider transferring his email to gmail, but was concerned about the privacy issues associated with gmail. The issue is that gmail uses software to scan your email and provide targeted ads to you. I don't worry about this for many reasons, not the least of which is that I don't currently encrypt my email. As a consequence it's hard to complain about google software scanning my email when it's already scanned by other software to determine where it's going, to determine if it's got a virus, to figure out if I'm reavealing insider information when I use my companies email, etc. None of that stops me from using email. Here's an article that articulates more reasons not to worry about gmail and privacy:

But when it comes to the advertising part of gmail, I'm actually quite in favor of it. I *want* google to deliver targeted ads to me... as long as the targeting is good enough. One of the lessons that I've learned from Economics is that division of labor, specialization, and trade makes us all wealthier. So I want to know as many people who are already specializing in things that I want so that I don't have to do (poorly) those things that they are specialists at.

Old media advertising (TV, radio, newspaper, billboard) is generally annoying because 99.9% of the time, it wasn't selling something that I wanted. For example, I will never, ever need tampons. Seeing a tampon commercial in the middle of a program that I like is a waste of my time. Time is a rare resource. Spending it on tampon commercials is annoying. But more broadly, most of TV, radio, newspaper, billboard advertising is annoying because I don't want most of what is advertised. I'm not their target audience. Advertisers have no choice but to create ads that hit a huge population in hopes that some small percentage of that population is in the market for their product. A few people are interested. Most people are annoyed.

Now, there's some targeting with TV commercials. You don't see a lot of tampon commercials during football games. Nor do you see a lot of beer commercials on the Lifetime Network. But these are really crude forms of targeting. Most of the time these ads still miss their mark. If you could increase the effectiveness of the targeting, then advertising becomes beneficial more often for more people.

An example: I am currently in the market for a car that gets better gas mileage than the minivan I drive around. So I take a little bit more interest in any ads that are selling cars. But I take a great deal of interest in ads that are selling small, inexpensive, fuel-efficient cars. If I could only look at those ads, I would seek them out to find out what's available. In fact, that's what I do when I search the web for car deals: I'm seeking out information about people who have something to sell. In other words I'm seeking out advertising. And we all do this. We all, at some point or another, seek out advertising. It's not the advertising that's bad. It's the missed target that is annoying to us.

Now imagine that google could infer what I'm in the market for without me having to tell explicitly them. Then they'd deliver ads to me that I already want. That's not just cool technology, it's efficient technology: I get the same information without having to do the work to find it. It finds me.

So receiving ads from gmail really doesn't bother me. In fact, the fact that someone has already written a program to determine my interests and what I might be in the market for, and go find ads to deliver to me, and is doing it for free, is a big benefit to me. I get the information that I want without having to work for it.

Of course, if google's targeting is bad, then I move back onto the annoyed side of the fence. But google has every incentive to target me correctly. If they don't, then I'm simply freeloading on their service - because I won't buy things that I don't want. If they target me correctly, then they can recover the costs of providing me this free service. And everyone's better off.

Disclaimer: This blog is hosted on a google product. I don't work for google. I interviewed with them once. I'm not trying to push their products. Use them, don't use them. I don't care. I have a gmail account (actually two) that I don't use that much.

Sunday, June 22, 2008

How to turn a cell phone into an ATM

This TED talk was pretty interesting. But the part I found most fascinating is how, in the streets of uganda, they've figured out how to create banking services with a cell phone. The part in question is at about the 8 minute mark.

Let me summarize. If you live in rural Uganda, you don't have access to a personal phone. But someone in your village might have one, and set up shop as a phone kiosk. This is done by purchasing a cell phone, and then selling access to the local residents who want to use the phone. Now if you have some money and you want to send it to your home village (which has one of these cell phone kiosks) what you do is buy cell phone airtime and call up the kiosk in your home village. You read off the numbers to the cell phone provider. Say you bought 1000 minutes for $5. The cell phone provider keeps all the thousand minutes (equivalent of $5), takes about 20% and gives $4 to the person you wanted to give money to. The kiosk owner then resells the minutes to make up that $4.

This is simply brilliant. But the part that's most fascinating to me is that it's doing exactly what Grameen Bank is trying to do - namely provide banking services to the extremely poor. The difference is that there's no central controlling authority. The people who have the most interest in it's success will be the ones who determine whether or not it works. The cell phone as ATM system is simple and elegant, and capital unintensive, and yet achieves much of what Grameen Bank is trying to do with a much bigger capital investment.

It never ceases to amaze me how much can be accomplished without central planning. And how it is usually accomplished much more efficiently.

Thursday, June 19, 2008

Unexpected Beauty

One of the things that I find amazing is how badly we are at predicting the future. Here's an example, in 1970 the total oil inventory of non-opec oil producers was roughly 200 billion barrels. With a consumption rate of roughly 11 billion barrels per year, you would have expected the non-opec oil producers to have run out of oil in 1988 (200 / 11 = 18). But here's the surprising reality of what happened. Since then, those same countries produced 400 billion barrels of oil, and now have a remaining inventory of 209 billion barrels. (Reference)

How is this possible? By adding 409 billion barrels of new inventory to the 200 billion barrels. Take away 400 billion barrels that were consumed and that leaves 209 billion in inventory. But where did those 409 billion additional barrels come from? One answer is the earth. But that oil was already in the earth in 1970. A better answer is that it came from people.

It was people figuring out new ways to discover new oil. Or people figuring out new extraction techniques for getting at oil they couldn't previously get to. It was people exercising their minds that produced the additional inventory. The results match fairly well with what Julian Simon predicted: natural resources act like they're infinite.

Of course, oil is not infinite. There is a finite supply of it in the world. Reconciling this fact with Julian Simon's prediction riles environmentalists and conservationists. How can Julian Simon predict that resources are infinite? The first answer is that he's not actually predicting that they're infinite. He's predicting that we'll never run out. Which is a very different prediction.

Russ Roberts describes it like a room full of pistachio nuts. Imagine that you're a huge fan of pistachio nuts, and that you suddenly find your self the beneficiary of a large room, filled with pistachios. You can have as many as you want, but there's one rule: you have to leave the shells in the room. At first, all is grand. You go in the room, grab some nuts and you always get shells with nuts in them. And it goes on for a while like this. But eventually, you start finding empty shells. Over time, you find more and more empty shells. Eventually, all you ever find is empty shells. Now you know that there are other nuts still in the room, you just can't find them. The amount of effort that you have to expend is so great that it's just not worth it to you. So, you leave the last nuts in the room, and go on to some other less costly substitute. In that room, even though you are addicted to pistachio nuts, you will never run out of them.

But maybe Julian Simon wasn't just predicting that natural resources act like they're infinite. Maybe he was saying they are actually infinite. How could oil be infinite? Only if we can figure out a way to make more. And it turns out that entrepreneurs are doing just that (HT: Growthology). Not only are they making more oil, but the oil that they're making is carbon neutral: it extracts more carbon from the environment to produce, than it releases as oil. In 1970, who could have predicted this? Who could have predicted that we'd consume twice as much as our supply, and have increased our supply by 5%? Who could have predicted that we'd be this close to synthesizing crude oil?

I find this all incredible and beautiful and utterly amazing. Should this actually work out, we should be careful of getting too proud of ourselves. No single person can take credit for anything other than a small contribution. Perhaps Greg Pal has a bigger claim than anyone else, but it's still insignificant compared to all that he depends on. Mr Pal is dependent on countless other people. Take any of them away and this can't be accomplished. Certainly he's on a team of people that are doing this. Some of them are doing other parts of the science. Some of them are maintaining the books. Some of them are maintaining the facilities. But he also relies on a stable food supply, and reliable transportation, and a housing sector that ensures he can get sufficient rest. He relies on computers to do his calculations, and electricity to power those computers. Heck, he relies on a market that signals the fact that this kind of work would be valuable. There are a myriad of things that he relies on, that if taken away would prevent this from coming to fruition. In deed, no single person can even take credit for the creation of a pencil, much less this.

No one designed this system. No one orchestrated it. This result emerged from individuals following their own incentives, without anyone directing any of it. When Adam Smith looked at this kind of thing, he saw what he called "the invisible hand". When I look at it, I see the hand of God. I think God built us this way. That despite all of our best efforts to try control creativity by putting a person at the top of an org chart, the most effective way is to involve all of us a little bit in something bigger than the sum of the parts. I think God's plan for creation is emergent. And our plan is not. "For my thoughts are not your thoughts, neither are your ways my ways". And when I see emergent phenomena like markets or evolution, I find myself amazed at how beautiful it is.

Thursday, June 12, 2008

"Poor countries are poor because..."

"...they lack secure property rights, free markets, the rule of law, and free trade" Or so says an excellent letter in the Wall Street Journal.

The problem for countries like Haiti is not a lack of investment in agriculture but the existence of a predatory public sector facilitated by international institutions like the World Bank and IMF peddling the latest fad. Poor countries are poor because they lack secure property rights, free markets, the rule of law, and free trade. Sorting that out, rather than developing a new Five Year Plan for agriculture, is what will lift their people out of poverty.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
University of Illinois

Hat Tip: Cafe Hayak.

Tuesday, June 10, 2008

The State of AGW Skepticism

I read a few blogs that are skeptical of anthropogenic global warming (AGW = manmade global warming). One of my favorites is Climate Skeptic. But I generally believed that the skeptics were in significant minority. I concluded this because, despite what seems like quite sound criticism, very little of it gets reported in the MSM.

However, the commentary on this article lets me start to think that skepticism is being more widely consumed than what is reported by the MSM. My reason for this is three-fold:
  1. Slashdot (where this commentary is hosted) allows a subset it's users to rank the responses - called moderation. Not all users get the ability to moderate, but generally speaking the moderation system seems reflect the general opinion of the average slashdotter. Anyone that diverges from that average opinion, gets repudiated by others who override the moderation. The viewer of slashdot can set a threshold to view comments that have reached a sufficiently high moderation point. This means that the cruft (of which there is a lot) is easily filtered out. In short, I think slashdot does a decent job of tapping into the wisdom of crowds.
  2. The average slashdotter seems to consume scientific data more than the average person. Any mistakes made in the commentary are quickly refuted, leaving only those who have useful commentary left to survive the moderation filter.
  3. I had anticipated that the commentary on this issue would be highly in support of the AGW position. But the commentary that's survived the moderation seems divided amongst critics and supporters. This suggests to me that the average slashdotter is consuming the AGW criticism and finding it convincing.
Of course, I have no way of knowing whether or not the average slashdotter is closer to reality than than anyone else. I also have not tested whether the average slashdotter's opinion is closer to the average scientific opinion of AGW or if it's closer to the average layperson's opinion. These are (I think) empirical questions.

Still without that testing, I suspect that the average slashdotter is closer to average scientist's opinion than the average layperson's opinion. And this gives me hope that the average scientist is consuming the AGW criticism and the average scientific opinion may be swaying as a result.