The fable of the billionaires

May 31 JDN 2458999

There are great many distortions in real-world markets that cause them to deviate from the ideal of perfectly competitive free markets, and economists rightfully spend much of their time locating, analyzing, and mitigating such distortions.

But I think there is a general perception among economists, and perhaps among others as well, that if we could somehow make markets perfectly competitive and efficient, we’d be done; the world, or at least the market, would be just and fair and all would be good. And this perception is gravely mistaken. To make that clear to you, I offer a little fable.

Once upon a time, widgets were made by hand. One person, working for one eight-hour day, could make 100 widgets. Most people were employed making widgets full-time. The wage for making widgets was $1 per widget.

Then, an inventor came up with a way to automate the production of widgets. For $100 per day, the same cost to hire a worker to make 100 widgets, the machine could instead make 101 widgets.

Because it was 1% more efficient, businesses began adopting the new machine, and now made slightly more widgets than before. But some workers who had previously made widgets were laid off, while others saw their wages fall to only $0.99 per widget.

If there were more widgets, but fewer people were getting paid less to make them, where did the extra wealth go? To the inventor, of course, who now owns 10% of all widget production and has billions of dollars.

Later, another inventor came up with an even better machine, which could make 102 widgets in a day. And that inventor became a billionare too, while more became unemployed and wages fell to $0.98 per widget.

And then there was another inventor, and another, and another; and today the machines can make 200 widgets in a day and wages are only $0.50 per widget. We now have twice as many widgets as we used to have, and hundreds of billionaires; yet only half as many people now work making widgets as once did, and those who remain make only half of what they once did.

Was this market inefficient or uncompetitive? Not at all! In fact it was quite efficient: It delivered the most widgets for the least cost every step of the way. And the first round of billionaires didn’t get enough power to keep the next round from innovating even better and also becoming billionaires. No one stole or cheated to get where they are; the billionaires really made it to the top by being brilliant innovators who made the world more efficient.

Indeed, by the standard measures of economic surplus, the world has gotten better with each new machine. GDP has gone up, wealth has gone up. Yet millions of people are out of work, and millions more are making pitifully low wages. Overall the nation seems to be worse off, even though all the numbers keep saying things are getting better.

There are some relatively simple solutions to this problem: We could tax those billionaires, and use the money to provide public goods to everyone else; and then the added wealth from doubling our quantity of widgets would benefit everyone and not just the inventors who made it happen. Would that reduce the incentives to innovate? A little, perhaps; but it’s hard to believe that most people who would be willing to invent something for $1 billion wouldn’t be willing to do so for $500 million or even for $50 million. At some point that extra money really isn’t benefiting you all that much. And what’s the point of incentivizing innovation if it makes life worse for most of our population?

In the real world there are lots of other problems, of course. Corruption, regulatory capture, rent-seeking, collusion, and so on all make our markets less efficient than they could have been. But even if markets were efficient, it’s not clear that they would be fair or just, or that they would be making most people’s lives better.

Indeed, I’m not convinced that most billionaires really got where they are by being particularly innovative. I can appreciate the innovations made by Cisco and Microsoft, but what brilliant innovation underlies Facebook or Amazon? The Internet itself is a great innovation (largely created by DARPA and universities), but is using it to talk to people or sell things really such a great leap? Tesla and SpaceX are innovative, but they have largely been money pits for Elon Musk, who inherited a good chunk of his wealth and made most of the rest by owning shares in PayPal. Yet even if we suppose that all the billionaires got where they are by inventing things that made the economy more efficient, it’s still not clear that they deserve to keep that staggering wealth.

I think the fundamental problem is that we have mentally equated ‘value of marginal product’ with ‘what you rightfully earn’. But the former is dependent upon the rest of the market: Who you are competing with, what your customers want. You can work very hard and be very talented, but if you’re making something that people aren’t willing to pay for, you won’t make any money. And the fact that people won’t pay for something doesn’t mean it isn’t valuable: If you produce public goods, they could benefit many people a great deal but still not draw in profits. Conversely, the fact that something is profitable doesn’t necessarily make it valuable: It could just be a very effective method of rent-seeking.

I’m not saying we should do away with markets; they’re very useful, and they do have a lot of benefits. But we should acknowledge their limitations. We should be aware not only that real-world markets are not perfectly efficient, but also that even a perfectly efficient market wouldn’t make for the best possible world.

Failures of democracy or capitalism?

May 24 JDN 2458992

Blaming capitalism for the world’s woes is a common habit of the left wing in general, but it seems to have greatly increased in frequency and volume in the era of Trump. I don’t want to say that this is always entirely wrong; capitalism in its purest form certainly does have genuine flaws that need to be addressed (and that’s why we have taxes, regulations, the welfare state, etc.).

But I’ve noticed that a lot of the things people complain about most really don’t seem to have a lot to do with capitalism.

For instance: Forced labor in Third World countries? First of all, that’s been around for as long as civilization has existed, and quite probably longer. It’s certainly not new to capitalism. Second, the freedom to choose who you transact with—including who employs you—is a fundamental principle of capitalism. In that sense, forced labor is the very opposite of capitalism; it spits upon everything capitalism stands for.

It’s certainly the case that many multinational corporations are implicated in slavery, even today—usually through complex networks of subsidiaries and supply chains. But it’s not clear to me that socialism is any kind of solution to this problem; nationalized industries are perfectly capable of enslaving people. (You may have heard of a place called the Gulag?)

Or what about corporate welfare, the trillions of dollars in subsidies we give to the oil and coal industries? Well, that’s not very capitalist either; capitalism is supposed to be equal competition in a free market, not the government supporting particular businesses or industries at the expense of others. And it’s not like socialist Venezuela has any lack of oil subsidies—indeed it’s not quite clear to me where the government ends and PDVSA begins. We need a word for such policies that are neither capitalist nor socialist; perhaps “corporatist”?

And really, the things that worry me about America today are not flaws in our markets; they are flaws in our government. We are not witnessing a catastrophic failure of capitalism; we are witnessing a catastrophic failure of democracy.

As if the Electoral College weren’t bad enough (both Al Gore and Hillary Clinton should have won the Presidency, by any sensible notion of democratic voting!), we are now seeing extreme levels of voter suppression, including refusing to accept mail-in ballots in the middle of a historic pandemic. This looks disturbingly like how democracy has collapsed in other countries, such as Turkey and Hungary.

The first-past-the-post plurality vote is already basically the worst possible voting system that can still technically be considered democratic. But it is rendered far worse by a defective primary system, which was even more of a shambles this year than usual. The number of errors in the Iowa caucus was ridiculous, and the primaries as a whole suffered from so many flaws that many voters now consider them illegitimate.

And of course there’s Donald Trump himself. He is certainly a capitalist (though he’s not exactly a free-trade neoliberal; he’s honestly more like a mercantilist). But what really makes him dangerous is not his free-market ideology, which is basically consistent with the US right wing going back at least 30 years; it’s his willingness to flaunt basic norms of democracy and surround himself with corrupt, incompetent sycophants. Republicans have been cutting the upper tax brackets and subsidizing oil companies for quite some time now; but it’s only recently that they have so blatantly disregarded the guardrails of democracy.

I’m not saying it’s wrong to criticize capitalism. There certainly are things worth criticizing, particularly about the most extreme free-market ideology. But it’s important to be clear about where exactly problems lie if you want to fix them—and right now we desperately need to fix them. America is in a crisis right now, something much bigger than just this pandemic. We are not in this crisis because of an excessive amount of deregulation or tax-cutting; we are in this crisis because of an excessive amount of corruption, incompetence, and authoritarianism. We wouldn’t fix this by nationalizing industries or establishing worker co-ops. We need to fix it first by voting out those responsible, and second by reforming our system so that they won’t get back in.

Terrible but not likely, likely but not terrible

May 17 JDN 2458985

The human brain is a remarkably awkward machine. It’s really quite bad at organizing data, relying on associations rather than formal categories.

It is particularly bad at negation. For instance, if I tell you that right now, no matter what, you must not think about a yellow submarine, the first thing you will do is think about a yellow submarine. (You may even get the Beatles song stuck in your head, especially now that I’ve mentioned it.) A computer would never make such a grievous error.

The human brain is also quite bad at separation. Daniel Dennett coined a word “deepity” for a particular kind of deep-sounding but ultimately trivial aphorism that seems to be quite common, which relies upon this feature of the brain. A deepity has at least two possible readings: On one reading, it is true, but utterly trivial. On another, it would be profound if true, but it simply isn’t true. But if you experience both at once, your brain is triggered for both “true” and “profound” and yields “profound truth”. The example he likes to use is “Love is just a word”. Well, yes, “love” is in fact just a word, but who cares? Yeah, words are words. But love, the underlying concept it describes, is not just a word—though if it were that would change a lot.

One thing I’ve come to realize about my own anxiety is that it involves a wide variety of different scenarios I imagine in my mind, and broadly speaking these can be sorted into two categories: Those that are likely but not terrible, and those that are terrible but not likely.

In the former category we have things like taking an extra year to finish my dissertation; the mean time to completion for a PhD is over 8 years, so finishing in 6 instead of 5 can hardly be considered catastrophic.

In the latter category we have things like dying from COVID-19. Yes, I’m a male with type A blood and asthma living in a high-risk county; but I’m also a young, healthy nonsmoker living under lockdown. Even without knowing the true fatality rate of the virus, my chances of actually dying from it are surely less than 1%.

But when both of those scenarios are running through my brain at the same time, the first triggers a reaction for “likely” and the second triggers a reaction for “terrible”, and I get this feeling that something terrible is actually likely to happen. And indeed if my probability of dying were as high as my probability of needing a 6th year to finish my PhD, that would be catastrophic.

I suppose it’s a bit strange that the opposite doesn’t happen: I never seem to get the improbability of dying attached to the mildness of needing an extra year. The confusion never seems to trigger “neither terrible nor likely”. Or perhaps it does, and my brain immediately disregards that as not worthy of consideration? It makes a certain sort of sense: An event that is neither probable nor severe doesn’t seem to merit much anxiety.

I suspect that many other people’s brains work the same way, eliding distinctions between different outcomes and ending up with a sort of maximal product of probability and severity.
The solution to this is not an easy one: It requires deliberate effort and extensive practice, and benefits greatly from formal training by a therapist. Counter-intuitively, you need to actually focus more on the scenarios that cause you anxiety, and accept the anxiety that such focus triggers in you. I find that it helps to actually write down the details of each scenario as vividly as possible, and review what I have written later. After doing this enough times, you can build up a greater separation in your mind, and more clearly categorize—this one is likely but not terrible, that one is terrible but not likely. It isn’t a cure, but it definitely helps me a great deal. Perhaps it could help you.

We still don’t know the fatality rate of COVID-19

May 10 JDN2458978

You’d think after being in this pandemic for several weeks we would now have a clear idea of the fatality rate of the virus. Unfortunately, this is not the case.

The problem is that what we can track really doesn’t tell us what we need to know.

What we can track is how many people have tested positive versus how many people have died. As of this writing, 247,000 people have died and 3,504,000 have tested positive. If this were the true fatality rate, it would be horrifying: A death rate of 7% is clearly in excess of even the 1918 influenza pandemic.

Fortunately, this is almost certainly an overestimate. But it’s actually possible for it to be an underestimate, and here’s why: A lot of those people who currently have the virus could still die.

We really shouldn’t be dividing (total deaths)/(total confirmed infections). We should be dividing (total deaths)/(total deaths + total recoveries). If people haven’t recovered yet, it’s too soon to say whether they will live.

On that basis, this begins to look more like an ancient plague: The number of recoveries is only about four times the number of deaths, which would be a staggering fatality rate of 20%.

But as I said, it’s far more likely that this is an overestimate, because we don’t actually know how many people have been infected. We only know how many people have been infected and gotten tested. A large proportion have never been tested; many of these were simply asymptomatic.
We know this because of the few cases we have of rigorous testing of a whole population, such as the passengers on this cruise liner bound for Antarctica. On that cruise liner, 6 were hospitalized, but 128 tested positive for the virus. This means that the number of asymptomatic infections was twenty times that of the number of symptomatic infections.

There have been several studies attempting to determine what proportion of infections are asymptomatic, because this knowledge is so vital. Unfortunately the results are wildly inconsistent. They seem to range from 5% asymptomatic and 95% symptomatic to 95% asymptomatic and 5% symptomatic. The figure I find most plausible is about 80%: This means that the number of asymptomatic infected is about four times that of the number of symptomatic infected.

This means that the true calculation we should be doing actually looks like this: (total deaths)/(total deaths + total recoveries + total asymptomatic).

The number of deaths seems to be about one fourth the number of recoveries. But when you add the fact that four times as many who get infected are asymptomatic, things don’t look quite so bad. This yields an overall fatality rate of about 4%. This is still very high, and absolutely comparable to the 1918 influenza pandemic.

But the truth is, we just don’t know. South Korea’s fatality rate was only 0.7%, which would be a really bad flu season but nothing catastrophic. (A typical flu has a fatality rate of about 0.1%.) On the (deaths)/(deaths + recoveries) basis, it looks almost as bad as the Black Death.

With so much uncertainty, there’s really only one option: Prepare for the worst-case scenario. Assume that the real death rate is massive, and implement lockdown measures until you can confirm that it isn’t.

Motivation under trauma

May 3 JDN 2458971

Whenever I ask someone how they are doing lately, I get the same answer: “Pretty good, under the circumstances.” There seems to be a general sense that—at least among the sort of people I interact with regularly—that our own lives are still proceeding more or less normally, as we watch in horror the crises surrounding us. Nothing in particular is going wrong for us specifically. Everything is fine, except for the things that are wrong for everyone everywhere.

One thing that seems to be particularly difficult for a lot of us is the sense that we suddenly have so much time on our hands, but can’t find the motivation to actually use this time productively. So many hours of our lives were wasted on commuting or going to meetings or attending various events we didn’t really care much about but didn’t want to feel like we had missed out on. But now that we have these hours back, we can’t find the strength to use them well.

This is because we are now, as an entire society, experiencing a form of trauma. One of the most common long-term effects of post-traumatic stress disorder is a loss of motivation. Faced with suffering we have no power to control, we are made helpless by this traumatic experience; and this makes us learn to feel helpless in other domains.

There is a classic experiment about learned helplessness; like many old classic experiments, its ethics are a bit questionable. Though unlike many such experiments (glares at Zimbardo), its experimental rigor was ironclad. Dogs were divided into three groups. Group 1 was just a control, where the dogs were tied up for a while and then let go. Dogs in groups 2 and 3 were placed into a crate with a floor that could shock them. Dogs in group 2 had a lever they could press to make the shocks stop. Dogs in group 3 did not. (They actually gave the group 2 dogs control over the group 3 dogs to make the shock times exactly equal; but the dogs had no way to know that, so as far as they knew the shocks ended at random.)

Later, dogs from both groups were put into another crate, where they no longer had a lever to press, but they could jump over a barrier to a different part of the crate where the shocks wouldn’t happen. The dogs from group 2, who had previously had some control over their own pain, were able to quickly learn to do this. The dogs from group 3, who had previously felt pain apparently at random, had a very hard time learning this, if they could ever learn it at all. They’d just lay there and suffer the shocks, unable to bring themselves to even try to leap the barrier.

The group 3 dogs just knew there was nothing they could do. During their previous experience of the trauma, all their actions were futile, and so in this new trauma they were certain that their actions would remain futile. When nothing you do matters, the only sensible thing to do is nothing; and so they did. They had learned to be helpless.

I think for me, chronic migraines were my first crate. For years of my life there was basically nothing I could do to prevent myself from getting migraines—honestly the thing that would have helped most would have been to stop getting up for high school that started at 7:40 AM every morning. Eventually I found a good neurologist and got various treatments, as well as learned about various triggers and found ways to avoid most of them. (Let me know if you ever figure out a way to avoid stress.) My migraines are now far less frequent than they were when I was a teenager, though they are still far more frequent than I would prefer.

Yet, I think I still have not fully unlearned the helplessness that migraines taught me. Every time I get another migraine despite all the medications I’ve taken and all the triggers I’ve religiously avoided, this suffering beyond my control acts as another reminder of the ultimate caprice of the universe. There are so many things in our lives that we cannot control that it can be easy to lose sight of what we can.

This pandemic is a trauma that the whole world is now going through. And perhaps that unity of experience will ultimately save us—it will make us see the world and each other a little differently than we did before.

There are a few things you can do to reduce your own risk of getting or spreading the COVID-19 infection, like washing your hands regularly, avoiding social contact, and wearing masks when you go outside. And of course you should do these things. But the truth really is that there is very little any one of us can do to stop this global pandemic. We can watch the numbers tick up almost in real-time—as of this writing, 1 million cases and over 50,000 deaths in the US, 3 million cases and over 200,000 deaths worldwide—but there is very little we can do to change those numbers.

Sometimes we really are helpless. The challenge we face is not to let this genuine helplessness bleed over and make us feel helpless about other aspects of our lives. We are currently sitting in a crate with no lever, where the shocks will begin and end beyond our control. But the day will come when we are delivered to a new crate, and given the chance to leap over a barrier; we must find the strength to take that leap.

For now, I think we can forgive ourselves for getting less done than we might have hoped. We’re still not really out of that first crate.