Rising Expenditure on Health Care

Here's the source. Hat tip Greg Mankiw.

Don't get me wrong, I'm very sympathetic to this argument. When there's a disconnect between a person's use of a resource and their cost for using the resource, overuse is the likely result. It's the tragedy of the commons all over again.

However, this graph does not by itself prove that the rising cost of health care in the U.S. is caused by insured people running to the doctor every time they get a runny nose. It's probably a significant factor, but I doubt that it's the only one.

Personally, I would like to know more about the relative market power of health care providers and health insurers, by locale. These two kinds of entities are in competition for the money that is paid by workers and employers for health insurance. When an insurer and a provider agree on rates for services, one or the other may bring considerably more clout to the table, and thereby become the price maker, while the other is forced to accept slim margins.

For example, insurers need to be able to tell potential customers that they will be able to go to a nearby facility for treatment. If there is only one health care provider in the local area (which is the case where I live), then the insurer will have to deal with that provider. The insurer doesn't have the option of simply walking from the negotiation table should the health care provider demand high fees for services. The opposite is true in an area where only one insurer operates while there are many health care providers competing for business.

I think it's interesting that in all of the discussion over health care, politicians have successfully demonized the insurance companies with allegations of price gouging (made possible by politicians who have regulated most competition out of the market for insurance), but have made no attempt to similarly attack health care providers for price gouging. I previously linked to graphs like the one below that suggest that health care providers may very well be culpable. I guess voters tend to like their doctors more than they like their insurers.

Modularization of Systems

1.       Define the system requirements.

2.       Select a system concept. A system concept is a well-developed description of how the system will achieve its function.

3.       Map the system as a set of discrete functions.

4.       Decide the level of modularity at the system level – which functions will be packaged together into one module, and which will singly form a module. Module designers may opt to further modularize below their level in the design, as expedient.

5.       Define each module in terms of its inputs and outputs.

6.       Define minimum performance requirements for each module.

7.       Define all of the inter-module interfaces, and create an Interface Control Document (ICD) for each interface. Remember to include serviceability in interface design. Interfaces must be designed in accordance with the performance requirements for the associated modules.

8.       Define the interfaces between the system and the external environment, including users/operators and other systems. These interfaces to the external environment may be modules in their own right.

9.        Define limits for each module’s physical envelope (size and shape), thermal properties, electromagnetic properties, emittance/effluence, and resistance to environmental factors (moisture, vibration, dust, heat, exposure to radiant energy, bumps and rough handling, etc.)

Modularity

Modularity is a powerful concept. There’s more in it than is immediately visible.

In this very interesting paper, the authors argue that a poor understanding of the implications of modularity nearly killed IBM. IBM created a modular computer because the modularity made it easier for them to manage the design process. But IBM’s executives failed to recognize that a modular design makes it possible to experiment with many more system configurations, at low cost and with low risk. They didn’t leverage this advantage of modularity but their competitors did, and quickly found that there were many ‘flavors’ of IBM compatible PC that were possible and desirable.

The modularization of the design of the computer led to a rapid decentralization of the computer industry, and a corresponding increase in innovation and growth in market value. IBM lost market hegemony and nearly disappeared altogether as hundreds of new specialist firms sprang up, each producing modules rather than entire computer systems with unique architectures. No single firm has ever come near to the market dominance once enjoyed by IBM.

Modularization is made possible by the creation of standardized system architectures, with design rules and interface specifications. Standards are a first step toward modularization. Open standards and open system architectures make it easier and less risky to innovate. This opens the door to massive competition.

There is a tradeoff that modern technology companies face: Use proprietary standards and tightly-bound system architectures to avoid competition, or use open standards and modular designs to enable rapid innovation and free support from your competitors (in the form of their innovations that make your products more valuable), but risk being eaten alive. I think the obvious answer is that with complex systems the benefits of modularity and open standards are so great that the proprietary model is not viable in a competitive market. Even well-funded and powerful firms simply cannot compete in innovation and quality with the huge and dynamic markets that grow up around a good open architecture. That’s why Apple computers are now being built from IBM compatible parts.

I Don’t Know How I Lived Without It

A few years ago I bought an expensive (for my budget) vacuum cleaner. My choice can be justified in sort of rational terms. I was tired of vacuums that didn’t work well, and wanted some particular features that I felt sure would ease the chore of vacuuming. Making the work easier would translate into more frequent vacuuming, and a pleasanter and more hygienic home. I also felt sure that buying higher quality would result in a longer service life with fewer repairs.

But my real reason for deciding to spend more money and get a ‘nicer’ vacuum was different from any of that. It made me feel good to be able to buy a product that represented a sort of utilitarian luxury. I enjoyed that the vacuum was well-designed, and that its injection-molded parts fit well. And it was more powerful and more effective than my previous vacuum, and was generally easier to use. 

It wasn’t perfect. In fact there were things about it that were simply poorly thought out and didn’t work as intended, but I almost didn’t notice because I was so pleased to have purchased a quality vacuum. In retrospect I’m quite certain I could have gotten as much carpet-cleaning effectiveness, ease of use, and durability out of a cheaper machine.

The weird thing is that I don’t regret my decision at all. As a matter of fact I caught myself looking at newer, more expensive vacuums by the same manufacturer just the other day. I wanted to have the same experience of purchasing quality all over again.

We’re all familiar with the concept of conspicuous consumption and how people desire to signal their position in the tribe with cars, clothes, etc. But there is another kind of signaling that we do through our unseen consumption. These are the signals we send to ourselves that help us to feel that we are OK. Safe in our own hands.

The title of this post illustrates what it really means to us to be able to provide ourselves with luxuries. I feel so contented now with what I’ve been able to provide for myself that I don’t know how I lived without this feeling.

It is irrational, because I had the ability (and with it the security and the option) before I actually made the purchase. I should have already felt the benefit. And I did. I immensely enjoyed the process of shopping for my vacuum, even of looking for the best price possible. But I knew that if I decided against buying it that it would be because I couldn’t quite stretch that far, and that would tell me something about the limits of my resources, and my own exposure to the vagaries of chance.

Can’t we do better than that?

Hat tip to Eric Falkenstein for ideas about consumption and envy.

A New Era of Cooperation?

The thing to do is to make it easy for people to contribute what they have to contribute. This is probably more important than providing an incentive because people have their own reasons for wanting to contribute.

DARPA's red balloon challenge was a study in how to recruit people. Not how to recruit them to your cause (anyone could have found the balloons, including people who hate MIT or any of the other organizations who competed in the challenge), but simply how to get them to contribute, by any means necessary. And how to out compete other groups who are trying to recruit these same people.

There is a tremendous amount of untapped human capital in the world. Some churches and charitable organizations thrive on directing this unused potential into good works and into spreading their message. Wikipedia, the open software movement, YouTube, and other examples illustrate that there is so much available human capital that it is literally being given away to groups that make it easy for people to contribute. In some cases the groups have incentivized contribution, but often the reasons for participation are private, known only to the contributor.

There are far too many people who have knowledge and ability that their current employers don't know how to put to use. Society would be greatly enriched if this potential could be made productive, but historically the costs of tapping it have been high. Today, technology compresses the globe into a single point where we all touch, and the costs are greatly reduced. But we lack the knowledge and institutions that could enable us to coordinate our efforts at low cost. The corporate bureaucratic model is a highly successful model for coordinating efforts in a world where the costs of coordination are necessarily high, but it took centuries to develop that model to its current incarnation, and it will take time and experimentation to learn how to most effectively leverage the internet.

A Market of Ideas
Is it possible that with the right model many more of us could be freelance engineers, researchers, programmers, editors, designers, advisers, writers...any profession that uses information as its coin? Shouldn't it be possible to build a sort of reverse eBay for projects, where money is auctioned off and the best contributor wins the auction? Maybe contributors don't submit completed work but instead provide a gist of what they can do, I don't know. There are difficulties to such a model, but mostly those difficulties are simply that we don't yet know what actually works. It's time to start figuring that out.

The Future of Labor

In 1850 about 50% of Americans made their living as farmers or farm laborers. In 2000 it was about 1%. Increases in productivity can dramatically decrease the demand for labor in a particular part of the economy. This is all for the best, but it is difficult for the displaced laborers.

I haven't seen data to support it, but the conventional wisdom is that demand for unskilled labor is in steady decline. One story to illustrate this idea is that increased automation in factories eliminates unskilled positions, but may increase the number of skilled positions in the form of an expanded technical staff who develops and maintains the automation equipment. I think that story is at best an oversimplification of reality (e.g. increasing automation may mean that a factory doesn't eliminate jobs but trades skilled labor, like machinists, for unskilled labor in the form of machine operators who only need to push some buttons and measure parts), but even if it's accurate it doesn't tell us what's happening to the number of unskilled labor positions in the overall economy.

Productivity increases in an industry lower the cost of production for that industry, meaning that society can spend less on that industry's products. That's why I spend a smaller percentage of my income on food than did my grandfather, and why fewer people are working on farms today than were in 1850. As we've gotten to be better at producing food we have saturated demand. The US produces more food than it knows how to consume. You can just as easily blame farm worker displacement on the 'low' demand for food as on high farm worker productivity.

Interestingly, increases in farm worker productivity have lowered the costs of non-farm products as well, because all that displaced farm labor was freed up to be used to produce more valuable items like cars and houses. And now we're choking on too much supply of those items as well (due to increasing productivity), and workers are again being displaced.

As Arnold Kling puts it:

"...before you tell me that we are outsourcing to China, you should remember that (a) our manufacturing output has been increasing, even though the number of people working in that sector is declining; and (b) employment in China's manufacturing sector has been shrinking, also."

So what is the future of labor, skilled and unskilled? Continual displacement from one industry to another, and a falling cost of necessities and luxuries. These are near certainties. But what else? Will the unskilled be left behind? The unskilled will always earn less and be less productive than the skilled, but I don't see any evidence that they are simply being left without work. I do see that average, middle class people are spending more of their income on paying someone else to care for their lawns, to service their cars, and to clean and repair their homes.

One day cars will be rolling off of 'lights off' manufacturing lines, with only a handful of humans monitoring entire factories. I don't believe that we'll have high unemployment, or (more to the point) a human welfare crisis when that day arrives.

This Blew My Mind

The following is an excerpt from a fascinating article in Wired.

Dunbar tells the story of two labs that both ran into the same experimental problem: The proteins they were trying to measure were sticking to a filter, making it impossible to analyze the data. “One of the labs was full of people from different backgrounds,” Dunbar says. “They had biochemists and molecular biologists and geneticists and students in medical school.” The other lab, in contrast, was made up of E. coli experts. “They knew more about E. coli than anyone else, but that was what they knew,” he says. Dunbar watched how each of these labs dealt with their protein problem. The E. coli group took a brute-force approach, spending several weeks methodically testing various fixes. “It was extremely inefficient,” Dunbar says. “They eventually solved it, but they wasted a lot of valuable time.”

The diverse lab, in contrast, mulled the problem at a group meeting. None of the scientists were protein experts, so they began a wide-ranging discussion of possible solutions. At first, the conversation seemed rather useless. But then, as the chemists traded ideas with the biologists and the biologists bounced ideas off the med students, potential answers began to emerge. “After another 10 minutes of talking, the protein problem was solved,” Dunbar says. “They made it look easy.”

When Dunbar reviewed the transcripts of the meeting, he found that the intellectual mix generated a distinct type of interaction in which the scientists were forced to rely on metaphors and analogies to express themselves. (That’s because, unlike the E. coli group, the second lab lacked a specialized language that everyone could understand.) These abstractions proved essential for problem-solving, as they encouraged the scientists to reconsider their assumptions. Having to explain the problem to someone else forced them to think, if only for a moment, like an intellectual on the margins, filled with self-skepticism.

I think there is really something in the idea that reasoning by analogy, though potentially a logical mistake, can spur creative and new understanding. And I definitely agree that being forced to explain without reference to standard models helps to advance one's thinking.

Systems Engineering - A Description

Systems Engineering is a structured approach to the development of complex, engineered systems.

The Whole System Approach

·         Top-down design, optimizing for system effectiveness not necessarily component effectiveness.

o   E.g. Metallic structures on spacecraft can magnify radiation hazards. Metal may be the best choice for the frame component, but may not be the best choice for the system.

·         Design the right system.

·         Systems design is inherently interdisciplinary. Systems Engineers must possess and cultivate broad technical knowledge.

·         Manage subsystem interactions.

Project Management

·         Manage cost, resource utilization, and scheduling constraints from an engineering standpoint.

·         Collect voice of customer, communicate with stakeholders, manage and coordinate suppliers.

·         Prepare and maintain a current Systems Engineering Management Plan (SEMP) as the primary controlling document for all system development activities.

The Iterative Design and Evaluation Method

·         The Systems Engineering method is an iterative process by which a system concept is developed and refined with continual evaluation against requirements, until a completed and functional system design is produced that meets the goals established for the system.

• The steps in the Systems Engineering method include:

1.       Develop system performance and cost requirements.

2.       Develop multiple system concepts that can satisfy most or all of the requirements.

3.       Select a concept and begin the design/evaluation loop.

a.       At the outset of the design/evaluation loop, the system concept has poor definition. Each pass through the loop increases the detail of the design.

b.      Also, at the outset there are many risks and unknowns. As the detail is added to the design, frequent evaluation of the design through testing and simulation identifies problems that are then corrected in subsequent design iterations. In this way risk is diminished on each pass through the loop

c.       The design/evaluation loop concludes when a system design that satisfies the performance and cost requirements is complete, and when all risks relevant to the design have been abated or effectively managed.

4.       Produce and implement the system.

Risk Management

·         Systems design carries risk inherently. Consequently, risk management is an important part of the Systems Engineering method.

·         Some common systems risks are:

o   Interdependencies between subsystems magnify effects of point failures.

o   Complex system behavior may be difficult to model or predict (greater than the sum of its parts).

o   System dynamics are strongly characterized by bottlenecks, load variations, and feedback loops.

o   New failure modes arise due to novel design, new technology, or increased complexity.

Interface Design

·         The Systems Engineer (or team) is wholly responsible for the specification and design of interfaces.

o   Create and maintain current Interface Control Documents (ICDs) for all system interfaces.

·         Interfaces carry material, information and energy between components. Interface types include:

o   Mechanical

o   Electrical

o   Data

·         Interfaces are loaded junctions exposed to hazards from more than one direction.

·         Interfaces are sensitive to peak loads, and are natural bottlenecks that can limit system performance.

·         Interfaces can be the source of unintended feedback loops.

·         The more complex a system is the more critical interface design becomes.

UPDATE - Presentation available here.

Shirking Your Duty

Want to get out of jury duty but don't have a good enough excuse, and don't want to stoop to the lows of feigning racism or stupidity? There's an easier way.

Prosecutors bring cases because they believe they have compelling evidence of the defendant's guilt. Weak cases can always be abandoned, or left to fester until more evidence can be collected. Attorneys for the defense have a harder job because if a case is pressed it's sure to be a relatively strong one.

This asymmetry between the two sides is easily exploited by the clever would-not-be juror. Because prosecutors believe they have the stronger case, and the moral upper hand, they are more likely to accept any juror of average or greater intelligence who is free of bigotries that will make him overly sympathetic to the defendant. The counsel for the defense, by contrast, will often be hostile to jurors who are accomplished, rational, or overtly moral or responsible. After all, they are going to ask the jury to put themselves in the shoes of a person who has likely made some poor decisions and displayed bad behavior, whether or not they are actually guilty of the crime of which they are accused. Remember that the prosecutor will bring charges against easy targets, and a person who has a history being a screw-up is an easy target.

How does this help you get out of jury duty? Because the easiest way to be dismissed from the juror pool other than for cause (e.g. extreme bigotry) is to be dismissed by the counsel for the defense without cause. To accomplish this you should try to present yourself as logical, successful, free from the spots of a checkered past, and most crucially, sympathetic to the person of the prosecutor. When the attorney for the defense is speaking, you can act as bored as you actually feel, but when the prosecutor speaks you must feign rapt interest, smile frequently, and show involvement. A nearly sure way to be dismissed is to raise your hand and ask a question (rarely done by potential jurors during the selection process) that is sympathetic to something the prosecutor has just said. Ask the question with a sincere and upbeat tone.

In fairness, I've never tried to avoid jury duty, and have only been called once. I was disappointed to be dismissed by the defense attorney, but it was my own fault because I did the things I suggest here. I couldn't help it. I had just graduated from college (literally a week before), had landed a great job as a rocket body design engineer, and on top of all of that the female prosecutor was attractive and intelligent, and frankly interesting to listen to. The accused was a sullen young man of approximately my age who, it came out, had frequently made a public nuisance of himself in the past and was accused of doing so again. I don't know if he was guilty, but I probably wasn't very likely to be sympathetic to him and that was painfully obvious to his attorney.

I do hope that someday I can actually serve on a jury because I'm interested in the process and the concept, and because I want to participate in this important part of government. I don't know if I will, though. Do people like me ever get selected to serve on juries?

I'm Starting To Get It

After considerably more reading, this is the way I'm understanding it. Let me know what I'm missing or getting wrong.

The key to Bayes’ theorem is that it makes explicit the relationship between two events, and the probability of one event given that the other event has occurred.

Here’s a simple example: Say you want to know if it rained last night, so you go outside and touch the grass to see if it’s wet. Before you touch the grass there is some probability that it rained during the night, maybe based on a forecast of 40% chance of rain. But after you touch the grass and feel that it is wet, there is a new (higher) probability that it rained. Bayes’ theorem gives you a way to calculate the new probability that it rained last night, given the evidence of wet grass.

You can’t conclude that it rained last night based on the fact that the grass is wet, because the sprinklers may have come on or it may just be dew. But if you know something about the relationship between the event of the grass being wet and the event of it having rained, then you can calculate how likely it is that rain is the cause of the wet grass (CORRECTION - that reference to 'cause' is objectionable, we're only discussing correlation). The real insight of Bayes’ theorem is that the likelihood that rain is the cause of the wet grass is related to the probability of the grass being wet when it hasn’t rained.

If you happen to know that there is a very low probability of the grass being wet in the morning after a night with no rain (maybe you don’t have sprinklers, and you live in a dry climate with very little dew), then wet grass is a strong indicator of rain. But if there is a high probability of the grass being wet on a morning after no rain, then wet grass is a very weak indicator of rain.

This is fairly intuitive, and so maybe it doesn’t seem very revolutionary. However, what Bayes’ theorem does is it makes this kind of reasoning explicit and calculable. Bayes’ theorem justifies this kind of reasoning by formally spelling out how and why it works. An understanding of Bayes’ theorem also helps one avoid mistakes of probabilistic reasoning, e.g. thinking that wet grass is a stronger indicator of rain than it really is. 

A Call to (Bayesian) Missionaries

Math is Tough

I need someone to show me the light.

I've tried, but I just can't seem to understand the far-reaching implications of Bayes' theorem. The more people I ask for help, the more I become convinced that 'Bayesian' is a synonym for 'inarticulate math-head'.

See, I want to understand why it matters. Why it's supposedly transformational.

Here's the example I have heard most frequently used to explain Bayes' theroem: Imagine there is a test to screen for a particular kind of cancer. When the test is administered to people who don't have the cancer, 99.5% of those screened will be correctly flagged as cancer-free (low false positive rate). When the test is administered to people who DO have the cancer, 99.9% of those screened will be correctly flagged as having the cancer (low false negative rate). In the general population, .01% of people have this cancer, so that would be about 30,000 people in the US!

Two questions: 1) Assuming the test is fairly cheap to administer, should this screening be done routinely for all people? 2) If I am flagged positive for having the cancer, what is the probability that I actually have the cancer?

The answer to question 2 is surprising, and that's why this example is used to promote Bayes' theorem. Using Bayes' theorem (I'll spare you the math) you find that if you're flagged as having the cancer, there is only about a 2% CORRECTION 16.7% chance that you actually have it. So the answer to question 1 is probably no, because getting a positive result still means you have a very low chance of actually having the cancer (instead the screening should probably only be done for people at high risk).

That seems like a pretty good example because it's easy to relate to and has a non-intuitive outcome. However, I think it must actually be a very poor example of the power of Bayes' theorem, because I can very easily work that same problem out with just standard probabilistic reasoning and get the same answer! You just divide the number of genuine positives (people who have the cancer who test positive for the cancer) by the number of total positives (false positives plus genuine positives) to get the likelihood that any particular positive result is a genuine positive result (the 2% result comes from the fact that the false positive rate is high relative to how rare the cancer is). It's simple, easy, and doesn't require Bayes' theorem.

But there are a lot of people who are excited about Bayes and his famous theorem, so there must be more to it than this example. So can someone please help me to understand?

Practical Economics

I know that several of you are much more knowledgeable than I am on this topic, so consider these to be cries for help rather than pontifications. Even though I'm going to phrase them like pontifications.

It seems like one of the major things that holds Economics back is insufficient data. There are some big schisms in Economics, and I think they could be healed with better data. More to the point, I think that Economics could become MUCH more productive and more helpful in engineering a brighter tomorrow if Economists had enough high quality data.

So why don't we go collect that data?

The argument goes that it would be unethical to perform economic experiments on live populations. Utter nonsense. Our Congress has no such qualms.

Speaking of Congress, you'll notice that legislators do not presume to design aircraft carriers or information systems (though they do weigh in pretty heavily on requirements). So why are they designing our economic system? Wouldn't it be preferable if they farmed that work out to experts?

So what I'm proposing is the establishment of several special economic zones around the country. These would be the labs for economic research, and the schools for economic engineering. The policies in the special economic zones should be set according to the aims of research, but with the limitation of always trying to achieve desirable outcomes in terms of human welfare. I don't think that cramps the science mission too much. It would be desirable to choose economically troubled cities where experimentation has the highest probability of doing good, and where any negative outcomes can be conveniently blamed on the history of the place (sort of kidding about that last point).

The administrators of special economic zones should have wide freedoms to implement policies, without regard to federal or state law, so long as those policies were consistent with the research plan. Results should be carefully collected and reported. Standard measures should be collected and compared for all of the special economic zones, in addition to the data that is collected specifically for the local research plan.

In the interest of human welfare, policies that restrict emigration from the special economic zones should be prohibited. This is a necessary limit on the research objectives. If Keynesville experiences economic implosion, it's not humane to force the residents to suffer through that.

What are the most serious problems with such an idea? Could it ever be possible?

Occam's Razor

Does it make any sense to have a preference for simpler explanations over more complicated explanations? Is there anything to Occam's Razor?

Yes, a little. There's more that can go wrong with a complicated explanation, or one that makes more assumptions, than a simpler explanation. Simply, when there are more elements to an explanation there is a greater possibility that one of them is inaccurate.

Is it useful or practical to invoke Occam's Razor? It is very useful for making guesses about explanations when you aren't heavily invested in actually being correct, and don't want to invest time and effort in evaluating the content of an explanation that you've already decided you don't like. It's sort of useful for dismissing extreme-case explanations where the number of assumed unknowns is very large (alternatively, you could just point out that there is uncertainty about all those unknowns - this requires you to make some kind of evaluation about the magnitude of the uncertainty rather than just using Occam's Razor as a sort of appeal to authority).

My point is simply that the more complicated explanation could be the more accurate one. Correctly invoked, Occam's Razor is a specific criticism about the content of an explanation. Incorrectly invoked, Occam's Razor is an intellectually lazy dismissal of an idea without addressing the content.

Generally speaking, it is probably better not to directly invoke Occam's Razor, but instead to simply be specific in your criticisms.

Pure, Unadulterated Awesomeness

Go here.

In fairness, the visual areas are still distorted a bit (because one's mind tends to fill in the cracks, rather than subtracting them out of the areas). But that doesn't hurt my enthusiasm.

Freedom

Scott Adams, in one of his weaker posts, claims that freedom is a zero sum game. OK, since it's Scott Adams, he might just be playing a joke on me (not me exactly, just incautious, literally-minded people). It's happened before.

In case he's serious though, I've prepared a short rebuttal: B.S.

In my opinion. the whole point of government, law, etc. is to EXPAND my usable freedom by limiting the freedoms to do things that have net deleterious effects on freedom.

Quick example: making murder illegal is a limit on freedom, but successfully preventing murder expands freedom far more than freedom has been limited by murder being illegal.

Systems Engineering

The New Hampshire Business Review is reporting that the University of New Hampshire will begin offering a certificate in Software Systems Engineering. From the article:


“Engineers who are successful at this ‘big picture’ work are rare, yet the demand for these skills is high...”


I think this is exactly correct, and not just in software design. Systems Engineering is one of the few academic disciplines, and the only engineering discipline, that is moving toward greater generalism. The increasing depth of technological knowledge has driven specialization at an increasing rate, and at a heavy cost to technical breadth. Additionally, the increasing specialization has tended to drive natural-born generalists from the ranks of those who pursue engineering degrees. The result is a serious lack of interdisciplinary competence and large world view that is essential to the complex engineering projects that are driving civilization's next big developments. Think of the projects to re-engineer energy production, to redesign cities and transportation at a conceptual level, and even to engineer society and government for the improved welfare of all citizens (we desperately need Economists to start thinking of themselves as Engineers - specifically Systems Engineers - and not as Scientists). 

The emergence of Systems Engineering is a direct and deliberate response to all of these trends. It got its start in the space program, but it has applications far beyond.

Addendum: The University of Illionis is offering a new Master of Science in Finacial Engineering degree through their Systems Engineering department. It's fascinating to me to see a university marrying its Business and Engineering departments in this way.

Appeal to Authority

I've heard it argued that appeals to authority are not necessarily fallacies. For example, Gene Callahan argues that, "...appeals to authority are perfectly valid when the authorities in question are, in fact, true authorities... ." I think this is confused, and in fact wrong.

Let me be clear, I'm NOT talking about relying on the opinion of an authority for advice. I'm also NOT talking about pointing to evidence that other people have collected. I'm talking about putting forth the opinion of an authority in place of reasoning and evidence, in the course of argument.

Commonly, appeals to authority are recognized, not by the mention of an authority, but by the absence of presentation of that authority's reasoning and evidence. Note that a statement of the kind, "Einstein claimed _____, therefore _____ is true" is a fallacy even if Einstein is an expert on the subject. If you are persuaded by an argument that has been presented by an authority and think others will be as well, simply present that argument (duly credited, of course).

There is another, much more insidious form of appeal to authority. It is the inappropriate appeal to one's own authority. In a previous post I criticized Richard Dawkins for his sponsorship of Militant Atheism. My criticism of Dawkins was, and remains, that he is leaning on his status as a highly regarded Biologist to support his unscientific opinions about whether there is a god. Not only is Dawkins not an expert on the question of whether there is a god, but the question itself cannot be framed in scientific terms! To wrap the unscientific proposition Atheism in the mantle of Science is to discredit one's own authority as a reliable practitioner of science.

Dawkins doesn't present an argument or evidence that proves there is no god. He can't, because the proposition that there IS a god is logically non-falsifiable. Instead, he expects his audience to rely on his authority, and accept a conclusion that he has reached intuitively.

Personal Note

For some reason the illustrious Harvard professor of Economics, Greg Mankiw, is starting to remind me of my brother, Jared. Maybe it has to do with surprising taste in music that he is both eager and reticent to admit?

Reading Faces

Willl computers soon be able to read facial expressions better than humans can? I don’t think so.

• ·         Our brains have evolved specifically to, among other things, recognize facial expressions.
• ·         So far, we’re not very good at teaching computers to interpret anything much. Have you used an online translator lately? I would think that accurately translating meaning from one language to another is sort of similar to extracting meaning from facial expressions (tell me why I’m wrong about that one), and I’d further think that translation from one language to another is generally more deterministic than is reading facial expression.
• ·         If a computer program is well understood, then it should be reasonably easy to fool. It might be as easy as simply using an extreme expression (say a really big smile) to swamp a computer program’s algorithms with false data. People have the advantage of being able to spontaneously create new rules and hypotheses to explain the facial expressions they observe, and are therefore more robust to this kind of deception.
• ·         Many insights into interpretation of facial expression could be used by people as easily as by computers, so computers would only gain an advantage if an effective face-reading technique was discovered that plays to the abilities of computers, and against the abilities of humans. Currently I think most face-reading techniques play to human strengths.

To me, the real advantage would be if computers could tell us something about someone else that we can’t tell on our own (I’m considerably less interested in the idea that computers are simply cheaper per hour at reading faces than are live humans).

Why Positive Externalities Are Bad

A.K.A. The Tragedy of the Commons

A negative externality is when someone who is doing some activity doesn't bear all of the costs of that activity. Instead, some or all of the costs are imposed on somebody else. This is bad not only because it's unfair, but also because it means that too much of that activity happens, like in the example from yesterday's post where gold mining in California was probably a net economic loss to the state. If the gold miners had to pay for the damage they were doing, they would have only mined the gold that they could get out without causing a lot of damage.

A positive externality is when someone who is doing some activity doesn't capture all of the benefit of that activity, and instead some of the benefit is captured by other people. It sounds like a good thing, like a service to society, right? Actually, positive externalities are also bad, because they mean that too little of that activity will happen.

In the digital age positive externalities are becoming much more noticeable, and having much more powerful effects on society. These effects are good! Google and Wikipedia (just two prominent examples) have provided enormous value to hundreds of millions of people. Though Google has made piles of money for its founders, it is still the case that the the value to society of Google's services is at least many times greater than all of the ad revenues the company has ever collected. How do I know that? Because I've already used Google more than 10 times this morning at no cost to myself, AND I didn't click on, or even notice, any ads. In fact I've hardly ever clicked on any Google ads. I am quite clearly free riding on Google's service, and have done so for years. Google is even subsidizing the wealthy, multinational corporation I work for by allowing my company to do research, for free, with its powerful tools.

So, why are positive externalities a bad thing? Oh right, because where positive externalities exist, not enough of a valuable activity is occurring. Can this be true? Do we really not have enough Google? Has society left money on the table in the form of investment that hasn't been made, but that could be making us all much, much better off?

Yes. Absolutely.

It's a hard thing to prove, because value that hasn't appeared is difficult to visualize, and even harder to quantify. but basic economics tells us that, yes, we are not getting an optimal amount of Google (and similar products/services). In fact, we are over-investing in something, maybe cars or houses or something, and under-investing in other things like information technology where it's hard to capture the benefit, and instead the benefit leaks out to the rest of society.

Just one quick example before this post gets long: Would the internet be what it is today if it hadn't been sponsored by the government? My guess is, no.

Why Externalities Are Bad

Here's another story which, like the one about the hurricane and the ice sellers, belongs in an introductory microeconomics class.

After gold was discovered at Sutter's Mill in Coloma, California, we all know that there was an influx of prospectors to the foothills of the Sierra Nevada mountains. The popular image is of solitary, rough-edged men kneeling in the shallows of mountain streams and panning for gold. There actually were many prospectors who fit this description, especially in the early days of the rush. However, once it became better established that there actually were large quantities of gold dispersed in the alluvium of the rivers, mining companies with the ability to outfit custom excavators and extractors moved into the gold fields. These companies with their mechanized equipment extracted gold much more efficiently than was possible by simpler means.

The equipment they used came in many varieties, but two kinds were particularly prominent due to their power and and effect on the landscape and rivers. The first of these, water cannons, were used to practice a kind of gold extraction know as "hydraulicking" in which sediments were blasted and washed into sluices where the gold would settle out. The second kind, dredgers, were used as platforms for processing large quantities of sediment in the alluvial plains at the base of the hills. Near Sacramento today there are still many places where you can see large fields full of lumpy hills of gravel and stones. These are the remnants of the work done by the dredgers.

All of this activity washed enormous quantities of sediment into the rivers that come down out the the Sierra Nevadas. For those of you not familiar with the physical geography of California, all of the drainage from those mountains comes into California's central valley. There is only one way out for all of that water, and that is through the San Joaquin Delta, into the San Francisco bay, and out to the Pacific. The sediments that were washed down from the hills dramatically impacted these waterways. One of the most noticeable effects was the great flood of 1850 that all but destroyed Sacramento. There is some argument about whether the flood was caused by the plug of sediments working its way through the river system, but it has been cited as a likely contributing factor. Another deleterious effect was the silting up of the San Francisco Bay. A considerable amount of usable area in the east bay was lost to infill from the sediments. Shipping lanes had to be dredged to keep them from becoming impassable. Less well documented, but doubtlessly significant, were the costs to wildlife in the affected wetlands.

It has been estimated that the economic damage to the San Francisco Bay alone was greater than the value of all of the gold that was extracted.

Economists call it an externality when the actions of one group cause consequences that are borne by others. The costs of the damage done downstream by the gold miners was real, but the miners were not held responsible for it. The result was that all of their efforts caused a net loss of wealth for California, even though they created wealth by extracting the gold.

The problem isn't that the miners wanted to extract the gold, or that they didn't care about what happened downstream (they may not have even known). The problem is that because they weren't forced to bear all of the costs associated with extracting the gold, they extracted too much gold, and used processes that were too costly - costly to others. If the miners had borne the costs, as well as the rewards, of their activity, they would have extracted less gold with cleaner processes, and the people of California as a whole would have reaped a net increase, instead of a loss, of wealth.

America's Competitive Edge

How did America become and why does it remain a super power? Here some possible factors:

• Large size - Basic economics tells us that there are huge advantages to be gained from specialization and trade. However, the magnitude of the advantage depends on the size of the market. For example, I can't specialize in making toilets if I live in a small village of population 100 and have no contact with the rest of the world. Why not? Because I won't have a large enough market to be able to sustain myself in that specialty. As a result, when someone does need a new toilet in my small isolated village, they will have to either produce it themselves, or hire someone in the village who has made toilets before to make one. Needless to say, quality will be low, and price will be high. America has at times been somewhat isolated from the rest of the world in trade terms. However, even during those times the US was a relatively large country with a large market for goods and services, and so it captured a large benefit from specialization within the market. I think this is also much of the explanation for the Soviet Union's ability to remain a super power for many decades during which it was economically isolated from the west.

• Free Market Capitalism - There are a couple of important features of free market capitalism that I believe make a big difference to the amount of wealth that is produced within the society. First, the freedom to compete within the marketplace spurs innovation, both for market incumbents and for new entrants to the market. I feel this every day at work (I'm an engineer working for a manufacturing firm) as we are constantly seeking to improve our processes and products in order to remain viable within the market. Everyone in the company knows that standing still means we'll all be out of jobs in a very short time because our competitors will beat us in the market with better products at lower prices. The second part of free market capitalism that is important is that it rewards good ideas and good execution, and punishes bad ideas and bad execution. Inefficient firms die while efficient firms take market share. The image below illustrates how differently capitalism is viewed in much of the rest of the world. If free market capitalism really IS an important part of high productivity and high standard of living, then those who reject it are putting the gun to their own heads.

•  Regime Certainty - This is the opposite of regime uncertainty, where no one is sure if the law will be the same today as it is tomorrow, whether there will be civil war tomorrow, whether property rights will be respected tomorrow, etc. The US has been stable and secure, with mostly predictable application of the law, for decades. This matters! When there is regime uncertainty investment drops because the value of any investment is a value that will mature over time, and uncertainty about the future of something as basic as the law or property rights decreases the value of any and all investment. Look to sub-Saharan Africa for an example of what regime uncertainty does to growth. Of course, the concept of regime certainty also embraces the fact that America was not ravaged by two world wars during the 20th century.

•  Immigration - The US accepts more immigrants than does any other country in the world. The US is characterized by its immigrant population, including those of us whose ancestors came here prior to the 1930s, and now think of ourselves as 'typical' Americans. I think that it is the case that the US has been very successful at attracting the best minds and the most innovative people from around the globe, in part because of the benefits of free market capitalism and regime certainty. Innovative people are drawn to places where they will be free to innovate. Entrepreneurs are drawn to places with regime certainty. I think this is much of the explanation for why the US is such an innovative and entrepreneurial nation. Listen to Paul Graham's comments on immigrants starting businesses to get a better idea of what I mean.

Now I know that this list isn't exhaustive, but these are the main things that come to my mind when I puzzle about the US and its accomplishments and place in the world. What have I left out? Or better yet, what is wrong in my approach altogether to this question?

Cultural Differences

A few weeks back I had a conversation with a coworker from Sweden about the differences in Swedish vs. American corporate culture. Notably, in Sweden there is a high value put on cooperation and consensus, and a lot of time and energy are spent trying to reach agreement. My coworker from Sweden contrasted this with his observation that in the American approach decisions are taken relatively quickly by managers, with or without agreement from their direct reports and colleagues. Inevitably this talk about how business is conducted in America reminded me of Dilbert, and of several particular Dilbert strips that I had read over the years.

However, I was quite surprised to learn that my Swedish colleague had never heard of Dilbert. Dilbert is such a large phenomenon in America, and so much American culture is exported to other countries particularly our culturally near neighbors in Europe, that it hadn't occurred to me that Dilbert would be unknown in Sweden.

I wonder why Dilbert hasn't found a foothold there. Could it be because it is difficult to effectively translate closely written comic strips into other languages? Or, are most popular American comic strips just so bad that there is no market for any American efforts in the field in other parts of the world? Or is it because of those differences in corporate culture between the US and Sweden? Maybe the jokes just don't work over there?

Here's one I like a lot, even if it isn't about corporate culture.

Picking Winners

In an earlier post I asked "How do you think the founders of Tesla feel about GM being propped up by the government?" Well, it turns out that Tesla can't complain too much. I guess I should have known.


I'm worried about the government funding companies, whether startups or established players, because government investment drives out private investment, and because the companies who receive support have a competitive advantage over the ones that don't. Why is this an important problem? Because the government doesn't know which companies are going to be enormously productive, and which ones won't. Just as an example, what if the government had propped up Ask Jeeves at the expense of Google? Of course I don't actually know what would have happened, but it's possible and maybe likely that Google would have been crushed or absorbed before it had a chance to bring so much value to so many people.


Econtalk has a great interview with Y-combinator partner Paul Graham. Graham says that government attempts to 'create the next Google' are doomed to failure because no one knows what the next Google is going to be like. By definition, the next big innovation is going to be something that is not currently understood well enough for the value to be obvious. It's ludicrous to me to think that government bureaucrats, no matter how competent, are going to be able to predict which companies are the future sources of important innovation, and which aren't.

Pirates of the Gulf of Aden

Imagine you’re the leader of a country, and another country wants to build a pipeline across your soil to get oil to the sea. Do let them do it for free, or do you demand a cut of the oil revenues? I’m betting that most of us would expect to get some piece of the action.

Now imagine that you’re the leader of a non-state entity that has de facto, though tenuous and extralegal, control of a body of water that happens to be an important trade route. If you demand payment for safe passage, are you more morally repugnant than is the government leader in the previous example? If so, why? Both are cases of rent-seeking, where a party tries to extract value without adding any value.

You might say that the leader of the country in the first example is within her legal rights under international law. This is a distinction between the two examples. However, some would argue that international law has a weak claim to legitimacy, since it has been crafted by powerful nations who have sought to codify their own interests.

You might argue that the leader of a country possesses standing to impose limits on regional activity, and that the leader of a pirate coalition does not. But, do the monarchies and dictatorships in the region of the horn of Africa truly have greater legitimacy than do the people who currently provide police and other public services within eastern Somalia?

OK, I’ll admit that the argument that international law legitimizes control of agreed borders, and that the pirate activity in the Gulf of Aden undermines the rule of law, is a compelling one. But how about rent-seeking? Is it any more desirable from a state actor than from pirates, assuming that either way it’s backed up with threat of force?

Yale Lectures

Donald Kagan is an excellent lecturer. Though some might feel that he is not critical enough of western civilization, I think it's a bit ironic that a Yale professor of classical antiquities comes across as an outsider throwing stones at the academic establishment.

That's it. I'm Buying a Motorcycle.

http://wehrintheworld.blogspot.com/2009/12/two-interesting-examples-of.html

The Hurricane and the Ice Sellers

If you haven't already started listening, Russ Roberts has an excellent podcast called Econtalk. It features guests who discuss issues related to economics and policy from a variety of viewpoints.

In one podcast Russ and Mike Munger discuss price gouging, and illustrate the subject with a true story.

When Hurricane Fran came aground in the Carolinas more than 10 years ago, power and other services were knocked out in Raleigh, and transportation through the city was halted by fallen trees. The damage was so widespread that it was simply impossible to restore services to all residents of the city in the first few days after the storm.

A couple of entrepreneurial young men who lived outside the affected area realized that without power in the city, many people would be in need of ice. So they decided to take the day off work, rent a truck and some chain saws, loaded the truck full of ice and headed for Raleigh intent on cutting their way through the fallen trees until they reached the city center where the ice would command the highest price. The morning that they headed into Raleigh, emergency services still had not reached many residents of the city. The National Guard, the Red Cross, and others simply were not yet present.

It took several hours, but the men were able to clear a path into the city and when they found what seemed to them to be a likely spot, they started selling bags of ice at an elevated price. Many customers lined up.

But they weren't all happy customers, and someone called the police. Price gouging is illegal. The people who had been waiting in line to buy ice clapped as the men were handcuffed and taken to jail. Maybe they clapped because they assumed they would now be able to have access to the truck full of ice for free, but the truck and the ice were impounded, and the ice melted away uselessly.

Remember, this is happening in a city bereft of electricity. At the same time that these ice sellers are being arrested, local officials are making an impassioned plea to the federal government to PLEASE SEND ICE, as much as possible as SOON as possible.

Nobody wants to be taken advantage of, especially not in an emergency. That's why there are laws against price gouging. But do these laws make any sense?

Consider: During an emergency, valuable commodities are in short supply in the affected area. However, these same commodities are still available outside that area. What is needed is for people to transport the needed goods from the areas where they are plentiful to the area where people are suffering. We could rely on the good natures of our neighbors to do this for us, or we could rely on the government. OR we could rely on the profit motive, and this just might marshal more resources, more quickly than will the other options. Who made it to downtown Raleigh that day with a truck full of ice?

Don't forget, there are real costs associated with providing a good or service during an emergency. Maybe I care about the people who are stranded without services, but I can't just leave work and spend my own money on a truck, chainsaws, and ice. I've got responsibilities at home that may trump my desire to help.

And what IS price gouging anyway? Who can say what a fair price is for ice in a city without electricity? it cost something to get the ice there, so the price of the ice must be something higher than what it would normally be. The high price is what motivates someone to rent a truck and chainsaws and take the day off work. If enough people do that, the price of ice in Raleigh will come down because the supply will go up!

Isn't that the desired outcome?