Wednesday, August 10, 2016

Colorado State University and its On Campus Stadium

A few disclaimers and clarifications before I begin. I have been watching the CSU on-campus stadium saga for some time and I am currently a member of the joint CSU/Fort Collins Stadium Advisory Group formed to mitigate any untoward effects of the new stadium on its neighbors.

This essay is NOT connected to the advisory group in any way and reflects, in its rambling way, my own opinions about the stadium process and university funding. All of my analysis and speculations are strictly that, analysis and speculations. They are based on the best information I have and I try to be factually correct, but I have no special knowledge.

Finally, I have found that all the people associated with CSU and the City of Fort Collins appear to be acting in ways they feel will genuinely improve, in the medium term, the university and the city.


Universities in general are in trouble. The reason, as is often the case, is money. State funding of the higher education system is drying up. There are four main sources of money for higher education:
 - Student Tuition and Fees
 - Faculty Research Grants
 - State Government Funding
 - Alumni and Large Donor Giving/Endowments

A couple of major forces related to funding of the university system are at work. The first is consolidation of wealth and power.

Astoundingly, wealth distribution in societies throughout the world and throughout time has followed a single pattern, a Pareto distribution.  The Pareto distribution is a self-similar curve where quantities are concentrated. For example, the top 10% of the population might control 70% of the wealth. If you take all of the wealth of that top 10%, the top 10% of those richer folks will have 70% of the wealth of the rich folks. Throughout the world, this basic curve can be used to describe wealth distributions. The differences are in the constants. In a highly egalitarian society, the top 10% may have 50% of the wealth. In a kleptocracy, the top 10% may have 95% of the wealth. For the past couple generation's wealth in the US has become increasingly concentrated in fewer hands. In 2012 the top 10% in the US had about 76% of all wealth.

The same concentration of wealth applies to institutions. There are an increasing number of college students. Before World War II, the entire university system was smaller relative to the population and fewer people received higher education. The system expanded after WWII to include a much larger percentage of the population. This was extremely successful economically. We met the need for additional seats by making existing institutions larger rather than increasing the number of institutions. In the 1970's the average size of a state university was probably about 20,000 students. In the past decade or so we have seen this increase to 30,000 or 35,000 students. Hand in hand with this increase in institution size there has been a growing concentration of alumni giving. The lion's share of giving is going to a smaller and smaller set of universities. In 2015 about 30% of the all donations went to just 20 schools. The more successful graduates you have, the more likely your university will move up on the alumni giving list. Within each school there is a smaller and smaller set of donors who give the lion's share of all donations, and hence have a larger and larger voice in the direction of the institution.

A second force is cultural. In the U.S. we tend to view all aspects of culture through the lens of commerce. This has become even more pronounced over the last 30 years. The primacy of commerce extends to all aspects of culture. Even religion has corners, like the "prosperity gospel" based on prayer as commerce. Government is seen as inherently inefficient (bad) because it does not operate in a marketplace.  This has become accepted to such an extent that we have starved every civic institution that is not directly involved in commerce. Prestige and power are associated with wealth. In effect, we are creating a new feudal society where wealthy merchants have become the noble class.

Universities are not exempt from this cultural lens. Every few years a drumbeat starts announcing that college graduates are not ready for the workplace. That is, a university education is viewed as job training. This push to commercialize everything has also hit university administration. Universities are increasingly run as a business. This seems to be inevitable. Basic management training in the US is based on the business model. There are specializations for non-profit organizations, but the models of organization, motivation, and feedback are based on the current business model fads. Along with this comes a top-down approach to management with power and money concentrated in as few hands as possible. The university president acts as a CEO. As such, he or she is charged the operation of the institution and all true decision making is made at the top. An effective CEO will listen to advisors, but this is more to counteract opposition and build consensus than to alter direction.

As a business, the university must do what it can to satisfy its customers. It competes against other, similar institutions. To be financially sound, each university must turn a profit so it can support current operations and expand in the future. In this view, the funding sources can be viewed as customers and, like a successful business, the institution should be customer focused.

Taking each customer in turn:

Students are ostensibly the raison d'être of the university but not all students are alike. Because they pay higher tuition, out of state students are more desirable, and CSU is competing against universities in the student's home state. For marketing reasons, higher achieving students are also more valuable. The product that CSU is marketing to students is the experience on campus. To satisfy these students, the experience should be comfortable and stimulating. That is one of the reasons so much money has been spent on improving dorms, the recreation center, and the student union.

Faculty research grants serve several functions. They fund labs, faculty, and graduate students. Grants serve a marketing function by increasing the international visibility and prestige of the organization. Grants follow grants. The more grants a university has, the more likely other grants will follow. There is an easy way to incentivize faculty to bring in more grants. You simply measure the size of the grants and reward the faculty who bring in the most. In terms of grants, each department is either a profit center or a loss. Sometimes unprofitable departments simply have to be funded (English, Art...) but they can be put under pressure in the normal ways to be more efficient. For example: increasing the number of adjunct faculty, automating instruction, increasing class size ...

While still a comparatively small portion of research grants, corporate funding of research is becoming more important. This leaves the university exposed to pressure to support the funding corporations. See the recent scandal at Brown University.

When you hear that CSU is a research institution, be aware that this a sales pitch to both students (we are on the cutting edge) and to grant organizations (we can effectively use your money). The goal may be research, but only in so far as that research provides funding either by attracting more grants or attracting more students. Research tends to be concentrated in areas that might be commercially viable in a decade or so. Too long for strictly commercial enterprises, but not pure research untied to commerce.

Because it is a funding source for the school, state government can be considered a customer of the university. In this sense, lobbying is "marketing" to the government. State government is in a rather unique position because it owns the institution even if it doesn't provide much support. In Colorado, the state government has a number of constraints that limit the amount of money it can spend on higher education. State government is thus the worst kind of customer: cheap, demanding, impossible to dump.

Finally, there is alumni and large donor giving. Donor funding is discretionary and based on whim. First you have to find the wealthy, then you have to persuade them that your institution is worth funding. If wealthy alumni feel the institution has helped them in their life or helped a community they care about, it will be worth funding. If a donor has a particular interest that can be furthered by funding, they will give. As an example, the equine department(s) at CSU have greatly benefitted from donor funding.


As far as I can discern there is very little overt corruption in Fort Collins. I find city employees well educated and thoughtful. They value information and when making decisions they look for other comparable situations and try to find best practices. The city as a whole is conservative in the sense that it likes the comfortable and conventional. We try to do the same as everybody else, just do it a little better.

Under Tony Frank, CSU is following a similar strategy. I think the CSU administration is well aware of the forces shaping the university system and is doing its conventional best to make sure that CSU ends up large enough and well enough endowed to survive the coming storms in higher education.

Tony Frank was made president of CSU in 2008. He has spearheaded the largest CSU expansion in decades, perhaps ever. The last major expansion was part of the post WWII restructuring of higher education. This is a perfect time for expansion largely because interest rates are at historic lows. The Board of Regents has viewed Tony Frank’s tenure positively and in 2015 he was made chancellor of the CSU system, which includes multiple campuses throughout the state.

During his tenure Frank devoted attention to all CSUs customers. Increasing enrollment brings in increasing tuition and fees. Much of the capital improvement money has been spent on the student tuition leg of the funding sources, improving and updating dorms, the rec center and the student union. Dorms have been improved. Faculty is aligned to the goal of bringing in more research grants. In the past few years a concerted campaign has aimed, successfully, at bringing in more donor money. Let's not talk about state government.

Sometime around 2011 Tony Frank made a marketing decision that both out of state student enrollment and large donor giving would be improved with a more visible and successful athletic program including an on-campus football stadium. Let me make this clear. I think the on campus stadium was a marketing decision made around 2011 before any public deliberation. Tony Frank as university president chose to build an on campus stadium. The only question afterwards was how to best implement that decision.

In December 2011 Jack Graham was hired as Athletic Director to implement this marketing plan. Within two months a "feasibility study" was started for a new stadium. The study was duly produced and in late 2012 Tony Frank recommended a new stadium to the CSU Board. This was followed by two years of PR bungling.

The stadium was popular with rich CSU donors and the athletics department. It was popular with no one else. The faculty members I have spoken with think the stadium is idiotic. The student body is divided, but largely opposed. Within the city a group, "Save our Stadium" formed to oppose the new stadium.

CSU and the city created a committee to look at stadium impacts. I had the bad fortune to watch one of these meetings on cable television. Representatives from CSU and the architecture/construction firms simply refused to answer any questions. My recollection of one exchange is: "How tall will the stadium be?" "We don't have an exact answer for that. We'll try to find out some information and get it to you later."

There is a real science to getting buy in for an existing decision. The stadium outreach violated many of the rules and it failed. One basic rule is to never give opponents the notion that the basic decision can be changed. Rather than creating support, the outreach created resentment and opposition. Fund raising proceeded but slower than hoped.

In a bold move, on August 8 of 2014 Frank simply fired his athletic director, Jack Graham. Within four months a new decision making process looking at alternatives was created and completed. The committee was given four alternatives and chose two of those as most viable. In the end, Tony Frank modified the options and chose to go with his original 2011 decision. A new stadium owned and operated by CSU would be built on campus.

Ground was broken and, in agreement with the city, a new Stadium Advisory Committee was created. This committee has the limited scope of trying to improve the operation of the already approved stadium. CSU has bent over backwards to be transparent, listen to the neighbors and not make the same mistakes twice. The stadium will be quieter and less bright than it might have been because CSU listened and spent money to satisfy its neighbors.


If my analysis is correct, all of this seems rational and perhaps even inevitable given the cultural environment. There is only one real casualty, the university itself.

There are probably as many opinions on the nature and purpose of a university as there are people. I am giving my point of view as someone who spent a lot of time as a student, both undergraduate and graduate. I am a parent of four children who graduated from college. I am currently owner of a business that caters to the university crowd. When my children started college I thought a lot about what I hoped for them to learn in their higher education

Historically, universities have been self-perpetuating institutions based on both educating societal elites and allowing intellectuals the freedom to advance human knowledge. I contend that the institutions have been successful in inverse proportion to their integration into the commercial structure of the society. There are exceptions. Land grant colleges in the United States have focused on practical farm research and, along with farm extension programs, have revolutionized agriculture in the U.S. multiple times. On the whole though, the most successful research programs have been those where the goal is pure knowledge. The application of that knowledge has not been the concern of the school or the professors.

It is on the science side where commercial results are most immediately apparent, but the academic developers of calculus, differential geometry, physics (classical, relativistic, and quantum), chemistry, evolution, and genetics have been concerned with basic understanding the world. All of these areas, which underlie so much of our commerce, were created without any possible awareness of commercial applications. Academic competition, jealousy, and infighting is as old as the institutions. Holding research private and patenting academic discoveries is relatively new. These developments potentially make some needed money for the institutions, but hinder long-term human advancement. Einstein once said, "I refuse to make money out of my science. My laurel is not for sale like so many bales of cotton."

On the education side, particular skills have always been less important than the ability to understand and adapt to the world. It is important to have a deep understanding or skill in something or other, but the importance comes from the fact that once you have one deep skill, it is easier to acquire a second or third. When the WWII veterans came out of college, they created a vital society
There were many factors involved: monetary policy, size of cohort, delay in starting families... Higher education helped the veterans by giving them particular knowledge and skills, but also because they understood more broadly and could see further than the less educated.

The emphasis on running the university as a business enhances funding and fosters efficiency. It also ties research to commercial results and chokes off longer-term thinking. It reduces the quality of education by increasing class sizes and putting more responsibility for basic education onto the least experienced members of the faculty community. If you read the Feynman lectures on physics one of the most illuminating aspects is the sheer clarity of mind and broadness of vision that is apparent from simply being in the presence of well educated genius. Fewer undergraduates experience this as we put more graduate students, adjunct faculty, and junior faculty members in charge of teaching.

Big college athletics serves no research or educational purpose. Very few students participate in the marquee sports and those students are largely segregated from the rest of the campus. Every dispassionate study of finances shows that the programs never pay for themselves. Many people get rich off college athletics, but the only function of big athletics within the university is marketing to two audiences: modern day barons who can contribute to endowments and potential out of state students who bring more revenue when they enroll.

The direct appeal to the barons is obvious in the design of the CSU stadium. Roughly one quarter of the facility is set aside for luxury accommodations some served by a separate elevator to keep the moneyed from the hoi polloi. The more you pay the university, the better your experience will be: better seats, more amenities and better parking. Students sit in the cheap seats across from their betters. In addition to watching, cheering, and identifying with the university, they can stare and wish for riches that will enable them to join the barons. Those with money can use a display of wealth as a way to court influence within their circles. This is a standard feature of modern spectator sports. In the Stadium Advisory Group some members have suggested that the prices are too low and that raising prices to the maximum level possible will make the most desirable spots a better way to display wealth and influence. It will also help pay for the stadium.

The choice of football as the main sport to market is obvious, trite, and tragic. It is obvious because of the popularity of the sport. It is trite, because every institution trying to make it to the top tier is doing exactly the same thing. It is tragic for a number of reasons. The first is consolidation of sports money is already occurring. Fewer institutions are getting larger and larger shares of the pie. That means that many second tier schools, perhaps CSU, will fail in their attempts to cover stadium costs by using sports to lure out of state students and donor money.

The choice of football is also tragic because it plays to the worst part of human nature and actually hinders the education of students. Football is a purely spectator sport. People feel kinship based on team affiliation, but they do not do anything to actually improve themselves or the team (except spending money). In football, the identification comes at the expense of the athletes themselves. The vast majority of athletes, even at the top ranks of university athletics, do not make a career of their sports. CSU makes a genuine attempt through its academic programs to support these young people who are trying to get an education at the same time as having a physically demanding, unpaid, full time athletic job. Time after time we have seen in college athletics that as the money pressures rise, so does the temptation to cut corners and win at the expense of the athletes. With what we have discovered about Chronic Traumatic Encephalopathy, the current form of the game cannot continue for more than a generation or so. The fans are rabid, the money is great, but more and more parents will stop allowing their children to risk brain injury to play. This will dry the pool of available talent.

Learning how to take care of ourselves and others is an important part of becoming an educated functioning adult. If you look at people in their forties, fifties, and beyond you will find healthy adults who run, swim, bike, play tennis, golf, baseball, basketball, racquetball, ski, and snowboard. You do not find football players. The activity is simply not consonant with maintaining health. The notion of spectator sports instead of participatory sports is at antithetical to the core of the university missions.


One of my rules of thumb is: If you want a great organization, don't put the money men/women in charge. In any organization, the money must work out. If you put the money men/women in charge, only the money works out. Everything else, including the reasons in the organization exists, suffers.

As a software professional, my career has centered on new product development. Often this is as a consultant to large organizations that wish to update their technology. The obvious reason to bring in outsiders is to get specialized expertise, but there is a cultural reason as well. People who are charged with maintaining and incrementally improving existing systems develop a conservative mindset. Many people charged with operational systems cannot cope with the uncertainty of new development. Conversely, many people in new development cannot cope with being confined to meticulously tracking potential problems.

The same kind of cultural dynamic probably occurs within the university. The skills necessary for the maintenance and gradual change of a university are different from the skills needed for major expansions. Major expansions require expensive and risky decisions that are made quickly. It is inherently a gamble on the future. The decision makers have to create a political environment where people feel involved but the pace of change is not slowed or halted.

In big college athletics the game is to quickly build a team and win more than you lose. As a coach, you either win or you are fired. If you win, you can leave and move up the coaching ladder to a bigger program with more resources. If you get fired, you move down the ladder.

In new software product development, once the job is done, the excitement subsides and the developers most instrumental in getting things done quickly move on. They are invested in the problem solving and the building, not the end result or the institution. The same is probably true for people involved in university expansion. The thrill is building the physical assets, creating the winning team. When that is completed, the tendency is to move on to the next place that needs this type of expansion.

The average tenure of a university president is about 8.5 years. Athletic directors last about 5 years. Football coaches, 4 years. For all these positions, the professional track usually moves the person from institution to institution. It is rare that these professionals "grew up" in the institution where he or she is president/athletic director/coach. Because their job tenure is much shorter than a career, people in these professions have to be more concerned with the job and their personal progress rather than the institution. Contrast this with faculty who tend to marry their institution and may very well stay with the same school for their entire professional life.

The highest paid people at CSU are associated with big budget sports (men's football and basketball coaches) and university administrators. These areas take increasing amounts of the overall labor budget. That is, we are paying the most for the people whose ties to the institution are weakest.

Following conventional wisdom gives a conventional strategy. Everyone following the same strategy competes for talent, driving up prices. When institutional loyalty is low, a larger paycheck and personal advancement are even greater lures. In addition, people naturally value their own work and value those who are like them. Administrators are likely to pay administrators more.

The end result of the current strategy is to invest large amounts of money into activities (athletics, creature comforts, administration) that are, at best, peripheral to the core of the university mission. The focus on money and business related metrics undermine faculty morale and lose the long-term research focus of the institution. The course may be inevitable in a culture based on business that does not value learning or education except as it helps commerce. The course may be inevitable, but it is also regrettable.

Monday, December 28, 2015

Creating Social Engagement

As the number of mass shootings continues to climb I, like everyone else, will put in my two cents about causes and possible solutions.

I do not believe the problem in the US is one of guns. It is a problem of culture and will not end until the culture changes. Luckily, culture is the sum of what each of us thinks, does, and says. That means we can change it by changing ourselves. This personally daunting task becomes easier as we see our friends and neighbors modeling the behavior. Each of us contains a multitude of selves and we just need to let the best of ourselves come out, repress the worst in ourselves, and reward the better actions of others.

In this post I won't be posting much in the way of references, but I believe that my argument is well supported by the evidence. I am looking at trends, not universals.

First, some words on "safe" and "comfortable". It is ingrained that these words belong together. In a recent survey on traffic in my city people were asked to prioritize the importance of a number of items. One of them was "Streets should be safe and comfortable". In fact, safety and comfort do not go together. If people feel too comfortable driving, they increase their speed which, off the highway, makes the street less safe. In the same way, we often feel most comfortable when we do not engage strangers, but we are social creatures and expanding our social circles makes us better people.

Violence against strangers tends to be perpetrated by people who are socially isolated. Social isolation is defined as a lack of contact with other people and it is deadly in a social animal like humans. The opposite of social isolation is social engagement. Increased social engagement makes us more capable in dealing with people in a variety of situations. It gives us greater control of our environment and makes us more aware of what is going on around us.

Here are some ways we can improve our culture and ourselves. Some are simpler than others. All require some effort, at least at the beginning.

You know that weird person you have noticed? The one that makes you a little uncomfortable? Next time you pass him/her, say hello. You need not converse, just acknowledge their existence as a fellow human being and move along. After a while you might make some small talk or even have a real discussion, but that is not a requirement. It is not likely, but eventually that person could turn into your best friend.

Join or start a group. Almost two hundred years ago Alexis de Tocqueville wrote: "Americans of all ages, all stations of life, and all types of disposition are forever forming associations." Prove him right. Join a book club, a bowling league, a soccer team, a bicycle club ... It doesn't have to require much time. Book clubs generally meet about once a month and you don't even have to read every book.

When you converse, listen to the other person. In general, allow them to have the last word. Listening does not signify assent. When it comes right down to it, you probably disagree with everyone around you on one topic or another. That doesn't mean you have to shun them. However... if someone's views are truly vile, feel free to call them on it. Tell the racist "I'm sorry, I could not disagree more. I think your beliefs are without support and if you act on them I will work against you." Again, this is hard, but with practice you will get better at it. If someone seems like they might be dangerous, report them.

If someone asks you for help, provide it. There are, of course, requests and circumstances that make this unwise or infeasible, but make "yes" your default answer. You can take this a step further. If someone looks like they need help, offer it. A little harder is a change of attitude. Be more concerned that everyone who needs help gets it and less concerned that someone who is "undeserving" may be abusing the system.

Our built environment is often badly constructed for social interaction. Do not support this. In choosing a home we often look at the inside amenities. This is important, but don't forget the outside. Is there somewhere outside, facing the street, where you and a couple friends can sit down and watch the world go by. If not, is there a way to easily construct a sitting spot? If a home fails this simple test, don't buy or rent it. Inside, is there a room where you are likely to spend time that has windows on the street? If not, you will have no opportunity to get to know the daily life of your street. It is harder to integrate into a neighborhood if you never see your neighbors. On a nice evening, think about walking around the block. As you go around, say hello to folks. Ask them about their day. If you cannot do this comfortably or if no one is ever around to say hello, you have a bad neighborhood. Try to fix it or move.

Vote to make your community better even if it means increased taxes. If there is a ballot measure to build/improve schools, support it. More parks and improved public spaces, support it. Support it especially if it goes to other folks who have less than you. Send your support to the lowest income schools and neighborhoods. Make sure poor kids have good parks and athletic fields. Even better, make sure your community works to integrate people of all incomes and backgrounds into the same neighborhoods. If, as is common, your school board sets the boundaries of schools to keep rich and poor separate, confront the candidates and ask them to change. A unit of neighborhoods is the boundary for the local elementary school. If a school does not have a mix of incomes, bus the rich kids in. Better is to build more lower income housing throughout the town. This seems scary, but all the evidence shows it makes everyone better and safer.

Underlying all of this is an acknowledgement that we are all people. We differ in backgrounds and in how we think society should work. Communication and engagement teaches us about each other, how to get along, and how much we are alike. We exist in a biological ecosystem, but also in a social ecosystem. Make your ecosystems stronger by encouraging diversity and strong connections.

Friday, September 12, 2014

Economists Are So Cute (but so are badgers )

Economists would be so cute in their naiveté if they weren't so destructive. The other day I was reading an article (oddly, on umpires and the strike zone) and I ran across this quote "As economist Edward Lazear has shown, organizations become more productive when a job well done is rewarded with extra money and dumb mistakes are punished." The referenced article is "Incentive Contracts" The paper is from 1986. Normally I would not bother with something so old, but it did get a reference from the recent article.

Actually, Lazear does not show much of anything, but he does survey various incentive schemes. There are a variety of equations, including a partial differential equation based on nonsense, that are not used for anything other than to give the article a patina of respectability.

Here is my summary. Workers are lazy and in order to get them to do anything we have to provide proper incentives. The goal of the incentives is to increase worker effort. We can base incentives on effort or on productivity. Oftentimes it is difficult to get information on effort and productivity, so we may have to adjust labor contracts for the best available information. Oh, by the way, we also have to think about quality.

The general notion of incentive is quickly replaced by money and the article only discusses wages. The reduction of "incentive" to "money" is a common simplification in economics. Money has the nice quality that it is easily counted and fits nicely in equations. Most people work to support themselves and their family, but over two thirds of workers also work to "Feel useful/productive".

The main payment schemes discussed are for sharecroppers, piece rate workers, and hourly wage workers. There is also mention of the value of pitting workers against each other so the most productive workers are disproportionally rewarded.

It is demonstrably true that compensation and incentives are important in the work place. The notions in the article are worth thinking about, but not within the framework presented. The intellectual framework for the pretended quantitative notions in the article is based on demonstrably false premises. The article include such gems as:
"Incentive contracts arise because individual (sic) love leisure. In order to
induce them to forgo some leisure, or put alternatively, to put forth efort,
some form of compensation must be ofered (sic)" 
This statement is true only when the work or the workplace involved is dehumanizing. Habitat for Humanity and other non-profit groups that rely on volunteers are simple counterexamples. Perhaps we should forgive the academic who thinks about work in terms of factory piece work and sharecroppers for simplifying the human condition to a form of slavery where monetary carrots and sticks are the only way to motivate.

Another quote gives the rosy view that the workers inevitably get the rewards of increased  output.
"Thus, (2) merely says that output, Q, must be paid entirely to the worker otherwise another firm could steal the worker away by paying more." 
Beware of arguments based on this type of logical sounding statement that bears no resemblance to reality. Simple evidence is the stagnation of wages over the past couple decades despite large increases in productivity. I did a couple blog posts on productivity. The most relevant one for this context is

The sad thing is that employers often believe this nonsense and instead of providing a more pleasant and humane workplace, they turn it into an unpleasant, metrics driven, competitive hell-hole.

Saturday, August 30, 2014

Conspiracies Without Cabals

Todays topic is human organization and the analysis of power. In particular, how we can have actions that look concerted, but which do not necessarily require collaboration between individual actors. That is we have things that may appear to be conspiracies, but without any organizing cabal of plotters.

We analyze situations at a level that is practical and with the tools that produce results. We cannot analyze complex physical phenomena in terms of wave functions because the mathematics are intractable. At the level of atoms and molecules we look at electron shells and bonding strength. At the level of materials we talk about stress and strain...

An analogous situation occurs when talking about human behavior. We have to decide which types of analysis are most productive for describing particular aspects of human society. Sometimes the appropriate level is examining individuals, their motivations and actions. At other times it may be more productive to look at larger scale organizations.

In the animal world, an example is a flock of geese. The flock travels long distances without a leader and without conclaves. At any given instant, the goose who is most certain about the proper direction influences the flock to move in that direction. No single goose knows the route, but at any instant one or another goose has a pretty good idea. The flock finds its way where the individuals might not. For analyzing travel, the flock is the correct unit.

We can view the political system as a means to resolve contention between individuals who have differing notions of man and society. Some people value loyalty and the preservation of known successful structures. Other people value fairness and adaptation to a changing world.

At a level up, we can view the US political system as a competition between two major groups, the political parties. The names and values of the parties change over time, but the structure of the US electoral system seems to ensure that there are only two parties (with the occasional splinter party). For analysis, we can look at the party itself, not the people in the party. That is, look at the machine. The parties have evolved over time, but for the US system, the important qualities seem to be: that there are two major parties, that the populace is partitioned into people who largely support one or the other, and that real consequences - power, money, and favor - flow to the inner circle of the party in power. At this level, the modern targeted marketing favored by both parties make sense. Elections are held. A party only gets power if its representatives get the votes in their district. Separating the electorate into very fine segments and appealing to a single issue that is important to a particular individual will sway votes and get the party into power. For the party, being in power is more important than any particular issue or group. The individual parties have expressed beliefs, the party platform. The platform is not any kind of coherent philosophy or reality tested approach. It is merely a collection of issues the core constituency cares about and that can be used to polarize the population and get votes. The party in power uses the apparatus of government to reward those who keep it in power. The favors generally flow to large contributors, often organizations not individuals. The base currency of reward is access. The result of access is most commonly legislation that favors financial interests (a group level result), but it can be personal (e.g. ambassadorships or other government jobs).

In this analysis the characteristics of the groups (parties, lobbying groups ...) rather than individuals is important. To my mind, this fits the facts pretty well. At an individual level, any participant may be internally persuaded that they are working toward future personal rewards, but sometimes the odds don't seem very good. During the presidential primaries of 2008 Andrew Young, an aid to candidate John Edwards, tried to protect the candidate by claiming to be the father of Edwards' illegitimate child. The notion that this lie would somehow advance Young's future personal prospects seems delusional. It looks more like a subsumption of personal interests to the aims of the campaign (the group).

Analysis of group behavior is difficult because groups are constantly appearing and disappearing and they form and break alliances. For example, there is a firearms industry that sells weapons to individuals. At one level we can examine each company as an organization promoting its own aims and competing with other firearm manufacturers. In the political sphere they have banded together and sponsor the National Rifle Association (NRA). The NRA is beholden to the manufacturers for much of its funding, but it also has a large number of individual contributors. The demands of the rank and file may move the organization away from the aims of the manufacturers. The NRA also gets direction from the specific individuals who lead the organization. The leaders of the organization have some autonomy, but they must operate within a range that is acceptable to the funding constituency.

The difficulty of analysis is increased by the natural human tendency to anthropomorphize the world around us. Every day on the news there is a story talking about the stock market rising or falling, and the reasons behind the movement. The "reasons" are invariably nonsense based on the feelings of "Investors". "Investors" or "The Market" is everyone who bought and sold stock that day. This is anthropomorphized into a thinking, feeling uber-being. On the news you will hear comments like "Investors were frightened by the newly released jobs figures, causing the market to go down". These comments reflect the personal feelings of news commentator and are not based on any rigorous polling of people making trades. If we did poll, we would undoubtedly find a huge range of reasons for buying and selling (the fund needed cash, rebalancing a portfolio away from stocks ...). Even rigorous polling would give us no sensible reason because most trades are not made by humans. Most trades are made algorithmically by computer programs so complex that no individual can, without extreme effort, determine why any particular trade was made. In the "flash crash" of May 2006 the stock market lost, then regained, 10% of its value in less than hour. After five months of analysis the SEC released a report trying to explain why the market fell on that particular day. The answer had nothing to do with the magical "Investors" or "The Market". The SEC explanation included a lot interaction between algorithmic trades (including high frequency traders). Almost a decade later, the reasons are still debated. If you hear a discussion about the stock market that includes human motivations for movement, it is almost certainly fantasy, often in service to the biases and aims of the organization that pays the commentator. That does not mean the commentator is deliberately lying. They are reflecting the views of those in their circle of "experts". Those experts in turn are employed by an organization with an organizational world view tuned to support the aims of the organization.

Analysis at the group level is not hopeless though. There are common strands that allow us to discover some rules and explain actions. Unfortunately, as in many complex systems, often we can only explain in hindsight. It is only in hindsight that we can see how the various forces actually played out. In hindsight, things that were uncertain when they unfolded appear to be more inevitable. This feeling of inevitability can, in turn, lead to the notion that there was deliberate intent by some small set of individual actors (the cabal). All of us have the intent trying to shape the future, but our individual intent is usually tempered by our position within society, which shapes what we think and believe, and by the organizations through which we act.

Partly because of our stated value of respecting individuals, US society is structured to support organizations rather than individuals . In the political sphere, we do not vote for a party, we vote for an individual in a winner takes all system. To get the resources necessary to win an election, individuals almost always have to join a party. The party has a ready place on the ballot for its candidates, the party has a pool of money and a network of people who can be mobilized to work for the candidate. To get this support, the individual must align him/herself with the aims of the party.

In national office, officials "represent" millions of people. They use "public opinion" to help shape their message (but perhaps not their votes). Public opinion can be gauged by polling, and by analyzing comments and requests from constituents. If you have ever written to a national elected official you can see how your feedback is handled. The "personalized" response from the official is a set of canned paragraphs on topics you mentioned. It is clear from this response, that you letter has been analyzed at the level of "concerned about issue X" or, at the most specific, "supports position Y". Based on that, the paragraphs are chosen. These days, the analysis of your letter and the response may be automatically generated without human intervention. I have asked my elected officials to let me talk to someone about this process, and been ignored. The input to the official is presumably equally coarse, basically a count in a spreadsheet that indicates how many constituent wrote in "support of position Y". That is, the responses are aggregated in a very simplistic way. In such a world, organizations have oversized influence because they can mobilize people to affect the count in the spreadsheet of public opinion.

This makes political life a competition of organizations. Powerful individuals can increase their power by creating "grass roots" organizations capable of generating pressure on elected officials by changing the counts in the spreadsheets. Thirty second ads are used to mobilize additional letters and calls. The smartest powerful people go one step further by controlling media to affect the way issues are framed. But, whenever an organization is created, even the most powerful individuals cannot force the organization to completely reflect personal beliefs. Inevitably, other individuals in the organization influence the direction as well.

When we see the results of this process, we may assume there is a conspiracy of individuals (the Trilateral commission, Davos participants ...). It is demonstrably true that actual public opinion has no effect on the legislative process in the US. But this does not mean there is a conspiracy with secret meetings, it is the result of the wars between competing, powerful, moneyed organizations. These organizations form alliances and work together when it is convenient. As alliances are created, individuals will meet, but I believe an appropriate level of analysis is the organization. Individuals create and manipulate organizations for personal gain. I contend individuals strongly influence organizations, but only occasionally control the outcome of the balance between organizations. Individuals generally ride the larger organization trends for individual advantage.

Saturday, December 17, 2011

A Comparison of Sweden and the US

The other day someone pointed out that if Sweden were a U.S. state it would not rank very high on per capita GDP. This was a Facebook conversation and the tone of the post was "see you socialist left wing fanatics, even in the best case your socialist state is worse off than almost all of the U.S.". This, of course, created a small firestorm of posts, which I think was the object of the provocation. The comparison is interesting though.
There are cases where the differences in governance, national attitude and results are stark. For example, Haiti and the Dominican republic share an island, but the contrast between the two is stark. The same can be said of Costa Rica and Nicaragua. Sweden is not, of course, a socialist state. The U.S. and Sweden are both industrialized nations with relatively educated populations. The U.S. has a leg up because of its vast natural resources.
Given the general similarity of status of Sweden and the U.S. as industrialized nations, a comparison of social policy and the results for the average citizen is worthwhile. I think the differences between Sweden and the U.S. are largely a reflection of basic philosophical differences in national attitude. As a nation the U.S. attitude is: social darwinist, each man for himself, pull yourself up by your bootstraps, if you cannot make it here don't blame anyone but yourself, government always does a worse job than the private sector. I have never been to Sweden so I cannot report firsthand on conditions there. From the outside its social policy seems more: we are all in this together, each does better when all do better, we are all people and things happen so let us support each other, government programs work well at providing the basis for us to build strong lives.
The Swedish GDP for 2010 is about 458,000 (millions). With a 2011 estimated population of 9,415,300 the per capita GDP is about $48,640. This is roughly the same as North Dakota at 47,714 which ranks as the 20th highest state GDP per capita. There is some disagreement about these numbers. For example the wikipedia article on the Swedish economy gives a per capita GDP of about $37,775, which would make it closer to Michigan, the 42nd poorest state. Sweden cannot prop up its social welfare system with natural resources like North Sea oil (Norway, Britain). It must pay through basic productivity.
In the World Economic Forum (the Davos folks) Global Competitiveness Report, Sweden ranks above the US (because of the recession)
Sweden is not going bankrupt. Its overall national debt is 40% of GDP compared to 60% - 90% for the United States (depending on whose number you use). Sweden went through a real estate and financial crisis in the early 1990s and had to re-adjust its social spending to accomodate lower GDP. Sweden is now used as a model for how a nation should handle financial crises. Sweden can afford its social programs. Because it is somewhat poorer pre capita than United States, we could afford similar programs if our national philosophy allowed it. The difference is choice, not money.
Sweden ranks high in taxation about 48% of GDP (2007). In the developed world, Sweden is on the high end of taxation exceeded only by Denmark. In the U.S. taxes are about 27% of GDP (2006). The U.S. tax rate is one of the lowest in the developed world. Only Mexico, Turkey, Korea, and Japan have lower taxes as a percent of GDP.
So, which resident gets the better deal: someone living in Sweden with its not-outstanding per capita GDP and high taxes or a resident of Michigan/North Dakota.
Health care in Sweden requires patients to pay a fee per visit/prescription, but total costs to the patient is limited to about $360 per year. In comparison to the US Sweden has more doctors and nurses per capita. Life expectancy is higher, and infant mortality is lower. Over 80% of all medical costs are paid by the government (vs. 45% in the US) but the total cost spent on health care is so much lower that the US government pays more as a percentage of revenue than Sweden does. So, in Sweden everyone is guaranteed health care, the cost is lower both to the individual and the government than in the U.S.. The outcomes of health care are generally better, and citizens do not need to fear medical bankruptcy.
In education, Sweden works hard to make sure that opportunity is equalized for children. Grants from the national government take into account the economic conditions of the particular region. Poorer regions are subsidized and richer regions bear an extra cost. Rural regions are compensated for transportation costs and smaller class sizes. There are independent schools, roughly equivalent to charter schools in the U.S. Parents may have to pay a fee for preschool and childcare, but there is a ceiling to those costs which takes household income into account. Higher education is essentially free to the students. Students must pay for text books, and equipment needed for personal use. This means that students enter the workforce essentially debt free.
This contrasts with the United States which has limited pre-school support and where higher education is increasingly unaffordable. Two thirds of students leave higher education with an average debt of $23,000 dollars. We have created a generation of young adults who, instead of leaving college and becoming entrepreneurs, are forced by debt to ender the labor force as employees. In the United States, public dollars going to higher education have decreased and tuition costs have increased. The United States of America is the only OECD country where 25-34 year-olds are not better educated than 55-64 year-olds. This may be in part because other countries had more room to improve over the past 25 years.
In Sweden, taxpayers spend about 6.6% of GDP on education. In the U.S. about 5.5% of GDP is spent by the government on education.
We all know how skewed incomes are in the United States where the top 400 wealthiest people have more than the bottom 150 million.
About 80% of the Swedish workforce is unionized. As might be expected in a place where people tend to feel part of a single society and look after each other, the unions make the society more equal, but do not eliminate inequality or reward laziness. In hard times, looking after each other may mean unions accepting pay cuts to save jobs. The Swedish unemployment system looks much like the US unemployment system.
If we honestly compare industrialized societies, the US doesn't look so good. We have a national mythology that we are a nation of rugged individualists in a country that provides the opportunity for everyone with drive and determination to make whatever they want of their lives. While we do pretty well on the individualist side, shunning all non-business forms of collective action. We do less well on the opportunity side. American families are less socially mobile than families in other countries.
Much of the U.S. national catechism is simply incorrect.
People do not do best as rugged individuals working for their own benefit. We are social creatures who do best as collections of individuals working together and helping each other.
People are not naturally dishonest or working to game the system. There is a persistent, endemic problem of dishonesty, but this is the exception not the rule. Most people getting unemployment benefits, welfare, food stamps, WIC payments, social security, medicaid ... are ordinary hard-working folks just like you and me who have hit hard times. Most of them will be back on their feet in a little while, they just need some help to see them through.
Work and money are not the center of most people's lives. Most people work for money to earn enough to live, but are not particularly interested in accumulating large amounts of wealth. Everyone would love to be wealthy, but if you talk to people about what they would do once they got that big pile of cash, very few of them talk about accumulating more. Most people would simply do more of what they currently enjoy the most. We should not be educating our children to be effective workers, we should be educating them to understand themselves and the world around them.
Government can be effective. Government is comparable to other large organizations in efficiency and effectiveness. I have worked as a consultant to both government and private entities. The problems are somewhat different, but both government and private entities tend to have about the same level of bone headedness. If we look around the world, we can see examples of more effective governance. Sweden seems to be one of those places.
The United States has low taxation, both at the individual and the corporate level. The question in most of the developed world is not "how much am I taxed", but "what do I get for my tax dollars". As an example, the citizens of every country with universal health care are basically pleased with their system do not want a privatized system.

Friday, September 30, 2011

If We Aren't Careful, We May End Up Where We Are Heading.

It is easy to predict man made catastrophes. Sometimes they even happen. Here are some intractable problems/trends that are likely to make the next hundred years "difficult". If we do not find some way, pretty quickly (fifty to one hundred years), to change course I think we could be fairly described as a failed species. That is, things will look much more like "Blade Runner" or "The Mote in God's Eye" than "Ecotopia".
This post assumes an unstated desired future. If your view of a desirable world differs significantly from mine, you may not find any problems here.
The good news is that we can relatively easily make things much much better. The bad news is that, as a species, we seem incapable of making good long term choices. If change occurs it will likely occur on the back of poverty, war, famine, and plague. If change does not occur, we are condemning our descendants to an impoverished, less habitable planet.

Social Trends - Concentration of Wealth

It has always been true in settled societies that wealth is concentrated. As productivity increases in industrialized societies, it takes less and less labor to make the same amount of goods. Either we constantly increase the amount of goods we desire and require (endless growth) or more and more people become "redundant" as they say in England. That is, there is no need for their labor.
In the nineteenth and twentieth centuries there was a serious countervailing social movement to redistribute wealth to make societies more equitable. Tides seemed to have turned and, particularly in the United States, the scales have tilted toward unfettered wealth and, along with it, increasing manipulation of both media and elections to serve the plutocracy.
I am not suggesting a trilateral commission type conspiracy. Instead, individuals and groups with plenty of money are doing their best to publicize their point of view and make it the basis of discourse. There has been about a century of systematic work to improve marketing. In the political arena the admonition that government should be more like business has been taken to heart in the propaganda department. Political messages use the tools of marketing (focus groups, test markets ...) to find the most immediately effective messages.
There have been some genuine innovations in the exercise of power though. For example, it is no longer necessary to buy politicians. It is much easier to find someone who already holds your point of view and work for their election. An extreme example is Caperton v. A.T. Massey Coal Co..
Sometimes there are social policies that reinforce the concentration of wealth as an unintended consequence. For example, higher education is increasing in cost and is commonly funded with loans. Forbes reports that two thirds of all students graduating from four year colleges and universities carry loans with an average debt of $23,000. This is a doubling from 1996. Instead of leaving the University with knowledge and a clean slate to start new enterprises, this generation is pretty much forced by debt to become simple employees of existing operations.
We know the end of this story. In the U.S. there is relentless propaganda campaign that insists that we have a pure meritocracy and the wealthy are the ones who feed us all. As the gap between haves and have nots continues to widen and the number of have nots increases, eventually they will simply rebel. If that happens, expect decades of chaos and class warfare with guns.

Social Trends - Fewer, Larger Entities

As technology improves it becomes possible to create larger and larger organizations. Advances in information processing have accelerated this capability.
The current tendency is writ large in the video distribution industry. When VHS tapes became the technology winner, the low entry costs for starting a video store allowed thousands or even tens of thousands of independently owned video stores to blossom. Almost as quickly there was a wave of consolidation as smaller operations were either bought or driven out of business by a regional video chains. These, in turn, were consolidated into a few national chains (Blockbuster, Showtime) which dominated the market. There are still mom and pop video stores, but after the first boom they never had appreciable impact on the market as a whole.
In many industries there are very few real players. This includes media companies where nine companies control virtually all television and Clear Channel controls 1200 radio stations. Four cell phone providers own the lion's share of the mobile phone market (280 million subscribers). There are five major oil companies. Oil companies are among the largest companies that have ever existed. Over half of all farm seed is produced by fewer than ten companies.
As a side effect, increasing institution size also works to further concentrate wealth.
We know from network theory and from study of biological systems that diverse systems which have large numbers of highly interconnected parts are more resilient and less prone to catastrophic failure than systems with fewer nodes and interconnections. When diverse systems of many nodes have some of them fail, the remainder of the system tends to work around the problem. When their are fewer, strongly connected nodes, they tend to drag each other down in the face of disaster. Note how this sounds just like the start of the 2008 financial crisis and the current Greek debt crisis.
In agriculture, the number of farms has decreased, the acreage of each farm has increased, and the vast majority of farms are a monoculture. We have centralized meat and food processing. While the system may be immediately efficient, it is also incredibly fragile and shortsighted. We impoverish the ecosystem, including the soil ecosystem. We also make our food supply dependent on a smaller variety of foods where a single virulent disease can spell disaster. Centralized processing means that millions of people can be infected or poisoned from a single point.
Despite their inherent fragility when faced with the unexpected, in the normal course of events, centralization tends to win. The only way to redress the problems is by creating an environment that rewards smallness or penalizes bigness.

Social Trends - Race to the Bottom

Globalization has allowed the entire world to become a source of labor and products. One side of this is that wealth has flowed to some desperately poor places. The other side is that it has depressed pay in many developed countries and made jobs much less secure. While money does flow toward poor areas of the world, the net effect is to lower labor costs in general. It is interesting to note that globalization involves capital and goods, not people. A factory worker in Sheboygan is competing with workers in Bangalore, but it is unlikely the factory worker can emigrate to Bangalore and take advantage of its lower cost of living.
Globalization allows producers to reduce costs. Labor is part of this, but not the whole picture. It is also possible to reduce costs by operating in locales that allow costs to be ignored or externalized. For example, it will be cheaper to produce in a country that allows wholesale pollution or deforestation because you don't have to install that expensive emission control equipment or worry about forty years down the road when the trees are all gone.
Because every locality wants the jobs, the tendency is to offer the most attractive deal possible to producers who promise jobs. Producers use this to pit localities against each other. Internationally, this rewards countries with the worst labor practices and the most lax regulations. Within the U.S., communities generally bid by offering tax breaks. The hope is that the increased wage base will make up for the breaks, but often the end result is simply to starve local government.
When the cost of production goes down, a number of things can happen. The cost of goods to the end consumer can go down. High tech items show this most clearly but it also shows up in the price of clothes at Old Navy. Second, profits for producers can increase. This has happened as well. In the current "recession" profits for U.S. manufacturers have completely recovered. Finally wages for workers can increase. In the past few decades this has not happened. Wages in the U.S. have been stagnant for almost two generations. When producers (owners) increase profits but workers do not share in the wealth, this increases the concentration of wealth.
Remarkably, public discourse on workers benefits has joined this race to the bottom. Look at the discussion over public pensions. There is a problem with pension funding. Governments have sometimes promised more than was prudent (as did GM and other major corporations). The discussion never seems to be "how can we get private retirement better", it is always "public employees are getting benefits that private employees do not, let's reduce them".

Social Trends - Rise of the Ideologues

Never underestimate the power of a simple idea or worldview even if it is completely wrong or destructive.
People will take a few general principles and assume everything can be explained by them without much regard to complicating factors. If the ideas lead to bad results, it is a failure of application, not the principle.
Among the current Ideologies that are threatening social destruction I would include (non-exhaustive list): radical violent Islam, any religion based on literal inerrancy of the bible, libertarianism, and all forms of racism.

Social Trends - Algorithms and Hubris

There is a notion in computer science called the singularity. This is the creation of smarter than human intelligence. A basic question is, will we notice it?
We already have specialized machines that perform much better than humans. Computers have bested humans in games like chess. Robots create and assemble parts much faster and more accurately than humans. In the computer gaming world, our "enemies" are dumbed down to correspond to our terribly slow human reaction time and limited ability to handle large numbers of inputs. Our planes and cars are already run by computers. Humans enter basic parameters for flight, but the plane itself makes virtually all decisions.
To increase efficiency we constantly streamline and automate business processes. The end result is an expansion in the power of algorithmic systems. In a modern corporation there are fewer and fewer levers pulled by fewer and fewer people. Take shipping as an example. A company like Fed-Ex has completely automated the routing of packages. Once your package information is entered into the system, humans do nothing but follow a machine generated instruction to pick up a box in one place and drop it at another. Airline reservations are another example. Humans do not play any role in the process. The price is determined by complex algorithms that are probably beyond the understanding of any single person. Planes are automatically booked and overbooked. Even upgrades and seat re-assignments are pretty much controlled by the algorithm. The person at the gate has almost no choices and no authority.
The system we have to create these systems is not reassuring. When a business decides to automate a process, a team of people, often outside specialists, is assembled to analyze the problem and implement a solution. When successful, the results are put into production and handed off to a separate team that is in charge of operating, maintaining, and improving the system. In theory this is a repeatable process with each group playing its specialized role. The players usually do not understand each other's roles very well. At the business level, the indicators are productivity (how many flights are booked in how much time and at how much cost) and overall profit and loss. The systems are designed to report some set of indicators so this can be tracked. The people who look at the indicators do not usually understand the underlying algorithms. The people who design and implement the system are specialists in new product creation and generally leave the scene after the process is in place. The people who maintain and improve the system generally have documentation, but they may not be aware of why particular design choices were made and the trade-offs involved.
Another way to state this is that every day we create large algorithmic systems that no single person, or even group of people, understands. As long as he systems work reasonably well or can be discarded, there is no real problem. When the systems fail or are critical but so complex they cannot be discarded, we run into trouble.
On Wall Street, most trading does not involve humans. In 2009 almost three quarters of all stock trades were automated trades based on computer algorithms. Since then this number has almost certainly increased. When you listen to commentators discuss the stock market and why it moves one way or another, it is complete nonsense. It sounds good and it always supports the commentator's overall view of the world, but it is not based in any kind of fact. On May 6, 2010 the stock market briefly crashed. It took five months to issue a report that could attempt to explain what actually happened. The basic answer is that the machines did it.
The hubris part of this trend is that there are people who think we can model and control complex systems. As an example, one of the great failures of modern economics has been the attempt to quantify risk. Do a google search for "quantification of risk economics". You will get pages of google results that are complete nonsense written by people who actually believe they are close to the holy grail of putting a number on risk. Often they create models that work well in certain circumstances - but their predictions ALWAYS fail catastrophically in the long term.
What happens when you put a couple of people with Nobel Prizes in Economics in a room with the Vice Chairman and Head of Bond Trading at Solomon Brothers. You get a well funded scheme to make money based on the finest and most capable economic models of the day. You get "Long Term Capital Management" a firm which made profits until it completely failed in 2000. The failure of a single firm, even a big one, is not particularly important. Unfortunately the firm was so highly leveraged (highly leveraged means "playing with huge sums of other peoples money") it threatened to bring down large portions of the financial system. Fixing the problem required a massive bailout supervised by the Federal Reserve. It failed because of events that they simply could not predict. That is the point. There are always events that we simply cannot predict. We do pretty well with "normal distributions", hence the reliable existence of life insurance. Unfortunately, most real world economics are not "normal".
The run-up to the 2008 collapse was a tribute to the power of simple greed, but all good cons need a convincing story. In this case, investors were reassured that the risk involved in collections of mortgages was known and quantified, and besides, we can hedge (insure) to limit losses. There was outright lying at every level of the financial transactions, but a systemic problem was that the intertwined system intended to reduce risk by spreading it, simply increased risk for everyone. Of course there were some folks who knew about the lying and worked the system to their own advantage (notably, Goldman Sachs).

Social Trends - Missing the Big Picture

Evidence based action is important to understand what works and what doesn't. When we have the evidence it seems silly to ignore it. But, it is also silly to read more into our simple experiments than is actually there.
Experimentation is difficult and expensive. This is especially true with trying to understand humans. Too often we end up understanding and exploiting a tendency. The results may be immediately satisfying but ultimately destructive.
There are many situations where short term investigation gives us a "local optimum" where people are more satisfied at this instant, but the end result is ultimately destructive to our health and well being.
The prime example of this is industrial food production. To build a more popular food product you have to understand what people want so they will buy your product. An industry with a new product must be able to produce it consistently and on a large scale. If you create a focus group or simply ask people on the street to tell you which of several food products they prefer, the winner is likely to be the the cheapest product with the highest sugar/fat/salt. As organisms that evolved in circumstances of want, we crave these things. To produce the product consistently and in large quantities you have to industrialize the production of the raw ingredients. In the case of food this is living organisms. For crops, we standardize the breeds, the methods of production, and we process the results in chemical plants to homogenize, filter, and extract. For animals, we reduce them to eating machines on a cheap controlled diet and we engineer their genetics to change what was an animal into a muscle production machine.
We get consistent products that we biologically crave, we also get obesity, diabetes, heart disease, and an odd form of malnutrition. Don't worry about the malnutrition though, because we have processed supplements to fix that.
Since the introduction of the automobile we have done exactly the same sort of short term fixes. When faced with traffic problems, typically traffic congestion, the answer is always the same. Congestion will be alleviated if we add more lanes and reduce the number of entrances into the main streets (no houses on arterials). It also helps if people stay away from the congested areas. The end result is our typical suburban city form. That is, a built environment that is reasonable if you are a car, but not very suitable for supportive human culture.
On a business level the question is usually "How can we improve our profits this quarter or this year?" It is almost never "How can we stay in this business in a sustainable way?" or "How can we make the world a better place in ten or a hundred years?" If your time horizon for profit is one or even five years and an opportunity arises to make a profit based on destruction that will not become apparent for ten or twenty years, most businesses will take the profit and screw the future, which leads to the next section.

Environmental Trends - Destruction of the Natural World

It is clear that as a species we are quite willing to destroy everything around us for short term survival or short term gain. We are willing to completely destroy the natural environment. Take as examples mountaintop removal for coal, deforestation and overfishing.
On top of this, there are unintended results of our actions. The prime example is global warming. General habitat destruction as we exploit more and more of the world is a severe problem.

Environmental Trends - Unsustainable Human Population

We have already passed a tipping point in human population. We have more people than the planet can sustainably support. Like a profligate child with a large inheritance, we can live for some time by depleting our inheritance, but in the end we will be broke. In this case of humanity, our inheritance is the natural world and all its riches which we are rapidly despoiling.
It is not clear what the carrying capacity of our planet is, particularly since this is partially related to the technology at hand. It is clear that we have exceeded the current capacity. As the human population continues to increase we will see even more rapid environmental degradation as well as more frequent human disasters (crop collapse, famine, social unrest, war for resources...).
In industrial countries population has stabilized or even decreased. This gives some hope that we can control our own numbers. For the world as a whole I think it is likely that we will simply exhaust natural resources. This will cause a very painful decline in human population based on misery.
As a contrast, think what the world would be like with our current technology if we had a third of our current population. We could live in a world of human plenty with a massively improved environment. We have passed the point in human society where increasing human labor is the best way to improve the human condition.

Tuesday, November 30, 2010

Economics - What is it Good For

I think of economics as the study of money and how it travels. I had a written conversation with one of my brothers and he explained that economists do not think of economics this way. They think of economics as the study of human choice and allocation of resources. For example, my brother wrote:

What are these non-economic spheres of which you speak?  Give me a couple of examples and I'll understand better.  To me, the economy IS society.  It's people using their resources to exchange with other people.  Taking the time to respond to you is a choice in the use of my resources.  I could have been riding my bike.  Economics studies how we make these choices.  It's as abstract as Galois theory and, IMHO, way more fun.

This is a very grand ambition, a unified theory of human choice. If this could be accomplished it would stand among the greatest human achievements.

When I speak of non-economic spheres, like religious or scholarly pursuits, there is an obvious mismatch with the economists view. If economics is about choice and resource allocation, there are no non-economic spheres. Cloistered nuns make the choice to spend their resources in meditation and prayer and scholars choose to spend their resources on acquiring and disseminating knowledge.

I took a negotiation class. The first exercise was to act out a scenario about buying/selling a car. Everyone in the class had exactly the same information about buyer, seller, and car. We paired off into buyers and sellers and negotiated. Perhaps because it was an exercise, no one walked away from the deal. At the end of the exercise each pair was satisfied with their transaction. The range of prices was huge. Some people bought a classic car that was likely to appreciate in value. Some people bought a source of spare parts, most of which would turn out to be useless. Each person brought their own sense of value to the table and negotiated the transaction based on that value.

This is the strength of the free market. Both buyers and sellers get to say what an item is worth and either complete a transaction or walk away. Each person assigns value and chooses how to allocate resources.

This is a basic notion of economics. To make it a science we have to be able to generalize, theorize, and test those theories. That "sense of value" is called a utility function. The utility function represents the value that a buyer or seller assigns to a resource at any given point in time. We can also speak about utility functions for large numbers of people. What is, for example, a fair price for an iPad where there are hundreds of millions of potential buyers. Can we establish that the collective utility function is such that 10 million buyers will pay $500 dollars but only 8 million will pay $600.

Here are a some facts about utility functions, both individual and collective.

  • They vary over time. A rotary telephone is worth much less today than it was 75 years ago.

  • They are discontinuous. When lcd televisions reached a certain price/quality point, CRT televisions suddenly lost almost all of their monetary value.

  • They are chaotic in the mathematical sense. That is, utility functions that are initially very close may, over time, diverge to be arbitrarily far apart. Two men may agree on the worth of a new Mercedes. One of them has a baby and suddenly the Mercedes is worth no more to that man than a Honda Civic.

These qualities are common in nature but are, so far, mathematically intractable. Economists generally work with simplified models assuming that utility functions are, at least locally, continuous and non-chaotic. That is, to make the mathematics simpler they ignore the basic complexity.

All scientists make simplifying assumptions in their models. The difference between economists and scientists becomes clear when the models fail. Scientists blame their models and re-examine their assumptions. Economists blame the world and try to persuade people that they should behave more like the model.

The brightest and most analytically rigorous economists have an impressive track record of failure in their predictions. Given this legacy, what does contemporary economics have to say that helps us with our lives? Is this a reasonable tool to use when looking at the world, or is it simply a case of "when you have a hammer everything looks like a nail".

Transactions are all about value, and value is mostly ontological. That is, what are we negotiating about? Is this a classic car or a bucket of bolts? To a philanthropist value might lie in the name of a building "The Jones Center for Advanced Learning". The question is not one of discovering the utility function, but of creating a story about the world. The utility function follows from the story. In creating the story, the tools of psychology are much more important than economics. This is marketing. I have almost never seen a marketer do an economic analysis. They create the story, the shape of the world, to make the object as desirable as possible to potential customers. It is the story that determines the utility function.

Unrealistic utility functions are not the only simplification made in economics. There are also the patently absurd notions that humans are rational actors (even in the limited economic sense) and that all parties have the same information about transactions.

While this discussion has mainly focused on microeconomics, macroeconomics has been equally unsuccessful in prediction and in guiding policy. Countries that defy conventional economic wisdom often end up better off than those that follow it. To see this, look at the history of the IMF and the results of following or disobeying its advice.

Given that the basic premises used in economics are faulty and that realistic mathematics are intractable, what is the use of current economic theory? Ben Bernanke explains:

Economic models are useful only in the context for which they are designed ... standard models were designed for these non-crisis periods, and they have proven quite useful in that context.

That is, economic theories and models are great except for the fact that they fail catastrophically from time to time.

Perhaps formal economics has failed us because the economists have not developed the analytical tools necessary for realistic models. Despite this, economic notions could provide us a particularly useful way of looking at the world or determining how we should behave.

I am not an economist and have not deeply studied the field. As a result my views are probably distorted. I see the field as an educated lay person.

I find viewing human relations in terms of self interested agents, resource allocation, and transactions to be largely bankrupt. It is true that we often work for our own gain, have limited resources and engage in many transactions. For most of us, these issues are not central to how we live our lives. Moreover, the notion that we are individualistic self interested agents has infected US society leading to a "greed is good" mentality. This flies in the face of what we know about our success as a species, which is dependent on cooperation and sacrificing self interest for family, friends, neighbors and nations.

Here is the bottom line. Economics as it is currently formulated has failed us in prediction, guidance and in world view. Economic models are only useful in the simplest situations. In world view, contemporary economics leads to greater inequality, poorer health and welfare for society as a whole, divisiveness between individuals and groups, and the mistaken belief that government cannot solve problems. All in all, an impressive record of complete failure.