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.

Fairness and US Federal Tax

I keep seeing articles about "fairness" of the federal tax system. In particular, that the wealthiest americans fund most of the government. For example, the Wall Street Journal "As it happens, the top fifth of earners currently pay 67% of all federal taxes". On the face of it, it doesn't seem fair that twenty percent of the population should pay two thirds of federal taxes. To make this even worse, depending on how you work the accounting, somewhere between ten and forty seven percent of households pay no Federal taxes at all.

This blog entry was triggered by an opinion piece written by Glenn Hubbard, a chairman of the Council of Economic Advisers under President George W. Bush. "Left, Right and Wrong on Taxes". In that piece Mr. Hubbard says

When I left my job as the deputy assistant Treasury secretary for tax policy in 1993, I left a message on my office blackboard for my successor. I wrote, “Broaden the base, lower the rates” repeatedly until I filled the entire space. I then had it covered with wax so it could not be erased. (Yes, the government charged me for my bit of vandalism. But it was worth it.)

I think all of this is nonsense. It seems to be based on the simplest possible notion of "fair" and a deep misunderstanding of wealth, taxes, and spending.

Anything to do with taxes and finance is complicated, but this note is not. I am using a very broad brush, but in data I use the numbers that argue against my point of view. For example, I use federal spending numbers from 2000 when the government spent much less than it does now. The income figures come from 2005, which gives households a higher income than in 2000. I did this because it is hard to get a consistent data set but I wanted to make sure I could not be accused of cherry picking data.

The gist of my argument is that the wealthiest must pay most of the burden because, frankly, they are the only ones that have any money. The federal government goes after them because they cannot get the money anywhere else without having people starving in the streets.

In 2000 the federal government spent about 1,789 billion (about 1.8 trillion) dollars. See: Government Spending Details, Federal Spending by the Numbers 2010, Table 1.1 — Summary of Receipts, Outlays, and Surpluses or Deficits: 1789–2009 . In 2005 there were about 110 million households . Dividing federal spending by households gives an "average" federal tax burden matching taxes to spending. In billions, this is: 1,789/.11 or $17,890/household

In 2005, twenty percent of all households had an income less than $18,500. That means for one out of five people to pay their "fair share" we would have to confiscate all their money leaving them nothing for food, shelter, heat, water... Looking at income breakdowns, the poor are disproportionately young and have less education. This group has more households headed by single women. My own experience and the fact that they tend to by younger indicates there are often children in the households. Children have no say in when or to whom they are born.

My earlier post discusses how, in virtually all societies, wealth is concentrated in the hands of a few. If you compare the wealth curve to the tax curve. you will find general agreement. Compare "But by 2005, the top 10 percent accounted for nearly 55 percent of all federal tax revenues, while the rest of the population paid about 45 percent." with the fact that the top ten percent has about 71% of the wealth.

The federal government taxes the rich for the same reasons Willie Sutton robbed banks. That is where the money is. If you look at capability to pay taxes (percent of wealth vs. percent of tax burden), the top ten percent are getting off easy. In terms of power politics, that makes sense. The wealthiest have the greatest ability to influence government policy and public opinion. As Warren Buffet famously said, "There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning."

We have income redistribution in the United States, as does every industrialized country in the world. We do this because the alternative is having malnourished children and a huge homeless population.

It would be impossible to argue in favor of the current federal tax system with its arcane rules and special deductions. Eliminating many of the current deductions would allow stated tax rates to go down and would make the stated rates closer to the actual rates. But calls to “Broaden the base, lower the rates” are another salvo in the class warfare already going on. If we look at Mr. Hubbard's specific proposals we can see where he stands.

Broaden the base lower the rates.

Reduce taxes for the wealthiest americans (softened by removing deductions).

Cut corporate taxes.

Increase income mostly for the wealthiest americans. The evidence that this spurs economic growth is sketchy at best.

Shift from income tax to a consumption tax.

This disproportionately affects those who must spend all their income.

The United States is the wealthiest nation that has ever existed. Even with our debt crisis we can afford to support those among us who are the poorest and most vulnerable, but it will require taking some wealth from those who have the most.

Election Related Blog Posts

Election season is on us again, so I thought I would collect some blog posts from the last election because I think they are still valid.

This election cycle is even worse than usual because of the amount of untraceable money. As I note in Following Politics Too Closely Makes You Stupid, nothing can be learned from a thirty second ad. Unfortunately, there are so many of them they are impossible to ignore.

If you have a small amount of energy to devote to politics, I recommend keeping a pencil and paper and jotting down the name of organizations sponsoring ads (Citizens for All Things Good). Look for the organization on the internet. If it does not list where the money comes from, that should be a black mark against the candidate. Whoever is sponsoring the ad is spending a lot of money to get the candidate elected (or to defeat the opponent). The sponsors will want something in return, but they don't want you to know who they are.

• Following Politics Too Closely Makes You Stupid


• It is Your Civic Duty - Lie to Political Pollsters


• Machine Politics

A little off topic, but related to many of the current election discussions is
Why Does Government Interfere With Markets?

Wealth Distribution and The Work Week

In this post I have quite a few links. They vary in political slant and probably somewhat in numerical values, but the overall picture is largely consistent. Often I reference an article rather than the base data because I found the article itself interesting. Sometimes the general articles contain other useful links.

I read a quote a while ago - but cannot find it now. It went something like "Every successful person says they got that way by dint of hard work, intelligence and perseverance. I never met an unsuccessful person who did not blame circumstance and bad luck."

I can interpret this statement in at least three ways, all of which have some truth. One is that successful people work hard and meet adversity with intelligence and persistence while unsuccessful people blame the world around them. A second interpretation is that successful people are likely to pat themselves on the back and attribute to themselves results that may have come from simple luck. A third interpretation is that both sides are correct. Hard work, intelligence and perseverance may be necessary precursors of self earned success. While these traits may be necessary, they are not sufficient. Many people are defeated by events beyond their control.

In my last blog post I requested a 1950 lifestyle in exchange for a work week that corresponds to current productivity compared to 1950 (11 hours per week). With steady increases in productivity it is a reasonable to question why life is as hard as it is and why the work week has not gotten any shorter, and may have gotten longer. I saw an analysis (unfortunately not very good) of hunter-gatherers that estimated they spent about 40 hours a week on survival. That means that in the past 4000 years we have we made no progress on shortening the labor needed to survive. Admittedly "survival" now is much different than 4000 years ago. Life is much more comfortable, longer and, for most of us, less brutish. Still... something seems wrong.

About a century ago an economist named Wilfried Pareto noticed than many phenomena including income and wealth follow what is now called a Pareto Distribution. This is often known as the 80/20 rule and says that 20% of the population have 80% of the wealth/income... The distribution is self similar in that if you take the top 20% it will follow the same distribution. That is, 20% of the most wealthy people will have 80% of the wealth in the wealthy group.


The distribution of wealth is not exactly a Pareto Distribution but it is close, particularly at the high end of the income/wealth scales. This is true in many societies around the globe including medieval Hungary.

When something is this widespread it argues for a common mechanism. This mechanism could be the distribution of brains/work ethic/persistence or it could be something having to do with the nature of economic systems. In 2002 the Harvard Business Review published an article "Wealth Happens" . Simulations based on a few assumptions about money flow show a Pareto Distribution occurring strictly by chance. That is, a few chance events may cause one person to become wealthy while another becomes poor. In their simulations, the basic feedback mechanism was investment. If you gained enough wealth to start investing in things that provided more wealth, you headed up the wealth chain. Wealth is compounding, so the more you have the more you get.

The numbers 80%/20% are really just an example. Different societies have different percentages. Most people underestimate how skewed wealth is and overestimate social mobility (moving from poor to rich or vice versa).

Net worth is the value of everything you own minus all debt. In 2007 the median net worth of a family was $120,000. If this were a stack of $100 bills, it would be a little less than six inches tall. The 400th richest American in 2007 was Kenny Troutt of Excel Communications with a net worth of 1.3 billion. That would be a stack of $100 bills just over a mile tall. Bill Gates topped the world list that year at 59 billion, a stack of $100 bills about 45.5 miles tall.

It is worth a moment to talk about "mean" and "median". In the last paragraph I said the median net worth in 2007 was $120,000. The median is the middle number. That is, if you have 11 different numbers then 5 numbers will be less than the median and 5 numbers will be greater than the median. The "mean" is the average you get by adding up all the numbers and dividing by the total. For the numbers (1,2,3,4, 10000) the median is 3. There are two numbers (1, 2) that are less than the median and two numbers (4, 100000) that are greater than the median. The mean of these numbers is 2002 = (1 + 2 + 3 + 4 + 10000)/5. The difference between the median and the mean is an indication of how skewed a distribution is.

In the case of US family net worth in 2007, the median was $120,000. The mean was $556,380. The Pareto Distribution is quite skewed. If we confiscated all wealth and redistributed it evenly among all families, every family in the US would be around the current 80th percentile of net worth. That is, every single family would be better off than about 80% of the families today.

Before you start the revolution remember the Harvard Business Review article. It indicates that inequality would quickly reassert itself and we would be in the same position as today in relatively short order. Many people would lose almost all their money and a few people would become fabulously wealthy.

Over the past 20 years the US has become less equal in terms of wealth distribution, but the absolute wealth of each class may have increased. That is, the economic pie has gotten bigger so that even though the very wealthy have increased their percentage of the pie, the rest of us still got a little more pie than we used to.

In social mobility there is a general trend for poor families to improve their lot over several generations. In the US it takes about four generations to move from 20% of the average income to about 90% of the average income. There is more social mobility in much of the developed world than in the United States. That is, families pull themselves out of poverty significantly faster in France, Canada, and Denmark than they do in the US.

On a macroeconomic level, measurements indicate productivity and wages are somewhat linked. At and industry level, this correlation does not hold. This can be seen in agriculture. Agricultural production has increased many fold over the past century and a half, but farm wages remain among the lowest of any industry.

I have said that Pareto Distributions of wealth and income probably have some basic underlying cause. That means we will always have a lot of relatively poor people and a very very few fabulously wealthy. However the percentages can and do vary from society to society. I believe that much of the difference is a result of government policy. In a Kleptocracy, 95% of the wealth may be owned by 5% of the population. Social welfare states (most of Western Europe) tend to have less wealth inequality than we have in the US.

The difference between median and mean income in the United States indicates there is plenty of room for increasing the general welfare of people and, at the same time, shortening the work week. The average American worker works 500 hours per year more than the average German worker, yet German quality of life and social security is at least as high. The difference is social policy.

The Pareto Distribution ensures that there will always be a pool of less well off people who may be willing to work more hours or for less pay. Decisions on the length of the work week are political and are based in part on how the populace feels about wealth redistribution. In US politics this topic cannot be discussed rationally. Because structural changes to the economy are likely to further concentrate wealth (possible topic of another blog post) and lack of rational discussion, you can expect to be working even longer hours in the near future.

Productivity and Lifestyle - Are We Being Shafted?

If we are to believe productivity statistics it should take 11 hours of work per week to have an output that is equivalent to a 40 hour work week in 1950. It should take 23 hours per week to equal 40 hours in 1975. http://groups.csail.mit.edu/mac/users/rauch/worktime/

I am writing this in my house, built in 1956. In front of the house is our single car, a ten year old Honda. Something seems wrong either with the statistics or with my life. Currently I am starting a new business, so I expect to be working a lot without much (any) monetary gain. That said, I have worked at least 40 hours per week for decades and I have never been four times as well off as the equivalent worker in 1950.

There are explanations (aside from the obvious one that I have been shafted for my entire adult life). Mostly these revolve around the difficulty of comparing time periods. On the measurement side, we have shifted from a manufacturing to a service economy. How do you compare my productivity as a software engineer (a white collar position that did not exist in 1950) with that of a mid level manager at a blender manufacturer in 1950. Within an industry we can more easily measure productivity gains, but as one industry becomes more productive, workers are laid off and shift to new industries.

On the consumption side, the goods and services we use have changed drastically. Instead of an expensive, crummy, black and white TV, I have a a big screen high definition TV that I can use to stream movies off the internet. Instead of a single phone line with expensive long distance, we have multiple cell phones and the internet. My 10 year old car is undoubtedly more efficient, comfortable and reliable than a brand new car in 1950. We have several computers in the house all of which are wirelessly connected to the internet.

Despite these difficulties, I personally believe the "we are all being shafted" theory. Honestly, my life is not that much different from life in the 1950's or the 1970s. My house was built in 1956 and has no air conditioning. The heater has changed several times, but is still a natural gas burning central system. My car, while of higher quality, is still just a car. I do not own that many appliances. Those that I do own are of higher quality and probably more reliable than anything available a couple decades ago, but their basic design and operation is essentially the same.

On the working side, I have always worked at a full time job, but these days most households have every adult member working outside the home for wages. In 1950 a primary white collar wage earner would have supported a household on 40 hours a week. Now we need two wage earners working close to 80 hours for my household. On top of that, many of the tasks that used to be someone else's job are now mine. For example, in the grocery store I used to wheel my cart up to a check out lane and someone would ring up my purchases. Now I have to ring it up myself. A business traveler in the 1950s or even the 1970s would have a travel agency - either external or internal - book travel. Now even highly paid executives book their own travel. White collar workers in 1950 or 1970 had secretaries for clerical work, now we do it all ourselves.

I would trade my current lifestyle for a 1950 lifestyle working 11 hours per week. It is true that I enjoy modern conveniences, so I am willing to double my work week to get some of that (computers and the internet). That brings me up to 22 hours per week. Heck, I'll throw in a couple hours for free and make it an even 24 hours of work a week - but that is my final offer.

Don't even get me started on the flying car that all visions of the future thought we would have by now.

Human Social Groups

Humans are social animals. We band together into family, social, and work groups. Our money societies allow us to see how dependent we are on these social groups. In most societies, roughly half the people earn the money to support everyone. The other half are either engaged in non-money activities, like taking care of children or the infirm, or they are children or infirm. If you are lucky, you will spend roughly a quarter of your life in the care of others. This includes your time as a child and time when age, illness or disability makes it difficult to earn. If you are unlucky, you may spend all of your life dependent on others.

While we have cities containing tens of millions of people, each individual has a much smaller social set. The average person probably has between one and two hundred people with whom they regularly interact. Humans have hierarchies of social identification and protection. Siblings will abuse each other within a family but band together to defend against people outside the family. People complain about intrusions of federal government in local affairs, but join a national army to defend the country. These nested social groups provide us with protection and purpose. We tend to be loyal to those with whom we identify. We will forgive and protect them, even when they do things we would condemn if done by outsiders.

The identification with social groups and antipathy toward outsiders seems to be a base human trait. I know of no social group without some degree of this. The positive part of this tendency is the ability to come together to work toward a common goal. On the negative side, the separation between us and them allows “us” to treat "them" without any consideration other than our own aim.

Separation of "us" from "them" is often justified because “they” are different from “us”. Biologically, this is hogwash. Each of us has parents and there are familial traits. Some of us are blonde and some have black hair. Some groups of people have lived with enough isolation to show adaptation to their surroundings. For example, groups living farther from the equator tend to have lighter skin. These differences are marked enough so that pathologists can identify human groups from these physical traits. That said, humans are also nomadic and relatively recent. This underlies a remarkable degree of genetic homogeneity. I liken the differences between humans to the differences between brown spotted and black spotted Dalmatian dogs. As a species, we have so little genetic diversity that some scientists postulate that the species was reduced to a very small number of individuals in the not so distant past.

Because there are physical differences between human groups, it is interesting to ask if there might be analogs in other areas. For example, some groups of humans might be more or less capable of mathematical reasoning or eye/hand coordination. I think this is unlikely. Variants like skin color give an advantage in a particular region. Mental and social advantages have no such geographic constraints. People with the advantage will quickly spread the genetics outside their own group. Only extreme geographic isolation could keep advantageous adaptations out of the general gene pool. Human history is filled with tales of travel, conquest, and stranger's babies. Unjustified claims of essential differences between groups of people have been used to justify genocide. To counter this tendency, the standard of proof for assertions of fundamental differences between groups must be extremely high. I know of no evidence that there are physical differences between human groups that elevate the fundamental capabilities of any group. This is especially clear when we look at genius. Genius is characterized by some capability, which is far greater than normal. Think Leonardo da Vinci, Mahatma Gandhi, or Michael Jordan. Genius springs up around the world and cannot be characterized by family, "race" or any other factor I know of. There are musical families, but to paraphrase Aaron Copeland "There was nothing to indicate that Leonard’s parents would produce a Bernstein."

Our upbringing affects who we are, not just emotionally, but physically. There is evidence, for example, that people brought up speaking a tonal language tend to respond differently to sound than those brought up speaking non-tonal languages. In those cultures, a higher percentage of people perceive absolute pitch. Our bodies change based on our environment, but are especially malleable before adulthood. There are some abilities, like language acquisition, that fall off as we grow older.

Humans are genetically pretty homogeneous, but in values, and hence behavior, we vary greatly. Because we learn behavior from each other, values and behavior tend to be cultural. The biggest influence is family followed peer groups and finally the culture as a whole. Some societies are monogamous, some have men with multiple wives and some have women with multiple husbands. In some societies butchers are respected and prosperous. In others they are outcasts. Food taboos are so strong that it is difficult to imagine violating them. Culturally forbidden foods include fish, insects, dogs, and pigs.


Humans like to be comfortable, both mentally and physically. Most of us are comfortable with our beliefs and day-to-day actions. Marked differences make us uncomfortable, so we avoid them. When we have a choice most of us only associate with people who share much of our own outlook and behavior. This tendency divides humanity into separate groups. In every U.S. high school there are the artists and the jocks. They may share classes, but they don't share much else. As adults, when the differences are solely those of belief, we sweep them under the carpet with admonitions about not discussing religion or politics at parties. When apparent differences are physical, the separation becomes stronger. Sometimes physical difference is innate, like skin color. Other times it is cultural, like dreadlocks, ear locks, or tattoos. We use these physically identifiable differences to announce the groups to which we belong. In a group of strangers it is always comforting and sometimes essential to find allies whose actions can be anticipated and whose help will be forthcoming.

In contemporary US society we have confused and conflated notions and enshrined two false concepts. The multifaceted nature of our current groupings is often reduced to false notions of race and ethnic group. Both of these are dependent on ancestry.

Our genetic homogeneity makes the notion of race pretty much absurd. The notion of ethnicity identifies groups of people based on cultural ancestry. This seems more reasonable because humans group first into families and families are a fundamental driver of values and behavior. In the US though, this has become hashed up as well. The cultural value of individualism and laws preventing discrimination based on obvious physical and cultural traits have caused some re-mixing of groups. This shift can be seen most clearly in people whose families have been in the US for several generations. Some of my great-grandparents were ethnically Irish-American. They were strongly Catholic and associated with others of Irish descent. They knew the history of their homeland and had views about their place in it. I am several generations removed from that. In totality, my ancestors came from a number of places. I do not identify with any of those places as a homeland and my customs and habits are only dimly related to that background. My ethnic group is "Middle Class Suburban". Social pressures have isolated some groups more than others in the US. This makes "African American" or "Hispanic" seem more reasonable as ethnic groups. However, there are a great many people classed in these groups who are culturally much closer to "Middle Class Suburban" than to the stereotypical "African American" or "Hispanic” ethnic groups.

It is demonstrably true that humans band together into trust groups. Innate traits like skin color or epicanthal folds are easy markers. As a regrettable consequence, each of us tends to exclude those with innate differences as not part of our group. This is natural, but not inevitable. For example, imagine a room with two black and two white men. If one white man and one black man both have gang tattoos and one black man and one white man are both wearing expensive business suits, they will initially pair up based on clothing rather than skin color.

None of us belong exclusively to a single group and all of us are capable of forming strong associations with almost anyone. Put a group of musicians from around the world in a single room and in short order they will be forming new associations based on their shared passion for sound.

Even in groups with strong cultural mores, there will be rogues. Every society has outcasts and criminals. Some people, gangs, clans, and governments are dangerous to outsiders. That is one of the reasons that we look for cultural allies. They may help protect us from the dangerous humans. But the tendency to bond in groups is more than a need for protection. We also have a need for acceptance by others in our group. The combination of fear and the need for acceptance and protection is very powerful. A social group can manipulate individual humans to do literally anything. They will rape, torture, and murder neighbors with whom they have lived peacefully for years. They will kill themselves and their own children. That is, the very groups we rely on for protection from the dangerous humans can also transform us into those dangerous humans.

Everyone thinks they have things they will do and things they will not do. However, the power of circumstance and persuasion move these lines. Totalitarian regimes recognize this so they create programs to make everyone complicit. Right now you would not think of killing the Jew/Black/Korean/Armenian shopkeeper on the corner, but in light of the past actions of people like him, would you be willing to keep an eye on him and report suspicious activity? Would you if there were a payment? One thing leads to another. Lines are drawn between us and them. They are clearly threatening. You are one of us. You have shown it by your actions – even accepting favors or money. But your status is provisional and must be earned by showing your commitment to us. You must show your commitment to us by acting more strongly against them.

Do we always want more

This was part of a facebook conversation that I thought might have more general interest. I apologize for the lack of context. There were two strands going, one on the effectiveness of economic theory. The second, and I think more interesting, topic I paraphrase as "are humans hardwired to want more and to equate more with better".

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I have no problem with the base notions that economists have come up with. They are extremely valuable. Supply/demand and the notion of marginal utility seem to explain some basic facts about humans as economic animals. The elaboration of those concepts into mathematics with the attendant simplifications is also fine by me, as long as the basic shortcomings are acknowledged. Unfortunately, certain brands of economists (pure free market capitalists) have hijacked the political discussion by making their value judgements into articles of political faith, partly on the basis of "science and mathematics".

On the basic question of more equals better in the human animal, I think the jury is out. Even if we accept more is better, what we want more of is quite malleable.

It is quite clear that virtually all human groupings larger than tribes establish social hierarchies and that social status is announced by appearance and behavior. It is also clear that in many groups, displays of wealth are associated with high social status. Wealth is often associated with a surplus of labor. In the middle ages, kings might have torch holders at a feast. This was not because the wall sconce was not invented. On the Yap islands, large carved stone discs served served as currency. The value of a stone was largely associated with the difficulty of acquiring it.

Social status is not always associated with material goods though. In academic circles status comes with papers, citations, and awards. In religious communities it can come with piety, prayer and even asceticism. These are cases where the hierarchy is disconnected from wealth. Hereditary social status is often associated with wealth, but the existence of sumptuary laws shows us that higher social classes (typically hereditary) may try to eliminate the advantage of wealth to maintain their own status.

Within the larger social hierarchy, both religious and academic social status often exist side by side with wealth or hereditary social status. That indicates that while social status is important, it need not be wealth based.

Even if we accept displays of wealth as indicators of status, what we spend our money on is almost completely arbitrary. Take fashion. The codpiece shows us that people can make anything fashionable.

To Michael's point on advertising. There are two ways that advertising can be effective. One is to channel existing notions of desirability into a particular product. For example, when I want a drink, advertising can influence my decision to get a Coke instead of a Pepsi or water. Thirst is the need, and advertising changes the choice, not the need.

The second way advertising can be effective is to create a new sense of need. That is, it changes the utility function rather than just directing it. The current market for diamonds in jewelry is an existence proof that this is possible. This should be a textbook case in marketing. Diamonds are sparkly and pretty. They have been used in jewelry for several thousand years. Through advertising, the De Beers company manufactured the diamond as the standard engagement ring. They controlled supplies and were able to create an artificial scarcity. This both increased the price and fed into the notion of giving a valuable engagement ring as a symbol. Now that synthetic diamonds are increasing in size and quality, they have added "natural" to the marketing. You must give a "natural" stone even though an electron microscope may be required to decide whether a given stone is natural.

Research shows that when you take a school class, the specifics of the subject are quickly forgotten. What is remembered are the basic concepts, the shape of the world. Advertisements are the same way. This is what allows Coke ads to be effective without mentioning any attributes of the product. What comes through, the shape of the world, is that Coke is part of good times with friends and family.

For commerce as a whole, the basic shape of the world is that things make the world better (which is often quite true) and that having the latest, most full featured, most stylish thing is fulfilling (which is often not true).

I personally believe that there has been a concerted commercial effort in the United States to base almost all social status on wealth and the conspicuous consumption of goods, many of which are designed either by manufacture or fashion to become obsolete quickly. I am not suggesting that this is a conspiracy, just that it makes economic sense for every business to increase the desirability of its products. In a world of mass media, non-economic spheres have less effective incentives and means.