Is Silicon Valley Ironic? March 23, 2014Posted by federalist in Human Markets, Markets, Open Questions.
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I’ve had a number of friends over the years go to Silicon Valley (SV) to pursue opportunities in technology and finance. SV has a unique entrepreneurial culture, and I have seen second-hand how, once you’re plugged in, you have first call on talent, funding, and ideas.
I find this ironic because so much of the output of SV has been products and services that eliminate physical location as a barrier to production and collaboration. Yet there’s still no substitute for being there in person: absent a physical presence you’re an outsider. Unless you can show up in person you’re mostly excluded from the discussions, ventures, and partnerships that form in face-to-face meetings.
Is this an expression of a human social instinct that technology won’t be able supplant? Or is it just an expression of the path of least resistance: I.e., since so much of the money and talent is willing to make the physical move there it’s just not worth the trouble, however small, to engage someone remotely?
Why don’t I just move out there? Yes, the cost of living is exorbitant. But if you’re any good you’ll make enough money to compensate. Besides, as one outdoorsy friend said referring to the perfect year-round climate: that’s the price for living in heaven.
But there’s a second irony: the government. My understanding is that the dominant ideology of the SV tech/finance world is libertarian, yet they elect to live under the most heavy-handed state government in America. All evidence I’ve seen suggests this is in spite of, not because of, that government: just look at the number of entrepreneurs and companies that setup operations outside of the state at every opportunity. Yet the core of this capitalist engine still operates from within a political regime that seems to despise wealth and free markets.
Yes, I could leave all my CA-illegal guns in a free state. But I chafe at the idea of “voting with my feet” for such a bad government. Granted, California is still something of a constitutional democracy, so because in principle you have a marginal influence on its government joining its public body isn’t quite like handing your life and property to a totalitarian state.
Yes, there’s some level of compensation that would make it worth my while to move to an expensive and politically oppressive place like that. Evidently my price is higher than most.
Economics of Human Sex Markets February 27, 2012Posted by federalist in Human Markets.
I recently came across Hooking Up Smart, a blog aimed at young women that tries to explain the practical realities of the market for sex. These are both simple and interesting:
The commodities that trade on human sexual markets are Commitment, Sex, and Attractiveness. The first two commodities are behavioral, so their supply can fluctuate with social norms, whereas Attractiveness is mostly fixed and out of the control of each market participant. (Both genders have evolved Attraction to gene-linked “beauty” characteristics of the opposite sex, many of which are immutable, that contribute to the survival and success of offspring. What men experience as sexual Attraction is generally a combination of a woman’s “beauty” and apparent fertility. What women experience as Attraction is generally a combination of male “beauty” together with a man’s power, wealth, or social status. In each case the most Attractive market participants enjoy above-average sexual capital and are referred to as “alphas.”)
Men make the market for Commitment: A male’s optimal reproductive strategy is to inseminate any woman who might bear children, but only to support women with children who are (likely to be) his own. Given the chance, a man will try to “lock up” the most Attractive women he can, at least while they are fertile; sex with more promiscuous or less fertile women is a lower-cost but less reliable means of reproduction.
Women set the market price for Sex: They have relatively few shots at reproduction, and they disproportionately bear its costs. The primal female mind balances the value of a prospective mate’s genes to her offspring with the fact that his long-term support might more than overcome genetic deficiencies when it comes to her children’s survival.
Given these instincts, an optimal human sexual market would be one that “clears” only via committed monogamy. If sex is traded by women only to men who trade commitment, then everyone in the market can have their sexual instincts satisfied. Note that this social arrangement was the western ideal (if not reality) for many centuries: Men agreeing to long-term support of a woman and her offspring in exchange for that woman’s sexual availability and fidelity.
Another arrangement that has appeared frequently in human societies is committed polygyny (i.e., one man potentially committing to multiple women). Relative winners in this regime are alpha males and beta females. Women generally have a strong instinct for hypergamy (i.e., “marrying up” to obtain the best possible genes and/or resources for their children). Polygyny gives the most number of women access to the most desirable men. Losers in polygynous societies are alpha females (who can’t secure the commitment of alpha males, as they can in a monogamous society) and beta males (who are deprived of the chance to mate at all). A large population of unmated men tends to be destabilizing, so polygyny tends to work only when alpha males have enough power to contain those destabilizing forces, or else when the sex ratio of a population is highly skewed (e.g., due to protracted mortal warfare).
Hooking Up Smart links to a good essay by Robert Frank on modern marriage (a.k.a., Commitment) markets. Most of the blog’s content deals with the fallout of the western 20th-century “sexual/feminist revolution,” which vastly lowered the market price for Sex and consequently reduced the supply of Commitment. The consequences, for both society and individuals, have been terrible. The only winners in this regime seem to be alpha males and sexually sociopathic females. (And this is disregarding the toll taken by an explosion in sexually-transmitted diseases.)
Are Government and Union Employees Overpaid? May 12, 2010Posted by federalist in Government Spending, Human Markets, Special Interests, Uncategorized, Unions.
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In a free market the concept of an “overpaid employee” is not a serious concern: If employment contracts are voluntary, and employers pay wages from their own resources, then it is hard to argue that any employee is overpaid, since evidently his employer believes he is worth his cost.
Union and government employees break this link. Unionized government employees seem to be a double-whammy! Updating a trend that has been increasingly evident, Gary Shilling explains:
Years ago, there was an informal “social contract”—public employees generally received lower wages than private-sector workers, and in return they got earlier retirement and generous pensions, allowing them to catch up. That arrangement has long since gone by the boards. The result is a remarkable trend. State and local government employees for years have received pay increases in excess of inflation, and BLS figures show they now have wages that are 34% higher on average than in the private sector.
Of course, unions vociferously deny any such assessments. But I don’t think we need to get into comparative statistical arguments to prove that union employees are overpaid. The labor market itself gives us two simple tests:
- Do union employees voluntarily quit their jobs at rates significantly lower than similar non-union employees?
- Are there significantly more qualified applicants for new union jobs than for similar private-sector jobs?
If the answer to either or these questions is yes (and it does appear to be so), then the market has spoken: Union employees are relatively overcompensated. Their excess rents come at the expense of employers, customers, and labor market competitors.
Intrinsic Inefficiencies in Executive Pay October 25, 2009Posted by federalist in Human Markets, Markets, Unions.
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Can every CEO be above average? Obviously not, but when a shareholder’s board is responsible for hiring and compensating an employee there is a structural defect, perhaps best summarized by Jonathan Macey:
No self-respecting board of directors is willing to admit that their company’s CEO is below average. So anytime the new disclosures indicate that an executive’s pay is below average in any way, a pay increase is ordered.
The board is responsible for representing shareholders’ interests. They would be abdicating their duties if they retained a substandard executive, so unless they’re either resigning their seat or firing a CEO they practically have no choice but to assert that he is above average, and to pay him accordingly. This leads to an “arms race” of sorts with respect to executive compensation, and the race can become completely detached from efficient labor markets.
If labor markets were efficient then executive pay would be set based on the supply of competent executive candidates and the demand for their labor. Demand would be limited by the marginal value that a “good” versus “not-as-good” executive could create in a business.
However, the dynamics of a representative board can overwhelm this microeconomic model. As Rick Bookstaber suggested in a recent post: the board may not be able to quantify or predict the marginal value of an executive. But that’s their job, so whether they have actually quantified the value of an executive — whether it is even theoretically possible — they behave (perhaps subconsciously) as if they are doing their job, which means they have retained exceptional executive talent. And the only way to confirm that — to themselves, to the executive, and to their shareholders — is to give their executives above-average compensation! So every board has to look at what every other board has chosen to pay comparable executives, and then they have to raise it. The only escape valve for this cycle is for compensations to get so clearly out of line with fundamental supply and demand of executive labor that a majority of shareholders not only see the disconnect but also become sufficiently energized to shake up the board. And as we know the threshold for large-scale shareholder activism is a high one indeed!
Note that this dynamic is not unique to executives or public companies. Governmental boards — e.g., school boards — often fall into the same compensation arms races with neighboring districts. Unions also exploit the arms race dynamic to inflate their wages by negotiating contracts, not on the basis of supply and demand for their labor, but on the basis of keeping up with some reference group (ideally one also engaged in the same arms race).
QOTD: Kidney Donation July 15, 2009Posted by federalist in Healthcare, Human Markets.
I have complained that “sexy” diseases get unfair resources, and current laws and regulations hurt the donor supply for life-saving human organs. Kidney shortages are particularly troublesome because normal people have two kidneys but only need one. Yet more than 80,000 people in this country alone linger on dialysis regimens and face early death waiting for a kidney donation. Virginia Postrel elaborates:
Kidney patients ought to command the kind of outrage that demanded a cure for AIDS. The [waiting] list doesn’t have to exist. It is a result not of medical necessity or economic constraints but of public ignorance, conscious policy, and complacent institutions. Too many people are suffering unnecessarily. . . .
The obvious solution . . . is, of course, money. Altruistic blood donors often receive freebies like movie tickets or paid vacation hours that would be illegal for kidney donors. Plasma and sperm donors routinely receive cash, as do egg donors and surrogate mothers, who get tens of thousands of dollars. If transplant centers could pay $25,000 or $50,000 to each living kidney donor, many more people would line up to contribute.
Rethinking Prison February 11, 2009Posted by federalist in Human Markets, Judiciary, Open Questions.
I previously lamented our society’s increasing dependence on imprisonment as a means of providing “justice.”
It seems clear that American-style imprisonment is an ineffective form of justice: It does provide deterrence to most criminals, but in general it is a poorly tailored punishment (except, perhaps, with respect to crimes of kidnapping). It does not effectively reform criminals — in fact, it often seems to harden them. It does not protect society from the criminally disposed, except when they are given life sentences. And it certainly does not serve any interests of restitution, as Gregory notes:
Each prisoner costs taxpayers thirty-five thousand a year. Victims are not made whole, but forced to foot the bill to house their perpetrators. The state used to have some restitution centers through which white-collar convicts could work and pay back their victims as well as some of their detention costs—but these were closed down last month. State officials said the program was too expensive. Only government could lose more money making people work than just locking them up, feeding and clothing them.
Reform is a difficult problem, and tailored punishment may be easy (and fun) in principle but we can leave that for another discussion. If society feels justified in taking away the freedom of convicts, why can’t it profitably employ them?
Evidently government cannot profit from slave labor, but surely for-profit enterprises can. There has been a lot of criticism of “for-profit prisons,” but those are not what I have in mind. For-profit prisons simply try to do in a more cost-effective manner what government prisons do, which is to confine and care for large populations of criminals. They are not permitted to exploit prisoners as slave labor.
Unfortunately, twentieth-century Russian Communists gave penal labor a bad name (“Gulag”). But that doesn’t mean that a more open and capitalist society like ours can’t profit from prisoners within reasonable bounds of justice.
Citizenship is a Public Good January 24, 2009Posted by federalist in Economic Policy, Human Markets, Taxation.
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And as I previously suggested, we should consider selling such public goods in lieu of taxing citizens to fund government. That citizenship might qualify for such consideration was suggested today by James Kardon in a letter to the WSJ:
Immigration can be the key out of our current financial morass. The attack of 9/11 may have caused the current crisis by inciting the government to encourage real estate price inflation and, more importantly, slowing the immigration of talented people, caught in the red tape of the Department of Homeland Security. We could rescue the housing market and kick-start growth again by selling green cards to solvent immigrants for, say, $200,000.
If you build a valuable country why should you give it away via lottery, as the United States presently does with green cards? Especially when there are so many people willing to commit not only their allegiance but also real capital?
Finding Five-Sigma Talent November 26, 2008Posted by federalist in Human Markets.
The Normal distribution has proven to be a very good model for the distribution of virtually every human characteristic and ability across populations. Most people cluster into a small range of values around the average, but there are a few outliers with exceptional abilities and disabilities. You can’t always predict where those extremes will appear. But if a characteristic is in fact normally distributed then you can predict, for example, that if 70% (one standard deviation, or “sigma”) of adult men are within 3″ of the average height of 5’9″, then 1 man in a billion will grow to a height of 7 feet.
Suppose you want to find the five-sigma human specimens for some physical or mental feat. With a global population exceeding six billion we’re essentially talking about finding the single most talented adult in the world. A sports management company made an interesting play for this, running a contest in India (population: 1.1BB+) to find a major-league caliber baseball pitcher. The structure of the contest may not have been ideal, but the $1MM prize and publicity were plausible incentives. (In the end, two contestants signed contracts with a professional baseball team in the U.S.)
Searching for five-sigma talent soon leads us back to the nature vs. nurture debate: How important are innate abilities? Is it easier to build a five-sigma athlete or scholar if you start with a person who was born with five-sigma physical or mental traits? Perhaps transformational traits like “trainability” and “perseverance” are separate faculties that have to be included in the equation with raw talents. Or perhaps innate ability can never contribute more than a certain fraction of a learned skill, which could mean that trained two-sigma performers are practically as good as trained five-sigma specimens.
These are not purely academic questions: Anyone who funds or profits from performers should want to know the answers.
Wired magazine has a feature on the science of memorization.
In the late 1800s, a German scientist named Hermann Ebbinghaus … discovered many lawlike regularities of mental life. He was the first to draw a learning curve. Among his original observations was an account of a strange phenomenon that would drive his successors half batty for the next century: the spacing effect.
Ebbinghaus showed that it’s possible to dramatically improve learning by correctly spacing practice sessions. On one level, this finding is trivial; all students have been warned not to cram. But the efficiencies created by precise spacing are so large, and the improvement in performance so predictable, that from nearly the moment Ebbinghaus described the spacing effect, psychologists have been urging educators to use it to accelerate human progress. After all, there is a tremendous amount of material we might want to know. Time is short.
However, this technique never caught on. The spacing effect is “one of the most remarkable phenomena to emerge from laboratory research on learning,” the psychologist Frank Dempster wrote in 1988, at the beginning of a typically sad encomium published in American Psychologist under the title “The Spacing Effect: A Case Study in the Failure to Apply the Results of Psychological Research.” The sorrowful tone is not hard to understand. How would computer scientists feel if people continued to use slide rules for engineering calculations? What if, centuries after the invention of spectacles, people still dealt with nearsightedness by holding things closer to their eyes? Psychologists who studied the spacing effect thought they possessed a solution to a problem that had frustrated humankind since before written language: how to remember what’s been learned. But instead, the spacing effect became a reminder of the impotence of laboratory psychology.
Ebbinghaus published a monograph in 1885 called Memory: A Contribution to Experimental Psychology.
Piotr Wozniak has been testing and developing a computer program called SuperMemo for twenty years to optimize the use of the spacing effect to learn. (This review recommends Mnemosyne as a more simple, user-friendly, and free program based on the same theory.) Based on Wozniak’s research it is evident that even the best efforts will permit a person to learn and retain only a few million things over the course of a lifetime.
- Given your memory capacity, what will you commit to long-term memory?
- Why hasn’t an open-source memorization store like Mnemosyne caught on in the education establishment?
Cognitive Surplus April 29, 2008Posted by federalist in Human Markets.
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[I]f you take Wikipedia as a kind of unit, all of Wikipedia, the whole project–every page, every edit, every talk page, every line of code, in every language that Wikipedia exists in–that represents something like the cumulation of 100 million hours of human thought. I worked this out with Martin Wattenberg at IBM; it’s a back-of-the-envelope calculation, but it’s the right order of magnitude, about 100 million hours of thought.
And television watching? Two hundred billion hours, in the U.S. alone, every year. Put another way, now that we have a unit, that’s 2,000 Wikipedia projects a year spent watching television. … This is a pretty big surplus. People asking, “Where do they find the time?” when they’re looking at things like Wikipedia don’t understand how tiny that entire project is….
Moral Hazards in Life Insurance: The Suicide Exclusion October 8, 2007Posted by federalist in Finance, Healthcare, Human Markets, Open Questions.
I was surprised to discover that life insurance policies cover suicide after a two-year “exclusion” period. (I.e., after two years of paying premiums an insured can kill himself and the insurance company will pay out the full benefit.) I was even more surprised to discover that nobody writes life insurance with a total suicide exclusion. A few observations:
- Obviously the fact that life insurance covers suicide creates a tremendous moral hazard. People with active life insurance have a financial incentive to commit suicide! There is ample evidence that this incentive has a real effect, as detailed in Samuel Hsin-yu Tseng’s paper, “The Effect of Life Insurance Policy Provisions on Suicide Rates.”
- As far as I can tell, the exclusion period stems from a majority of state regulations. Life insurance is regulated at the state level, and (as of 2005, ibid. page 4) 36 states require life insurers to cover suicide after no more than two years of the policy being active.
- As a consumer I would like to be able to buy insurance contracts that don’t pay a suicide benefit. Such policies would be substantially cheaper.
- The irony: Our government forbids anyone from being compensated for donating organs to save the lives of others (supposedly because of the moral hazard of such an incentive), yet it requires insurers to create an incentive to commit suicide!
The Conformity Epidemic August 9, 2007Posted by federalist in Education, Human Markets.
We have a society that is in certain dimensions so rigid that it creates disorders out of differences.
As I read this recent article on autistic adolescents I was surprised at how intent families and public schools were to put children into mainstream schools and social situations for which they are obviously not suited. (The WSJ has also done a recent series on mainstreaming mentally disabled children, highlighting many cases with traumatic results.)
It may be that a majority of children will realize their maximum return on investment within the standard system of schooling (though even that is open to debate). I can appreciate the desire to keep things simple by squeezing every person through the same system, but there are some people who will just not fit. The attempt strains the system and traumatizes the deviant.
How much better could these cases turn out if parents and teachers accommodated the differences instead of trying to overcome them? If someone can’t connect, communicate, or comply then figure out what they can do — based on innate ability and interest — and accommodate their development in that direction.
Computers Offer Productive Recreation June 26, 2007Posted by federalist in Energy, Human Markets.
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I love the idea of distributed computing projects that harness idle computer processors for computationally intensive projects. However the proliferation of power-saving technology has reduced the attraction of this sort of spare-cycle application: Since computer processors idle their power consumption when they aren’t being used it is no longer completely free to put them to work.
Wouldn’t it be great if we could harness the computational power of all the human brains that idle away hours playing completely unproductive games of solitaire and minesweeper? Humans are unparalleled for many useful computational tasks. Luis von Ahn at Carnegie Mellon is a pioneer in capitalizing that fact. Google is putting his technology in practice. There is also research into exploiting the enormous subconscious computing power that every person carries.
Unlock Adolescent Productivity June 3, 2007Posted by federalist in Education, Human Markets.
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Society has essentially locked up the human capital of teenagers, putting adolescents in a sort of limbo where they are unable to participate productively in society. Robin Moroney summarizes Robert Epstein’s thoughts on this:
Today’s schooling and child-labor laws worked well in the late 19th century, when factories brutally exploited young workers, and a lifetime of education had to be packed into the start of life. A century later, the laws serve only to divorce teens from the adult world.
“They are free to spend, to be disrespectful, to stay out all night, to have sex and take drugs,” says Dr. Epstein. “But they’re not free to join the adult world, and that’s what needs to change.”
Parents who want to give their children “responsibility tied to significant rights” have few ways to do it. States have been increasing restrictions on teens since the 1960s. Having raised the drinking age, some states are considering prohibiting teens from attending parties where alcohol is served, even if they’re not drinking. Parents have few ways to resist such infantilization, other than by assigning household chores, which tends to increase household conflict.
Dr. Epstein recommends giving teens more options, privileges and responsibilities. He believes we should see schooling as a lifetime project, rather than something only for the young. He would allow some teens to work and set up businesses while still in school. He recommends establishing tests that teens could take to prove they’re competent to assume responsibilities like owning property or running a business, the way they can now if they want a driver’s license.