Category Archives: Economics

Would Hayek Support Obama’s Healthcare Plan?

medicine

I voted for the President, and I’ll likely do it again.  But while I’ll certainly take the new approach to healthcare over what we had, that doesn’t mean I like it. 

There’s been some talk on the left that maybe even Hayek (the classic Libertarian) would have supported the current plan.  Will Wilkinson, not surprisingly, has something to say about that:

At a cosmetic level, there’s something to this. Hayek was open to the idea of mandating the purchase of health insurance on the grounds that “many who could thus provide for themselves might otherwise become a public charge.” But I think it’s safe to say that Hayek would not have supported the recent health care legislation. Why not?

Well, Obamacare builds upon and consolidates some of the worst features of the American health care system from a Hayekian perspective, such as (a) It is more or less illegal to sell actual insurance, and (b) There is at best a grievously hobbled price mechanism in the health care market, if you can call it market.

If Hayek stood for anything, he stood for the importance of the informational function of freely moving prices for both individual planning and effective social coordination. (a) and (b) screw it up bad.

He continues with a story comparing the current system of human healthcare vs the healthcare available to his dog:

As many of you know, our dog recently broke his leg and had surgery that involved installing a plate and some pins. (He’s doing really well, thanks!) Do you know what I got when we came to pick him up? AN ITEMIZED RECEIPT?! I could see what the pins cost! The tube for the IV bag! Can you believe it? Later that week I had a doctor’s appointment at the university hospital and mentioned the itemized receipt to the resident and his supervising physician. Man, did they laugh. “How much does this appointment cost?” Hoo! Good times, good times.

Call a hospital and ask “How much for a hip replacement?” and they’ll almost certainly ask, “What insurance do you have?” This is not what Hayek had in mind in “The Use of Knowledge in Society.”

Prices, prices, prices, prices.

Without even knowing the prices of what you’re buying, how on God’s green earth can we make smart choices.  No market can thrive without an honest knowledge of the price of its goods and services. 

I can’t say this with certainty, as Hayek is dead, and he can’t defend himself.  But, I think Hayek would be for a minimum of healthcare for those who can’t afford it that covers all major necessary care (and especially preventative care).  But, only in a system of open prices, free markets (It’s still illegal to sell insurance across most state borders), and freedom of choice for the consumer.  That would lower prices for all, and increase quality of care. 

Sadly, the current plan is not that.

What is the “Middle Class”? And Why are they so Whiny?

Who is the Middle Class?

My fiance and I just got back from having dinner with my Mother and Step Dad.  It was a good time, lots of food, wine, and whining.  Yes, whining.  Somehow or another the issue of my Mother’s taxes came up.  And of course, like all of us, she doesn’t like to pay them.  She understands they are necessary, and is willing to pay “her share” (whatever that means), but doesn’t think she should be so heavily “burdened”.  “Why don’t the rich take most of the slack?” she says.

My mother is a smart Woman, well educated, and has a very professional job where she is required to think.  She has a good heart, and means well.  But, on this singular issue, she’s exemplifying an attitude I take strong issue with.  She makes a good deal of money, complains constantly about what she doesn’t have, and how we need to fund more programs to make the country better, but she wants to lower her taxes.  In short, she is a member of the whiny and hypocritical “middle class”.  (I’m not trying to single her out, don’t worry, I love my Mom.  But, a good example is a good example.)

You may ask why I–a vocal Libertarian–would find fault with someone saying they want to pay less taxes.  Shouldn’t I encourage such banter?  No.  At least not from liberals.   If you want to fund schools, pay for universal healthcare, rescue children in Darfur, and keep NASA in space, then you have to pay taxes–a lot of taxes.   If you want low taxes, then give up on programs.

I think there are two reasons liberal middle class people are so prone to hypocracy.  The first is because they don’t realize how much money they actually make relative to the rest of the nation (and more importantly, to the rest of the world).  And second, they don’t realize how impossible it is to pay for everything we want by only taxing the “rich” heavily (because it’s impossible to get them to pay).  I’m not going to tackle the second problem, which is admittedly large.  But, I will hammer away at the first one.

Everybody is Middle Class

Every American thinks they are a member of the middle class–the middle of the middle class.  Over the years the term has expanded along with our bellies to include households that make as little as $25,000/year to single individuals making $100,000/year or more.  The term has lost all meaning.

I’m not going to take issue with people who make less than $25, 000 a year, or households making less than $50,000 who want reduced tax rates AND who still want all the liberal standards.  They are the people we’re supposed to be helping to get healthcare and good education for their children.

I do take issue with individuals pulling in over $60,000, especially when they don’t have children (or their children have left the house already) or households making $100,000, who want all the liberal goodies along with a lowered tax bill.

If you make that kind of money, you are upper middle class by today’s standards.  By the standards of the 1950’s, or of the current state of the rest of the world, you’re outright rich.

The facts

The true middle of the middle class is about $47,000/year for a household.  Not a person.  A household.  If you make $50,000 (just you) and you don’t have kids, then you pull in more than the average middle class family does with a combined income.  In other words, you’re rich.

If you and your spouse pull in a combined $100,000 then, even if you do have kids, you live on DOUBLE what the average American family does per year!  You’re rich.

The term “middle class” has become a weapon wielded by Politicians to lure in unsuspecting voters by making them feel like victims.  “The middle class is struggling!”, or “The middle class can’t pay it’s bills!”, are common catch phrases used by members of both parties to sell votes–and it works.  It works because everybody thinks that the politicians are talking about them!

The truth is less romantic.  Odds are, you are not a member of the middle class. The middle class is (by definition) only the people in the middle.  The rest of us are either below or above that.

I make a negative income.  I make decent money as a private weightlifting coach, but it’s no where near enough to cover my Tuition and living expenses.  So, I take out loans every year to continue my education while still feeding my face.  My net earnings per year are in the red.  Very red.  A deep blood red.  But, that’s ok.  I’m a student, it’s normal, and it’s worth it to me.

“Hi, my name is Nick, and I’m not Middle Class.”  There, that wasn’t so hard was it?

My Mother is well into the upper middle class (I call these people rich) group.  I’ve got a number of good friends in the lower middle class group (under $46,000/household with kids).  And a few friends who make right around $40,000, but are single and don’t have kids (I also call these people rich).

It’s all relative.

In America we look up at the super rich (Celebrities, Oil Exec’s) and say, “hey, I’m not making what they’re making, so I’m only middle class.”  What we should do is look at the average income for the average human being living on the planet, and compare our incomes to that.

Take a look at these averages collected by the World Bank:

Region Per Capita Income in US$

United States:   37,500

Ethiopia:  710

World: 8,200

East Asia & Pacific: 4,680

Europe & Central Asia 7,570

Latin America & Caribbean 7,080

Middle East & North Africa 5,700

South Asia 2,660

Sub-Saharan Africa 1,770

I’d say if you’re on a computer reading this, you’re doing pretty well.

References

Census Bureau Home Page. http://www.census.gov/

Thompson, William E., and Joseph V. Hickey. 2007. Society in Focus: An Introduction to Sociology. 6th ed. Allyn & Bacon, July 12.

Risk vs Reward: A Quantum Hawk-Dove Game and the Financial Crash of 2008

In a paper uploaded to the Arxiv in April, a group of researchers headed up by Matthias Hanauske, approach the recent financial meltdown from a Quantum Evolutionary point of view.  Here’s the abstract:

The last financial and economic crisis demonstrated the dysfunctional long-term effects of aggressive behaviour in financial markets. Yet, evolutionary game theory predicts that under the condition of strategic dependence a certain degree of aggressive behaviour remains within a given population of agents. However, as the consequences of the financial crisis exhibit, it would be desirable to change the ‘rules of the game’ in a way that prevents the occurrence of any aggressive behaviour and thereby also the danger of market crashes. The paper picks up this aspect. Through the extension of the in literature well-known Hawk-Dove game by a quantum approach, we can show that dependent on entanglement, evolutionary stable strategies can emerge, which are not predicted by classical evolutionary game theory and where the total economic population uses a non aggressive quantum strategy.

The Hawk-Dove game is a classic of Evolutionary Game Theory and has been applied in many varied ways all over the study of animal (and human) behavior.  So, their use of it to study markets is nothing new.  What IS new is taking a Quantum approach to this old game as a way of studying a method by which we can introduce regulations (a rule system) to the game of financial economics that would mitigate the kinds of behaviors that lead to the situation we’re in now.  Don’t worry, it doesn’t require that we all spend our lives staring at quantum computers!

FINANCIAL RISK AND AGGRESSION

In the lead up to the financial crisis of 2008, certain actors in the market can be said to have exhibited aggressive behavior since they made choices that benefited only their own short term utility while KNOWING that these choices would negatively affect the utility of the group (all of us) as a whole. That is, these actors knew that these risky financial products would do harm to the overall market portfolio (and therefore be harmful, long term, to themselves), but would, in the short term, result in a positive gain to themselves–so they took them on anyway.

Given that we’re approaching economics like a game as it is, can we change the “rules” of this game so that aggressive behavior of the type discussed above is lessened? If this behavior is “natural” given the situation, then we certainly can’t expect people to play nice. We ought to do as the Boy Scouts do, “Hope for the best. Plan for the Worst.”

QUANTUM GAMES TO THE RESCUE

The authors show that dependent upon the type of entanglement, evolutionarily stable strategies (ESS’s) can show up that would NOT have been predicted by classical evolutionary game theory. What I love about their approach is they are not restricting themselves to a literalist interpretation of quantum game theory (that is, games played over quantum channels with tiny molecular objects as the unit of information). Instead, they are using this theory “metaphorically”.

That sounds bad. But, in truth ALL mathematics is metaphoric. A wave equation is not itself a wave. It just represents a wave. So, it’s not a stretch to take a mathematical idea that was originally strictly defined with respect to a particular physical situation, and apply it to a totally different situation. This has been the history of how great ideas in applied mathematics proliferate.

Here is how they set it up:

“We interpret entanglement in this context as the objective influence of socio-economic context factors, while the application of quantum strategies exhibits the degree to which decision makers incorporate these factors into their decisions. This interpretation allows the derivation of consequences and shows the linkage of our study to other game theoretical analyses that also highlight the importance of the socio-economic context to the outcomes of games.”

But, first let’s look at the classic (non-quantum) evolutionary game as applied to the financial crisis.

They call the Doves in the game those bank investors who acquire rather low risk products that return moderate payoffs. The Hawks are those bank investors who seek out high risk products that have the potential to return large payoffs–but, these also could result in huge losses. The authors make the point:

“Additionally, when selling their products to investors, doves remain with their contract conditions and do not try to make a deal by all means, e.g. promising unrealistic returns or omitting to point out severe risk factors of the investment product.”

Hawks do whatever necessary to make a profit.

Both of these investors then fight to garner the attention of a more moderate or neutral group of investors. When a hawk “fights” a dove, the hawk wins, since he can offer a higher return to the investor. If 2 doves fight, then the investor splits his investment equally among them assuming they will both return an equal amount. If 2 hawks meet, the investment is again spread equally.

The payoffs of all three situations are different as is true in the classical version of the game. I’m NOT going to get into what this actually looks like, as the math gets ugly, but it results in the following. The evolutionary game theoretic predictions of this particular version of the Hawk-Dove game are that the ratio of aggressive vs. non-aggressive behaviors would not reach equilibrium. That is, it predicts a crash!

OK, great. We already HAD the crash. What can we do to prevent it? That is:

“Although the risk of destabilization in the investment market was obviously increasing for the last few years, the behaviour of some aggressive investment bankers did not change. However, instead of ending in a stable state, finally the market crashed and almost all aggressive agents disappeared from the population. This could have been prevented, if any aggressive behaviour were inhibited completely.”

QUANTUM VERSION

They reformulated this game in a quantum game theoretic context and show that by entangling the strategies of the doves they induce a new Evolutionarily Stable Strategy that eliminates excessive hawkishness. By increasing the amount of entanglement (interconnectedness) the incentives to “go it alone” are reduced and the incentives to act in a more cooperative manner are increased.

The point is that regulations  and social pressures that encourage openness and interconnectedness of market participants may be enough to drastically reduce aggressive and hawkish behaviors that lead to the type of destabilization seen in the recent market crash. In the lead up to 2008, there was very little entanglement of the strategies employed by market participants. This caused them to play the “game” in the classical way, a way that led inevitably to a market crash.

To reiterate, what’s great about this paper is their approach to using quantum game theoretic language OUTSIDE of a purely physical context:

“So far, in literature entanglement has been discussed from a more physical point of view. However, in order to derive consequences from the obtained results we want to propose one possibility to interpret it in an economic context. In this paper, entanglement has been termed a conjoint, psychological contract between the members of an economic population aligning their strategies. However, this contract is not the result of conscious negotiations but of general socio-economic factors influencing the agents simultaneously. These factors comprise moral standards, values, legal rules, joint experiences, a similar educational background etc. All these factors can drive the decision processes of different individuals into the same direction without the necessity that the individuals have to communicate to each other. The objective existence of these background factors can vary, which is reflected by the degree of the entanglement parameter .”

In Japan there is massive social pressure to be polite, at a level unheard of in America. In fact, it is so great, most American’s find it problematic and strange.  It results in an entire culture avoiding certain types of behaviors they deem aggressive. We Americans wouldn’t think of these same behaviors as aggressive, per se. Instead, we value a type of forthrightness the Japanese find rude. As such, we exhibit behaviors seemingly more aggressive than they do.

The social pressures involved in Japanese culture can be seen as types of entanglement, since they correlate the strategies of the actors involved.

I think this is a fruitful way of looking at Quantum Game Theory applied to the social sciences and human behavior that better takes into account the socio-economic situations we all face, and how they affect our decision making than does classical game theory.

References

Hanauske, Matthias, Jennifer Kunz, Steffen Bernius, and Wolfgang König. 2009. Doves and hawks in economics revisited. An evolutionary quantum game theory-based analysis of financial crises. 0904.2113 (April 14). http://arxiv.org/abs/0904.2113.

SMITH, J. MAYNARD, and G. R. PRICE. 1973. The Logic of Animal Conflict. Nature 246, no. 5427 (November 2): 15-18. doi:10.1038/246015a0.

The Science of Health Care

From the New Scientist.  One of the graphs he goes through compares health care spending in Miami, San Fransisco, and in the capital of my my state, Salem, OR.  It turns out Miami spends near double what Salem does on care and gets about half the quality.

World Happiness Graph: Does Health Care Matter?

Check out the graph bellow that maps out the level  of happiness that many of world’s countries allegedly posses.

The graph comes from an article called Income, Health and Wellbeing Around the World: Evidence from the Gallup World Poll, in the Journal of Economic Perspectives.

Here’s a part of the abstract:

The US ranks 88th out of 120 countries in the fraction of people who have confidence in their healthcare system, and has a lower score than countries such as India, Iran, Malawi, Afghanistan or Angola . While the strong relationship between life-satisfaction and income gives some credence to the measures, as do the low levels of life and health satisfaction in Eastern Europe and the countries of the former Soviet Union, the lack of correlations between life and health satisfaction and health measures shows that self-assessed life or health evaluations cannot be regarded as useful summary indicators of human welfare in international comparisons.

Emphasis mine, of course.

The paper goes on to say:

It is far from clear why questions of life satisfaction should be so closely related to national incomes. A good deal of the literature emphasizes the relative nature of such responses; when people answer such questions, they must surely assess their life satisfaction relative to some benchmark, such as their own life in the past, or the lives of those around them. Indeed, in their recent review, Clark, Frijters, and Shields (2007), argue that life satisfaction is sensitive to respondent’s income relative to those with whom they most closely associate, which implies that there should be no relation between average national life satisfaction and national income, unless there is some other aspect of national income that raises everyone’s life satisfaction together.

When we turn to health and its effects on life-satisfaction, the poll results diverge from what would be required in a “capabilities approach” to an understanding of the sources of human well-being. Longer life expectancy surely enables people to do more with their lives, and is arguably the best single indicator of population health. Yet, conditional on income, longer life expectancy has no apparent effect on life satisfaction. Instead, it is changes in the expectation of life that seem to have an effect, no matter whether life expectancy is high or low. Even satisfaction with health, a more focused question, is not related to life expectancy. The extraordinary low health satisfaction ratings for Eastern Europe and the countries of the former Soviet Union are a testament, not to their poor population health, but to a decline in health among a population that was used to a better state of affairs.

In spite of the positive relationship between life satisfaction and national income, and in spite of the plausibility of unhappiness and health dissatisfaction in the countries of Eastern Europe, neither life satisfaction nor health satisfaction can be taken as reliable indicators of population well-being, if only because neither adequately reflects objective conditions of health.

So, the author is making the argument that we need to beware of using self-assessed measures of heath satisfaction in our evaluations of a countries citizens level of happiness.

I think a lot of Americans (like the ones who were so rabid during the Health care town hall meetings) have become so desensitized to the status quo that they don’t realize what they are missing.

(Hat Tip: Gene Expression)

WordPress.com: One More Reason to Digg it!

Wordpress

Wordpress

I logged into my blog this morning and my sidebar was hanging out way at the bottom of the page!  Some sort of software problem, apparently. Since this blog is hosted on WordPress.com (as opposed to on my own server with WordPress software manually installed, like this), I don’t have access to the back end.  So, I went to the forums, posted my problem, and in a half an hour, it was fixed!

The ladies and dudes (like this one) who run the show here are totally on the ball.  (Surprising, considering that it’s free to start a blog.)  I’ve been here for years and I’ve had very very few problems.  Every time, they’re fixed promptly. You gotta respect that.

Living a world of Enron’s and other monster corporations that make a living preying on consumers, I think it’s imperative to acknowledge those companies that don’t, that are actively involved in building a better community, and better products.

Side note, check out this cool WordPress logo:

Starbucks and the American Brand

Starbuck, the Ultimate Corporation

Starbucks, the Ultimate Corporation

Ian Trever posted a piece on a new Starbucks brand aiming to capture the “local” coffee shop vibe (as opposed to their own mega-corporate vibe).

He says:

What is most interesting to me, however, is that the opening of this store indicates the failure of Starbucks as a brand.  They have spent decades and millions (if not billions) of dollars to solidify Starbucks as your first thought upon hearing ‘coffee’ and it appears to have backfired.

Howard Schultz, CEO of Starbucks, has been concerned with the over “commoditization of the Starbucks experience” for years but this shift seems to run deeper than corporate decisions that moved the coffee chain from an experience to a money making venture.  Instead, Starbucks has over-saturated their ideal market and, as a backlash, many people have–again–sought out the comfort of a locally owned, non-corporate coffee experience.  For many, the Starbucks brand holds no cache.

I posted in his comments section the following:

Starbucks represents the best and worst of corporate culture.  They honestly do have a good product, good service, and they’re decently priced. (they ain’t cheap, but what is anymore?)  As such, they’ve grown huge and profited considerably.  The nations coffee scene is probably better for their influence.  They brought (real) coffee to every town in America.

But, they succumbed to the magnetic pull of their own success.  I wouldn’t count them out, though.  They’re no fools.   I predict a resurgence.

But, I’d like to follow up by saying that here in Portland, Starbucks is looked down upon.  We already HAD a coffee culture before Starbucks showed up.  It came in like Walmart and has driven some mid-level businesses out.  And to top it off, anything that smacks of corporate culture is considered borderline evil.

That said, the small business coffee shop is still the most prominent type of business in Portland.   Starbucks never took over here like it did in most places.  Almost literally every block in Portland has a coffee shop OTHER than a Starbucks.  Sure, Starbucks is there too, but we drink so much damned coffee that we’ll just go to both.

I count 10 coffee shops within easy walking distance of my apartment.

My point?  If Starbucks can survive here, where competition is stiff, it can survive anywhere.