Good Student

There is a student in my intro Econ class who really loves the class and my teaching style. His family includes bankers and finance professionals, so he is glad that he is learning enough to be a part of their conversation. He really likes the way that Economics uses math to address social issues, and the course has already changed his mind on the minimum wage and drug laws.

He is a senior, finishing up a mechanical engineering degree. He is doing a co-op with a power utility, and is on the management track. He came to my office yesterday and we had a nice long chat. I learned a lot of interesting things about our electric grid and the contracting arrangements between the different companies and organizations that make everything work well. I used my knowledge of the Coase Theorem to make a guess about arrangements for power line maintenance that was so accurate that it literally stunned him speechless.

Before coming here, he got a 2-year degree in some kind of engineering, and spent a summer working at a co-op in Belgium working with the dikes and water transport systems. Before that, he was a junior manager at a contact lens plant. He is very good at math, has excellent people skills, and has a great curiosity and love of learning, but is a bit disorganized and messy. Overall, he is the kind of student that every teacher dreams of having.

If you have not done so already, form a mental picture of this guy in your head.

He is a big black guy with a backwards baseball cap and diamond stud earrings.

Every year, I seem to have at least one guy that matches that description, who is a good and inquisitive student who likes learning what Economics teaches about the world. I tend to connect well with them, and with older and non-traditional students, and anyone who wants to learn.

A Real Word

A student just came up to me after class and asked 

Is 'technocrat' a real word, or did someone just make it up?

I explained to him that the answer to his question is 'yes' because the answer to both parts is 'yes'. 'Technocrat' is a real word, and someone just made it up. This is true of every single word in our language. Someone invented the word at some point on the past, and it became a real word whenever enough people used it and knew what it meant.

Now, it is a linguistic bastard of a word, because it combines an English prefix and a Greek suffix, but a great deal of English vocabulary was constructed in a similar way. Our language does not really follow any rules other than popularity.

This leads to thoughts of what makes a thing 'real' in a social setting. His question implies that 'reality' in language is defined by some authority. In France it is. They have an official committee that decides what words can be used. This means that French is a more beautiful and logical language than English, but that the French are utterly incapable of succinctly expressing modern concepts like 'weekend' and 'internet' without using English.

There is actually a good lesson there about emergent order versus central planning.

IQ Dogma

Today I got am email from change.org that included the following:

One panel at this week's Conservative Political Action Conference in Washington, DC is called "The Failure of Multiculturalism," and it features the founder of a website that's claimed:
* Black Americans have lower IQs than whites,

The tone of the email email implied that such a claim is a self-evident sin, on the same level as anti-semitism, and that anyone who would associate with the people who make it is evil.

It is a statistical fact that the average black person has a lower IQ than the average white person. This is not an accusation of inferiority. Having a low IQ does not make you a bad person, for several reasons.

First, IQ is strongly affected by environmental factors like nutrition, pollution, and low access to enriching activities. Growing up in the bad environments associated with poverty will lower a child's IQ, and once they grow up, it is too late to change it. As we improve public health, IQ differences will become smaller.

More importantly, IQ tests only measure a very limited slice of human cognitive potential. I may have a higher IQ than the black sensei of my dojo, but he is a far better leader than I will ever be. He is politically astute, a good teacher, has excellent stage presence, and is skilled at working a crowd, commanding attention, maintaining friendships, making people comfortable, making people trust him, and a lot of other little things that are required to turn a disorderly mass of people into a well-functioning team.

For most of human history, his cognitive skills would be far more valuable than mine. The fact that my skills have a much higher market value in our economy does not mean that I am superior. It means that we live in a strange world.

It is probably best to think of a high IQ as a freakish mutation that hijacks the brainpower meant for social organization and uses it to do things that are unnatural, bizarre, and random. The skills that IQ tests measure happen to be extremely useful in the artificial and unnatural technological civilization we inhabit. 

A high-IQ human is to a natural human what a dog is to a wolf. The dog might make a better pet, but it would have much lower survival odds in the wild. It is silly to say that one is better than the other. They are suited for different situations.

We will never be able to think intelligently about human capability and potential, and help all people live good lives, unless we are comfortable with these facts.

The Future Looks Good

I am very optimistic about the future of mankind in general and the United States in particular. This post will explain why, with reference to economic theory.

One of the fundamental lessons of economics is that wealth comes from productivity. Wealth, defined broadly, includes everything that makes our lives better, including material goods, leisure, health, a good environment, love, community, and human connection. All of these things are improved by any factor that improves the productivity of human endeavors.

People think that economists are money-obsessed, but an economist is actually more likely than most commentators to look at the big picture when analyzing human choices. For example, we understand that Facebook has given the world a massive increase in wealth and productivity. Facebook has dramatically decreased the time cost of 'purchasing' friendship and community. When people work less in order to spend more time on Facebook, they are sacrificing material goods to gain more social connections. This is a natural and rational response to the new, lower price of social connections.  Anyone who claims that Facebook decreases productivity is focusing only a limited slice of the human experience.

There are three overall categories of things that can affect productivity: technology, politics, and culture. Technology is any knowledge, tool, or infrastructure that helps you accomplish things or makes your life easier. Politics is the formal structure of government, and how laws and taxes affect human behavior. Culture is everything else, like religious doctrine, or how children are raised, or the prevalence of discrimination in a society, or shared social attitudes about education, that can affect people's ability to accomplish their goals.

Over the past few years, everything I read about technology made me more optimistic about the future, while most of the things I read about politics and culture made me more pessimistic. It seemed that there was a tug-of-war, with technology pulling us forward while the government wasted more resources and cultural changes harmed people's ability to be productive.

Even then, I was cosmopolitan enough to understand that humanity as a whole would probably be just fine even if things were getting worse in the United States. If you look at the total well-being of every person on the planet, then right now is the best time in human history, and things are getting better at a rapid pace. I had anticipated that the USA was going to experience a gradual decline, in relative terms, as the rest of the world got richer and freer and we got more dysfunctional.

Several things have changed this appraisal. The first is a dramatic improvement in our diplomatic and geopolitical situation over the last several years. Our deft handling of the Arab Spring is making friends all over the world, and our major rivals are revealing themselves to be venal and incompetent. China is making enemies all over Asia, pushing everyone there, including Vietnam and possibly even Myanmar, towards friendship with us. The Chinese regime is also under severe internal stress as the failures of state control become apparent, and its people are ever more vocal in demanding liberty and self-determination.

Another big improvement seems to be coming in education. Our education system is literally stuck in the dark ages; the 'production technology' of a teacher lecturing to a class comes from the days when books were too expensive for students to buy. In the past this was a source of pessimism, but now I predict that technology is going to shake things up, and discard much of the flawed old system entirely, more quickly than many people imagine. I think that online schools of various kinds will displace traditional lecture halls, and a system of electronic records will replace our antiquated credential-based signaling system. This will cause a massive boost in productivity and happiness, and probably some positive cultural change, over the next few generations.

From what I can tell, the USA is further along in developing online education systems than other countries. If we get it right, we will remain the market leader in higher education, just as we are today, and might extend our leadership into many other kinds of education. This would give us an incredible source of financial and social power.

Our short-term relative economic situation is also starting to look better. Europe is still in serious trouble, Japan is still stagnant, and China is showing hints of the kinds of economic imbalances that crippled Japan two decades ago. Meanwhile, we have made a lot of progress at getting rid of the debt imbalances that played a big part in the crisis, and a general recovery seems to be progressing nicely.

In the middle to long term, things still look good for us. We still dominate high tech. iPhones may be made in China, but all of the profits and the good jobs go to Americans. All of the major players in the tech industry are American; the foreign companies have all been reduced to selling commodity products. Of course that itself means nothing, given how fast the tech industry changes, but we always seem to dominate the cutting edge, no matter how things change, which is a good sign. We will probably also have a comparative advantage in the 'App Economy' that is developing. And as much as is annoys me, our entertainment industry is a reliable source of exports and profits and cultural influence. Given that a great deal of the economy of the future will revolve around tech, entertainment, and education, we are in a very good position.

There is a very real possibility that we will soon see a world that is almost entirely free and democratic, and that we will remain the economic, political, and cultural leader of that world.

Our internal politics and much of our culture remain a mess, but as the rest of the world improves, it will force us to improve as well. Right now, an extremely productive American has the choices of putting up with taxes and regulations, lobbying for government change, breaking the law, or not working. The latter two are not credible threats for most people, and true wealth generators do not have a comparative advantage in lobbying, so the people who generate most of the wealth have relatively low political bargaining power and cultural influence.

As long as you will earn more money working in the USA than anywhere else, the government, driven by the desires of society, will be able to extract the difference from you, plus a bit more because moving is expensive. But if enough wealth-generating Americans could credibly threaten to move to India or Estonia and make as much money, then the government would be forced to lower taxes or regulations and/or do something to make the Americans more productive again.

The USA keeps slipping down in the rankings of economic freedom, corruption, and a few other measures of political quality. Partly this is because we are getting worse, but mainly it is because other places are getting better. Pretty soon this will generate a powerful moral and practical case for reform that favors wealth generation and productivity over populist redistribution.

The economic conditions of the rest of the world form a lower limit to our productivity and prosperity. We will see one of two possible futures. Either Americans are much more productive than people elsewhere, and the government extracts that difference from people, or we are just as productive as the rest of the world, and the government must remain lean and efficient to compete. I think that other nations will get a lot better, but that we will improve at least as fast. The only real threat to our prosperity is the rest of the world getting a lot poorer and less free, but the odds of that look are very low right now.

Human Organizational Incompetence

Reading this post on the consulting industry, and the dozens of supporting comments, set in motion a train of thought that made me realize just how bad humans are at organizing ourselves and coordinating our activities.

I'd recommend reading the whole thing, but if you can't, here's a key quote,

My guess is that most intellectuals underestimate just how dysfunctional most firms are. Firms often have big obvious misallocations of resources, where lots of folks in the firm know about the problems and workable solutions. The main issue is that many highest status folks in the firm resist such changes, as they correctly see that their status will be lowered if they embrace such solutions.

I can recall dozens of case studies with this pattern, and it was true of the firm I used to work at. Managers insist on doing things that literally destroy the organization, because it gives them a feeling of power and control. A typical example is keeping information secret from employees. Most people who have been part of a large organization have similar experiences. Decisions are made based on office politics rather than scientific judgment or business efficiency. This problem seems inherent in human nature; it happens whenever people try to organize themselves to do something.

More often than not, the business consultants are simply there to bypass office politics and give a stamp of approval to what any thoughtful observer knows needs to be done. CEO's and shareholders are willing to pay millions of dollars for this service, which suggests that office politics costs the economy billions of dollars each year.

But economists know that the failures of human-led organization are far deeper. One of the things that we have to do in every introductory class is to explain how the price system works and what it is good for. It has repeatedly been shown that a system of market prices allocates resources far more effectively than central planning in almost every case. Whenever there is something that prevents the price system from working, the result is chaos and mismanagement.

A naive observer of human behavior might think that a human planner would be strictly better than a price system. After all, a price system is one of many possible allocation mechanisms a planner could use. When the price system works, the planner can use it, and when it does not, than a different system can be used. But things rarely work out that way. Central planning, where humans can choose from a menu of options, usually does worse than blind adherence to a simple price system, because of the inherent psychological desires of the human race that cause power to corrupt decision-makers.

Economists always sell the price system as an amazing model of emergent order, focusing on its elegance and benefits. But objectively, allocation via market prices is a remarkably blind, dumb, simple, stupid mechanism. Its flaws are obvious and well-documented: externalities, large income differences, information assymetries, irrational short-term desires, and an inability to accurately measure value can can all cause it to fail.

Our inability as humans to consistently do better than this flawed and senseless mechanism is truly amazing. Human discretion reliably causes dysfunctional outcomes that are far worse than the problems generated by markets. It is one of our more fundamental failures as a species.

A well-programmed computer would not have either of these problems. It would be strictly better than markets, using a price system when appropriate and using something else otherwise. It could capture information not available from market prices, such as social media chatter and patterns of network connections among people. It could measure and test people and products to find ideal fits. It would not be selfish, or play politics, or lie, or be distracted by games of power and signaling. It could do a better job than either human management or markets of aggregating information and using that information to make decisions.

We are already seeing glimpses of this. Think about the recommendation engines of Netflix and Amazon. They already do a better job of predicting what products you will enjoy than most people who know you. They certainly do a better job than market prices. A high price is only a signal of quality if your tastes are very similar to everyone else's and there is a reliable connection between inputs and output quality. Neither of these is typically true of entertainment. The decision of how to allocate your entertainment time is best done not by other humans, and not by market prices, but by a cleverly programmed computer.

I predict that, sometime in the next few decades, a private equity company will program an intelligent-allocation computer and use it to replace the management of companies it buys out. There will be many experiments, and many of them will fail. But when they get it right, a lot of dysfunctional human-led firms will be quickly replaced by machine-directed enterprises who make production and hiring decisions that coordinate human activity better than humans can.

Lego Friends Controversy

Over the holidays, my friend, an anthropologist, showed me a copy of Businessweek with an article on a new Lego product line for little girls called Lego Friends:

Over the years, Lego has had five strategic initiatives aimed at girls. Some failed because they misapprehended gender differences in how kids play. Others, while modestly profitable, didn't integrate properly with Lego's core products. Now, after four years of research, design, and exhaustive testing, Lego believes it has a breakthrough. On ... Jan. 1 in the U.S., Lego will roll out Lego Friends, aimed at girls 5 and up.

I'd recommend reading the whole thing, because it has good observations about culture and child development, but if you don't have time, I will summarize and simplify the key points:
The Lego company almost went bankrupt last decade. To survive, they followed the time-honored business strategy of focusing on their core market. While Legos were traditionally meant to appeal equally to boys and girls, it was mainly boys who played with them. The company started deliberately designing Lego sets to appeal to boys, and marketing them to boys. This strategy helped make the company profitable, and now they want to start selling to girls again.
I was curious to learn more about this, so I started reading more about it to see what the reaction was. Many people in the core group of Lego fans do not like these sets, for various reasons that I will cover later. But it is clear that the new toys are not meant to appeal to people who already buy Legos. They are meant to expand the market, to get more people buying them, and the strategy seems to be working, as evidence by comments like these from the Lego message boards:

Just Bought my daughter the new LEGO Friends. ... I never even thought of buying my daugter LEGO's untill after this past Christmas when my daughter recieved lots of barbie items from "santa" but after the 2nd day, she was back to playing with her brother's Legos. She is thrilled with the "girl" LEGO's, so I asked her why she liked the Friend LEGO's and she said she liked the pretty colored bricks, but she mostly liked the fact that the Treehouse (3065) that she bought, has a kitty with it. ... She told me that for her birthday, which is not until October, all she wants is the new FRIENDS LEGO's. She loves the fact that she can build just like her brother, and her brother is thrilled because she won't be taking his LEGO's all the time, and I KNOW he won't be taking these.
I think LEGO has a real Hit with these new FRIENDS LEGO's, and I know that she will be getting these for Christmas and birthday's this year instead of BARBIE !!!
THANKS LEGO !!!!

I had thought that this was the end of the issue. It looked like the free market had pushed a profit-maximizing company to deliver a product that people like, making everyone better off. Maybe the 'girl Legos' are not quite as good as the 'boy Legos', but they are certainly better than Barbie dolls in every possible way and the Legos are successfully winning market share from them. The issue would perhaps be worthy of a link and a quick comment, but not a full blog post.
But yesterday, change.org sent me an email asking me to sign a petition protesting these new Legos. It seems that people are making a culture-war political issue about the new Legos, and this requires a response.
The short version of the rest of my blog post is that the feminists are making the perfect the enemy of the good. I agree that, in a perfect world, all Lego sets would be gender-neutral, marketed to both boys and girls, and feature an even mix of male and female figures. But this is not the world we live in, Lego does not have the power to create that world, and it makes no sense to attack them for an honest and well-researched effort to get more girls playing with their building toys.
One issue is that the new sets have a different style of person. The new girl 'Lego Friends' figures look more like dolls than bricks, and that upsets some people. It is true that they are more sexualized than the traditional minifigs, but it would be almost impossible to create a representation of the human form that is less sexualized than the traditional Lego person.
Here is some background from the Businessweek article:

To develop Lego Friends, Knudstorp relaunched the same extensive field research—more cultural anthropology than focus groups—that the company conducted in 2005 and 2006 to restore its brand. It recruited top product designers and sales strategists from within the company, had them join forces with outside consultants, and dispatched them in small teams to shadow girls and interview their families over a period of months in Germany, Korea, the U.K., and the U.S.
The research techniques and findings have been controversial at Lego from the moment it became clear that if the company were serious about appealing to girls, it would have to do something about its boxy minifigure, its 4-centimeter plastic man with swiveling legs, a yellow jug-head, and a painted-on face. "Let's be honest: Girls hate him," says Mads Nipper, the executive vice-president for products and markets.

One side note about that last quote. The people launching the petition complained about the executive using the word 'him' to refer to the minifig, citing that quote as proof of Lego's sexism. But in Germanic languages like Danish, 'him' is often used as a gender-neutral pronoun, and is even used to refer to things that are clearly female, like milk cows. This is just another example of cultural misunderstandings causing communication problems and bad feeling.

The petition writers, and some disgruntled Lego fans, say that Lego should just go back to selling the simple gender-neutral tubs of bricks that they used to. Lego never actually stopped selling these open-ended imagination-focused toys. You can still go to stores or to lego.com and buy a basic collection of bricks. They have always been an option, and they are getting better over time. For example, this safari building set is amazingly good from almost any perspective. For only $10, you get two Lego people, a man and a woman, and the bricks to build a wide variety of vehicles and animals. That is a lot of play and education for the money, a perfect gift for any girl or boy. It is everything that the petition-writers say Lego should be.

But selling these things exclusively is not a sustainable corporate strategy. $100 worth of sets like these is fuel for limitless building, and Legos are durable enough to be family heirlooms. While it may be ideal from a social, educational, and personal finance perspective for every family to spend no more on toys than $100 of Lego every three or four generations, it would mean that Lego would either go bankrupt or have to lay off a lot of people.

Lego has to keep selling new sets if they are to survive in their current form. They have to keep producing new things that people want to buy. Fortunately for them, people are natural novelty seekers. They can keep generating a new thing almost indefinitely, especially if they sell toys based on the latest movie or TV show.

The toy aisles are full of junky plastic vehicles, playsets, and action figures that are clearly marketed toward boys. Many of them are building block toys make by Lego's direct competition. If Lego failed to compete for this market segment, they would lose a lot of money.

By steering boys away from junk like this and toward their high quality building toys, Lego does a good thing. But an unfortunate side effect is that all of the 'boy Legos' seem to make the gender-neutral Legos less attractive for girls and their parents, as the Lego brand becomes associated with boy-centered stuff.

It would be a good thing both for society and the Lego company if 'Lego' was gender neutral, and people understood that some individual Lego sets were meant for boys, while other individual sets were meant for girls. Lego would be able to steal market share from Barbie and also from Transformers, improving the world in both cases.

To restore the gender neutral image of their overall brand, Lego must either stop making boy Legos or start making girl Legos. Making more gender neutral Legos is not enough for balance, and as this controversy shows, their existing gender neutral Legos are being ignored. They clearly cannot afford to abandon the boy market, so they make Lego Friends, a deliberately feminine product, to balance it out.

Lego critics say that selling masculine Lego sets is harmful to girls, and also that selling feminine Lego sets is harmful to girls. It is hard to see how both of these beliefs can be true at the same time. It actually does make sense that the proliferation of masculine Legos has harmed girls by making a good educational toy less attractive to them. Lego Friends is, in my view, a very good way to reverse this trend while making more money rather than less.

But there are people who think that nothing should have a stereotyped gender identity, and that it is wrong to sell anything that is meant for just one gender. I think that this is the belief driving the complaint about the new Legos. I actually do have some sympathy for this belief. Constraining the options and choices of individuals is typically a bad thing, and social norms can be powerful constraints.

But they are clearly choosing the wrong target for their activism. I have never seen a change.org petition complaining about the existence of Barbie dolls and asking Mattel to stop selling them. As long as there are heavily gendered toys that sell well, Lego will be improving the world by successfully competing with them. 

Child Development and Work

Last weekend, while I was visiting my parents for the holidays, my cousin and his wife and three boys came to visit us. The oldest is six. Like me, and his father, he is smart, and likes playing with Legos and reading books, but is not extraordinarily brilliant.

Over the holidays, I had restored two old cast iron machines, a food chopper and a meat grinder, from my grandmother's basement. I cleaned off some rust, disassembled them, cleaned off more rust, and then coated them in canola oil, until they could easily be assembled and disassembled by hand.

Somehow this came up in conversation, and my dad asked me to bring the machines out to show them. While they were out, I realized that they might be a fun thing for the six-year-old, my first cousin once removed, to play with.

I asked the boy, who was looking through some books, "Hey W__, would you like to put together a real machine?" His eyes lit up with excitement and he jumped up and followed me out to the shed, where we had been talking.

Each machine is six pieces when disassembled, although their construction is slightly different. I assembled the meat grinder while he watched, and then pointed him to the pieces of the food chopper. It was the case, feed screw, crank, chopper, and two assembly screws. He had it assembled in less then two minutes.

Then, of course, he wanted to chop something. I found a patch of green weeds for him to feed into it.  Then he started turning the crank, and the chopper worked well, producing something like coleslaw.

Then he started grabbing handfuls of grass and weeds to chop. I told him how to use the thing safely, never putting his hand near the feeder while the crank was turning, and let him keep going while I talked with family nearby.

When I went inside to get the camera to take pictures, and tell everyone what was going on, my mom commented "Maybe we should have set him up near the compost pile." He was still going when I went outside, so we picked up and moved the table the chopper was attached to. Then we tossed the chopped weeds into the compost pile and I used the pitchfork to go through the pile for fruits and vegetables to chop. 

Pretty soon I had a pile of banana peels, apple cores, avocado husks, pomegranate pith, lettuce and cabbage stalks, pepper cores, a corn cob, and a few rotting tomatoes on the table. He started to chop this pile up, industriously and methodically. He just kept going and going. He never got bored or tired or frustrated with the task.

It was hard work at times. Sometimes he had to use his whole body to move the handle. He would lean over it and use his weight to press it down, and then use his legs to lift it up, like a weightlifter doing squats. When even that did not work, because he had fed in too much at once, he reversed the handle, cleared some of the stuff out, and kept going. He had the attitude that he could handle this job, and that he would do whatever it took to do it right.

It was an incredible display of what I would call 'work ethic' if he was not having so much fun. He was clearly in a flow state. He did not stop until he had turned every fruit and vegetable in the compost pile into chunky salsa, and he was clearly disappointed when there was no more work to do.

He had done quite a bit of useful work. The compost pile will be much better as a result of the chopping. The task was physically strenuous and mentally challenging. Under minimal supervision and with relatively minor positive feedback, he had assembled a machine and dedicated himself to using it to do challenging and productive work. And when he was done, he disassembled the machine and helped me clean it.

The human brain is clearly wired for children to do things like this. If he lived in a primitive society, he would already be an economically productive member of the family or tribe. Much of his life would resemble this fun vacation. He would be surrounded by relatives, learning useful skills from them, and making them proud by applying those skills. He would have a measure of independence, and the pride that comes from doing useful things to the world.

Under the rules and structure of our modern society, he will have to sit through 12 years of schooling before he is considered capable of doing any kind of useful work. In order to live a decent life, he will require six more years of schooling. Even if he is a good student like I and his father were, he will hate much of this, or be bored by it. He will be constrained and powerless and isolated from his family for much of his childhood. In order to keep him happy, his parents will have to spend money on things that replicate the experience of learning in this fashion.

I am not nostalgic for any time in history. Life before rule of law, democracy, and property rights, and the technology and infrastructure that came from them, was nasty, brutish, and short. But that life, and not modern life, is what our brains are wired to function in. The more I learn about how the human brain functions, the more I realize just how bizarre and alien our modern world is, and what it costs us to live in it.

There have to be better ways of educating our children and organizing society, ones that maintain the benefits of our modern world while being more suited to the natural functioning of our brains. I do not know what they are, but I do know that, if things go well, our descendants will see our current society as   twisted and perverse. 

I suspect that, in this society, people will start working at a much younger age, and life will be a combination of work and education. "Child labor" had a horrible connotation nowadays, because of its history in the industrial age*, but I can guarantee that my little cousin enjoyed doing that labor far more than he will enjoy most of his time in school. If our work lives were structured the right way, and if people had the right attitude about things, then children of as young as eight could spend a couple hours a day working, doing useful things for real money. This would most likely be better for their development as human beings than the contrived and artificial development environment that they currently experience.

*I suspect that time working in a textile factory is no worse than time spent in some of our public schools, but that is a different topic.