Tag Archives: Inequality

The Socialist Manifesto

As I’ve read criticisms of socialism, I thought I should read some advocates. This seemed promising:

Bhaskar Sunkara, The Socialist Manifesto: The Case for Radical Politics in an Era of Extreme Inequality (April 2019) … What, exactly, is socialism? And what would a socialist system in America look like? The editor of Jacobin magazine, Sunkara shows that socialism, though often seen primarily as an economic system, in fact offers the means to fight all forms of oppression, including racism and sexism. The ultimate goal is not Soviet-style planning, but … to create new democratic institutions in workplaces and communities. A primer on socialism for the 21st century.

I’ve just finished it. Alas, the vast majority of its 288 pages is an “inside baseball” history of socialist movements in history. Who inspired them, ran them, and joined or supported them. How they allied with and fought each other and outsiders, and rarely, what policies they pushed for or how they ran things. Generally, Sunkara’s heros are those who “called for” the most “radical” change, regardless of their actual impact on people or policies.

Amazingly for something called a “manifesto” and “primer”, there’s little effort to argue for why socialism is good; we are supposed to find that obvious. More on that below.

Yes, big failures like Stalin’s Soviet Union and Mao’s China are acknowledged, but blamed on their being insufficiently “democratic”. Sunkara doesn’t discuss why that seems to happen so often, nor how to stop it from happening again. The actual socialist-like government that he seems most willing to embrace is that of Sweden until a few decades ago. But he has little discussion of why Sweden has since moved far away from that, other than to blame it on business media campaigns and bad strategy choices by politicians.

Much is packed into Sunkara “democracy” concept, as he often blames the failure of socialists to gain more influence as due to capitalist influences on votes. Apparently any elections done within capitalism can’t be fully “democratic.” The US today is also said to be “undemocratic” because our system tends to favor having two main parties. Sunkara also says having things decided by local governments is less democratic, as capitalists have more influence at smaller scales. Sometimes merely voting is seen as insufficiently democratic; Sunkara instead prefers the pressure that comes from mobs, especially mobs willing to break the law. I don’t really see a coherent “democracy” concept here, other than that “democracy” is whatever leads to Sunkara’s favored policies.

Socialism is said to be the solution not only to inequality and oppression, but also to racism and global warming:

People can overcome their prejudices in the process of mass struggle over shared interests.

Democratic socialism would do far better at keeping humanity flourishing along with the wider ecology. …Worker-controlled firms don’t have the same ‘grow or die’ imperative as capitalist ones. A more empowered citizenry, too, would be better able to weigh the costs and benefits of new development.

Though Sunkara does call for

avoiding a narrow ‘call-out culture’ along with the kinds of identity politics that, taken to its extreme, will lead us down the path to a hyper-individualized and anti-solidaristic politics. Hyperbole and the politics of personal shaming are a recipe for demoralization, paranoia, and defeat.

So what exactly is “socialism”? It is not the end of competition or inequality. Under socialism, there is still personal private property allocated by competitive markets. Romantic and friend relations are set by competitive markets for association. Competitive labor markets still allocate jobs, which result in differing wages and working conditions. People compete under democracy to see who gets to run firms and the government, and people compete to gain government approval to start and grow firms:

Collectively you and your coworkers now control your company. … You have to pay a tax on its capital assets, in effect renting it from society as a whole. … Everyone [must] participate in management on an equal footing. … [Your firm picks] a representative system of governance. … From the unit supervisor’s perspective, she has the duty to make sure everyone is doing their share. [A lazy worker] goes through a progressive disciplinary process – first comes a warning, with concrete suggestions for improvement, then a suspension with pay, then finally, dismissal with three months of severance. …

There is still market competition, and firms still fail, but the grow-or-die imperative doesn’t apply. … There’s pressure to make sure janitorial and other ‘dirty’ jobs are well compensated. …

Capital goods tax … funds are invested into … national planning projects. What’s left is given to regions on a per capita basis … channels by regional investment banks (public of course) that … apportion … to new or existing firms. Applicants are judged on the basis of profitability, job creation, and other criteria including environmental impact. … These tradeoffs are political decisions. … Since you’re starting the firm, you have some discretion in setting the initial operating agreement. … To attract workers [you decided on] income differentials. … you are rewarded for your invention with a small amount of state prize money, and you do end up earning more as an elected manager.

Sunkara says that you wouldn’t be scared to lose your job as you “can get by on the state’s basic income grant and supplement it by taking a guaranteed public sector job.” No mention is made of savings, so it seems you can’t forgo consumption today to save more for you or your children’s future.

Sunkara offers this as his definition of “socialism”, but he doesn’t do anything to assure us that others agree with his definition. From what I’ve read before on the subject, there’s a lot of disagreement on that question.

I have serious doubts that such a system will work as well as familiar ones for choosing products and methods of production. Why are they better for creating efficiency and growth, or for happiness and meaning? Seems to me people would try a lot less hard to figure out better ways to do things. They’d instead figure out how to pander to and lobby the more ignorant politicized panels that allocate capital. As we’ve seen in “socialist” regimes before.

You probably have such doubts too. Yet Sunkara offers zero arguments to allay our fears. No theory arguments. No systematic data comparing how different systems have worked in practice. Not even a few detailed anecdotes on which we might hang our hopes. Nothing, other than perhaps invoking a faith that more democracy must improve all things.

To anyone tempted in the future to write a “manifesto” for some radical proposal, I suggest: actually argue for it. With theory, data, anecdotes, something. And you’d do best to argue for particular concrete trials to test your proposal. Call for more such trials, but don’t call for everyone everywhere to adopt your proposal in the absence of generally positive results from a series of trials of increasing scale and difficulty.

Given how much experience the world has had with regimes that were called “socialist”, I don’t see how anyone could seriously propose more of it without a review of some data drawn from these experiences. While we do have some such data regarding “democracy” of various forms, that data isn’t especially encouraging. Data on government panels deciding what new production ventures to try, and what old ones to maintain, seems to me even more sparse and less encouraging. But do show us that’s wrong, if you can.

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Abstract Views Are Coming

Two years ago I predicted that the future will eventually take a long view:

If competition continues for long enough, eventually our world should contain units that do care about the distant future, and are capable of planning effectively over long timescales. And eventually these units should have enough of a competitive advantage to dominate. … The future not being neglected seems such a wonderfully good outcome that I’m tempted to call the “Long View Day” when this starts one of the most important future dates.

Today I predict that the future will also eventually take a more abstract view, also to its benefit. Let me explain.

Recently I posted on how while we don’t have a world government today, we do now have a close substitute: a strong culture of oft-talking world elites, that can and does successfully pressure authorities everywhere to adopt their consensus regulation opinions. This is much like how in forager bands, the prestigious would gossip to form a consensus plan, which everyone would follow.

This “world forager elite”, as I called them, includes experts, but often overrules them in their areas of expertise. And on the many topics for which this elite doesn’t bother to form a consensus, other institutions and powers are allowed to made key decisions.

The quality of their judgements depends on how able and knowledgeable is this global elite, and on how long and carefully they deliberate on each topic. And these parameters are in turn influenced by the types of topics on which they choose to have opinions, and on how thinly they spread themselves across the many topics they consider.

And this is where abstraction has great potential. For example, in order of increasing generality these elites could form opinions on the particular kinds of straws offered in a particular London restaurant, or on plastic straws in general at all restaurants, or on all kinds of straws used everywhere, on how to set taxes and subsidies for plastic and paper for all food use, or on how to set policy on all plastic and paper taxes and subsidies.

The higher they go up this abstraction ladder, they more that elites can economize on their efforts, to deal with many issues all at once. Yes, it can take more work to reason more abstractly, and there can be more ways to go wrong. And it often helps to first think about concrete examples, and then try to generalize to more abstract conclusions. But abstraction also helps to avoid biases that push us toward arbitrarily treat fundamentally similar things differently. And abstraction can better encompass indirect effects often neglected by concrete analysis. It is certainly my long experience as a social scientist and intellectual that abstraction often pays huge dividends.

So why don’t elites reason more abstractly now? Because they are mostly amateurs who do not understand most topics well enough to abstract them. And because they tend to focus on topics with strong moral colors, for which there is often an expectation of “automatic norms”, wherein we are just supposed to intuit norms without too much explicit analysis.

In the future, I expect us to have smarter better-trained better-selected elites (such as ems), who thus know more basics of more different fields, and are more able to reason abstractly about them. This has been the long term historical trend. Instead of thinking concrete issues through for themselves, and then overruling experts when they disagree, elites are more likely to focus on how manage experts and give them better incentives, so they can instead trust expert judgements. This should produce better judgements about what to regulate how, and what to leave alone how.

The future will take longer, and more abstract, views. And thus make more sensible decisions. Finally.

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The World Forager Elite

My last post was on Where’s My Flying Car?, which argues that changing US attitudes created a tsunami of reluctance and regulation that killed nuclear power, planes, and ate the future that could have been. This explanation, however, has a problem: if there are many dozens of nations, how can regulation in one nation kill a tech? Why would regulatory choices be so strongly correlated across nations? If nations compete, won’t one nation forgoing a tech advantage make others all the more eager to try it?

Now as nuclear power tech is close to nuclear weapon tech, maybe major powers exerted strong pressures re how others pursued nuclear power. Also, those techs are high and require large scales, limiting how many nations could feasibly do them differently.

But we also see high global correlation for many other kinds of regulation. For example, as Hazlett explains, the US started out with a reasonable property approach to spectrum, but then Hoover broke that on purpose, to create a problem he could solve via nationalization, thereby gaining political power that helped him become U.S. president. Pretty much all other nations then copied this bad US approach, instead of the better prior property approach, and kept doing so for many decades.

The world has mostly copied bad US approaches to over-regulating planes as well. We also see regulatory convergence in topics like human cloning; many had speculated that China would be defy the consensus elsewhere against it, but that turned out not to be true. Public prediction markets on interesting topics seems to be blocked by regulations almost everywhere, and insider trading laws are most everywhere an obstacle to internal corporate markets.

Back in February we saw a dramatic example of world regulatory coordination. Around the world public health authorities were talking about treating this virus like they had treated all the others in the last few decades. But then world elites talked a lot, and suddenly they all agreed that this virus must be treated differently, such as with lockdowns and masks. Most public health authorities quickly caved, and then most of the world adopted the same policies. Contrarian alternatives like variolation, challenge trials, and cheap fast lower-reliability tests have also been rejected everywhere; small experiments have not even been allowed.

One possible explanation for all this convergence is that regulators are just following what is obviously the best policy. But if you dig into the details you will quickly see that the usual policies are not at all obviously right. Often, they seem obviously wrong. And having all the regulatory bodies suddenly change at once, even when no new strong evidence appeared, seems especially telling.

It seems to me that we instead have a strong world culture of regulators, driven by a stronger world culture of elites. Elites all over the world talk, and then form a consensus, and then authorities everywhere are pressured into following that consensus. Regulators most everywhere are quite reluctant to deviate from what most other regulators are doing; they’ll be blamed far more for failures if they deviate. If elites talk some more, and change their consensus, then authorities must then change their polices. On topic X, the usual experts on X are part of that conversation, but often elites overrule them, or choose contrarians from among them, and insist on something other than what most X experts recommend.

This looks a lot like the ancient forager system of conflict resolution within bands. Forager bands would gossip about a problem, come to a consensus about what to do, and then everyone would just do that. Because each one would lose status if they didn’t. In this system, there were no formal rules, and on the surface everyone had an equal say, though in fact some people had a lot more prestige and thus a lot more influence.

This world system also looks new – I doubt this description applied as well to the world centuries or millennia ago, even within smaller regions. So this looks like another way in which our world has become more forager-like over the last few centuries, as we’ve felt more rich and safe. Big world wars probably cut into this feeling, so there was probably a big jump in the few decades after WWII, helping to explain the big change in attitudes ~1970.

Elites like to talk about this system as if it were “democratic”, so that any faction that opposes it “undermines democracy”. And it is true that this system isn’t run by a central command structure. But it is also far from egalitarian. It embodies a huge inequality of influence, even if individuals within it claim that they are mainly driven by trying to help the world, or “the little guy”.

This system seems a big obstacle for my hopes to create better policy institutions driven by expert understanding of institutions, and to get trials to test and develop such things. Because as soon as any policy choice seems important, such by triggering moral feelings, world elite culture feels free to gossip and then pressure authorities to adopt whatever solution their gossip prefers. Experts can only influence policy via their prestige. Very prestigious types of experts, such as in physics, can win, especially on topics about which world elites care little. But otherwise, elite gossip wins, whenever it bothers to generate an opinion.

That is, the global Overton window isn’t much wider than are local Overton windows, and often excludes a lot of valuable options.

Notice that in this kind of world, policy has varied far more across time than across space. Context and fashion change with time, and then elites sometimes change their minds. So perhaps my hopes for policy experiments must wait for the long run. Or for a fall of forager values, such as seems likely in an Age of Em. Alas neither I nor my allies have sufficient prestige to push elites to favor our proposals.

Added 11p: It seems to me that the actual degree of experimentation and variance in policy is far below optimum in this conformist sort of policy world. We are greatly failing to try out as many alternatives as fast as we should to find out what works best. And we are failing to listen enough to our best experts, and instead too often going with the opinions of well-educated but amateur world elites.

Added4p: As John Nye reminds me, in the early years of a new tech, only a few nations in the world may be able to pursue it. They then set the initial standards of regulation. Later, more nations may be able to participate, but risk-averse regulators may feel shy about defying widely adopted initial standards.

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For Fast Escaped Pandemic, Max Infection Date Variance, Not Average

In an open column, … to provide greater dispersion, the vehicle distance varies from 50 to 100 meters, … distance between dismounted soldiers varies from 2 to 5 meters to allow for dispersion and space for marching comfort. (More)

The troop density has decreased through military history in proportion to the increase in lethality of weapons being use in combat. (More)

Armies moving in hostile areas usually spread out, as concentrations create attractive targets for enemy fire. For soldiers on foot, it might be possible to try to induce such dispersion by having a vicious wild animal chase them. After all, in the process of running fast to escape, they might spread out more than they otherwise might. But this would be crazy – there’s no reason to think this would induce just the right level of dispersion, and it would have many bad side effects. Better just to order soldiers to deliberately space the right distance. 

For a very infectious pandemic like COVID-19, clearly not contained and with no strong treatment likely soon, the fact that medical resources get overwhelmed toward a pandemic peak creates a big value in dispersion – spreading out infection dates. But, alas, our main method is that crazy “chased by a wild animal” approach, in this case chased by the virus itself. 

That is, each person tries to delay their infection as long as possible, in part via socially destructive acts like staying home instead of working. Like soldiers running from a wild animal, our varying efforts at delay do create some variance as a side effect. But probably less than optimal variance, and at great cost. 

Yes, delay has some value in allowing more stockpiling. For example, we should (but apparently aren’t) mass training more medical personnel who can function in makeshift ICU tents. But increasing average delay is can be less valuable than increasing delay variance. Even if we can’t just tell each person when to get infected, like telling soliders where to walk, we have several relevant policy levers. 

First, as I’ve discussed before, we might pay people to be deliberately exposed, and covering the cost of their medical treatment and quarantine until recovery. Yes, if their immunity has a limited duration, then we might want to not start deliberate exposure until there’s less than that duration before the pandemic peak. But there’s still big potential value here, especially via targeting medicine and critical infrastructure workers. 

Second, this is a situation were inequality of wealth, health, and social connections is good. In the last few years, many have loudly lamented many kinds of social inequalities that make the low feel ashamed and unloved, resulting in their more often becoming lonely and sick. Some are enough friends and money that they can afford go to all the parties, while others suffer in poverty alone. And no doubt many will cry loudly when such inequality makes the low get infected before the high.

But however bad such inequality might usually be, in a pandemic it is exactly what the doctor should order, if he could. Among a community close enough to share the same medical resources, the more that individuals vary in their likeliness of catching and passing on the pandemic, the better! Those who catch it early or late will do better than those who catch it just at the peak.  So for this pandemic, let’s maybe back off on whatever we now do to cut inequality, and maybe even open up more to whatever we are not doing that could increase inequality. 

In my next post, I’ll describe some simple concrete sim models supporting these claims.

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Capitalism Uses Hate; That’s Good

“Good! Your hate has made you powerful. Now, fulfill your destiny.” (More)

The most natural human social structure is based on prestige. People compete to look impressive, and then everyone defers to those who seem most impressive. We let them run the things they want the way they want, if only they will let us gain some prestige via association with them. Which is often a big problem, as in the modern world the way to look most impressive is often not the best way to run things.

When the way to seem an impressive doctor is not the best way to heal patients. When the way to seem an impressive lawyer or judge is not the best way to win or rule on cases. When the way to seem an impressive warrior is not the way to win wars. When the way to seem an impressive cook is not to make cheap tasty nutritious food. In such cases, letting the most prestigious folks do things their way can lead to wasteful inefficient outcomes.

In “capitalism”, big firms are run by rich greedy bossy managers in the service of even richer and greedier owners. For many, a natural ancient human reaction to such a situation is “hatred.” Or at least strong distrust, wariness, and suspicion. Many of us are primed to think the worst about these people and this situation.

Which is great, because this enables us to hold such people and firms accountable. We are willing to switch from firms who supply us with products and services when other options look better. We are willing to quit jobs we don’t like, and go home when we feel done for the day. And when firms fail to satisfy customers and employees, we are willing to let those firms die, and let their investors lose their shirts. Because we hate them.

Unfortunately, our hate also makes us more willing to regulate such firms, and to take from such people. Some regulation and taking may be useful, but too much can kill or at least emaciate the goose that lays the golden eggs of capitalism. Our related suspicions of big powerful politicians and their supporting organizations helps to mitigate this problem somewhat, but alas it seems we don’t hate such people and orgs remotely as much as we should.

Beware of love; sometimes hate is what we need.

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Social Roles Make Sense

The modern world relies greatly on a vast division of labor, wherein we each do quite different tasks. Partially as a result, we live in different places, have different lifestyles, and associate with different people. The ancient world also had a division of labor, but in addition to doing different tasks, people tended to have expectations about what kinds of people would tend to do what kinds of tasks, live where, and associate with who. Often strong expectations. Such expectations can be called social “roles”.

For example, in a society with “gender roles”, there are widely shared expectations regarding the kinds of tasks that women do, relative to men. In some societies these expectations have been so strong that all women were strongly and directly prevented from doing any other tasks. But more commonly, expectations could often be violated, if one paid a sufficient price. Similarly, ancient societies often had roles related to family, ethnicity, class, age, body plan, personality, and geographic location. People who started life with particular values of these parameters were channeled into particular tasks, places, training regimes, and associations, choices that tended to support their doing particular future tasks, with matching lifestyles, associations, etc.

When there is an existing pattern of what sorts of people tend to do what tasks and fill what social slots, then it is natural and cost-reducing to at least weakly use those patterns to predict what sorts of people will do well at what tasks in the near future. Furthermore, it is natural and cost-reducing to at least weakly use future task expectations to decide the locations, training, associations, etc., of people earlier in life.

It seems obvious to me that it is possible to have both overly weak and overly strong social roles. With overly strong social roles, we rely too much on initial expectations, experiment too little with alternate allocations, and act too little on any info we acquire about people as their lives progress. But with overly weak social roles, we rely too little on easily accessible info on what sorts of people are likely to end up well-suited to particular roles.

For example, consider climate roles. If you grow up in a particular climate, there’s a better than random chance that you will live in a similar climate when you are older. So it makes sense early in life for you to adapt to that climate in your habits and attitudes. When people are looking later for someone to live or work in that climate, it makes sense for them to prefer people already experienced with that climate. Part of this could be genetic, in that people with genes well suited to a climate may have been previously preferentially selected to live there. But it mostly doesn’t matter the cause; it just makes sense to respond to these patterns in the obvious way.

(Yes, sometimes one will want to pick people who seem especially badly-matched to certain tasks or context, just to experiment and check one’s assumptions about matching. But such experiments are unusual as choices.)

Of course the world may sometimes stumble into inefficient equilibria, wherein we keep tending to assign certain sorts of people to certain tasks, when we’d be even better off with some other pattern of who does what. In such cases we might try to break out of previous patterns, in part via discouraging people from using some features as cues to assigning some aspects of tasks, locations, associations, etc. This is one possible justification for “anti-discrimination” rules and laws.

But this certainly doesn’t justify a general prohibition on any sorts of social roles whatsoever. And any decisions based on theories saying that we were in inefficient equilibria should be periodically re-examined, to see if observed patterns of who seems to be good at what support such theories. We might have been mistaken. And unless there is some market failure that we must continually fight against, we should expect to need anti-discrimination rules only for a limited time, until new and better equilibria can be reached.

Yes, among the features that we can use to estimate who is fit for what roles, some of those features are easier for individuals to change, while others are harder to change. However, it isn’t clear why this distinction matters that much re the suitability of such features for task assignment. Even when features can change, there will be a cost of such changes, and so it will often be more cost-effective to use people who already have the suitable features, instead of getting other people to change to become suitable.

From a conversation with John Nye.

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Open Borders

In their new book Open Borders: The Science and Ethics of Immigration, Bryan Caplan and Zach Weinersmith do everything you’d think that good policy pundits should do.

They don’t just track trends or scold rivals, they identify and focus on a feasible positive policy change. They don’t just pick any old change, but focus on one of the biggest possible gains they can identify. And it isn’t a complex fragile proposal that most people couldn’t understand, or that would go badly if not implemented exactly as recommended; their proposal is simple and robust. They don’t pick a topic that has little emotional-resonance, regarding which few would act even if they were persuaded; their topic is quite emotionally-engaging. They don’t pick a change so abstract (like futarchy) that few can concretely imagine it; one can create concrete vivid images of what would happen if their proposal were implemented.

They don’t use complex technical prose, they write in simple clear language, and even add engaging pictures; their book is actually a well-done “graphic novel”. They don’t just present one side of an argument, but instead respond to many major counter arguments. They don’t just use one favored framework of analysis, they consider the issue from many possible frameworks. They don’t just focus on their favorite policy choice, they consider many possible ways to compromise with others. They aren’t overly confident in their claims. And while they consider many possible details and complexities, their main argument, regarding the main effect of their proposal, is simplicity itself.

Most important, their arguments seem solid and correct. Adopting their proposal could in fact plausibly double world product, over and above the growth rate that we might achieve without it. The main obvious effect seems so huge as to overwhelm other considerations. Relative to that huge gain, other costs and risks seem minor and acceptable. Of course, the real world is more complex than are our models of it, and so we can never be very confident that changes which go well in our models will actually go well in the real world. And all the more so when our models are noisy and partial, as in social science. Even so, this is another case I’d call “checkmate”, at least in argument terms.

So, damn it, Caplan and Weinersmith do everything you might think pundits should do. I remain personally persuaded (as I have long been); I’d pull the trigger on doing large broad tests of their plan, and if necessary making big compromises to get a deal that can make these tests happen.

I very much hope that everyone loves this book, and that it is the trigger we needed to start a larger debate that leads eventually to big trials. But alas, I’d bet against this happening, if I had to bet. The large political world isn’t that responsive, at least in the short to medium term, to the world of elite policy debates, and in the elite world people mainly care about signs of status and prestige. Elites loved Hawking’s Brief History of Time, Dubner & Levitt’s Freakonomics, Piketty’s Capital in the Twenty-First Century, and Bostrom’s Superintelligence not because those offered clear solid arguments that readers understood, but because they came with signs of high status. Many elites talked about them, their style projected prestige, their authors had high status affiliations, and the positions they took were in fashion, at least in elite circles.

I deeply admire my colleague Bryan Caplan, and am proud that he has again gone for the big solid simple intellectual win, as he did before regarding politics, parenting, and school. I hope he can do it another dozen times. I’ll read each one, and usually be persuaded. There’s a small chance he’ll have big effects, and his taking that chance seems a clear win on cost-benefit terms. But I must also be honest; that chance is still low.

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Separating Redistribution From Hardship Insurance

Today “social insurance” tends to transfer money and other resources to people when they are in relative need, such as when sick, disabled, unemployed, homeless, or too old to work. These policies tend to mix together the functions of redistribution, transferring resources between people, and insurance, for a person transferring resources between different future states of the world.

By mixing up redistribution and insurance, we make it harder for people to get insurance tailored to their individual style, preferences, and circumstances, and we instead push everyone to get the same kind of insurance. Here’s how we could do better.

Imagine that at a standard newly adult age, say 18 years old, everyone makes a big initial payment to gain a long-term hardship insurance contract, covering their future sickness, disability, unemployment, homelessness, retirement, etc. The client who buys this contract can pay more later to upgrade it if they like, but if they do not so upgrade then this contract will cover them for the rest of their life, even if they stop making payments. (Though the contract may specific quality cuts in this case.)

Insurers must be reinsured sufficiently to ensure that they can in fact meet their contractual obligations over a lifetime. And contracts may specify that the client will pay fractions of their future income or wealth to the insurer, to help lower their initial payment. Contracts might also allow groups of new adults to co-insure, in effect agreeing to help each other in the case of hardship.

Those who have larger budgets will of course be able to afford more generous hardship insurance. So the larger society could do a once-per-lifetime redistribution of resources to increase low budgets, enabling those people to buy more generous hardship insurance.

If this once-per-lifetime transfer were this society’s main channel for redistribution, then it would have largely succeeded in separating redistribution from hardship insurance. The rich could help the poor, while also leaving individuals free to choose the details of their hardship insurance to suit their individual concerns, risk-aversion, likely problems, and social resources.

Parents would of course be expected to contribute to their children’s hardship insurance purchase, and redistribution to those with low budgets would in effect be a subsidy paid to parents for having more children. As fertility seems excessively low today, this doesn’t seem such a bad thing now.

When hardships arise later, people may complain about the terms of their hardship insurance if it was chosen by someone else on their behalf, or if they were too young and ill-informed when they made their choice. So hardship insurance should be chosen at the sort of age when it would be legitimate to let someone choose a career or a housing loan, or to choose to get married or emigrate.

Perhaps the choice of hardship insurance should be marked by a solemn ritual, and only done after passing a test showing that one understand the basics of the contract to which one has agreed. And of course regulations might prohibit some hardship contracts terms when authorities believe that such choices would usually be mistakes.

If we also had vouchers for criminal law, it seems natural to consider merging the roles of crime law vouchers and hardship insurer. And if we merged the role of life and health insurer in order to create better medical treatment incentives (an idea I published 25 years ago!), it also seems natural to consider merging in this role as well. Then you’d have a single long-lived organization who vouches not just for your crime, but also for your health and your security.

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Beware Multi-Monopolies

Back in 1948, the Supreme Court ordered Paramount, Metro-Goldwyn-Mayer and other movie studios to divest themselves of their theater chains, ruling that the practice of giving their own theaters preference on the best movies amounted to illegal restraint of trade.

In 1962, MCA, then the most powerful force in Hollywood as both a talent agency and producer of TV shows, was forced to spin off its talent agency after the Justice Department concluded that the combination gave it unfair advantage in both markets.

And in 1970, the Federal Communications Commission prohibited the broadcast networks — ABC, CBS and NBC — from owning or producing programming aired during prime time, ushering in a new golden era of independent production.

In recent decades, however, because of new technology and the government’s willful neglect of the antitrust laws, most of those prohibitions have fallen by the wayside. (more)

My last post talked about how our standard economic models of firms competing in industries typically show industries having too many, not too few, firms. It is a suspicious and damning fact that economists and policy makers have allowed themselves and the public to gain the opposite impression, that our best theories support interventions to cut industry concentration.

My last post didn’t mention the most extreme example of this, the case where we have the strongest theory reason to expect insufficient concentration:

  • Multi-Monopoly: There’s a linear demand curve for a product that customers must assemble for themselves via buying components separately from multiple monopolists. Each monopolist must pay a fixed cost and a constant marginal cost per component sold. Monopolists simultaneously set their prices, and the sum of these prices is intersected with the demand curve to get a quantity, which becomes the quantity that each firms sells.

The coordination failure among these firms is severe. It produces a much lower quantity and welfare than would result if all these firms were merged into a single monopolist who sold a single merged product. So in this case the equilibrium industry concentration is far too low.

This problem continues, though to a lessor extent, even when each of these monopolists is replaced by a small set of firms, each of who faces the same costs, firms who compete to sell that component. This is because the problem arises due to firms having sufficient market power to influence their prices.

For example, this multi-monopoly problem shows up when many towns along a river each separately set the tax they charge for boats to travel down that river. Or when, to get a functioning computer, you must buy both a processing chip and an operating system from separate firms like Intel and Microsoft.

Or when you must buy a movie or TV experience from (1) an agent who makes actors available, (2) a studio who puts those actors together into a performance, and (3) a theatre or broadcast network who finally show it to you. When these 3 parties separately set their prices for these three parts, you have a 3-way monopoly (or strong market power) problem.

This last example is why the quote above by Steven Pearlstein is so sad. He calls for anti-trust authorities to repeat some of their biggest ever mistakes: breaking monopolies into multi-monopolies. And alas, our economic and policy authorities fail to make clear just how big a mistake this is. In most industrial organization classes, both grad and undergrad, you will never even hear about this problem.

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What’s So Bad About Concentration?

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. (Keynes)

Many have recently said 1) US industries have become more concentrated lately, 2) this is a bad thing, and 3) inadequate antitrust enforcement is in part to blame. (See many related MR posts.)

I’m teaching grad Industrial Organization again this fall, and in that class I go through many standard simple (game-theoretic) math models about firms competiting within industries. And occurs to me to mention that when these models allow “free entry”, i.e., when the number of firms is set by the constraint that they must all expect to make non-negative profits, then such models consistently predict that too many firms enter, not too few. These models suggest that we should worry more about insufficient, not excess, concentration.

Two examples:

  • “Cournot” Quantity Competition Firms pay (the same) fixed cost to enter an industry, and (the same) constant marginal cost to make products there. Knowing the number of firms, each firm simultaneously picks the quantity it will produce. The sum of these quantities is intersected with a linear demand curve to set the price they will all be paid for their products.
  • “Circular City” Differentiated Products Customers are uniformly distributed, and firms are equally distributed, around a circle. Firms pay (the same) fixed cost to enter, and (the same) constant marginal cost to serve each customer. Each firm simultaneously sets its price, and then each customer chooses the firm from which it will buy one unit. This customer must pay not only that firm’s price, but also a “delivery cost” proportional to its distance to that firm.
  • [I also give a Multi-Monopoly example in my next post.]

In both of these cases, when non-negative profit is used to set the number of firms, that number turns out to higher than the number that maximizes total welfare (i.e., consumer value minus production cost). This is true not only for these specific models I’ve just described, but also for most simple variations that I’ve come across. For example, quantity competition might have increasing marginal costs, or a sequential choice of firm quantity. Differentiated products might have a quadratic delivery cost, allow price discrimination by consumer location, or have firms partially pay for delivery costs.

Furthermore, we have a decent general account that explains this general pattern. It is a lot like how there is typically overfishing if new boats enter a fishing area whenever they expect a non-negative profit per boat; each boat ignores the harm it does to other boats by entering. Similarly, firms who enter an industry neglect the costs they impose on other firms already in that industry.

Yes, I do know of models that predict too few firms entering each industry. For example, a model might assume that all the firms who enter an industry go to war with each other via an all-pay auction. The winning firm is the one who paid the most, and gains the option to destroy any other firm. Only one firm remains in the industry, and that is usually too few. However, such models seem more like special cases designed to produce this effect, not typical cases in the space of models.

I’m also not claiming that firms would always set efficient prices. For example, a sufficiently well-informed regulator might be able to improve welfare by lowering the price set by a monopolist. But that’s about the efficiency of prices, not of the number of firms. You can’t say there’s too much concentration even with a monopolist unless the industry would actually be better with more than one firm.

Of course the world is complex and space of possible models is vast. Even so, it does look like the more natural result for the most obvious models is insufficient concentration. That doesn’t prove that this is in fact the typical case in the real world, but it does at least raise a legitimate question: what theory model do people have in mind when they suggest that we now have too much industry concentration? What are they thinking? Can anyone explain?

Added 11a: People sometimes say the cause of excess concentration is “barriers to entry”. The wikipedia page on the concept notes that most specific things “cited as barriers to entry … don’t fit all the commonly cited definitions of a barrier to entry.” These include economies of scale, cost advantages, network effects, regulations, ads, customer loyalty, research, inelastic demand, vertical integration, occupational licensing, mergers, and predatory pricing. Including these factors in models does not typically predict excess concentration.

That wiki page does list some specific factors as fitting “all the common definitions of primary economic barriers to entry.” These include IP, zoning, agreements with distributors and suppliers, customers switching costs, and taxes. But I say that models which include such factors also do not consistently predict excess firm concentration. And I still want to know which of these factors complainers have in mind as the source of the recent increased US concentration problem that they see.

Added 7Sep: Many have in mind the idea that regulations impose fixed costs that are easier on larger firms. But let us always agree that it would be good to lower costs. Fixed costs are real costs, and can’t be just assumed away. If you know a feasible way to actually lower such costs, great let’s do that, but that’s not about excess concentration, that’s about excess costs.

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