Tag: Garrett Hardin

Why Fiddling With Prices Doesn’t Work


“The fact is, if you don't find it reasonable that prices should reflect relative scarcity,
then fundamentally you don't accept the market economy,
because this is about as close to the essence of the market as you can find.”

— Joseph Heath

***

Inevitably, when the price of a good or service rises rapidly, there follows an accusation of price-gouging. The term carries a strong moral admonition on the price-gouger, in favor of the price-gougee. Gas shortages are a classic example. With a local shortage of gasoline, gas stations will tend to mark up the price of gasoline to reflect the supply issue. This is usually rewarded with cries of unfairness. But does that really make sense?

In his excellent book Economics Without Illusions, Joseph Heath argues that it doesn't.

In fact, this very scenario is market pricing reacting just as it should. With gasoline in short supply, the market price rises too so that those who need gasoline have it available, and those who simply want it do not. The price system ensures that everyone makes their choice correctly. If you're willing to pay up, you pay up. If you're not, you make alternative arrangements – drive less, use less heat, etc. This is exactly what market pricing is for – to give us a reference as we make our choices. But it's still hard for many well-intentioned people to understand. Let's think it through a little, with Heath's help.

***

As Heath points out in the book, the objection to so-called “price gouging” goes back at least to the Roman Emperor Diocletian, who in AD 301 imposed an Edict of Maximum Prices:

If the excesses perpetrated by persons of unlimited and frenzied avarice could be checked by some self-restraint—this avarice which rushes for gain and profit with no thought for mankind; or if the general welfare could endure without harm this riotous license by which, in its unfortunate state, it is being very seriously injured every day, the situation could perhaps be faced with dissembling and silence, with the hope that human forbearance might alleviate the cruel and pitiable situation.

And with that, Diocletian set a hard cap on the price of over a thousand different items. Some were tangible, like wheat and barley, and some were intangible, like farm labor and barber services.

This was, of course, very dumb and did not last very long as people realized that one barber and another were not equal, that wheat and barley might have local supply constraints, and that an arbitrary government price was not the fair one for most of the 1000+ items.

Inflation vs. Supply

As Heath points out in his book, there are two separate issues to untangle when we talk about “price-gouging” — general inflation and constraints on supply. The two are very different, and confusing a supply issue for general inflation leads to a lot of wrong thinking:

If you wander into a Polish supermarket and discover that a kilo of carrots is selling for four zlotys, you probably haven't learned very much. It's only once you find out what a pound of potatoes costs, and a chicken, and a pint of beer, that you begin to discover whether carrots are expensive or cheap.

As a result, the price of everything going up is analytically equivalent to the price of nothing going up. It follows that if the price of everything seems to be going up, it must be because the price of at least one thing is (inconspicuously) going down. Usually that inconspicuous item with the falling price is hidden in plain sight — money. We tend to overlook money because it's not directly consumed; it simply circulates, thus we forget that it has a price. We think of “four zlotys per kilo” as the price of carrots, expressed in zlotys, while forgetting that it is also the price of zlotys, expressed in carrots.

As Garrett Hardin would well recognize, part of the problem is the way language misleads us. When the price of stuff is going up, we don't always make the equivalent connection that the value of our money is going down. And thus, we can often confuse a rising price environment for greedy so and so's who are simply reacting to the declining value of money.

Often, governments hurt the value of money purposely. In Diocletian's time, a denarius coin went from being made entirely of silver to being made of about 2% silver and 98% base metals – the origin of the term currency debasement. In a world of inflation, what seems like greed is often an illusion caused by money losing its value generally (a complex phenomenon in its own right).

To see the flow-through effects of this, imagine that all wage-earners were given a significant raise next month. Sounds good, right? Problem is, the increased cost of labor would be passed through in the form of higher prices for everything, or alternatively, businesses would figure out how to operate with fewer workers altogether. The owners of society's capital don't just sit back and lose money — they figure out a new plan or reallocate their resources elsewhere.

Thus, a wage increase would put us right back to where we started. This is why the minimum wage debate isn't simply a humanitarian “business versus workers” issue — there are no easy answers. (In other words, The consequences have consequences.)

Prices are simply signals which allow us to make decisions on how much we really need that thing. If each of us was handed $5,000 to spend each month, we could choose to spend X amount on food, Y amount on housing, and Z amount of organic 97% cacao chocolate. The alternative would be a state planner sitting in a high tower trying to fix prices based on how he or she thought everyone should make their food/housing/chocolate allocation for the month. The history of planned economies would show this to be a majorly bad idea.

This leads us to our next point which is that, of course, our income allocations are not the same. Might price-fixing help level the playing field?

Fixing What, Exactly?

Heath quotes the economist Abba Lerner who once said that the problem for the poor is not that prices are too high, but that they don't have enough money. (“The solution of poverty lay not with the manipulation of prices but with the distribution of money income.”)

On this, Heath turns to the example of electricity prices, an occasional hot-button issue which leads to subsidies because high electricity prices are seen as regressive — poor people spend a larger percentage of their money on electric power than those more well-off. Why not subsidize electricity prices to help?

The problem is that it's a massively inefficient way to help, and puts a lot of dollars into pockets of those who don't need it. Citing Canadian statistics on the use of subsidies to keep electricity prices down, Heath writes:

The middle-income quintile spends an average of $1,117 per year (2.4% of income), while the upper quintile spends $1,522 per year (1.1% of income). This means that the $250 million annual gift being bestowed upon the poor is coupled with a $408 million gift to the middle class and a $556 million gift to the richest 20% of the population. Needless to say, a welfare program that required giving $2 to a rich person for every $1 directed to a poor person would hardly be regarded as progressive (despite the fact that, when expressed as a percentage of income, the poor person is receiving “more”).

Of course, finding a way to get the entire $1.2 billion to the people who truly need it, through a deserving program, would be a far better solution, and one that would also avoid encouraging people to use more electricity than they need (which artificially lower prices can do).

This kind of thing happens, but worse, when it comes to rent control, the system of fixing rental prices for apartments in cities. In addition to subsidizing some of the wrong people, who also have access to rent-controlled housing, the lower prices tend to distort the market for apartment and housing construction.

With apartments so affordable, people who might otherwise have purchased a house now choose to rent, crowding out some people who could never afford a home at all. And with prices artificially low, fewer apartment houses are built! Not a great outcome for the people rent control hopes to help.

To understand why think about the massive spike in energy prices leading up to the 2008 financial crisis. At one time, oil neared $140 per barrel and natural gas reached $13 per MMbtu. The result was somewhat predictable: A massive investment went into the energy complex, leading to new resources and new technologies, while demand quickly abated. Almost no one correctly predicted that 8 years later, oil would be sitting below $50 per barrel and natural gas around $2 per MMbtu. This is, of course, how pricing markets are supposed to work. The signals did their job. Artificial prices for metropolitan apartments don't allow the market to do this job effectively.

Relative Scarcity: The Key to Understanding Market Prices

The main problem with manipulating and fixing prices is a misunderstanding of what determines prices. What usually determines prices in a true market is relative scarcity, the intersection between how much you want a particular good relative to another one, and the availability of that good. As our wants and needs change, and available supplies change, prices go up and down (ignoring, for now, speculative factors, which play a huge role in some price markets).

What exactly are we paying for when we buy an item?

Clearly, it's not just the cost of the physical thing being produced. A cup of coffee costs a lot more than a few beans and some water. The total cost is something Heath calls the “social cost” of the good, which includes the entire chain of costs and opportunity costs in producing it:

Whenever someone consumes a good (say, a cup of coffee), this can be thought of as creating a benefit for that individual, combined with a loss for the rest of society (all the time and trouble it took to produce that cup of coffee, now gone). Paying for things is our way of compensating all the people who have been inconvenienced by our consumption. (Next time you buy a cup of coffee at Starbucks, imagine yourself saying to the barista, “I'm sorry that you had to serve me coffee when you could have been doing other things. And please communicate my apologies to the others as well: the owner, the landlord, the shipping company, the Columbian peasants. Here's $1.75 for all the trouble. Please divide it amongst yourselves.)

“Social cost” represents the level of renunciation, or foregone consumption, imposed upon the rest of society by each individual's own consumption. This is a fairly abstract notion, since it's not just that the good could have been consumed by someone else, but that the labor and resources that went into making that good could have been used to produce something else, which then could have been consumed by someone else. (So when I drink a cup of coffee, I am not only taking away that cup of coffee from all those who might like to have drunk it, but taking away vegetables from those who might like to have used the land to grow food, clothing from those who might like to have employed the agricultural workers in a garment factory, and so on.)

[…]

If the price of coffee tracks changes in supply and demand, it will tend to reflect this level of hardship. If the rest of us really want coffee, then we will be prepared to pay more for it, and so the price will rise. Coffee will become more “dear” (as the British would say), reflecting the fact that the person who drinks it is denying the rest of us something we really want. Thus the coffee-drinker had better really want it in order to justify depriving us of it. His willingness to pay the higher price is precisely what ensures that he does, in fact, really want it.

At the price where the hardship of creating a certain amount of some good meets the desire for a good, a price emerges. It's this “market clearing” price which efficiently allocates most of society's resources the way we need them allocated.

If prices are systematically lower than they should be, consumers benefit from society's hard work in a way that might be better allocated elsewhere, where some other group would happily pay more for the same level of “social costs” imposed, and the producers would receive more for all their work.

Conversely, if prices are too high, then consumers don't really get to be as happy as they should be relative to the modest “social cost” they've imposed. Each outcome is inefficient and produces less happiness and material wealth. A well-established pricing mechanism does the job of sending the right signals about wants, needs, and supplies.

Income Over Pricing

Heath makes a final important point about the inequality of income in society, and that in many cases, people who have had a rough hand dealt to them do deserve help. It's just that playing with the pricing mechanism is usually the worst way to do it — as we saw above, you hand people money who don't need it while distorting an efficient allocation of resources throughout society. Heath calls this the just price fallacy — the idea that some alternative level of prices are more “fair” and that we should intervene to ensure them. The “just price fallacy” fails because it doesn't ask the crucial question: And then what?

Returning to the dictum that poor people simply don't have enough money (ridiculous as it sounds), the better method is to attack the other side — income — through the system of taxation and other mechanisms, things which we do in great heaps in modern society, but will always be argued over. If market prices tend to efficiently signal suppliers about the wants and needs of society, we can usually help the less fortunate best by giving them more “claim checks” rather than distorting the very thing that works.

***

Still Interested? Try reading more from the wonderful book Economics Without Illusions, where Heath takes on some fallacies from the left and some fallacies from the right in the economic debate.

For more from Farnam Street, check out Charlie Munger's speech on what could make the economics profession work a little better or check out economist John Kay's recommendations on books about economics in the real world.

Hans Rosling’s Important Truths about Population Growth and the Developing World

Garrett Hardin's Living Within Limits had a huge influence on how I thought about population.

In the book, he convincingly demonstrates the folly of allowing human population to grow unchecked over a long enough timeframe. Even a small rate of compound would add up to large figures. Hardin's argument can be summed up fairly simply: An exponentially expanding population in a world with defined limits creates a problem. (An example of where scale has an effect on values.)

Hardin was clear to acknowledge that he wasn't sure where the limits actually were. As supporters of Thomas Malthus have found out over the years, agricultural and other technology can and has outpaced population growth. But it was a certainty that some limits can not be overcome as long as we're a single planet species — things like natural beauty, energy consumption, water consumption, fertilizer, living space, and other things mostly have limits. (Again, where those limits are is up for debate, and a certain Mr. Musk would like to make us multi-planetary as well.)

Hardin also gave us the terminology of a longage, as opposed to a shortage. Our terminology refers to a population without enough to eat as having a shortage of food. Hardin claimed it was equally correct to say there was a longage of people relative to the available resources.

Mostly, this was all I knew on the topic. Enter Hans Rosling to continue that education.

***

Hans Rosling is a Swedish academic and scientist who came to popular fame as a TED speaker. Among his talks are discussions on poverty, HIV, and the developing world. A few minutes tell you that man has a way with statistics and data presentation. (One of his talks is titled Let My Dataset Change Your Mindset.)

Rosling's favorite twin topics are ones of population growth and the truth about what's happening in developing countries — a truth the developed world doesn't know much about. Are the world's poorer nations like India, Bangladesh, Nigeria, and Mozambique going to go on exploding world population forever? What does this mean for the world? What are they living like now, what is their future? How does that affect the future of the developed world?

In the wonderful hour-long video above, Rosling blows up some misconceptions and misunderstandings, and convincingly makes the following points:

  • Population growth should hit a limit around 11 billion within the next hundred years, as the world equalizes in health outcomes.
  • In developed countries, a ratio near 2 parents to 2 children mostly exists and developing nations are getting closer and closer as their childhood health outcomes continue to improve. (And they have improved drastically.)
  • Stated another way, as a result of equalizing health outcomes, low child mortality, and family planning, family sizes go down, and population growth slows in a predictable way.
  • Current population trends are strong enough that by 2100, only ~10% of the world population will be in Western nations (North America, Western Europe) — Africa will quadruple in population and Asia will increase about 25%. It will be a very different world.
  • After an explosion of births in the second half of the 20th century, the number of children worldwide has already leveled off at around 2 billion, and should stay there at least through the century, barring a major development. Population growth from here will mostly be determined by more 30-85 year olds existing in the future than now. (In other words, births are nicely leveling off, but population growth must continue for a while anyways as the current crop of children grow up and have 2 children each. We currently have a very young world.) Watch from minute 22:00 or so for this counter-intuitive conclusion.
  • There are three or four income “groups,” roughly defined, across the planet — most of you reading this are in the $100/day or more income bracket. We're extremely fortunate. Then, a major swath in the $10/day bracket. And then the world's poorest, around $1/day. There's also a big group with less than that. (Of course, there are also the super rich in the $1000/day+ bracket — it works in a power-law like fashion). One problem for those of us at the top is that when we look down, we see the people living one order of magnitude down ($10/day) and two orders of magnitude down ($1/day) as the same. The difference between the two groups is at least as big as the difference between you and someone who makes 10x as much money as you. (And probably larger.)
  • An interesting way for “rich” Westerners to think about the above, which Rosling demonstrates in a genius way: The absolute poorest in the world, nearly a billion people, would love a good pair of shoes with which to walk. The people living around two orders of magnitude down from us (~$1/day) are struggling to afford a bicycle. Those living one order of magnitude down (~$10/day) are working to afford one car for the family. The richest billion fly in airplanes, and the super-wealthy fly in their own airplanes. It's an interesting way to conceive of the stratas of the world and where we all stand.

Of course, one of Rosling's more interesting points is that, when polled, most Westerners are fairly clueless about all of this.

For example, over 50% of Brits think that the average Bangladeshi mother births around 5 children — the actual answer is 2.5 (and declining). When they were asked what percentages of adults in the world are now literate, about half the Brits thought it was 40% or less — the actual answer is over 80% (and rising). (Not to pick on Brits — I doubt most Westerners would have done any better.)

He concludes with a discussion on energy: As billions are lifted out of poverty by improvements in health, education, and infrastructure, as is happening and seems likely to continue, their energy use goes up dramatically. Think about the stratas we discussed above: Bicycles to a car to airplanes to private jets. As hundreds of millions look to improve their lot, and are now able to do so, human power is replaced by machine power, which takes great amounts of energy. With 80% of it currently coming from fossil fuels, what will we do?

Rosling doesn't really provide an answer and we too must quitclaim this problem, but simply admonishing Westerners to “chill out with your energy use” is probably not going to be effective. We'll probably have to solve it with great engineering — and, in some, ways, we already are.

***

Returning to the question of population growth and limits, it's hard to say where we'll end up with all this. Hard to say. Technology will have to solve many of the largest problems: Energy, emissions, water, and food. Not to mention the survival of the species we co-habitate with. Cheap solar energy will go a long way towards alleviating some strains. (Hurry up, Elon!)

But in the end, it's a subject worth spending some time learning about. We can't think about the problems unless we understand their parameters, or as some smart wag once said: “A problem well-defined is half-solved.” 

Life Changing Books (New Guy Edition)

Back in 2013, I posted the Books that Changed my Life. In doing so, I was responding to a reader request to post up the books that “literally changed my life.”

Now that we have Jeff on board, I've asked him to do the same. Here are his choices, presented in a somewhat chronological order. As always, these lists leave off a lot of important books in the name of brevity.

Rich Dad, Poor Dad – Robert Kiyosaki

Before I get hanged for apostasy, let me explain. The list is about books that changed my life and this one absolutely did. I pulled this off my father's shelf and read it in high school, and it kicked off a lifelong interest in investments, business, and the magic of compound interest. That eventually led me to find Warren Buffett and Charlie Munger, affecting the path of my life considerably. With that said, I would probably not recommend you start here. I haven't re-read the book since high school and what I've learned about Kiyosaki doesn't make me want to recommend anything to you from him. But for better or worse, this book had an impact. Another one that probably holds up better is The Millionaire Next Door, which my father recommended when I was in high school and stuck with me for a long time too.

Buffett: Making of an American Capitalist/Buffett's Letters to Shareholders – Roger Lowenstein, Warren Buffett

These two and the next book are duplicates off Shane's list, but they are also probably the reason we know each other. Learning about Warren Buffett took the kid who liked “Rich Dad, Poor Dad” and watched The Apprentice, and might have been on a path to highly leveraged real estate speculation and who knows what else, and put him on a more sound path. I read this biography many times in college, and decided I wanted to emulate some of Buffett's qualities. (I actually now prefer The Snowball, by Alice Schroeder, but Lowenstein's came first and changed my life more.) Although I have a business degree, I learned a lot more from reading and applying the collected Letters to Shareholders.

Poor Charlie's Almanack – Peter Kaufman, Charlie Munger et al.

The Almanack is the greatest book I have ever read, and I knew it from the first time I read it. As Charlie says in the book, there is no going back from the multi-disciplinary approach. It would feel like cutting off your hands. I re-read this book every year in whole or in part, and so far, 8 years on, I haven't failed to pick up a meaningful new insight. Like any great book, it grows as you grow. I like to think I understand about 40% of it on a deep level now, and I hope to add a few percent every year. I literally cannot conceive of a world in which I didn't read this.

The Nurture Assumption – Judith Rich Harris

This book affected my thinking considerably. I noticed in the Almanack that Munger recommended this book and another, No Two Alike, towards the end. Once I read it, I could see why. It is a monument to clear and careful thinking. Munger calls the author Judith Rich Harris a combination of Darwin and Sherlock Holmes, and he's right. If this book doesn't change how you think about parenting, social development, peer pressure, education, and a number of other topics, then re-read it.

Filters Against Folly/Living within Limits – Garrett Hardin

Like The Nurture Assumption, these two books are brilliantly well thought-through. Pillars of careful thought. It wasn't until years after I read them that I realized Garrett Hardin was friends with, and in fact funded by, Charlie Munger. The ideas about overpopulation in Living within Limits made a deep impression on me, but the quality of thought in general hit me the hardest. Like the Almanack, it made me want to become a better and more careful thinker.

The Black Swan – Nassim Taleb

Who has read this and not been affected by it? Like many, Nassim's books changed how I think about the world. The ideas from The Black Swan and Fooled by Randomness about the narrative fallacy and the ludic fallacy cannot be forgotten, as well as the central idea of the book itself that rare events are not predictable and yet dominate our landscape. Also, Nassim's writing style made me realize deep, practical writing didn't have to be dry and sanitized. Like him or not, he wears his soul on his sleeve.

Good Calories, Bad Calories / Why We Get Fat: And What to do About it – Gary Taubes

I've been interested in nutrition since I was young, and these books made me realize most of what I knew was not very accurate. Gary Taubes is a scientific journalist of the highest order. Like Hardin, Munger, and Harris, he thinks much more carefully than most of his peers. Nutrition is a field that is still sort of growing up, and the quality of the research and thought shows it. Taubes made me recognize that nutrition can be a real science if it's done more carefully, more Feynman-like. Hopefully his NuSi initiative will help shove the field in the right direction.

The (Honest) Truth about Dishonesty – Dan Ariely

This book by Ariely was a game-changer in that it helped me realize the extent to which we rationalize our behavior in a million little ways. I had a lot of nights thinking about my own propensity for dishonesty and cheating after I read this one, and I like to think I'm a pretty moral person to start with. I had never considered how situational dishonesty was, but now that I do, I see it constantly in myself and others. There are also good sections on incentive-caused bias and social pressure that made an impact.

Sapiens – Yuval Noah Harrari

This is fairly new so I'm still digesting this book, and I have a feeling it will take many years. But Sapiens has a lot of (for me) deep insights about humanity and how we got here. I think Yuval is a very good thinker and an excellent writer. A lot of the ideas in this book will set some people off, and not in a good way. But that doesn't mean they're not correct. Highly recommended if you're open-minded and want to learn.

***

At the end of the day, what gets me excited is my Antilibrary, all the books I have on my shelf or on my Amazon wish list that I haven't read yet. The prospect of reading another great book that changes my life like these books did is an exciting quest.

Garrett Hardin on the Three Filters Needed to Think About Problems

One of the best parts of Garrett Hardin‘s wonderful Filters Against Folly is when he explores the three filters that help us interpret reality. No matter how much we'd like it to, the world does not only operate in our circle of competence. Thus we must learn ways to distinguish reality in areas where we lack even so much as a map.

Hardin's genius reminds us of this quote by Sports Illustrated's Andy Benoit.

Andy Benoit

Mental Tools

We need not be a genius in every area but we should understand the big ideas of most disciplines and try to avoid fooling ourselves. That's the core to the mental models approach. When you're not an expert in a field, often the best approach is one that avoids stupidity. There are few better ways of avoiding stupidity than understanding how the world works.

Hardin begins by outlining his goal: to understand reality and understand human nature as it really is, removing premature judgment from the analysis.

He appropriately quotes Spinoza, who laid out his principles for political science thusly:

That I might investigate the subject matter of this science with the same freedom of spirit we generally use in mathematics, I have labored carefully not to mock, lament, or execrate human actions, but to understand them; and to this end I have looked upon passions such as love, hatred, anger, envy, ambition, pity, and other perturbations of the mind, not in the light of vices of human nature, but as properties just as pertinent to it as are heat, cold, storm, thunder, and the like to the nature of the atmosphere.

The goal of these mental filters, then, is to understand reality by improving our ability to judge the statements of experts, promoters, and persuaders of all kinds. As the saying goes, we are all laymen in some field.

Hardin writes:

What follows is one man's attempt to show that there is more wisdom among the laity than is generally concluded, and that there are some rather simple methods of checking on the validity of the statements of experts.

Three Filters Needed to Think About Problems

Literate Filter

The first filter through which we must interpret reality, says Hardin, is the literate filter: What do the words really mean? The key to remember is that Language is action. Language is not just a way to communicate or interpret; language acts as a call to, or just as importantly, an inhibitor to action.

The first step is to try to understand what is really being said. What do the words and the labels actually mean? If a politician proposes a “Poverty Assistance Plan,” that sounds almost inarguably good, no? Many a pork-barrel program has passed based on such labels alone.

But when you examine the rhetoric, you must ask what those words are trying to do: Promote understanding, or inhibit it? If the program had a rational method of assistance to the deserving poor, the label might be appropriate. If it was simply a way to reward undeserving people in his or her district for their vote, the label might be simply a way to fool. The literate filter asks if we understand the true intent behind the words.

In a chapter called “The Sins of the Literate,” Hardin discusses the misuse of language by examining literate, but innumerate, concepts like “indefinite” or “infinite”:

He who introduces the words “infinity” or any of its derivatives (“forever” or “never” for instance) is also trying to escape discussion. Unfortunately he does not honestly admit the operational meaning of the high-flown language used to close off discussion. “Non-negotiable” is a dated term, no longer in common use, but “infinity” endures forever.

Like old man Proteus of Greek mythology, the wish to escape debate disguises itself under a multitude of verbal forms: infinity, non-negotiable, never, forever, irresistible, immovable, indubitable, and the recent variant “not meaningfully finite.” All these words have the effect of moving discussion out of the numerate realm, where it belongs, and into a wasteland of pure literacy, where counting and measuring are repudiated.

Later, in the final chapter, Hardin repeats:

The talent for handling words is called “eloquence.” Talent is always desirable, but the talent may have an unfair, even dangerous, advantage over those with less talent. More than a century ago Ralph Waldo Emerson said, “The curse of this country is eloquent men.” The curse can be minimized by using words themselves to point out the danger of words. One of their functions is to act as inhibitors of thought. People need to be made allergic to such thought-stoppers as infinity, sacred, and absolute. The real world is a world of quantified entities: “infinity” and its like are no words for quantities but utterances used to divert attention from quantities and limits.

It is not just innumerate exaggeration we are guarding against, but the literate tendency to replace actors with abstractions, as Hardin calls it. He uses the example of donating money to a poor country (Country X), which on its face sounds noble:

Country X, which is an abstraction, cannot act. Those who act in its name are rich and powerful people. Human nature being what it is, we can be sure that these people will not voluntarily do anything to diminish either their power or their riches…

Not uncommonly, the major part of large quantities of food sent in haste to a poor country in the tropics rot on the docks or is eaten up by rats before it can be moved to the people who need it. The wastage is seldom adequately reported back to the sending country…(remember), those who gain personally from the shipping of food to poor nations gain whether fungi, rats, or people eat the food.

The Numerate Filter

Hardin is clear on his approach to numerical fluency: The ability to count, weigh, and compare values in a general or specific way is essential to understanding the claims of experts or assessing any problem rationally:

The numerate temperament is one that habitually looks for approximate dimensions, ratios, proportions, and rates of change in trying to grasp what is going on in the wold. Given effective education–a rare commodity, of course–a numerate orientation is probably within the reach of most people.

Just as “literacy” is used here to mean more than merely reading and writing, so also will “numeracy” be used to mean more than measuring and counting. Examination of the origins of the sciences shows that many major discoveries were made with very little measuring and counting. The attitude science requires of its practitioners is respect, bordering on reverence, for ration, proportions, and rates of change.

Rough and ready back-of-the-envelope calculations are often sufficient to reveal the outline of a new and important scientific discovery….In truth, the essence of many of the major insights of science can be grasped with no more than child's ability to measure, count, and calculate.

***

To explain the use of the literate and numerate filters together, Hardin uses the example of the Delaney Amendment, passed in 1958 to restrict food additives. This example should be familiar to us today:

Concerned with the growing evidence that many otherwise useful substances can cause cancer, Congress degreed that henceforth, whenever a chemical at any concentration was found to cause cancer–in any fraction of any species of animal–that substance must be totally banned as an additive to human food.

From a literate standpoint, this sounds logical. The Amendment sought to eradicate harmful food additives that the free market had allowed to surface. However, says Hardin:

The Delaney Amendment is a monument to innumerate thought. “Safe” and “unsafe” are literate distinctions; nature is numerate. Everything is dangerous at some level. Even molecular oxygen, essential to human life, becomes lethal as the concentration approaches 100 percent.

Sensitivity is ordinarily expressed as “1 part per X,” where X is a large number. If a substance probably increases the incidence of cancer at a concentration of 1 part per 10,000, one should probably ban it at that concentration in food, and perhaps at 1 in 100,000. But what about 1 part per million?…In theory there is no final limit to sensitivity. What about 1 milligram per tank car? Or 1 milligram per terrestrial globe?

Obviously, some numerical limits must be applied. This is the usefulness of the numerate filter. As Charlie Munger says, “Quantify, always quantify.”

Ecolacy

Hardin introduces his final filter by requiring that we ask the question “And then what?”  There is perhaps no better question to prompt second-order thinking.

Even if we understand what is truly being said and have quantified the effects of a proposed policy or solution, it is imperative that we consider the second layer of effects or beyond. Hardin recognizes that this opens the door for potentially unlimited paralysis (the poorly understood and innumerate “Butterfly Effect”), which he boxes in by introducing his own version of the First Law of Ecology:

We can never merely do one thing.

This is to say, all proposed solutions and interventions will have a multitude of effects, and we must try our best to consider them in their totality.

In proposing this filter, Hardin is very careful to guard against the Slippery Slope argument, or the idea that one step in the wrong direction will lead us directly to Hell. This, he says, is a purely literate but wholly innumerate approach to thinking.

Those who take the wedge (Slippery Slope) argument with the utmost seriousness act as though they think human beings are completely devoid of practical judgment. Countless examples from everyday life show the pessimists are wrong…If we took the wedge argument seriously, we would pass a law forbidding all vehicles to travel at any speed greater than zero. That would be an easy way out of the moral problem. But we pass no such law.

In reality, the ecolate filter helps us understand the layers of unintended consequences. Take inflation:

The consequences of hyperinflation beautifully illustrate the meaning of the First Law of Ecology. A government that is unwilling or unable to stop the escalation of inflation does more than merely change the price of things; it turns loose a cascade of consequences the effects of which reach far into the future.

Prudent citizens who have saved their money in bank accounts and government bonds are ruined. In times of inflation people spend wildly with little care for value, because the choice and price of an object are less important than that one put his money into material things. Fatalism takes over as society sinks down into a culture of poverty….

To Conclude

In the end, the filters must be used wisely together. They are ways to understand reality, and cannot be divorced from one another. Hardin's general approach to thinking sums up much like his multi-disciplinary friend Munger's:

No single filter is sufficient for reaching a reliable decision, so invidious comparisons between the three is not called for. The well-educated person uses all of them.

Check out our prior posts about Filters Against Folly:

The Effect of Scale in Social Science, or Why Utopia Doesn’t Work

Scale in Social Science

The Math Behind Scale

In one of the more remarkable chapters of a remarkable book, Filters Against Folly, author Garrett Hardin discusses the effect of scale on values.

He opens with an interplay of biology and mathematics to answer a simple question: Why couldn't a mouse be the size of an elephant?

The weight of an animal goes up as the cube of its linear dimensions, whereas the strength of its supporting limbs goes up only as the square…

Suppose we compare two identically shaped animals. Animal A is 3 units long (never mind what the units are), while animal B is 6 units long. How do their weights compare?

Weight of A = 3 cubed = 3 x 3 x 3 = 27

Weight of B = 6 cubed = 6 x 6 x 6 = 216

We can see that 216 is 8 times as great as 27; though animal B is only 2 times as long as animal A, it is 8 times as heavy. (Note that 2 cubed is 8.) As for the strengths of their legs:

Strength in A = 3 squared = 3 x 3 = 9

Strength in B = 6 squared = 6 x 6 = 36

So B's legs can bear only 4 times as much weight as A's legs. But B is 8 times as heavy, so B's legs are only half as strong as they need to be (4 divided by 8)…If the material of which the legs are composed is the same, then the cross-sectional area of the leg has to be doubled. The leg has to be thicker.

Hardin concludes:

If mice evolved to be as big as elephants, their silhouette would be that of elephants…thus does simple mathematics prove the point that a mouse cannot be as big as an elephant.

The point isn't that hard to grasp with some basic numerical fluency; physical law dictates that scale matters in all things.

Hardin wisely points out that once we've done the computation once, all that we really need to hang in our brain is the basic idea. We don't need to re-run the numbers every time we think of the scale effect in order to recall the point.

This reminds us of Charlie Munger's thought on statistics and practical usage:

But I know what a Gaussian or normal distribution looks like and I know that events and huge aspects of reality end up distributed that way. So I can do a rough calculation…but if you ask me to work out something involving a Gaussian distribution to ten decimal points, I can't sit down and do the math. I'm like a poker player who's learned to play pretty well without mastering Pascal.

We need to be numerate, but frequently, the precise calculation is not necessary. In many large areas of life, only knowing the rough calculation is plenty good enough.

Scale in Social Science

From there, Hardin goes on to point out that while physical science integrated scale long ago, social science has been quick to ignore its dictates.

What works at a small scale (say, a Utopian community), loses its effectiveness as it scales. Everything has a breakpoint.

The reason communism or utopianism can work at small scale is because of the tight knit nature of a small group. Think of your family dinner table: Do you need to trade chits to decide who gets to eat how much, or do you need some grand overseer to dole out the potatoes? No. You all simply take what you need for the meal, and make sure everyone has enough. Think of the shameful admonitions if you over-eat and leave another family member hungry.

The problem is that the concept doesn't scale. Let's run an example.

‘Lost' as an Economics Lesson

Four people in a small boat land on a deserted island, and decide to split the labor and duties needed to survive. Bill does the hunting, Mary builds the shelter, Steve cleans the clothes, and Susan takes care of the fire. They all share in each other's labors: Mary gets to eat what Bill killed and Bill gets to sleep in the shelter built by Mary. By and large, this is a workable system. To each according to his need, from each according to his ability – a concept we recognize as Marxism.

If Bill does not go hunting one afternoon, all four of them go hungry. Not only that, but Mary, Susan and Steve won't be happy about that outcome. The hunger and shame placed on Bill will, generally, get him back on task the following day. And what if Susan decides to eat more than her fair share one night? The other three would not look kindly upon that, and Susan is likely to have to pull back on her eating.

There is no need for a management consultant to use motivational tactics to push Bill or punish Susan – the community works fine without it. And the four of them don't need to use any sophisticated methods of trade either: Bill doesn't need to sell his food to Susan in exchange for a night beside the fire. Such a system would be extremely inefficient among four people bound by tragedy and circumstance. And so the islanders live in relative peace.

After a few months, a cruise liner crashes nearby and four hundred people swarm on to the island. The original four, remembering how well their system worked, start assigning tasks: 40 people on hunting duty, 30 people tending to 8 different fires, 10 people on laundry crew, and so on. Assuming things will be the same, they set up the same “shared economy” system – take what you need, give what you can. We're all good folk here.

Within a few weeks, the islanders notice that food is short and the clothes are taking weeks to get cleaned. One by one, the new cruise-liner folks are not holding their own, and they aren't following the rules. The logic of the cheater is simple: If we've got enough food for 400, what's the problem if I take a little extra? I'm really hungry today, and tomorrow I'll eat a little less. Besides, Steve could stand to lose a few pounds and I'm malnourished. My need is greater. (Steve might not agree.)

Seeing one bad apple take more food than he or she deserves, the other islanders get a little jealous. If he's going to take extra, why shouldn't I? It's only fair, after all. In no time, in-fighting begins and the island begins to schism.

The islanders decided to solve the problem with organization and oversight. The original four islanders form a Board of Overseers, doling out the food and the work duties with strong oversight and punishment as needed. As time goes on, the laundry folks decide they are working a lot harder than anyone else, and decide they won't clean another pair of underwear for free. They being to trade their services for an equivalent amount of food, shelter, and fire. In turn, the hunters, the fire-builders, and the architects follow their lead.

What Happened?

By necessity, a utopian communist system is replaced by a combination of socialism and market-based capitalism. The problem is that the system of communist distribution which worked for a tight-knit group of 4 people did not scale to 400. Each person, less visible to the group and less caring about others they rarely interacted with, decided in turn to cheat the system just a bit, and only when “needed.” Their cheating had a small individual effect initially, so it went unnoticed. But the follow-on effect to individual cheating is group cheating, and the utopian goal of To each according to his need, from each according to his ability had the effect of expanding everyone's needs and shrinking their ability, aided by envy and reciprocation effects. Human nature at work.

The problem with ignoring scale in social science, in Hardin's view, is that it doesn't work.

In an uncrowded world like the one our ancestors enjoyed in Pioneer America, a communistic arrangement may be satisfactory. Fruit taken from common-property trees present in excess, or game animals harvested from vast wild herds, do not demonstrably diminish the resources available next year. Communizing a cost of zero hurts no one. Similarly, wastes may be thrown away into vast areas without harming other people, so long as the metabolic powers of uncrowded nature are more than sufficient to recycle the elements.

But the poltico-economic system that works well on the frontier breaks down miserably in a world as crowded as ours. Unfortunately, long after the reality has vanished, the dream of an uncrowded world endures, often romantically glorified.

In a trivially abstract sense, would-be modern cowboys may have a good idea, but the scale is wrong. The judgment of “good” must be tied to scale

Check out Filters Against Folly for more brilliance.

Garrett Hardin: The Other Side of Expertise


From Garrett Hardin's mind-blowingly awesome Filters Against Folly.

In our highly technological society we cannot do without experts. We accept this fact of life, but not without anxiety. There is much truth in the definition of the specialist as someone who “knows more and more about less and less.” But there is another side to the coin of expertise. A really great idea in science often has its birth as apparently no more than a particular answer to a narrow question; it is only later that it turns out that the ramifications of the answer reach out into the most surprising corners. What begins as knowledge about very little turns out to be wisdom about a great deal.

So it was with the development of the theory of probability. It all began in the seventeenth century, when one of the minor French nobility asked the philosopher-scientist Blaise Pascal to devise a fair way to divide the stakes in an interrupted gambling game. Pascal consulted with lawyer-mathematician friend Pierre de Fermat, and the two of them quickly laid the foundation of probability theory. Out of a trivial question about gambling came profound insights that later bore splendid fruit in physics and biology, in the verification of the causes of disease, the calculation of fair insurance premiums, and the achievement of quality control in manufacturing processes. And much more.

The service of experts is indispensable even if we are poor at ascertaining under which circumstances they add value, when they add noise, and when they are harmful. Hardin cautions that each new expertise introduces “new possibilities of error.”

“It is unfortunately true that experts are generally better at seeing their particular kinds of trees than the forest of all life.”

— Garrett Hardin

Thoughtful laymen — that's us — can, however, “become very good at seeing the forest, particularly if they lose their timidity about challenging the experts. … In the universal role of laymen we all have to learn to filter the essential meaning out of the too verbose, too aggressively technical statements of the experts. Fortunately this is not as difficult a task as some experts would have us believe.”

Filters Against Folly is Hardin's attempt “to show there …. (are) some rather simple methods of checking the validity of the statements of experts.”

12