This is a case of the market value vs. book value dilemna. Things are worth more to you than what you paid for them, otherwise you wouldn’t have decided to buy. Tax rebates buy behavior which is presumably more valuable to the government than the tax income lost, but under simple analysis is valued at the tax income lost.

Of course, when the tax-avoiding behavior is not the anticipated kind, then it is called a loophole. If you believe that regulators will never outsmart corporate tax lawyers, you should be arguing for a simplification of the tax code.

Similarly, imagine an economy with four people in it – a baker, a shoemaker, a farmer and a blacksmith. The four people sell each other goods at prices that result in no savings or loans. Now imagine another world, except it only has 3 people, and the shoemaker and the blacksmith are now the same person – i.e. the shoemaker/blacksmith makes in total the same things as the two people in the first world, and consumes in total the same amount as the two people in the first world. This second situation does not change the standard of living of the baker and the farmer at all, but assuming equal incomes in the first world, income inequality is higher in the second world.

If I am the farmer, should I care that I live in the second world instead of the first?

wikipedia

Another article, like the one about Japanese engineers, where worrying is done about competing with well-paying finance and consulting jobs. Instead of engineers, the sector of focus here is public service.

But for many Harvard seniors, corporate work represents security. “It’s scary not knowing what you’re going to do,” said Chen Xie, who is joining McKinsey. “A lot of people think, ‘Here’s a plan, let’s just do the safe thing.’ ”

I think young people underestimate the risk that they are capable of withstanding, and at the same time also underestimate the risks that they are taking, so the two generally cancel out. The desire for expression, coupled with a low level of risk adversity, drives investment in uniqueness, which pays off pretty well for society as a whole since diversity has all sorts of positive externalities.

But ultimately those benefits ARE externalities, so even though an activity is productive and “meaningful”, its benefit is not fully captured by the individual. Such channels then get shut down when people do better accounting. Society loses diversity, gets closer to monoculture and as a whole becomes more fragile.

Or does it? Higher education is subversive, in that you rarely get what you are asking for. In that sense, people usually do the right thing for the wrong reasons. In this case, the scenario above says they are doing perhaps a less correct thing, but for the right reason! As far as honesty in advertising goes, cash promises are much more testable and more reliable than vague pictures of “making an impact” and “contributing to humanity”. Those other things almost always require a paternalistic attitude, or faith in some untestable belief system about how the world works. I say it’s the prevalence of beliefs uncoupled with empirical reality that make the world a fragile place.

article

The intention of Long Bets is to encourage responsibility in prediction-making (by keeping a public roster of predictions), to encourage long-term thinking (by offering an opportunity to shape a long-term bet), and to sharpen the logic of forecasting (by recording the logic of predictions and bets.)

…

Buffett’s bet is an ideal Long Bet. It makes a huge difference to anyone who invests in stocks (as do a large percentage of the US, either directly or indirectly) whether a boring index fund yields as much as fancy private hedge funds. The answer either way would be a huge influential signal. When economist Julian Simon won the famous bet against biologist Paul Ehrlich (Simon betting that the long-term prices of commodity minerals would decrease over ten years; Ehrlich betting they would increase), his win essentially eradicated the argument of resource scarcity from the environmental debate. Environmentalists then shifted their concern to the many other issues needed to foster a healthy environment.

Wikipedia has an interesting article on that last wager mentioned, including analysis on why Ehrlich lost. The main gist of the analysis is that the bet was in economic terms and scarcity leads to price changes only indirectly. There is no question that resources become scarce, but we really sit on deep pools of long-term elasticity, where any long term increase in price pressure pulls miracles out of the pool. For example, public discussion about oil scarcity today is phrased in strange terms – people generally do not mention the vast amounts of more expensive oil which remain untapped, and “oil running out” actually means “oil at today’s prices running out”.

A biologist positing a theory which violates a law of physics is just plain wrong, because the rules of physics exist at a higher level of rigor. Granted this is a rare situation, because biological phenomena are usually too hard to capture in physics terminology, but when it does happen the victor is certain.

The followup: just how fundamental is economics? Sure, it may be based on expired physics concepts, and sometimes takes its assumptions way too seriously, but when compared to most populist ideas like “eating less meat because it is better for the environment”, if conflicts between the two arise, I’d lean heavily towards the economics approach. In this case, I will agree with efforts to price in the externalities of meat, but not be willing to take individual action otherwise since I really enjoy eating meat and highly doubt that it is so bad for the environment that abstaining would be profitable overall.

HT: MR

Not true! Because of trade. We live so well today because we trade. No growth = no efficiency improvement = eventually nothing to trade as others outcompete you. For no growth to mean a constant standard of living, you need to be isolationist as well!

Note that this applies to both countries and individuals.

A mathematician, a physicist, and an engineer are riding a train through Scotland.

The engineer looks out the window, sees a black sheep, and exclaims, “Hey! The sheep in Scotland are black!”

The physicist looks out the window and corrects the engineer, “Strictly speaking, all we know is that there’s at least one black sheep in Scotland.”

The mathematician looks out the window and corrects the physicist, ” Strictly speaking, all we know is that is that at least one side of one sheep is black in Scotland.”

Why should you care about rigor? Two reasons:

• There are many people who find rigorous arguments more convincing. If you learn to construct rigorous-looking arguments you will be able to more effectively convince such people.
• Groups of people who share conventions of rigor have more effective ways of disagreeing and arriving at truth through discussion.

So, what is rigor? wikipedia:

An attempted short definition of intellectual rigour might be that no suspicion of double standard be allowed: uniform principles should be applied. This is a test of consistency, over cases, and to individuals or institutions (including the speaker, the speaker’s country and so on).

This means that arguments should be explicit about when and where they are valid. In the opening, the mathematician, physicist and engineer arrived at different conclusions because they started from different premises. The engineer had assumed that the observed sheep was representative of all sheep in Scotland, and the physicist had assumed that each sheep can have only one color.

Explicit assumptions are useful because they allow the quality of your logic to be evaluated separately from the soundness of your premises / assumptions. It allows people to divide up the task of understanding the world, because then ideas can be connected to each other. For example, If I prove that “A implies B” and you prove that “B implies C”, then if from experiments we find that “A is true”, we can infer that C is true. If, however, we find that the “A implies B” proof is wrong, we can still hang on to the “B implies C” piece until we find some other way of proving or measuring “B is true”.

Despite this great benefit, however, people do not usually make all assumptions explicit – there are simply too many assumptions to exhaust explicitly. This being the case, the communication of rigorous arguments requires an understanding exist between speaker and listener, in the form of a body of common assumptions. In the presence of such a convention, only assumptions new or contrary to the convention need to be stated explicitly.

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A rigorous argument is composed of three types of statements – premises, logic and conclusions. When conclusions are wrong, either the premises or the logic is wrong. If conclusions are observed to be wrong and yet both logic and premises are correct, people get thrown into a panic. This is because it means that one of the unstated, implicit assumptions must be wrong. Erroneous implicit assumptions are troublesome because you don’t know where else they could pop up.

The ideal rigorous argument only has explicit assumptions. This is an unattainable ideal, because in reality it is impossible to state all assumptions. The ways in which this shortcoming is overcome are complex indeed. wikipedia:

A variety of 20th century movements, including liberalism and neo-classicism, traced their intellectual heritage back to the Enlightenment, and away from the purported emotionalism of the 19th century. Geometric order, rigor and reductionism were seen as Enlightenment virtues. The modern movement points to reductionism and rationality as crucial aspects of Enlightenment thinking, of which it is the heir, as opposed to irrationality and emotionalism. In this view, the Enlightenment represents the basis for modern ideas of liberalism against superstition and intolerance.

Reductionism, liberalism and tolerance of diversity all help to manage the body of implicit assumptions. It is ultimately these attitudes that make the ideal of rigor practical as a guiding principle in reality.

It was engineering prowess that lifted this nation from postwar defeat to economic superpower. But according to educators, executives and young Japanese themselves, the young here are behaving more like Americans: choosing better-paying fields like finance and medicine, or more purely creative careers, like the arts, rather than following their salaryman fathers into the unglamorous world of manufacturing.

What I don’t understand is how following economic incentives can make a nation’s economy weaker. Are the economic signals wrong, or are the investors (the students) ignorant? Absent evidence so, the flight from science and engineering could be an efficient reallocation. Heck, I’m one of those who are leaving.

The only other possibility that comes to mind is that benefits from science education are a public good – benefits from having such an education exist, but are enjoyed by society overall and cannot be efficiently captured by the individual.

HT: Xinhong

Richard Florida quotes Scott Page (The Difference) on the causes of innovation (paraphrased by me):

If you want to know where innovation comes from, you have to understand cognitive diversity – cognitive diversity is critical for innovation. And an easy route to cognitive diversity is through demographic diversity – diversity in ethnicity, nationality, place of birth, gender, sexual orientation, age groups. Benefits from such result in the clustering force.

Most of the people I know who criticize the paternalistic policies of modern Asian nations are bent on replacing that paternalism with another paternalism of their own design. Pluralism requires a bigger cognitive jump, I think.

At 53:30, Florida explicitly mentions the missing element in trying to create Silicon Valleys by combining universities and venture capital – you are still missing the tolerance for diversity, which is left out because of its subversive potential.

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Diversity is not all good, however – according to Robert Putnam (KSG), there is evidence that diverse neighborhoods exhibit more social isolation. That study is consistent with “Who’s Your City” in determining a positive correlation between diversity and creativity/economics, but finds that social trust is lowered by diversity.

People lie about luck with each other. People have personal convictions about what they/others deserved or not, causal reality as they see it. Those convictions are often impossible to communicate, because of how large the assumption base is. Yet we operate, because we do not start ab initio when thinking about things. When we do use logic, it is often done in an incremental, as opposed to the minimalist, manner. This is in stark constrast to the emphasis in formal education, where the right way is in general minimalist. The minimalist approach emphasizes objectivity and independence of components, and advocates that little things be made of big things. For the minimalist, the prime problems are those of rule discovery and complex deduction. As evidenced by all the researchers with low pay, these problems are not very susceptible to the parallelization algorithm we call money.

What do I mean by incremental logic? I mean the comparative approach that should be used when dealing with large complex systems. As an actor in a larger problem solver, it is sufficient impetus for action that one knows the action will improve the knowledge base, and to the extent a complete analysis can be avoided, it should be.

I’ve seen doors quite a few times in my life. Certain doors, especially the ones without locks, I pass through often, and almost forget about. There is a second type of forgotten door, the ones that I wish did not exist. These latter doors have their destination painted on in huge bold letters, always in the same font. Below the huge letters of that font, in very tiny print, is the warning:

“entrance only. return impossible.”