I won’t be posting for the next little while because I’m working on revamping the mechanics of my site. I should be back to regular posting in a week or two.

Simplified the problem away.

I was attempting to drive out all the uncertainty and ambiguity in real economics. With all the ambiguity gone, what’s left is only a dry abstract framework. How the framework is specified determines its behavior. Boring.

Human limits are perhaps helpful.

I’m starting to think that our lack of rationality may actually have some benefits. If everyone knows everything and can change their behavior on a dime, odd things can happen. I think that part of what keeps real world economies functioning is inertia. People do what they did yesterday most of the time. A shock to the economy doesn’t cause huge reactions because most people don’t notice the shock straight away.

Even simple markets have problems

I can’t figure out how a stable exchange price for apple pies and ingredients could be established in Apple Pie World.

Suppose that it takes two farmers to produce the ingredients that one baker is able to use making pies working full time. It makes sense that 2/3 of the population should be farmers, 1/3 should be bakers. The bakers should give 2/3 of their pies to the farmers for the ingredients keeping the final third for themselves.

This is the full employment situation we would want. Bakers and farmers get the same number of apple pies so there is no incentive to switch professions.

The trouble is I can’t think of a good mechanism to get to this equilibrium if the number of bakers and farmers is not properly balanced. At least I can’t think of a good mechanism without adding complexity to the model.

Too many farmers

If there are too many farmers at a given point in time, there are going to be ingredients that can’t be used. Some farmer isn’t going to be able to trade his crops for apple pies. Which farmer will it be? The farmers will trip over each other lowering their price trying to make sure they aren’t left without their coveted apple pie. Even a small surplus of farmers would drive the price of the ingredients (in pies) very low.

The same problem would happen to bakers if there were too many bakers.

Stampedes

The result of crazy price swings would be stampedes back and forth creating surpluses and then deficits of farmers. The situation is inherently unstable.

Optimization

Decision making in my simplified apple pie world reduces to optimization. The goal is to get as many apple pies as possible. When faced with any decision, all you have to ask yourself is “will this help me get more pies?”

Some uncertainty

I’m still going to allow for uncertainty in my apple pie world. While you know that apple pie is the goal, you may not know for sure how best to get them. Having said that, the apple pie world isn’t that complicated; there are only farmers and bakers after all. Neither of these professions are especially complex.

Choosing a career

All you have to do is determine if you have a special talent for either farming or baking. If you are better at one than the other, you will likely do better choosing to work to your strength. If you don’t have an advantage in one profession or the other, you would likely decide your profession based on small price fluctuations. If you guess well, you might end up a little better off.

That’s it folks

Other than picking a profession I’m going to assume that there isn’t much more to be thought about. Your aptitude determines your productivity. There isn’t much room for innovation because farming and pie making are old  mature professions.

To understand the promise of market economies, let’s imagine a world where people can be rational. In a world where people can behave rationally, markets should be able to efficiently get the job of organizing and distributing production done. Instead of imagining a world where people are a lot smarter, let’s focus on a world that is much simpler. By seeing what market economies can deliver, we might be better able to see how they are failing us today.

One simple goal

To be rational, you have to have a clear goal. Part of what makes being human tough is that we don’t have a clear idea of what it is that we need to be happy. In my simple world, let’s assume that the only thing people need to be happy is apple pie. The more apple pie you have, the happier you are. Everything else in the world is meaningless.

Farmers and bakers

If an individual could efficiently do everything that is needed to produce an apple pie, there would be no need for economics. People could just go their separate ways, making as many apple pies as they could. In my rational world, there is a problem. People are more efficient if they focus their effort on one part of pie making. People either focus on growing the raw materials for pies or converting the raw materials into pies. That is, people are either farmers or bakers.

No, the math doesn’t come next.

To people who have studied economics, this probably sounds like the lead up to a mathematical model. That’s not where I want to take this. Instead, over the next several posts, I’m going to explore this simple world. I’m going to describe how the economy works in words. Then I am going to try to imagine what it would be like to live in such a world. I’m not sure exactly where this will lead. However, my hope is that we will learn something about the shortcomings of real-world market economies by comparing them to an ideal situation.

I’m also going to try using a lot more headings. The idea is to make my posts easy to skim read. This will hopefully make it easier for people to quickly get the gist of a post so that they can decide if they want to read it more carefully. I’m doing this because I have found that I like posts where the main points are highlighted.

The way we think about our friends and family is very different from how we think about strangers. People close to us affect us emotionally in ways that strangers cannot. If you hear about a fatal car accident on the highway on the news, you give it hardly a second thought. If your spouse is late coming home, you can work yourself into a tizzy of worry even though nothing has happened.

While it is rational to be more concerned about how people you interact with and rely on are doing, there seems to be an emotional component that is irrational. Journalists take advantage of this irrationality. They give details of the tragedies they uncover to try to draw people into the story. A death on a highway is forgettable. The death of a young driver who has recently beaten cancer and was moving his things from Toronto to his first year dorm at McGill after beating the odds draws us in.

Do we not care about other people simply because we don’t have the time to learn the details of their lives?

Every stranger could be a friend.

When you hear of a tragedy, imagine that you had met the people involved a year earlier. Imagine building a friendship up over weeks and months. Imagine how the tragedy would affect you if you knew them well. It is harder to ignore the plight of other people when you realize that they are not that different from the people you do care about.

Getting to know people takes time

I think the lack of caring about strangers in large communities is simply the result of how long it takes to get to know people. If the detail of the lives of all the people in your community could somehow be instantly implanted in your head, I believe you would care much more about what happens to people you don’t interact with.

How much should we care about strangers?

I don’t know if it would be better if we cared more about people we don’t know that well. What is clear, though, is that the size of the circle of people we do care about is determined by how quickly we can form meaningful relationships.

Maslow’s hierarchy of needs is a theory of human motivation that has 5 levels of human needs. The levels are

1. Physiological – Breathing, Food, Sex.
2. Safety – Personal security, Financial Security, Health.
3. Love / Belonging – Friendship, Intimacy, Community.
4. Esteem – Self esteem, Confidence, Respect.
5. Self Actualization – Morality, Creativity, Spontaneity.

Maslow’s idea was that a person has to satisfy the lower levels in the hierarchy before moving to higher levels. In simple terms, a starving man doesn’t have time or energy to worry much about morality.

While Maslow’s theory has its critics, I think it has good insight into what motivates people.

Economics

If it makes sense for a person to address lower needs on the list before addressing higher ones, perhaps it makes sense for communities and even countries to do the same thing. If people are starving, all available resources should be focused on making sure everyone has food. Only when everyone’s physiological needs have been met should economic output be devoted to meeting higher needs.

This is really just another argument for my egalitarian view of the world. The analogy is that if it doesn’t make sense for a starving man to save for a yacht, perhaps it doesn’t make sense for a community with starving people in it to be building yachts for some of its members.

Imagine what would happen if scientists found a way to cheaply manufacture flawless diamonds. Their value would drop to that of costume jewelery. While some people would still wear them, most people would move on to find other exotic gems to lust after.

While it is natural to like things that are rare or unusual, liking rare things creates an interesting economic problem. Most people think economic growth is a good thing. If, however, a significant part of the allure of luxury items is their scarcity, producing more of them may not make us better off. We all end up working harder to produce ever more exotic trinkets that are all of little intrinsic value.

Is it sensible to have armies of miners toiling away looking for diamonds? People are willing to pay the high prices, so it seems the answer is yes. It is worth it. Consider this, though. If diamonds suddenly ceased to exist because of some quirk of physics, would we be any worse off? Not really. Somehow all this work is ultimately for nothing.

People want to feel good about themselves. They want to be able to show the world that they are successful. Buying things like diamonds is one way to do that. Given the effort involved and the inevitable environmental degradation from mining, wouldn’t we be better off finding other ways to prove our worth?

Instead of proving our value by buying a big house, a fancy car, and a big diamond ring, perhaps we could define our worth through service to others. If that takes too much altruism, I’d even settle for sports contests. Almost any other outlet for our desire to best our neighbors would be better than buying more stuff.

Unfortunately, the human brain seems to be wired to like rare things. The question is how far we will go trying to out-rare our neighbors before we give up and come to our senses.