Excellent Treatise on the Ego or Reactive Mind

In Psychoanalysis the Ego is defined as the part of the psychic apparatus that experiences and reacts to the outside world and thus mediates between the primitive drives of the id and the demands of the social and physical environment. My usage is somewhat more relaxed and is simply that part of the mind that reacts without thinking or, thinks fast. Daniel Kahneman the Nobel Prize winning Psychologist and Behavioral Economist has written a wonderful book on that very subject entitled Thinking, Fast and Slow

I have just finished this exhaustive volume. An invaluable treatise on what others have called the “reactive mind”, fight-or-flight response; that part of our mind that “moves” first. Not only does Kahneman give study after study that illuminates the workings of our “fast thinking” mind or Ego, he gives us ways to counteract the biases inherent in our quick reactions. He calls the antidote essentially  “thinking slow”.

I read it twice right away to really let it sink in. It’s that good!

Economics and Unpleasant Truths

I enjoyed this snippet from an essay by Arnold Kling of GMU here:

As economists, we remind people of some unpleasant truths. Such unpleasant truths are deserving of respect, even if not all economists are.

One unpleasant truth is that resources are finite. As individuals, we would each like unlimited access to medical services without having to pay for them. But economists will point out that this is not possible, and instead hard choices must be made. It would be easier to make health policy if resources were not finite, and people are understandably resentful when the consequences of finite resources are spelled out.

Another unpleasant truth is that the “intention heuristic” does not work on a large scale. The “intention heuristic” is to judge the morality of a policy by its intentions, without regard to its consequences. Instead, an economist will point out that a higher minimum wage might harm low-skilled workers, even though the intention is the opposite. It would be a lot easier to assess policy if the “intention heuristic” were reliable, and people are understandably resentful when the problems with that heuristic are exposed.

When research is widely read, there are likely to be enough reviewers with different points of view to ensure that flawed analysis is subject to criticism.

The theory that economists were corrupted by special interests is an example of the “intention heuristic.” It suggests that economics failed to prevent the financial crisis because of bad intentions on the part of economists. With better intentions we would reach a wiser consensus.

Economics and the Death Penalty

I commented on an interesting post by Scott Lemieux reviewing Charles Lane’s article on the death penalty here. The post discusses the Norwegian mass murderer Anders Breivik’s case and whether Norway’s lack of a death penalty and a relatively short sentence is a problem.

I am against the death penalty and my reasoning is based on the economic principle of “perfect information”. My comment on the blog was:

“I oppose the death penalty because we can’t always be sure the person did the crime or did it in a manner that led to the court’s sentencing. If we had perfect information of all crimes and motives then no problem; we could setup objective death penalty sentencing rules and carry them out confidently.

Since we don’t have perfect information, we let everyone live because prison is an experience of life. With death, all experience of life ends for the person and, morally, I can’t do that without perfect information and that will never be.”

In our normal economic daily lives we incur costs in our transactions due to imperfect information (among other things). A lack of perfect information is one reason why our markets don’t always produce the most efficient outcomes. Executing the wrong person or for the wrong reason as a cost of imperfect information (no matter how improbable) is unacceptable.


Big Think on Invisible Children

Big Think says:

What’s the Big Idea?

One criticism of the video is that it uses social media to advocate for armed conflict. Foreign Policy‘s Michael Wilkers says it is extremely dangerous to essentially sell a foreign intervention in a reductive and highly-produced video (apparently that sort of thing must be left to more sanctioned media). The biggest criticism of Invisible Children comes from a blog called Visible Children which accuses the non-profit of spending too much money on awareness efforts and not enough on the ground in Uganda. What do you think? Can the video have a multiplier effect on funding given the incredible success it has had?

I commented:

Michael Wilkers is towing the old coward’s line; “best not get involved, it could be dangerous.” Its a global community now and we are a part of it. Invisible Children is trying to get someone to bring Kony to justice to save the children. The ICC wants him and Invisible Children would like anyone to bring him in. It is the best effort I have seen to bring these Central African criminals into the world’s awareness and hopefully into court. We can look the other way or we can do something. A little bit of money every month from everyone will bring in some great bounty hunters. It’s that simple.

I love it, some tough bounty hunters should get together and create a Kickstarter-like  project (the Kickstarter Vig is too high for charity work). When they bring in Kony, all contributors to the project should get a finger painting from a Ugandan child.

It doesn’t have to be direct services or direct aid because we really don’t know who the good guys are. We do know though, that Kony is a bad guy. Building awareness is the key and someone will bring Kony down (most likely his own men).

It will raise my spirit tremendously if we save the children of Central Africa this year by bringing down the LRA!

Juan Cole weighs in on Andrew Breitbart.

I respect Juan Cole immensely. Dr. Cole is a distinguished University of Michigan History Professor and author of several books on the Middle East. Today he characterizes Andrew Breitbart accurately I believe here.

I also have tremendous respect for Peter Hart and Jim Naureckas and all the analysts at FAIR (Fairness and Accuracy in Reporting) and lest you don’t hear enough objective information about Mr. Breitbart today, there are links here, here and here that help explain how Mr. Breitbart duped not only the public but major media outlets as well.

I am also of the opinion that each of our roles in life, no matter how we or others feel about them, are sacred and are all a part of what makes up this world. Hence no rancor just the facts.

Another Gold Standard Rebuttal

Gary Gibson surprises us all (not!) that in gold, the price of gas is falling.

My comment:

Somehow we forget the problems the world economies experienced trying to grow with the value of money tied to a scarce natural resource. I have read from gold supporters that there must have been a conspiracy to defraud the world as the major global economies of the world went off the gold standard. That is not the case.

Tying money’s value to gold is a notion that does not support free market mechanics. It depends on fixed exchange rates which are untenable in a growing world economy.

If you like gold, buy it! It is a great hedge against inflation it seems. So is land. Buy it too! Buy silver! Just leave the money alone. The world’s move towards free-floating exchange rates were part of the global free-market economic progress. Money is to facilitate commerce first, let the market decide what it is worth, we do not need to legislate its value.

Free-Market Money

I read John Tamny’s letter to the editor of Cato Unbound yesterday. Even though I enjoy reading letters and essays about free-market publications from intelligent people this one hit me wrong. I have an Economics degree (BA) from UCSD but I skipped post-graduate academia in favor of the business world. While working my first job, I went on to earn a Certified Public Accountant designation to learn the “language of business”. While I am not qualified to debate many in academia,  I do believe I can shed some light on why a return to a commodity standard for money is ill-advised.

John Tamny, who has excellent credentials, wrote this letter to the editor of Cato Unbound explaining why he felt a return to the gold standard would be optimum. Mr. Tamny makes some excellent points about money, many of which I agree with. He quoted some world-class economists (including Mr. Keynes) about the need for a stable measuring rod to be used in the exchange of goods.

Mr. Tamny’s argument is that money, if not backed by a stable commodity such as gold (the most stable commodity ever according to him), will never be an optimal measuring rod of value. I would argue that there can be only one optimal determinant of the value of money and that is the market.

Money needs no proxy to help the market determine its value. Money’s value is what the market settles on based on its supply and the general confidence in the government issuing it. The US dollar is not backed by a stable commodity for the very reason that unless the supply of that commodity can expand ad infinitum and the government can acquire it ad infinitum, as money can and must, it will eventually drag on the economy.

Gold is a finite commodity and the potential size of the world’s economy is not. If I would like to sell my cows to a butcher, I could accept just about anything of value in exchange although the most efficient would be money. Money is the chit that goes on the left side of the ledger in place of my cows. Do I really care if it is backed by gold? It makes no difference to me because in a market economy with a stable central government I know that when I need feed for my cows I can take the chits I got from the butcher and use them at the feed store.

If we tie the chits to gold, what happens when the need for money increases (because commerce is growing along with population etc) beyond the supply of gold? We then have to devalue the currency relative to our cache of gold. Government intervention to devalue money will, most likely, be problematic. It raises too many questions.

By example, suppose today we have dollars backed by 1/1000th of an ounce of gold. In several years, we will need more money to conduct more commerce (because GDP growth depends on money growth), and so we either buy it or we devalue the dollar dropping its worth  to 1/2000th of an ounce of gold for example. Regardless of how much gold we can buy today, we will eventually have to devalue. Taken to the extreme our money, after many devaluations,  will effectively not be backed by any commodity because it will be backed by 1/200,000,000th or some other tiny fraction of an ounce of gold which, for all purposes, is not far from zero. In addition, we endured numerous shocks along the way as our government intervened (without the help of the market and global economy) to devalue the dollar thereby allowing us to increase the supply of money to accommodate more commerce.

What is surprising is that many free market proponents such as the Cato Institute, Mises.org, and many of the Austrians (including Ron Paul), do not have faith in these markets they adore to set an optimal currency value; a value on currency backed by the full faith and credit of the participants in the economy. They lack faith in currency supported by the robustness of the free market whose supply is assured by a stable government.

These “free-market” advocates see a number of problems with “unbacked” currency stemming from the evils of government and including imminent inflation. Apparently they believe folks will wake up one day and say “Damn I thought I had gold in my pocket and it’s only really paper” and perhaps they believe the butcher will suddenly say, “since this is only paper and I thought it was gold or I think it should be gold, I want $100 for this pound of beef instead of my usual $10″.  This thought process and behavior seems inconsistent with a market understanding and free market ideology.

I say, if you’re free-market, believe in the market. The gold standard is ancient history. It is like training wheels on a bike; we don’t need them. Let’s do business and let the market stabilize the value of a dollar while we grow the economy through that very same market.