Taleb, And Other Overrated 'Intellectuals'

Contrary to (often) popular opinion, I think most of our so-called 'world's great intellectuals' - Richard Dawkins, Stephen Hawking, Laurence Krauss, Steven Pinker, Paul Krugman, Steven Weinberg, AC Grayling (to name but a few) - are overrated. I don't find it all that surprising - humans tend to over-estimate the quality of public intellectuals, which then brings about further over-inflation from the many others that jump on the bandwagon of intellectual subservience.

But aren't they top contributors in their fields?

Yes, and their contributions - Richard Dawkins (biology), Stephen Hawking (physics), and so on - are immense.  But I didn't say they aren't proficient in their fields of expertise (though often I wish they would stay in their fields of expertise) - I said I think they are overrated, by which I mean I think there is an over-inflation of their general abilities, which isn't the same thing as saying they are not edifying in their specialised field. If you won £1 million but overestimated your windfall to the value of £10 million, you'd get a big shock when you went to pay for the £4 million house and £1 million car you'd set your heart on purchasing.  Those that do understand Richard Dawkins know they have a million pounds worth of biology; those who vastly overrate him believe they have ten million pounds of biology, religion, philosophy, cosmology, ontology, psychology and socio-political commentary.  That’s the principal difference.

Perhaps the most overrated of all, though, is Nassim Nicholas Taleb - author of the 2007 best-seller The Black Swan, in which he spends far too many pages talking about how improbable events are unpredictable due to being rare and seeped in unknown factors.  Not only is The Black Swan (to me) obvious and unoriginal, it stretches out about one chapter's worth of substantial material into a whole book, making the latter two-thirds seem (again, to me) execrably dull and repetitive. 

But perhaps the most noteworthy thing is that on several occasions I have seen Taleb referred to as ‘The greatest thinker of our time’ - which, unfortunately, judging by some of his television appearances, seems to be hype by which Taleb has also been swayed. Now here's the big irony; the kind of reasoning that is employed when conferring the adulation of ‘The greatest thinker of our time’ onto Taleb is the same kind of erroneous reasoning Taleb's book The Black Swan is set up to undermine.  In the first place, the popularity of the book occurred largely because of the financial crisis (with one caveat – see below) and the self-congratulatory claim by Taleb that he had predicted this 'black swan' event.  Ironically his bigger critics claimed that he couldn't really have predicted the financial crisis because 'black 'swans' are supposed to be high impact, low probability events that foil our expectations. 

Both Taleb and his fiercest critics have got their reasoning wrong here. The critics are wrong in denying that the financial crisis was predicable, but Taleb and his proponents are wrong in calling the financial crisis a 'black swan' event.  If the financial crisis really were a black swan event then Taleb is hoisted by his own petard because the black swan events in the book that earned him the title ‘The greatest thinker of our time’ are those events of which we do not know the probability. 

In the second place, the further irony is that it is actually the fortuitousness of the book's impact that is the black swan event, not any propitious timing or expertly executed foresight. Consider that Taleb's 2001 book Fooled by Randomness contained more or less the same underlying arguments as The Black Swan but made hardly any impact at all at the time of its release.

If we want to be super-critical towards his most fervent admirers (the ones that ascribed the success of his book to the occurrence of the financial crisis) – the book makes repeated allusions to the butterfly effect, which is the biggest indicator that one cannot necessarily make such simple causal ascriptions.  The whole wisdom of the butterfly effect is that a butterfly flapping its wings in India can start a causal chain that eventuates in a hurricane in the USA a few years later.  But to realise this one has to realise that from the standpoint of the hurricane observer the causal chain is prohibitively untraceable, with so many other causal factors remaining beyond the sphere of human observation.  Therefore, ascribing the success of The Black Swan to the financial crisis means necessarily selecting out one palpable link on the causal chain and disregarding the other links - which is the very thing being counselled against.  

The flip side to there being lots of overrated public intellectuals whose fame is as much about for fortuitous and serendipitous events as it is intellectual proficiency is that there are going to be lots of underrated, largely undiscovered talents awaiting the break that will give their abilities the recognition they deserve.  Maybe some of you are cases in point - in which case, go make yourself known - the world might be awaiting the discovery of whatever talent you have to offer. 

Economic Foolishness: The Truth About Bankers' Bonuses & Government Subsidies

If you’re looking for an area in which the most nonsense is spoken by the most people on any one subject, a good candidate has to be the financial crisis and the spurious ideas surrounding caps on bankers’ bonuses and Government bail-outs. You’ll hear politicians talking about how the banks needed more regulation, how bankers’ salaries and bonuses need capping, and how they were reckless in focusing on narrow, short-term visions rather than the supposedly preferred long-term incentives. The politicians are confused; they've got it wrong here on just about every level – but just as bad, they’ve not offered any example of a reasoning process to lead them to this conclusion, they’ve just assumed that because there was a financial crisis that this must mean bonus caps and more regulation will make things better. They won’t, they will make things worse.  Of course, the majority of the electorate also think that bonus caps and more regulation will make things better, so our MPs don't really have much of an incentive to understand where they're going wrong.  Unlike politicians, I will give you a clear and accurate reasoning process that demonstrates why bonus caps and more regulation won't make things better.

What politicians want to propose is that bankers’ deals are constrained by revoking bonuses if the borrower defaults or the deal collapses. They think that with the threat of bonus revocation bankers will be less reckless – but they have their reasoning backwards, they will actually be more reckless.  Let me first explain why it is incorrect to say that senior bankers have very narrow, short-term visions.  A significant proportion of bankers' bonuses are commensurate with the share prices of the bank (they are paid either in shares or in cash), where those share prices are determined by forecasted profits. If a banker undertakes disproportionately risky deals to obtain short-term profits then the forecasts will likely predict much bigger losses in the future, which means share prices will immediately drop.  Hence, managers paid in shares cannot afford to risk the narrow vision.

The banking risks that brought about the financial crisis were down to excessive gambling because the credit markets and stock markets didn't factor in those risks. Had this failure not happened, banks would have seen a rise in the cost of capital and a drop in share prices much sooner, giving the natural incentive for bankers to reduce the risk voluntarily to maximise their variable pay.  

The Government's regulatory proposals are a disaster, and tangible evidence that they don't understand economics.  Here's why the regulatory proposals will increase recklessness not decrease it. Suppose we take the state's advice and award variable pay when profitable ventures are completed instead of at the point of making them - it's pretty clear why that won't help things. Consider corporate lenders A and B who each lend out £1 million to 2 identical clients on a 4 year plan. With Government regulations, any bonuses A and B procure on the deal should be deferred until the 4 year period is up, subject to the loans being fully paid off. If A's client defaults within that time period then most politicians think A should receive no variable pay. Here's the problem; how on earth can this improve A's decision-making? At the time of lending, the known risks presented by the 2 clients were factored in to the deal. It is a combination of varying factors way beyond the lender’s foresight that client 1 turns out to be one of the few that ends up defaulting. The risk is taken at the point of the loan, not at any time thereafter - so it is ludicrous to try to improve initial analyses by basing variable pay on unforeseeable future circumstances.

Such a proposal does not adjust risks, it adjusts unforeseen consequences - so it would be crazy to evaluate financial restitution based on such factors, because it increases bankers' incentives to heighten risks. If they have to wait for the culmination of repayment you'll see a huge increase in risky deals because a great proportion of loan deals are low probability of high loss, so lenders might as well make more deals, particularly as the cost of huge losses won't be incurred by bankers' themselves but by bail-outs.  The way to incentivise bankers to calculate the risk more diligently when making loans is to have them bear the cost of that risk at the time of making the decision by imposing a banker's insurance premium for the risk that that decision engenders (this is how banks insure using buffers for capital, where a premium for every loan can still be weighed).

Suppose the lender was paid variable pay equal to 10% of his contribution, where "contribution" means the interest margin he earns from the loan minus the premium charged to insure against the risk of the loan defaulting - the banker will have an incentive to only make the loan if the interest margin is greater than the cost of the risk-insurance. The bankers' role would be to calculate these loans using a risk analysis, and make the ones that seem economically viable, enjoying their bonuses on the profits, and bearing the costs on the losses. If you underestimate the risks then the insurance premiums will be too small, and there will be excessive lending - but this issue isn't solved by changing variable pay and bonuses, it is solved by improving the calibration of risks in the first place.

Next, most politicians think that high-paid, big-gambling bank managers are the real failure of corporate governance. They are not - it is the other way around - it is low-paid, risk-averse bank managers that are failing the system. Firstly, managers tend to take fewer risks than shareholders (despite most people thinking the reverse is true), as most shareholders have diversity in stocks that are not correlated with each other, so all the eggs are not in one corporate basket. Managers on the other hand more often have all their managerial eggs in the basket of the company for whom they work, so if their company fails they'll lose their salary plus any company shares they own.

In a healthy system then, big bonuses, therefore, have the positive effect of increasing appetite for risk - which is a good thing because if risks pay off then appreciation of equity increases hugely, whereas if the risks don't pay off, the most the shareholders can lose is the value of the shares they bought (in other words, a few eggs in their basket). That is why shareholders benefit from risk, and why they want managers whose appetite for risk is voracious (the best way to achieve this is if when it comes to shares owned in companies managers have diverse portfolios).  

Ah, but I’ll bet you have a burning question; what stops the risk culture going out of control and becoming a culture of recklessness?  What stops (or should stop) companies engaging in crazy lending is that a company's creditors (either a single investor or another company) have a claim on the services of the company taking risks, by providing something (a property or service) under the contractual agreement.  As creditors don't share in the company's profits they don't gain from their company's risks - which is reflected in the risk premium agreed by the first and second parties (it is the increasing cost of borrowing that places constraints on corporate leverage and other risky ventures). This ought to make it crystal clear why Government bail-outs and guarantees are mostly a terrible idea - and why they only increase the incentive for risk-taking. Put it this way, if you stake your house on a deal and it goes wrong you're going to be hugely out of pocket and asking a friend for lodgings. If you stake your house on a deal and it goes wrong but is under guarantee by the Government, you get another house at the taxpayer's expense. It's pretty obvious which deal is going to elicit the most careful analysis before it is finalised.

And the last point, a mother would be foolish if she kept buying her young son lots of cakes and chocolate and then complained that he’d got fat.  But if a boy wants lots of sugar he cannot be blamed for accepting his mother’s sweet subsidies.  Similarly, a company's executive who rejects Government subsidies does something irresponsible because he drives down the value of his company's shares. Given that a Government's guarantee of bank deposits severely reduces the risk premium that banks must pay on their debt capital, it is clear that these kinds of bail-outs are unadvisable, and bad for the general public, who as taxpayers benefit much better when markets are left alone. When the Government acts as a creditor they won't often demand higher interest rates commensurate with risk-taking, which is why it is better when non-Government creditors incentivise against foolish risk-taking by reining in recklessness. To prove the point, here's a fact you may not know - in the past 35 years, of all world's largest financial institutions that have failed, over 90% of them have creditors that suffered no significant loss due to Government bail-outs. This basically amounts to a Government subsidised risk encouragement, by removing or depleting the standard market risk-taking discipline that creditors charge.  It's a shame politicians that think this way are in charge of our country.

* Photo courtesy of debtonation.org

The Best Way To Get More Tax From Corporations Is To Stop Taxing Them

Hot on the agenda in recent times surrounding the World Leaders’ convention has been whether there is a tenable solution Governments can put in place to have global tax regulations that stop companies avoiding tax.  People are asking whether there can be such a thing on a world scale, as such an achievement would be unprecedented in terms of global economics.  As anyone who knows the history of attempted international coalescences would know, this is a very tricky situation to administer - particularly given the vast differences in the countries that would be involved in this kind of globalised tax system.  How on earth could we ever get so many different nations (with frequently changing Governments) to agree on, and proficiently oversee, such a complex system?  And even if we could, is it right to revert to potentially despotic measures to get places like Switzerland, Cyprus, Luxembourg and Ireland to conform, when such tax havens have self-governing national autonomy, and the good economies and high employment as a result of low income tax? Given the relationship between taxpaying and the positive impact on developing countries that need to be lifted out of the mire, I'm happy to assume that these measures are to be supported - so how, then, can such a complex and intractable system be achieved?

A bit of general advice, whenever you want to find the best solution, the first thing to do is identify the problem that needs solving, and make sure that that is the problem you are actually solving. The problem is twofold; firstly, that the whereabouts of a company's profits in a global economy is hard to keep a track of; and secondly, that it is often hard for outside authorities to identify what a company's profits amount to. From what I can gather from every time an MP speaks on this issue, their central focus is on refining the system to scour the market for companies' unpaid taxes and surreptitious distortions of the balance books.  I think this is a misjudged method of tackling the problem - not because it is the wrong thing to do, but because in the first place such an endeavour is probably going to end up being as costly as the tax they'd hope to recover; and in the second place I doubt whether a body of world authorities would have the competence (and synergy of thought) to achieve their aims.  And to add weight to the problem, tax avoiding companies hire economists that can show them how to find loopholes in Governments' tax policies, so these companies are adept at staying one step ahead of the authorities (these economists are often ex-treasury consultants who helped advise on the original policies, and are ideally equipped to understand profits and business practices a lot better than politicians).

So what's the best solution?  My view is, if the problem is to do with how hard it is to keep track of the whereabouts of a company's profits, and how difficult it is to identify what a company's profits amount to, the best thing to do is to ditch corporation tax altogether.  Here's why.  It's a great myth that corporations pay tax. Corporations don't pay tax - only individuals pay tax.  The cost of corporation tax is borne by customers (with increased prices of goods or services), employees (with decreased wages) or shareholders (with lower dividends).  Corporations pay tax only in the sense that the cheque or debit is written in the name of the company. If the cost of taxes ultimately falls on individuals, then it makes sense to have tax policies that are only focused on individuals, and scrap all the payments in the name of corporations.

This to me is an obvious solution to the aforementioned problems, because unlike profits in a global economy, the locations of personal incomes and expenditure are relatively transparent, so the Government might as well focus predominantly on taxing dividend income (shareholder profits), earnings (through income tax) and sales (through consumption tax).  The Government already does this anyway, but to a much less judicious level due to the corporate tax, so it wouldn’t be too hard or too costly to administer.  In actual fact, as far as Government income is concerned, taxing earnings and taxing consumption are more or less interchangeable; you can tax the money as it is being earned or you can tax it as it is being spent.

The obvious question is; if this idea is as good as I’ve made it sound, why don’t the Government follow the model and recover billions of pounds of tax that’s currently being avoided?  I’ll wager that the answer is twofold.  In the first place, such a policy is risky – not because it is a bad policy, but because a lot of the electorate have got the wrong idea about its demerits, which means the Government considers it a potential vote loser.  When you hear the rhetoric of those sceptical about ditching corporation tax, they usually say something along the lines of this;

Wouldn't the danger of scrapping corporation tax be that the companies (shareholders) would simply guard against their losses by increasing prices and lowering wages, meaning that the workers and consumers are getting penalised while the wealthier shareholders are hardly affected because they passed all the tax on to workers and consumers?

What they mean is, if corporation tax is ditched and individuals associated with the companies pay more tax through the extra taxing of income and sales, then that extra expenditure will come from the reduction in staff wages and in increased prices on goods as shareholders won't want the losses to come from their dividends. Here’s what they are missing.  Except where a company enjoys a monopoly (which is rare in this day and age), shareholders of any company cannot decide what prices to charge for their goods or services, nor can they decide their labour rate either. These prices are determined by supply and demand of the goods, services and labour concerned, not by shareholders.  Further, if corporation tax is abolished, salaries and dividends will be higher not lower, and prices will be lower (with consumption being higher).  The Government can automatically recoup what it has lost from corporation tax in extra income tax and sales tax without having to radically change the system. Whether they recoup less, more or the same depends on whether personal income, tax rates and VAT are higher or lower than corporation tax rates, and on the effect of ditching corporate tax on aggregate employment and consumption.

A second reason why the Government may be furtive about this policy is that many low earning consumers may think they are going to be hit hardest.  They have it in their heads that if corporation tax is abolished then individuals associated with the company (primarily customers) are going to pay more to make up for what the Government is now not getting, which means more on consumption tax. They are worried about average earning Joe who ends up paying more for his goods, because relatively speaking average Joe is getting hit harder than richer people on this consumption tax because a few pounds extra on goods prices for him has a greater effect than on the wealthiest who will hardly notice.

Not only do they fail to realise that if the lost tax is transferred to earning and consumption then the rich will get hit hardest (because they earn and consume more), they also fail to realise how switching tax within a corporation to individuals affects the situation.  Let’s use a simple illustration to show what happens.  Suppose the Government gets £1 million from a corporation in corporation tax. If the Government didn’t get it, either someone else would get that £1 million, or several other people would get a share of it. For simplicity, suppose the £1 million would all go to a single shareholder (let’s call him Bob) in dividends. If the Government taxes Bob’s dividend at 45%, then the Government has £450,000, even without changing tax rates. Now the Government can increase taxes on dividends to make up the £550,000 it has lost.  Bob is now no worse off than when there were corporation taxes and lower taxes on dividends, and the Government is no worse off because it still gets its £1 million.  But the world is altogether better off because corporate taxes being more avoidable have higher deadweight costs for the Government than individual income taxes. That is to say, they dampen economic activity and waste resources on unproductive avoidance efforts (usually in the form of accountants).  

The third and final reason why I think the Government won’t ditch corporation tax is a pretty ugly reason, but undoubtedly true, at least to a great degree.  The Government is primarily concerned with how it can buy votes – and many of the people that bear the cost of corporation tax are foreigners who have no power to vote, so they are ideal people on whom to impose a cost.  You can see from the reaction to non-UK citizens using our NHS how pervasive this national prejudice really is.  Once we jump these three Government hurdles, there is no logical reason why we can’t see the abolition of corporation tax. 

I said earlier that taxing income and taxing consumption is pretty interchangeable, so which is preferable as a primary source of Government income?  Well given that higher earners spend proportionally less of their income on consumption, the ratio of tax obligation diminishes as wealth grows, so it is important that higher earners still pay proportionally more tax on their earnings, and low earners are taxed at a much lower rate (in both cases the Government recoups these tax losses when people spend their money on consumption – but this kind of economy is much more mobile and faster growing than a tax system that discourages earning and spending). 

The general rule of thumb with taxation is that when the Government taxes something it results in less of it.  For example, higher tax on savings discourages saving; higher tax on earnings discourages work, and higher tax on consumption discourages spending.  That’s why I favour taxing consumption over earnings, because consumption tax yields higher employment and formation of capital, which increases a nation’s economic growth.  This has a positive corollary effect; if when the Government taxes something it results in less of it, then higher taxes on the things we want less of (or things that we like but know are bad for us) will bring about a reduction of those things.  So I’m all for much higher tax on cigarettes, alcohol, gambling, pollution and use of natural resources that degrade the environment (I draw a distinction here between taxes related to genuine degradation of the environment, which are mostly progressive, and green taxes, which are mostly regressive and unjustified – that’s another future Blog post)

The upshot, though, is it is possible to have a much better tax system that closes the loopholes being exploited in tax avoidance – and this will put an end to the deadweight losses associated with corporation tax, and it will help spread the money to developing countries in which many of these multinational companies make so much of their money. 

 

 

 

What's Worse: Hate Crime or Road Rage?

Recently I enquired on Facebook:

Suppose you are called to answer the following two questions instinctively, based only on the details I've provided.  

Question 1: Which should the state treat more severely in a court of law?

A) Stabbing a man to death because you don't like that he was driving too slowly in front of you

B) Stabbing a man to death because you don't like that he is a Muslim

C) Both the same

Question 2: Which should the state treat more severely in a court of law?

A) A white man stabs a black man to death in a country in which the ratio of people amounts to 85% white and 15% black

B) A black man stabs a white man to death in a country in which the ratio of people amounts to 85% white and 15% black

C) Both the same

Unsurprisingly, almost everyone who answered chose C for both questions.  I then asked a further question to all those who responded by private message:

Question 3: Which should the state treat more severely in a court of law?

A} Stabbing a man to death because you found out he just raped and killed your friend's 2 young children

B} Stabbing a man to death because you don't like that he is a Muslim

C} Both the same

With question 3 the results were mixed; many stuck with C, and many more chose B this time, with nobody choosing A. 

So let's ask it this way; is targeting a specific individual more harmful to society than targeting a randomly chosen person from a large group (like Muslims)?  That’s a question often asked, but one that I think is rarely answered correctly.  The answer isn’t yes or no, it’s yes and no, as I hope you’ll see from my above questions.  Irrespective of how we would want the courts to judge these crimes, I fancy that most people would say no in the case of question 3.  After all, getting revenge may not be a good course of action generally speaking - but killing the man who raped and killed your friend's 2 young children seems to have slightly more mitigation attached to it than killing an innocent man who has done you no harm, but just happens to belong to a faith group you don't like. It seems obvious to me that we should see more mitigation in A.  If it isn’t obvious to you, consider an even more extreme case, where a father killed his own child's killer - that's even more mitigation still. That doesn't mean the courts should act on those mitigating circumstances (although they usually do) - but it does suggest most of us have a sympathetic disposition towards these responses, even if we're not glad when they occur. 

But the above model - that targeting a specific individual is not more harmful to society than targeting a randomly chosen person from a large group - doesn't always hold, because if you did a survey among any large number of people you'd find that people are willing to pay more than 1 thousand times as much to avoid guaranteed death than they will to avoid a 1 in a thousand chance of death. By that measure, targeting a specific individual like the man driving too slowly in front of you is more harmful to society than targeting a randomly chosen Muslim man. Moreover, if the randomly chosen person from a large group happened to be in the context of a road rage, and the targeting of a specific individual happened to be an attack of prejudice against a black person, we would answer yes.

Governments generally set their spending targets to grab the attention of the masses, not the minorities – so they largely target that group rather than specified individuals.  But conversely, it is sometimes thought in Governmental policy to be better to target an individual rather than randomly chosen people.  For example, the spending limit for a Government to put up a safety fence by a river where drunk people regularly congregate (saving unforeseen lives) is lower than the spending limit for a Government to rescue a specific man trapped in a mine.  Hence, it cuts both ways; the answer is yes and no, not just yes or no. 

When I asked the 3 questions on Facebook, just about everyone thought that questions 1 and 2 should be answered C, and more people thought that question 3 should be answered B rather than C.  That would suggest a broad brush example of popular opinion, but it is a fact that the State doesn't usually accede to public opinion on this one.  The State punishes what they call 'hate crimes' more severely.  Their position is that the death of an outrageously slow driver is marginally not as bad as the death of a randomly chosen Muslim. If you expand on this in the obvious way, it’s a position that justifies treating hate crimes more severely - which is interesting because 'level of hate' isn't really the issue at all.  The hate you'd have for the killer of your friend's children (or your own) probably exceeds the hate a Muslim hater has for all Muslims, as in the former case you've been one of the personal victims, whereas in the latter case you haven't.  

Unofficially.....and this is unofficial…..the State's metric for judging crimes of the above nature is based primarily on two things; on – and they won’t use these terms - a potential victim pool, and on recidivism probability (the probability of re-offence). That means if you are convicted of a crime against a Muslim 'because' the victim is a Muslim you have a much greater probability of a longer sentence than if your crime is against a bad driver 'because' he is a bad driver (note most people I surveyed felt that each crime should receive the same sentence). Using this kind of logic, then in question 2 it should be the case that B is worse than C, because when a black man stabs a white man to death in a country in which the ratio of people amounts to 85% white and 15% black, the potential victim pool is greater than when a white man stabs a black man to death in a country in which the ratio of people amounts to 85% white and 15% black (as is the recidivism level if there are potentially more people to kill).  But I don’t think we’d be happy with that kind of thinking.  Think of it like this. When you target a specific victim because he has annoyed you on the road, or played his music too loud, or made a pass at your girlfriend, you do a lot of damage to that one person, but not too much to everyone else.  When you target a specific victim because of his skin colour, you do a lot of damage to that one person, but potentially (and in many cases, actually) a whole lot of societal damage to everyone else with the same skin colour.  It seems to me that it is immediately obvious in which case you’ve done more total damage -  the micro evidence points to the second case, not the first.  I think the potential victim pool idea is nonsense; crimes against whites or blacks due to prejudice are equally as bad in either case, and the sentencing should reflect that. 

Further, if the potential victim pool and recidivism are factors, then clearly this doesn't always go against people who target specific individuals - because if you're the sort of person who is only likely to kill in the event of a personally felt injustice (such as yours or your fiend's child being raped and killed) then your potential victim pool must be extremely unrepresentative of the population, and consequently your probability of recidivism extremely low too.

Why is there so much crime?

Lastly, now we’re on the subject of crime, have you ever stopped to ask yourself why we’re so soft (relatively speaking) on so much crime, when it is in our power to drastically reduce it?  There are so many crimes (some very serious, and some less serious), that we know it is well within the State’s power to virtually eradicate, yet they don’t.  For example, rape, sex trafficking and grievous bodily harm (to name but three) are horrible crimes that just about everyone wishes didn’t happen.  Suppose a new law was introduced tomorrow; if you are convicted of any of those crimes you have to spend the rest of your life in prison, with no chance of seeing daylight again.  I’m pretty sure that as a result crime levels for rape, sex trafficking and grievous bodily harm would drop significantly.  The lesser crimes, like graffiti and using your mobile phone whilst driving, are social nuisances that would be all but eradicated if lengthy prison sentences were imposed.  If the average youth knew that spraying a road sign or a statue with graffiti would get him ten years in prison, he would have a deterrent sufficient enough to see him throw away the spray can.  Does the State consider the spillover costs of such tough punitive measures as outweighing the benefits of having such a crime reduction?  Perhaps more importantly, does the general public feel the same?  I’m not so sure.  I’d guess that if pressed, the majority of people (those who are highly unlikely to commit serious crimes) could bring themselves to have less of a problem with a rapist getting life in prison, provided he was given ample capacity for rehabilitation and the lifetime opportunity to repent. 

Is this another case where the State’s protocols are unrepresentative of the popular opinion – or do we in fact embrace the opportunity for shorter sentences and second chances more than our first instincts tell us?  If we don’t, then I don’t know why the State doesn’t do more to bring about the near-eradication of crime.  Actually, I think I do know the answer, and I will present it in my next Blog post. What is clear thus far in our enquiry is that the notions of potential victim pools and recidivism probability are secondary to the urgency of tackling the nasty kinds of prejudice we see in society - the ones that are equally bad irrespective of ratios within a population.

* Photo courtesy of http://www.wichitasedgwickcountycrimestoppers.com/

The 'Save The Planet' Paradox



I care about the planet, but I care about people more.  Let me put it this way - if the choice was: preserve the Yorkshire moors and kill 1 million British people, or build factories on the moors and the 1 million people get to live, I'd choose the latter, and I'm pretty sure just about everyone else would too.  When people say we need to 'Save the planet' I think they usually mean we need to 'save people'.  I say this because everyone knows that the planet has been surviving long before we came along, and it would survive perfectly well if we all died out.  Some will argue that by 'save the planet' people mean preserve its beauty, lower our emissions and reduce our carbon footprint - but as my Yorkshire moors example shows, people don't generally value these things over the preservation of human life - so saving the planet (by which it is meant ‘the globe’) must always be a secondary aim behind saving the planet (by which it is meant ‘life on the planet’). 

Therefore, if preserving life is the primary goal, then part of that goal (the most urgent goal in my view) is to bring an end to global poverty and help the neediest people out of their plight of impoverishment.  This leaves the 'save the planet' folk with a problem, because the only way to bring an end to global poverty and help the neediest people out of their plight is to help those people attain economic freedom, and the ability to trade, be self-sufficient, and productive in the broader market economy.  The only realistic way to achieve this is to generate the kind of industry and globalised expansion of the market that will increase our emissions and our carbon footprint, which comes at the cost of not preserving the natural world as well as we’d like. 

The upshot is, in the short-term future, to end global poverty we're going to have to increase our environmental damage, not reduce it.  Of course, as third world countries increase their infrastructure and market potential, they are largely going to be using the most ecologically efficient technology, so there is every reason to continue to develop and pioneer more environmentally efficient methods of industry.  But realistically, the things that are the biggest ingredients in achieving this - free trade, healthy imports/exports, high employment, sensible and equitable Government spending, a good legal system, cultural plurality, immigration, global travel, welfare systems, human rights, property rights, family rights, and freer citizens – are going to have an environmental cost that is more than compensated for by the good it will do for the neediest people in the world.

So instead of just asking “How can we best reduce our carbon footprint?”, I think people should be asking a more urgent question; “How can we best cope with the fact that our increased technology and a wider market economy has environmental costs as well as all the benefits it confers?”  That’s a much better question.  Stirring up people to become too obsessed with reducing emissions often causes them to be less mindful of coping with the costs of our increased technology and a wider market economy, which then has the concomitant danger of causing them to be less mindful of the immeasurably more good that increased technology and a wider market economy does for the world’s neediest.

* Picture courtesy of https://www.gov.uk/government/news/we-can-end-global-poverty-by-2030-united-nations-report

Something 99.9% Of People Are Probably Wrong About

Can you think of an opinion held that over 99% of the UK (or US) population think is right, but that you’re 99% certain is wrong?  I’ll bet there aren’t many – but I do have one.  In this Blog I explained why your vote in a general election probably won't matter, and in this Blog I introduced a radical shake up of the political system to incentivise politicians to be better candidates and stronger MPs.  Here is another radical measure to consider – one that almost everyone thinks is right, but hopefully by the end of this Blog you’ll think might be wrong.  Politicians are always telling us that the more people that come out to vote in a general election the better it is for democracy.  If you ask around I think most citizens would agree with this under the pretext that more voters means better democracy, and better democracy means a better chance of a good Government.  I think they are right about the least important thing – that more voters means better democracy – but I think they are completely wrong about the most important thing – that better democracy means a better chance of a good Government – because it seems quite clear from where I’m sitting that the best chance you have of getting a better Government is by drastically reducing the amount of people who can vote. 

The logic of this is fairly straightforward (I’ll explain in a moment), but it does come with the correlative question of what is the most important thing for a society; to have a population where the majority of citizens are free to vote for what will probably be a worse Government (call it Option A), or a population where only the minority will be able to vote for what will probably be a much stronger Government (call it Option B).  I have a feeling that if I asked around I’d find most people would value Option A more highly, because they would believe that a fundamental right to vote is primary over the eventual quality of the MPs representing them. 

Here’s why I think they’re wrong.  The whole purpose of Government is to have representatives who are honest, hard-working, skilful, ethical, pro-active and dynamic in running the country and in constructing the most efficient policies with which to achieve these aims.  I’ll bet if you asked everyone in this country if those things are the foundation of our having a democratic system of election, you’d find unanimity in concurrence.  Therefore, consequently, if your primary goal is to attain this, then the number of voters leading up to this ought to be much less relevant than the importance of actually attaining this.  Anyone who disagrees with this is saying that they are more concerned about everyone’s right to vote than they are about the quality of the end result of that voting.  Is this rational?  In terms of economic analysis, I’d say definitely not.

Let me give an analogy to show how absurd I think this is.  Suppose there is an island with a King and 50 citizens.  The King employs the 50 citizens to build a 4 metre wall around the entire circumference of the island.  If they can build it in two years he will give them each £1 million.  If they fail then they only get £50,000 each when the job is complete.  Naturally some of the citizens – let’s say the fastest 10% - are much faster bricklayers than others; but it is worked out that if everyone works to their full capacity then the wall will be complete just before two years has passed.  But now imagine that the majority 90% complain and insist on introducing some kind of ‘Fair Bricklaying Policy’, meaning that the fastest 10% must slow down and lay bricks at the same pace as the majority to give all citizens equality of bricklaying.  Not only would we chastise the 90% for ensuring that the wall won’t be complete in two years, we’d also chide them for the absurdity of caring more about the ‘Fair Bricklaying Policy’ than they do about the overall goal of completing the wall within two years.

In real life terms, the completion of the wall and the successful payment is equivalent to having a selection of representatives in Parliament who are honest, hard-working, skilful, ethical, pro-active and dynamic in running the country, and the insistence on everyone’s need to vote is equivalent to the ‘Fair Bricklaying Policy’.  The ‘Fair Bricklaying Policy’ is a handicap to the minority that can be most influential in reaching the two year wall completion target, and the ‘everyone’s need to vote’ ethos is a handicap to the target of having a good selection of representatives in Parliament, because the best way to get a bunch of strong MPs is to have fewer people voting.

The sad fact is that everyone who votes knows that their vote is almost certainly going to make no difference to the outcome of any constituency election (even the tight seats are won by margins of hundreds, or at the very least, tens).  Every prospective MP knows this too, so their incentive to be honest, hard-working, skilful, ethical, pro-active and dynamic is much less than it should be, and hence, voters’ research and analysis concerning the best candidates is also much less diligent than it should be.  Of course, you may object that there are already decent, hard-working MPs in the country – but that’s not the point – the point is we are not maximising the probability of having even better MPs (and right across the board too).  To use that objection is a bit like arguing that putting up with a toothache is no bad thing because at least it saves us a trip to the dentist. 

To see why the incentive isn’t currently maximised for the prospective MP or for the voter, consider a job interview scenario.  You and one other colleague are going to read the applications and then interview eight candidates for a job, and then appoint one of them after some rigorous background checks.  But suppose that before you even got the first application you were told that the decision will no longer be made by just the two of you, but by the two of you and another ninety eight people who work for your firm.  With 100 people now making the decision, the importance of your own personal involvement is now greatly diminished, as well as the chances that your diligent research and analysis will impact the overall outcome.  In short, you have much less reason to put in the concentration and effort that you would if there were just two of you making the final decision.

This is very much what it is like in the voting world – most people know nothing or virtually nothing about the candidates in their constituency, and so they vote without much research and analysis, and give no incentive for the political parties to field high calibre candidates, nor for the candidates to work hard to impress the electorate.  As a voter, if you know all this, you have much less incentive to conduct a rigorous study of economics, political policies, jurisprudence, home affairs, international affairs, or an in-depth study of personal abilities of those hoping to represent you.  In fact, not only are most people relatively ignorant of these things – it is actually the case that having ignorant voters is even worse than if you selected candidates through an entirely random process, because ignorant voters tend to be swayed by biases that one would not see in a random selection process.  For example, they tend to underestimate the benefits of free market economics, they tend to undervalue immigration, they tend to overvalue national interests, they have scantier regard for those in third world countries, and they are more likely to believe that prices of goods and labour market salaries are determined by corporate venality rather than supply and demand (to take a few of many more examples). 

The only way to vastly improve the quality of our MPs is to improve the quality of the voters – and the only way to improve the quality of the voters is to drastically reduce the number of them, and then give those that are selected randomly the time and resources to rigorously research and analyse the candidates before them.  Here’s what I’d suggest.  Reduce the number of voters in each constituency to 200 people chosen at random (to ensure a proportional representation of sexes, ages, ethnic backgrounds, income groups, religious beliefs, political views, education, and so forth) and have each of them accompany the political candidates to a location in which they stay for a week, ensuring the time, resources and intellectual and emotional capacity to question the MPs, give and solicit feedback, and test the candidates’ political calibre before casting their votes at the end of the week (the benefits of the outcome would more than pay for the financial costs of this, and some of the offsetting savings will occur by not having to employ polling clerks throughout the country on election day).

You may worry that this will disenfranchise most of the other citizens that don’t get to vote – but there’s no reason to think this.  At the start of play, everyone has exactly the same chance of being selected, and everyone in the country (both those selected and those not) will be secure in the knowledge that the people who are going to represent them in Parliament will have been chosen with the utmost rigour and analytical scrutiny by the most conscientious citizens in the country.  That cannot be as disenfranchising as the current system in which every single person that votes knows that that vote will have the same use as if they’d stayed at home. 

All that said, the bottom line is, even if the system I proposed is a superior system for improving the calibre of our MPs (which seems logically unimpeachable to me), it might still instinctively be the case that our present less effective voting system is a pearl of great electoral price from which it is too emotionally and psychologically costly to depart (even if it is the least economically rational).  It might be, in fact, that the instincts of the 99.9% are wrong on this one.  It wouldn’t be the first time that we human beings have assented to a less-rational view in order to placate ourselves emotionally and psychologically.  Or perhaps placating ourselves emotionally and psychologically ‘is’ sometimes our most rational recourse.  I’ll leave you to decide on that one.  Finally, at the very least I hope to have given exhibition to one of the many Knight-isms by which I try to live my life – this one being:

Do not fear to formulate and express a view that departs from the security of consensus - for every view held consensually was once held by no one, and may one day be held by no one again.

JK

Off Your Trolley: Re-Examining A Famous Ethical Dilemma

In my last Blog we talked about John Harsanyi’s brilliant ‘amnesia' principle, and how we can use it as a short cut to tackling ethical issues.  Perhaps the most famous of all the ethical dilemmas in circulation is the trolley problem:

"A trolley is running out of control down a track. In its path are five people who have been tied to the track by a mad philosopher. Fortunately, you could flip a switch, which will lead the trolley down a different track to safety. Unfortunately, there is a single person tied to that track. Should you flip the switch or do nothing?"

I must admit that when I first saw the trolley problem and subjected it to an economic analysis I was surprised that it had been given such a high regard, as it hardly seemed to me to be much of an ethical dilemma at all.  Using the ‘veil of ignorance’ principle we get a much clearer reason why – you don’t know any other details from behind the veil, only that you have a 50% chance of one person dying and a 50% chance of five people dying.  But it's much easier than that, because the trolley problem isn’t asserting that you have a 50-50 coin tossing situation and that you’ve got to hope the coin lands on the one person and not the five; it is saying that you can choose the outcome, which, to me, makes it a no-brainer.  It seems fairly obvious to me that in a straight choice between five people dying and one person dying we should choose the one.  Under Harsanyi’s principle we should choose the one to die because if you have amnesia and cannot remember whether you are the one or one of the five, probability favours your being one of the five. 

The next variation on the trolley problem is, instead of flicking a switch you have to push a heavy bystander on the track to stop the trolley, killing him and saving the five into which the trolley is heading.  Surprisingly, some people who were happy to flick the switch are less happy to push the heavy bystander onto the track.  On economic grounds there really should be no difference - if the only way to stop the trolley and save the five is to push one bystander on the bridge in front of the trolley we should do it, because, again, if you have amnesia and cannot remember whether you are the one on the bridge or one of the five on the track, probability favours your being one of the five. 

I said in the last Blog that duty and good intentions are high on our list of strivings, but there are also cases that bring us into direct contact with something potentially conflicting.  The philosopher Frances Kamm called this 'The Principle of Permissible Harm', which is the notion that one may endorse some forms of harm occurring but only if such harm is an effect or an aspect of the greater good itself. Some people claim that proponents of deontology do not have this option available to them, but this isn’t strictly true.  In the trolley situation the deontologist knows that some harm will come to someone (either one person or five people), so the option of ‘no harm’ isn’t available to him.  Not only does Harsanyi’s principle endorse flicking the switch to kill the one and save the five, Kamm’s ‘Principle of Permissible Harm’ says the same thing, because in Kammian terms of harm, you should push the bystander onto the track because if the five are killed this would be 5 contraventions of the Kamm’s Principle of Permissible Harm edict, whereas flicking the switch or throwing one innocent bystander in front of the trolley would only be 1 violation. 

You may object that there is a touch of self-interest in proposing the decision to kill one, but while that’s true, it doesn’t matter because, as we saw in the last Blog, probability favours self-interest and the collective good.  Here’s why it applies to the trolley problem.  If we consider Harsanyi’s principle again, not knowing which person (out of 6) you’d be in the situation, you are naturally hoping for the optimum outcome (as are the other 5).  You know you are one of the 6, so with the amnesia principle you know you are five times more likely to survive if you flick the switch or push the bystander.  It is ironic that most people’s protestations appear to be against the factor of self-interest, because here’s what they’re missing – the self-interest is not just self-interest for one, it is self-interest for all involved because when the probability is maximised for one it is maximised for everyone in the scenario.

And aside from self-interest we have beneficence too; for as long as we are behind the veil of ignorance we have the ideal balance of self interest (I want my own chances of death to be minimised) and beneficence (as long as I am choosing optimally, I am guaranteeing the best interests of the sum of people). For that reason I find it peculiar that the majority of people say they would flick the switch in the first example yet not push the bystander off the edge in the second.  In case anyone's still unsure, let me give a recap to show why an economic analysis doesn't support that view.  In Harsanyi's principle the scenario consists of the person standing on the edge, and five others at the end of the track about to die.  You don't know where you'll be in this model, which is why you should opt for the person standing on the edge to be pushed because, before you know where you'll fit, each of you has a 5/6 chance of being safe from death and a 1/6 chance of dying.  So before any information has been revealed, even the one who will end up being pushed still should have been in favour of one of the six being pushed because it gives him a 5/6 chance of being one of the safe members in the scenario (that’s why self-interest for you is simultaneously self-interest for everyone else in the scenario).  In opting for the best decision for himself he also opts for the best decision for the group, and in opting for the best decision for the group he also opts for the best decision for himself.

Now interestingly, I have a feeling that if we bring in a more emotive consideration things will change again.  I think this will give you pause for thought.  Suppose that instead of pushing the heavy bystander on his own, it emerges that his weight will only stop the trolley if your weight is combined too.  In other words, to save the five people you have to push him off and jump with him.  I have a feeling that more people will approve of that scenario than if the heavy bystander was pushed by himself.  The reason being, to jump with the heavy bystander suggests an instance of self-sacrifice on your part - a sacrifice that evidently must appear to have the best interests of the majority (the five at the end of the track) at heart, because it is still a 5/2 ratio of surviving members as opposed to the much worse 2/5 ratio. 

But this is where I think things become peculiar, because to me it seems clear that anyone who prefers you and the heavy bystander landing on the track over just the heavy bystander landing on the track probably does not have a very good grasp of moral dilemmas and is definitely not a very good economist.  Everyone should want to live in a world in which a 5/1 or 5/2 ratio of surviving members is chosen from behind the veil over a 1/5 or 2/5 ratio of surviving members.

Sometimes the moral philosopher pushes the situation further by asking if we’d willingly take the organs of the one man (killing the one) in order to save five other who needed his organs (enabling the five to survive).  Most people who think flicking the switch and pushing the fat man are ok draw the line at this third proposal, claiming the act of dismembering to be a little too extreme.  They have reached the right conclusion (I wouldn’t favour dismembering the one person either) but I suspect for the wrong reasons.  Maybe it takes an economist to conclude what a philosopher is less likely to conclude.  It isn’t because it is ‘too extreme’ that we should resist doing it - it is because the overall societal costs would outweigh the benefits.  Under Harsanyi’s principle nothing has changed with regards the probability – in economic terms you should still choose to kill the one, because from behind the veil of ignorance you and everyone else in the scenario are five times more likely to survive if you dismember the one man and use his organs to save the five.  But here’s why we should want to live in a world in which resisting dismemberment is chosen from behind the veil and not dismemberment.  Remember that from behind the veil of ignorance we are looking to choose a society that is optimal, not knowing where we’d fit into that society.  The reason we should resist is because we certainly would not wish to create a society in which people used our organs against our will to save others, because that would amount to a terribly unhealthy population full of individuals that didn’t pay much regard to looking after their body, and had much less incentive to do so.  If I know that any time soon I could be dismembered against my will to save the lives of others I’d have no qualms about living an excessive and unhealthy lifestyle - and the same would go for the rest of the population.

In actual fact, that is a good general rule of thumb regarding why utilitarianism by itself isn’t a strong enough foundation for an optimally healthy society.  Those who are opting for the utilitarian choice usually decide that it’s better to save the most and kill the fewest in any given scenario.  That’s why to a strict utilitarian saving the lives of five patients in a hospital by taking the organs of an unwilling sixth member and causing his death appears to be justified on utilitarian grounds, because it seems to maximise utility by sacrificing one person to save five.  The difficulty is, most people find the idea of using people as means to the end of promoting utility abominable if there is no recourse to moral duty.  I find I agree with them – it is questionable because on this instance it draws attention to the wider societal harms caused by actions such as this.  Strict utilitarianism fails because it would be horrible living in a land in which one might, at any moment, be sacrificed or compromised for the greater good.  Those who lived under such a regime could not be happy very easily, because they would more likely be neurotic, forever afraid of that knock on the door from the utilitarian Government’s officers. As such, actions which flout the rights of individuals (such as the transplant case) lead to a decrease in utility.

Regarding the different scenarios in the trolley problem, as far as psychology goes, it is perfectly reasonable to treat each case with different levels of revulsion.  I would always feel less uncomfortable flicking a switch than I would pushing a heavy bystander off a bridge.  I would always feel less uncomfortable pushing a heavy bystander off a bridge than I would harvesting the organs of an innocent man.  I almost certainly would feel inclined to kill the five and save the one if the one was my beloved, my child or a parent.  These feelings are perfectly natural – we have evolved to value those close to us more than strangers, and we have evolved to be repulsed at murder irrespective of whether there are five to one survival ratios that would favour such an act.

I’m not 100% sure what it says about human minds that so many people would flick a switch to save five and kill one but not push a heavy bystander off the edge to do the same, and that a situation with a 2/5 death ratio where the pusher self-sacrifices along with the man pushed is often preferred to a 1/5 death ratio where the man pushed is the only one that dies.  Maybe it just shows that these kinds of human moral instincts are misleading us.  Or maybe it shows that becoming too personally involved distorts our consequentialist analysis.  For example, if instead of physically getting up close and pushing the heavy bystander we had to flick a switch that dropped him in front of the trolley saving the five, and the switch was in a room one mile away next to a live videocam of the five people at the end of the track, we might well feel differently.

Finally, despite economic analysis to the contrary, I’m also unsure why it feels better and more honourable to grab the heavy bystander’s hand and jump with him rather than create a situation in which he falls by himself (and in doing so halves the death ratio). This is particularly strange, given that from behind a veil of ignorance all parties concerned would opt for the latter scenario.  Perhaps it shows that once we strip away all the things that pervert or confound us, we have much more of a subliminal likeness for self-sacrifice, love, grace, kindness and togetherness than we are often willing to admit.