Strange Economics
I came to an appreciation for micro-economics relatively late in my career…. I’d taken some economics courses in college, but it all seemed relatively abstract and inapplicable until many years later when I found myself running a struggling technology company. There was a long period in WildTangent’s history when the company was tremendously “successful” in terms of traffic but persistently unprofitable. After years of reworking the technology and tinkering with the business model I finally cracked a book on micro-economics and directed my technology engineering skills in the direction of business model engineering which worked AMAZINGLY. Using deep analytics of our traffic behavior and applying my own strange formulation of micro-economic theory to WildTangent’s online game business resulted in an 18X leap in the company’s revenues and a surge in traffic that resulted in the company becoming the largest online game publisher in the world within a few years. What truly impressed me with micro-economics was its power to describe and optimize business models to maximize specific results. Unlike the real-world where economic theory can be difficult to measure and analyze and may therefore seem remote and abstract, applying the theory online was very different. The online world was frictionless and relatively easy to thoroughly track and analyze with audience samples measured in the 10’s of millions of users. What I found in this “idealized’ economic world was that not-only were my micro-economics equations relevant, they were highly predictive of the audiences collective behavior. The stats I would get from our analytics reporting system when we introduced a modification to our business model conformed closely to the continuous flowing lines of my Mathematica models, and when they didn’t, it was always an error in my math.
The experience also led me to coin the term “Quantum-Economics” to describe the world of frictionless online commerce which arose modifications I made to the traditional micro-economic supply and demand equations to account for the lack of costs, inventory and distribution friction associated with online media. One of the reasons for calling my modified equations “Quantum-Economics” was the realization that in the absence of “classical” market forces, micro-economic modeling took on wave-like properties more akin to the math that describes quantum physics rather than the math of classical Newtonian physics. The point of all of this is that my success with applying economic theory to saving my failing company gave me a deep and abiding fascination and appreciation for the subject which caused me to begin looking at many aspects of life in micro-economic terms. The trouble with learning economics is that in the absence of hands-on experience it can seem remote, abstract and unintuitive. In other words, it doesn’t appear to make “common sense”. For me, it took applying and succeeding with it in the real-world for a light to go in my mind and for me to start seeing the economic forces at work in everything around me.
I’ve written many articles on the subject of “Quantum-Economics” and its power for designing online business models for this blog, but I would like to try to share my fascination with the power of economic analysis with others who may not have learned an “intuition” for it given it’s often seemingly abstract implications. I read and truly enjoyed the book Freakanomics and would recommend it to everybody as a great starting point. It’s one of those great books that makes a seemingly dull subject riveting and personal. In the same vein, I would like to explore some economic subjects that are a little off the beaten path but which I find fascinating because of their counter-intuitive properties. Because of my own strange interests in physics I tend to look for examples of “Quantum Economic” influences in the classical world… which really just means that I like to look for examples of real-world situations in which the absence of classical economic friction results in strange or interesting economic dynamics… more importantly, examples of situations in which people’s misguided economic “common-sense” results in irrational behavior.
Many years ago in the 1990’s I read a report on how the introduction of fat-free Olestra based potato chips had impacted potato chip sales which I recall to this day as having seeded my mind with the early ideas that would lead to developer Quantum-Economic models for online goods a few years later. I can’t find the original study online today, but this article is a great reference on the subject.
http://business.highbeam.com/industry-reports/food/potato-chips-corn-chips-similar-snacks
Basically, what happened was that potato chip sales began declining precipitously in the 1990’s as a result of a “health-conscious” movement in America away from salty and fatty processed foods. This resulted in the food industry introducing “healthier” potato chips with less salt and fat… which resulted in a massive increase in sales of these products and… more interestingly… an even more disproportionate increase in salt and fat consumption! In other words, people seeking healthier food choices and food companies supplying them resulted in Americans eating MORE FAT AND SALT as a result. This phenomena was, of course a great economic mystery to a lot of people, but good economic analysis illustrated exactly HOW this seemingly absurd phenomena came about. Most interestingly to me, is that today I see the answer in “quantum-economic” terms. Classical economics doesn’t seem to explain how this phenomena would occur because if people demand LESS salt and LESS fat than you would expect the supply and consumption of these goods to DROP not increase, right? If I replace bags of potato chips on store shelves with the same quantity of product containing less salt and fat at the same price as the old product, assuming no other variables, such as taste, changed, I would expect to sell the same volume of product, make the same money but end up with people consuming LESS salt and fat, right?
Well, obviously, I’m going to say WRONG… but why? Something else MUST have changed right? I don’t think anybody would argue that the new products tasted BETTER or that suddenly stores started devoting twice as much shelf space to chips. What changed? This is where the strange economics begin to emerge. Economic theory was really designed to describe how goods and services are exchanged for MONEY, but money isn’t the only currency that people trade-in, it’s just the currency that we tend to think about. In this case video games and potato chips actually have a lot in common. Neither product has any real productive or redeeming properties, yet we VALUE them for some reason. Consuming them FEELS GOOD, which we are willing to pay CASH for. In other words we subconsciously assign a price to our emotional state and price many products and services we buy NOT for their practical tangible economic value to us but for how they make us FEEL. So, let’s enter the strange world of quantum economics and pretend that potato chips have ZERO cost associated with them. They are TOTALLY FREE to everybody in any volume. Would people consume more or less potato chips than they do now if they were free? Well of course the answer is MORE and most people can intuitively understand why this would be the case. But now the strange economics question… assuming all potato chips were free and I introduced new FREE potato chips containing LESS salt and LESS fat than the other free chips, would consumption increase even MORE? Well… yes… they probably would… but why?
Feeling fat and unhealthy is a NEGATIVE feeling that we associate with eating potato chips. This FEELING reduces the subconscious value we are willing to pay for potato chips. Even when the chips are FREE we are paying this negative emotional price for consuming them which reduces consumption for potato chips JUST AS MUCH as increasing the cash price of chips would accomplish. Now we are dealing with a form of currency that DOES NOT conform to ordinary economic theory. It can’t be taxed, it has no costs, inventory, requires no “energy” to manufacture or even rational basis for a price that can be assigned to it and yet it tangibly affects the collective demand and cash value of potato chips. So what happened to market demand for potato chips with the introduction of lower salt and lower fat varieties? The emotional cost of buying potato chips dropped precipitously and sales soared. Pringles potato chip sales, for example, doubled with the introduction of fat-free Pringles. Sales soared so much that the NET result was much greater consumption of salt and fat than before the “healthy” potato chip was introduced.
This wasn’t the ONLY reason chip sales soared however, another reason was that sales of smaller packages of chips sold in convenience stores at much higher margins also soared because people regarded buying and consuming chips in smaller units as another way to reduce their overall salt and fat consumption from potato chips, while still enjoying them thus increasing the margins and profits on potato chip sales. So why are Americans Obese? In addition to being lazy and sedentary, we are fat because of our poor understanding of economics in a relatively free-market economy. Ironic, isn’t it?
Oatmeal sales is another fascinating example of this phenomena. We all KNOW that oatmeal is good for our hearts right? Everyone including the government tells us this is so… however, it’s not exactly true for two reasons. First, studies found that the reduction in cholesterol associated with eating oatmeal for breakfast was ACTUALLY the result of eating oatmeal INSTEAD of bacon or pancakes. The oatmeal had NO IMPACT on reducing cholesterol other than being a substitute for a different breakfast good that was higher in calories. Second, it has been “discovered” that salt and cholesterol levels actually appear to have NO IMPACT on heart health or longevity (most people haven’t gotten that memo yet, even though it is rapidly becoming scientific “consensus”)
http://www.huffingtonpost.com/dr-jonny-bowden/cholesterol-health_b_2035487.html
This is a great example of a “positive” quantum-economic outcome. People ate LESS “unhealthy” food because they IMAGINED that oatmeal was healthy which validated the belief that oatmeal was responsible for improved health outcomes which further enhanced the myth. The net result was people eating lower calorie diets while buying more oatmeal. In this case the people were assigning a higher value to feeling healthy about what they were eating than they were to eating foods that tasted better.
Classical economic thinking works well for describing trade in goods that have practical but NOT infinite value. For example, survival has nearly infinite value to us, if somebody held a gun to our heads we might be willing to trade almost anything NOT to die, right? How would you assign an economic price to NOT DYING? The answer is, it’s worth almost anything you’ve got, which may vary wildly depending on your economic status in life. Talking about supply and demand really doesn’t make much sense in this example because its meaning breaks down, however when we talk about something like food, which we all need a continuous supply of in order to NOT DIE, our understanding of economic theory begins to make sense. When many producers work in competition with one another to meet a markets continuous incremental demand for NOT DYING, classical economics emerges. However, when it comes to intangible needs like NOT BEING MISERABLE, classical economics begins to fail us because, like the need to NOT DIE, we place a nearly infinite value on NOT BEING MISERABLE as well BUT tangible goods and services don’t consistently satisfy this need and can’t be fully described using classical economic methods, YET we do unconsciously assign a price to them that is hidden in all of our purchasing behavior.
We all know the saying “Money can’t buy happiness” but what we really mean is “We don’t know how to value happiness with money” because the things that make us feel good are often intangible and don’t have physical costs associated with them that make classical economic pricing applicable to them. When I first began to understand these ideas as they applied to selling games online I had a tremendous struggle getting the people around me to understand what I was talking about and why understanding it was important to our business. I began looking for tangible real-world examples of the kinds of ideas I was trying to convey that would be easier for people to understand… and I found the examples I needed at the supermarket.
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It was at the supermarket that I first came to understand and appreciate the concept of “portfolio-pricing”. The importance of portfolio-pricing emerges from the realization that it is impossible to identify an individual buyer’s value for a good or service without altering it. This is the quantum-economic analog to Heisenberg’s uncertainty principle, which simplistically observes that it is impossible to measure the location and velocity of a particle simultaneously because there is no way to measure one of the variables without altering the other. We can, however, measure the average location and velocity of a group of particles to a high degree of precision. For example the accuracy with which we can measure the location and speed of a thrown rock is very high. The same is true of figuring out the emotional or irrational value people subconsciously assign to the products they purchase. It’s impossible to figure this out for an individual person and an individual product because the value is highly relative and changeable, but it can be measured very accurately and captured for a large group of people across a portfolio of products.
Consider the toothpaste aisle in a supermarket. The shelf-space the toothpaste occupies has a real tangible economic real-estate cost. The toothpaste product itself is… well… paste… it costs nearly nothing to make and can be stored almost indefinitely. I’m sure everyone visiting the toothpaste aisle at a supermarket has asked themselves the question… “Why does PASTE come in 50 brands and occupy half an aisle?” Okay, maybe I’m the only one who thinks about pricing models while shopping but the point is, it does seem kind of odd doesn’t it? If people really only valued toothpaste based on how effective it was at cleaning their teeth you would think there would be one row of the stuff in one size for .50 cents wouldn’t you? Why would you buy a small tube of toothpaste if the stuff never goes bad and you know you’re going to be using it your entire life? Might as well buy it in bulk right? How do supermarkets justify filling whole rows with the stuff and charging nearly $7 for a small bottle of Hanna Montana tooth paste, or gel toothpaste with sparkly crap in it that you’re just going to spit out?
The answer is portfolio pricing. The presence of a huge selection of toothpaste varieties increases the collective value of ALL of them in your perception. Nobody goes to the grocery store SPECIFICALLY to buy just toothpaste, BUT if you happen to be at a supermarket for other purposes, you will almost certainly ALSO purchase your toothpaste there because they have the best selection of it and it’s not worth the investment in energy and time to make a special visit to the “Toothpaste warehouse” just to buy a commodity product. Let’s enumerate just a few of the intangible “features” that the supermarket uses to sell us sodium bi-carbonate paste for seven bucks.
Convenience- Dentist approved
- No-mess bottle
- Family size
- Travel size
- Pretty packaging
- Trusted brand
- Flavor
- Tooth whitening
- Cute branding for kids
- Fresh breath
- Not needing to bend down to reach the cheaper stuff on the bottom shelf
All of these intangible properties of toothpaste have real-value to toothpaste buyers, however it’s impossible to match the optimal toothpaste “feature set” to every buyer, so instead the supermarket creates a “portfolio” of toothpaste features and calculates an optimal portfolio value for the family of products grouped together and presented to a large audience of buyers. Each buyer SELF Maximizes the amount of money they pay for toothpaste by evaluating the entire portfolio of toothpaste “Features” and deciding which combination of features they value most, thereby justifying a $7 premium for what should otherwise be a .50 cent tube of paste.
I went to so far as to track down a supermarket manager and ask them about how they make decisions about their shelf space. The manager informed me that they DON’T actually make those decisions, the vast majority of the aisle space is controlled and stocked by major food companies like Kraft and P&G who hire the best and brightest mathematical minds out of top universities to design optimal product portfolios. These companies then PAY supermarkets rent to allow them to stock their shelves with their product portfolios. This is a great benefit to the supermarket because of course they lack the extremely advanced math skills and enormous data required to compute the optimal product configurations for their stores to maximize revenue and profitability from a business that survives on only 2%-5% margins.
I realized, of course, that the same concepts applied to selling online games. Having a portfolio of games that were carefully selected to represent a range of intangible entertainment features that people valued increased the perceived value of all of the games in the service and weirdly increased the amount of traffic AND the amount of money people would spend simultaneously. Take an individual tube of toothpaste out on the street and ask people how much they are willing to pay for it and you might get offers of $1-$2, place the same tube on a shelf in a matrix of toothpaste products all priced from $2.50 – $8 and magically the same people will choose to pay $5 for some tube of paste.
Having introduced the idea of how to think about pricing intangible goods like “feelings”, it’s interesting to observe that a wide range of highly popular economic beliefs are the result of economic illusions that result when economic reality doesn’t conform to common-sense. For example, here’s a really interesting and common example of an economic delusion widely held by almost everybody. Are fuel efficient cars a good thing? When you shop for a new car is fuel efficiency an important consideration in your choice of car? Do you believe that the government forcing auto makers to produce fuel efficient cars reduces pollution emissions and reduces wasteful gas consumption? Most people would nod approvingly at these statements as being obvious… right? These beliefs are so deeply held and accepted that it’s almost impossible to question them… but let’s transform the question into a seemingly entirely different economic space… Is selling milk at half price a good thing? If milk were sold for half price, would people drink MORE or LESS of it? Do you think people will waste more or less milk if it is cheaper? Does making milk cheaper reduce Peoples demand for milk? Should the government subsidize milk prices to make it cheaper so people will consume less milk and waste less milk?
Give those questions a second to sink in before instinctively responding that it’s NOT THE SAME THING as making fuel efficient cars, because I’m going to show you that it’s actually EXACTLY the same thing in economic terms. When I frame selling cheaper milk in the same terms as making transportation cheaper by virtue of needing less fuel to travel the same distance it all suddenly sounds absurd doesn’t it? This discontinuity in beliefs stems from a classical economic illusion. GAS is tangible and its price is subject to well understood classical economic forces, TRANSPORTATION however is intangible and subject to the strange pricing vagaries of quantum economics. Some people buy gas purely for economic purposes such as transporting goods from where they are made to where they will be sold, however a great deal of transportation is purchased for intangible reasons that have little correlation to the price of gas. Like low-fat potato chips… demand for “recreational” transportation goes UP when transportation is cheaper for any reason. Making a car that consumes half the fuel of an ordinary car is equivalent to selling gas at half price to that car owner. The amount of TRANSPORTATION that cars owner will consume at the lower price may not bear any rational correlation to the reduced cost if it is recreational in nature. Just as people may consume four times as much milk as they did at half price, they may travel four times as much when gas costs them half as much.
There are a great many societal beliefs that people hold very dear that make no sense whatsoever in rational economic terms. Consider markets for any products that have nearly infinite value to their customers. These markets generally fall in two broad categories, the general market for NOT DYING and the general market for NOT FEELING MISERABLE. The market for “criminal enterprises” like drugs, gambling, sex, etc. can all be said to describe nearly infinite demand markets. The people who NEED drugs, gambling or sex to NOT FEEL MISERABLE will pay everything they have got to get this need met. Is there any amount of money or enforcement that can be spent that will prevent such markets from existing? Probably not. Weirdly, not only can these markets not be quashed by traditional enforcement means, criminal enforcement actually constitutes a government subsidy for these enterprises.
Our government PAYS farmers money to NOT grow crops and places high tariffs on the import of certain foodstuffs in the theory that protecting our agricultural base is strategically important to the country. By preventing competition and paying farmers to produce less food we keep food prices higher for everybody and prevent our agricultural base from collapsing under competition from farmers in poorer countries that can produce the same foods much more cheaply. Whether or not you agree that this is a good practice, we all understand that it achieves the DESIRED result of keeping farmers in business by RAISING and stabilizing the cost of food in the country while reducing competition through tariffs. As with food subsidy’s, criminalizing demand for goods and services that also have nearly infinite value to their consumer’s results in an economically EQUIVALENT effect to subsidizing the criminal enterprise. Penalizing and jailing drug dealers and outlawing classical retail distribution channels from selling drugs has the same economic impact as raising tariffs on food imports. It reduces competition and therefore INCREASES the perceived value and potential margins for people who are willing to take the risk of getting caught. Paying police officers and DEA agents to PREVENT the sales of drugs is analogous to paying farmers NOT to produce food. The net result is a thriving, violent, and highly profitable market for drugs where one might not otherwise exist if it were not for the subsidies. The cost of drugs has no impact on demand for them which is nearly infinite, so criminal enforcement simply increases the profitability of the business for its participants, just as a gas shortage increases the price of gas while its cost remains the same.
In my next installment on this subject, we’ll explore more of the absurdities of modern “Eco-nomic” theory such as why solar panels and windmills are net energy CONSUMERS and why electric cars and “energy efficient” bulbs consume MORE energy than their traditional counterparts. I will preface this article by saying that I was born in Berkeley California in 1967 and was raised in a log cabin in Alaska for 16 years with no water, electricity or plumbing, so if you think you know anything about being “environmentally concerned” you haven’t met MY family. Save your ignorant liberal outrage for somebody who doesn’t know any better. 🙂
The counter to your point of gas use going up from the effective price (actual price per mile) going down is that when we look at the majority of people then they have a budget. The money has to come from somewhere. This puts a significant depression on how far gas use will increase as they will have to find money from other sources to buy more actual gas (that takes them further due to efficient cars) so so it is skewing the budget spread by making discretionary travel cheaper and so able to push out other spending but it is highly unlikely that giving everyone a car with double the efficiency would give a major rise in discretionary gas use, as they’d have to travel more than twice their existing total travel (so many times increasing their discretionary car travel distance) to even reach the point of using the same amount of gas (same level of pollution) as they currently do. Now the added commercial work that could become viable by the movement to more efficient vehicles, that is worthy of consideration as a potential risk of increasing gas use (and massaging to discourage via limiting commercial fuel subsidies etc).
Increased car efficiency can also be looked at from the societal case, by reducing the price of discretionary travel it is providing that to more people. Car use increases and this is providing an added freedom (and happiness with our model of beneficial results from being able to travel more) to all the people previously priced out of that activity before. The problem is the combining of heavy advertising for added efficiency with a lack of detailed personal auditing/budgeting that will make some people think a car with 5% added fuel efficiency will significantly increase how far they can drive on a reasonably fixed gas budget. And then wonder why they’re feeling the pinch at the end of the month and not realise it is the added travel.
An environmentally concerned government would both push (via road tax linked to emissions or mileage / other strategies to penalise ‘gas guzzlers’) added efficiency of vehicles to increase the freedom of the individual to use limited budget for travel (and reduce the cost and pollution generated from mandatory travel that the internet has unfortunately not solved by removing the daily commute from almost any workers who could work remote) AND increase duty on gas to reduce the bonus from this added efficiency. A classic case of new technology arriving (added efficiency) and the allowance of a push against ‘bad’ activity (generating pollution, using up a limited resource) by increased taxation. The only problem if those without the capital to upgrade to a better vehicle, for which many places have these schemes that allow old vehicles to be scrapped for a government subsidy on a new efficient vehicle to remove this barrier from those who would not otherwise be able to afford to move to a better (for them, for the environment) vehicle. As you point out, the interactions (and lack of people acting as perfectly rational entities) make it all more complex than a first pass, but that does not mean everything ‘good’ is ‘bad’.
Well you raise lots of fun economic debates in one comment Shivoa, some of which I expect to touch on in the my next article. In the case of cars the term “recreational” is an oversimplification of a consumption decision that is about preference vs classical economic motive. For example, I lived in the Berkeley area of CA for a while where many people lived in the country because they could afford larger homes and send their kids to better schools while commuting to the city to work. They all fastidiously recycled, bought “green products” and drove fuel efficient hybrid SUV’s. Were they consuming LESS energy or resources for any of this behavior? Clearly not, the CHOICE of a discretionary longer commute had enabled them to live much more energy lavish lifestyles including fuel consumption so in this example, the “fuel efficient” car had not only dramatically increased their driving time (and sitting in traffic time) it had enabled them to consume vastly more electricity by also dramatically increasing their home buying efficiency. They could get a home four times larger and more energy consuming by virtue of being able to travel twice as far at the same cost. The irony is that BART enabled the same phenomena yet also advertised itself as being energy efficient.
I’ll start the fun for the next feature by asking the following questions Shivoa? Why would an environmentally concerned government amass vast debt building roads at all and then taxing them? Isn’t that kind of silly if the simple absence of tremendously costly roads and infrastructure were JUST not created to enable transportation consumption in the first place? Doesn’t simple congestion achieve the same travel deterrence as a tax? Why would the government bother to incentivize the purchase of costly NEW “energy efficient” cars (which take vast amounts of energy to make) instead of just paying people to drive their old cars less as they do for farmers? Why would you imagine that increasing the cost of fuel would reduce consumption of transportation? Since transportation underlies such a substantial portion of our entire economy isn’t it more likely that the result of your proposal would be simple net inflation and the associated economic privations and NO net loss in transportation beyond what results from less overall economic activity in all sectors and a proportionate drop in the COST of gas resulting from reduced demand for it?
You see the problem I have with the widely espoused government solutions for environmental problems, even if I accepted the premise that our energy supply is limited, make no logical sense under very basic rational scrutiny. Stop wasting my tax dollars building roads if fuel consumption is bad and you want to deter it. doh… What is the government going to do with the tax money after it collects it? Give it to poor people to enable them to drive more? Increase people’s life spans so they can drive more? Fight wars to preserve freedom with gas guzzling jets and tanks? Pay the salaries of government bureaucrats so that otherwise unemployed people now have jobs and need cars? Pay our debts to China so that they have more money to develop into a gas guzzling first world nation? How does ANY of that make any sense as a solution to imagined energy shortage or environmental problems?
I think you’re combining several things into a single bucket there and so preventing a real solution from emerging unscathed (I believe all of the government intervention I mention is quite common in at least some EU states, those desperate to hit their international commitments to reducing pollution).
Building of roads allows for uncongested travel because the worst thing for the environment and the citizen is people sitting taking too long to get somewhere using too much fuel because they’re sat (possibly with the air con on) going nowhere with the engine ticking over. As you point out, transportation infrastructure is too important to the economy to allow to go rotten and so must be invested in to account for the demand of a decade later when the projects complete (why it takes 10+ years to build a road or railway is a different issues of government ability to actually manage infrastructure projects and the private companies paid to enact their plans at the lowest cost). But government see this as being a problem of mandatory demand (we all have to drive to work, at least in much of Europe is is very hard to build housing where you want, and a lot of commercial activity is demanded by the current shape of the economy) and ensuring the price of this is constrained first, on top of which the discretionary travel is an environmental issue they would like to shape with pricing but only once the first step (improved efficiency via new technology) is done. There is clearly an issue with using discouraging pricing via taxation while trying to avoid penalising those who cannot afford required use of such services, which is why prioritising efficiency and providing a path to upgrade for all is important (also worth noting we probably spend more time worrying about the just-world fallacy over here, we have no American dream of everyone being able to be above average).
The best situation is people using the least gas to travel the least they can at the optimum cruising speed (remove unnecessary deceleration and acceleration and sitting in traffic). But if we can’t get there then at least giving people the most freedom to travel as cheaply as possible assuming they do it efficiently (make low efficiency vehicles significantly more expensive, invest in infrastructure to reduce congestion, make an easy path to moving to more efficient vehicles) is a real world second place goal. And yes it does mean having to weigh the freedom to travel in a vehicle that has a low MPG as being something only for the rich (as all freedoms do, especially with the lovely mix of pollution that comes out of cars that everyone else has to inhale) and is not the best possible result. I would not be surprised if similar results could be generated with actual tracking of how far everyone drove and tax incentives for not driving very far (obviously this would be a windfall for those too poor to own a car at all) but the overhead to manage such a scheme (they do occasionally get talked about, GPS in every vehicle or roadside trackers/cameras) would be a drain on the economy when the easiest way to incentivise using less gas is to make it more expensive by increasing the tax.
It is very hard to generalise this over such a difference in location (if the US saw prices for gas in line with prices across Europe then there would likely be an uprising, and over here we are used to budgets increasing duty on fuel as a necessary tax on generation pollution and paying for the costs of the results). I do believe some statistical analysis has been done of gas prices in the US and corresponding use of public transport that indicates the use of personal transport can be curbed for more efficient shared travel systems for essential and recreational travel, but obviously that would require long term investment in public transportation system to take the added load (which may also be an issue harder to deal with in the US). I have certainly not done any meta-analysis of the research papers in this area to give a definitive comment on correlation.
Actually, you would be the one introducing the magic term “pollution” to confuse a pure economic discussion. “pollution” is a word we throw around to mean “Putting chemicals in a place we don’t think they should be”. The term pollution is used very generously in energy management and government intervention conversations specifically for the purpose of confusing rational dialog by imposing an arbitrary term of judgment on different solutions to the same economic problems. The term “pollution” is used by folks like yourself to try to exclude or quell points of view that don’t conform to your own by suggesting that people who disagree are somehow in favor of “polluting”.
So let’s unravel the arguments YOU are combining in a single bucket.
1) I don’t accept your definition of “pollution”. Dumping carbon dioxide into the atmosphere is not polluting and is the natural outcome of biological metabolism on Earth derived from burning organic fuels for energy, which all living things have done for the past 3.5 billion years, thus terraforming the Earth’s climate into one habitable to life today. It is no more polluting than dumping water into the sky.
2) You believe that there is a real difference between people wasting their time consuming energy sitting in traffic and wasting their time consuming energy performing work that is converted to taxes? These two forms of energy wasting are economically and environmentally analogous, you just HOPE that what people do for a living wastes less energy than sitting in an idle car.
3) Building roads involves enormous energy and environmental damage… why aren’t you concerned about this pollution and ecological destruction?
4) People who understand economics know that it is a liquid that cannot be easily or trivially contained with regulation, people who want the power to rationalize confiscating others income pretend that this is not the case and that there is some amount of money and regulatory force that can overcome market forces.
5) It is your misunderstanding of economics that produces and keeps people poor by virtue of imagining that paying people for not being productive eventually results in them becoming productive… while punishing successful people, somehow motivates them to produce more…
6) Actually any uniform distribution of energy or wealth is nullified economically. If you traveled to an isolated closed island economy and gave all of the islands “poor” citizens 10 million dollars each… what would change about their lifestyles? Nothing… the cost of everything they consume within their economy would increase in direct proportion to the wealth you had re-distributed. All you gave them was the gift of inflation. You might even introduce temporary hyper-inflation when all of the islands economic output ceased because people thought they didn’t need to work anymore. That’s exactly what happens to medical costs when the government guarantees them all, to food costs when a government guarantees that everyone is fed or college bills when a government guarantees that everyone is educated. You get inflation in whatever market was artificially “made fair” with no change in outcome. You might say… AH but what if the island has one rich citizen who has all that money and you confiscate it and pass it around? Same result… either the money was invested in the economy by the citizen thus employing people and you KILLED that investment by taking the money out of the economy and therefore killed the jobs and destroyed any motive for the rest of the islanders to work OR the money was in a mattress under the citizens bed and was not warping the economy or causing inflation until you artificially induced it.
7) The idea that public transportation is energy efficient is analogous to the notion that solar cells are efficient. Public transportation consistently fails without forced tax subsidies from the systems NON-users…combined with tremendous debt. Needing to tax people who don’t use the system in order to rationalize that the people using the system are somehow consuming less energy fails to recognize that vast energy had to be wasted by the people WORKING to generate the taxable income that subsidizes the system. As stated earlier this perception relies on you to accept that sitting in a idle car is a waste of time and energy but taxing productivity is not. Additionally the vast costs of public transportation generally produces financial debt on a scale that would have purchased transportation for all of the systems users more efficiently as a simple fuel subsidy. Creating debt is an economically brilliant way of hiding “pollution” and energy consumption by borrowing from the future because debt obligates your children to do the work and polluting you avoided in order to pay your debts. Furthermore, public transportation enables poorer people to consume MORE energy not less by enabling them to live further from their jobs in lower cost neighborhoods where they can afford bigger more energy consuming homes for the same cost.
How much debt has the EU accumulated for its public transportation? How much interest will you pay on that debt over the infinite amount of time over which it will never be repaid? How much productive work will have to be “wasted” to pay that debt? How much “pollution” will that wasted work generate?
Thus as I said, none of these prescriptions for energy conservation or pollution reduction make any rational sense under basic scrutiny.
Alex, I don’t know why you’d call it strange economics. Economics has always been premised on scarcity vs utility. Someone trying to consume more expensive “healthy” meals is an expression that it isn’t monetary scarcity that drives their behavior, but the lack of health, or the ignomity associated with gluttony. In any system, price inelasticity occurs when price is no longer the rate-limiting factor. It doesn’t preclude the existence of other causes.
That’s correct, economics provides tools for analyzing price elasticity without explaining it or predicting it. Quantum Economics gave me tools to predict certain kinds of elasticity using models for pricing intangible value.
I re-read your article. Good stuff. How is this different from market segmentation? Or are we dealing with the creation of different needs?
I wonder if this theory can be applied in reverse to reduce consumption, e.g. in terms of government policy, e.g. reducing childhood obesity, smoking or excessive video gaming. Perhaps teaching people how to recognize what’s being sold as being the same junk, different packaging.
Yes, it’s symmetrical with market segmentation. Market segmentation doesn’t attempt to explain WHY intangible segments exist, how they interact, or price them, it just measures and optimizes the result. In other words, traditional market segmentation might predict how a portfolio of products might yield revenue from an audience in concert but it would not tell you the virtual value of each of the intangible components of the portfolio. in this context, it’s just a linear algebra transformation, like separating out the X and Y vectors of a cannon ball trajectory. When the product becomes truly “virtual” like a game, the linear algebra transformations break down and become non-linear. This is an important distinction in “quantum economics” because as I discovered with games the intangible components of value to a game can amplify each other in a zero friction environment which is probably not the case with physical products. For example, does toothpaste branded with Hanna-Montana which has a segment value of $2 when combined with being “breath freshening” which has a separate intangible value of $1 acquire a $5 dollar virtual value when packaged-together from a new segment? This occurs with online games… ( A good example was a game that appealed to kids that ALSO happened to be educational would amplify value because kids were much more successful at persuading mom to buy it for them) I can’t claim to know much about how common feature amplification is in physical goods.
With respect to the government, I believe that people would be much better off if the government didn’t assume the role of absolving people from being personally responsible for the welfare of their families and communities by providing soulless charity instead of expecting people to be individually responsible. The problems you describe can only be solved from the bottom up, through the culture, not from the top down through a parental state.
I thought your idea interesting because it reminded me of how Stackoverflow wondered whether they could “fool people into providing answers for fake internet points”. Virtual achievements can create new achievements/currency that are orthogonal to existing ones. For for game designer, you can create a virtual world which people cannot be satiated because there’s always another thing.
This is similar to how snack companies keep coming up with new flavours and new packaging. The real cost is not in the physical packaging, but in the cost to society of people being overweight. This is not a question of personal responsibility because an individual only has so much attention span that they can spend on finding out which way their preferences have been hacked.
I think it’s very interesting how we let TV tell us that our diet is responsible for our obesity when we spend 5.11 hours sitting on our butts staring at it/day and almost 12 hours/day consuming media in general.
http://www.statisticbrain.com/television-watching-statistics/
http://www.huffingtonpost.com/2013/08/01/tv-digital-devices_n_3691196.html
Here’s a crazy idea, what if our food is just fine… and the problem is we don’t work for it anymore? Isn’t it interesting how eager the TV and the government are to tell us to eat differently but they never tell us to turn off our media?
http://www.caloriesperhour.com/tutorial_net.php
10 hours/day of sitting consuming media vs 10 hours/day of walking is roughly equivalent to eating two extra Whoppers/day or about 2lbs of body fat accumulation per week.
If we are apparently too stupid to regulate our own diets… why does the government permit us to regulate our own media consumption? No warning labels on my 84″ TV for some reason.
Inversely, how does it cost society anything to be obese? Where is the cost? We all live longer on average than before weight was a problem, we all are going to die and experience debilitating decline and soaring medical costs approaching infinity before we go unless we do society a huge favor and die abruptly in the prime of health. How does obesity hinder our productivity when we sit at desks all day to work?
I love the stat about the average high school kid graduating having spent more time watching TV than in a class room. I’m not worried about child-hood obesity, I’m worried about childhood stupidity.
My view personal is that society regulates for its own survival. Whether this is done through legislation, religion or shared values, it defines a set of principles to allow internal harmony and fend of enemies. After all, intra-species competition is the fiercest because competitors occupy the same niche. Libertianism, while sound in theory, does not deal with complexity well. Meanwhile, good governance requires participants act in good faith, which is soundly lacking at the moment.
The stupidity you see in your government now is simply because it has grown to a size where there are no natural predators left, and there’s a certain cancer which prevents the brightest minds of the country from influencing the nations outcomes, it’s like a 300million-core cpu running on a handful of cores.
You know Chui, I think I can accept THAT argument. You may be right about Libertarianism, but it relies on market forces doing the thinking that stupid people can’t. There’s also good cause to believe that societies age and decline with decadence that results in their overthrow through war and privations. It’s not in anybody’s interest to invite inevitable societal collapse though insurmountable debt accumulation which results from the out of control expansion of government. We saw EXACTLY that happen to the worlds second largest superpower in the 1980’s. If we let that happen to the US, it would devastate the entire world economy. I personally believe that governments serve people best when their role is very narrowly defined and that legislation and regulation cannot substitute for shared values or religion… the scary phenomena we have taking place in the US is government as a religion.
Debt is all about reputation. Market forces have always been – and will continue to dictate the US’s ability to raise debt. You only need to knock a few notches off US’s credit rating before US finds debt hard to stomach.
Everyone knows the US has a debt problem. However, none of you could agree on how to fix it. You have rascals who wrap themselves up in the flag when it suits them, forgetting wars have sunk more civilizations than pestilence.
I recall an article about how the Military-Industrial complex in Soviet Union self-servingly ratcheted up the arms race at the expense of conventional industrial production. The current situation in the US when civilian workers are being furloughed, but the military continues running on full steam strikes an eerie parallel.
If there’s a place for Libertariansim, it is not in getting rid of government. It is in each individual taking time to seriously educate themselves before they pick their representatives. To align with no-one, and trust nobody. Politics is too important to be infotainment. Both sides of politics are extremely polarized. Grumbling about bad government on talk-radio is easier that worrying about one’s own failings.
Too right about how government has become religion. There’s so much dogma and ideologues around that no one can have a sensible discussion about the messy business of governance.
Shocking Chui, “War” is just a Republican word for “Stimulus” program… which are great right? When it comes to debt accumulation in the US, welfare is trumping wars for our civilization destroying debt. Operating the military is the one function everybody agrees is the an appropriate role for government. Distributing charity on the other hand…
I don’t recall advocating Libertarianism or doing away with governments. I do advocate doing away with the ineffective and dysfunctional aspects of government… such as running up accelerating debt with no budget or plan to ever address it. We all know that only has one outcome and it’s not good for anybody. Personally, I’m a huge fan of the Republicans blocking raising the US debt ceiling. It desperately needed to be done and whatever harsh economic consequences may come from it will be far better than what will happen to us if it continues. Debt is NOT just about reputation, it is also directly linked to REAL economic output and the US is very close to never having the economic output necessary to pay its debts. The US government has gone completely out of control and any measure to reign it is, is well advised at this point. Who cares why politicians finally do the right thing… I’m just glad it’s happening.
On the economics of oatmeal, check out the higher priced “reduced calorie” instant oatmeal sometime. It is the same as the regular instant oatmeal, just less of it in each pouch – hence the reduction!
Oh, good one. Yeah I’ve had two other interesting experiences with that. The “low-fat” mayonnaise at Subway is the same as the regular fat mayonnaise, they put it in a separate bottle to indicate to the servers that they should apply half as much. I’ve also been told at several bagel shops that their “low-fat” cream cheese is just regular cream cheese that they apply in half the quantity.
My wife informs me that I ruined her bath after she read this article and made the mistake of comparing the ingredients in her expensive “color preservation” shampoo to her daughters “hair strengthening” shampoo and found the identical ingredients listed in the identical order.
I tried getting into micro 101 once, but at the first few lectures it had me scratching my head. Supply and demand curves for instance. It just makes no sense at all, why are those 2 independent? A bit of inquiry would show you they are linked in various ways. There’s no accounting for time, which seems pretty fundamental. It also doesn’t account for herd behavior, group dynamics, class based preference, etc etc… I just quit after a while. Similar problems with price and wage theories, they’re all nice cartoon versions of some fictional world. How is that supposed to help me running a business? Maybe I didn’t get far enough, but I’ve recently read some articles by heterodox economists lamenting the state of the profession. Debt ceiling is another one of those things, how is a government supposed to keep it’s balances in check when it’s spending is not discretionary? Should it just tax more and cut social benefits? That doesn’t seem very ethical, not to mention it would do bad things to consumption in the private sphere, etc. I also don’t get how it can get “broke” if you have a press printing money…
So yeah, to me ‘strange economics’ sounds like an oxymoron.
You do have a point, economics didn’t need my help getting strange. I think the big trouble with how it was taught in college in my day was that it had to be cartoonified to be manageable with a calculator and a human brain. We all know it’s much more complex then the simple business school equations would imply.
In a rare demonstration of my own naiveté on the subject of why governments do the things they do, I’ve always wondered by the government didn’t simply print money INSTEAD of taxing people. Printing money is just taxation via inflation and you would need a lot fewer IRS agents, accounts and lawyers to administer it… oh wait a second… damn it!