Crawl Across the Ocean

Sunday, May 31, 2009

Playoffs Never-Leaver: Round 4

Round 1 post, Round 2 post, Round 3 post

They're still playing hockey? It sure seems like a long time since I made my round 1 post. Let's get this over with.

First, let's recap my picks for round 3:

Pick: Wings in 5

Pretty much as expected, although I was hoping for a bit more of an offensive show.

Pick: Penguins in 7

Well, my gut was right that Pittsburgh would win, but I certainly didn't expect a sweep. This was probably my biggest missed prediction so far, in that I didn't see the series being anywhere near that lopsided.

OK, so I'm a bit late for the finals, with Detroit already winning game 1, so I won't make a prediction, although going into the series I was leaning towards Pittsburgh, perhaps thinking of the 2 back-to-back Oiler-Islanders series of the mid 80's which marked the changing of the dynastic guard in the NHL with the Gretzky led Oilers taking over from the Islanders who beat the Oilers in '84 for the 4th straight title, only to be beaten easily by the same Oiler team one year later in '85. But after game 1, Detroit may be just too good. I guess we'll see.

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Thursday, May 28, 2009

Medical Costs and Financial Regulation

One of the best places on the web to find links to interesting material on ethics and economics with interesting discussion thereof, is Mark Thoma's Economist's View blog.

A couple of recent links from there that are worth noting here on the blog:

1) The Cost Conundrum, links to this excellent piece of journalism by Atul Gawande in the New Yorker, tracking down the source of high costs in the U.S. medical industry. I may come back to this piece further down the line in my series of posts on ethics.

A couple of quotes from the article that I want to remind myself of when I come back to this later,
"The primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine.

This is a disturbing and perhaps surprising diagnosis. Americans like to believe that, with most things, more is better. But research suggests that where medicine is concerned it may actually be worse."


"There was no sign, however, that McAllen’s doctors as a group were trained any differently from El Paso’s. One morning, I met with a hospital administrator who had extensive experience managing for-profit hospitals along the border. He offered a different possible explanation: the culture of money.

"In El Paso, if you took a random doctor and looked at his tax returns eighty-five per cent of his income would come from the usual practice of medicine," he said. But in McAllen, the administrator thought, that percentage would be a lot less.

He knew of doctors who owned strip malls, orange groves, apartment complexes—or imaging centers, surgery centers, or another part of the hospital they directed patients to. They had “entrepreneurial spirit,” he said. They were innovative and aggressive in finding ways to increase revenues from patient care. “There’s no lack of work ethic,” he said. But he had often seen financial considerations drive the decisions doctors made for patients—the tests they ordered, the doctors and hospitals they recommended—and it bothered him. Several doctors who were unhappy about the direction medicine had taken in McAllen told me the same thing. “It’s a machine, my friend,” one surgeon explained."


"I spoke to a marketing rep for a McAllen home-health agency who told me of a process uncannily similar to what Powell found in biotech. Her job is to persuade doctors to use her agency rather than others. The competition is fierce. I opened the phone book and found seventeen pages of listings for home-health agencies—two hundred and sixty in all. A patient typically brings in between twelve hundred and fifteen hundred dollars, and double that amount for specialized care. She described how, a decade or so ago, a few early agencies began rewarding doctors who ordered home visits with more than trinkets: they provided tickets to professional sporting events, jewelry, and other gifts. That set the tone."


"We took a wrong turn when doctors stopped being doctors and became businessmen,” he said."


A cardiologist tells an elderly woman that she needs bypass surgery and has Dr. Dyke see her. They discuss the blockages in her heart, the operation, the risks. And now they’re supposed to haggle over the price as if he were selling a rug in a souk? “I’ll do three vessels for thirty thousand, but if you take four I’ll throw in an extra night in the I.C.U.”—that sort of thing? Dyke shook his head. “Who comes up with this stuff?” he asked. “Any plan that relies on the sheep to negotiate with the wolves is doomed to failure.”

2) Credit Crisis Cassandra links to another hoocoodanode story, this one by Manuel Roig-Franzia in the Washington post telling the the story of Brooksley Born - an American regulator, head of the Commodity Futures Trading Commission in the late 1990's, who went head to head with folks like Alan Greenspan, Robert Rubin and Larry Summers as they stymied her attempts to bring greater oversight and regulation to the derivatives market in an attempt to prevent the sort of financial debacle we are currently being subjected to.

A couple of quotes,

"Greenspan had an unusual take on market fraud, Born recounted: "He explained there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."

(Rumour has it Greenspan was up for baseball commissioner until word got out he was going to fire all the umpires since what team would play against another team that was known to cheat on calls...ok, I'm kidding, that's a joke - I hope)

"In one call, Summers said, "I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II," recounted Greenberger, a University of Maryland law school professor who was Born's director of the Division of Trading and Markets. Summers declined to comment for this article.

The discordant notes crescendoed in April 1998 during a tension-filled meeting of the President's Working Group, a gathering of top financial regulators that periodically met behind closed doors at the Treasury Department. At that meeting, Greenspan and Rubin forcefully opposed Born's plans, Waldman said.

"Greenspan was saying we shouldn't do it," Waldman recalled. "Rubin was saying we couldn't do it."

The next month, Born released her concept paper anyway.

Within weeks, she was under attack. Lauch Faircloth, then a Republican senator from North Carolina, took to the Senate floor to call her "a rogue regulator." A Boston Herald column accused her of a "power grab. . . . She reached for that brass ring and in doing so cast a pall of legal uncertainty." Greenspan, Rubin and Levitt jointly urged Congress to pass a moratorium on the CFTC regulating over-the-counter derivatives. "


But then, in September 1998, a huge hedge fund that had bet heavily on derivatives -- Long-Term Capital Management -- nearly failed and had to be bailed out by a group of banks. Here was a living example of Born's prophecy. Even Leach, who supported the moratorium on CFTC regulatory action, introduced Born at a hearing by saying, "You're welcome to claim some vindication, if you want."

Born responded: "I certainly will not do so." But she went on to tell the committee that the Long-Term Capital debacle "should serve as a wake-up call about the unknown risks in the over-the-counter derivatives market."

No one woke up. That same month, Congress passed the moratorium. Born says they were "muzzling an independent agency."

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Tuesday, May 26, 2009

Libertarian Magic Dust

I only post this video because just the other day I was reading (via this very interesting post from Dani Rodrik) a Libertarian argument that the case of Somalia shows the virtues of anarchy/Libertarianism in action...

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I was flipping through Jane Jacobs' 2004 book 'Dark Age Ahead ' last night and came across the following passage that I thought I'd pass along for all the economists and pundits out there who offer their plaintive cry of 'hoocoodanode?' with respect to the collapse of the U.S. housing bubble,

"As prices of houses and condominium prices rise, owners can continually borrow more against the rising value of these assets. In Canada, ratios of household debt to household income are thus at record levels.

The miracle of money growing on houses operates even more potently in the United States, where mortgage interest is deductible from income tax and where purchases of resale houses reached record high levels in 2002, as their prices rose to record high levels and mortgage interest rates fell to record low levels. Perhaps the conservative think-tank economist quoted above foresaw and welcomed this bubble. It will burst, either if rising prices significantly push up inflation rates, hence also interest rates, or else if house price inflation slows, halts or retreats."

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Monday, May 25, 2009

13. Self-Interest Part 2

Note: This post is the thirteenth in a series. Click here for the full listing of the series.

Another way to look at the question of self-interest is from a biological point of view. In this perspective, self-interest could be defined as those actions which make one's genes more likely to be passed on, with selflessness defined as those actions which make ones genes less likely to be passed on. The concept of natural selection would, at first glance, seem to indicate that any organism that exhibited selfless behaviour would find itself reproducing at a lower rate than the competition and would eventually be made extinct.

This analysis is complicated, of course, by the fact that we share genes with various family members. So, if we followed a strictly selfish-gene style of behaviour, we would place full weight on our own interests, half weight on the interests of our siblings and parents and children, or a 1/8 weight on first cousins and so on, with our willingness to value the interests of others declining as their closeness to us and likelihood of sharing genes with us declines as well.

Biologists generally refer to this idea as the theory of kin selection.

That's about all I have to say on the topic of self-interst for now, other than to
note how well the idea of kin selection - where our ethical identification with people is strongest with those closest and weakens the more distant people are - lines up with Hume's notion of an ethical sense that functioned in the same manner as visual perspective, with objects further away registering as smaller on our ethical consciousness.

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12. Self-Interest (part 1)

Note: This post is the twelfth in a series. Click here for the full listing of the series.

Here’s a question which sounds straightforward but can be hard to nail down – what does it mean for someone to act in their ‘self interest’?

In trying to research the answer to this question, the best answers I found were these two (Danny Shahar, Alonzo Fyfe) similar blog posts on the topic.

Here, Danny explains the typical economists usage of the phrase 'self-interest',

"I am told that within the discipline of economics, what it means to say that a person "acted in her own self-interest" is that a person "acted according to her own interests." The idea here is that all action demonstrates preference, and that this necessarily means that the actor preferred the action that was taken to all other actions. So if I jump on a grenade in order to save my friends, what I have demonstrated is that I preferred to jump on the grenade over all other alternatives that I considered, and it's fair to say that I wanted to jump on the grenade; that out of all available alternatives, the one I consider the best is the one where I jump on the grenade so that my friends live. I'm down with that.

When I jump on the grenade because I want to save my friends, I take it to be uncontroversial that I do so according to my own interests. How could it be otherwise? And if what we mean by "self-interest" is simply that I act according to my own interests, then yes, my jumping on the grenade is self-interested."

Of course if you're like me, or most people I suspect, you don't associate the phrase 'self-interest' with jumping on a grenade to save the lives of your friends.

As Danny points out, there is a dramatic difference between the economic usage of the expression and the English language usage of the phrase, and this causes trouble.

On the one hand, the economic usage refers to self-interest meaning any interest that the self has, whereas in normal English, the phrase self-interest means taking an interest in oneself or taking an action where the object of that action is yourself.

Danny notes,
"So if my sister were sick, I might go get her some medicine. To say that my getting the medicine is "self-interested" would mean, to the lay person, that I get the medicine in order to promote some self-directed end. That is, I get the medicine because, perhaps, I am happier when my sister is not sick, or my sister is irritating when she's sick, or there's a cute pharmacist who will think I'm sweet for taking care of my sick sister. The lay-person, then, would call "non-self-interested" or "selfless" an interest with an object which does not directly involve the actor. So I act selflessly if the reason I go get the medicine is that I value my sister's health for its own sake, and am willing to take on the costs necessary to promote her health."

To the economist, however, all action is self-interested. Since every action you take was presumably taken for a reason, and that reason reflects your interest in taking that particular action.

Alonzo describes the two different meanings, as follows:

"(a) "Interests in self" [the typical 'laymans' usage of the term]

(b) "Interests of self" [the economic usage of the term]"

Sometimes people will muddy the waters further by referring to (a) as 'narrow' self-interest and (b) as 'enlightened' self-interest, but this isn't really helpful.

Alonzo describes the confusion caused by the two conflicting meanings as follows:

"I am going to assert that most people who hear or read the phrase, 'rational self-interest' immediately call to mind the narrower 'interests in the self' definition. To make matters worse, the 'rational self-interest' theorist often asserts this same definition. Then the listener/reader starts to raise all sorts of objections to this 'interests in the self' concept. In responding to this, the 'rational self-interest' theorist equivocates. He switches to the concept of 'interests of the self' to defend himself from objections to the 'interests in the self' concept, claiming that this is what he meant all along. Yet, when asked for a specific definition, the defender of rational self-interest goes right back to using the 'interests in the self' definition.

After which, the listener walks away mumbling to himself, 'those guys are nuts.'"

Danny makes a similar objection, and further notes that in the economist's conception of the term, the possibility of altruistic or selfless acts has been defined out of existence, which is not helpful since there are a wide range of actions that are routinely categorized by people as being 'selfless'.

He also notes that economists themselves, being English speakers before they were Economists, are prone to confusing the two meanings themselves.

There is some usefulness in the economic meaning of the term since it can remind us that just because people are in a group or organization of some sort, doesn't mean that they suddenly take on the motivations of the group for their actions, they are still 'self-interested' in the sense that they follow their own reasons in deciding what to do, but this is a pretty marginal usefulness compared to the much richer distinction made in the regular English usage in which self-interested acts are made with regard to the effect on the self, and selfless acts are made with regard to the effect on someone else.

So for this series of posts (and in general) I will attempt to use the phrase 'self-interested' solely in the English sense of meaning actions with regard to the effect on the self, i.e. not selfless. If I find the need to use the economic definition, I'll make it explicit what I am referring to.

In order to make this all a bit clearer, let's return to the example of the Prisoner's Dilemma.

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects) for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only one year in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

If we assume that the Prisoners are self-interested, meaning that they place no weight on what happens to the other Prisoner, then the payoffs are as follows (each pair of brackets represents the jail time of Prisoner 1 followed by that of Prisoner 2):

                                                      Prisoner 2
                                                   No Confession Confess
Prisoner 1   No Confession:      [1,1]                 [10,0]
                               Confess :      [0,10]                [5,5]

If both prisoners are purely self-interested and don't care about the other prisoner, then we will end up with both confessing and they both serve 5 years.

Now consider what happens if both Prisoners are purely selfless, in the sense that they care 100% about the other Prisoner, and care nothing about their own fate. Now the payoffs look like the following:

                                                      Prisoner 2
                                                   No Confession Confess
Prisoner 1   No Confession:      [1,1]                 [0,10]
                               Confess :      [10,0]                [5,5]

This time, both prisoners refuse to confess while hoping that the other prisoner will so that the other prisoner will get away with no sentence. Their actions prevent this, however and we end up with neither confessing and they both serve one year.

Finally, let's say that both prisoners apply a fairness rule which says that all people are valued equally so they equally weight their own potential jail time and the other prisoners potential jail time. Now the payoffs look like the following:

                                                      Prisoner 2
                                                   No Confession Confess
Prisoner 1   No Confession:      [1,1]                 [5,5]
                               Confess :      [5,5]                [5,5]

Here, the values in the brackets represent the average sentence given to the prisoners (since they weight each prisoner the same, a sentence of 10 years to one and 0 to the other, is equivalent to 5 each) and we can see that both prisoners have a clear motivation not to confess.

Oddly enough, if you change the rules a little so that if one prisoner confesses and the other doesn't, the jail time for the one who doesn't confess is 20 years, then you get the following:

                                                      Prisoner 2
                                                   No Confession Confess
Prisoner 1   No Confession:      [1,1]                 [10,10]
                               Confess :      [10,10]                [5,5]

Now this has become a coordination game where the two prisoners need to ensure that whether they confess or don't confess, the main thing is that they both pick the same option.

I'm not sure if that has any significance, I just thought it was kind of odd.

To sum up, I'll refer to self-interested or selfish actions as those which place weight in making the decision solely or primarily on the consequences for the self, with altruistic or selfless actions referring to those which take into account the consequences for others as well.

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Thursday, May 21, 2009

Carbon Tax Politics

For a change, here's a couple of observations on the politics of carbon taxes after watching two elections where it was a fairly significant issue:

Although you might think that making a carbon tax revenue neutral would be an effective tactic to neutralize the ‘tax grab’ line of attack, in practice people seem unwilling to buy into the notion of a carbon tax being revenue neutral.

The B.C. Liberal government, first elected in 2001, has done only one thing consistently throughout it’s 8 years in power – cut taxes. They’ve never shown any desire to increase taxes nor, at the time they introduced the carbon tax, did they have any need to do so. They specifically outlined the measures they would take to ensure the tax was revenue neutral including tracking and regular reporting with adjustments to the offsetting tax cuts as necessary to ensure no extra revenue was collected due to the carbon tax. On top of all that, they have a provincial media which is effectively an extension of their party. It's hard to imagine anyone ever making a more convincing case to an electorate that their carbon tax was indeed revenue neutral. And although it is difficult and risky to assume I know how things would have gone in the counterfactual situation where they did not take these measures, I don’t see that they got much of a payoff from all this effort to ensure revenue neutrality.

One of the bigger risks to support for the tax, both in B.C. and federally, was that other levels of government might come out in opposition, where their area would be hit relatively harder by the tax (for example).

Finally, one of the arguments against the tax from rural residents and people in smaller towns was that they had no option to reduce their carbon usage – where city folk had the option of taking transit, they had to drive everywhere.

So here's a suggestion: Future carbon tax proposals should scrap the notion of revenue neutrality and instead guarantee regional neutrality. Mandate that all revenue from the carbon tax will be returned to the region it was collected from, where it will be used exclusively for public transit development.

Note that this effectively downloads the real decision to local governments which can reduce their own transit funding and substitute in the money they get from the new tax - effectively make the tax back into a revenue neutral one for their area - or use the money for increased transit funding as 'intended'.

Of course it goes without saying that it is dumb to *campaign* on bringing in a carbon tax, that is the type of thing you do in your first or second year of being in charge...

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Wednesday, May 20, 2009

Credibility Watch

One of the good/bad things about blogs is that it's all in writing, so you can often go back and see what was written in the past by various people. Occasionally I like to take advantage of this and cherry pick some recent event, where I was right in some prediction and others were wrong, in order to highlight my superior predictive abilities.

For instance, here’s a recent post by Andrew Coyne regarding the polls leading up to the B.C. election – the post was written before the B.C. election took place, so now that the election has happened, we can assess whose interpretation of the polls was more accurate:

Andrew wrote:

I dunno. This makes no sense to me:

"Halfway through the B.C. election campaign the race for the leadership is tighter than ever. The BC Liberals and New Democrat parties are separated by just three percentage points, according to a new Angus Reid Strategies/CTV poll.
The online survey of 822 voters found the BC Liberals are holding top spot with 42 per cent, with the opposing NDP not far behind at 39 per cent. The Green Party remains in third place with 13 per cent."

The same poll shows that, by a wide margin, the public thinks the economy is the number one issue. And that, by a margin of three to one – 48% to 16 — they pick the Liberals’ Gordon Campbell as the best person to handle it. Nearly two to one — 40% to 23% — also prefer Campbell as “best premier.” Yet the Liberals are only three points ahead?

Going into the campaign, the Liberals enjoyed a 17-point lead. Nothing much has happened since. The NDP have run a scattershot, unfocused campaign. And suddenly they’re only three points behind?
Colour me skeptical.

And then in the comments:

dan in van says:
Smacks of a push-pull that was manipulated, whether accidentally or purposely, to ensure that Liberal forces are motivated to vote. It is the only poll in a few years that have shown this kind of narrow margin. But while my theory may sound a little conspiracy-like, in any event I take this with a long tall one.

Critical Reasoning says:

I never trust online polls like this one. Here’s the justification by CTV/Angus Reid:
Our polls are conducted online, and not over the telephone or through face-to-face interviews. The rationale behind this approach is simple. Canada is now one of the most connected countries in the world, and Internet access has spread to every key demographic group in the country, including seniors and people with below average household incomes.

Conversely, telephone-based research has been greatly affected by declining response rates and the absence of land-lines in the homes of many younger Canadians.
Codswallop! Online polls are only used because they’re cheap. Almost any online poll is more likely to magnify the young, left-leaning “can’t be bothered to vote” demographic at the expense of the older, more conservative demographic who always vote, but only venture online to check email.

Derek Pearce says:
Heh. Where can I online-vote that Unicorns are the prettiest of all the fabled creatures? Actually I bet that you’d get a better than 19 out of 20 result for that, so it’s a bad example. What was the methodology of survey even if online? If people had the option of clicking one party or another from a public site and meandering off, then the NDP will be over-represented by zealots who did their quick-click duty and then went web-surfing elsewhere, while those who cared stayed to answer more in depth questions will more accurately reflect the public opinion of Campbell.

bigcitylib says:
A response to the speeding scandal, which arrived plop in the middle of the polling period?

As for AR’s online polls, I’ve complained alot about them but during the last Federal they did as well as (maybe better than) anyone else’s.

catherine says:
These results are only a small shift from the last Angus Reid poll (done in March which put the Liberals at 43 and NDP at 37) and the small shifts could be fluctuations in small numbers (MOE) or due to the speeding scandals.

Mike G says:
Well, no one ever accused British Columbians of being sensible.
Here’s the thing, though: I would contribute to those statistics. I think Gordon Campbell is probably a better administrator than Carole James. I am not entirely happy with either platform; the economy is certainly the biggest challenge ahead, but I don’t actually think that the provincial government can do much about it. I’m very unhappy with a lot of the things that the Liberal government here has done over its current tenure, I think there’s been a lot of hamhandedness and ignorance on their part, and I think a bit of shakeup could be good for them. On top of that, my local MLA, Shane SImpson (NDP, Vancouver-Hastings) seems to be just fine and I see no need to boot him.

Dale says:
The 17 point lead poll is a Mustel poll. This company was started by a current MLA for the Liberals. If any poll has a tendency to bias it is that one.
The A. Reid poll is very close to Robbins Reasearch poll wich uses telephone polling. You can complain about one but it is backed up by the other. The BC election will be won or lost in each riding. Liberals are strong is some but the NDP are equally strong in others. Who ever gets the vote out will win.

Declan says:

Libs won by 4% last election. Seems pretty plausible to me that things haven’t changed much since then. I guess we’ll see soon enough.


Election result:
Liberals get 46.02% of the vote, NDP gets 42.06%, Liberals have a margin of victory of almost exactly 4%.

Credibility Increase:
Angus Reid, Me, Catherine, bigcitylib, Dale and Mike G.

Credibility Decrease:
Mustel, Andrew Coyne, dan in Van, critical reasoning and Derek Pearce

That is all. Just trying to enforce a little accountability around here...

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Thursday, May 14, 2009

Playoff Griever: Round 3

Round 1 post, Round 2 post

So round 2 gave us a seven game showdown between Ovechkin vs. Crosby and Malkin and Ovechkin almost single-handedly destroyed my pool team and eliminated the Pens but the Pens greater depth and more reliable goaltending was the difference in the end.

Meanwhile Carolina plays another 7 game series, this time eliminating the Bruins late in the first OT of game 7.

Over in the West, the last two cup champs battled it out in a series that could have been a great cup finals itself and was only decided in the last few minutes of game 7.

And finally the up and coming Hawks snipers helped their team come from behind to tie or take the lead in all 6 games, finishing up by scoring 7 on a Canucks team that hadn't allowed 7 goals once all season.

Not really a whole lot more a hockey fan could ask for.

my predictions were:
Pick: Carolina in 6
Pick: Pittsburgh in 6
Pick: Wings in 6
Pick: Canucks in 7

The one series I said would go 7, went 6, and the three I said would go 6, went 7. Let's just say I predicted they would all be close, and I was right about that. The winners were all as I predicted, with the exception, of course, of the Canucks.

The difference between my expectation and the result can be summarized in one stat: The Canucks .879 save percentage (or if you prefer, the Hawks 12.2% shooting percentage). The difference between a save percentage like that and one like, say .920, is over a third fewer goals scored against. Would the Canucks have won the series if the Hawks had scored over a third fewer goals? Of course. Part of the low percentage was Luongo being off his game, part was the Canucks failing to keep the Hawks to the perimeter and part was simply bad luck. I suspect that if you were to tabulate the series winning percentage of teams with save percentages below .880 over the last decade or two, it would be *extremely* low.

As for next round, it is rare to see two such strong offensive (and weak defensive) teams as Detroit and Chicago meet this late in the playoffs. I hope they go toe to toe and see who can outskate and outscore the other which would be great to watch. The Hawks will likely need Osgood's save pct. to be even lower than .879 to win this one.

Pick: Wings in 5


The classic 4 seed vs. 6 seed matchup! I honestly don't know here. Carolina looked like they were getting tired as the series against Boston wore on, but the Pens have played a fair bit of hockey as well. The Pens made tough work of much easier opponents than the Canes have faced so far, but somehow my gut just wants to go with Pittsburgh on this one.

Pick: Pittsburgh in 7

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Monday, May 11, 2009

11. An Enquiry Concerning the Principles of Morals

Note: This post is the eleventh in a series. Click here for the full listing of the series.

There's a few more chapters in the Efficient Society that I haven't covered, but I think it's time to move on for now. For a change, I'll talk about a book not written by a Canadian in the last 15 years.

David Hume, the Socttish philosopher, wrote, 'An Enquiry Concerning the Principles of Morals' back in 1777. As a result, it's not under copyright (not yet, anyway) so the whole book is available for free online and I can cut and paste freely into a blog post. Of course a lot of cutting and pasting can make a long post, so here's the short version of my summary of Hume's work:

Things are moral (good) to the extent that they are useful to mankind or agreeable to us. Our sense of morals is like our sense of perspective, where things close to us (our own well-being, the well-being of our family members, etc.) register as large sentiments, and those far away from us (people we read about it in books, people we’ve never met) register as smaller sentiments. Thus, people are genuinely concerned with the well-being of others (i.e. they are altruistic), but will typically put greater weight on their own cares, unless their reason has been trained to overcome the illusion of moral perspective and realize that all people are equally important.

Finally, there can sometime be a conflict between what is useful to ourselves and what is useful to society but in this case what is useful to society takes precedence.

And here's the long version:

Section 1: Of the General Principles of Morals

At the outset, Hume considers the arguments that morals derive from our reason vs. the arguments that morals derive from our sentiments and concludes that the arguments on both sides are so strong that morals must derive from both, with sentiment aligning with reason in the majority of cases.

"These arguments on each side (and many more might be produced) are so plausible, that I am apt to suspect, they may, the one as well as the other, be solid and satisfactory, and that reason and sentiment concur in almost all moral determinations and conclusions. The final sentence, it is probable, which pronounces characters and actions amiable or odious, praise-worthy or blameable; that which stamps on them the mark of honour or infamy, approbation or censure; that which renders morality an active principle and constitutes virtue our happiness, and vice our misery; it is probable, I say, that this final sentence depends on some internal sense or feeling, which nature has made universal in the whole species. For what else can have an influence of this nature? But in order to pave the way for such a sentiment, and give a proper discernment of its object, it is often necessary, we find, that much reasoning should precede, that nice distinctions be made, just conclusions drawn, distant comparisons formed, complicated relations examined, and general facts fixed and ascertained."

He then notes that if we can discover the origin of the moral sentiments that would settle the question of whether they are a matter of sentiment or reason, and argues that only an empirical (as opposed to deductive) approach is likely to get any results,

"As this is a question of fact, not of abstract science, we can only expect success, by following the experimental method, and deducing general maxims from a comparison of particular instances. The other scientific method, where a general abstract
principle is first established, and is afterwards branched out into a variety of inferences and conclusions, may be more perfect in itself, but suits less the imperfection of human nature, and is a common source of illusion and mistake in this as well as in other subjects. Men are now cured of their passion for hypotheses and systems in natural philosophy, and will hearken to no arguments but those which are derived from experience. It is full time they should attempt a like reformation in all moral disquisitions; and reject every system of ethics, however subtle or ingenious, which is not founded on fact and observation."


Hume notes that the most universal praise attaches to benevolent tendencies such as "SOCIABLE, GOOD-NATURED, HUMANE, MERCIFUL, GRATEFUL, FRIENDLY, GENEROUS, BENEFICENT"

He then goes on to note that in offering praise to any person or item, people always insist upon how useful that person or thing was to society and concludes,

"Upon the whole, then, it seems undeniable, THAT nothing can bestow more merit on any human creature than the sentiment of benevolence in an eminent degree; and THAT a PART, at least, of its merit arises from its tendency to promote the interests of our species, and bestow happiness on human society."

He notes that many actions can be either praiseworthy or not, depending on the usefulness of the result,

"Giving alms to common beggars is naturally praised; because it seems to carry relief to the distressed and indigent: but when we observe the encouragement thence arising to idleness and debauchery, we regard that species of charity rather as a weakness than a virtue."


In this section, Hume sets out to show that public utility is the sole source of the principles of justice.

First he points out that the concept of justice would be meaningless if there were no scarcity or any need for considerations of utility,

"We see, even in the present necessitous condition of mankind, that, wherever any benefit is bestowed by nature in an unlimited abundance, we leave it always in common among the whole human race, and make no subdivisions of right and property. Water and air, though the most necessary of all objects, are not challenged as the property of individuals; nor can any man commit injustice by the most lavish use and enjoyment of these blessings."

There’s an interesting point by Hume in this section on how in a time of war, there is a change in the rules,
"The rage and violence of public war; what is it but a suspension of justice among the warring parties, who perceive, that this virtue is now no longer of any USE or advantage to them? The laws of war, which then succeed to those of equity and justice, are rules calculated for the ADVANTAGE and UTILTIY of that particular state, in which men are now placed."

Having read Jane Jacobs 'Systems of Survival' I can't help but think of the Guardian syndrome where, among other differences from the commercial syndrome, honesty is no longer a virtue, instead replaced by 'deceit for the sake of the cause' and how it might line up with Hume's notion of 'the laws of war' where the rules are calculated for the advantage of particular state.


Here, Hume argues that government as well only survives because it is useful,
"It is evident, that, if government were totally useless, it never could have place, and that the sole foundation of the duty of allegiance is the ADVANTAGE, which it procures to society, by preserving peace and order among mankind."


Hume comments that many philosophers have rejected the notion that what is moral is what is useful because it is hard for us to explain why we should associate a positive sentiment with something that is useful unless we have been taught to do so.

"perhaps the difficulty of accounting for these effects of usefulness, or its contrary, has kept philosophers from admitting them into their systems of ethics, and has induced them rather to employ any other principle, in explaining the origin of moral good and evil. But it is no just reason for rejecting any principle, confirmed by experience, that we cannot give a satisfactory account of its origin, nor are able to resolve it into other more general principles."

Then Hume moves to a long discussion of the notion that morals arise from 'self-love' or a 'regard to private interest'.

"It has often been asserted, that, as every man has a strong connexion with society, and perceives the impossibility of his solitary subsistence, he becomes, on that account, favourable to all those habits or principles, which promote order in society, and insure to him the quiet possession of so inestimable a blessing, As much as we value our own happiness and welfare, as much must we applaud the practice of justice and humanity, by which alone the social confederacy can be maintained, and every man reap the fruits of mutual protection and assistance.

This deduction of morals from self-love, or a regard to private interest, is an obvious thought, and has not arisen wholly from the wanton sallies and sportive assaults of the sceptics. To mention no others, Polybius, one of the gravest and most judicious, as well as most moral writers of antiquity, has assigned this selfish origin to all our sentiments of virtue."

Hume is very skeptical of this viewpoint.

"the voice of nature and experience seems plainly to oppose the selfish theory.

We frequently bestow praise on virtuous actions, performed in very distant ages and remote countries; where the utmost subtilty of imagination would not discover any appearance of self-interest, or find any connexion of our present happiness and security with events so widely separated from us.

A generous, a brave, a noble deed, performed by an adversary, commands our approbation; while in its consequences it may be acknowledged prejudicial to our particular interest.

Where private advantage concurs with general affection for virtue, we readily perceive and avow the mixture of these distinct sentiments, which have a very different feeling and influence on the mind."

"It is but a weak subterfuge, when pressed by these facts and arguments, to say, that we transport ourselves, by the force of imagination, into distant ages and countries, and consider the advantage, which we should have reaped from these characters, had we been contemporaries, and had any commerce with the persons. It is not conceivable, how a REAL sentiment or passion can ever arise from a known IMAGINARY interest; especially when our REAL interest is still kept in view, and is often acknowledged to be entirely distinct from the imaginary, and even sometimes opposite to it."

He summarizes where we are in his overall argument,
"Usefulness is agreeable, and engages our approbation. This is a matter of fact, confirmed by daily observation. But, USEFUL? For what? For somebody's interest, surely. Whose interest then? Not our own only: For our approbation frequently extends farther. It must, therefore, be the interest of those, who are served by the character or action approved of; and these we may conclude, however remote, are not totally indifferent to us."

Hume goes on at some length in his arguments on the issue of self-love vs. a more general concern for the wellbeing of man with one interesting comment being the following footnote,
"It is wisely ordained by nature, that private connexions should commonly prevail over univeral views and considerations; otherwise our affections and actions would be dissopated and lost, for want of a proper limited object. Thus a small benefit done to ourselves, or our near friends, excites more lively sentiments of love and approbation than a great benefit done to a distant commonwealth: But still we know here, as in all the senses, to correct these inequalities by reflection, and retain a general standard of vice and virtue, founded chiefly on a general usefulness."

One of the more remarkable passages (to me) in the book is the following,

"It is needless to push our researches so far as to ask, why we have humanity or a fellow-feeling with others. It is sufficient, that this is experienced to be a principle in human nature. We must stop somewhere in our examination of causes; and there are, in every science, some general principles, beyond which we cannot hope to find any principle more general. No man is absolutely indifferent to the happiness and misery of others. The first has a natural tendency to give pleasure; the second, pain. This every one may find in himself. It is not probable, that these principles can be resolved into principles more simple and universal, whatever attempts may have been made to that purpose. But if it were possible, it belongs not to the present subject; and we may here safely consider these principles as original; happy, if we can render all the consequences sufficiently plain and perspicuous"

Hume can't account for why we might have a 'fellow feeling' for other people, but he has the trust in his own observational powers to stick to his conclusions nonetheless and not to try and conjure up some explanation where none is available. Of course, Darwin and his theory of evolution came many years after Hume, so Hume didn't have the necessary knowledge to make a good guess anyway, but I was impressed that rather than make a bad guess, he just stuck to his guns in defending his observations on the areas he could observe directly, even if he couldn't account for the 'why' of what he was observing.


Qualities that make us less effective in getting useful things done are considered as personal faults,
"It seems evident, that where a quality or habit is subjected to our examination, if it appear in any respect prejudicial to the person possessed of it, or such as incapacitates him for business and action, it is instantly blamed, and ranked among his faults and imperfections. Indolence, negligence, want of order and method, obstinacy, fickleness, rashness, credulity; these qualities were never esteemed by any one indifferent to a character; much less, extolled as accomplishments or virtues."

"Besides DISCRETION, CAUTION,ENTERPRISE, INDUSTRY, ASSIDUITY, FRUGALITY, ECONOMY, GOOD-SENSE, PRUDENCE, DISCERNMENT; besides these endowments, I say, whose very names force an avowal of their merit, there are many others, to which the most determined scepticism cannot for a moment refuse the tribute of praise and approbation. TEMPERANCE, SOBRIETY, PATIENCE, CONSTANCY, PERSEVERANCE, FORETHOUGHT, CONSIDERATENESS, SECRECY, ORDER, INSINUATION, ADDRESS, PRESENCE OF MIND, QUICKNESS OF CONCEPTION, FACILITY OF EXPRESSION, these, and a thousand more of the same kind, no man will ever deny to be excellencies and perfections."


We count as moral, actions and temperaments that we like to be around.

"Whoever has passed an evening with serious melancholy people, and has observed how suddenly the conversation was animated, and what sprightliness diffused itself over the countenance, discourse, and behaviour of every one, on the accession of a good-humoured, lively companion; such a one will easily allow that cheerfulness carries great merit with it, and naturally conciliates the good-will of mankind."

Some more comments from Hume that hint at two different sets of ethics, one for 'civilized' cultures and one for militaristic ones,
"It is indeed observable, that, among all uncultivated nations, who have not as yet had full experience of the advantages attending beneficence, justice, and the social virtues, courage is the predominant excellence; what is most celebrated by poets, recommended by parents and instructors, and admired by the public in general. The ethics of Homer are, in this particular, very different from those of Fenelon, his elegant imitator; and such as were well suited to an age, when one hero, as remarked by Thucydides [Lib.i.], could ask another, without offence, whether he were a robber or not. Such also very lately was the system of ethics which prevailed in many barbarous parts of Ireland; if we may credit Spencer, in his judicious account of the state of that kingdom."


I'll just let Hume speak to this one,

"It is the nature and, indeed, the definition of virtue, that it is A QUALITY OF THE MIND AGREEABLE TO OR APPROVED OF BY EVERY ONE WHO CONSIDERS OR CONTEMPLATES IT. But some qualities produce pleasure, because they are useful to society, or useful or agreeable to the person himself; others produce it more immediately, which is the case with the class of virtues here considered"

"We approve of another, because of his wit, politeness, modesty, decency, or any agreeable quality which he possesses; although he be not of our acquaintance, nor has ever given us any entertainment, by means of these accomplishments. The idea, which we form of their effect on his acquaintance, has an agreeable influence on our imagination, and gives us the sentiment of approbation. This principle enters into all the judgements which we form concerning manners and characters."


The idea that what is moral is what is useful was pretty obvious, says Hume,
"It may justly appear surprising that any man in so late an age, should find it requisite to prove, by elaborate reasoning, that Personal Merit consists altogether in the possession of mental qualities, USEFUL or AGREEABLE to the PERSON HIMSELF or to OTHERS. It might be expected that this principle would have occurred even to the first rude, unpractised enquirers concerning morals, and been received from its own evidence, without any argument or disputation. Whatever is valuable in any kind, so naturally classes itself under the division of USEFUL or AGREEABLE, the UTILE or the DULCE, that it is not easy to imagine why we should ever seek further, or consider the question as a matter of nice research or inquiry. And as every thing useful or agreeable must possess these qualities with regard either to the PERSON HIMSELF or to OTHERS, the complete delineation or description of merit seems to be performed as naturally as a shadow is cast by the sun, or an image is reflected upon water."

"And it seems a reasonable presumption, that systems and hypotheses have perverted our natural understanding, when a theory, so simple and obvious, could so long have escaped the most elaborate examination.

But however the case may have fared with philosophy, in common life these principles are still implicitly maintained; nor is any other topic of praise or blame ever recurred to, when we employ any panegyric or satire, any applause or censure of human action and behaviour. If we observe men, in every intercourse of business or pleasure, in every discourse and conversation, we shall find them nowhere, except the schools, at any loss upon this subject."

Hume here makes a nice distinction between universal moral judgements vs. personal circumstances,
"When a man denominates another his ENEMY, his RIVAL, his ANTAGONIST, his ADVERSARY, he is understood to speak the language of self-love, and to express sentiments, peculiar to himself, and arising from his particular circumstances and situation. But when he bestows on any man the epithets of VICIOUS or ODIOUS or DEPRAVED, he then speaks another language, and expresses sentiments, in which he expects all his audience are to concur with him. He must here, therefore, depart from his private and particular situation, and must choose a point of view, common to him with others; he must move some universal principle of the human frame, and touch a string to which all mankind have an accord and symphony."


Here, Hume basically restates his earlier contention that morals require both sentiment (in order to motivate us towards moral action) and reason (for us to determine what is truly useful, and hence moral).


Here Hume restates and elaborates on his arguments against the notion that man is motivated strictly by self-interest rather than, at least in part, a concern for his fellow man.


Although buried in a late appendix, this is perhaps the most relevant section of Hume's work to the issues of externalities and prisoner's dilemmas that we've been discussing.

Hume notes that for the social virtues, the usefulness is immediately apparent and realized as in the case of a parent which goes to help their child without concern for whether mankind as a whole will be helped or hurt by this action, but the case is different for the virtue of justice,

"The case is not the same with the social virtues of justice and fidelity. They are highly useful, or indeed absolutely necessary to the well-being of mankind: but the benefit resulting from them is not the consequence of every individual single act; but arises from the whole scheme or system concurred in by the whole, or the greater part of the society. General peace and order are the attendants of justice or a general abstinence from the possessions of others; but a particular regard to the particular right of one individual citizen may frequently, considered in itself, be productive of pernicious consequences. The result of the individual acts is here, in many instances, directly opposite to that of the whole system of actions; and the former may be extremely hurtful, while the latter is, to the highest degree, advantageous."

Note the correspondence between the notion of individual acts which have a result opposite to the impact on the whole system, and the concept of the Prisoner's dilemma where people act on their self-interest but end up worse off overall.

Hume moves to an analogy,
"The happiness and prosperity of mankind, arising from the social virtue of benevolence and its subdivisions, may be compared to a wall, built by many hands, which still rises by each stone that is heaped upon it, and receives increase proportional to the diligence and care of each workman. The same happiness, raised by the social virtue of justice and its subdivisions, may be compared to the building of a vault, where each individual stone would, of itself, fall to the ground; nor is the whole fabric supported but by the mutual assistance and combination of its corresponding parts."

Note that the situation analogized here is less that of the Prisoner’s Dilemma, and more that of the Stag Hunt, where results can be achieved through coordinated action only but people are better off cooperating than they are betraying each other.

Hume moves from here to,
"For if it be allowed (what is, indeed, evident) that the particular consequences of a particular act of justice may be hurtful to the public as well as to individuals; it follows that every man, in embracing that virtue, must have an eye to the whole plan or system, and must expect the concurrence of his fellows in the same conduct and behaviour. Did all his views terminate in the consequences of each act of his own, his benevolence and humanity, as well as his self-love, might often prescribe to him measures of conduct very different from those which are agreeable to the strict rules of right and justice.

Thus, two men pull the oars of a boat by common convention for common interest, without any promise or contract; thus gold and silver are made the measures of exchange; thus speech and words and language are fixed by human convention and agreement.

Whatever is advantageous to two or more persons, if all perform their part; but what loses all advantage if only one perform, can arise from no other principle There would otherwise be no motive for any one of them to enter into that scheme of conduct."

Hume doesn’t develop this line of thought much further, instead turning to a discussion of private property and how it is instituted because it is good for society as a whole, even though certain individuals may be worse off because of it.


This appendix is just semantics. :)

A final note, which I put at the bottom since it doesn’t really tie in to the bigger ethical questions, but which I thought was interesting all the same.

Chapter 9 in 'The efficient society' (one of the ones I didn’t cover), is on the topic of equality and how it trades off (or doesn’t) against equality.

In this chapter, Heath talks at length about the ‘Wilt Chamberlain Argument’
"What shook Cohen's faith in Marxism was the "Wilt Chamberlain argument" It started as a rumour back in the late 1960's. A young graduate student named Robert Nozick was reported to have come up with the ultimate refutation of Marxism. Nobody had seen the actual text of it, but informal summaries spread like wildfire throughout the academy, largely by word of mouth. When Nozick finally did publish, in 1974, leftist scholars throughout the Western world went into full scale damage control mode. But there was little that could be done. The Wilt Chamberlain argument proved irresistable.

What is this argument? How could it have such a powerful effect? And what does Marxism have to do with Wilt Chmaberlain?

Nozick asks us to consider the following scenario: Imagine a society in which the extremes of poverty and wealth have been eliminated. Everyone lives a confortable, middle-class existence and enjoys approximately the same amount of wealth. Suppose that in this society many people like to watch basketball, and so the skills of talented basketball players such as Wilt Chamberlain are in high demand, Now suppose that Wilt makes the following deal: he agrees to play only if a twenty-five cent surcharge is added to the cost of tickets at home games, with all of the extra revenue going straight to him.

Here comes the punch line. "Let us suppose that in one season one million people attend his home games, and Wilt Chamberlain winds up with $250,000, a much larger sum than the average income and larger even than anyone else has. Is he entitled to this income? Is this new distribution unjust? ...

...It is very difficult to see anything wrong with this new distribution. Each of the fans who comes to a Chamberlain gamevoluntarily gives up twenty-five cents in order to see Wilt play. For them, it's a good deal. They are willing to pay a bit more in order to see a great player. Like all exchanges, it generates an efficiency game."

When I read this, I was always puzzled that this argument could really be something that wasn’t obvious all along, so I was amused to see how concisely Hume dealt with the topic back in 1777.

"But historians, and even common sense, may inform us, that, however specious these ideas of PERFECT equality may seem, they are really, at bottom, IMPRACTICABLE; and were they not so, would be extremely PERNICIOUS to human society. Render possessions ever so equal, men's different degrees of art, care, and industry will immediately break that equality."

Nothing new under the sun around here, other than a good advertisement for the condensed wisdom contained in Hume's excellent work.

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Wednesday, May 06, 2009

Reading the Globe and Mail comment threads and wondering...

Why is Joe Sixpack so hard in the middle? The rest of his life is so soft.

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Monday, May 04, 2009

B.C. Election 2009

B.C. will be having an election on May 12, 2009, 8 days from now.

If you want more info on the parties, their platforms, the polls, etc. I recommend Sacha's excellent site.

Personally, I'm not too enthusiastic about this particular election. The Liberal (in name only) party has been in charge for 8 years and although they've moderated some of their more unpleasant views (on aboriginal relations and the environment for example) and they have certainly accomplished a fair bit in terms of infrastructure (albeit by committing the province to a large stream of payments over the next 25 years or so), I'd certainly be happy to see them removed from power.

Under their watch B.C. has seen some of the fastest rising inequality and poverty levels in Canada, and has failed to take care of all of its citizens. Furthermore, the Liberals seem increasingly corrupt and willing to sell off the province's resources to their friends and party insiders and to big business.

Given the huge housing and construction bubble, the perilously low savings rates and the rising inequality, B.C. can be expected to be hammered extra hard by the economic downturn - if the Liberals do win this one, they may get to reap some of what they've sown.

The only alternative likely to be elected is the NDP party. The NDP platform has some good ideas, such as raising the minimum wage and ending/taxing the flaring of natural gas. Still, I can't bring myself to vote for a party that is campaigning on increasing the province's carbon emissions and contributing *more* to one of the greatest threats that mankind currently faces. It is funny in a way that so many people viewed the revenue neutral carbon tax as a tax increase, but even though repealing it will produce just as many losers as putting it in did, you don't hear, for example, residents of downtown Vancouver up in arms about the tax/debt increase they'll have to face due to repeal of the carbon tax that currently benefits them.

The other killers in the NDP platform are the promises to lower hydro bills (again, a move that will increase emissions) and to kill the plan for smart meters. After all, peak oil is another huge threat to our future, so obviously we should cancel plans to modernize our electrical grid and give ourselves a greater capacity to make efficient use of our electricity resources.

It's a great plan really, cancel plans for new electricity production, lower prices to encourage more consumption and kill measures designed to encourage conservation. I don't see any problems with that agenda at all.

Whoever wins will deserve what they get trying to govern this province from 2009 - 2013 (Olympic perks and a whole lot of economic headaches, I predict).

So yeah, I think I'll vote Green. I thought I might vote for the Marijuana party, since legalizing marijuana is one of the most positive changes that could be made by our politicians, but I see that they are endorsing the Greens rather than running their own candidates.

The main thing that will bring me to the polls is the chance to again vote in favour of scrapping our antiquated electoral system and replacing it with one that can actually function in a province with more than 2 political parties - STV. But more on that in another post perhaps - or just visit the blog I wrote back in 2005 the first time we voted on electoral reform. Maybe if we can fix the electoral system we'll have more palatable choices when the next election comes around.

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Friday, May 01, 2009

10. The Efficient Society (Part 4): Market Failure, Corporations and the State

Note: This post is the tenth in a series. Click here for the full listing of the series.

Chapter 6 of The Efficient Society is all about market failure, and the main point is that although the situation is often framed as if the vast majority of markets work fine but occasionally there is a market failure, the truth is closer to the idea that almost all markets fail and it takes a lot of work to gradually construct more functioning markets.

For the most part the chapter is a pretty straight forward account of the various well known ways in which markets fail, generally similar to what Tom Slee covered in 'No One Makes You Shop at Wal-Mart' - externalities, assymetrical information, etc.. Wikipedia also has a good article on the topic of Market Failure which is worth reviewing if you want an overview.

What gets more interesting is chapter 7 where Heath talks about how corporations are primarily created and grow for the purpose of overcoming market failures of one form or another. Some of these failures occur for no other reason that markets take place in a certain time and space.

For example, why have an assembly line all owned by the same company rather than allow independent assemblers to come together in a market and offer their best price to, for example, take a partially assembled product and add one more piece to it before selling it on to the next assembler and so on.

The reason is that an assembly line actually consists of a series of very localized monopolies. Imagine if each person on the line was able to demand whatever price they wanted of the next person down the line before passing down the item being assembled. The next person on the line would have little choice but to pay an amount close to the final value of the product being assembled because where else are they going to get a partially assembled product to add their piece to?

Heath notes that this logic explains why corporations will often buy up suppliers or distributors in order to avoid being held captive by a local monopoly. And a similar reasoning explains why people with specialized knowledge are retained on a salaried basis rather than working on contract (because they have a monopoly on specific knowledge that the firm needs).

I remember my dad talking once about a company that decided to contract out some of the technical work they used to do in-house, because that was part of the business philosophy of 'getting lean' and not carrying more staff members than necessary. Of course, the factory quickly realized that in the relatively small town they were located in - there wasn't anybody else who could do the job of the people let go, and they were soon rehired for a much higher amount of money on a contract basis.

Heath notes that rather than relying on people to follow their self-interest, as is intended in a market, companies instead go to great lengths to build a sense of teamwork and get employees to put the companies interest ahead of their self-interest. They want their employees to cooperate to achieve company goals while at the same time competing for promotion within the company. The primary way companies secure the efforts of their workers is of course to pay them, but it quite clear that companies see significant value in getting workers to 'buy in' to the company rather than simply work for a paycheque.

The chapter concludes with a discussion of how market failure in the insurance industry for health care led to the growth of large health management organizations (HMOs) in the U.S. Companies providing the insurance didn't have the know-how to determine what was medically necessary and what wasn't, so the market ended up providing more and more services to customers since for each customer an additional service was a free benefit, but the increase to their premiums didn't show up until later after the insurer tallied up the cost of all the medical procedures done.

And, as in every classic prisoner's dilemma, any individual customer had no incentive to stop the rise in premiums by having less work done for themselves, since they would suffer the whole cost of not having the procedure, while the benefit of the lower premiums would be spread across all the plan members.

By combining the organization doing the medical procedures with the insurer that would eventually have to pay for them, the new integrated Health Management Organization could control costs and stop the increase in premiums.

The discussion of health care leads naturally into chapter 8 which talks about the role of government in solving market failures. Heath gives a couple of examples of Prisoners Dilemmas that the state often plays a role in solving:

1) Enforcing a switch to unleaded gas (ideally for a self-interested individual, they continue to buy the cheaper leaded gas, but everyone else switches to unleaded so they get the cheaper gas plus benefits of air that doesn't have lead in it - hence the prisoners dilemma).

2) Providing security services (better for me if my neighbours get together to do this and I reap the benefits of a safe neighbourhood without having to help out.

Heath notes that although corporations can fix some prisoner's dilemmas, they can't do much about those where the benefits from fixing the dilemma don't provide a monetary reward sufficient to pay the necessary employees and make a profit for a company. If moral suasion can't fix the dilemma, and money can't fix it, then the coercive power of the state is the only option left.

Heath notes that with respect to insurance, competition between companies takes place not on the basis of offering a lower price, but rather on the basis of denying coverage. Because companies insure only a subset of the population, the biggest driver of their profitability is ensuring that they don't provide insurance to people who are high risk. As a result, insurance markets tend to end up charging extremely high premiums to higher risk clients, they often leave a number of people entirely uninsured and there is a huge amount of overhead consumed by paperwork with respect to verifying and disputing claims.

In this environment, the efficiency gains from having a single insurer that needn't spend money on all the administration required for screening clients are large and outweigh the lost efficiency from having a monopoly provider. This is a major reason why governments are so heavily involved in providing insurance to their citizens.

A final point is that Heath comments on how GDP does not measure income but instead measures the value of transactions that take place through markets. Therefore, a country which organizes more of its transactions through the state rather than through a market may have a lower GDP than a country that uses more markets and less state intervention, but the difference in GDP reflects a difference in the structure of transactions, not a difference in actual income (as measured by goods and services provided).

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