Competing ideas

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While it may be a sign of genius to hold two opposing ideas in your head and still function, let’s assume that is a necessary, but insufficient condition.  I have I have been trying to keep a few opposed ideas in my head at the same time, and all I’m getting is a headache.  There are the big questions around, why, utilitarian trade offs, time (which themselves have internal contradictions), and then there’s the everyday.

‘Well Doug, you’re not a philosopher, and you should get out there and try to get something done even if it is sub-optimal’  It’s this simple impulse to do and not just think which generated the title–Thirdly–for this blog.  I often roll into things that seem like good ideas without fully evaluating the potential consequences thereof (as if I could know)…There’s yet another competing idea…

I don’t want to be too glib about this criticism. It is a major fault of mine, and I think that if I spent a bit more time thinking about where to invest my time and money, then I would probably be a lot better off. Diving into half-baked ideas means I run the risk of self rationalizing shortly thereafter, at least in the mid-term, and that is not ideal.

That said, I have not been holed up like a monk.  As I mentioned a couple of posts ago, I have been discovering some of the areas where I felt like (with no data or theoretical framework) I might be able to invest.

When I talk about investment I don’t just mean an investment of my time, I mean an investment of money.  I think that I would like to buy a small business with a succession crisis.  Something that makes a quality product, and takes care of its suppliers, people, and customers.  I would love it if this little business could also be a ladder for the people in need in the community who are in need.  People like trafficked women, and refugees.  As I said, I don’t have a lot of theoretical underpinnings for why these people and why this way might be the best. It’s just something I feel like I would like to do.  I am working on this in parallel with the theoretical framework that I hope land on top of it.  If this theoretical framework and practical instance don’t connect, then I’m in for a lot of cognitive dissonance.

Heaps of problems have cropped up in even finding a business to buy. Though this is a far less grand project than my meta-project.  I would like to talk a little bit about those problems and the competing issues therein before I circle back on that damnable utilitarian question, or the ‘why’ or any of the others that I can’t seem to get a handle on.

I think that I need to define three terms before I set out to solve them.

The economics of time
Adam Smith cleverly used a pin in the “Wealth of Nations” to illustrate the economics of time.   He made the correct point, that if we had to make a single pin, without any capital investment, then it would take us all day.  We would need to find the iron ore (a difficult task without a shovel), heat it somehow, figure out how to use something like the Bessemer Process if we ever expected it to be like steel, pull it (difficult without gloves, at least), cut it, sharpen it, and then dip it back into the still-molten metal to make the pinhead.  This would take days, perhaps weeks, perhaps a lifetime depending on how many tools we allowed ourselves.  Autarky is poverty.  The only way out of this is specialization, whereby we save time by improving our skills.  We also save time by not switching between tasks, and by increasing our own understanding of how to do that task.

Fundamentally, the value that we are creating whenever we do anything is by saving the other people around us the time it would take them to do the same thing.  People do not generally pay more for something that they could do themselves with less time/resources. For instance, you could always pay someone to brush your teeth for you, but it’s likely that the cost to employ someone to do this would greatly exceed the cost to do it yourself, and would save your virtually no time.  That said, most of us are not dentists and although we could study, purchase x-rays, etc and become qualified to diagnose issues in our teeth, we don’t do that because the cost to do so is much higher than the few dollars that we pay after insurance to have our teeth checked out.

I had an interesting conversation with a technical trader a few weeks ago who traded on his own book, which was not yet massive, but a few hundred thousand dollars, a few orders of magnitude above what 90% of the population lives on.  He lamented that he could reduce his costs, but it always cost him time.  He lived further from the city, and the cost of the houses went down, but the time for the commute went up.  He could reduce the cost of his groceries, but he had to shop at several places and clip coupons, which took more time.  Ultimately, he lamented that although he had written some impressive algorithms for finding patterns, he had not so routinized them that they could run without his explicit approval, this time sunk him, and he ultimately went back to a conventional banker job.

David Ricardo talked about the logic of specializing in the thing that you were best at, your natural competitive advantage. Oddly, if everyone nation did this, then we would all end up with more stuff at the end.  The logic here is flawless (if too involved to go into here), but there is another way to view it.  If we all did what we were best at (meaning the things that we were fastest as doing), then we would all have more time to do the things that we wanted to.

This sets us on a trajectory: increased specialization based on lower time to produced things.

Competitive Advantage
This is the notion that a given firm is NOT the marginal producer of a given good or service.  I’m not going to go into a great deal of detail here, but it basically means that you reliably have lower costs (typically) or higher prices (occasionally) than your competitors. This is the supply and demand curve that were are used to looking at:

economics5

In truth, it looks something more like this:

supplydemandreworked

Each of the layers on the stacked bar represent a supplier.  If you are supplier S1, then you are sitting pretty you are pretty happy no matter what the equilibrium price is because you are happy to continue to produce.  Why are you willing to produce when no one else is?  In the long run, that can only happen because you are much more efficient than they are (though in the short run there are exceptions).
Generally speaking, this can be related back to time.  All goods are produced by some combination of people and machinery. Practically, we have all been endowed with various inequitable allocations of natural resources in our countries, and may not be keen to release them to others.  In the modern world it is unlikely that we will allow just anyone from any country dig for anything anywhere they please without first buying at least a permit. This unequal allocation of resources, be they intellectual, institutional, or natural, can lead to lower costs.
This sets us on a trajectory: be the lowest cost producer because only the efficient survive.

Money Illusion
Most economists think of money as having two purposes.  First, it is a store of value, and second it is a medium of exchange.  The first of these is really something like time travel.  If you produce something in your early life and convince someone to pay for it, then you can keep the currency, and use them later on.  This is a pretty valuable function when you consider that things like the seasons of the year.  Seasons prevent many fruits from growing in the winter, but fruit farmers still need to provide food, water, and shelter for themselves during this time.  The second function, this ‘medium of exchange’ is something different.  It means that we don’t need to exchange our goods directly with the person we need goods from.  To use our fruit farmer again, he does not need to barter his fruit for gas, or for shelter.  This creates a lot of efficiency.  We don’t end up lugging around goods, we don’t end up with supply-demand mismatches where the heating company has a stockroom of fruit, and we can normalize across products.

Here is the problem: an equivocation between money and usefulness. Very few people have bartered for much of anything since the end of childhood.  They start to believe that money is some kind of special thing, that if they can just get enough of it, then everything will be fine.  In most of their practical experience, this is correct, but most is not the same as all the time.  As long as currency is accepted, then even ill-gotten gain (e.g. proceeds from bank-robberies) will suffice to pay public and private debts. People tend to not really think about how the supply and demand for currency affects their lives.  Whether they think of this money illusion much or not, the effects, over the long term, can be quite dramatic, reducing their real liability on, for instance, their home loans.

One of the other equivocations that people start to believe is that their position is useful because they are paid for it.  Here there is a breakdown.  Mobsters are paid by the people they ‘protect’, but we could hardly say that a protection racket creates value for society.  This is an obvious case, but much less obvious are the cases where there is the seed of something worthwhile for society that has been greatly transformed.  The legal world can fall into this category at times.  There is no doubt that the body of law, both statutory and common, that has been built over time can serve a great good.  It can enforce contracts, norms, and ensure justice.  That said, it can also exact a very costly toll on citizens without the ability to pay.  Patent trolls, vexatious suits, medical malpractice in America are all over-indulgences of an otherwise good thing.  Just because people pay for them does not mean that they produce a net benefit for society.

Many people are under an illusion that money is some kind of special thing, and that obtaining it is a good thing both for themselves and society. Unfortunately, as Bernard Madoff, and Jeff Skilling showed us, there are ways to make money in the short term that are not good for society.  There are four values that this allows us to take on:

capture-1

Most people try to spend time in the Green Zone, but in truth, it’s not very easy to stay there.  What pulls them out? Lucrative spots in the lower right quadrant, and emotionally rewarding things in the upper left quadrant.

This sets us on a trajectory: Try to do what is right for society and for yourself.

Combination
So what happens when we combine these three things, time, competitive advantage, and money illusion? Well, you end up with a pretty nasty cube of potential outcomes. Against my better judgement, I have made all of the choices binary and created a two dimensional representation of them below.

capture-2

So where does this leave me?  Ideally, I should like to find something that is in the lower left of the lower left (I have made it extra-green so it stands out).  It leaves me wanting to find something that I am especially good/quick at doing, that I have especially abundant/cheap resources to do, and that is good for both me and society.

Well now that I’ve got that all down…it’s taken me a while, and I will probably need to revisit this in the next post.

Please, tell me what you thought before reading this, and let me know if this changed your mind.





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