No more business as usual

A million thanks to SusanG at Daily Kos for mentioning this:

Obama's Victory: A Consumer-Citizen Revolt

As recently as this summer, while the economy unraveled (BusinessWeek, 7/14/08), I made two trips to Silicon Valley in the hopes of finding leaders who grasped the crisis—and the opportunity—inherent in the destruction of trust. I listened to Facebook executives but found them obsessed with how to monetize the site with advertising. Their users were not individuals, but "eyeballs." I asked Google (GOOG) CEO Eric Schmidt how he would develop and sustain the trust of his users. His response was to cite the provision of two classes of stock intended to insulate top management from investor pressures. I gave a talk on the crisis of trust. The response from self-described Internet court jester Esther Dyson was typical of what I had been hearing: "Personally, I'm not that concerned if people don't trust large institutions."

A few weeks later economic panic gripped the stock market. I flipped on ABC's Sunday morning news show with George Stephanopoulos only to hear economist Larry Summers explaining that the surprising depth of the economic meltdown was due to the loss of trust in institutions. What he didn't say was that this loss of trust is a vast sea whose level has been rising for decades. The subprime debacle and the ensuing credit freeze simply marked the moment when the sea wall was finally breached. ...

So can we invent a business model in which advocacy, support, authenticity, trust, relationship, and profit are linked? Can I write that sentence without invoking fear, disbelief, cynicism, or peals of laughter? The ugly practices that killed trust seem intractable to most people, whether they are the ones trapped inside the money machine or on the receiving end of its operations. But after this election, the answer to these questions has irreversibly changed. The answer today would have to be not only "yes we can" but also "yes we must."

No, this is not about "science" per se, unless one considers the philosophical side of economics (rather than the quantitative side) to be a science. Rather, it is the simple observation that anyone reading the daily news with an open mind can understand: Basing a modern large-scale economy primarily on the evolutionarily ancient motivation of greed and personal self-interest is not working out very well...

"Consumers" are well-programmed robots

Brand Names Subconsciously Afftect People's Shopping Goals (7/17/08)

Even 60 milliseconds of exposure to a brand name such as Wal-Mart or Tiffany can alter consumers’ subconscious goals, according to new research.

Authors Tanya L. Chartrand, Joel Huber (both Duke University), Baba Shiv (Stanford University), and Robin J. Tanner (University of Wisconsin) examined goals that are triggered when consumers shop. “Results suggest that simple exposure to brand names has the potential to activate goals which then influence choices,” write the authors. “This data thus opens the door to an intriguing new way to think about the role and power of brands.”

The research suggests that goals can be triggered without consciousness. In other words, passing a discount store on the way to the sporting good store might affect an eventual purchase. ...

“To the best of our knowledge, this provides the first evidence that such brands can automatically activate purchase goals in individuals and that these goals can influence consumers’ product preferences without their awareness or conscious intent,” the authors conclude.

Even though we like to think we’re in control of our choices, this research indicates that our response to some brands is deeply rooted in our subconscious.

Emphasis added.

Too bad humans can't be programmed to think rationally. But that would be counterproductive to society's real goals.

Altruism and economics

Another shocker: even economists may have to take into account that altruistic behavior, not just selfish behavior, can be rational, while selfishness can be suboptimal. Gordon Gekko, the Republican Party, and the Chicago School of Economics may not agree, but:

The Economics Of Nice Folks (6/19/08)

A basic tenet of economics is that people always behave selfishly, or as the 18th century philosopher economist David Hume put it, "every man ought to be supposed to be a knave."

You may recall that David Hume was recently mentioned here, concerning a related aspect of ethical theory.

But what if some people aren't always knaves?

Sam Bowles argues in Science June 20 that economics will get it wrong then, sometimes badly so. He points to new experimental evidence that people do often act against their own personal self-interest in favor of the common good, and they do so in predictable, understandable ways. Poorly-designed economic institutions fail to take advantage of intrinsic moral behavior and often undermine it. ...

These examples show that economists ignore human altruism at their peril. Standard economic theory assumes that incentives that appeal to self-interest won't affect any natural altruism that may exist, but that assumption is clearly wrong. Bowles discusses the research to date that helps to explain when and why that assumption breaks down.

The thesis here may be more clearly expressed in the abstract of the research review in question:

Policies Designed for Self-Interested Citizens May Undermine "The Moral Sentiments": Evidence from Economic Experiments (6/20/08)

High-performance organizations and economies work on the basis not only of material interests but also of Adam Smith's "moral sentiments." Well-designed laws and public policies can harness self-interest for the common good. However, incentives that appeal to self-interest may fail when they undermine the moral values that lead people to act altruistically or in other public-spirited ways. Behavioral experiments reviewed here suggest that economic incentives may be counterproductive when they signal that selfishness is an appropriate response; constitute a learning environment through which over time people come to adopt more self-interested motivations; compromise the individual's sense of self-determination and thereby degrade intrinsic motivations; or convey a message of distrust, disrespect, and unfair intent. Many of these unintended effects of incentives occur because people act not only to acquire economic goods and services but also to constitute themselves as dignified, autonomous, and moral individuals.

You may also recall that Sam Bowles showed up in this, from last November, concerning a more distantly related aspect of evolutionary ethical theory.

Tags: economics, altruism

More about alternative energy

About a month ago, I wrote about the shortcomings of various alternative energy sources. That was mainly about a variety of problems with nuclear energy, solar energy (photovoltaics), and hydrogen.

I didn't even get into the subject of biofuels, but I should have, because the problems in that area are becoming painfully obvious.

Ordinarily I would not expect to find much significant reporting on a scientific/technical subject in Time magazine, especially something that challenges "conventional wisdom". But via DarkSyde at Kos I see there's an interesting article on the problems of "biofuel": The Clean Energy Scam

Several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it's dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous. Even cellulosic ethanol made from switchgrass, which has been promoted by eco-activists and eco-investors as well as by President Bush as the fuel of the future, looks less green than oil-derived gasoline.

Meanwhile, by diverting grain and oilseed crops from dinner plates to fuel tanks, biofuels are jacking up world food prices and endangering the hungry.

The Time article focuses on the loss of rainforest, and consequently the loss of its ability to soak up and sequester CO₂. When the forest is gone, CO₂ will still be incorporated in biomass (crops of some sort). But then that is converted to biofuel, and released back into the atmosphere when it's burned. (To say nothing of the energy that's just wasted along with release of CO₂ when the forest biomass is burned to clear it away.) Given all the energy that has to be expended to grow and harvest biofuel crops, with resulting additional release of CO₂, we are worse off in terms of greenhouse gas emissions than if we just burned oil (or even coal).

But that's not the only serious problem. Crops that are grown to make fuel (from sugar cane, corn, switchgrass, or whatever) use land where food crops (for people and animals) could be grown instead. Driving up the cost of food for everyone on the planet. (Have you checked the price of bread or eggs at the market recently?)

Economists have spoken out about this problem for several years, when the hype for biofuels and ethanol was just beginning to build. For instance, we have from Howard Simons in early 2006: Making Our Food Fuel Isn't the Answer

If high prices strengthen energy's claim on food supplies, governments everywhere will intervene on behalf of their hungry citizens. If low prices torpedo biofuels' economics, governments everywhere will respond with subsidies for these industries. Only an elimination of current mandates and subsidies today will avoid these problems tomorrow, but the likelihood of this happening is near zero. Somehow I believe we will rue the day when we decided to make food and fuel substitutes at the margin.

In early 2007 Paul Krugman picked up the story: The Sum of All Ears

There is a place for ethanol in the world’s energy future — but that place is in the tropics. Brazil has managed to replace a lot of its gasoline consumption with ethanol. But Brazil’s ethanol comes from sugar cane.

In the United States, ethanol comes overwhelmingly from corn, a much less suitable raw material. In fact, corn is such a poor source of ethanol that researchers at the University of Minnesota estimate that converting the entire U.S. corn crop — the sum of all our ears — into ethanol would replace only 12 percent of our gasoline consumption.

So ethanol doesn't even help the U. S. all that much in terms of dependence on foreign oil. And this February Krugman returned to the subject here, linking to this: Ethanol Demand in U.S. Adds to Food, Fertilizer Costs

About 33 percent of U.S. corn will be used for fuel during the next decade, up from 11 percent in 2002, the Agriculture Department estimates. Corn rose 20 percent to a record on the Chicago Board of Trade since Dec. 19, the day President George W. Bush signed a law requiring a fivefold jump in renewable fuels by 2022.

Increased demand for the grain helped boost food prices by 4.9 percent last year, the most since 1990, and will reduce global inventories of corn to the lowest in 24 years, government data show. While advocates say ethanol is cleaner than gasoline, a Princeton University study this month said it causes more environmental harm than fossil fuels.

And then last week Krugman had even more: Grains Gone Wild

The subsidized conversion of crops into fuel was supposed to promote energy independence and help limit global warming. But this promise was, as Time magazine bluntly put it, a “scam.”

This is especially true of corn ethanol: even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But it turns out that even seemingly “good” biofuel policies, like Brazil’s use of ethanol from sugar cane, accelerate the pace of climate change by promoting deforestation.

And meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states.

Here's a report of a scientific study on the issue: Some Biofuels Risk Biodiversity And Could End Up Harming Environment

Corn-based ethanol is currently the most widely used biofuel in the United States, but it is also the most environmentally damaging among crop-based energy sources.

Finally, to bring this back to a solid scientific foundation, Sean at Cosmic Variance reminds us that Energy Doesn’t Grow on Trees

In particular, biofuels (such as ethanol) and hydrogen are not actually sources of energy — given the vagaries of thermodynamics, it costs more energy to create them than we can get by actually using them, as there will inevitably be some waste heat and entropy produced

.

Although all this bad news about just about every prospective near-term form of alternative energy is discouraging, there are a few other options that may become available in the slightly more distant future. There's the old perennial, controlled nuclear fusion. Even though work on that is even more active than ever, it's still at least several decades away.

But there's another significant option that's often overlooked: solar power satellites. This technology uses very large arrays of photovoltaic panels high in orbit around the earth. The energy is beamed back to the ground in the form of microwaves. (So this should not be confused with simply using mirrors to redirect additional sunlight, which presents serious problems of its own.)

Solar power satellites also have many uncertainties and potential problems, but the largest is simply boosting enough of them into orbit, and maintaining them. A possible approach to those problems involves space elevators. But those, again, present a whole additional set of challenges.

For now, here are a couple of articles from last fall with more details:

Pentagon backs plan to beam solar power from space

New Space Solar Power Report from DoD NSSO

Tags: ethanol, biofuel, alternative energy, solar power satellite

Economics 101

I'm going to broaden the focus here with a lesson in elementary economics. This is a fairly standard example used by economists everywhere, to illustrate how competitors position themselves to divide up a market.

Suppose there is a nice beach somewhere. (It may be either swimsuit optional, or else the gov't requires all users to wear suits, because the gov't knows what's best for everyone. However, that's not germane to what follows.)

Suppose further that two hot dog vendors want to locate their carts on the beach in order to maximize their revenue. You might think that the best way to do this is to imagine the beach divided in half, with each vendor in the middle of one half. That places one 1/4 of the way from one end, and the other 1/4 of the way from the other end. Assuming people are uniformly distributed on the beach, this minimizes the maximum distance a customer needs to walk in order to get a hot dog – at most 1/4 the length of the beach.

But counterintuitively, either vendor can apparently do better by moving to the middle of the beach. That way the vendor who moves to the middle first can still have all of his previous customers, plus half the customers between the center of the beach and the other vendor. Unfortunately, if the other vendor moves to the center also, to avoid losing business, the total quantity of hot dogs sold will be less for both than previously. This is because about half of the customers would have to walk farther to get a sausage, and many of these won't want to get so much exercise.

Actually, however, this only illustrates how hypothetical a lot of reasoning by economists is. What "should" happen if markets were efficient (which they aren't) is that after both existing vendors have moved to the center, then somebody with a little capital would buy new carts, hire two undocumented immigrants (at less than minimum wages), and set them up in the old .25/.75 points.

This could go on indefinitely, until the "point of diminishing returns" when the market for hot dogs on the beach is "saturated".

But at that point, someone with even more capital would step in with an advertising campaign to promote eating hot dogs to beach-goers, and then set up additional carts, selling hot dogs made from recycled turkey parts at prices below cost, to drive all the other vendors out of business. Then the last entrant can buy up the remaining assets in bankruptcy, cut back on the number of locations, but not raise the product quality, and make more money than everyone in total previously.

Maybe, just maybe, the beach-goers would demand gov't regulation of hot dog vendors at that point. But the remaining vendor can use his substantial profits to buy off any relevant gov't officials and fix any elections that might be held (using his electronic voting machine subsidiary), to prevent any gov't action.

And then, using this new gov't-relations infrastructure, the vendor would lobby for gov't subsidies to help produce lower-cost hot dogs. The gov't would oblige (since many officials are former vendor executives) and hold secret meetings to plan the subsidies and make all necessary arrangements. Mainstream media (large portions of which are owned by friends and suppliers of the vendor) would laud the gov't for its foresight. Some sharp lawyers might challenge such practices in court, but since a majority of judges have been appointed by the gov't on the advice of its lobbyists, the lawsuits would go nowhere. Further lawsuits would be forestalled by "tort reform".

And "consumers" would go on obliviously, happily eating hot dogs until they (the "consumers") keel over from cardiovascular disease, due to bad diet and lack of exercise. The only mistake made by the vendor and his allies in all this is failing to secure gov't health care to keep the "consumers" alive a little longer. Because "economists" had forecast that such a move would not actually improve profits in the long run, since older "consumers" would be too sick to eat many hot dogs.

Wealthy preachers of religion would then step in to assure the populace that all of this was God's plan, and remind all the survivors that there was still time to contribute to the church's building fund, before the Rapture.

Happy New Year!

Update (1/12/08): At a link to this post, the writer comments that governments and other powerful actors have long intervened in economic affairs. The example cited involves medieval cartels and monopolies, but of course this goes back much farther in history – as long as any sort of gov't has existed, I would suppose.

And in case anyone thinks this note is a little over the top in parodying economics, here's something I came across just a few days after writing the above. It's by economist and hedge fund manager Jean Paul Schmetz:

In my field (theoretical economics), I believe that most ideas taught in economics 101 will be proved false eventually. Most of them would already have been officially defined as false in any other more hard-science, but, because of lack of better hypotheses they are still widely accepted and used in economics and general commentary. Eventually, someone will come up with another type of hypotheses explaining (and predicting) the economic reality in a way that will render most existing economics beliefs false.