Abundance and Trade

Yesterday, I noted my first objection to Peter Diamandis and Steven Kotler's book Abundance. My second is perhaps more technical. In Chapter Four, the authors make the (entirely true) point that progress is cumulative. The more we progress, the easier progress becomes, primarily because ideas interact and complement each other. Although not quoted in the book, Matt Ridley's quote on this blog's sidebar makes the same point:

"The more we prosper, the more we can prosper. The more we invent, the more inventions become possible. The world of things is often subject to diminishing returns. The world of ideas is not."

However, in making this point, the authors quote Dean Kamen (previously featured here as the inventor of the Slingshot water purifier, although better known as the inventor of the Segway):

"In a world of material goods and material exchange, trade is a zero-sum game. I've got a hunk of gold and you have a watch. If we trade, then I have a watch and you have a hunk of gold. But if you have an idea and I have an idea, and we exchange them, then we both have two ideas. It's nonzero."

While Diamandis & Kotler's overall point is true, Kamen's quote is just plain wrong. Even in a purely material world, trade is not a zero-sum game. Kamen looks only at the physical objects, not the value the traders place on those objects. By trading, both parties increase the value they place on the objects they have, so trade is positive-sum even if it's solely material trade.

Kamen is trying to speak of opportunity cost. When he and I trade material goods, I have to give up the material good that he wants, and vice versa. The opportunity cost of the material trade is the value of the material good that I'm giving up. But the value of the material good I'm receiving is higher than my opportunity cost, otherwise I wouldn't agree to the trade. The same is true on his side. Both of us increase the value of the things we hold, and our trade is a positive-sum game.

By contrast, if Kamen and I trade ideas, neither gives up the idea that we share with the other. The opportunity cost may include the time it takes to teach an idea, the effort to write it out, the cost to publish a book, etc., but the opportunity cost does not include the idea itself. This makes combinations of ideas far more likely, which is what Kamen seems to be getting at.

This is not just semantics. Much of our government's trade and economic policy is based in the idea that trade is a zero-sum game. Too many people think that if another country is getting richer, we must be getting poorer. The same applies within countries as well--if the rich are getting richer, the poor must be getting poorer. This is used to justify everything from import tariffs and export restrictions to higher taxes and complex regulations. Getting the public to accept that trade is positive-sum, not zero-sum, is the first step towards better economic policy.

Music Monday: Occupy Wall Street

Via To Get Rich is Glorious, an appropriate anthem for the Occupy Wall Street folks:



The best lines (despite rhyming "age" with "age") are reminiscent of my previous entry:
...At what point in history could a kid and a king 
both have clean water to drink?
George Washington was the richest man of his age 
But he lost all his teeth at a very young age 
Because they didn't have Scope and they all crapped in trays. 
We're not wealthy?

Now there's fountains on streets
from which clean water pours.
Four dollar generics
at all big box stores.
A sultan and student
both have iPhone 4s.
It's not fair...

(The full lyrics are available on YouTube.)

Online Polls from Sixth Debate

In the sixth Republican debate, held in Orlando, Florida, Fox News polled online viewers on a number of questions and then reported on three of the results during the debate. Those questions, the results and my own answers are below. The questions and results are based on the video of the debate here and the transcript here.

I define rich as someone having an annual income higher than:

I was surprised at the result here, with a full 44% of respondents saying someone with an annual income of $999,000 would not be rich. My answer was the lowest available, $100,000, and only 13% agreed with me. My reasoning is that US median individual income for 2010 was $26,197 (table P-7 here). Someone making $100,000 a year makes almost four times more than the median American. If that's not rich, I don't know what is.

If we're talking about households rather than individuals (as I assumed), I might have chosen $250,000, even though I think that's a bit high. For households, an income of $100,000 puts you in the second-highest quintile; the upper cut-off for the second-highest quintile is $100,065 (table H-1 here). I think being in the top-fifth of American households probably qualifies as being rich, so maybe the right answer is slightly higher than $100,000. Even so, the lower cut-off for the top 5% of American households is $180,810, so an annual income of $250,000 puts someone solidly into the top 5%. If that's not rich, once again, I don't know what is.

If you had to cut a government department, what would you cut?

This result wasn't surprising at all. The Department of Education is a huge target for both conservatives and libertarians. I think it could certainly use reform, but I'm not convinced that eliminating the Department entirely is the best way to reform education policy in this country. The same goes for the EPA. They've definitely overstepped their bounds of late, but regulating externalities like pollution is one of the core functions of government.

The Department of Labor could probably be recombined with Commerce, and I'm sure many of the regulations it enforces could be streamlined or eliminated with no ill effects. At the same time, a lot of its agencies perform necessary government functions, like the BLS and OSHA. I think at least some of the opposition to the Department of Labor comes from its name, which some see as synonymous with unions. I didn't realize this until writing this entry, but in fact, the National Labor Relations Board (which does probably deserve to be eliminated) is an independent agency, separate from the Department of Labor.

I voted to eliminate the Department of Housing and Urban Development. As the Department responsible for Fannie Mae and Freddie Mac, HUD has been possibly the most abject failure of any federal department over the last two decades. Even if it hadn't overseen the housing bubble, there's simply no reason that I can see that we need a federal housing policy, or a federal urban development policy. I don't know of anything the federal government does that is more local in nature than urban development. Even the name begs for the department to be localized.

What is the best way to fix immigration in the US?

The third answer read out loud during the debate was "deport all immigrants," which received 22% of the vote and was the second-place answer. I don't remember the exact wording of the options that night, but I hope that either the actual option read "deport all illegal immigrants" or that these 22% of people interpreted it that way. Conflating the illegal/legal immigration issues is something I expect from liberals, not conservatives.

My answer was to "create a path to citizenship," and 35% agreed with me, more than any other answer. However, a stronger fence and more border patrol agents go hand-in-hand, and it's hard to see someone supporting one of those while opposing the other. Combined, the "stronger border" options get 39% of the vote.

I support a path to citizenship out of practicality, although I would prefer to call it a "path to legality." Not everyone who comes to the US wants to stay permanently, and not everyone who stays permanently wants to become a citizen. Our immigration policy has to recognize that fact. But I do support some kind of path to legality for illegal immigrants already here because the other two options are simply impractical. With upwards of ten million illegals in the country, it is practically and fiscally impossible to deport them all. But leaving them alone and maintaining the status quo, where ten million people are in open disobedience of the law, is also impractical. It breeds contempt for the law and for America as a country, as evidenced by the 2006 protests. The only way forward is through some kind of path to legality.

The stronger fence and border patrol also won't work for practical reasons. The border is so porous already that sealing it would cost tens of billions of dollars at a time when we're already borrowing more than 40% of what we spend. Keeping the border sealed would cost tens of billions more. The only reason people immigrate illegally is because we've made it so difficult to immigrate legally. Get rid of the quotas and the waiting lists, and simplify the immigration process, and illegal immigration will fall dramatically overnight.