Greetings, lawmakers.
When was the last time democracy had a makeover? Arguably, there hasn't been a big change to the way Americans govern themselves for 200 years. Well, except maybe allowing black people to vote in 1969 and women in 1920; OK maybe there have been some 20th-century improvements in terms of who can vote. However, in almost every one of today's democracies, the only governmental venue where the electorate at large expresses their views is at the polling station.
The Checkbox Menace
Yes or no questions can distort your position. Don't believe me? Try:
Elections so far allow only really coarse-grained opinions to pass from the people to the law. Politicians don't have a monopoly on good policy ideas, ergo there are some great ideas floating around which will never see the light of day as long as votes are the only way to influence laws.
Until now, this restriction of opinions has been necessary to keep procedures streamlined: there's been no way of having an intelligent exchange of opinions with 200 million voters. Until now?
Kiwi Wiki
That's right, the New Zealand government has opened up a wiki site where they let you draft the law. Its power so far is only advisory (I think that's wise, at least for now), but it allows good ideas and intelligent debate to percolate up from the people without the government doing a thing (apart from setting up MediaWiki or some such).
I'll be interested to see what comes of the New Zealand experiment. Does anyone below care to register their predictions as to if this will be fabulous or a flop?
Keep on wikin',
LeDopore
Showing posts with label future-proof policy. Show all posts
Showing posts with label future-proof policy. Show all posts
Thursday, September 27, 2007
Friday, May 11, 2007
Liberty and Bandwidth for All
Greetings, YouTubers*.
In my last post I outlined how our current system of private Internet Service Providers (ISPs) companies is economically wasteful. Although in general the private sector is better than the public sector at providing higher-quality services at a lower cost, with ISPs the product (Internet bandwidth) is a factor of 1000 times cheaper than what ISPs charge. Almost all the ISPs' operational costs come from advertising, distributing and charging for this cheap-as-dirt Internet backbone bandwidth. In other words IPSs are intrinsically so wasteful that publicly-owned networks make sense. This post is going to tackle how I think we should implement municipal data networks.
Letting Demand Drive Expansion
Internet technology changes so fast that it would be unwieldy for a council to try to have a sane policy of technology roll-out which took advantage of the latest and greatest. It would also be hard to periodically gauge the service levels residents truly want. It's much better to make technology policy future-proof, meaning that no new laws or regulations will be required to implement better technology where it's wanted as soon as it's developed.
Here's an example of a future-proof network-building scheme. Have residents pledge (with holds on their credit cards) that they would be willing to pay X dollars for Y service. As soon as a private company notices that enough residents in a neighborhood have pledged enough money to make granting the service worthwhile, they can install whatever hardware they choose which is able to meet or exceed the bandwidth demands Y of all the people who pledged X dollars. The money from the credit card holds would then go into a trust which would pay the hardware companies annuities for as long as the service works (or maybe the trust should be invested with low risk, and 25% of the total equity should be paid to the hardware builder/maintainer each year; since Internet technology becomes obsolescent so much faster than roads it makes sense to make the payment schedule accelerated).
The city would provide all of the (essentially free) backbone bandwidth in exchange for the fact that all Internet services using that bandwidth must be broadcast over authentication-free wireless Internet or users must be able to plug in wired connections for free in publicly-accessible points. (Perhaps encryption could be optional to prevent people from spying, but it shouldn't be mandatory, and passwords must not be secret. With good crypto you can have every user use a different session key, so that even if they know each others' passwords they can't snoop on each other.)
Miscellaneous Points
Here are a few guidelines for details of the policy which might help:
In the Chicago example of last post we saw that the entire city could have a free data network for a one-time cost of under $15 per person. People are probably willing to pay a lot more for much faster connections; the plan outlined in this post shows a way in which a publicly-owned network can deliver services the public wants as soon as their feasible to deliver without wasting money on advertising and accounting.
This plan isn't anti-business either. The local companies which would spring up to supply the network services asked for by the people would have a leg up spreading to other municipalities where this same incentive policy gets implemented. (I am fairly confident that other municipalities would want to emulate the digital utopias which would come from this type of municipal Internet service.)
With some organization, the people can have cake and eat it too: they can pay a pittance in extra tax in exchange for hassle-free, state-of-the-art Internet connectivity. Everybody wins except old-school ISP shareholders. (Sell!)
*Web 2.0 couch potatoes?
In my last post I outlined how our current system of private Internet Service Providers (ISPs) companies is economically wasteful. Although in general the private sector is better than the public sector at providing higher-quality services at a lower cost, with ISPs the product (Internet bandwidth) is a factor of 1000 times cheaper than what ISPs charge. Almost all the ISPs' operational costs come from advertising, distributing and charging for this cheap-as-dirt Internet backbone bandwidth. In other words IPSs are intrinsically so wasteful that publicly-owned networks make sense. This post is going to tackle how I think we should implement municipal data networks.
Letting Demand Drive Expansion
Internet technology changes so fast that it would be unwieldy for a council to try to have a sane policy of technology roll-out which took advantage of the latest and greatest. It would also be hard to periodically gauge the service levels residents truly want. It's much better to make technology policy future-proof, meaning that no new laws or regulations will be required to implement better technology where it's wanted as soon as it's developed.
Here's an example of a future-proof network-building scheme. Have residents pledge (with holds on their credit cards) that they would be willing to pay X dollars for Y service. As soon as a private company notices that enough residents in a neighborhood have pledged enough money to make granting the service worthwhile, they can install whatever hardware they choose which is able to meet or exceed the bandwidth demands Y of all the people who pledged X dollars. The money from the credit card holds would then go into a trust which would pay the hardware companies annuities for as long as the service works (or maybe the trust should be invested with low risk, and 25% of the total equity should be paid to the hardware builder/maintainer each year; since Internet technology becomes obsolescent so much faster than roads it makes sense to make the payment schedule accelerated).
The city would provide all of the (essentially free) backbone bandwidth in exchange for the fact that all Internet services using that bandwidth must be broadcast over authentication-free wireless Internet or users must be able to plug in wired connections for free in publicly-accessible points. (Perhaps encryption could be optional to prevent people from spying, but it shouldn't be mandatory, and passwords must not be secret. With good crypto you can have every user use a different session key, so that even if they know each others' passwords they can't snoop on each other.)
Miscellaneous Points
Here are a few guidelines for details of the policy which might help:
- The quality of service could be specified by three numbers: bandwidth, reliability and latency-to-backbone; that way users can communicate what's most important for them to the free market.
- Perhaps users should pay on a sliding scale, with payments tied to the quality of service received, so that there is always an explicit incentive to provide better Internet service.
- Assuming only 25% of residents who want a given service would pledge for it, maybe the city should match pledges paid out of property tax.
- Since optical fiber is cheap but expensive to lay, it's a common practice to lay cables with many more fibers than will be needed in the near future. These "dark" fibers can later be cheaply lit if needed. Policies should probably specify that some percentage (like 95%) of the fiber laid to make a network must be dark.
- Depending on political will, it might make sense to pay for city-wide phone-level coverage off the bat through taxes, and let people pledge for upgrades as desired.
In the Chicago example of last post we saw that the entire city could have a free data network for a one-time cost of under $15 per person. People are probably willing to pay a lot more for much faster connections; the plan outlined in this post shows a way in which a publicly-owned network can deliver services the public wants as soon as their feasible to deliver without wasting money on advertising and accounting.
This plan isn't anti-business either. The local companies which would spring up to supply the network services asked for by the people would have a leg up spreading to other municipalities where this same incentive policy gets implemented. (I am fairly confident that other municipalities would want to emulate the digital utopias which would come from this type of municipal Internet service.)
With some organization, the people can have cake and eat it too: they can pay a pittance in extra tax in exchange for hassle-free, state-of-the-art Internet connectivity. Everybody wins except old-school ISP shareholders. (Sell!)
*Web 2.0 couch potatoes?
Saturday, April 21, 2007
Taking Ears Off Your Life
Greetings, colonels.
Today's post is going to look at some of the dietary consequences of US corn subsidies. The United States corn industry is politically untouchable since so many processed foods are made from corn derivatives. (If you're interested in more details about factory foods, I thoroughly recommend Michael Pollan's book The Omnivore's Dilemma.)
While many wary eaters know that corn products like corn-fed beef and high fructose corn syrup (HFCS) are wrecking dietary havoc among the American people, it's difficult to assault the entrenched food industry without convincing facts about just how much direct damage corn subsidies do to our health. In this post I'm going to show that we can blame pretty much all of our HFCS woes on corn subsidies, and I'm going to show how much damage HFCS really does.
Corn Subsidies
Ever since 1975, the United States has been paying farmers to grow corn in excess of the quantities which the market would naturally bear. Taxpayers make up the difference between the market price and a government-guaranteed price, which is often in the neighborhood of twice the buying price of corn. Americans pay over $5 billion per year (about $17 per capita) to keep farmers producing way more corn than we could ever safely consume.
Consequences of Corn Subsidies
Corn farmers aren't the ones getting rich; the net effect of corn subsidies is to ensure a huge surplus of raw biomass to be used to manufacture higher-value food products. From The Omnivore's Dilemma, I learned that about 60% of the corn grown in the United States goes to animal feed, and much of the remainder goes into producing HFCS. If you drink diet soda or if you steer clear of US-grown meat, your taxes are paying for someone else's unhealthy diet. (Show of hands: would anyone out there resent subsidizing tobacco?)
HFCS Created by Corn Subsidies
If I'm going to accuse subsidies for making us eat unhealthy corn and corn-fed meat, I'd better be sure the subsidies are actually to blame. There are three factors which make methink corn subsidies are the root cause of pretty much all the HFCS consumed by Americans. First, HFCS is cheaper than cane sugar in the US due to subsidy. Second, in Europe, where corn isn't favored like it is in North America, HFCS is almost never used as a processed food sweetener. Third, the timing of the introduction of the corn subsidy coincides with the explosive growth of HFCS consumption in the US, as is evident in this graph (from this USDA site):
Corn subsidies were introduced in 1975, before which it's plain that HFCS was a bit player. Also note that soft drinks began phasing in HFCS as a sweetener, a transformation completed by 1984. (I fancy I can see the kink in the HFCS curve around 1984 - I wonder if that's caused by saturating the soda market.)
Fat Caused by HFCS
If HFCS were like normal unhealthy food, at least a calorie of HFCS consumed would displace a calorie from some other source, meaning that HFCS wouldn't be more responsible for today's obesity epidemic than any other unhealthy food. However, as I mentioned in this post, a recent study showed that HFCS doesn't make you feel full, so consuming HFCS will not make you eat less of other things. (The 95% confidence limit to this study was that 100 HFCS calories may displace 24 other food calories, but the study's best estimate is that people actually eat 17 more calories of other foods for every 100 HFCS calories they consume. Also note that other liquefied sugars may be just as bad as HFCS at displacing other calories.)
Even if you take the most charitable view towards HFCS allowed by the study's margin of error, 76% of the HFCS calories consumed by Americans go to fat. The average annual per capita consumption of HFCS in the United States is 59 pounds. Even assuming half of that gets wasted, that means annually an extra 22 lbs of sugar per American is consumed just because HFCS happens to be today's sweetener of choice. According to this publication (page 13 - also interesting because it claims HFCS might be not worse than other liquid sugars), HFCS is about 4/9 as calorie-dense as fat, so the availability of HFCS means that on average Americans gain an extra 10 lbs per year.
Conclusion
On average, $17 of your taxes every year go to a subsidy which causes people to gain an astonishing 10 lbs per year just through the HFCS mechanism I've outlined. (I expect subsidized animal feed also makes Americans fatter, but the story there is harder to untangle.) Moreover, the over-fertilized Iowa corn monocultures are horrible on the environment, and have killed Mexican farms which can't compete with American corn prices. (Those of you who object to Mexican farm labor should throw your lot in with the anti-subsidy crowd: it's just the subsidies which enable Americans to pay migrant workers $4 an hour while just across the boarder no farmer can afford to hire at $1 an hour. It's not something magic in the soil which makes American farms magically 4 times as efficient at turning labor into food - its the subsidies.)
In conclusion, corn subsidies do enormous harm. While I haven't supported every anti-subsidy argument in this post, I've shown that without corn subsidies you'd have the equivalent weight loss of 10 lbs per year. (I suspect many Americans diet more because of their HFCS-related weight gain - imagine if you got an extra 10 lbs of "free" fat per year! Mmmm... what I'd do!)
It's going to be a tough fight against the food industry, but there are lots of good reasons to abandon our current destructive corn-driven Leviathan. Let's ditch the subsidies and let 'em howl.
Today's post is going to look at some of the dietary consequences of US corn subsidies. The United States corn industry is politically untouchable since so many processed foods are made from corn derivatives. (If you're interested in more details about factory foods, I thoroughly recommend Michael Pollan's book The Omnivore's Dilemma.)
While many wary eaters know that corn products like corn-fed beef and high fructose corn syrup (HFCS) are wrecking dietary havoc among the American people, it's difficult to assault the entrenched food industry without convincing facts about just how much direct damage corn subsidies do to our health. In this post I'm going to show that we can blame pretty much all of our HFCS woes on corn subsidies, and I'm going to show how much damage HFCS really does.
Corn Subsidies
Ever since 1975, the United States has been paying farmers to grow corn in excess of the quantities which the market would naturally bear. Taxpayers make up the difference between the market price and a government-guaranteed price, which is often in the neighborhood of twice the buying price of corn. Americans pay over $5 billion per year (about $17 per capita) to keep farmers producing way more corn than we could ever safely consume.
Consequences of Corn Subsidies
Corn farmers aren't the ones getting rich; the net effect of corn subsidies is to ensure a huge surplus of raw biomass to be used to manufacture higher-value food products. From The Omnivore's Dilemma, I learned that about 60% of the corn grown in the United States goes to animal feed, and much of the remainder goes into producing HFCS. If you drink diet soda or if you steer clear of US-grown meat, your taxes are paying for someone else's unhealthy diet. (Show of hands: would anyone out there resent subsidizing tobacco?)
HFCS Created by Corn Subsidies
If I'm going to accuse subsidies for making us eat unhealthy corn and corn-fed meat, I'd better be sure the subsidies are actually to blame. There are three factors which make methink corn subsidies are the root cause of pretty much all the HFCS consumed by Americans. First, HFCS is cheaper than cane sugar in the US due to subsidy. Second, in Europe, where corn isn't favored like it is in North America, HFCS is almost never used as a processed food sweetener. Third, the timing of the introduction of the corn subsidy coincides with the explosive growth of HFCS consumption in the US, as is evident in this graph (from this USDA site):
Corn subsidies were introduced in 1975, before which it's plain that HFCS was a bit player. Also note that soft drinks began phasing in HFCS as a sweetener, a transformation completed by 1984. (I fancy I can see the kink in the HFCS curve around 1984 - I wonder if that's caused by saturating the soda market.)
Fat Caused by HFCS
If HFCS were like normal unhealthy food, at least a calorie of HFCS consumed would displace a calorie from some other source, meaning that HFCS wouldn't be more responsible for today's obesity epidemic than any other unhealthy food. However, as I mentioned in this post, a recent study showed that HFCS doesn't make you feel full, so consuming HFCS will not make you eat less of other things. (The 95% confidence limit to this study was that 100 HFCS calories may displace 24 other food calories, but the study's best estimate is that people actually eat 17 more calories of other foods for every 100 HFCS calories they consume. Also note that other liquefied sugars may be just as bad as HFCS at displacing other calories.)
Even if you take the most charitable view towards HFCS allowed by the study's margin of error, 76% of the HFCS calories consumed by Americans go to fat. The average annual per capita consumption of HFCS in the United States is 59 pounds. Even assuming half of that gets wasted, that means annually an extra 22 lbs of sugar per American is consumed just because HFCS happens to be today's sweetener of choice. According to this publication (page 13 - also interesting because it claims HFCS might be not worse than other liquid sugars), HFCS is about 4/9 as calorie-dense as fat, so the availability of HFCS means that on average Americans gain an extra 10 lbs per year.
Conclusion
On average, $17 of your taxes every year go to a subsidy which causes people to gain an astonishing 10 lbs per year just through the HFCS mechanism I've outlined. (I expect subsidized animal feed also makes Americans fatter, but the story there is harder to untangle.) Moreover, the over-fertilized Iowa corn monocultures are horrible on the environment, and have killed Mexican farms which can't compete with American corn prices. (Those of you who object to Mexican farm labor should throw your lot in with the anti-subsidy crowd: it's just the subsidies which enable Americans to pay migrant workers $4 an hour while just across the boarder no farmer can afford to hire at $1 an hour. It's not something magic in the soil which makes American farms magically 4 times as efficient at turning labor into food - its the subsidies.)
In conclusion, corn subsidies do enormous harm. While I haven't supported every anti-subsidy argument in this post, I've shown that without corn subsidies you'd have the equivalent weight loss of 10 lbs per year. (I suspect many Americans diet more because of their HFCS-related weight gain - imagine if you got an extra 10 lbs of "free" fat per year! Mmmm... what I'd do!)
It's going to be a tough fight against the food industry, but there are lots of good reasons to abandon our current destructive corn-driven Leviathan. Let's ditch the subsidies and let 'em howl.
Saturday, April 14, 2007
Upfront Cost Disclosure
Greetings, homeowners.
If you're a regular reader, you'll already know that I have both an environmental and a capitalist streak in me. I don't think these two need be in eternal conflict; in fact today's post is going to outline a way in which we can encourage the adoption of green technologies without messing around with the marketplace.
Good Policy Assumes Laziness
First of all, let me fire a diffuse attack at all of the legislated incentives to get people to adopt new green technology. While legislated incentives can be better than nothing, often the incentives are not proportional to the environmental good done (e.g. giving a fixed tax rebate to cars purchased with better than a certain mileage - there's just a threshold and no proportionality), and almost always these bills can't and shouldn't be passed when the technology has only limited applicability. However, I think that there are potentially many diverse opportunities for incremental improvements that just can't be addressed by legislated incentives. Good policy should automatically reward where it should; good policy is lazy and future-proof.
Virtue should be Its Own Reward
In this post I'm going to outline a way to promote environmental benefits in a natural, non-legislative way. Specifically, we should require that the advertised price of goods reflect the total cost of ownership, and not just the sale price. For example, when buying a house, the only price you would be allowed to advertise should be the sum of the sale price and the forecast cost of 20 years of utilities in the house. This way, houses with the same listed price would be equally affordable, and there would be incentives to build houses that were greener. Let me slow down a bit to unpack all of these comments so that they make a little more sense.
I'm Lazy Too
How many of you have bought a house or rented an apartment without first calculating the expected utility bills? I have never requested past utility statements for any property I've rented, and I certainly haven't done any thorough analysis of properties I'm only marginally interested in. I think I'm pretty typical in my laziness too: while I might try to factor in energy efficiency, I don't have a clear idea as to how much a given setup will affect my bottom line.
Modern economists acknowledge that humans make decision (and big ones too) with imperfect information, which results in less-than-optimal buying decisions. The most common numeric piece of information people take into account when looking to buy a house or rent an apartment is its price; my idea is to fold utility costs into the price from the outset so that people can make a lazy but correct decision as to how much they would like to spend on a heated domicile.
Implementation
If I ruled the world, the list price for all houses would have to be the sale price plus 20 years of expected utilities costs, based on prior use records. (Aside: 20 years is a round figure on the order of the inflation-adjusted doubling time of money at prime rates, so if you were to invest this sum at the time of sale its simple interest could pay utilities from the interest essentially for ever. Perhaps 20 years is a little on the short side.) The sale price would be allowed to be advertised only as a line item in conjunction with the utilities cost and the total list price. Lying would be considered fraud.
Guessing the efficiency of a new building might be difficult, but it should be possible to use statistics to fine any construction company which consistently lowball's the heating estimates of the buildings they make.
The same idea could be applied to automobiles: add the cost of driving 50 000 city and 50 000 highway miles before getting the list price. (Aside: this will come out to around $10 000: enough to perhaps convince many people to buy newer, more fuel-efficient cars. Who would want a clunker when the list price is $11 200? We might be able to persuade car manufacturers to lobby for this idea since it would boost new car sales.)
Perhaps major appliances and computers should have a similar addition to advertised price, maybe also including the mean time until failure. At some point gizmos become too small for these advertising restrictions cease to make sense, but I don't know if this transition happens at the "toaster" level or the "microwave" level.
Lazily Greener Incentives
Consider the implications of my idea on builders and house maintainers. If you build a house that's more energy-efficient, its value to the seller will automatically be higher, since it competes with houses of the same list price. The 20-year cost of heating a poorly-insulated house in a cold climate can top $100 000*, so energy-efficient designs and materials could give a significant edge on the open market.
Moreover, if home buyers were to display a fraction of the eco-chic that Prius-cravers show, perhaps small 20-year heating cost stats would carry the same caché as slim cellphones. In any case, energy efficiency could be reducible to a dollar value, which is great for putting things into perspective.
Conclusions
Let me recap a few of the reasons why I think we should add use cost to sale price to determine the list price of automobiles, houses etc.
*Friends of mine in Toronto rented a house with typical winter heating bills of $2000 per month, even though some of them opted to turn the heat down and sleep in arctic sleeping bags. I'm sure that if this heating were advertised in the listed rent they would have rented elsewhere. The 20-year heating cost for this Victorian behemoth would have been over a quarter-million bucks: a significant warning to any prospective home-buyer, and a burning incentive for the current owner to insulate better to protect the house's retail and rental value.
If you're a regular reader, you'll already know that I have both an environmental and a capitalist streak in me. I don't think these two need be in eternal conflict; in fact today's post is going to outline a way in which we can encourage the adoption of green technologies without messing around with the marketplace.
Good Policy Assumes Laziness
First of all, let me fire a diffuse attack at all of the legislated incentives to get people to adopt new green technology. While legislated incentives can be better than nothing, often the incentives are not proportional to the environmental good done (e.g. giving a fixed tax rebate to cars purchased with better than a certain mileage - there's just a threshold and no proportionality), and almost always these bills can't and shouldn't be passed when the technology has only limited applicability. However, I think that there are potentially many diverse opportunities for incremental improvements that just can't be addressed by legislated incentives. Good policy should automatically reward where it should; good policy is lazy and future-proof.
Virtue should be Its Own Reward
In this post I'm going to outline a way to promote environmental benefits in a natural, non-legislative way. Specifically, we should require that the advertised price of goods reflect the total cost of ownership, and not just the sale price. For example, when buying a house, the only price you would be allowed to advertise should be the sum of the sale price and the forecast cost of 20 years of utilities in the house. This way, houses with the same listed price would be equally affordable, and there would be incentives to build houses that were greener. Let me slow down a bit to unpack all of these comments so that they make a little more sense.
I'm Lazy Too
How many of you have bought a house or rented an apartment without first calculating the expected utility bills? I have never requested past utility statements for any property I've rented, and I certainly haven't done any thorough analysis of properties I'm only marginally interested in. I think I'm pretty typical in my laziness too: while I might try to factor in energy efficiency, I don't have a clear idea as to how much a given setup will affect my bottom line.
Modern economists acknowledge that humans make decision (and big ones too) with imperfect information, which results in less-than-optimal buying decisions. The most common numeric piece of information people take into account when looking to buy a house or rent an apartment is its price; my idea is to fold utility costs into the price from the outset so that people can make a lazy but correct decision as to how much they would like to spend on a heated domicile.
Implementation
If I ruled the world, the list price for all houses would have to be the sale price plus 20 years of expected utilities costs, based on prior use records. (Aside: 20 years is a round figure on the order of the inflation-adjusted doubling time of money at prime rates, so if you were to invest this sum at the time of sale its simple interest could pay utilities from the interest essentially for ever. Perhaps 20 years is a little on the short side.) The sale price would be allowed to be advertised only as a line item in conjunction with the utilities cost and the total list price. Lying would be considered fraud.
Guessing the efficiency of a new building might be difficult, but it should be possible to use statistics to fine any construction company which consistently lowball's the heating estimates of the buildings they make.
The same idea could be applied to automobiles: add the cost of driving 50 000 city and 50 000 highway miles before getting the list price. (Aside: this will come out to around $10 000: enough to perhaps convince many people to buy newer, more fuel-efficient cars. Who would want a clunker when the list price is $11 200? We might be able to persuade car manufacturers to lobby for this idea since it would boost new car sales.)
Perhaps major appliances and computers should have a similar addition to advertised price, maybe also including the mean time until failure. At some point gizmos become too small for these advertising restrictions cease to make sense, but I don't know if this transition happens at the "toaster" level or the "microwave" level.
Lazily Greener Incentives
Consider the implications of my idea on builders and house maintainers. If you build a house that's more energy-efficient, its value to the seller will automatically be higher, since it competes with houses of the same list price. The 20-year cost of heating a poorly-insulated house in a cold climate can top $100 000*, so energy-efficient designs and materials could give a significant edge on the open market.
Moreover, if home buyers were to display a fraction of the eco-chic that Prius-cravers show, perhaps small 20-year heating cost stats would carry the same caché as slim cellphones. In any case, energy efficiency could be reducible to a dollar value, which is great for putting things into perspective.
Conclusions
Let me recap a few of the reasons why I think we should add use cost to sale price to determine the list price of automobiles, houses etc.
- It's the duty of the government to protect consumers from false advertising.
- Markets are more efficient when more information is used.
- It's easier to perform cost analyses once per item sold than once per potential sale.
- Green policy should provide continuous incentives to make better products, and these incentives should be proportional to the environmental good done.
- Legislated incentives are rigid, slow-to-implement, and fiscally inefficient.
*Friends of mine in Toronto rented a house with typical winter heating bills of $2000 per month, even though some of them opted to turn the heat down and sleep in arctic sleeping bags. I'm sure that if this heating were advertised in the listed rent they would have rented elsewhere. The 20-year heating cost for this Victorian behemoth would have been over a quarter-million bucks: a significant warning to any prospective home-buyer, and a burning incentive for the current owner to insulate better to protect the house's retail and rental value.
Tuesday, March 13, 2007
ExChange in the Weather
Greetings, rain-dodgers.
A few posts ago, I made a case for future-proof policy; that is policy which automatically keeps up with the best that today's technology has to offer. I've advocated the use of results-based prizes for rewarding the discovery of useful medical treatments, since they tend to align public and private interests. Today I'm going to talk about another way we could make our policy future-proof by harnessing the free market: have our government meteorological systems switch over to prediction market-based weather prediction.
The Status Quo
Today, typically large institutions or governments hire meteorologists whose full-time job it is to interpret computer models based (largely) on publicly-available data. It takes a relatively long time for new weather-prediction models to gain acceptance: each one must be academically-verified and promoted, and the uptake of better weather-prediction techniques seems to be a patchwork affair.
At the same time, there are hundreds of math and physics geeks with computer power to spare who like to try their hand at predicting just about anything. Even the private sector has been unable to tap this latent talent pool, as is evidenced by the fact that the Netflix prize has been claimed.
Netflix Prize Exhibits Geek Talent
The Netflix Prize rewards people for discovering new ways of predicting the ratings people give their movies based on which other movies they liked. The contest started on October 2nd, 2006, and by October 15th one team had already beaten Netflix's predictions enough to claim a prize. If even a private-sector firm is unable to efficiently harness the best numerical prediction methods out there, what hope does a government agency have of keeping cutting-edge?
Prediction Markets for Weather Prediction
Imagine instead that any math nerd with a computer and an Internet connection could instantaneously profit by predicting weather better than rivals without having to apply for meteorology jobs. There are already small-scale weather prediction contests (like the WxChallenge), but these are still mostly for bragging rights, not for general-purpose weather and climate prediction.
Prediction markets are like stock markets. You can already buy and sell shares in, for example, Hillary Clinton becoming the Democratic nominee, in an online prediction market. The shares are worth $1 if the event takes place, and nothing if it doesn't. The fact that Hillary's shares trade at about 40¢ means there's a market consensus that there's a 40% chance Hillary will be nominated. Prices fluctuate with every factor that may influence her nomination probability.
If we did the same for weather (and maybe even sweetened the pot a bit to provide incentives for high-volume trading and good predictions) we could find the geeks' market consensus over the chances of it raining tomorrow. Other predictions could be made too, like the total rainfall in a season, or any other season-related information which might be economically, socially or environmentally relevant. Storm warnings could be automatically posted through regular weather channels when the price of storm stocks rose above some (low) threshold, like 20¢.
Probably what would happen is that a few centralized weather servers would emerge which would make predictions about weather at many different locations, while local "old salts" who have a sense for the weather could also make a quick buck while letting the world in on their secret, quasi-instinctual privileged weather-sense.
Conclusions
There is no method as efficient as the anarchy of the market to predict the value of a commodity. If we commoditize knowledge about the weather, we will automatically harness all the disparate knowledges about our turbulent atmosphere to reward the weather-seers and keep the rest of us dry under umbrellas when appropriate.
Stay dry!
LeDopore
PS I have to add a final caveat: if some foreign power (like a government) had deep enough pockets and had a desire to manipulate the market (by, for instance, ruining 4th of July plans by buying shares in it raining everywhere), they could do so as long as they were prepared to sustain a virtually unlimited financial loss. Perhaps a good safeguard in the system would be to include automatic "bizarreness detectors" which would sound an alarm if some fishy market activity starts.
A few posts ago, I made a case for future-proof policy; that is policy which automatically keeps up with the best that today's technology has to offer. I've advocated the use of results-based prizes for rewarding the discovery of useful medical treatments, since they tend to align public and private interests. Today I'm going to talk about another way we could make our policy future-proof by harnessing the free market: have our government meteorological systems switch over to prediction market-based weather prediction.
The Status Quo
Today, typically large institutions or governments hire meteorologists whose full-time job it is to interpret computer models based (largely) on publicly-available data. It takes a relatively long time for new weather-prediction models to gain acceptance: each one must be academically-verified and promoted, and the uptake of better weather-prediction techniques seems to be a patchwork affair.
At the same time, there are hundreds of math and physics geeks with computer power to spare who like to try their hand at predicting just about anything. Even the private sector has been unable to tap this latent talent pool, as is evidenced by the fact that the Netflix prize has been claimed.
Netflix Prize Exhibits Geek Talent
The Netflix Prize rewards people for discovering new ways of predicting the ratings people give their movies based on which other movies they liked. The contest started on October 2nd, 2006, and by October 15th one team had already beaten Netflix's predictions enough to claim a prize. If even a private-sector firm is unable to efficiently harness the best numerical prediction methods out there, what hope does a government agency have of keeping cutting-edge?
Prediction Markets for Weather Prediction
Imagine instead that any math nerd with a computer and an Internet connection could instantaneously profit by predicting weather better than rivals without having to apply for meteorology jobs. There are already small-scale weather prediction contests (like the WxChallenge), but these are still mostly for bragging rights, not for general-purpose weather and climate prediction.
Prediction markets are like stock markets. You can already buy and sell shares in, for example, Hillary Clinton becoming the Democratic nominee, in an online prediction market. The shares are worth $1 if the event takes place, and nothing if it doesn't. The fact that Hillary's shares trade at about 40¢ means there's a market consensus that there's a 40% chance Hillary will be nominated. Prices fluctuate with every factor that may influence her nomination probability.
If we did the same for weather (and maybe even sweetened the pot a bit to provide incentives for high-volume trading and good predictions) we could find the geeks' market consensus over the chances of it raining tomorrow. Other predictions could be made too, like the total rainfall in a season, or any other season-related information which might be economically, socially or environmentally relevant. Storm warnings could be automatically posted through regular weather channels when the price of storm stocks rose above some (low) threshold, like 20¢.
Probably what would happen is that a few centralized weather servers would emerge which would make predictions about weather at many different locations, while local "old salts" who have a sense for the weather could also make a quick buck while letting the world in on their secret, quasi-instinctual privileged weather-sense.
Conclusions
There is no method as efficient as the anarchy of the market to predict the value of a commodity. If we commoditize knowledge about the weather, we will automatically harness all the disparate knowledges about our turbulent atmosphere to reward the weather-seers and keep the rest of us dry under umbrellas when appropriate.
Stay dry!
LeDopore
PS I have to add a final caveat: if some foreign power (like a government) had deep enough pockets and had a desire to manipulate the market (by, for instance, ruining 4th of July plans by buying shares in it raining everywhere), they could do so as long as they were prepared to sustain a virtually unlimited financial loss. Perhaps a good safeguard in the system would be to include automatic "bizarreness detectors" which would sound an alarm if some fishy market activity starts.
Sunday, February 11, 2007
Making Future-Proof Policy
Greetings, fellow nerds.
Today I'm going to address an emerging problem for policy-makers: how to exploit all the latest tech without getting bogged down in implementation details. I'm going to make the case that governments should adopt an adjudicating rather than a micro-managing role in some kinds of service provision.
Today's Tech is a Moving Target
Ours is an age of innovation. The rate of innovation has never been so fast. There's a yawning gap between the cutting edge of (especially) information technology and typical technology usage. As tech speeds up, I see this problem getting worse, not better. Do we want to perpetually wait around for bright ideas to crawl their way through the legislature? Or, do we want an adaptive system where better solutions to public problems can be implemented and rewarded instantaneously? How would such an unregulated system work?
Examples: Road Construction and Power Distribution
I've already given an outline on how we could get the private sector to automatically implement any useful tech in terms of road durability and safety in the form of bonds which annually pay the holder an amount proportional to the good that was done to the community. See my 21st century capitalism post at the bottom for more details.
I'm going to argue that we should trade in our monopsony/monopoly electrical power distribution system for a free market system with fluctuating prices for the same reason. As soon as a new gizmo which does things better gets invented, you should be able to just plug the sucker in and start making cash.
Case in Point: Cold Dutch Ideas
Recently, a Dutch research agency suggested that refrigeration warehouses should turn off their refrigerators during the day (nature article and ZDNet summary) in an idea called "night wind". Excess wind power is generated at night and might get wasted if nobody used it. Since it's OK for some refrigerated goods to vary in temperature a couple of degrees, you would let your warehouse warm up a bit during the day, but get cooled right off at night using green power through a grid that didn't happen to be at peak.
Let's review some of the steps you'd need to go through to put this idea into practice given the current power system.
I think letting the price of power float is a much better idea, so long as any approved entity can buy or sell energy to the grid. We already have "time of use" power meters which record the time of day each kWh of energy was used. Usually, energy at peak hours costs a high fixed rate while energy at off-peak hours is much less expensive - often less than half as costly.
Suppose we took the time-of-day concept one step farther and let electrical power be traded like any other commodity. Then, the steps needed to get warehouses to take advantage of extra power would be:
Free Market Benefits
There are six benefits to this system:
Conclusions
A market-based power-distribution system has the advantage of instantaneously adding incentives exactly where they would be with an ideal policy system. There would be no lumbering lag between technological innovation and implementation: if it will make money, do it.
Ensuring that financial incentives are aligned with the good of humanity is what 21st century capitalism is all about. Policies where every party has the same goals makes us work together to the benefit of all, harnessing our uniquely human gift of capitalism to do good.
Today I'm going to address an emerging problem for policy-makers: how to exploit all the latest tech without getting bogged down in implementation details. I'm going to make the case that governments should adopt an adjudicating rather than a micro-managing role in some kinds of service provision.
Today's Tech is a Moving Target
Ours is an age of innovation. The rate of innovation has never been so fast. There's a yawning gap between the cutting edge of (especially) information technology and typical technology usage. As tech speeds up, I see this problem getting worse, not better. Do we want to perpetually wait around for bright ideas to crawl their way through the legislature? Or, do we want an adaptive system where better solutions to public problems can be implemented and rewarded instantaneously? How would such an unregulated system work?
Examples: Road Construction and Power Distribution
I've already given an outline on how we could get the private sector to automatically implement any useful tech in terms of road durability and safety in the form of bonds which annually pay the holder an amount proportional to the good that was done to the community. See my 21st century capitalism post at the bottom for more details.
I'm going to argue that we should trade in our monopsony/monopoly electrical power distribution system for a free market system with fluctuating prices for the same reason. As soon as a new gizmo which does things better gets invented, you should be able to just plug the sucker in and start making cash.
Case in Point: Cold Dutch Ideas
Recently, a Dutch research agency suggested that refrigeration warehouses should turn off their refrigerators during the day (nature article and ZDNet summary) in an idea called "night wind". Excess wind power is generated at night and might get wasted if nobody used it. Since it's OK for some refrigerated goods to vary in temperature a couple of degrees, you would let your warehouse warm up a bit during the day, but get cooled right off at night using green power through a grid that didn't happen to be at peak.
Let's review some of the steps you'd need to go through to put this idea into practice given the current power system.
- Some researcher thinks it up.
- Political will is mustered to look into the study.
- The specifics of which warehouses could use no diurnal refrigeration (possibly season-dependent) are compiled by a central authority.
- New regulations have to be developed and approved.
- Businesses are notified of discounts (or worse yet - income tax incentives) available for night-only refrigeration.
- Enforcers patrol the warehouses which signed up to make sure they don't use their refrigerators at night.
I think letting the price of power float is a much better idea, so long as any approved entity can buy or sell energy to the grid. We already have "time of use" power meters which record the time of day each kWh of energy was used. Usually, energy at peak hours costs a high fixed rate while energy at off-peak hours is much less expensive - often less than half as costly.
Suppose we took the time-of-day concept one step farther and let electrical power be traded like any other commodity. Then, the steps needed to get warehouses to take advantage of extra power would be:
- Somebody notices power is more expensive in the day, so she turns off the refrigerators during the day.
- Profit!!!
Free Market Benefits
There are six benefits to this system:
- Consumers would have financial incentives to cut back electricity usage when it's most scarce.
- The market would be able to decide exactly when price-dependent operation is worthwhile. Personally, I would say "no" to lightbulbs which dim when power is expensive, but "yes" to a fridge which works most when power is cheap, and "definitely" to a plug-in hybrid car which guzzled late-night 2¢-per-kWh hydro power. No extra laws needed!
- Power generation systems would be rewarded for producing electricity when it's most needed (potentially making solar power more financially-feasible in hot and sunny areas - solar needs all the financial help it can get).
- If somebody developed a large battery for leveling out peak usage, they would be able to make a quick buck right away. No need for proving the thing first: just buy low and sell high. No public investment risk would be involved, and peak prices would go down as peak supply increased, as if by magic.
- The financial incentives for long-distance power cables (such as HVDC) would be immediately apparent, and if they were economical, would be built quickly by profit-seeking companies.
- There would finally be some elasticity in demand for power. Trying to match generation with consumption is one of the biggest causes of damage to power equipment causing blackouts. If systems become over-stressed, prices would go up and everyone who had a smart air conditioner would instantaneously decrease the load on the critically-stressed system.
Conclusions
A market-based power-distribution system has the advantage of instantaneously adding incentives exactly where they would be with an ideal policy system. There would be no lumbering lag between technological innovation and implementation: if it will make money, do it.
Ensuring that financial incentives are aligned with the good of humanity is what 21st century capitalism is all about. Policies where every party has the same goals makes us work together to the benefit of all, harnessing our uniquely human gift of capitalism to do good.
Keeping Bounty Hunters Honest
Greetings, fellow nerds.
Two posts ago I showed how terribly inefficient big pharmaceutical companies are at finding treatments which actually help people. Less than 7% of what you pay for medicine funds useful research and development. In the last post, I outlined an incentive program whereby research companies get compensation proportional to the good they do us, so the incentive is to do work that actually benefits humanity. Today I'm going to show a few refinements to the last post's incentive program which make it more practical.
Refinement #1: What Counts as "Cured?"
Sometimes the success of a treatment can't be reduced to cured/not cured. In these cases, you'd probably replace the "% cured" number in the example I gave (the one which resulted in a $2 billion reward - see last post for details) with a fixed formula, possibly including prevalence of side effects, time for the treatment to work, cost/complexity of the treatment, or other factors. Health organizations get to decide what counts as success, and the researchers who best achieve it get the most award money.
The same disease might even have multiple prizes if desired: one whose formula emphasized quick recovery while the other's formula emphasized the absence of side effects. Complexity isn't necessary, but might be appropriate in some circumstances.
Skepticism Built-in: Incentives for Thorough Studies
It would be a good idea to reward based on the bottom of the 99% confidence interval of the study, so you would have to be statistically sure (at the 99 in 100 level) that the new treatment was better than the old treatment, and claims would tend to be understated. (This is to prevent companies from designing weak studies with few subjects. If you do many of these weak studies, a few of them will, by chance, show the new treatment to be better.) This measure would also provide an incentive for drug companies to do thorough drug evaluation, since the better the study statistics are, the smaller the confidence interval and the more companies get paid. Companies falsifying results would be dealt with just as they are in today's system.
Avoiding Getting Scooped Without Rewarding Pharmasquatting
It's also a good idea to allow a company to be locked in to a certain treatment/disease pair without competition for a limited time: you don't want to have to rush clinical trials to keep the competition from scooping you. I propose that you be able to take out two-year-long exclusive rents for each trial phase of any specific treatment/disease pair combination. For example, a company could pay (say) $100,000 for the exclusive right to do phase II testing of a new treatment. If it looked promising at the end of two years, they would get an exclusive offer to try phase III testing for (say) $500,000 for two years.
The $100,000 and $500,000 figures probably should be linked to the size of the incentive pot to discourage pharmasquatting (the pharmacological equivalent to cybersquatting: essentially leasing large blocks of treatment-malady combinations in the hopes that someone who does real research will buy the exclusive rights off you). If you made the fees big enough that randomly choosing treatment-disease pairs results in an expected loss, nobody will pharmasquat.
Harness Prediction Markets
Once research starts, these leases would have a value which reflects the probability that a certain therapy-illness combination proves fruitful. Allowing these leases to be tradable (and allowing the possibility of dividing them into shares) would instantly generate a prediction market in therapies, harnessing the full power of the free market to finance medical research. It might not be true that the best treatment discovery companies start out with access to the best funding; selling shares in treatment possibilities would be an efficient way of raising capital and of gaging the expected success of new treatments coming through.
Bounties, Ethics and Intellectual Property Law
Right now there's a huge debate over the ethics of withholding life-saving treatments from those who cannot afford the licensing fees. It's a really tough issue: is it OK to demand that people die for the sake of the survival of a company which produces life-saving treatments? If the bounty system were implemented, there'd be no issue over who has to pay what to whom to use life-saving knowledge: as soon as it's discovered, (as long as you are within the group of nations/HMOs that pay their dues - my great hope is that this group would quickly swell to encompass the whole world) you can use the treatment.
Another great advantage to the bounty system is that there would no longer be a need to enforce medical patents. In general, it's a good idea to replace negative reenforcement systems with positive reenforcement proportional to the good done, since it means you don't have to police the whole world.
Conclusions
The bounty system for new treatment discovery gives incentives for medical researchers to find ways to treat illnesses. It can coexist in a world with the current patent-protection paradigm, although if it works half as well as I expect I doubt many people won't join up.
There are probably more refinements to add to the bounty system, and there may be a few flaws in it that I haven't seen. If you think of anything I haven't mentioned (pro, con or refinement) regarding the bounty system, please leave a comment below. Thanks!
Two posts ago I showed how terribly inefficient big pharmaceutical companies are at finding treatments which actually help people. Less than 7% of what you pay for medicine funds useful research and development. In the last post, I outlined an incentive program whereby research companies get compensation proportional to the good they do us, so the incentive is to do work that actually benefits humanity. Today I'm going to show a few refinements to the last post's incentive program which make it more practical.
Refinement #1: What Counts as "Cured?"
Sometimes the success of a treatment can't be reduced to cured/not cured. In these cases, you'd probably replace the "% cured" number in the example I gave (the one which resulted in a $2 billion reward - see last post for details) with a fixed formula, possibly including prevalence of side effects, time for the treatment to work, cost/complexity of the treatment, or other factors. Health organizations get to decide what counts as success, and the researchers who best achieve it get the most award money.
The same disease might even have multiple prizes if desired: one whose formula emphasized quick recovery while the other's formula emphasized the absence of side effects. Complexity isn't necessary, but might be appropriate in some circumstances.
Skepticism Built-in: Incentives for Thorough Studies
It would be a good idea to reward based on the bottom of the 99% confidence interval of the study, so you would have to be statistically sure (at the 99 in 100 level) that the new treatment was better than the old treatment, and claims would tend to be understated. (This is to prevent companies from designing weak studies with few subjects. If you do many of these weak studies, a few of them will, by chance, show the new treatment to be better.) This measure would also provide an incentive for drug companies to do thorough drug evaluation, since the better the study statistics are, the smaller the confidence interval and the more companies get paid. Companies falsifying results would be dealt with just as they are in today's system.
Avoiding Getting Scooped Without Rewarding Pharmasquatting
It's also a good idea to allow a company to be locked in to a certain treatment/disease pair without competition for a limited time: you don't want to have to rush clinical trials to keep the competition from scooping you. I propose that you be able to take out two-year-long exclusive rents for each trial phase of any specific treatment/disease pair combination. For example, a company could pay (say) $100,000 for the exclusive right to do phase II testing of a new treatment. If it looked promising at the end of two years, they would get an exclusive offer to try phase III testing for (say) $500,000 for two years.
The $100,000 and $500,000 figures probably should be linked to the size of the incentive pot to discourage pharmasquatting (the pharmacological equivalent to cybersquatting: essentially leasing large blocks of treatment-malady combinations in the hopes that someone who does real research will buy the exclusive rights off you). If you made the fees big enough that randomly choosing treatment-disease pairs results in an expected loss, nobody will pharmasquat.
Harness Prediction Markets
Once research starts, these leases would have a value which reflects the probability that a certain therapy-illness combination proves fruitful. Allowing these leases to be tradable (and allowing the possibility of dividing them into shares) would instantly generate a prediction market in therapies, harnessing the full power of the free market to finance medical research. It might not be true that the best treatment discovery companies start out with access to the best funding; selling shares in treatment possibilities would be an efficient way of raising capital and of gaging the expected success of new treatments coming through.
Bounties, Ethics and Intellectual Property Law
Right now there's a huge debate over the ethics of withholding life-saving treatments from those who cannot afford the licensing fees. It's a really tough issue: is it OK to demand that people die for the sake of the survival of a company which produces life-saving treatments? If the bounty system were implemented, there'd be no issue over who has to pay what to whom to use life-saving knowledge: as soon as it's discovered, (as long as you are within the group of nations/HMOs that pay their dues - my great hope is that this group would quickly swell to encompass the whole world) you can use the treatment.
Another great advantage to the bounty system is that there would no longer be a need to enforce medical patents. In general, it's a good idea to replace negative reenforcement systems with positive reenforcement proportional to the good done, since it means you don't have to police the whole world.
Conclusions
The bounty system for new treatment discovery gives incentives for medical researchers to find ways to treat illnesses. It can coexist in a world with the current patent-protection paradigm, although if it works half as well as I expect I doubt many people won't join up.
There are probably more refinements to add to the bounty system, and there may be a few flaws in it that I haven't seen. If you think of anything I haven't mentioned (pro, con or refinement) regarding the bounty system, please leave a comment below. Thanks!
A Spoonful of Sugar Helps the Medicine Get Found
Greetings, fellow nerds.
Last post exposed how little incentive there is for drug companies to develop useful new treatments. Only 7% of pharmaceutical revenue goes to finding better drugs. Moreover, this meager 7% isn't normally spent developing any kind of therapy that can't be patented; efforts are skewed towards discovering new and untested substances for the sole reason that they are patentable.
The current system is broken because pharmaceutical companies get rewarded only if the treatments they find lead to widespread purchasing of chemicals they have patented. We need a system whereby private industry gets rewarded every time it discovers a better way to treat pertinent diseases.
Suggestion: Mprize-Like Rewards
The easiest way to reward companies for discovering cures is to do just that: pay drug companies a bounty for each new treatment they show (or discover) that's better than the last one. My favorite way to pay out the bounties would be like they do with the Methuselah Mouse Prize (Mprize for short), similar to the Ansari X prize for commercial spaceflight in that both provide cash rewards for results.
The Mprize encourages scientists to make mice as long-lived as possible, with the hope that some of their techniques could be applied to humans too. Whereas the original X prize offered a single cash reward for the first commercial team to achieve the target (to have one spacecraft fly twice within two weeks to 100 km with a pilot and two passengers or their weight equivalent), the Mprize offers chunks of its money to research teams who provide incremental improvements to the lifespan of mice. Prizes are proportional to how long the winning mouse outlives the old record-holding mouse.
I propose that the financial rewards for research organizations that discover new cures should be awarded incrementally. Like the Mprize, prizes should be proportional to the benefit the new treatment gives above and beyond the current best treatment. For example, say the old treatment for pancreatic cancer has a 25% success rate, the new one has a 40% success rate, and there's $10 billion in the pot for finding a cure to pancreatic cancer. Then, since the company decreased the failure rate (which was 75%) by 15%, they would get (15%/75%) = 20% of the $10 billion, or $2 billion.
Filling the Prize Pots
In a perfect world, we'd solve the prize-funding problem with alphabet soup. The WTO would request a percentage of each nation's GDP to go to the WHO, who would allocate funds as needed. Perhaps nations would get discretion over where 50% of their funds go, so that individual rulers could appease their special interest groups and gain some political capital. (As long as no special interest groups become overwhelmingly powerful in all nations, the WHO could probably end up with the same money distribution they would choose voluntarily by spreading the remaining 50% among neglected but important prizes.)
In an imperfect or intermediate world, only some nations (or a subset of HMOs within a nation) would participate in the bounty system; the others would be required to license any intellectual property discovered by the bounty system. Unfortunately, one of the strengths of the bounty system is that it provides an incentive to discover unpatentable treatments. (I wonder for example how many diseases could be helped by proper exercise. Under the current system that kind of study is hard to fund, so we'll never know.) Groups not participating in the bounty system would thus get these benefits for free (or perhaps at the expense of losing face in the international community for being freeloaders). Researchers outside of the bounty system could choose to claim the cash prize and give up their intellectual property, or they could license their work as they do now.
Still, without the burden of having to market new drugs (recall that only 14% of drug company revenue goes to R & D), it's possible that a bounty-based system could beat drug companies at their own game, producing more patentable treatments per chunk of cash, especially if M.D.s become sick of being hounded by incessant glossy ad campaigns for new drugs of dubious quality. (Hey, I can always dream, can't I?)
Sanity, Meet Drug Quality Regulations
I can't resist adding one more suggestion which would lower the cost of drugs. If you're not squeamish, check out how many rodent hairs and insect parts the FDA allows into food. Here's my question: if it's safe to eat reasonable amounts of contaminants in food (including food we give to sick people), why isn't it OK to allow even minuscule levels of contamination in the medicines we eat? Eating traces of rat hair is either bad (in which case we shouldn't allow it in food), or not a big deal (in which case we should relax the US FDA requirements which keep generic drug manufacturing expensive). Apart from dose and shelf life quality control, generic medicines you eat should have no more regulations than food.
Conclusions
If we want drug companies to work for us, we have to give them incentives to work for us. Right now their incentives are barely aligned at all with discovering new and better medical treatments. By replacing the patent system with a bounty system, we can harness the capitalist desires of pharmaceutical corporations for the benefit of humanity. It will be hard to set up a system which collects money for the rewards, but even if we assume this system is only about 50% efficient and collects 50% of the revenue of today's system, this system would still more than triple the amount of useful treatment research and development going on today. 7% efficiency isn't a hard benchmark to beat.
Let's harness the power of the free market by giving incentives for finding the best (not the most profitable) cures possible.
P.S. There are a few details in the way we'd need to implement bounties to keep people from abusing the system. I'll go into these in my next post. After that, please feel free to point out any remaining flaws in my bounty ideas. Thanks!
Last post exposed how little incentive there is for drug companies to develop useful new treatments. Only 7% of pharmaceutical revenue goes to finding better drugs. Moreover, this meager 7% isn't normally spent developing any kind of therapy that can't be patented; efforts are skewed towards discovering new and untested substances for the sole reason that they are patentable.
The current system is broken because pharmaceutical companies get rewarded only if the treatments they find lead to widespread purchasing of chemicals they have patented. We need a system whereby private industry gets rewarded every time it discovers a better way to treat pertinent diseases.
Suggestion: Mprize-Like Rewards
The easiest way to reward companies for discovering cures is to do just that: pay drug companies a bounty for each new treatment they show (or discover) that's better than the last one. My favorite way to pay out the bounties would be like they do with the Methuselah Mouse Prize (Mprize for short), similar to the Ansari X prize for commercial spaceflight in that both provide cash rewards for results.
The Mprize encourages scientists to make mice as long-lived as possible, with the hope that some of their techniques could be applied to humans too. Whereas the original X prize offered a single cash reward for the first commercial team to achieve the target (to have one spacecraft fly twice within two weeks to 100 km with a pilot and two passengers or their weight equivalent), the Mprize offers chunks of its money to research teams who provide incremental improvements to the lifespan of mice. Prizes are proportional to how long the winning mouse outlives the old record-holding mouse.
I propose that the financial rewards for research organizations that discover new cures should be awarded incrementally. Like the Mprize, prizes should be proportional to the benefit the new treatment gives above and beyond the current best treatment. For example, say the old treatment for pancreatic cancer has a 25% success rate, the new one has a 40% success rate, and there's $10 billion in the pot for finding a cure to pancreatic cancer. Then, since the company decreased the failure rate (which was 75%) by 15%, they would get (15%/75%) = 20% of the $10 billion, or $2 billion.
Filling the Prize Pots
In a perfect world, we'd solve the prize-funding problem with alphabet soup. The WTO would request a percentage of each nation's GDP to go to the WHO, who would allocate funds as needed. Perhaps nations would get discretion over where 50% of their funds go, so that individual rulers could appease their special interest groups and gain some political capital. (As long as no special interest groups become overwhelmingly powerful in all nations, the WHO could probably end up with the same money distribution they would choose voluntarily by spreading the remaining 50% among neglected but important prizes.)
In an imperfect or intermediate world, only some nations (or a subset of HMOs within a nation) would participate in the bounty system; the others would be required to license any intellectual property discovered by the bounty system. Unfortunately, one of the strengths of the bounty system is that it provides an incentive to discover unpatentable treatments. (I wonder for example how many diseases could be helped by proper exercise. Under the current system that kind of study is hard to fund, so we'll never know.) Groups not participating in the bounty system would thus get these benefits for free (or perhaps at the expense of losing face in the international community for being freeloaders). Researchers outside of the bounty system could choose to claim the cash prize and give up their intellectual property, or they could license their work as they do now.
Still, without the burden of having to market new drugs (recall that only 14% of drug company revenue goes to R & D), it's possible that a bounty-based system could beat drug companies at their own game, producing more patentable treatments per chunk of cash, especially if M.D.s become sick of being hounded by incessant glossy ad campaigns for new drugs of dubious quality. (Hey, I can always dream, can't I?)
Sanity, Meet Drug Quality Regulations
I can't resist adding one more suggestion which would lower the cost of drugs. If you're not squeamish, check out how many rodent hairs and insect parts the FDA allows into food. Here's my question: if it's safe to eat reasonable amounts of contaminants in food (including food we give to sick people), why isn't it OK to allow even minuscule levels of contamination in the medicines we eat? Eating traces of rat hair is either bad (in which case we shouldn't allow it in food), or not a big deal (in which case we should relax the US FDA requirements which keep generic drug manufacturing expensive). Apart from dose and shelf life quality control, generic medicines you eat should have no more regulations than food.
Conclusions
If we want drug companies to work for us, we have to give them incentives to work for us. Right now their incentives are barely aligned at all with discovering new and better medical treatments. By replacing the patent system with a bounty system, we can harness the capitalist desires of pharmaceutical corporations for the benefit of humanity. It will be hard to set up a system which collects money for the rewards, but even if we assume this system is only about 50% efficient and collects 50% of the revenue of today's system, this system would still more than triple the amount of useful treatment research and development going on today. 7% efficiency isn't a hard benchmark to beat.
Let's harness the power of the free market by giving incentives for finding the best (not the most profitable) cures possible.
P.S. There are a few details in the way we'd need to implement bounties to keep people from abusing the system. I'll go into these in my next post. After that, please feel free to point out any remaining flaws in my bounty ideas. Thanks!
Saturday, February 10, 2007
Bad Medicine: Big Pharma's Not On Your Side
Greetings, fellow nerds.
Today's medicines fund tomorrow's miracles. That's what GlaxoSmithKline's publicity department decided was the most palatable excuse for the high cost of drugs: we charge a lot to make more magic bullets to fight new and ominous plagues. It's "pay up or die," with a sugar coating.
"Funding miracles" is stretching the truth a bit (as I will show), but I don't fault GlaxoSmithKline or any of the other big pharmaceutical companies. The way we've set up drug research has public and private incentives badly misaligned.
Today I'm going to show the two biggest ways in which our interests are misaligned, and in the next post I'm going to suggest a fix which will provide an incentive for drug companies to do the most good possible for humanity while still making boatloads of cash.
First Flaw: Drug Companies are Promotion Companies
The overwhelming majority of drug company revenue goes to drug promotion, not drug discovery. Let's take a look at the raw data on drug company revenue and research and development (R & D) expenses in 2004. (From MedAdNews, September 2005. Wikipedia link here for those without a subscription.)
Less than $1 for every $7 of drug company revenue is spent on finding new drugs. Now, I have nothing against a company making a tidy sum of money off of its investments, especially when some degree of risk is involved. However, > 600% return on investment is excessive, and indicative of a serious failure of the free market, which is supposed to deliver goods with minimal overhead.
I lied: that $6 isn't all investor profit. In fact, the majority of it goes to promotion: direct promotion to doctors, HMOs and even patients themselves. Here's a more honest slogan for GlaxoSmithKline: "Today's ad campaigns fund tomorrow's ad campaigns."
Second Flaw: Half of R & D has Minimal Benefit
Of the sliver of funding which goes to drug discovery, about half of it goes towards providing novel (and thus patentable) but not superior medicines for diseases we can already treat. Here's a link to a review of "The $800 Million Pill" (which quantifies the money wasted on redundant drugs) by BusinessWeek. I'm linking to this review because it defends the actions of drug companies within the system (as do I) without asking how we could make the system give better incentives for companies to do good for humanity (which is the whole point of my 21st century capitalism idea).
Essentially, since companies can only make money off patented drugs and since patents typically last only about 20 years, there's a huge incentive to discover new cures to already-controllable diseases. The new cures don't even have to be superior: marketing departments of big pharmaceutical corporations have enough muscle to push new drugs into the marketplace regardless of whether or not they're needed.
Drug Discovery: 7% Efficient?
In total, only about 7% of the money paid for drugs goes to finding new useful medicines. It's a tautology then that any solution resulting in as much (or more) useful R & D funding while lowering the cost of drugs would be a good thing for humanity. If you're tempted to counter that it's a good idea to maintain non-productive sectors of the economy (like the $282 billion per year drug companies spend on things other than useful R & D) to create jobs, you should familiarize yourself with the parable of the broken window. In any case, I'm going to introduce a system which beats today's 7%-efficient system in my next post.
In truth, 7% might even be an overestimate of the efficiency with which our drug expenses fund cures. Recently, a group of scientists from the University of Alberta discovered that a small and un-patentable molecule (dichloroacetate, DCA) might cure most cancers with little side effects. (At excessive doses, DCA can cause trouble, but then again, so can water - see line 202.) Whether or not DCA will turn out to be one of "tomorrow's miracles," it's unsettling that the major drug companies have avoided studying it like the plague due to an absence of profit motive. It underscores the fact that drug company revenue really doesn't work in the public's best interest. It's time to align our interests more strongly - I'll suggest one way to accomplish this in the next post.
Conclusions
Eighty-six percent of the cash you pay for your meds funds mostly advertising, not R & D. Half of the remaining 14% goes to try to produce new medicines which aren't better than old ones - they're just patentable. The remaining 7% of drug company revenue is devoted to new cures, but only those new cures which might result in a patentable drug: any promising treatment which isn't patentable will be suppressed.
You're getting a raw deal. Let's change the incentive system for big pharma so that they want to be on our side.
TO BE CONTINUED...
PS If you agree with me, let's try to generate a buzz. Forward a link of this to your friends. If you disagree with my facts or my reasoning, please post your findings as comments.
Today's medicines fund tomorrow's miracles. That's what GlaxoSmithKline's publicity department decided was the most palatable excuse for the high cost of drugs: we charge a lot to make more magic bullets to fight new and ominous plagues. It's "pay up or die," with a sugar coating.
"Funding miracles" is stretching the truth a bit (as I will show), but I don't fault GlaxoSmithKline or any of the other big pharmaceutical companies. The way we've set up drug research has public and private incentives badly misaligned.
Today I'm going to show the two biggest ways in which our interests are misaligned, and in the next post I'm going to suggest a fix which will provide an incentive for drug companies to do the most good possible for humanity while still making boatloads of cash.
First Flaw: Drug Companies are Promotion Companies
The overwhelming majority of drug company revenue goes to drug promotion, not drug discovery. Let's take a look at the raw data on drug company revenue and research and development (R & D) expenses in 2004. (From MedAdNews, September 2005. Wikipedia link here for those without a subscription.)
| Rank | Company | Revenues (USD billions) | R&D Spending (USD billions) |
|---|---|---|---|
| 1 | Pfizer | 50.516 | 7.614 |
| 2 | Johnson & Johnson | 47.348 | 5.203 |
| 3 | GlaxoSmithKline | 37.318 | 5.204 |
| 4 | Sanofi-Aventis | 31.615 | 4.927 |
| 5 | Novartis | 28.247 | 4.207 |
| 6 | Hoffmann-La Roche | 25.163 | 4.098 |
| 7 | Merck | 22.939 | 4.010 |
| 8 | AstraZeneca | 21.427 | 3.803 |
| 9 | Abbott Laboratories | 19.680 | 1.697 |
| 10 | Bristol-Myers Squibb | 19.380 | 2.500 |
| Total | 303.63 | 43.26 |
Less than $1 for every $7 of drug company revenue is spent on finding new drugs. Now, I have nothing against a company making a tidy sum of money off of its investments, especially when some degree of risk is involved. However, > 600% return on investment is excessive, and indicative of a serious failure of the free market, which is supposed to deliver goods with minimal overhead.
I lied: that $6 isn't all investor profit. In fact, the majority of it goes to promotion: direct promotion to doctors, HMOs and even patients themselves. Here's a more honest slogan for GlaxoSmithKline: "Today's ad campaigns fund tomorrow's ad campaigns."
Second Flaw: Half of R & D has Minimal Benefit
Of the sliver of funding which goes to drug discovery, about half of it goes towards providing novel (and thus patentable) but not superior medicines for diseases we can already treat. Here's a link to a review of "The $800 Million Pill" (which quantifies the money wasted on redundant drugs) by BusinessWeek. I'm linking to this review because it defends the actions of drug companies within the system (as do I) without asking how we could make the system give better incentives for companies to do good for humanity (which is the whole point of my 21st century capitalism idea).
Essentially, since companies can only make money off patented drugs and since patents typically last only about 20 years, there's a huge incentive to discover new cures to already-controllable diseases. The new cures don't even have to be superior: marketing departments of big pharmaceutical corporations have enough muscle to push new drugs into the marketplace regardless of whether or not they're needed.
Drug Discovery: 7% Efficient?
In total, only about 7% of the money paid for drugs goes to finding new useful medicines. It's a tautology then that any solution resulting in as much (or more) useful R & D funding while lowering the cost of drugs would be a good thing for humanity. If you're tempted to counter that it's a good idea to maintain non-productive sectors of the economy (like the $282 billion per year drug companies spend on things other than useful R & D) to create jobs, you should familiarize yourself with the parable of the broken window. In any case, I'm going to introduce a system which beats today's 7%-efficient system in my next post.
In truth, 7% might even be an overestimate of the efficiency with which our drug expenses fund cures. Recently, a group of scientists from the University of Alberta discovered that a small and un-patentable molecule (dichloroacetate, DCA) might cure most cancers with little side effects. (At excessive doses, DCA can cause trouble, but then again, so can water - see line 202.) Whether or not DCA will turn out to be one of "tomorrow's miracles," it's unsettling that the major drug companies have avoided studying it like the plague due to an absence of profit motive. It underscores the fact that drug company revenue really doesn't work in the public's best interest. It's time to align our interests more strongly - I'll suggest one way to accomplish this in the next post.
Conclusions
Eighty-six percent of the cash you pay for your meds funds mostly advertising, not R & D. Half of the remaining 14% goes to try to produce new medicines which aren't better than old ones - they're just patentable. The remaining 7% of drug company revenue is devoted to new cures, but only those new cures which might result in a patentable drug: any promising treatment which isn't patentable will be suppressed.
You're getting a raw deal. Let's change the incentive system for big pharma so that they want to be on our side.
TO BE CONTINUED...
PS If you agree with me, let's try to generate a buzz. Forward a link of this to your friends. If you disagree with my facts or my reasoning, please post your findings as comments.
Wednesday, February 7, 2007
21st Century Capitalism
Greetings, fellow nerds.
Today, we're going to examine a cornerstone of our western world: capitalism. I'm going to first give a brief history of capitalism starting from its evolutionary roots which set us aside from other animals, then I'll settle down into a rant about what I think is wrong with our current implementation of capitalism, and finally I'll give a few specific ideas about how we can tweak public policy so that capitalism achieves its goals better.
Capitalism and Humanity
Capitalism, and its relative friendship, set us apart from the majority of the animal kingdom. I don't believe that early humans were categorically smarter than other animals; even today's humans would have a hard time without cooperation.
Imagine if you were dropped on a desert island without having had any kind of education. (This is really impossible, because humans need nurturing to develop properly, but stay with me.) I doubt you'd be able to do better than the New Caledonian Crow, which can fashion its own tools (National Geographic video link) even out of metal (significant, since metal hasn't been around long enough to develop instincts involving it). You may counter by saying that this crow probably learned form another crow; that's exactly my point though. Individually, we're puny, but together we can build spaceships and make good cheese.
We specialize, we discuss things and we pass on knowledge to others. Why? It's more than having selfish genes; we are happy to forge friendships and help people totally unrelated to us. It's more than the herd mentality; I've met my share of loner humans, and besides I don't think sheep specialize. We share, lend things, trade, and educate each other because we live in a social construct where we can expect roughly the same degree of favors given to us as we give to others. (Doing nice things without reciprocity is a bad evolutionary strategy. However, the reciprocity needn't come directly from the people you help; doing good without expecting anything in return provides evidence to others that you're not a psychopath; see below.) In small groups, reciprocation is mediated by friendships, where we (usually) keep some sort of tally as to how nice the partner has been to us. We don't numerically quantify the favors our friends do us, although your typical human sees one-sided friendships as unhealthy, as if there must be some deeper, twisted exchange going on.
Genetically,We're All Cold, Calculating Psychopaths
I don't mean to suggest that we're consciously cold, calculating psychopaths who use each other for common gain. Our genes shape us to be good-natured towards each other, and it's a good thing too. Imagine if you knew somebody who appeared friendly most of the time but had a few Jekyll and Hyde moments. You'd steer clear of that shady character, and never want to engage in friendly behavior with them. Moreover, you'd tell your friends to watch out for the creep. As a result, being a conscious psychopath is a poor strategy in the long term, since others won't trust you enough to be friendly with them.
However, if our genes keep us behaving civilly towards one another all the time, we're less prone to the slip-ups that betray psychopaths. If we can demonstrate that we always help our friends, more people will want to be friends with us. We don't have to be cold, calculating psychopaths on a conscious level; our genes do a much more consistent job for us without our conscious minds having to bother.
Does understanding the selfish reasons behind friendship make one cynical about human nature? In some ways, knowing that we're hard-wired to do good does exactly the opposite. What do you think?
Money and Friendship
Money becomes necessary when the group of people you want to collaborate with becomes too large to develop a personal relationship with everyone. Money lets you have strangers do friendly things towards you, and to earn it you (usually) have to do friendly things to others. Money is impersonal, quantified, anonymous, fungible friendship, in the sense that it keeps track of the favors you're owed from any member of your trading community.
Capitalism and Human Evolution
Capitalism (if you extend its definition to include its instinctual analogue, friendship) is what lets us specialize, and gives us the incentive to work together to produce all those wonderful creations only large groups of (mostly) cooperative humans have been able to do. Without capitalism, we'd be brawling in the muck.
Language is also one of the fundamental abilities humans have that sets us apart from other animals (if, indeed, we are set apart as far as we style ourselves). Language, however, is mostly useless without capitalism (in the sense I've defined it). Without capitalism, you have no framework within which to trust the speaker. Without capitalism, you have no specialized skill set to describe to others. Without capitalism, you have little incentive to divulge information (especially information about food, mates, etc.), so you probably wouldn't bother. Therefore, language evolved to make us better capitalists; without capitalism language would confer little benefit. Either capitalism predated language in our history or there was so much synergy between the two that sorting out who came first is moot.
People also talk about the "theory of mind" as being important in human evolution. Having a theory of mind means that you try to predict what other entities around you know, often by putting yourself in their shoes and wondering what you would do in the same situation. Clearly, having a theory of mind is useful to both capitalists (for outfoxing your fellows) and speakers (so you can relate exactly what the listener needs to hear given what they already know), so it's no surprise that humans excel at guessing what others are thinking. However, having a theory of mind can also be useful in purely competitive (i.e., non-capitalist) contexts: ravens (but not most birds) notice when something (like food) captures the attention of other animals, and even the odd octopus has demonstrated that it is aware of how others see it. However, these animals lack capitalist tendencies (and therefore have no incentive to develop language), which are the true sine qua non of humanity in evolutionary contexts.
Current Issues with Capitalism
If capitalism really is the Promethean panacea I've proposed, why is everybody complaining about it? Let me list a few possibilities, and suggest a couple of remedies.
A few days ago, a total stranger picked a bunch of grapes for me. She set these grapes on a truck in Chile, which proceeded to a port where a monumental ocean-going vehicle waited. This floating steel mountain's sole purpose it to get things to where people want them; in my case it crossed the Equator and continued to an undisclosed location in North America. Total strangers unpacked the grapes, checked them for damage, and then placed them in a location where I could easily reach them for my culinary enjoyment.
By now, you've probably guessed what I'm up to: I've described what we'd consider to be the most mundane of commercial transactions: buying Chilean grapes. However, all the people involved in the chain of events (most of them total strangers to me) performed well-orchestrated diverse tasks for my benefit and enjoyment. If the context were anything but commercial, I would be touched to the brink of tears by the selfless generosity implicit in shipping me grapes out of season. Yet, somehow, in the monetized context of buying grapes from a local supermarket, it's unnatural to feel gratitude to the ship's crew or the shelf stocker - it's all in a day's work for them, and that somehow nullifies the joy I'd feel from having all these people slave away for my benefit.
Does it have to be that way? I'm going to give an exercise to my readers. For the next week, please try, at least once a day, to feel the connection you have to the millions of people who help you through the messy web of financial transactions we call an economy. Just for a split second, imagine that they were all doing you favors without letting money enter into the picture. Then open your eyes, and ask yourself if you really have to ignore the fact that all these people are conspiring to do you good just because you're paying them for it.
If your assignment rings false, we should try to find out why. I bet that financial transactions, by default, don't tickle the "friendship detector" circuits in our brains. Possibly we don't feel that friendship glow at the market because friendship with total strangers is impossible. It's also possible that brands have taken center stage in stores; give me a show of hands: who finds it easier to remember the brand of a product you bought than the name of the person who sold it to you? It's hard to feel friendship with a faceless company (although many people try).
Why not try to get to know the local shopkeepers a little by name? Maybe entering into a friendly relationship will give your instinctual friendship detector a face to latch onto, and maybe some of the gratitude you feel for the stuff you buy will brush off a little onto the human. You'll have your instinctual craving for mutual support reinforced at the same time as getting low, low prices. (Prices are ridiculously low because of specialization: imagine how hard it would be to travel on foot to Chile to grow your own February grapes.)
I promised this post would lead to practical suggestions; here's the first:
Quirky Staff, not Faceless Drones
I bet not many corporate executives are going to read this blog, but if they do (or if you know one - remember the power of talk), maybe suggest to them that instead of having sales-force employees follow the replaceable-parts model (i.e., interchangeable, single-faceted, lowest-common-denominator automata), they should show a little more personality, especially if they work in small enough units that customers might recognize them in subsequent visits.
I was a regular at Enterprise Rent-a-car until I got a car, and let me tell you, that company understands the benefit of human interfaces. Even though the company Enterprise might be a monolithic, faceless mega-corp, the employees I talked to at the branch were all charismatic, genuine-personality outgoing types. It's true that they were made to recite wrote-learned phone greetings, but other than that visits were all fun-loving chutzpah. I don't know exactly how to foster that kind of environment, but staid companies might do better if they encouraged their staff to be lively and idiosyncratic enough to make customers see them as people.
Marginally Legal, Inc.
Let's consider the second problem with contemporary capitalism: capitalist institutions often do things against the public good. I haven't mentioned law yet, but let me try to describe it as succinctly as possible. Capitalism:friendship :: law:enmity. I'm not suggesting that capitalism is intrinsically good and law bad. However, law and enmity both keep you from doing bad things to other humans; the former uses explicit codes while the latter uses the same level of thought as friendship (i.e. feelings of attraction/repulsion based on how you've been treated).
Enmity is the necessary mirror of friendship: it's the instinctual process which makes you try to be a pain to those who do you disservice. It's also a good game-theoretic strategy to demonstrate that pissing you off makes you a formidable enemy for an analogous reason to why psychopathy is a bad strategy: if people know you have a mean side, they'll try to avoid crossing you.
Law and capitalism are based on opposite reinforcement mechanisms, though, so when government meets private industry strange things can happen. Typically, corporations will do for themselves as much good as possible while narrowly avoiding getting sued. It's usually a good thing that laws change slowly: anarchy is just democracy with constant elections and one voter. However, when corporations can take advantage of this sluggishness through loopholes, capitalism can lead to technically-legal injustices. Moreover, using negative reinforcement (law) on entities that respond best to positive reinforcement (corporations) is a recipe for trouble: public-private incentives aren't going to magically align themselves without help.
There's a way to resolve the root problem caused by the negative/positive reinforcement mismatch between government and corporations:
If governments encourage companies to do as much good as possible, such that their rewards are proportional to the good they do, we can resolve the negative vs. positive reinforcement conundrum.
Practical Example: Road Bonds
Right now, governments set certain requirements in terms of what they would like in a road: they want it made of X material with Y safety feature, and it should last Z years. The company's reward is not affected at all by the value given to the public by the road, so long as the government's contractual expectations are met. If the road doesn't meet expectations, the government can try to sue the construction company for breach of contract: a long and inefficient process. Even in the best cases, the company has no incentive to build a road which will last longer than Z years (indeed they wouldn't want it to last any longer than Z years, since they're in the construction business), and all safety and durability research has to be done by the government body who decides the specifications of the road to build. Research isn't free, and it's hard for public institutions to make the correct call in terms of what research needs to be done.
Scrap the meets-contract/doesn't-meet-contract model. We can do better. Imagine an incentive system like this. When a government wants a road built, the incentive they offer is in the form of a transferable bond. The bond would pay the holder annually according to a formula like so:
Annually, pay $A if the road is usable, but deduct $B per cubic foot of pothole in the road (averaged over the year), $C per vehicle-hour of delay due to repair, $D for every human life lost on this road due to traffic accidents on this road and E% of the costs to drivers arising from damage to their vehicles due to accidents. If, in any year, the road is not usable or the net value of this payment in negative, this bond is valueless for all subsequent years.
Let the government choose B-E, and issue the bonds to the company which accepts the contract for the lowest value of A. Then, the private sector would be able to use new road durability and safety technologies where they make sense in terms of public benefit, without the government having to test any materials or make any policy regarding the specifics of what materials to use. In this case the lowest bidder won't be the one that does the crappiest acceptable job, it will be the one able to maximally align public and private interests, since it benefits exactly when the public does.
In turn, the construction company has the incentive to make durable, safe roads so as to collect the maximum reward from the bonds. By making the bonds transferable, companies good at construction (but maybe not inspection or maintenance) could sell the bonds to investment firms. The better the job they did the more money they could potentially make in the sale.
Governments are bad at details. If you reward results instead of punishing breeches, you align interests and harness the power of that uniquely human tool: capitalism.
Conclusions
Capitalism (including friendship) is more than just what makes being human so good; in many ways capitalism is the fundamental trait that distinguishes humans from other animals. It's vital for our policy makers to understand what capitalism really is and how to harness it to pull our 21st century in the right direction: towards the fellowship, harmony and cooperation. If you like the idea of aligning interests using rewards proportional to benefits, or if you like the concept of being friendly in your commercial transactions, try them out by all means, but also please talk about them. A million cocktail parties could change the fate of the world.
Today, we're going to examine a cornerstone of our western world: capitalism. I'm going to first give a brief history of capitalism starting from its evolutionary roots which set us aside from other animals, then I'll settle down into a rant about what I think is wrong with our current implementation of capitalism, and finally I'll give a few specific ideas about how we can tweak public policy so that capitalism achieves its goals better.
Capitalism and Humanity
Capitalism, and its relative friendship, set us apart from the majority of the animal kingdom. I don't believe that early humans were categorically smarter than other animals; even today's humans would have a hard time without cooperation.
Imagine if you were dropped on a desert island without having had any kind of education. (This is really impossible, because humans need nurturing to develop properly, but stay with me.) I doubt you'd be able to do better than the New Caledonian Crow, which can fashion its own tools (National Geographic video link) even out of metal (significant, since metal hasn't been around long enough to develop instincts involving it). You may counter by saying that this crow probably learned form another crow; that's exactly my point though. Individually, we're puny, but together we can build spaceships and make good cheese.
We specialize, we discuss things and we pass on knowledge to others. Why? It's more than having selfish genes; we are happy to forge friendships and help people totally unrelated to us. It's more than the herd mentality; I've met my share of loner humans, and besides I don't think sheep specialize. We share, lend things, trade, and educate each other because we live in a social construct where we can expect roughly the same degree of favors given to us as we give to others. (Doing nice things without reciprocity is a bad evolutionary strategy. However, the reciprocity needn't come directly from the people you help; doing good without expecting anything in return provides evidence to others that you're not a psychopath; see below.) In small groups, reciprocation is mediated by friendships, where we (usually) keep some sort of tally as to how nice the partner has been to us. We don't numerically quantify the favors our friends do us, although your typical human sees one-sided friendships as unhealthy, as if there must be some deeper, twisted exchange going on.
Genetically,We're All Cold, Calculating Psychopaths
I don't mean to suggest that we're consciously cold, calculating psychopaths who use each other for common gain. Our genes shape us to be good-natured towards each other, and it's a good thing too. Imagine if you knew somebody who appeared friendly most of the time but had a few Jekyll and Hyde moments. You'd steer clear of that shady character, and never want to engage in friendly behavior with them. Moreover, you'd tell your friends to watch out for the creep. As a result, being a conscious psychopath is a poor strategy in the long term, since others won't trust you enough to be friendly with them.
However, if our genes keep us behaving civilly towards one another all the time, we're less prone to the slip-ups that betray psychopaths. If we can demonstrate that we always help our friends, more people will want to be friends with us. We don't have to be cold, calculating psychopaths on a conscious level; our genes do a much more consistent job for us without our conscious minds having to bother.
Does understanding the selfish reasons behind friendship make one cynical about human nature? In some ways, knowing that we're hard-wired to do good does exactly the opposite. What do you think?
Money and Friendship
Money, you got lots of friends-Billie Holiday and Arthur Herzog Jr., "God Bless the Child"
Money becomes necessary when the group of people you want to collaborate with becomes too large to develop a personal relationship with everyone. Money lets you have strangers do friendly things towards you, and to earn it you (usually) have to do friendly things to others. Money is impersonal, quantified, anonymous, fungible friendship, in the sense that it keeps track of the favors you're owed from any member of your trading community.
Capitalism and Human Evolution
Capitalism (if you extend its definition to include its instinctual analogue, friendship) is what lets us specialize, and gives us the incentive to work together to produce all those wonderful creations only large groups of (mostly) cooperative humans have been able to do. Without capitalism, we'd be brawling in the muck.
Language is also one of the fundamental abilities humans have that sets us apart from other animals (if, indeed, we are set apart as far as we style ourselves). Language, however, is mostly useless without capitalism (in the sense I've defined it). Without capitalism, you have no framework within which to trust the speaker. Without capitalism, you have no specialized skill set to describe to others. Without capitalism, you have little incentive to divulge information (especially information about food, mates, etc.), so you probably wouldn't bother. Therefore, language evolved to make us better capitalists; without capitalism language would confer little benefit. Either capitalism predated language in our history or there was so much synergy between the two that sorting out who came first is moot.
People also talk about the "theory of mind" as being important in human evolution. Having a theory of mind means that you try to predict what other entities around you know, often by putting yourself in their shoes and wondering what you would do in the same situation. Clearly, having a theory of mind is useful to both capitalists (for outfoxing your fellows) and speakers (so you can relate exactly what the listener needs to hear given what they already know), so it's no surprise that humans excel at guessing what others are thinking. However, having a theory of mind can also be useful in purely competitive (i.e., non-capitalist) contexts: ravens (but not most birds) notice when something (like food) captures the attention of other animals, and even the odd octopus has demonstrated that it is aware of how others see it. However, these animals lack capitalist tendencies (and therefore have no incentive to develop language), which are the true sine qua non of humanity in evolutionary contexts.
The Octopus: Not a Capitalist
Current Issues with Capitalism
If capitalism really is the Promethean panacea I've proposed, why is everybody complaining about it? Let me list a few possibilities, and suggest a couple of remedies.
- People don't feel the love when making economic transactions.
- Governments and capitalist institutions often do not share a common agenda.
A few days ago, a total stranger picked a bunch of grapes for me. She set these grapes on a truck in Chile, which proceeded to a port where a monumental ocean-going vehicle waited. This floating steel mountain's sole purpose it to get things to where people want them; in my case it crossed the Equator and continued to an undisclosed location in North America. Total strangers unpacked the grapes, checked them for damage, and then placed them in a location where I could easily reach them for my culinary enjoyment.
By now, you've probably guessed what I'm up to: I've described what we'd consider to be the most mundane of commercial transactions: buying Chilean grapes. However, all the people involved in the chain of events (most of them total strangers to me) performed well-orchestrated diverse tasks for my benefit and enjoyment. If the context were anything but commercial, I would be touched to the brink of tears by the selfless generosity implicit in shipping me grapes out of season. Yet, somehow, in the monetized context of buying grapes from a local supermarket, it's unnatural to feel gratitude to the ship's crew or the shelf stocker - it's all in a day's work for them, and that somehow nullifies the joy I'd feel from having all these people slave away for my benefit.
Does it have to be that way? I'm going to give an exercise to my readers. For the next week, please try, at least once a day, to feel the connection you have to the millions of people who help you through the messy web of financial transactions we call an economy. Just for a split second, imagine that they were all doing you favors without letting money enter into the picture. Then open your eyes, and ask yourself if you really have to ignore the fact that all these people are conspiring to do you good just because you're paying them for it.
If your assignment rings false, we should try to find out why. I bet that financial transactions, by default, don't tickle the "friendship detector" circuits in our brains. Possibly we don't feel that friendship glow at the market because friendship with total strangers is impossible. It's also possible that brands have taken center stage in stores; give me a show of hands: who finds it easier to remember the brand of a product you bought than the name of the person who sold it to you? It's hard to feel friendship with a faceless company (although many people try).
Why not try to get to know the local shopkeepers a little by name? Maybe entering into a friendly relationship will give your instinctual friendship detector a face to latch onto, and maybe some of the gratitude you feel for the stuff you buy will brush off a little onto the human. You'll have your instinctual craving for mutual support reinforced at the same time as getting low, low prices. (Prices are ridiculously low because of specialization: imagine how hard it would be to travel on foot to Chile to grow your own February grapes.)
I promised this post would lead to practical suggestions; here's the first:
Quirky Staff, not Faceless Drones
I bet not many corporate executives are going to read this blog, but if they do (or if you know one - remember the power of talk), maybe suggest to them that instead of having sales-force employees follow the replaceable-parts model (i.e., interchangeable, single-faceted, lowest-common-denominator automata), they should show a little more personality, especially if they work in small enough units that customers might recognize them in subsequent visits.
I was a regular at Enterprise Rent-a-car until I got a car, and let me tell you, that company understands the benefit of human interfaces. Even though the company Enterprise might be a monolithic, faceless mega-corp, the employees I talked to at the branch were all charismatic, genuine-personality outgoing types. It's true that they were made to recite wrote-learned phone greetings, but other than that visits were all fun-loving chutzpah. I don't know exactly how to foster that kind of environment, but staid companies might do better if they encouraged their staff to be lively and idiosyncratic enough to make customers see them as people.
Marginally Legal, Inc.
Let's consider the second problem with contemporary capitalism: capitalist institutions often do things against the public good. I haven't mentioned law yet, but let me try to describe it as succinctly as possible. Capitalism:friendship :: law:enmity. I'm not suggesting that capitalism is intrinsically good and law bad. However, law and enmity both keep you from doing bad things to other humans; the former uses explicit codes while the latter uses the same level of thought as friendship (i.e. feelings of attraction/repulsion based on how you've been treated).
Enmity is the necessary mirror of friendship: it's the instinctual process which makes you try to be a pain to those who do you disservice. It's also a good game-theoretic strategy to demonstrate that pissing you off makes you a formidable enemy for an analogous reason to why psychopathy is a bad strategy: if people know you have a mean side, they'll try to avoid crossing you.
Law and capitalism are based on opposite reinforcement mechanisms, though, so when government meets private industry strange things can happen. Typically, corporations will do for themselves as much good as possible while narrowly avoiding getting sued. It's usually a good thing that laws change slowly: anarchy is just democracy with constant elections and one voter. However, when corporations can take advantage of this sluggishness through loopholes, capitalism can lead to technically-legal injustices. Moreover, using negative reinforcement (law) on entities that respond best to positive reinforcement (corporations) is a recipe for trouble: public-private incentives aren't going to magically align themselves without help.
There's a way to resolve the root problem caused by the negative/positive reinforcement mismatch between government and corporations:
If governments encourage companies to do as much good as possible, such that their rewards are proportional to the good they do, we can resolve the negative vs. positive reinforcement conundrum.
Practical Example: Road Bonds
Right now, governments set certain requirements in terms of what they would like in a road: they want it made of X material with Y safety feature, and it should last Z years. The company's reward is not affected at all by the value given to the public by the road, so long as the government's contractual expectations are met. If the road doesn't meet expectations, the government can try to sue the construction company for breach of contract: a long and inefficient process. Even in the best cases, the company has no incentive to build a road which will last longer than Z years (indeed they wouldn't want it to last any longer than Z years, since they're in the construction business), and all safety and durability research has to be done by the government body who decides the specifications of the road to build. Research isn't free, and it's hard for public institutions to make the correct call in terms of what research needs to be done.
Scrap the meets-contract/doesn't-meet-contract model. We can do better. Imagine an incentive system like this. When a government wants a road built, the incentive they offer is in the form of a transferable bond. The bond would pay the holder annually according to a formula like so:
Annually, pay $A if the road is usable, but deduct $B per cubic foot of pothole in the road (averaged over the year), $C per vehicle-hour of delay due to repair, $D for every human life lost on this road due to traffic accidents on this road and E% of the costs to drivers arising from damage to their vehicles due to accidents. If, in any year, the road is not usable or the net value of this payment in negative, this bond is valueless for all subsequent years.
Let the government choose B-E, and issue the bonds to the company which accepts the contract for the lowest value of A. Then, the private sector would be able to use new road durability and safety technologies where they make sense in terms of public benefit, without the government having to test any materials or make any policy regarding the specifics of what materials to use. In this case the lowest bidder won't be the one that does the crappiest acceptable job, it will be the one able to maximally align public and private interests, since it benefits exactly when the public does.
In turn, the construction company has the incentive to make durable, safe roads so as to collect the maximum reward from the bonds. By making the bonds transferable, companies good at construction (but maybe not inspection or maintenance) could sell the bonds to investment firms. The better the job they did the more money they could potentially make in the sale.
Governments are bad at details. If you reward results instead of punishing breeches, you align interests and harness the power of that uniquely human tool: capitalism.
Conclusions
Capitalism (including friendship) is more than just what makes being human so good; in many ways capitalism is the fundamental trait that distinguishes humans from other animals. It's vital for our policy makers to understand what capitalism really is and how to harness it to pull our 21st century in the right direction: towards the fellowship, harmony and cooperation. If you like the idea of aligning interests using rewards proportional to benefits, or if you like the concept of being friendly in your commercial transactions, try them out by all means, but also please talk about them. A million cocktail parties could change the fate of the world.
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