It is a right!

Unless you live under a rock, you are aware of the ongoing healthcare debate in the US. The legislation finally passed Congress sometime last week and will come into effect later this year. Emotions are still high and the country is deeply divided on the issue. There are countless articles, blog entries and forum threads on the subject - the sheer volume will make your head spin. Having in mind the lofty ideal of providing thoughtful comment based on prudent research, I grudgingly restrain myself from taking a stance on the issue as a whole. The amount of ground to cover is simply far out the realm of human comprehension. However, I can't help myself from noting this highly seductive and appealing bit of prose I found lately. It puts a new spin on the old 'healthcare is a right' line of argumentation:

Indeed Healthcare is no more a right than Liberty or the sanctity of owning property which become rights when men (sorry girls, but it was men) declared it thus. I would argue that hierarchical domination is the natural order within human and similar branches of the animal kingdom, and that individual "rights" ascended only through the organization of society and the extension of laws to guarantee present cornerstones such as freedom and property rights. Healthcare follows in this vein of argument. Liberty, (and in other nations) universal health insurance covereage and public finance of basic insurance for those unable to pony-up, are not naturally-conferred, but societal constructs not as a result of their ordination by a deity-of-choice, but because they yield meaningfully large positive externalities far in excess of their costs.

I genuinely like the reasoning here. One cannot deny the historical succession of certain rights: personal liberty --> property rights. I also agree with the author that they are not 'insert-deity-here'-given, but established by man. The French Revolution, ratification of the Constitution of the United States - all fundamental milestones in the development of our society. Based on this, it is reasonable a suggestion to make, that maybe it is time to take the next step: property rights --> healthcare.

But... Yes, there always is a 'but'.

Liberty and the right to property are non-intrusive. They merely define our personal space and the set of actions we are permitted to pursue. A good rule of thumb here is that we are free to do whatever we want as long as it is not in conflict with the freedom of others. The 'right to healthcare', on the other hand, legalizes a wealth transfer between the ones who require healthcare and the ones who are forced to pay for it. It infringes on personal liberty and right to property of the reluctant sponsors. Therefore it is not a logical next step, increasing the degree of our freedom - in fact, it is partially dismantling it. Or at least transferring it.

And one last thing - I could just as easily state that 'the negative externalities of limiting or transferring freedom are far in excess of any of the benefits of universal healthcare coverage'. Simply stating something is true does not make it so and is... how do I put it... childish?

In conclusion - a noble attempt, but I remain skeptical.

On progress

A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.

-Max Planck

If your first thought was Well then I hope they manage to explain things to me before I die - you have my repsect.

If your first thought was Well then just die already! - you and I have a lot in common.

Natures hidden beauty

Recently, while on my on-going quest for becoming the (first) 'Man To Have Read The Internet, All Of It'^TM I have uncovered this little gem of economic cogitation:

In this [ultimatum] game, one player divides a pot of money between himself and another. The other then chooses whether to accept the offer. If he rejects it, neither player benefits. And despite the instincts of classical economics, a stingy offer (one that is less than about a quarter of the total) is, indeed, usually rejected. The question is, why?

The reason is that in multiple period games it pays off to build a reputation for rejecting low offers - other players aware of this trait will revise their offers upwards accordingly. But this leaves us with one last question - why would you reject anything in a one period game? There is no benefit of learning or accumulating reputational capital to be gained. Thankfully, the article does not end with a cliffhanger:

As he describes in the Proceedings of the Royal Society, the responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer [the lowest] but only one of the 19 others made the same decision.

What Dr Burnham's result supports is a much deeper rejection of the tenets of classical economics than one based on a slight mis-evolution of negotiating skills. It backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species.

Yes, yes, this is all fine and well - basic knowledge and old news, really. In some circles at least. But what really sparked an interesting thought, was a rather harsh conjecture by the astute Equity Private:

Taken in this context, the irrationality of the particular (and large) demographic of private equity's Schadenfreude (and champions of "fairness" everywhere- read: "income equality" mouthpieces) may be understood to be suffering from the uncorrected, regressive artifacts of evolutionary biology.

Now, this seems comfortingly ego-boosting and simple to grasp. All at once, how lovely! Yet, not far away you would find, Dear Reader, a vehement critique of flat and simple, and, by extension, a praise of complex and demanding. Indeed, the more elusive and difficult an explanation the more probable it is the correct one.

'But how could this be' - you ask, perplexed - 'it seems painfully obvious that this particular deviation from the perfect homo economicus is just a rough edge of our cognitive surface, sadly not yet ironed out by time and evolution, due to our sudden and abrupt arrival at the era of civilization and cable TV'. Indeed, this seems to tie up the loose ends nicely - but hold on for just a second before the arrest is made and case closed announced. Let us take a peek at the grander scheme of things.

* * *

Every young acolyte of the Dismal Science quickly learns about the importance of equilibrium. In fact, equilibrating seems to be the only thing markets do. In this regard - they are everything that war is not. What kind of a war would it be, with every battle ending with the opposing forces frozen, well aware that none of them have the advantage - balance of the kind that would anihilate both were they to engage. This is what markets, by the magic of prices, do every day¹.

This is where common knowledge ends, and some wild philosophical thinking begins.

I would risk a statement, that markets find equilibrium not only within, but also between one another. It seems pretty obvious when you think about the process - if selling fish becomes a rather popular activity, with the market for fish too crowded and efficient to satisfy giddy rent seekers, the alternatives suddenly find themselves overwhelmed with some much needed attention. Like baking. Or manufacturing sports cars. Or any other form of providing goods and services you can think of. With this diffusion process in place (coupled with a healthy attitude for reproduction) an optimist could expect that all markets, and by extension - all economic activities - soon become colonized and unable to generate outsized returns. That is truly a beautiful prospect, and a recurring theme in economics.

Remember CAPM? Its basic tenet is: investors get compensated in line with the risk they bare. No excess profits! Could I extended this reasoning to, say, wages? Would it be naïve to expect effort (and maybe initial investment) to be compensated, so that there is income equality among industries and geographies? This is a very bold and candid view of the world - one where market efficiency is complementary to fairness, not rival to it. But this concept feels so intuitive and elegant - it simply must be true!

'A, ha!', you exclaim, 'but this is not the case - what about all those nasty monopolies, oligopolies, externalities and market asymmetry problems - all headwinds pushing the capitalistic experiment of course!'. To this I respond - those are some mixed issues you got there. Lets put them in two distinct categories. One would be structural problems, and the other I'd like to call the 'economics of violence' (patent pending) issues.

Let me quickly dismiss the structural bag by saying - there is ample evidence to support the claim that human ingenuity will overcome all technical problems on its road towards utopia. Natural monopolies - all sooner or later face a certain doom from competing substitutes (you say railroads, I say cars and planes; you say telegraph², I say phones and Internet). Oligopoly - see above and don't forget about the always handy Prisoners' Dilemma. Externalities - internalized under perfect information. Asymmetric information - internet, for one thing! And given some time, hopefully, there is a lot more coming. But you get my drift, moving on then.³

The second type of distortions in our, otherwise perfect, markets is usually either the mob or the government (with the mob being the easier to deal with). Since the dawn of mankind peaceful, prosperous communities had to deal with testosterone fueled jack-asses, wielding heavy stones, swords, machine guns (in that particular order, I believe), making use of their superior strength to acquire benefits otherwise not earned. It was the privilege of kings to enact charters and create monopolies, putting hands on profitable endeavors and reaping excess rewards by preventing others from joining in the fun. Even if some legacy monopolies (i.e. delivering first-class mail) have a utilitarian or social rhetoric behind them now - the revenue motive was always the driving force for establishing such ventures (or prying them from the hands of private agents), and defending them from pesky competition by the muscular arm of the sovereign.⁴

So where am I going with this, rather lengthy, argument? Classic economics portrays what happens in a market, victimized by such a forceful intrusion, were it inhabited with homo economicus-type agents (see how I escaped the plural form there?). The markets finds a new, suboptimal equilibrium, a deadweight loss occurs, accompanied by a hefty transfer of consumer surplus to the monopolist, in the form of excess returns. And that is it. Everybody is cool, people just shrug their arms and get back to work. The villain wins and crime does pay.

But reality is usually less serene than this.

Maybe nature knew better. Maybe it implanted in us a sense of fairness, exhibited in the ultimatum games, not as an anachronic leftover, but as a way to spot foul play in the markets. As a way to bring about efficiency. Remember, complementary?

Think about the example at hand - the private equity boom, at its height in 2007. There is - no doubt - an argument to be made for the social benefits of private equity investing. And it is easy to dismiss public outcries as silly, envious slander uttered by the 'lowly-not-yet-evolved-enough-to-understand-homo-not-at-all-economicus'. But what if PE profits during the boom years could not entirely be attributed to PE itself? That is - what if there were circumstances making life easier for investors? For example - way too accommodative domestic monetary policy. Foolish exchange rate pegging in China, leading to massive excess reserves ready to be deployed onto the financial markets all over the world. Petro-dollars.

Let's assume for a second that that is, in fact, the case - suddenly your natural, lizard brain instincts and rational reasoning reconcile and it all makes sense again.

Of course, it is a stretch to suggest that people subconsciously felt that massive profits for financiers were caused by price fixing⁵ in some of the most important markets in the world, making money cheap and speculation rampant. It is just a tad more probable, that the public somehow made the connection between profits for the rich and asset price inflation⁶, brought about by massive expansion of money and credit. Finally - it is quite likely, that our collective inner instincts sounded of alarm bells, signaling that the level of these gains is way out of proportion - that there is no conceivable way of earning them by means of fair market competition.

From where I stand - that signal was right. Unfortunately, the reaction - less so. And by reaction I mean lack of thereof. Too bad really, but it comes as no surprise - at this level of complexity you need to expend considerable time and effort to analyze the situation and arrive at, more or less, correct conclusions. And even then there would be not much you could do about it. Besides, you would probably need some sort of an initial hint - and where are most people supposed to get such an impulse? News networks? I don't think so. Add to this the built-in inertia of our species and it's not hard to see why things are going the way they are. The measures employed in the US after the crisis are generally counterproductive and will only make matters worse, and a more educated public might have stopped that. But they didn't, and they won't. The system will absorb more and more stress until it breaks and implodes.

Still, the point of this piece is not to discuss the credit crisis or the Great Recession. I intended to defend our atavistic instincts, even if just a little. Back in Econ101 my lecturer used to say: we can sacrifice efficiency in the name of fairness, referring to government intervention in the markets, assuming that the government is out there to do good and equalize incomes. This trade-off is very convincing at first - poetic and economic-y alike. But it assumes that the natural state is flawed - that it gravitates towards inequality and therefore is unjust in some way. The logical implication is that we can alter this undesirable state. With the emphasis on can. It is a rather arrogant presumption and it hints at quite some hubris, if not ego. I would be much easier convinced that our understanding is fallacious and the truth more sophisticated and not-evident.

And what would be more surprising, unintuitive, convoluted and against popular belief, than having efficiency bring about equality? What if some part of us already knows this and we subconsciously expect reality to conform to this scheme? It is an entertaining thought to say the least.



¹ And what a fitting analogy, too, if you remember that war stifles trade while free trade helps nations to stave off conflicts. Indeed, the two are polar opposites, two states of nature perfectly antagonized, with no configuration of the two permitting them both to exist at the same time, with transitions between them in the form of rough, instant jump processes.
² On second thought - maybe you don't, but the argument is a strong one nonetheless.
³ Now, I'm perfectly aware that this is far from a complete, all-encompassing proof, thank you very much, but it nevertheless outlines, in broad strokes, the line of my argument. Trying to address every single conceivable situation that might get thrown at me in a debate such as this one, would resemble an attempt at clogging every hole in a sieve the size of the Hubble Telescope. Yet, I accept the challenge and, if time permits, will amass some evidence in favor of the 'hands off' approach. So watch this space keenly, as it will be an amusing sight to behold.
⁴ The wide and diverse range of state run-monopolies, the historical precedent that spawned them, and the propaganda that legitimized their existence, are all yet another great topic for future musings. Stay tuned.
⁵ Central bank monetary policy and currency peg's - the main culprits to blame for the latest financial calamity - are nothing else than forms of price fixing. If you strongly oppose the view that these policies caused the crisis (and maybe support some other, imaginative explanations out there), then you have yet another reason to frequent this page, as I may or may not expound on this some time or another.
⁶ Inflation benefits those with first access to money - bankers, politicians and the already rich. Once again a great topic for a blog entry, but why bother if I can simply redirect you here. Read, get informed.