Economics in one sentence

From Economics in One Lesson:

… the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Related post: One thing to remember in economics

Decentralized knowledge, centralized power

Arnold Kling argues in his interview on EconTalk that knowledge is becoming more decentralized while power is becoming more centralized. Therefore more decisions will be made by people who don’t know what they’re doing.

His strongest point is that knowledge is being decentralized. Jobs have become more specialized, academic disciplines have become more narrow, people have become more interdependent, etc. It’s harder to defend a blanket statement that power is becoming more centralized. Kling gives important examples of power consolidation, but one could also give examples of an opposite trend. It would be easier to argue that at least in some contexts power is becoming more centralized.

If in some context power is becoming centralized while knowledge is being decentralized, it is inevitable that more decisions will be made without adequate knowledge. This sounds like a breeding ground for a sort of antibiotic-resistant strain of the Peter Principle.

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The Stone Age didn’t end because we ran out of stones

According to Richard Sears, the world hit peak oil in 1985 in the sense that oil accounted for 50% of world energy in 1985 and the percentage has been declining since then. By that same measure, we hit peak coal in the 1920’s and peak wood in the 1820’s. Sears summarizes

For 200 years we have been systematically de-carbonizing our energy system.

We didn’t stop using wood as our primary energy source because we ran out of trees; we moved on to something better. Sears believes we are now in the process of transitioning from oil to renewable energy sources, and not because we’re running out of oil. He concludes his presentation (link rotted) by saying

… the Stone Age ended, not because we ran out of stones. It’s ideas, it’s innovation, it’s technology that will end the Age of Oil before we run out of oil.

A tale of two espresso machines

This post tells the story of two espresso machines: one in Los Angeles and one in Brenham, Texas. But it’s more about deciding what you do and do not want to control.

* * *

In his book Made by Hand, Mark Frauenfelder chronicles his quest to make great espresso at his home in Los Angeles. He reviews some of the tricks to make good espresso from a relatively inexpensive espresso machine. (The machine he describes, a Rancilio Silvia, was around $500 when Frauenfelder bought it. That’s a lot more than a Mr. Coffee, but it’s cheap compared to espresso machines that cost over $10,000.) The problem with inexpensive espresso machines is that they have poor temperature. The water temperature can vary as much as 40 °F. Frauenfelder hacked his espresso machine by replacing its controller with a more sophisticated proportional-integral-derivative controller or PID.

(Small changes in brewing temperature can have a large impact on coffee taste. This is because coffee is chemically complex. Brewing at different temperatures extracts these chemicals in different proportions. See this Scientific American article for details. [Update: looks like SA took the article down.])

The context of Frauenfelder’s story is his book on doing things yourself, not to save money, but to have more control of your environment. He describes his adventures from growing vegetables to making musical instruments for the joy of doing so.

* * *

Roger Sessions tells a very different story about why he does not have his own espresso machine in The ObjectWatch Newsletter. He describes why he drives 10 miles every day to the Starbucks in Brenham. He says he saves money, even though he spends more on gasoline than the price of his doppio macchiato. For starters, Sessions estimates it would take nearly four years to pay off his hardware investment. Then he lists the things that could go wrong:

  • Something might break down.
  • Something could short out his electrical system.
  • The roaster could burn his house down.
  • He might not be able to use the equipment well.

The context of Sessions’ story is the benefits of software as a service. Even when it appears to be more economical to create and host your own software, you may save money by paying someone else to offer that software as a service. Sessions pays Starbucks to make his espresso for him because they not only make the capital investment in hardware, they’re also responsible for operation and maintenance. (Update: See Roger Sessions’ comment below.)

* * *

Sessions makes as strong a case for not owning an espresso machine as Frauenfelder makes for owning one. Frauenfelder speaks of the confidence and joy that comes from having detailed knowledge and control of the things around you. Sessions speaks of the hassle and expense of being responsible for the things around you. Both have valid points. I’m sure there are areas in which Frauenfelder is happy for someone else to take responsibility, and areas in which Sessions enjoys fine-grained control. But they disagree which approach is preferable when it comes to making espresso.

One of the things that prompted me to buy Mark Frauenfelder’s book was an interview I heard on a podcast. He said that he was attracted to do-it-yourself projects after becoming editor of Make Magazine. The spirit of the writers rubbed off. At one point in the interview he says DIY is not about saving money; in fact, the DIY approach will often cost more money. I appreciated this comment since many DIY enthusiasts justify their projects with dubious financial arguments rather than simply say that they enjoy what they’re doing and that the extra expense is worth it to them. I suspect Frauenfelder may agree with Sessions on the economics of espresso making, though they have different perspectives of the non-monetary benefits.  And although Sessions only argues monetary benefits, he also has non-monetary benefits to visiting Starbucks. I imagine he enjoys getting out of his house, seeing familiar faces, etc.

* * *

Posts quoting Mark Frauenfelder:

Endless preparation
Getting women to smoke

Post quoting Roger Sessions:

Three quotes on software development

Where the Unix philosophy breaks down

Unix philosophy says a program should do only one thing and do it well. Solve problems by sewing together a sequence of small, specialized programs. Doug McIlroy summarized the Unix philosophy as follows.

This is the Unix philosophy: Write programs that do one thing and do it well. Write programs to work together. Write programs to handle text streams, because that is a universal interface.

This design philosophy is closely related to “orthogonality.” Programs should have independent features just as perpendicular (orthogonal) lines run in independent directions.

In practice, programs gain overlapping features over time.  A set of programs may start out orthogonal but lose their uniqueness as they evolve. I used to think that the departure from orthogonality was due to a loss of vision or a loss of discipline, but now I have a more charitable explanation.

The hard part isn’t writing little programs that do one thing well. The hard part is combining little programs to solve bigger problems. In McIlroy’s summary, the hard part is his second sentence: Write programs to work together.

Piping the output of a simple shell command to another shell command is easy. But as tasks become more complex, more and more work goes into preparing the output of one program to be the input of the next program. Users want to be able to do more in each program to avoid having to switch to another program to get their work done.

An example of the opposite of the Unix philosophy would be the Microsoft Office suite. There’s a great deal of redundancy between the programs. At a high level, Word is for word processing, Excel is the spreadsheet, Access is the database etc. But Excel has database features, Word has spreadsheet features, etc. You could argue that this is a terrible mess and that the suite of programs should be more orthogonal. But someone who spends most of her day in Excel doesn’t want to switch over to Access to do a query or open Word to format text. Office users are grateful for the redundancy.

Software applications do things they’re not good at for the same reason companies do things they’re not good at: to avoid transaction costs. Companies often pay employees more than they would have to pay contractors for the same work. Why? Because the total cost includes more than the money paid to contractors. It also includes the cost of evaluating vendors, writing contracts, etc. Having employees reduces transaction costs.

When you have to switch software applications, that’s a transaction cost. It may be less effort to stay inside one application and use it for something it does poorly than to switch to another tool. It may be less effort to learn how to do something awkwardly in a familiar application than to learn how to do it well in an unfamiliar application.

Companies expand or contract until they reach an equilibrium between bureaucracy costs and transaction costs. Technology can cause the equilibrium point to change over time. Decades ago it was efficient for organizations to become very large. Now transaction costs have lowered and organizations outsource more work.

Software applications may follow the pattern of corporations. The desire to get more work done in a single application leads to bloated applications, just as the desire to avoid transaction costs leads to bloated bureaucracies. But bloated bureaucracies face competition from lean start-ups and eventually shed some of their bloat or die. Bloated software may face similar competition from leaner applications. There are some signs that consumers are starting to appreciate software and devices that do less and do it well.

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Freebies and entitlement

Take away a freebie and people will hate you.

The latest EconTalk podcast relates a story of people who harbored a grudge against the Red Cross for decades. What did the Red Cross do that was so bad? They sold doughnuts at cost.

The Red Cross had given soldiers doughnuts for a while. Then at some point they started charging a nickle. They were not making a profit, only selling the doughnuts at cost. And they only started charging because the U. S. Army asked them to. Even so, some veterans and their families remained angry about this for many years. To this day, some Red Cross workers bring free doughnuts to meetings trying make up for hard feelings.

If you give away something but make it clear from the beginning that it’s only free temporarily — a free sample, a trial version, etc. — then you may charge money later without causing resentment. But if people ever get the idea that your product will remain free, they feel entitled to it.

If Facebook, for example, decided to charge even $1 a year for an account, they would lose millions of members. People would burn Mark Zuckerberg in effigy. Presumably they could have charged $1 a year without criticism when they started. But since the service has been free, they can never charge for it without creating enormous ill will.

Idea people versus results people

I liked this quote from Hugh MacLeod the other day:

Idea-Driven People come up with Ideas (and Results), more often than Results-Driven People come up with Results (and Ideas).

His quote brings up two related fallacies.

  1. People who are good at one thing must be bad at something else.
  2. People who specialize in something must be good at it.

Neither of these is necessarily true. It’s wrong to assume that because someone is good at coming up with ideas, they must be bad at implementing them. It’s also wrong to assume that someone produces results just because they call themselves results-driven.

The first fallacy comes up all the time in hiring. Job seekers may leave credentials off their résumé to keep employers from assuming that strength in one area implies weakness in another area. When I was looking for my first programming job, some companies assumed I must be a bad programmer because I had a PhD in math. One recruiter suggested I take my degree off my résumé. I didn’t do that, and fortunately I found a job with a company that needed a programmer who could do signal processing.

Andrew Gelman addressed the second fallacy in what he calls the Pinch-Hitter Syndrome:

People whose job it is to do just one thing are not always so good at that one thing.

As he explains here,

The pinch-hitter is the guy who sits on the bench and then comes up to bat, often in a key moment of a close game. When I was a kid, I always thought that pinch hitters must be the best sluggers in baseball, because all they do (well, almost all) is hit. But … pinch hitters are generally not the best hitters.

This makes sense in light of the economic principle of comparative advantage. You shouldn’t necessarily do something just because you’re good at it. You might be able to do something else more valuable. When people in some area don’t do their job particularly well, it may be because those who can to the job better have moved on to something else.

Related post: Self-sufficiency is the road to poverty

“Noncommercial” is fuzzy

It is common for software, photos, and other creative works to be free for noncommercial use. I appreciate the generosity of those who want to give away their creations, and I appreciate the business savvy of those who see giving some things away as a way to make more money elsewhere. But “noncommercial” is a fuzzy term.

What exactly is noncommercial use? If I include a photo in software that I give away, is that noncommercial use? What if someone includes the same photo in iTunes? That’s software that is freely given away, although it’s clearly a distribution channel for Apple music sales. What about Internet Explorer? Microsoft gives away IE, and it’s not an obvious distribution channel for Microsoft, but many people would call IE commercial software. Is it the nature of the organization rather than the nature of the product that determines whether something is non-commercial?

Sometimes “noncommercial” is used as an opposite of “professional.” But what about employees of charitable organizations such as the American Red Cross? Is a Red Cross relief worker in Haiti doing noncommercial work? What about a lawyer working at Red Cross headquarters? Would it change anything if the lawyer were a volunteer?

Sometimes “educational” is used as a synonym for noncommercial. But if your profession is education, is your work professional or educational? Does it matter whether a school is public or private? Most people would agree that a student doing a homework assignment is engaged in noncommercial activity. What if the student is a teaching assistant receiving a small salary? In that case is it noncommercial use when the student is doing his own homework but commercial use when he’s preparing to teach a class? Isn’t education almost always a commercial activity? After all, why are students in school? They’re preparing to make a living at something. They may have blatantly commercial motives for doing their homework.

Not only can you argue that educational use is commercial, you can argue that commercial use is educational. If an accountant looks up a tax regulation, they’re trying to learn something. Isn’t that educational? Is it educational use when a student looks up a tax regulation but commercial use when an accountant looks up the same regulation?

Individuals and organizations are free to define “commercial” or “noncommercial” use however they please. Personally, I’d rather either sell something or give it away without regard for how it’s going to be used.

Self-sufficiency is the road to poverty

In his podcast Roberts on Smith, Ricardo, and Trade, Russ Roberts states that self-sufficiency is the road to poverty. Roberts elaborates on the economic theories of Adam Smith and David Ricardo to explain how specialization and trade create wealth and how radical self-sufficiency leads to poverty.

Suppose you decide to grow your own food. Are you going to buy your gardening tools from Ace Hardware? If you really want to be self-reliant, you should make your own tools. Are you going to take your chances with what water happens to fall on your property, or are you going to rely on municipal water? Are you going to forgo fertilizer or rely on someone else to sell it to you? Carried to extremes, self-reliance ends in a Robinson Crusoe-like existence.

People in poor countries are often poor because they are self-reliant in the sense that they must do many things for themselves. They do not have the opportunities for specialization and trade that are available to those who live in more prosperous countries.

Some degree of self-reliance makes economic sense. Transaction costs, for example, make it impractical to outsource small tasks. It also makes sense to do some things that are not economically feasible. For example, an orthodontist may choose to make some of her own clothing or keep a garden for the pleasure of doing so, not because these activities are worth her time. In general, however, specialization and large trading communities are the road to prosperity. Without a large economic community, no one can become an orthodontist (or an accountant, barrista, electrician, …)

Why do we so often value self-sufficiency more than specialization and trade? Here are a three reasons that come to mind.

  1. In America, self-sufficiency is deeply rooted in our culture. We admire the pioneer spirit, and this leads to seeing as virtues actions that were once a necessity.
  2. Self-sufficient people are generally well liked, especially if they’re not too prosperous. Conversely, those who create wealth by leveraging the labor of others are often treated with suspicion and jealously.
  3. Our school system encourages “well-roundedness” rather than excellence. The way to succeed is to be moderately good at everything, even if you’re not outstanding at anything. (More on this idea here.)

Update: After writing this post, I read Russ Robert’s book The Choice: A Fable of Free Trade and Protectionism. I discovered one of the later chapters is entitled “Self-Sufficiency Is the Road to Poverty.” Excellent book.

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