Economic Freedom and GDP per capita — Gapminder-style

For a while now I’ve shared common hopes to have the Economic Freedom data take new forms.  The relationship between Economic Freedom and GDP per capita for example is not hard to imagine, however there is always something a bit more compelling about a nice visualization.  Gapminder’s Trendalyzer seemed to have established the perfect format — it was just a matter of time before unique data sets could be plotted in a similar manner.  Google has now made this possible, and with the release of their new spreadsheet gadgets I’ve taken the opportunity to dive into the Economic Freedom data, and add motion.

This first graph compares the Heritage Foundation and Wall Street Journal’s Index of Economic Freedom country scores with GDP per capita in US dollars as reported from the United Nations Common Database the data from 2000–2005.  Colors denote regions.  Size denotes population.

This second graph uses the same data minus some of the clutter.  I’ve selected to display just a few countries which I think are interesting to compare to one another: North Korea and South Korea, China and Hong Kong, Cuba and Spain, and Botswana and Zimbabwe.

A hat-tip to Google for making this powerful tool available at such an accessible level. Now, on with setting free all that interesting information housed in academic jargon, repelling visuals, and bullet-pointed presentations.

Book Review: Fooled by Randomness

“Reality is far more vicious than Russian roulette.  First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands, of chambers instead of six.  After a few dozen tries, one forgets about the existence of a bullet, under numbing false sense of security,” says Nassim Nicholas Taleb.  He refers to this as the black swan problem.

Mistaking Luck For Skill

Fooled by Randomness is a book about mistaking luck for skill, a mistake Taleb sees most prevalent in journalism and the world of markets.  At the root, “risk detection and risk-avoidance are not mediated in the ‘thinking’ part of the brain but largely in the emotional one.” “The consequences are not trivial: It means that rational thinking has little, very little, to do with risk avoidance.  Much of what rational thinking seems to do is rationalize one’s actions by fitting some logic to them.”

Yet, “[p]eople fail to learn that their emotional reactions to past experiences (positive or negative) were short-lived.” “[T]hey continuously retain the bias of thinking that the purchase of an object will bring long-lasting, possibly permanent, happiness or that a setback will cause severe and prolonged distress (when in the past similar setbacks did not affect them for very long and the joy of the purchase was short-lived).”

He paraphrases a remark by Einstein: “[C]ommon sense is nothing but a collection of misperceptions acquired by the age eighteen.”

Other Common Misperceptions

Taleb also redefines a common misperception of the word ‘mistake’:  “A mistake is not something to be determined after the fact, but in the light of the information until that point.”

This point ties succinctly with the concept of creative destruction which embraces the role of failure in development.  Mistakes need not be avoided, but learned from.  But, many environments are not conducive to such a framework.  Many of these frameworks have been engrained in society and social relationships for years.  Taleb explores why “bad traders have a short- and medium-term survival advantage over good traders,” by tying the world of markets to naive evolutionary theories.

“[M]any amateurs believe that plants and animals reproduce on a one-way route toward perfection. Translating the idea to social terms, they believe that companies and organizations are, thanks to competition… irreversibly heading toward betterment.” This is simply not true.

Taleb offers multiple reasons.  I will follow each with a few of my own thoughts.

1) Organizations do not reproduce like living members of nature.  Competition is never between buyers and sellers.  It is always between buyers and buyers or sellers and sellers.  While finding the perfect mate could fall in the same category as competition between businesses, reproduction is different in many ways.  Perhaps a more valid metric to compare the social environment of organizations to reproduction would be one of accessibility.  That is, to what level do companies, or mates, have the opportunity to enter or exit the marketplace?

2) Randomeness.  Some mutations are for the better, others for the worse.  “Negative mutations (Gould) are traits that survive in spite of being worse, from the reproductive fitness standpoint, than the ones they replaced.” Again, this acquires a level of complexity when translated into social terms.  While market trends may be surprising on their own, subsidies, labor protection laws, and a variety of other market distorting policies add another level of randomness to the mix, often allowing unprofitable enterprises (negative mutations) to survive.

In Taleb’s mathematical verse: “Just as an animal could have survived because its sample path was lucky, the “best” operators in a given business can come from a subset of operators who survived because of over-fitness to a sample path--a sample path that was free of the evolutionary rare event.” “[E]volution means fitness to one and only one time series, not the average of all possible environments.”

The Dive Bar that is Journalism

Distinguishing between signal and noise is widespread, though, journalism receives the largest swath of Taleb’s relentless skepticism: “[J]ournalism may be the greatest plague we face today—as the world becomes more and more complicated and our minds are trained for more and more simplification.”

This effect of this large-scale compression—going from the particular to the general—“is the reduction in the degree of detected randomness.” Journalism, through induction, favors the palatable over the counter-intuitive.  In sum: “[M]ost poetic sounding adages are plain wrong.”

From journalism to winning streaks, “if someone performed better than the crowd in the past, there is a presumption of his ability to do better in the future.” But this is a weak presumption.  It depends on two factors: “The randomness content of his profession and the number of monkeys in operation.”

While Taleb doesn’t offer any advice on which particular profession to choose, he does offer a suggestion.  Don’t shoot for a profession where you only like the way people live at the top. Consider the lifestyle of the average person, there are many more of them.

Escaping Randomness (Kind of)

The idea of alternative histories across several disciplines all seem to converge on the same concept of risk and uncertainty: “certainty is something that is likely to take place across the highest number of different alternative histories; uncertainty concerns events that should take place in the lowest number of them.” Taleb mentions examples in philosophy, physics and economics.

However certain this convergence may appear, one still has to stay alert.  Profits and losses are never guaranteed.  “The frequency or probability of [a] loss, in and by itself, is totally irrelevant; it needs to be judged in connection with the magnitude of the outcome.”

Book Review: Why Wages Rise

At a talk this Fall, Charles Koch mentioned that the book Why Wages Rise by F.A. Harper was an influential book in his career.  Curious of the subject and the inspirations of such a successful man, I decided I best read it myself.

It was fascinating to see that the book did not begin with much framing and jumped right into the discussion with a focus on labor unions and the misperception that their demands lead to a rise in wages.  This says a lot about who Harper was trying to communicate these ideas to and places the stage of development of the US economy at the time the book was written, in 1957.

Harper draws a nice analogy to explain why it can be harmful to simply raise workers wages without a commensurate increase in productivity:

During 1955, the average pay of an employee of GM was $5,011.  Yet GM’s profits for the year were $1,189,477,082 (or $3,751,477,082 before any ascertainable taxes) on a total business of $12,433,277,420.  It can be seen at a glance that doubling the pay of this employee would be no more noticeable in the whole enterprise than would be the adding of another automobile to those owned in the State of Michigan.

Doubling the pay of all GM employees, however, would be quite a different story.  It would eat up in one year more than the total value of the firm’s real estate, plants, and equipment.

He continues to explain how productivity is the true source of real wage increases and how inflation can harm wages.  He emphasizes the role a sound currency play when considering wages:

When you accept money in trade, you are proceeding on faith in it as a sort of implied contract.  The implied contract is this:  When you trade something for money as an intermediate step to getting what you eventually want in exchange, you are operating on the assumption that the money will serve your intent rather than thwart it.

Harper’s broad approach to understanding the forces which influence wages is commendable.  I truly enjoyed Harper’s use of images throughout the book to complement his main points.  Here are a few of my favorites:

The Business Cycle

The eloquence of this graph captures the fluctuation of the economy as a force that is always present rather than a cycle that fluctuates around some sort of equilibrium, as the business cycle is often depicted.

Buying Power

What I particularly like about this graph is how it labels the section in between the citizens buying power before taxes, and the citizens buying power after taxes. The section is labeled: The Cost of Being Governed.  I find the language eye opening in a small way.  Most of the costs that we have in our life we try to find a way to reduce.  Increased productivity involves identifying better ways to do things and then changing our ways accordingly, freeing up more time to invest in other ways or for leisure in the process.  By framing the data in such a way, it suggests that governance has a specific role in the economy and leaves the hope that: if we can improve the ways in which we currently govern our society, we can reduce our necessity of this governance, freeing up more time to invest in other ways or for leisure across the society.  A very nice way to put it.

Propriety and Developing Countries

At one point they were referred to as the "third world."  As some considered this disrespectful, "developing countries" was suggested (though aren’t all countries developing?  and isn’t the problem just that, the countries being referred to are not developing?).  Some believe LDC (Least Developed Countries) is the new respectful standard.  Others equate such a metric to the "fourth world."  Doesn’t seem we’re moving forward here…

In Pursuit of Florida Parrot T-Shirts

Pietra Rivoli‘s Travels of a T-Shirt in the Global Economy is an excellent biography of an unexpected protagonist: her Florida Parrot T-Shirt. From analyzing the institution of slavery as a cotton subsidy to looking at the US used clothing market in East Africa, Rivoli takes a tastefully empirical look at what has led the cotton industry to thrive and exist as it does today.  NPR has even done a three-part audio series inspired by the book.

I think most commendable to her analysis is how she has mentioned that in all of her travels, and in all of her interviews, she did not meet a single bad person.  It suggests the solution to the many conflicts that arise out of all countries cotton subsidies must be much deeper than the everyday people making decisions about what and what not to purchase.

While the book does not offer any solutions to the many dilemmas faced in the global textile trade, it adds a remarkable amount of depth to an often two-dimensional debate.  Rivoli has mentioned one thing she sees as possibly hopeful for removing these engrained cotton handouts is an increase in non market distorting subsidies.  She defined these subsidies as when you pay people to go sit on the beach rather than pay them to produce an excess supply of something that will drive prices down.

While I would guess the idea of a non market distorting subsidy may be contested, it does raise an interesting question.  Ten years from now, might it be easier to push for the end to cotton subsidies if all of the cotton growers are working hard in their feilds, or if they are all off enjoying the beach?

On related issues, Russel Roberts writes on the peculiar relationship between Chinise textile quotas and the WTO.

Birds Eye Lesson in Land Reform

This is an impressive visual of the tragedy of the commons.  The interactive satellite photo compares  communal farmland to private farmland in Zimbabwe over the period of its land redistribution.  It’s significant to note is that this land reform only began around 2000, a few years ago.

And What is Even Worse

"Imagine an alternate world identical to ours save one techno-historical change: video games were invented and popularized before books."

In his book Everything Bad is Good for You, Steven Johnson raises many good questions about the way we perceive popular culture and emphasizes just how much more complex our passive existence would be today compared to just 50 years ago.  i.e. Pong never involved outsourcing to China.

For our next thought experiment, try to imagine an alternate world where the corporation was invented and popularized as an icon of tradition and nostalgia before the mom and pop shop.  What would your parents think!?

A Bundle of Instincts

"It was (and is) common to think that other animals are ruled by "instinct" whereas humans lost their instincts and are ruled by "reason", and that this is why we are so much more flexibly intelligent than other animals. William James took the opposite view. He argued that human behavior is more flexibly intelligent than that of other animals because we have more instincts than they do, not fewer."

Leda Cosmides & John Tooby offer more here: Evolutionary Psychology: A Primer.

Cognitive Knowledge Networks & Local Know-How

"It’s not who you know, it’s what who you know knows."  Or so suggest cognitive knowledge networks.  Noshir Contractor can tell you all about it.  Rob Curley can tell you all about who knows who knows in Lawrence, Kansas.

This adds a lot of challenges to the veracity involved in traditional borders, both in space and mind.  Watch these networks appear at CommonCensus, who is letting you map where you think you live, or marumushi, who is mapping social networks in flickr.

A crash course on spontaneous order may be appropriate for those kindergarten classes soon.

How to Improve Fair Trade: #9

Summary of Concerns About Current ‘Fair Trade’

The ‘fair trade’ movement is full of people that care about local communities and the global village.  It is also full of good intentions.  What concerns me is that intentions don’t always heed their desired result.

Currently, I am displeased with how much these principles of ‘fair trade’ favor special interests and hurt small businesses and low-income buyers.

These principles assume human nature is different if you are a producer or a buyer or a worker; yet often the workers, producers and buyers are the same people.  These current principles of ‘fair trade’ treat people like they change personalities throughout the day.  The public is considered accountable yet a worker is considered incompetent to look after herself.  If someone favors sustainable development and good working conditions they are assumed less likely to grant privileges to special interests.  If someone is a producer they are more likely to need assistance than a buyer.  And if someone is a worker (regardless of what they do because they should be provided a job) they have more rights than the person providing them work and all of the buyers who are just trying to make a living purchase.

After it is established that the same people behave differently and have different rights at different times of the day, all of the industries they work in, the products they create and trade relationships they form are considered to be homogenous.  It is then proposed that all of these relationships will function best if we are to constrict the diversity of their nature to a few chosen relationships.

It is very important that we revise the principles of the current ‘fair trade’ movement and make them more sound.  At the moment, they are a mess of contradictory claims that don’t even support the ends we are fighting for.

How to Improve Fair Trade: #8

8. All aspects of trade and production are open to public accountability

I am concerned that this requirement favors big business over small business.  In order to be prepared for public accountability a producer has to be very diligent and keep track of lots of different procedures and exchanges within their business.  If a producer is using resources to be accountable she is not using resources in other ways.  To divert resources to such tasks is a lot to ask of a small business and even more to ask of the large number of small informal businesses in the low-income countries.

When all aspects of trade are also subject to public accountability, the hardships on small businesses will be accentuated even more.  And as more resources are used on complying with accountability, the less resources are used in improving health and environmental conditions in personal lives and purchasing mobile phones or clothing.

How to Improve Fair Trade: #7

7. Equal employment opportunities are provided for all

This principle sounds good though I don’t understand how employment opportunities can just be provided.  A producer offers a job to someone when there is work to be done.  It would be silly if a small coffee farmer had to provide jobs to a bunch of CEOs when they are completely unnecessary to his workplace.  On top of this, many jobs are very specialized and require people with the requisite skill set, talent and information are spread amongst the diversity of all of the people in the global village. 

Does this mean that an NFL Football team should provide employment for Chinese and Polish to an equal extent that it provides employment for African Americans?  Should a feminist organization hire an equal number of men and women?  Should a small family business hire an equal number of people from outside of the family?  Should a business in San Francisco also provide opportunities for people who choose to live in New Mexico?  Should low-income producers provide work for high-income workers?  Should an organization like Global Exchange provide work for those who think the oil industry has been extremely beneficial to society to the same extent as those who think it has not?

It is important that people have an equal opportunity to try to get the available jobs, but one cannot just assume jobs will be provided to all.  It is unfair to ask producers to provide employment to people that don’t improve their business.

How to Improve Fair Trade: #6

6. Working conditions are healthy and safe

Once again, I agree with this principle, and I am concerned that it places more importance on the health and safety of the workplace than in people’s personal lives.  Not all of life is about work.

For example, if an employer is required to make an improvement to her factory, she has fewer resources to spend on her workers.  Her workers will now have fewer resources to improve the condition of where they live.  Often, in low-income areas there is very little access to clean water and the houses have dirt floors.  If the workers had more resources to use in their personal lives, they could improve the conditions around their house and also improve health and safety.

How to Improve Fair Trade: #5

5. Sustainable production techniques are encouraged

I am in agreement with this principle, and I am concerned that it limits the advancement toward a sustainable society.  By focusing on sustainable production one discounts the benefits that a higher standard of living can add to sustainability.  The benefits of a higher standard of living can be reached while only a limited number of sustainable production techniques are present.  And in general, people with a higher standard of living enjoy products that are produced in a more sustainable way.  Many sustainable technologies are still quite expensive to purchase, and buyers and producers have to make the decisions if these fit their personal budgets.

How to Improve Fair Trade: #4

4. Producers have access to financial and technical assistance

This principle also assumes that a producer’s rights are more important than a buyer’s rights.  This is not fair.  Many low-income buyers also find themselves in economically disadvantaged positions.

Furthermore, a person or a small group will have to receive a position of authority in order to decide who will receive financial and technical assistance.  Whoever is in this position will be the target of producers and special interests that wish to receive preferred status.  There is no reason to believe that these people will be any less targeted than the current politicians or that, over time, these interest groups wouldn’t find there way into these positions themselves to make what decisions served them best.

Also, I am having a hard time seeing the difference between this principle and the current subsidy system.  Subsidies are meant to help out producers in need and the current subsidy system has been overtaken by special interests, which has, in turn, raised the prices for local buyers and greatly disadvantaged low-income farmers abroad.