The main idea of this book is to review history of development of economic thought after WWII and attempt to provide guidance for future development. The period covered by this book was period when Marxist ideas of superiority of central planning, so popular earlier and actually implemented in many countries at the cost of hundreds of millions of deaths, proved to be spectacular failure, while ideas of relatively free markets proved to be not less spectacular success. However authors’ ideas are far from unequivocal support for the free market. They rather believe that free market is susceptible to failure and requires a wise guidance of somebody outside and above its trivialities.
Introduction: Terms of Service
Here authors discuss their intentions in writing this book and it comes down to providing a guide to “Terms of Services” for the world we live in, the word saturated with multitude of markets.
1 Why People Love Markets: R. A. Radford’s Stiff Upper Lip and the Economic Organization of POW Camps
This is tory of spontaneous development of primitive market in POW camps in Germany and Japan where inmates exchanged their rations and everything else they could use. The point here is that even in such conditions market function actually saved lives by automatically allocating resources to the individuals who needed these resources most, consequently improving effective use of these resources. This analysis is very powerful because various camps had various rules allowing markets function or forbidding it. The result was higher level of survival in camps with functioning market.
- The Scientific Aspirations of Economists, and Why They Matter: How Economics Came to Rule the World
This is about mathematization of economics in the years after WWII. Authors see it as continuation of Pareto work and intermixes it with general mathematization of strategy via theory of games at RAND. Authors consider Paul Samuelson with his General Equilibrium to be the most important economist of this period. They also mention Ken Arrow and his mathematical prove of Equilibrium existence theorem. However Arrow’s theorem required postulation of a number of highly unrealistic assumptions that actually made it all into abstract play with no practical meaning whatsoever. Authors briefly discuss input of Robert Solow with his various grades of capital, Gary Becker with his human capital, and Josef Stiglitz with his prove of ability of inconvenient reality to destroy Equilibrium, rending them model useless.
- How One Bad Lemon Ruins the Market: That’s for Me to Know and for You to Find Out (But Only When It’s Too Late)
This chapter is about the role of information disparity between buyer and seller also know as Market for Lemons thanks to George Akerlof’s article. It discusses application of these ideas in E-commerce, specifically E-bay operations. At the end of chapter authors conclude that information disparity is unavoidable as well as existence of individuals happily applying it to unethical uses.
- The Power of Signals in a World of Cheap Talk: Face Tattoos and Other Signs of Hidden Qualities
This chapter is about power of signals uses an interesting story about gang tattoos serving as powerful signal of belonging that capable completely define individual’s live and death. After that authors review typical market signaling methods with special attention to mixed signals and cost of signal as method to support its validity.
- Building an Auction for Everything: The Tale of the Roller-Skating Economist
This is about auction theories that become very popular late in XX century. It reviews a number of various types of auctions, their advantages and disadvantages.
- The Economics of Platforms: Is That a Market in Your Pocket or Are You Just Happy to See Me?
This is about the old economic notion of platform that recently become highly popular due to Internet with its preponderance of platform as the most effective form of monopoly in contemporary world. It discusses pre-internet platform of credit cards and theory of two-sided markets and role of platform as necessary intermediary between sides developed by Jean Tirole.
- Markets Without Prices: How to Find a Prom Date in Seventeen Easy Steps
This chapter is about the huge market, which has a lot bigger role in human live than anything else: market where voluntary exchange of goods and services occurs without intermediate use of money. It includes dating, all kinds of interactions between kin and kith, and charity. Authors review applications of newly developed algorithms for matching of everything and everybody from school dance couple to doctorate students assignments, to school choices. This is based on work of market designer Al Roth.
- Letting Markets Work: How a Hardcore Socialist Learned to Stop Worrying and Love the Market
This is kind of extension of the previous chapter with a small quirk about how reality forced even hard core socialists, dedicated to non-monetary work in capitalist society, accept necessity of market driven solution if they want to achieve positive results. Examples reviewed here are from simple school problem of lack of enough hooks for overcoats that could be resolved by assigning price, to distribution of free food, which becomes much more effective with quasi monetary system. It also includes retelling of Al Roth’s story about kidney exchange market. Finally it looks at the new Internet based markets for sharing such as Uber and Airbnb.
- How Markets Shape Us: The Making of King Rat
The final chapter is about negatives of market that makes human selfish and unethical in search of winning in competition.
MY TAKE ON IT:
It is a nice review of history of economic thought, but I think it is highly deficient because it completely ignores a very serious branch of economics represented by Ludwig von Mises who completely rejected the very idea of use of mathematics in economics because he saw it as the science of human actions, which are unpredictable and unquantifiable. In this view equilibrium is not possible because human wishes are tend to change every second, making any idea of aggregate demand ridiculous on its face. In this view money is just one of many intermediate goods necessary to achieve final result of satisfying human wants. Another very important and missing part of economic thought is Friedrich Hayek’s idea of markets as process of use of distributed information to satisfy human wants versus central planning as use of concentrated and necessary heavily curtailed information to fit information processing ability of a few individuals at the top and consequently incapable to satisfy human wants or even reasonably well evaluate them. The final part of the book about negative consequences of markets that makes people selfish and unethical authors somehow forget or just not capable to understand that alternative to markets (voluntary exchange) is involuntary exchange that is robbery either by unorganized gangs or by organized government. In either case the idea that robbers either as couple armed guys on dark street or highly refined and well educated members of central planning committee, would be unselfish or ethical sounds to me as highly implausible.
The main idea of this book is to demonstrate a number of tricks used to misrepresent data in order to lead reader to preordained conclusions beneficial to data presenter. In short it is a nice guide to methods of creating “facts” and “proves” where there are none or spin real facts to such extend that they become irrelevant.
Introduction: Thinking, Critically
The brief introduction promotes the idea that users should not blindly trust any pseudo scientific ideas supported by graphs and numbers, but rather critically analyze what these data really show.
PART ONE: EVALUATING NUMBERS
The first step in this review is the test on plausibility. The sample of impossibility: something is down by 200%. Obviously nothing could be down by more than 100% at which point it becomes 0.
Fun with Averages
This is about typical misuse of Average vs. mean (same as average) vs. median (50% above/below) vs. mode (most frequent – pick of distribution). There is very nice example of company salary / bonus for owners income presentation manipulation to convey different points to different audiences.
This is about the use of graph with typical manipulation reviewed such as: Unlabeled Axes, Truncated vertical axis, Discontinuity of Axes, Improper scale of Axes, Double Y-axis with inadequate scales.
Hijinks with How Numbers Are Reported
This is about technics for misleading numerical data presentation such as: use of cumulative data to hide changes with nice example of cumulative sales data to hide drop in sales, plotting on the same graph unrelated data to imply correlation where there is none, use of deceptive illustrations and extrapolations with hilarious example of extrapolation decrease in coffee temperature to absolute 0, variation in data precision with nice example of manipulating birth data to prove point, and final trick – special subdividing with nice example of manipulation of statistics of heart disease death by subdividing them into categories in order to move another type of disease to the first place as cause of death.
How Numbers Are Collected
This is about manipulation of data collection in order to achieve preordained results such as: sampling biases, Participation Bias, Reporting Bias, Lack of standardization, Measurement error, and inclusion of unverifiable data.
This is a nice analysis of use of probabilities. It divides this use into classic probability based on symmetry, frequency probability based on known outcome, and subjective probability based on opinion (Bayesian probability). After that author briefly goes into the basics of statistics with probably most important point being that conditional probabilities are not invertible meaning that if probability of B is higher after A occurred, it does not mean that occurrence of B does not increase probability of A. Very good example number of car incidents at 7am vs. 7pm.
PART TINO: EVALUATING WORDS
How Do We Know?
This is a small chapter on veracity of quotations and expert opinions. The key phrase here is “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so”.
This is about identifying truthfulness of witnesses and real knowledge of experts. Author somewhat support trust into licensed experts, degreed experts, governmental experts, experts certified by prizes, authoritative publications and similar establishment supported validations. However he also provides some meaningful advice such as: True expertise is always narrow, Check website domains and links to find out who is really behind catchy name, Check for time relevance of websites, Take into account institutional bias.
Overlooked, Undervalued Alternative Explanations
When evaluation claims, take into account alternative from suggested reasons for factual events. Exclude non-provable and therefor meaningless explanations: like “Aliens did it”. For research result check existence and validity of control group, sample sizes, selection criteria, and overall statistical validity of claims.
This is about misinformation packaged to look like a fact. Author provides examples of step-by-step building a misinformation case based on accumulation small plausible, but not necessarily correct statements. One of very popular misleading technics providing facts without link to big picture something like “double number of hurricanes in area A during last year means huge increase in X” without mentioning that previous year there were 1/10 of average number of last 100 years, meaning that X is not changing or maybe even decreasing. Another very nice technic of persuasion is to provide a number of weakly related correct facts in congestion with false statement one wants to promote. Here is a nice example for selling bottled water:
PART THREE: EVALUATING THE WORLD
How Science Works
This is a nice small presentation of formal methods of deduction and induction.
Here author discusses sample limitation leading to illusory correlation, framing probabilities and risks, and believe perseverance when contradictory evidence is heavily discounted. As example author provide story about link between autism and vaccines.
Knowing What You Don’t Know
This is a brief discussion of 2X2 Known / unknown matrix popularized by Rumsfeld with stress on need to minimize unknown/unknown, which is the most dangerous form of ignorance.
Bayesian Thinking in Science and in Court Four Case Studies
This is another brief discussion this time on Bayesian thinking: conditional probabilities.
Four Case Studies
Here author provides 4 case studies to demonstrate difficulties of decision-making and supporting information selection in contemporary world overwhelmed with various data often presented in such way that it is very difficult to obtain valid representation of reality. The cases are:
- Author dog’s fatal illness and related decision making process
- Reality of moon landing
- David Blaine’s presentations of non-breathing or ice cube frizzing
- Pattern recognition in in periodic table and use of statistics in Standard Model of Particle Physics
Conclusion: Discovering Your Own
The conclusion is the call to use one’s own intellectual facilities to recognize misleading information and data presentation because the world is filled with agenda currying presentations and lack of vigilance would lead to costly mistakes in decision making.
MY TAKE ON IT:
In my opinion it is a very valuable book, even if for me personally there is very little new in this presentation. Having spent first 37 years of my live in Soviet Union, that really had Orwellian ministries of truth and propaganda was considered a necessary tool of mass education, I learned to read between lines, decode graphs and tables to identify truthful information that these graphs and tables where designed to hide. However such training was not available for everybody so lots of people in western world get lost without such skills and often buy into all kinds of misrepresentations causing them significant harm in many areas from dietary behavior negatively impacting their health to political behavior negatively impacting their material well-being. Paradoxically author of this book on more than one occasion demonstrate his leftist leaning, clearly demonstrating how it impacts his judgment in presenting examples of misleading.
The main idea here is that growing inequality is not really such a big problem and it is overstated anyway. Moreover inequality is the engine behind the risk taking, innovation, and economic growth would not happen without it. The usual ideas of leftists that incentives do not matter and success is unearned, but rather is matter of luck are just plainly incorrect. Some other myths, which are not true, are:
- Economy has slowed down because there are little opportunities for investment;
- Middle class is hurt by progress;
- Class mobility has declined
The real solutions are change in immigration laws to promote high skill immigration, decrease marginal corporate tax, and apply full accounting for redistribution and government services that would show quite different picture of inequality than the one promoted by leftists.
Here author refers to his previous book “Unintended Consequences” where he expressed concern that massive blame of the free enterprise system for crisis of 2008 would lead to slower than necessary growth. The point was that high risk / high reward economy is more productive and more efficient than low-risk / low reward one. His point is that Keynesian interference into economy could not create growth because it stifles innovation and discourage savings by inflating money supply. This book is designed to demonstrate power of incentives in moving economy ahead via innovation and risk taking that would not occur in environment of heavy redistribution.
Part I: THE WORLD AS WE FIND IT
Chapter 1. The Causes of Growing Inequality
This chapter confirms growth of inequality with a nice graph:
Here are reasons:
- Globalization: Larger economy rewards stars more even if it decreases cost to consumers: CEO of company with 500000 employees receiving 0.001% of sales as compensations would get millions per year, while CEO of company with 5 employees would starve at this rate of compensation.
- IT disproportionally benefits most productive people and decrease needs for capital. Here is the graph for this:
- Compounding success benefits most productive individuals, by attracting more investment in their intangibles such as knowledge and experience:
- Increased risk taking increases inequality because even if increasing majority of new enterprises fails, the few who succeed would succeed with bigger returns, sometime in billions.
Chapter 2.The Reasons for Slowing Wage Growth
The same dynamics have negative effects on average wage growth:
- Globalization brings competition from poor countries where similar talent costs much cheaper.
- IT and low skill immigration directly restrict wage growth at the bottom and in the middle.
- Trade deficit strains economic capacity and consequently reduces wages even further.
Overall trend for commodity labor is to equalize over open global markets and that is what happening: highly paid American labor wages stagnate or even going down via inflation, while developing countries labor wages such as China are growing dramatically.
Part II: DEBUNKING MYTHS: Mitigating Inequality Is Not the Solution
Chapter 3.The Myth That Incentives Don’t Matter
Here author makes a point that growing literature about psychological drivers of risk taking and achieving success are stronger than pecuniary rewards do not really consistent with real live experience that demonstrates that without material rewards innovation and risk taking disappear, even if it does not happen immediately. Movement in both directions has compounding effect so results become obvious only over time. Correspondingly redistribution does not stop innovation right away when most established innovators would continue do what they like, but it would decrease numbers of individuals moving into these activities. Author also points out that high payoff of success does not impede reality that the most benefits are eventually going to consumers.
Chapter 4. The Myth That Success Is Largely Unearned
This is the challenge to idea that top earners not really earn their compensation, but rather get it by using their positioning in the business structure: something like CEOs get their compensation defined not by investors but by other CEOs sitting on the board of their company. In exchange they return the favor by voting for high compensation as directors on the board of some other company. To contradict this author presents study that income of CEO did not really grew as proportion of their companies’ income, it is that companies become much bigger. Similarly money managers’ compensation directly related to volume of funds they manage and these volumes increased dramatically. Another point author makes is that CEO job is highly risky, difficult to get, and is usually one time shot after long carrier of acquiring necessary knowledge and experience, so compensation should cover this risk. Overall high-risk high reward pays off for companies and here are some graphs to prove it:
Chapter 5. The Myth That Investment Opportunities Are in Short Supply
This is about high corporate profits and unwillingness of corporations to invest them back into economy. The inference Keynesians make from this is that government should confiscate unused capital and redistribute either to poor who would increase consumption or just use for more government spending. Author makes important point that in reality investments do not wait for demand, they create demand by providing more and new goods and services that customers did not know they want. The amount of examples is infinite from cars to smart phones. The real constrain is government interference with regulations, confiscations, and limitation of rewards that make such investments not worth trying. Author also looks at government interference into banking business where imposed demands on landing to unqualified borrowers led to crisis. Finally author criticizes an idea of starting economy up via infrastructure investment by referring to Japan huge spending over decades with no productivity growth to show for it.
Chapter 6. The Myth That Progress Hollows Out the Middle Class
Here author reviews and rejects idea that progress hollows out middle class. Here is the graph showing relatively small shift in income distribution over decades:
Finally author discusses cultural changes dependency on economic changes such as increase in women participation in labor had decreased value of marriage for them or dramatic increase in college education leading to inflation in value of college degrees.
Chapter 7. Myth That Mobility Has Declined
The final myth author challenges is decline in mobility. He does it by comparing US mobility with Denmark and finding no significant difference except at the very bottom, where Americans tend to stick relatively more, except for whites who have the same rates as in Denmark:
Part III: THE WAY FORWARD
Chapter 8. Our Moral Obligation to Help Those Less Fortunate
This is about poverty with usual inference that poor should be helped, but the problem is that help decreases incentives to work, acquire skills, and get out of poverty. The interesting point is that with all this help in terms of access to goods and services American poor actually are rich by international standards. However psychologically it does not help because people live by local standards and to be poor is devastating, even if American poor are fat, have cars, air conditioners, and unlimited access to entertainment and communications.
Chapter 9. The Limitations of Education
This is somewhat non-traditional take on education that starts with denial of inferiority of American schools to higher-scoring international schools. It is actually not that difficult to prove. One just has to be a little bit politically incorrect and look at test scores European-Americans separately and see that they are not worse than for children in European schools. The same applies to Asian Americans. After author looks at charter schools, other attempts to improve education, and comes to somewhat trivial conclusion that the best way to improve education is to filter out bad teachers and promote the good ones. He also makes a point of denying direct positive impact of increased levels of education on economic performance of the country.
Chapter 10. Real Solutions
Here author provides solutions for the problem of slowing economic growth based on American traditional openness as society and support for risk taking to achieve highly rewarding results:
- High-skill immigration should substitute low skill illegal and family based immigration
- Lower marginal corporate tax rates
- Allocation of all government expenses to households instead of middle-class tax cuts. Here author provide a table to demonstrate redistribution by counting in government services and taxes:
MY TAKE ON IT:
There are a lot of reasonable points here especially about incomplete accounting of transfers and government services, importance of incentives, dependency of investment opportunities on preponderance of societal attitudes, and needs to change nature of immigration. However some of this in my opinion is not justified such as ignoring prevalence of self-dealing by upper classes in control of other people’s money. Whether it is CEO that receives ridiculously huge income in exchange for providing ridiculously huge income to another CEO when voting as a Board Director on compensation, or it is politician in control of public resources using these resources and government power to create foundation for future multimillion income as lobbyist, it is the human nature and expect these people to link their income to their productivity would be unreasonable. I think that inequality is a very important issue not because it hurts economy, but because it creates foundation for all kind of leftist demagogues to undermine or even explode structure of society and therefore it should be minimized as much as possible. However this limitation should be achieved not by decreasing incentives, but rather by making them clearly linked to results of individual actions so negative results should lead to negative returns. When in addition to CEO making millions as 0.001% of company profits we learn about CEO loosing millions as 0.001% of company loses them issue of inequality would go away. I guess the best way is when owners run companies. In the case of huge public corporation when it is not an option I would like to see CEO based compensation limited to some multiplier of average salary of company employees with 100% profits/losses transferred to owners who then may or may not decide provide additional compensation to CEO as they wish. I doubt that this way anybody would complain about inequality, even if total compensation goes in billions.
- Compounding success benefits most productive individuals, by attracting more investment in their intangibles such as knowledge and experience:
Luckily author summarized the main idea of this book in succinct list of eight interrelated principles:
- Watched people are nice people.
- Religion is more in the situation than in the person.
- Hell is stronger than heaven.
- Trust people who trust in God.
- Religious actions speak louder than words.
- Unworshipped Gods are impotent Cods.
- Big Gods for Big Groups.
- Religious groups cooperate in order to compete.
Chapter 1 Religious Evolution
It starts with brief review of Mormon’s history as real live well-documented example of creation of the new and highly viable religion. Then author discusses necessity of religion as glue that allow to keep together big groups of unrelated people when initial sources of cooperation evolutionary developed such as kin selection are not sufficient anymore to protect group from free riding and selfish, group detrimental behavior. For some reason author considers development of Big Gods in agricultural societies as puzzle to which he outlines solution: prosocial character of religions supported evolutionary fitness of big groups as whole and allowed for practically unlimited scalability of such groups.
Chapter 2 Supernatural Watchers
This chapter starts with specific human ability to use mind theory to predict actions of other people and human tendency to assign agency to just about any conceivable entity or object. This creates very solid foundation for accepting god(s) as reality, even if individual has no direct contact with them. A very interesting point here is that god(s) are normally treated as personalized entities with all limitations typical for humans, despite theological notions of omniscience and unlimited power. This idea confirmed by MRI analysis and other research that demonstrated activation of parts of brain related to mind theory when individuals think or discuss god. However even if circuits in brain used for gods and for other humans are the same, people perceive gods as continuously watching entities hiding from which is just impossible. Author describes quite interesting research demonstrating that gods perceived to pay much more attention to moral and other violations of norms than to neutral actions and behavior.
Chapter 3 Pressure from Above
This chapter presents an interesting approach by characterizing religion as presented more in situation than in person. Basically it means that human actions occur under influence of multitude of forces and true believes are only one of them. Consequently the behavior consistent with believes is highly dependent on circumstances of the moment. Author provides description of a number of experiments confirming this idea. Author also reviews mechanics of Supernatural monitoring with Carrots and Sticks used to achieve conformity. Typically sticks are by far more powerful factor.
Chapter 4 In Big Gods We Trust
This chapter explores connection between prosocial religions and trust with true believe being very significant factor in generating trust in individual honesty and integrity without which long distance trade and many other business transactions becoming if not impossible outright, then very complex and cumbersome. This explains to significant part distrust of atheists comparatively to believers in other gods, even if these gods are hostile.
Chapter 5 Freethinkers as Freeriders
This chapter is looking at contemporary situation when powerful governments, which take consistently increasing role in monitoring behavior and enforcing norms, challenge gods. There is also dependency here on levels of development of a country when more developed countries have relatively uncorrupted governments assuring that game is playing by the rules, while in underdeveloped countries governments are thoroughly corrupted leaving people only hope on gods for interventions to correct the wrongs.
Chapter 6 True Believers
This chapter looks at critical requirement to separate true believers from pretenders. Since true believers enjoy trust from other people who convinced that gods enforce good behavior, they have non-trivial opportunities for benefiting from deception. Author reviews solution for this problem: high cost of proving one’s true believes. This is achieved by high level of burdens from tithe to self-mutilation that true believers voluntary subject themselves to. This cost also facilitates feeling of belonging to chosen group that is strongly reinforced by music, dance, and overall pageantry of religious ceremonies.
Chapter 7 Gods for Big Groups
This is a bit of historical review starting with the first known large-scale religious artifact at Gobekli Tepe created by hunter-gatherers even before mass transition to agriculture. Author believes that it is evidence that big gods are not a product of agriculture, but rather a contributing factor to such transition. The discussion here also moves to specifics and differences between Gods of small groups and Big Gods of big groups. This difference is mostly in the nature of religious concerns, with Big Gods much more concerned about group cohesiveness and conditioning of individual to promote group interest first, rather than help individual. Correspondingly rituals become more group oriented and standardized and punishment more strict. Author also reviews history of supernatural policing of moral behavior that becomes a serious concern in big groups.
Chapter 8 The Gods of Cooperation and Competition
This chapter looks at religion as a tool to increase group evolutionary fitness by creating a moral community, supporting military effort in intergroup competition, maintain internal stability, and assure group growth by promoting high levels of fertility and attracting converts.
Chapter 9 From Religious Cooperation to Religious Conflict
This is about another side of religion – religious conflicts. Author sees it as a very complex process in which on one-side religions engender conflict because of their very nature to divide true believers from wrong believers, which is practically inseparable from conflict. On other hand they often promote tolerance and call to avoiding violent conflict. The final point in this chapter is that religion has inherently sacred views that could not possibly be negotiable and therefore contain seeds of conflict that due to the very fact of unacceptability of “false” believes could last practically forever.
Chapter 10 Cooperation without God
The final chapter is about possibility for societies do well without religion when monitoring and punishing transgressions roles are taken over by government that had become much more powerful with development of contemporary technology and bureaucracy. It now can be successful in controlling people in areas that governments of the past could not. At the end author analyzes various characteristics of atheism and concludes that, with prosperity typically intertwined with secularization of society, such society has better claim on future dominance. However they have demographic disadvantage since people in such secular societies care most about their own happiness even at the expense of creating and raising next generation, so they are typically in serious demographic decline, which opens vacuum for more religious group in societies to fill and take society as whole over.
MY TAKE ON IT:
I think that religions are a very valid and necessary tool for making society into one unified group capable to succeed in fight with another groups for resources in intergroup competition. It is also absolutely necessary and very effective tool for achieving internal cohesion in societies that depend on sacrificing some people’s live to provide for others being it military aristocracy, intellectual elite, or industrial management. However when society and technology move into situation when such sacrifices are not needed any more due to technology and knowledge that allow automate all processes not enjoyable for humans, proper behavior outside of established sphere of privacy can be automatically monitored, and military conquest becomes impossible due to weapons of mass annihilation, the religions themselves become redundant and are going to expire. As to demographic weakness of secular societies, the process of creating and rising the next generation in sufficient numbers could and probably will be based on joy and satisfaction that many people can obtain from this process, especially if many negative problems related to it: medical, financial, opportunities costs, and such would become things of the past.