People Have Purposes; Markets Don’t

In a comment on my blog post on the GameStop controversy yesterday, Jonathan Seder wrote:

Remember – the purpose of the capital markets is to facilitate price discovery for equities, and to direct capital to the most productive uses. Passive investors are outsourcing that job to traders – individuals and pros – who gather information and try to identify pricing errors. (I think there’s an argument to be made that people with business expertise have some moral obligation [on top of the financial incentives] to play The Game rather than being passive investors.)

Jonathan’s first sentence is incorrect. He has confused, as many people do, one beneficial result of markets with their purpose. Markets don’t have purposes; people do. Markets come about as a result of people pursuing their purposes. When I buy shares or sell shares, my purpose is not to facilitate price discovery. My purpose is to buy shares or sell shares and, hopefully, make myself better off. Ditto the person or institution on the other side of the buy/sell order.

The distinction between purpose and results is not specific to capital markets. It applies to all markets. In pursuing our own self-interest in any market, we, buyers and sellers, drive the price to some level that informs other people. Let’s say, for example, that the demand for and supply of computer programmers leads to entry-level programmers making $80K a year, and that the demand for and supply of social workers leads to entry-level social workers making $45K a year. Those price signals are valuable information that can help guide decisions of undergrads who are willing to pay attention to them. But the purpose of those price signals is not to tell people what jobs they should train for. Those price signals don’t have a purpose. People have purposes. Price signals are inanimate.

Notice that throughout the paragraph I quote from Jonathan, he makes the same mistake of attributing purposes. He writes:

Passive investors are outsourcing that job to traders – individuals and pros – who gather information and try to identify pricing errors.

I’m a passive investor, but I’m not outsourcing that job to anyone. Those traders are taking on the job themselves and they are trying to identify pricing errors for the same reason I’m investing: to make money. I’m glad they’re doing it. But I’m not asking them to do it.

Jonathan goes even further, writing:

I think there’s an argument to be made that people with business expertise have some moral obligation [on top of the financial incentives] to play The Game rather than being passive investors.

Whence that comes that moral obligation? Simply because they have information and expertise, they should, for reasons not connected to financial incentives, play “The Game?” I don’t agree.

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KevinDC on Jakarta, Local Knowledge, Rules, and Marines

Regular EconLog reader KevinDC wrote me last week with some interesting content from Slate and his own insightful comments. He has given me permission to quote.

Kevin writes:

I came across a story in Slate I thought you might find interesting. The author describes how food delivery apps similar to UberEats or GrubHub work in Indonesia. From a certain naive point of view, these sorts of services could be seen as successful instance of an algorithmic, central planning model of food delivery. But the author points out that these systems can work due only to the ability of the drivers to bring their deep knowledge of specific local conditions, the quintessential Hayekian point about “particular circumstances of time and place.”

From Rida Qadri, “Delivery Platform Algorithms Don’t Work Without Drivers’ Deep Local Knowledge,” Slate, December 28, 2020:

To do their jobs, they must think every day about which routes have the most potholes and which traffic signals stay red the longest. Their mental maps of the city note what places have unfriendly security, where they might encounter violent traditional motorbike drivers, specific agreements they have to comply by [sic], friendly roadside restaurants that would let them rest. They must compensate for inaccurate geolocations caused by GPS signals blocked by nearby infrastructure.

Much has been written about the frictionless technology of ride-hail platforms celebrated by customers and technologists alike…Yet their elegance is powered by and relies on the human mediations of the drivers on the street. It is the local markets they claim to replace that have often furnished drivers with the knowledge of local physical and social constraints.

Kevin then points out that this caused him to recall “a similar observation by James C. Scott about how apparently successful planning depends on the ability of people to ignore the plans and regulations, and follow their own evolved rules instead.”

Scott wrote:

Workers have seized on the inadequacy of the rules to explain how things are actually run and have exploited it to their advantage. Thus, the taxi drivers of Paris have, when they were frustrated with the municipal authorities over fees or new regulations, resorted to what is known as a grave de zele. They would all, by agreement and on cue, suddenly begin to follow all the regulations in the code routier, and, as intended, this would bring traffic in Paris to a grinding halt. Knowing that traffic circulated in Paris only by a practiced and judicious disregard of many regulations, they could, merely by following the rules meticulously, bring it to a standstill. The English language version of this procedure is often known as a ‘work-to-rule’ strike. In an extended work-to-rule strike against the Caterpillar Corporation, workers reverted to following the inefficient procedures specified by engineers, knowing that it would cost the company valuable time and quality, rather than continuing the more expeditious practices they had long ago devised on the job. The actual work process in any office, on any construction site, or on any factory floor cannot be adequately explained by the rules, however elaborate, governing it; the work gets done only because of the effective informal understandings and improvisations outside those rules.

I (this is David R. Henderson speaking) remember when I first heard, in my teens, about a work-to-rule strike and thought “What’s the problem? Isn’t everybody supposed to be working by the rules?” It might not surprise you to learn that I grew up in a family run by a man (my father) who was a high-school principal. Someone, probably my mother, who, OMG, was so much looser with rules, explained to me why such a strike would be effective.

Back to Kevin. He writes:

These (and other examples) are bringing into focus something that I’ve noticed for a long time but never articulated. “Planning” is most able to appear successful in places where people are most free to ignore or work outside the plan. Delivery drivers aren’t successfully allocated by algorithms crunching all the “relevant data” – the drivers use their own local knowledge, unaccounted for by planners, to determine what the most efficient allocation of driving resources will be. A de jure “well regulated” taxi industry can appear to work efficiently, but only to the extent that the taxi drivers are de facto free to ignore regulations and act instead by their own evolved order. In countries that were dedicated to the idea of “planned economies,” life was most tolerable in the places where the local authorities tacitly approved (or at least tolerated) the existence of black markets operating in parallel to allocate resources outside the dictates of the planners. The less effectual planning is, the more successful planning appears.

This is even true (in my experience) of what appears one of the most “command and control” organizations you can think of – the US Military. (I was in the Marine Corps for nine years.) On the one hand, there are the official rules, regulations, general orders, and standard operating procedures written up by people sitting behind desks and printed up in the official manuals. And on the ground, there is how stuff “really gets done,” which varies from unit to unit. (This phenomenon was made fun of in the Terminal Lance webcomic, where Marines fresh out of training are quickly advised to forget everything they were taught: https://terminallance.com/terminal-lance-character/itb/) There was also an informal understanding that “regulation thumpers” who insisted that everything be done “by the numbers” according to the official rules should never be allowed to be in charge of anything – because they were prone to substitute official rules for evolved unit level practices, and nothing would ever get done properly.

Back to David R. Henderson:

One of the funnest and most illuminating projects I gave my students for the last 15 years I taught was to discuss I situation they had confronted in the military and say acting according to local knowledge worked (or didn’t work) or why centralized decisions didn’t work (or worked.) We all agreed that a lieutenant should not start a nuclear war, but there were some really good examples far below that level of importance where local knowledge worked well (and some where it worked badly.)

I’ve sometimes thought to collect these in a book.

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Tyler Interviews a Liar

Tyler Cowen’s latest “Conversations with Tyler” is an interview of former CIA Director John Brennan. If you read the whole interview, you see that Tyler has done due diligence by reading background material on Brennan.

Unfortunately, Tyler doesn’t ask him a thing about Brennan’s lying to Congress about the fact that his CIA staff, at his behest, spied on Senator Feinstein and other employees of her Senate Intelligence Committee. Conor Friedersdorf lays it out in “A Brief History of the CIA’s Unpunished Spying on the Senate,” The Atlantic, December 23, 2014.

A key paragraph from Friedersdorf’s 2014 article:

CIA Director John Brennan denied the charge. “Nothing could be further from the truth,” he said. “We wouldn’t do that. That’s just beyond the scope of reason in terms of what we’d do.” It would be months before his denial was publicly proved false. “An internal investigation by the C.I.A. has found that its officers penetrated a computer network used by the Senate Intelligence Committee in preparing its damning report on the C.I.A.’s detention and interrogation program,” The New York Times reported. “The report by the agency’s inspector general also found that C.I.A. officers read the emails of the Senate investigators and sent a criminal referral to the Justice Department based on false information.”

Tyler Cowen has written a lot about what he calls “state capacity libertarianism,” which he favors. In this post, he lists 11 propositions about state capacity libertarianism. None of the 11 seems to involve holding government officials accountable for mistakes and lies. But I would think that a state capacity libertarian would see that as important.

Apparently not, at least from its main proponent.

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The Sense in Which I Don’t Trust the Media

I ignore the news, in part, because I deem it unreliable.  That’s right, “I don’t trust the media.”  But what exactly do I mean by this seemingly conspiratorial statement?

All things considered, when I hear the media report on direct observations, I believe them.  If they say rioting is happening in DC, I am highly confident that rioting is happening in DC.  If they quote a politician, I am highly confident that the politician said the quote.  If they say that a person was convicted of a specific crime, I believe that the person was indeed convicted.

But my trust largely ends there.  When the media makes claims about any of the following, I habitually roll my eyes.

1. Causation. I distrust media claims about causation – about claims like “X caused event Y” as well as “Event Y caused Z.”  If the media says a politician won an election, I believe them.  When they try to tell me why the politician won, however, I scoff.  If they try to tell me what will happen as a result of the politicians’ victory, I scoff again.  Why?  Because causation is notoriously difficult to untangle, and few journalists have the slightest training in causal inference.  (They are however masters of hyperbole).

2. Meaning. I distrust media claims about what events mean – about claims like “X shows Y” or “X is part of broader trend Z.”  Why?  Because putting any particular event in context requires long-term statistical reasoning, and few journalists have more than mediocre training in statistics.  So if journalists claim that a notorious crime illustrates a general pattern about crime, I skeptically shrug.

3. Importance.  Whenever the media cover a story, there’s a subtext.  And the subtext is: This is important! The goes goes when the media ignores a story.  The subtext is: This is not important! Even if I knew nothing about the world, I would wonder, “What qualifies these people to adjudicate events’ importance?”  And since I do know a great deal about the world, I am convinced that the media’s sense of importance is radically defective.  These are the kind of people who would rather cover an insensitive tweet than Uighur concentration camps.  They would rather report a fatality-free nuclear accident than the vastly greater health damage of coal.  They would rather investigate the latest terrorist attack than discuss the global murder rate.  These are not isolated shortcomings.  The media’s main function is to distort viewers’ priorities.

4. Politics. Even on utterly apolitical issues, I consider the media deeply unreliable on causation, meaning, and importance.  Once causation, meaning, and importance become political, however, I deem it absurdly, insultingly unreliable.  Why?  Most obviously, because of the media’s overwhelming left-wing bias.  You can tell simply by reading the headlines; diction alone is a dead giveaway.  Less obviously, because of the media’s unthinking nationalism.  Despite their cosmopolitan pretensions, even very left-wing journalists are nationalists at heart.  That’s why a minor terrorist attack against fellow citizens gets a hundred times as much attention as mass murder of foreigners.  That’s why token cuts in domestic welfare programs outrage the media a hundred times as much as massive cuts in the admission of refugees.  When critics attack the media as “globalist,” it’s a case of 99% nationalists lashing out at 90% nationalists.

 

Personally, I should add, journalists almost always treat me very well.  When they interview me, they’re not just consistently fair and respectful; they also accurately report my positions.  What gives?  Much of the reason must be self-selection: Journalists who interview me tend to be favorably disposed.  A secondary reason, though, is that journalistic vices are often a response to consumer demand.  On some level, most journalists know that plane crashes are grossly over-covered; but alas, “If it bleeds, it leads.”  In a one-on-one conversation, though, the media is more thoughtful and open-minded than their output suggests.  Another possibility, admittedly, is that when you interview someone as averse to Social Desirability Bias as myself, you can get a good story without bending the truth…

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Kuznicki on Liberty

He had me at “hat.”

We can attempt to extrapolate from what we know, but that is very difficult. When we attempt to predict advances that have not yet been made, like the warp drive, that invites disaster. But it’s very tempting to try to do so. The inability of the mind to foresee its own advance is one of the reasons the future will always surprise us.

The other reason is that not all tastes, values, and desires of individual human beings are accessible even to them. That sounds very weird if it’s an unfamiliar concept to you. But I will give you an example that I find especially dramatic. Consider your own face. You probably know things about your face that your own spouse does not know. You probably have very considered opinions about what kind of eyewear looks better or worse, what kind of hat or cosmetics you favor, or what kind of shaving products you prefer. All these things are known to you, but only partially. Sometimes you walk into a store and see a hat that you’ve never seen before and say, “This is perfect! Hey, I did not know that, but this is the one!” And it is this inaccessibility of consumer tastes, values, and preferences that means economic planning is always impossible to do in advance when you want to try to plan for the entire society.

This is from Jason Kuznicki, “The Future History of Liberty,” Cato’s Letter, Fall 2018, Vol. 16, No. 4.

During my staycation, I’m catching up on things in my pile that had gone unread. The whole article is excellent. Kuznicki’s statement up front about the book that did a great deal to make him a libertarian is nicely surprising.

When he used the example of the hat, it immediately worked for me. Not that I’m a hat person that much, although when I play pickle ball I always wear a cap. Rather, I will see a shirt that maybe no one thought I would like–and I love it. My wife is very good at ascertaining my tastes. But even some shirts are ones that she wouldn’t have thought of.

Although truth be told, she hit a home run with her Father’s Day present, a T-shirt that says on the front:

Surely not EVERYONE was Kung-Fu Fighting.

Kuznicki’s piece, especially the quote above, is a nice application of Hayek’s “The Use of Knowledge in Society,” Michael Polanyi’s The Tacit Dimension, and my 7th Pillar of Economic Wisdom.

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