Saturday, July 30, 2016

A Little Logic Puzzle

Consider the following syllogism.

Premise 1: All living things need water.
Premise 2: Roses need water.
Therefore: Roses are living things.

Is the conclusion logically valid or invalid? Try to answer before reading on.

About 70 percent of university students who have been given this problem think that the conclusion is valid. They were wrong, probably by confusing truth and logical validity. The syllogism's form is as follows.

Premise 1: All S is P.
Premise 2: Q is P.
Therefore: Q is S.

This is more likely judged as invalid, since true/false doesn't interfere.

The following with the same form is more obviously invalid.

Premise 1: All cows breathe air.
Premise 2: My cat breathes air.
Therefore: My cat is a cow.

If the conclusion and Premise 2 of any syllogism above were reversed, it would be logically valid. Of course, 'my cat is a cow' would remain false.

Wednesday, July 27, 2016

Lotto Probabilities

Is the probability of drawing six consecutive lotto numbers, e.g. the first set following, different than the probability of getting six random numbers, e.g. the second set following?
     5, 6, 7, 8, 9, 10          1, 13, 15, 29, 49, 32

They are equal, but many people believe the second set is more likely to be drawn. I guess they believe that because random numbers are more likely to be drawn. Indeed, that is true in aggregate. But to impute that to one combination commits the fallacy of division. Suppose  there are Z possible combinations and N is the number of consecutive combinations. Then the probability of drawing one consecutive combination is (1/N) * (N/Z) = 1/Z. The probability of drawing one non-consecutive combination is (1/(Z-N)) * ((Z-N)/Z) = 1/Z.

Saturday, July 23, 2016

Constructivist and Ecological Rationality #5

A market in which lenders can measure and monitor each borrower's risk will charge more/less for more/less risk. Lenders will also deny loans to risks that are too high. Pooling customers into different classes -- short-term loans to businesses, longer-term loans to businesses, loans to states/municipalities for various purposes, car loans, mortgages, loans for college, and so on -- may be the best practical market solution to attenuate the problems of adverse selection and asymmetric information. "The non-existence of certain markets that are not self-sustainable, or their failure to serve all potential customers, or that otherwise encounter incentive compatibility problems that fail to align prices with individual costs and benefits, is evidence of market success, not market failure" (p. 97, my bold).

Wednesday, July 20, 2016

Capitalism-Socialism Debate

At FreedomFest2016 there was a debate about capitalism versus socialism. The debaters were John Mackey for capitalism and John Roemer for socialism. Mackey is the CEO and co-founder of Whole Foods Markets (link). Roemer is a Marxist professor of political science and economics at Yale University (link).

Mackey argued that capitalism offers the profit incentive that motivates entrepreneurs to build businesses and create new products. Roemer argued for redistribution of income from people with high incomes to people with low incomes via taxes, also wealth from rich to poor via inheritance (or estate) taxes. He argued that high taxes would not demotivate high-achieving entrepreneurs, because such people are self-driven to accomplish their goals for reasons beyond only money. He may have given Steve Jobs as an example; I can’t recall. He seemed to approve of having competitive markets -- he has advocated a species of market socialism (link).    

He said nothing about redistribution altering the incentives for other people – most people – who aren’t entrepreneurs, self-driven, and ambitious for other than only money. If they don’t have the need to earn a living, work hard to get a raise or promotion or even keep their jobs, and yet receive a comfortable income regardless of how little they produce, how would that affect the level of production in their society?

He said nothing about redistribution altering opportunities for other people. Money taken by the government as taxes from a profitable business is money the business can’t use to produce more and hire more people.

Professor Roemer probably believes his intentions are glorious, but the road to serfdom and misery is paved with the unintended consequences of ideas like his. Venezuela is a great example.

Sunday, July 17, 2016

Constructivist and Ecological Rationality #4

It is commonly believed that monopoly means one supplier and such a supplier will raise prices and gouge customers.  Vernon Smith used what happened after airline deregulation to show suppliers not acting that way.  “With low entry and exits cost, passenger rates on any route were highly competitive [ ], even if the numbers serving those routes were very small. “Small” includes one. Yes, a route served by only one airline might well charge little above a competitive price; otherwise, the airline would soon find itself facing other airlines operating on the same route. Hence if the route passenger demand were such that it was a “natural monopoly,” with only one firm needed to serve the route at lowest cost, this implied not a monopoly price, but a price that would limit the entry of a second competitor. There is no way that any single airline thinking that it had a monopoly on a particular route could charge more than the opportunity cost of a second entrant. Such a price is a competitive equilibrium price: The market clears with one firm scheduling, say, one flight a day to serve all those willing to pay at least the clearing price, with no firm finding it profitable to schedule a second flight” (p. 86-7).  

He adds that neoclassical economics had relied on the mistaken notion that any competitive equilibrium requires a large number of buyers and sellers actively serving a market, rather than on the opportunity costs of potential suppliers. This is another example of the significance of knowing what is not (an absence of other actual suppliers) in order to understand what is (only one supplier).

Wednesday, July 13, 2016

Constructivist and Ecological Rationality #3

In the chapter Asymmetric Information, Smith critiques the ideas of Joseph Stiglitz. Stiglitz is another Nobel Prize winning economist, who got the prize for work on markets with asymmetric information.  These are markets that don’t meet the assumptions for "perfect competition". Stiglitz’s early work focused on markets where the participants are "imperfectly" informed and unequally informed. Smith takes Stiglitz to task for jumping to the unwarranted conclusion that such markets are “imperfect”, inefficient, and thus need governmental constructivist intervention.  Stiglitz is a vocal critic of Adam Smith’s “invisible hand” and free markets. Vernon Smith defends Adam Smith’s ideas. Stiglitz has become a prominent leftist. 

Sunday, July 10, 2016

Constructivist and Ecological Rationality #2

My first post gave the essences of the two concepts. In the next paragraph Smith describes their relationship.

"Again, individuals and groups invent products, ideas, policies, and such, but whether they endure or are copied is subject to forces of selection and filtering that are well beyond the control of the initiators. Every business decision is someone’s constructivist idea of a best or appropriate action, but whether that decision is ecologically fit is up to socioeconomic forces far beyond the originator. Ecological rationality, however, always has an empirical, evolutionary, and/or historical basis; constructivist rationality need have little, and where its specific abstract propositions lead to some form of implementation, it must survive tests of acceptability, fitness, and/or modification”  (p. 25).

"Reason is good at providing variation, but poor at selection; that is, construcivism is a powerful engine for generating variation, but it is too far narrowly limited and inflexible in its ability to comprehend and apply all the relevant facts in order to serve the process of selection, which is better left to to ecological processes that implicitly weights more versus less important influences" (p. 38).

Constructivist ideas are also used for political action, advocacy and influence. Smith doesn’t say a lot about that on or near page 25, except Hayek criticizing some constructivist ideas of John Stuart Mill. It seems he will later in connection with U.S. airline deregulation (1978-yy) and the California energy crises (2000-01). Hayek strongly criticized constructivist ideas in politics, and Smith is an admirer of Hayek.

As an aside, the middle paragraph reminded me why there is beta testing and other forms of testing for computer programs (link).

Friday, July 8, 2016

Constructivist and Ecological Rationality #1

Friedrich Hayek identified both kinds of rationality but did not give a name to the second. The following quotes from the book give the essence of the two concepts.

     “Constructivist rationality, applied to individuals or organizations, involves the deliberate use of reason to analyze and prescribe actions judged to be better than alternative feasible actions that might be chosen. When applied to institutions, constructivism involves the deliberate design of rule systems to achieve desirable performance.  [ ]       
       Ecological rationality refers to emergent order in the form of the practices, norms, and evolving institutional rules governing action by individuals and institutions that are part of our cultural and biological heritage and are created by human interactions, but not by conscious human design.

       The two concepts are not inherently in opposition; the issues are emphatically not about constructivist versus ecological rationality, as some might infer or prefer, and in fact the two can and do work together. For example, in evolutionary processes, constructivist cultural innovations can provide variations while ecological fitness processes do the work of selection” (p. 2). 

Tuesday, July 5, 2016

Rights and Goods

The title is the title of a book by Virginia Held. I borrowed it from a library after reading a chapter by her in another book. See my June 26 blog post. The subtitle – Justifying Social Action – made me skeptical, but I read some anyway. What a disappointment.

“The teachings that students and citizens absorb frequently extol rather than question egoism: the liberal tradition asserts that government is justified only if it serves individual self-interest; the myth of Adam Smith, on which capitalism and market economies rest, asserts that if all pursue their own selfish interest, this will add up to what is best for everyone; the novels of Ayn Rand and the theories of libertarians carry the excesses of egoism to new heights of popularity.  … But trust and cooperation cannot be built on egoism” (p. 63).

I see; her idea of egoism is being a predator. So I disagree. Trade with mutual benefit is built on all three, especially trade of money for work.

I nevertheless read chapter 10 – Property and Economic Activity. “The orthodox Western scheme of property rights and interests is by no means the most plausible that could be maintained on moral grounds. It’s most obvious deficiency is the lack of a built-in requirement that those with a surfeit share with those unable to obtain what they need.  The most acceptable way of achieving such sharing is through taxation and redistribution, but if individuals would satisfy the obligation by voluntary contributions, governmental involvement would only be necessary as a last resort” (p. 182).    

She’s a cheerleader for statists. They are never satisfied with the situation and always demand more government control, i.e. coercion.  She continues: 

“It is as legitimate to use the powers of government to assure that this obligation is met as it is to use the powers of government to assure that obligations of noninterference are met. In denying this, libertarians distort the reality of property and coercion and then draw moral conclusions from their myths.” (p. 182).  
This book returns to the stacks long before its due date.

Friday, July 1, 2016

Contractual Bonds and Hegemonic Bonds

I noted on June 26 that Virginia Held contrasted the contractual relations of “economic man” or homo economicus with the relations between mothers and their children.

Ludwig von Mises compared contractual bonds with hegemonic bonds.  He said there are two kinds of social cooperation – one by virtue of contract and coordination, the other by virtue of command and subordination or hegemony.  The two most important hegemonic bonds are the family and the state. What differentiates the hegemonic bond is the scope in which the choices of the individuals determine the course of events.

“Any kind of human cooperation and social mutuality is essentially an order of peace and conciliatory settlement of disputes. In the domestic relations of any societal unit, be it contractual or hegemonic bond, there must be peace” (Human Action, 3rd revised edition 195-97).

He says little about contractual bonds. They are symmetrical, whereas hegemony is asymmetrical. The contractual order of society is an order of right and law. He doesn’t say so, but I think contractual bonds – including unwritten contracts -- are an important part of the marketplace and economic production. He does not describe hierarchies within business firms as hegemonic. However, bosses or supervisors do have control and influence over other people.  A few examples are work assignments, organization, setting priorities, promotions, and compensation. The higher a person in the hierarchy of a firm, the more authority and control that person generally has. His or her direction and decision-making exercise more control over the course of events within the firm and for the firm in the marketplace. The big boss or CEO has the most authority and control.