A Bit on Rent Seeking

Cherry BlossomsThis is a continuation of two previous posts: Is Competition Always Good, and Competition in Free Markets.

Prabhudesai referred to JEE (Joint Entrance Exam) in a comment and wrote, “An examination that has too much of competition resulting to very high cost of producing one engineer. For a poor country like India it is a massive blow.”

Is that type of competition good? That is socially wasteful competition. It belongs to a broad class of activities that are technically known as “rent seeking.”

One of the principal ways of obtaining wealth is by earning a profit. Profits are the difference between the cost of producing something and the price obtained from its sale. Profits indicate that wealth has been created and value delivered. Rent seeking occurs when one attempts to obtain some wealth without actually creating wealth. 

Continue reading

Competition in Free Markets

wine tomato

I ended the previous bit with the claim that competition in a second-best world can be bad.

Competition in a free market is nearly always good because it is that process which provides the incentive to market participants to do the best they can, which leads to all the advances we all enjoy.

Remember that every one of us is a market participant. Therefore we all have to compete. It doesn’t have to be cutthroat but it we cannot avoid competing.

But what about cooperation? Doesn’t that matter? Yes. It matters enormously. We even have to compete in our cooperation. Individuals who are good at cooperating out compete those who are bad at cooperating. This holds true for higher levels of aggregation too. More cooperative, high trust cultures do better than cultures that mistrust and don’t honor their word.

In a perfect world, which in our case we don’t have, competition would always be good for everyone. Even those who lose out in their particular competition would nevertheless be better off in this world of competition because competition raises the general level of welfare, than they would be in a world without competition.

Continue reading

Is Competition Always Good?

lion gazelleIn a comment to a post, Prabhudesai asked “Is competition always good?” The simple answer is “It depends.” It depends on the circumstances and on whether one gains or loses from competition.

Competition

Competition is a feature of the biological world. The competitive struggle for survival is ubiquitous and ineradicable. And one may argue that it is also necessary and desirable for evolution to do its magic. The competition between predator and prey improves both groups. Competition is good for the group but not for the individuals who are unable to come up on the top. Continue reading

The Cost of Things

Mountain streamWe humans value economic goods. But everything we value doesn’t necessarily have to be an economic good. What’s the defining characteristic? The demand for the good has to exceed the supply for it to be thought of as an economic good.

Let’s look at some goods and ask if they are economic goods or not. You are walking along a clear mountain stream in the wilderness. Is the water an economic good? No, because the demand for the water in the stream (only you are the consumer for miles around) is much less than the supply. Is the water of value to you? It certainly is: you can drink the water or take a bath. A thing of value need not be an economic good but any economic good has a positive value (and conversely, an economic bad has a negative value.) Continue reading

Leaving in a Jet Plane

Airbus A380

The last time I was on a flight was the end of January 2020 — return from San Francisco Bay area after attending the Mont Pelerin meeting at Stanford University’s Hoover Institution.

Because of the Chinese virus, I have avoided flying. Because I like road trips, it wasn’t too much of a constraint for me, except of course I couldn’t do a road trip to Finland or India.

I am off to Austin, TX today. From Philadelphia to Austin on an American Airlines flight.

I am amazed at the big jet planes and the commercial aviation industry. Airliners are some of the most beautiful things humans have ever designed. The development of aviation surpasses all imagination. Just think: the first successful heavier-than-air powered aircraft flight in all of recorded history happened for the first time in 1903. The Wright Flyer took to the air in Kitty Hawk.

Continue reading

Pathogens in One Lesson

GalaxiesLockdowns are a terrible idea. This of course goes against our “common sense” but the problem is that we are not equipped by nature to have the correct common sense. On top of that, our naïve common sense is distorted by the media and politicians. They are in the business of selling panic to people so that they obey their commands.
.
It is hard to unlearn a lesson that has been repeated for years. If it took 20 years to push a wrong idea into some’s head, the idea cannot be expelled from the mind in 20 minutes. That is why “allah hu akbar” is so tenacious. They repeat it 5 times a day since birth. By the time a Muslim grows up, AHA is part of his DNA.
.
For over a year now, the peddlers of panic have been pushing their agenda. It’s hard not to be influenced by their reality-distorting propaganda. But it is possible to see through their bullshit.
.
The truth — as far as humans are able to discover some part of it — is accessible, provided one is open to reason. Fortunately, we have almost instantaneous access to what domain specialists and experts understand to be true. We have to rely on them and are better off for their expertise. Unfortunately, social media has poisoned the well by the constant barrage of senseless forwards of idiocy. In that cacophony, the quite voice of reason gets drowned. Continue reading

Lee Kuan Yew – The Sage of Singapore

“Try and get a government on the cheap and you end up with a cheap government. … First job of a government is to equalize opportunities, right? You equalize results, you’re done for.”

It’s heartbreaking that hundreds of millions of Indians have to needlessly endure extreme poverty because of the insanely retarded policies of Gandhi, Nehru and the rest of the worthless bunch. If only, lord if only, India had the good fortune to get a leader like Lee Kuan Yew. Continue reading

A bit on the Principal Agent Problem

Recently, Sambaran Mitra asked:

Why would an honest person run for public office or serve as a committee member of a resident welfare association? What kind of system will provide the right incentives for honest people to assume public office?

Designing proper mechanisms for ensuring honest behavior in officials is well-understood. The general class of problems is known as the “principal agent” problems. 

The politicians are the agents of the citizens who are the principals; the resident welfare association members are the agents of the residents who are the principals. The managers of a firm are the agents and the shareholders of the firm are the principals. The workers are the agents and the owner of the firm is the principal.

Continue reading

The Importance of Epistemic Humility

In one of his interviews, Milton Friedman was asked if he would stop someone from doing something that he, Friedman, knew to be wrong. Is it his moral duty, the interviewer pressed on, to prevent someone from doing what could lead to harm. Friedman replied (and I am paraphrasing here; I will find the exact quote later) that yes, it was his moral duty but he added, “But how can I be sure that I am right? How can I know for certain? Because I can’t know for sure, I should resist the urge to interfere with another.”

This is what I would call epistemic humility. Epistemic — of, relating to, or involving knowledge and cognition. Humility — the attitude that acknowledges weakness or incompleteness in one’s capacities. Epistemic humility is when you know that you don’t know, and resist the pretense of knowledge.

People who hold absolutely rigid views on matters that are intrinsically unknowable or incompletely known cause a lot of misery. They lack the wisdom to realize that as imperfect beings we are subject to all sorts of illusions and have at best an incomplete understanding of the world. We have to be especially wary of our beliefs. Bertrand Russell was once asked if he was prepared to die for his beliefs and he replied, “Certainly not, after all I may be wrong.” That’s prudent.

Continue reading