While analogies, like cars, always break down in the end, they can be useful discussion devices. While on a run, I was thinking about my recent injury-induced lack of racing trophies and this topic kept blending in with that of the division of goods in a competitive capitalist society. This lead to an obvious analogy between road races and capitalism.
Both racing and capitalism involve competition and this generates winners and losers. Winners are, of course, supposed to be rewarded for the victories while losers are expected to reflect on their defeat and try harder next time. When planning a road race or managing capitalism, those in charge must address the nature and division of the rewards for the competition. In the case of a road race, this requires the race director to work out the prizes and decide such things as whether there will be age group awards and, if so, how deep the awards will go. In the case of capitalism, those in charge decide how the laws and polices will divide up the rewards.
While there are many ways to approach the division of the rewards, there are two broad approaches. One is to have a top-heavy reward system that yields the rewards to a few winners. In the case of a road race, this will typically involve all the prizes going to the top three runners or even just the first-place finisher. In the case of capitalism, this will typically involve most of the rewards going to the very top winners with the leftovers divided up among the many losers.
Another approach, broadly speaking, is to spread the rewards more broadly among a larger base of winners. For example, many races have age group awards in addition to the overall awards. Most races also have male and female groups as well, which further divides the prizes of victory. In the case of capitalism, this approach would give less to the top winners and divide more among the lesser winners. For example, under such an approach successful small businesses and successful middle and lower class individuals would get more of the rewards. This would, of course, mean less for those at the top of the pyramid, such as the biggest corporations and the individual billionaires.
One argument often advanced in favor of the top-heavy systems of capitalism is to contend that a broader division of the rewards would be some sort of socialism that would destroy competition. But, this is not the case. A broader reward system would still be competitive capitalism, it would just have a broader division of the rewards. Returning to the race analogy, a race that has a broader division of prizes is no less a race than one that offers prizes only to the first-place finishers. Competition remains, the difference is that there will be more winners and fewer losers.
It could, of course, still be argued that having a broader division of rewards would reduce competition and make things worse. In the case of a race, the idea is that runners would think “why should I train or race as hard as before to try to win the whole race when I can now get a prize for being third in my age group?” In the case of capitalism, people would presumably say “why should I work as hard as before to try to be the biggest winner when I can now get decent rewards for just being moderately successful?”
While I will not claim that no one thinks that way, most runners still train hard and race hard regardless of what sort of division of prizes the race offers. The same would seem to hold true of capitalism—people would still work hard and compete even when there was no massive prize for a few and little for everyone else. In fact, people who know they have little or no chance at the biggest prize would presumably compete somewhat harder if they knew that there was a broader division of the rewards and their efforts could pay off with prizes. Also, in the case of capitalism, people already work hard for small prizes when they know they have no chance of ever getting the biggest prize. As such, unless they are delusional or irrational they are not motivated by having a top-heavy reward system. Survival provides an adequate motivation.
At this point, one might want to bring up the example of races that have participation awards—that everyone gets a medal just for showing up. The economic analog would be a form of socialism or communism in which everyone gets the same reward regardless of effort. This, many would argue, would be terrible and unfair.
In the case of races, runners still compete even if everyone gets the same prize (be it the same medal or nothing at all). Because, of course, many people just love to compete for the sake of competition or for reasons that have nothing to do with prizes. It would hardly be a stretch to think that this view also extends into the economic realm—especially since there are people, such as open source developers and community volunteers, who work hard for no prizes. But, there is certainly a reasonable case to be made that people need to win prizes to be really motivated to do anything.
I must admit that while I will still run hard in such a race, I still have a love for competing for prizes. As such, I prefer races that offer competition-based rewards. I am, however, grudgingly tolerant of participation medals—after all, someone who shows up and does the whole race has accomplished something meaningful even if they did not win. Naturally enough, a race can have both participation medals and prizes for winning. In the case of an economy, this would be a competitive system that offered better rewards to the winners, but also provided those who are actively participating in the economy with at least minimal reward. One area in which this analogy breaks down is that the economy has people who cannot participate (the very old, the very young, the ill and so on) and it would be a far more serious matter for these people to get nothing than it is for people who do not finish the race to not get their participation medals.
All analogies break down in the end, but perhaps this one breaks down at the start. The key breaking-point is the production of the rewards, which is at the heart of the analogy between a race and an economic system.
1. In a race, everybody is competing along exactly one axis – speed to the finish line. They do not stop to smell the flowers on the way. In an economic system, the participants make choices about where they spend their time and resources, and how they divide those between wealth production and personal enjoyment.
2. In a race, the runners do not produce the rewards.
3. In a race, the total amount of rewards given does not depend on the effectiveness of the runners.
4. A race has competition as its aim, while an economic system has the production of goods we all need – food, shelter, energy, clothes, iPhones – as its aim, with competition just an emergent element that adds motivation.
What would a race be like, if food and clothes and shelter materialised with every mile that a participant ran?
P.S. oh, and iPhones meterialised too of course? I imagine we’d have a lot of teenagers….
Michael LaBossiere says
All true. But, the main question I am concerned with is the division of the goods based on performance in a competition. Race directors have to decide narrow or broad distribution of awards within a single competition, the rulers of capitalism have to decide whether the rules and laws favor narrow or broad distribution of rewards within a competitive system.
And I am pointing out that the division of rewards cannot be separated from the methods by which the rewards are generated, when those methods determine the amount of the rewards.
A better analogy than a race might be a camp of hunters. Each goes out every day to catch food. The food is what keeps them alive. How should the food be divided?
“the main question I am concerned with is the division of the goods”
In both cases, you imagine some higher power – either a person (like a race director) or a committee (like Congress or our government) deciding what should be of value to people, creating this valuable commodity, and distributing it based on some arbitrary methodology.
In a race, I think this person or committee decides on a set of prizes with the attitude, “Here, this might make things more interesting for some”, but by no means does this define the purpose of the race for the field. At your level of competition (and I’m making an assumption here), I would imagine that beating your best time for a 10K would be far more gratifying than winning a trophy against slower individuals. Does it satisfy you when you “age up”, and can win trophies because you are the youngest in your age group, even if you run slower times? I seriously doubt that …
In capitalism, I don’t think there is an equivalent of the race director or committee. At best, this “director” might handle the distribution of entitlements – but in that case the competition is not about achievement or production, it’s about knowing the bureaucracy and (in some cases) successfully gaming the system. Otherwise, it’s like I said in my other post – we define our own standard of success and winning – and for some (I think most …) the financial reward is a secondary benefit for a job well done.
In either case, to define our own individual success by comparing ourselves to others is a losing proposition that leads to envy of all sorts, and is a very destructive force to us as individuals and as a society.
There will always be someone faster than me, always someone who can swim longer and farther, just as there will always be those who have a bigger income or more assets than me. Sometimes it’s hard to not care about that, but it’s vitally important. Sometimes it’s easy to get caught up in the envy – and when you do, you can turn that into resentment or incentive, or simply try to get over it.
In both cases, you imagine some higher power
As Milton Friedman famously asked, where will you find all these angels?
Though as I said below, I’ve pointed this out time and time again. Mike imagines some system where “good” people, perhaps people very much like himself, determine where resources should or should not be distributed. He thinks that by saying, as he does below,
that he’s not arguing against capitalism. No, no, no, no, no. He likes capitalism. Really. He just thinks that the very thing that makes capitalism work is something he, or those very, very much like him, can appropriate. To not understand (or to pretend not to understand) that such an act undermines the very incentives that create the wealth he/they plan to distribute in the first place, at this point well into the 21st century, well after the fall of the Berlin Wall, etc., is stunningly dense. And yet this is the boilerplate attitudes one gets from the Ivory Tower types. A good part of this is his failure to accept or understand that there is not one static-state sized pie to be carved up. And thus this concept of redistributing wealth is very popular amongst many of those who have passed through our so-called advanced education institutions. This is a very serious problem.
Michael LaBossiere says
Well, we do make those decisions via laws, policies and so on as to how the goods are distributed. Examples include tax law, government subsidies, the sale of public resources, and so on. Obviously, the analogy to the race director breaks down in terms of there not being one person or one entity in charge of the whole economy. But, the division of goods is a matter of conscious choice rather than some magical hand working like an invisible god.
Examples include tax law, government subsidies, the sale of public resources, and so on.
They say you can lead a horse to water. Can I get a witness?
Completely disagree here. Maybe the problem is that you’re using the word “distribution”, which just does not apply.
Well, actually, it can apply, but not in a capitalistic sense. Government subsidies, entitlements, etc., are part of our system, but are outside of Capitalism. They are where Socialism (or maybe Communism) blends in – where for one reason or another people fail to compete effectively and have to be picked up using the wealth generated by others. Not saying this is a bad thing – in fact, I think it makes us a generous and compassionate society – but it isn’t Capitalism. Ironically, qualifying for these benefits is still a kind of “competition”, but not in a fiscal sense.
Rather, within this distribution system, people compete for benefits by trying to show how needy they are – like the old show, Queen For A Day. In this show, contestants competed for prizes by demonstrating how bad their circumstances were. The worse off you are, the more likely you are to win. If you can prove that your income is below a certain level, you get an EBT card, or Section IV housing. Many of those who do play that game consider it to be their own version of sound financial planning. (“If I work on the books, I’ll show too much income and lose my unemployment …”). Others. of course, are truly needy based on circumstances beyond their control, and the Socialist side of our government is
The word I’d use is “acquisition”, or maybe even “creation”. For the most part, no one tells me how much wealth I can acquire, or in what format. (To an extent, of course, the government does place some restrictions on my methods, and on the legality of what I’m acquiring. I can’t, for example, acquire my wealth in the form of crystal meth and distribute it via gang methods – but those kinds of laws are different from any kind of top-down “distribution of goods” scheme).
There are those in our system who choose to seek great wealth as a prize in itself – they are “serial entrepreneurs” who invest in businesses regardless of the product or service; their goal is to turn profits. There are others who turn real-estate, others who invest in commodities like gold or platinum, and still others who are in sales – they don’t care what they sell as long as there’s a market and they can pile on the commissions.
There are others in our system whose motivations “blend” there desire to produce something meaningful with their acquisition of wealth. Doctors, for example, or other professionals would fall into this category. (Of course, once a certain level of wealth has been achieved, they can and do devote part of their time to that first category, investing and increasing their wealth). I can go out and join a framing crew and earn a decent wage banging nails and building houses – or I can hang out a shingle and go into business for myself; I can even rise up those ranks and become a general contractor, and put away my hammer and subcontract multiple crews to build multiple houses simultaneously, and pocket even more money.
Then there are still others who really don’t want to have anything to do with any more than they need to get by – for them (us) money is a utilitarian necessity. Once we are able to secure the income and savings we need, we devote all of our additional time to our passion – art, writing, teaching, research, travel – whatever it is.
In every single one of the above cases, though, the wealth production creates more wealth for others. Right now, at this moment, I am accepting bids from painting contractors to paint the exterior of my house. I saved the money to do this, but frequently this is done by taking a home-equity loan. So let’s follow the money …
I go to the bank and apply for a loan. If it closes, the bank loan guy makes a commission. The bank’s lawyers make a fee, the bank earns interest on the loan. If they sell a lot of loans, maybe the loan guys get a bonus at the end of the year.
I hire a painter to do the job. He increases his liability insurance and worker’s comp to adjust for the job. I put a rider on my homeowner’s insurance just in case. The insurance salespeople get a commission, the companies make a profit. The actuaries keep their jobs, because they are busy.
The painter hires a crew, either directly or via subcontract. They make wages, and pay their bills.
The painter buys paint – the sales guy makes a commission, the paint store makes a profit, the paint company makes a profit.
Each one of these threads goes infinitely deep – these people who have earned money from my paint job buy clothing, go on vacation, go to the movies, buy cars, refrigerators, dinners … and everyone they come in contact with makes some money.
No one has told me I must paint my house, or that I cannot paint my house, or that I have to hire a certain person or buy a certain kind of paint.
The “laws, policies, and so on”, if they dictate anything at all, only define how I cannot act, and how much wealth I am allowed to keep. As long as I operate within the law and pay my taxes, no one can tell me what to do with my money.
Of course, as I said above, once I do pay my taxes, the government can and does distribute my confiscated wealth in a completely anti-capitalist way. This kind of “distribution” DOES take money from others. Outside of the taxing authority of the State, of course, things like Unemployment Compensation, Welfare, Social Security, etc. ARE finite pools of money – and any benefits given to one person reduces the total amount available to the others. In response, the government must either limit distribution, tighten the rules of distribution, or confiscate more money from the capitalists to meet their bottom line.
I take it back – there is wealth production in that scheme. Give enough money away to the right people, and guarantee re-election, spend more time in Congress and siphon off millions for yourself … then your pilot, your limo driver, your restaurateur, your tailor, and everyone else in your network will make money.
This is not rocket science, it’s Econ 101.
Thanks, dh. You save me much trouble. A beer sometime is owed. A minor quibble about the wrapup twixt wealth and money, but very well stated. As TJ also said, Econ 101. TJ’s video is most excellent as well.
Mike, the reason capitalism works is that everybody, even the losers, are better off under capitalism than under any other system. Far better to be poor in a rich country than be poor in a poor country.
The main thing we need to guard against in capitalism are attempts to cheat the system or tilt the playing field.
Michael LaBossiere says
I don’t argue that capitalism does not work or that it is not the best of all plausible worlds. Rather, I focus on the distribution strategies. So, the question is not whether it is better to be poor here or there, but whether a competitive system should distribute rewards more narrowly or more broadly. All of these systems would be capitalistic (except the system that gives only participation medals, real or metaphorical). For the topmost, the best system for them would be a narrow system. For everyone else, the better systems for them would be broader systems.
OK. Do you think that we have a narrow or broad system in the U.S.?
I think that the “prize” or “reward” of capitalism is similar to that of racing, but is not as you describe. In a broad sense, the prize for either is based on choice. We can all choose what level of participation we wish to engage, and vie for whatever prize is meaningful to us.
I have a steady job, I have tenure – I don’t make a ton of money, but I pay my bills, I can afford a vacation once in a while, I don’t want for clothing or food, and I’m very happy. I don’t aspire to more, financially – my level of “success” has bought me what I need it to.
At one point in my life, I was in financial services … sales, brokerage, etc – the “big guns” in my office were after one thing only – money. They measured their success by their suits, their cars, their houses, etc. Not me. I got out of there fast.
In my own way, I consider myself to have won the game. Capitalism has allowed me to by the home of my choice in the city of my choice; within certain parameters I am able to work as much as I want, and I am looking forward to many choices in retirement. I don’t need a mansion or a yacht, I don’t aspire to great wealth, and I am absolutely unwilling to do what it takes to earn those things, unless you count the occasional splurge on a lottery ticket.
When you say, “people would still work hard and compete even when there was no massive prize for a few and little for everyone else…” you are describing the politics of envy. Compared to Oprah Winfrey, George Soros, Donald Trump and others of that ilk I have practically nothing – my bank account is paltry compared to theirs – but I have everything I want materially (with all due respect to the old adage, “money is like closet space and sex – we all wish we had about 10% more …). And I DO work hard and compete – I work hard to stay current in my profession, to publish among my peers, to invent and create ideas and images that are new and innovative – and the motivation behind them is decidedly NOT money. What about you? Didn’t you say that your own compensation is unrelated to the amount of work you do? Are you a “loser”?
I have also participated in some races, though my sport of choice is swimming. Not too long ago I went to Bermuda and swam in a 10K – the longest I’ve ever swum. True, there were trophies and ribbons distributed to the overall winners, the age-group winners, the oldest and youngest .. but none of those mattered to me. I was in it for the participation trophy – I worked out for over a year to be able to finish that race, and the T-shirt I got as a result is one of my prized possessions – because it reminds me that I can set a goal for myself and achieve it. My prize is my health. My prize is sleeping well, and being physically and mentally alert – much more so than so many other sexagenarians I know. If I wanted trophies, I’d enter races with smaller fields – the age-group equivalent of “Division 3” college athletics.
The New York City marathon has some 50,000 entrants, but a field of only 20 or so “elite runners”, those who are competing for top honors, trophies, or the $100,000 prize. That prize is really nothing compared to the amount of money and time these people put forth in their years of training – but winning is their goal and good for them. What about the other 49,980 runners? Should they go home, “reflect on their defeat and try harder next time”? Did they really think they were going to win? Do they really feel as though they lost?
Just because a race director says what he thinks a prize should be doesn’t make it so – and just because some Democrat says I should be envious of the 1% doesn’t mean I can’t derive satisfaction from my own self-defined participation in capitalism.
The real reward of capitalism is not the biggest bank account – it is a free market where prices are self-regulating, it is opportunity to ply a trade or learn a profession on your own terms, and to create wealth to whatever extent you desire. It is a HUGE lie that when some people get rich, it takes away from others. Just look at the graph of the GDP over the last hundred years or so. It is NOT some “pile of money” that bureaucrats decide how to distribute among those they deem to be “winners” and “losers”.
Of course in both cases, there are definite losers – those who, for some reason, cannot compete. In Capitalist America, there are safety nets – unemployment compensation, food stamps, welfare, charity health care. I would argue that these institutions’ very existence is a result of a capitalist system that, contrary to the belief that it is “greedy”, is wealthy enough and generous enough to take care of those who cannot participate.
It is a HUGE lie that when some people get rich, it takes away from others.
Been trying to tell Mike this for many, many years. At one point he pretended to understand, then continued to throw up posts that demonstrated he did not (or did not wish to). I wish you good luck as this HUGE lie is, to me, probably the biggest problem facing our society today. It reinforces envy amongst people who might not feel such otherwise. So many of our society’s problems can be traced to either the misunderstanding of this or obliviousness to the degree that such holds people back. And many, many college professors are the greatest perpetuators of this huge lie. Others who do know it to be a lie use this ignorance for their own petty, personal advantage. This in spite of the billions (trillions?) we spend on education.
Agree. Mike is hopeless on Econ 101.
But, the division of goods is a matter of conscious choice rather than some magical hand working like an invisible god.
Mike, it is like a magical hand and it is called “emergent order.” This phenomenon is everywhere–not just economics.
The economist Russ Roberts did a nice podcast on this concept:
In the podcast, the economist Boudreaux states:
the notion of spontaneous order is indeed the most profound, single most profound insight of good economics. It remains the insight that is most elusive to the general public. Sadly, it remains an insight that is elusive to a lot of professional economists these days.
Here is a poem the Roberts wrote:
Very good. Pity the narrator has such an annoying voice and somewhat condescending tone. Reminds me of the guy who voices Mazda commercials. I think he’s an actor from Breaking Bad.
Michael LaBossiere says
Yes, I am familiar with that. Philosophers developed the notion of emergent properties to try to explain how consciousness arises out of matter. The usual idea is that higher order properties supervene on lower order properties. There has been some speculation that there could be even higher order properties emerging from consciousness; perhaps a “general will” of sorts.
But, of course, this notion is hardly one that has been established with certainty.
You could also make an appeal to a non-religious teleology, as Aristotle did.
But, of course, this notion is hardly one that has been established with certainty.
You could also make an appeal to a non-religious teleology, as Aristotle did.
Or you could take a walk out in the real world and open your damn eyes. But hey, whatever blows up your skirt.
But, of course, this notion is hardly one that has been established with certainty.
Mike, in physics (my field), the notion of emergence is quite well established.
In the podcast, one of the guests notes that it is ironic that the more likely one is to believe in the emergent phenomenon of evolution, the less likely one is to believe in the emergent phenomenon of the free market.
Great article in Reason. Mike is clearly a “man of the system.”
Adam Smith spoke of “the man of system” who “seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.” Thaler and his benevolent friends are men, and some few women, of system. They hate the Chicago School, have never heard of the Austrian School, dismiss spontaneous order, and favor bossing people around—for their own good, understand. Employing the third most unbelievable sentence in English (the other two are “The check is in the mail” and “Of course I’ll respect you in the morning”), they declare cheerily, “We’re from the government and we’re here to help.”
We humans face a choice of treating people as children or as adults. A liberal society, Smith’s “liberal plan of [social] equality, [economic] liberty, and [legal] justice,” treats adults as adults. The principle of an illiberal society, from Thaler’s to the much worse kind, is that you are to be corrected not through respectful dialog that treats you as an equal, but by compulsion or trickery, which treats you like a toddler about to walk into traffic.
Wikipedia lists fully 257 cognitive biases. In the category of decision-making biases alone there are anchoring, the availability heuristic, the bandwagon effect, the baseline fallacy, choice-supportive bias, confirmation bias, belief-revision conservatism, courtesy bias, and on and on. According to the psychologists, it’s a miracle you can get across the street.
For Thaler, every one of the biases is a reason not to trust people to make their own choices about money. It’s an old routine in economics. Since 1848, one expert after another has set up shop finding “imperfections” in the market economy that Smith and Mill and Bastiat had come to understand as a pretty good system for supporting human flourishing.
Interesting read. I listened to a podcast on “Hidden Brain” (yes, NPR) about “Behavioral Economics”, mostly a conversation/interview with Thaler. I find the whole topic fascinating. In the interview, the host described a situation wherein he and his wife would go out to dinner, and his enjoyment of the night out ramped up significantly when she took out her credit card and paid – even though it was from a joint account.
There’s no reason to correct his behavior – he understands that he’s being irrational – but for the sake of his marriage and his relationship with his wife it would seem incumbent upon her to pull out the plastic once in a while to make him happy.
So many situations fall into the category of “The Law of Unintended Result” that it’s impossible to say whether a decision is good or bad in and of itself. As far as the market goes, well, I have done better based on my limited understanding of human psychology and tendency toward error than I have based on any understanding of P/E ratios or capitalization. Bitcoin is a great example. (One company doubled its stock price overnight simply by changing the name of the company to include the word “Blockchain”). So was the dot-com runup of the 90’s. (Any company could overcome the fact that they had no value and a mountain of debt by calling themselves “Newco-dot-com”). So is my current passion for Cannabis stocks. (Disclaimer – I am not advocating or recommending any investment opportunity here. You should consult with your own financial advisor before making any investment decisions.)
My favorite “I’m from the government and I’m here to help” story is one of airlines and car seats. Back in the day, parents of young children could take them on an airplane without buying a seat for them – holding them on their laps. I did it with my 3-year old, and we both survived. Well, that was no good – after all, a child would just become a deadly projectile in case of a crash (that would probably kill everyone anyway, but that’s beside the point). So the FAA made a rule that said that small children had to have their own seat, and an FAA approved child-carrier like a car seat. Much, much safer, they said.
The result? Well, the number of children killed in plane crashes stayed pretty much the same. However, majority of young parents decided they couldn’t afford the extra seat, so they vacationed closer to home – driving instead of flying. This of course, put them all in far greater peril, as anyone knows we are far more likely to suffer a car crash than a plane crash.
Anyway, I find Thaler and the whole field of “Behavioral Economics” to be fascinating – right up to the point where someone thinks they need to do something about it. My biggest disagreement is with the conclusion – “it’s bad to be free”. I don’t know much about Thaler beyond the podcast and now this article – but I don’t think that’s necessarily his point. More research required for me, I guess.
As an analogy, or maybe just a quasi-relevant anecdote, in academia we have this thing called “Student Ratings of Teachers”. Many of the biases listed in Wikipedia exist in this rating system – and there are also flaws and inconsistencies in the evaluation of the Likert data it produces. It is far from a perfect system, but it is what it is.
The flaws and biases are part of a national conversation – and one under investigation by my own institution. I’m part of that conversation.
The bottom line for me is that yes, there are flaws – and fixing one will give rise to five others. No amount of control over how people deal with the questions, no amount of tweaking with the answers will overcome the human element and our penchant for error, misinterpretation, or even “new and different” understanding.
But – and this is the key – knowing the flaws and understanding how they can skew the results is empowering to a free and intelligent administration – just as it is to a free and intelligent society – and we can make more intelligent decisions based on our understanding of the inherent flaws of any system than we can based on our trust in the promise of a flawless one.
Oh, and in the podcast, Thaler also said that one of the most irrational things we can do with our money is donate to NPR – after all, why give money when you can listen for free? (Nervous laughter …)