Monday, May 23, 2011

Physics, Transaction Costs, and Production Costs

Bob asks in response to my temporal autarky posts: "Right now I have $100 I'm trying to decide what to do with. I could invest it, I could spend it on sushi, OR I could wire it to a hungry guy in Africa. Now if that guy in Africa could touch a rock and turn it into a gold bar, then ship it back to me, for sure I would consider that a great trade and I'd do it. By the same token, the guy in Africa would much rather have the stuff he could buy with $100 than the labor it takes him to touch a rock.

Ah but alas, the laws of physics don't allow him to touch a rock and turn it into gold. Hence, I myopically do not take into account the fact that if I just *gave* my $100 to the guy in Africa, he would have more utility.

Did I just spotlight another example of a problem with the laws of physics impoverishing us?"

In a sense, he absolutely did spot another example of the laws of physics impoverishing us. Physics, after all, is the primary source of scarcity in this world and scarcity is impoverishing and the whole motivation for economic action. So sure! Blame the laws of physics.

But this is an odd thing to complain about. Generally economists don't complain about the lack of superpowers as welfare-reducing.

What's different? Bob is really pointing to an infinite production cost imposed by physics. Fair enough, but production technology is usually taken as given (if he wants to make an argument why we should care more about these sorts of limitations, he's welcome to). I'm pointing to an infinite transaction cost imposed by physics. Usually economists take the inability to make transactions to be worthy of more serious consideration than the inability to succeed at alchemy. On top of this infinite transaction cost is an externality: we can impact the future but they can't impact us. This is not all that bad, of course! That's what we call "cause and effect", and we wouldn't be able to understand all that much without it. I'm not cursing the laws of physics here, I'm just trying to understand its implications for human society, and thinking through decisions we might want to make as a result of those implications.

UPDATE: And Facebook tells me it's Bob's birthday today - Happy Birthday Bob!


  1. It's a weak distinction--they're both things that would be neat but are impossible, so who cares? As for the externality, it's inescapable. No matter what, we are inevitably setting the initial conditions for future generations. Without access to every single future person's utility function, there is no practical advice you can give ("Will somebody please think of the future children? You know, the ones with immortal metal bodies immune to any physical harm.")

    Also, where is the line? We affect people in the year 2100, certainly, and people in the year 150,000. You might need a pretty good calculator to figure out the optimal tax here. A FUTURE calculator, even....

    I had the exact same conversation with a physicist once, although he wasn't so gung-ho about spaceflight so much as Malthusian problems, which I mostly cured him of.

  2. Or, considering that future people will likely be much richer than us, it's perverse to set aside some of our welfare for theirs. If a poor man is humming in an elevator with Bill Gates and being annoying, he's creating a negative externality and should be taxed, but that wouldn't be cool.

  3. Stravinsky -
    Right - nobody can answer the questions you pose. I certainly don't claim to.

    So what is to be done?

    Pretend the phenomenon and its implications don't exist or think up a few things in the near-long-term that might be smart to do, and then take a risk?

    re: "Or, considering that future people will likely be much richer than us, it's perverse to set aside some of our welfare for theirs."

    RIGHT. That perversity is the whole problem. They can't compensate us. That's precisely the problem I'm highlighting. Autarky sucks.

  4. Risk? As in, probability distributions? No way. Seems more like uncertainty. You don't know what future people want or what their world will look like if we do this versus that. It's your guess vs mine--a competition to see who has read more sci-fi. You'd probably win, mind you, as I haven't read anything published after my death.

    Regarding the perversity, I thought your issue was the negative externalities created by our shortsightedness. Is it also the positive externalities as a result of us giving the future people a world to live in in the first place?

  5. Ah yes - that was used casually and not technically. What would you call that?

    Take a gamble? No.
    Take a chance? No.

    You know what I mean, though :)

    re: "Regarding the perversity, I thought your issue was the negative externalities created by our shortsightedness. Is it also the positive externalities as a result of us giving the future people a world to live in in the first place?"

    This is right - it's an externality but it's both positive and negative. We enjoy all the benefits and endure all the costs of the decisions that we make, and all the benefits AND the costs experienced by the future don't enter into our decision making. It telescopes all cost-benefit calculations - it generates an artificially high discount rate, with effects on the upside and the downside.

    re: "You don't know what future people want or what their world will look like if we do this versus that."

    Right. And again - what is to be done? Sit on our hands? Nope - there's issues with that. Do something? Nope - there's issues with that. You're going to run into this in either direction. We're never going to have an airtight proof or answer to the question "what is to be done?". "Nothing" is as problematic an answer as "something". We will do something, of course. I just think when we go about doing that we ought to do it with a cognizance of this issue.

  6. I didn't think you were actually talking about probability distributions, but that's my point. Any solution to this problem is just a wild guess. The same with the externalities--does the positive outweigh the negative, the negative over the positive, or do they cancel each other out? Maybe we over invest in the future. Nor is it clear why "a cognizance of this issue" matters when you don't know enough to make a decision one way or the other.

    You're right that "nothing" is the same as "something," but that doesn't tell us anything useful. It's an interesting thought and fun to think about, but it has no practical purpose. It just shows that when we muddle on through, it's even more muddle-y than we thought.

    But what do I know--I've been dead for forty years.

  7. How wild is wild?

    We'll never know exactly what ought to be expected or done about climate change... but don't you think we have a rough enough idea to take a stab at it?

    Again, I ask "what is to be done?". In the face of this uncertainty (which I agree is there), what would you advocate doing and how would you back it up? Doing nothing has consequences too, I suppose it what I'm saying. It's hard but I would take care not to get too relativistic about what we know.

    re: "But what do I know--I've been dead for forty years."

    Yes yes - I caught that in the last comment :-D

    A current commenter named Gary used to go by the pseudonym "Xenophon". He had you beat :)

  8. I know nothing about climate change, but I believe other people do. It doesn't seem unreasonable that a bunch of climate scientists and economists could get together and hash out a plan. Providing for the people of 2100 or 10000 doesn't seem to be on the same level. You simply have no idea, unlike climate scientists.

    Since I have no idea what to do, or even if there is a problem, as the externalities may balance out, I wouldn't recommend anything drastic. We have a system that so far has done a pretty good job of making the future a better place than the past, and there's no reason to expect that to change. Given the crushing uncertainty, it seems prudent to stay the course. If you think spaceflight is the way to go, go for it. Persuade people. Fund a spaceship. Maybe it's a good idea, maybe not. Well never know for sure. Fucking uncertainty, am I right?

    You insinuate that I am an impostor. I'll ignore the rudeness and simply inform you that zombies always feel the need to point out that they are zombies, much like how robots always mention the robotic nature of themselves.

  9. 1. Right, I don't have a great idea which is why I don't make these decisions on my own. I have some insights, though, and those insights are worth sharing and talking about with the other people that get together and make these sorts of decisions.

    2. Not doing anything drastic is the golden rule of collective decision making - I agree strenuously. Sending manned missions to Mars doesn't even approach how drastic things like (1.) health reform, (2.) the war in Iraq, or (3.) dismantling the Fed are. I'm proposing some relatively conservative, non-drastic points here. In the past I've proposed increasing NASA's budget by chump-change increments, and leaving a lot of the work to the private sector.

    3. I think people underestimate how drastic stasis is. If a dictator has to impose a decision, then that's clearly drastic. If a democratic republic is slowly evolving towards a position and I'm advocating going a little faster, that's not "drastic". If a democratic republic is slowly evolving away from (for example) a more libertarian arrangement) I think advocacy of such an arrangement is fairly drastic and an unadvisable attempt to force a design on an emergent order.

    4. So do you consider yourself a zombie?

  10. 2. As talking about externalities automatically brings to mind taxation and subsidies, Your argument does open up drastic possibilities, even if you don't advocate them. I'll be nervous about it even if I don't have to be nervous about you.

    3. Hmm--this is tricky, as exactly what qualifies as drastic is subjective, but I would add that the more uncertain the consequences, the more drastic the decision--or lack thereof. And "drastic" has lost its meaning in my head now. Great.

    4. Vigorously deceased, if you don't mind.

  11. The idea that "we" need to do something is the core of your problems. There is no "we." There are only individual people.

    Leave people alone; let them make their own decisions regarding the use of their resources.

    And you object to John and Russ' use of the phrase "your central plan." Hah! That's rich

  12. There is a "we". It's a bunch of individual people.

    Methodological individualism makes it incumbent upon us not to imagine a hive mind. I'm not doing that. Methodological individualism does not rule out the use of the first person plural.

    re: "And you object to John and Russ' use of the phrase "your central plan." Hah! That's rich."

    Come on Mattheus. You and I have interacted long enough that you ought to be above this. Raise concerns, not hackles.


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