• World After Capital: Limits of Capitalism (Self-Conservation) July 16, 2018 12:01 pm
    NOTE: Today’s excerpt from World After Capital rounds out the section on limits of capitalism. We already saw the issue of missing prices, the problem of power laws and today talks about how the self-conservation of capitalism through the political system keeps attention trapped in the job loop.Self-ConservationToward the end of the Agrarian Age, when land was scarce, the political elites came from land ownership. Their influence really wasn’t substantially diminished until after World War II. Now we are at the end of the scarcity of capital, but the political elites largely represent the interests of capital. In some countries, such as China, this is the case outright. Senior political leaders and their families own large parts of industry. In other countries, such as the United States, politicians are influenced by the owners of capital because of the constant need to fundraise.A study conducted at Princeton analyzes how much public support for a policy influences the likelihood of that policy being enacted [51] in the United States. It turns out that for the bottom 90% of the population their preferences have no influence on outcomes. Only the preferences of the wealthiest 10% of the population matter. Even within the 10% whose preferences matter, there is a huge concentration. For instance, over a 5 year period the 200 most politically active companies alone spent nearly $6 Billion on lobbying.Individual and corporate lobbying results in policies favorable to owners of capital, such as low capital gains tax rates (or in the case of venture capital and buyout funds the taxation of General Partner profits as capital gains instead of income). Low corporate tax rates with lots of loopholes, including the accumulation of corporate cash in low tax countries is also favorable to owners of capital. So in 2018 we are finding ourselves with some of the lowest corporate tax rates, the highest stock prices and the highest share of profits in national income.In addition to preserving and creating benefits for owners of capital there are also outright attacks on the sharing and creation of knowledge. I have written more about these in the chapter on Informational Freedom, but want to give one example now. Corporations lobbied heavily over the years to lengthen copyright and strengthen copyright protections. Scientific publishers such as Elsevier have used these protections to make access to knowledge so expensive that even universities as wealthy as Harvard can no longer afford the subscriptions. [52]The existing political and economic system thus acts to conserve the scarcity of capital past its expiration date. As long as that is the case we will not be able to solve the attention allocation problem outlined above. We will heavily over-allocate attention to the job loop (work and consumption) and under-allocate attention to the individual need for purpose and the collective growth of knowledge.How then do we overcome these limitations? That is the subject of Parts Three and Four of World After Capital. But first we will take closer look at the power of knowledge and the promise of the digital knowledge loop.
  • Principles (Introduction) July 14, 2018 12:43 am
    While I am working on my book World After Capital, I am also collecting ideas for an important project that I want to tackle afterwards: a compendium of principles. Before you think, oh Albert is going full on Ray Dalio, let me provide the definition of “principle” the Oxford Dictionary:(1) A fundamental truth or proposition that serves as the foundation for a system of belief or behaviour or for a chain of reasoning.(2) A general scientific theorem or law that has numerous special applications across a wide field.I am interested in principles that represent a “fundamental truth” that serves as the “foundation” of all knowledge and hence has “numerous special applications.”What is an example of such a principle? Feedback: entity A influencing entity B, which in turn influences entity A. There are quite a few truths we have figured out about both positive feedback and negative feedback.Once you understand the principle of feedback you can see it pop up in lots of different contexts, from Jimmy Hendrix’s guitar play to the working of the cruise control in your car. That happens to be the point of compiling principles. They are incredibly powerful. And if you understand them you have that power at your disposal as you try to understand other knowledge or help contribute new knowledge.In addition to general principles which are the foundations of all knowledge, I believe that major fields of knowledge, such as business, also have a limited number of powerful foundational principles. What is an example in business? Financing: any activity for which cash outflows precede cash inflows requires financing (unfortunately Wikipedia only has an entry for Funding, which doesn’t neatly capture this principle).Again, once you understand the principle of financing there are a great many other things about business that you can understand faster and deeper, including venture capital.I am always surprised how little attention is given to principles in most teaching, given how powerful they are. Hence my plan for a compendium. Going forward, I will periodically post some other principles. If you have suggestions for principles, please make them in the comments.
  • Uncertainty Wednesday: Updating (Beta Distribution 2) July 12, 2018 2:42 am
    Last Uncertainty Wednesday, I introduced the beta distribution to model our prior belief about the probability of Heads in a coin toss. We saw that for the parameters α = β = 1 the beta distribution gives us a uniform prior, which expresses the highest degree of uncertainty (you may want to revisit the earlier post on entropy for that). Now I will toss an actual coin while writing this post. Wait. It came up tails (i.e. not heads). What should our new values be for α and β? As it turns out the updating formula is super simple. If we observe heads we increment α and if we observe tails we increment β. Here is what the Beta distribution looks like for α = 1 and β = 2, i.e. after we have observed tails:What does this picture tell us? Going from a uniform prior, the observations of tails has shifted a fair bit of probability towards lower values of θ. Remember that θ is the parameter we are interested in. It is the probability that the coin will come up heads. Since we have seen only one outcome and that outcome was tails, we are updating by assigning a lot more probability to values of θ below 0.5 (on the horizontal axis). This is our updated belief.Is this the only possible update we could have made? Well, if we use the Beta distribution to model our beliefs and the thing we observe has a binary outcome (such as a coin toss), then this is the precise updating as determined by Bayes’ Theorem. If you are so inclined you can find a very accessible derivation of this result here, which also shows how the simple updating rule results.So let’s keep tossing our coin. I just did and as it turns out got heads. So our updated values are now α = 2 and β = 2 and our new distribution looks as followsThis is symmetric, which shouldn’t surprise us as we have observed both head and tails. It is also starting to shift probability away from the extremes and towards the middle.Now if you want to play this game by yourself and see how the beta distribution changes after each toss, you can just head over to this query on WolframAlpha. Just add 1 to the value of α (alpha) each time you toss heads and 1 to the value of β (beta) each time you toss tails. Watch the distribution update!I have just tossed my coin 30 times and observed 17 heads and 13 tails. Here is what the Beta distribution looks like for α = 18 and β = 14So the beta distribution is starting to bunch up around 0.5, but we can see that the average is slightly above 0.5, in line with having observed more heads rather than tails (making heads somewhat more likely). Next Wednesday I will talk more about what we have learned at each step and also some of the limitations of this approach.In the meantime, thanks to Eric Novik from Generable for helping me with my understanding of this!
  • World After Capital: Limits of Capitalism (Power Laws) July 9, 2018 11:47 am
    NOTE: Last week’s excerpt from World After Capital described how prices cannot exist for many of our most important attention allocation decisions. Today I describe how production functions with network effects result in power law distributions that have bad social and economic implications.Power LawsEconomics is not normative when it comes to the distribution of income and wealth. Many different outcomes are possible and what is realized depends a lot on the underlying production functions. Consider first a fairly manual production function such as was common pre-industrialization. If you were a cobbler making shoes by hand, there were only so many shoes you could produce. I don’t know if such data is available, but the output of cobblers likely formed a normal distribution, with even the most productive cobbler making only a small multiple of the number of shoes of the average cobbler.Then along came industrialization and with it economies of scale. If you made more cars you could make them more cheaply and that was true until you got to a fairly large number of cars relative to total demand. That’s why, over time, we wound up with relatively few car manufacturers around the world and the owners of the surviving largest ones wound up with large fortunes (e.g., the Ford or the Piech families). It turned out that many service businesses have relatively small economies of scale (e.g., a hair salon). That has allowed a great many service businesses to exist. The biggest exception to this has been financial services in which a few large banks, insurance companies, and brokerage firms tend to dominate.Now, however, with digital technologies we are seeing a shift to power laws for many more situations. For instance, on YouTube the most watched video has been watched billions of times compared to the vast majority of videos which have been watched just a few times. Or in ecommerce, Amazon is an order of magnitude larger than the next biggest competitor and several orders of magnitude larger than most ecommerce companies. The same goes for apps in the appstore. The leading apps have hundreds of millions (and some even billions) of users. But the vast majority of apps has just a few users.Digital technologies are driving these power laws because of network effects combined with zero marginal cost. As I explained in the chapter on digital technology this means that in principle we need only one medical diagnosis systems to serve the entire world (in practice we would want several). So far we have seen one social network by far dominate all others. We have one search company dominate all others. Protected markets, such as Russia and China, have their own search and social network companies, but their size also follows a power law distribution.This shift to power laws everywhere is driving a huge increase of wealth and income inequality to levels that are now beyond the peak of the early 1900s. At that time it was undone by two world wars, which destroyed much of the accumulated existing wealth as well documented in Thomas Piketty’s book “Capital in the Twenty-First Century.” Inequality beyond a certain level is socially corrosive, as people effectively start to live in different world that is disconnected from the problems faced by large parts of the population. There is no self-corrective to this kind of excessive, power-law driven, inequality built into capitalism.Beyond the social implications of such inequality, the largest digital companies also wield undue political and market power. A recent example of that was the dramatic drop in the market capitalization of pharmacy chains when Amazon acquired a relatively small online pharmacy, such signaling its intent to compete in that market. Historically market power was bad because it produced inefficient allocations due to excessive rents (and such artificially low quantity). In digital markets powerful companies have often pushed prices down or made products free entirely thus causing seemingly no harm to consumers. The harm here comes via reduced innovation as companies and investors stop allocating capital to trying to bring better alternative products to market.The purported self-corrective in capitalism for market power is “creative destruction” as first described by Joseph Schumpeter. And indeed if you look at the dominant companies today they are quite different from those of the Industrial Age. But going forward this may be quite a bit harder, if not impossible. Why? During the Industrial Age machines served a specific purpose. This meant when a new product or a new manufacturing technology became available, the installed base of machines became essentially worthless and was a weight on the incumbents. Today, however, the new incumbents operate general purpose computers, which take information as one of their key inputs. They can easily implement a new product, or add a feature to an existing one, or adopt a new algorithm. Production functions with information as a key input have a property known as super-modularity: the marginal benefit of additional information is higher the more information you already have. This gives the digital incumbents tremendous sustained power as they get more marginal value from a new product or service than a new entrant.
  • Happy 4th of July: Climate Edition July 4, 2018 2:37 pm
    Independence Day is a cheesy summer action blockbuster. And yet, after watching it one can’t help but feel good about humanity defeating an existential threat using courage, technology and science (and doing so under American leadership). The irony today is that we face such a species level threat. It just happens to be invisible and slow moving. I am talking about the greenhouse gases that are slowly but steadily warming up our planet (in particular our oceans) and our atmosphere. Climate change is the defining threat to humanity and we should be fighting it using all the courage, technology and science we can muster.Here is the latest reporting from the Washington Post on all the heat records being broken in the last week leading up to this 4th of July. And here is a chart I just generated using the University of Maine Climate Reanalyzer, which shows departures from the 1979-2000 temperature average. You can see big heat bubbles over the US, Europe and especially over Antarctica:Antarctica is especially troubling because it now appears that ice there is melting three times faster than before.Seeing how the current president doesn’t even believe climate change is a real phenomenon and has someone heading the EPA who thinks it could all be a good thing, I give you instead a rousing speech by a cheesy movie presidentThis is also a good time to resurface the post I wrote last year on 4th of July. In it I rewrote the beginning of the Declaration of Independence to make it address what I believe we need for a World After Capital:We hold these truths to be universal, that all humans are created equal; that they are endowed qua their humanity with certain unalienable Rights, that among these are Life, Liberty and the pursuit of both Happiness and Knowledge; that they have Responsibilities towards each other and other species, that among these are Tolerance, and the Application and Furtherance of Knowledge for the Benefit of All.Happy 4th of July!PS Uncertainty Wednesday will continue next week.
  • World After Capital: Limits of Capitalism (Intro & Missing Prices) July 2, 2018 1:09 pm
    NOTE: Today’s excerpt from World After Capital starts to explain why capitalism cannot solve the problem of allocating attention which is scarce at the individual and collective levels.Limits Of CapitalismCapitalism has been extraordinarily successful. So much so that even communist countries like China, that had long sought a different path, have embraced it. But capitalism cannot solve the scarcity of attention without significant changes in regulation and self-regulation. That’s due to three important limitations. First, there are prices that will always be missing for things that we should be paying attention to. Second, capitalism to date has limited mechanisms for dealing with the power laws arising from digital technologies. Third, capitalism acts to preserve the interests of capital over those of knowledge. Put differently: we need to make changes now, precisely because capitalism has been so successful. The important problems that are left over are the one’s it cannot solve.Missing PricesWhy won’t capitalism help us allocate attention? Because the great strength and the great weakness of capitalism is that it relies on prices determined in markets. Prices are amazingly powerful because they efficiently aggregate information on consumer preferences, producer needs, etc. But not everything can be priced. And increasingly the things that cannot be priced are becoming much more important than those that can—think of the benefits from space travel, the cost of climate change, or even an individual’s sense of purpose and meaning.There are foundational issues that prevent the existence of prices for many things. This is not just a question of a missing market that can magically be created by assigning property rights.The first foundational issue is zero marginal cost for copies and distribution in the digital realm. From a social perspective, we should make all the world’s knowledge, including all the existing music, videos, educational materials available for free at the margin. That’s not just true for content but also for services that can be provided at essentially zero marginal cost, such as medical diagnoses. As long as we are relying on the price mechanism, we will—by definition—under-produce free resources. Another way to think about this is as follows: the Industrial Age was full of negative externalities, such as pollution, which resulted in over production; the Knowledge Age is full of positive externalities, such as learning, which implies under production. So for instance, relying on the market mechanism we will not pay nearly enough attention to the creation of free educational resources.The second foundational issue is extreme uncertainty. Because prices aggregate information, they fail when no such information can exist. There are events that are so rare or have not occurred at all yet that we have essentially no information on their frequency or severity. This is especially true around the kind of societal event horizon that we are currently dealing with. Nassim Taleb’s work on tail risk is highly relevant here. The price mechanism cannot work when forecast error is infinite. For instance, large asteroid impacts on Earth occur millions of years apart. There is no price that can help us allocate attention to detecting such asteroids and building systems for deflecting them. As a result we are currently paying a trivial amount of attention to this problem relative to the potential damage to humanity from an impact.The third foundational issue is new knowledge itself. The further removed the knowledge is from creating a product or service that can be sold, the less the price mechanism is of use. That is quite obvious for basic research, but is even true in applied settings. Consider early aviation pioneers, for example. They did not pursue flight because there was an obvious market with clear prices for air travel. Instead, they were fascinated by solving the challenge of heavier-than-air flight. Take the early days of quantum computing when any actual machine was still decades away. The price mechanism would not allocate attention to quantum computing at that time.The fourth foundational issue is the deeply personal. For markets and prices to exist there have to be multiple buyers and sellers. So there is no market and hence no price for you to spend time with your children. Or for you to figure out your purpose in life. Ironically, it has been an ad campaign for a commercial product that got this idea right: Master Card’s long running series of “Priceless” ads. In the first of these from 1997 a father takes his son to the ballpark. The text reads “Two tickets, $28; Two hotdogs, two popcorns, two sodas, $18; autographed baseball, $45; real conversation with 11-year old son: priceless, there are some things money can’t buy.” Capitalism and the market mechanism cannot help us allocate attention to anything that is deeply personal.
  • Uncertainty Wednesday: Updating (Beta Distribution) June 28, 2018 12:29 am
    It’s been six weeks since the last Uncertainty Wednesday, so I strongly suggest you go back first and read that post which provides an introduction to the idea of updating. Take your time, this new post won’t go away!The distribution that we will use for modeling our coin is the Beta distribution. Why choose that one? Because the beta distribution when combined with likelihood function for a coin toss gives us another beta distribution. This is known technically as a so-called conjugate prior. That all sounds very technical but the idea is simple: when our prior is a beta distribution and the observations are of the 0 or 1 (head or tails) variety, then our posterior distribution after updating is once again a beta distribution.Now the beta distribution has two parameters, which are commonly referred to as α and β. These parameters can take on lots of values, but there is straightforward choice for initial parameters. We will pick α = β = 1 because for those values, the beta distribution coincides with the uniform distribution. All the plots in this post are generated using Wolfram Alpha.As a refresher: the x axis on this chart is the parameter θ for which we are expressing our belief. In the coin toss example θ would be the probability that the coin comes up Heads on any one toss (in which case 1 - θ is the probability that it comes up Tails). We know nothing about the coin right now so that probability θ could be anything between 0 (never see Heads) and 1 (every toss comes up Heads).At this point you may be thoroughly confused. How do the parameters from the beta distribution relate to the parameter for the coin toss? Sometimes people call the α and β hyper-parameters, but I think a better term would have been meta-parameters or belief-parameters. Put differently α and β determine the shape of our belief about θ.So now what remains to be done is to figure out how we should update α and β after we have observed some outcomes. We are looking for new values of α and β after we have observed either Heads or Tails. As we will see next Wednesday the updating of these values turns out to be super simple.
  • World After Capital: Getting Past Capital (Attention Cont’d) June 26, 2018 12:11 am
    NOTE: I am resuming publishing excerpts from my draft book World After Capital. Today’s section continues the discussion of why attention is scarce. Since it has been five weeks, I recommend first rereading the prior section which introduces attention scarcity.Collective Attention ScarcityAt the same time our collective attention is also scarce. How so? Humanity as a whole is not devoting nearly enough attention towards moving knowledge forward with regard to a variety of threats and opportunities.On the threat side, for example, we are not working nearly hard enough on how to recapture CO2 and other greenhouse gases from the atmosphere. Or on monitoring asteroids that could strike earth, and coming up with ways of deflecting them. Or containing the outbreak of the next avian flu: we should have a lot more collective attention dedicated to early detection and coming up with vaccines and treatments.Climate change, “death from above,” and pandemics are three examples of species level threats for humans. As I wrote earlier, we can only sustain the present number of humans on this planet due to our technological progress. Each one of these risk categories has the potential to fundamentally disrupt our ability to meet the basic needs of millions, potentially billions and possibly the entire human species. That’s why our collective attention is scarce in the precise sense of scarcity provided earlier.On the opportunity side, far too little human attention is spent on environmental cleanup, free educational resources, and basic research (including the foundations of science), to name just a few examples. There are so many opportunities we could dedicate attention to that over time have the potential to dramatically improve quality of life here on Earth not just for humans but also for other species.As in the individual case, much of our collective attention, instead of being applied to these threats and opportunities, is absorbed by having to earn a living, with our leisure time increasingly consumed by watching entertainment on the internet.The result is that we are not investing nearly enough attention in generating more knowledge. And if we don’t have enough knowledge, we may not be able to solve some of the threats we are currently facing, such as climate change. The climate change threat is not a hypothetical concern, but has repeatedly led to the downfall of prior human civilizations, such as the Rapa Nui or the Mayans. Now, however, we are facing the climate change threat on a truly global scale. We should be using a few percent of all human attention to fight this but I suspect the actual number is two to three orders of magnitude smaller.I am proposing this as a (possibly new) explanation for the Fermi Paradox, which famously asks why we have not yet detected any signs of intelligent life elsewhere in our rather large universe. We now even know that there are plenty of goldilocks planets available that could harbor life forms similar to those on Earth. Maybe what happens is that all civilizations get far enough to where they generate huge amounts of information, but then they get done in by attention scarcity. They collectively take their eye off the ball of progress and are not prepared when something really bad happens such as a global pandemic.But why exactly is attention so poorly allocated? One key reason is that we are currently attempting to use the market mechanism to allocate attention. The next chapter explains why that cannot work.
  • Personal Responsibility in the Age of TrumpYesterday, I tweeted that I considered Sarah Sanders... June 24, 2018 5:24 pm
    Personal Responsibility in the Age of TrumpYesterday, I tweeted that I considered Sarah Sanders tweet about being asked to leave the Red Hen restaurant an abuse of government power. Since I got quite a few questions on Twitter about that I want to elaborate the argument in a blog post.Sarah Sanders is currently the White House Press Secretary. This is a role that she has chosen voluntarily. In this role she has time and again repeated and defended the many lies of President Trump, most recently the lie that separating children at the border was a law for which the Democrats were responsible, when in fact it was a policy decision by the White House.Sarah Sanders was asked by the owner of the Red Hen to leave. She was at the restaurant as a private citizen and not on any government business. She then used her official United States government account to complain about her treatment. The official account has over three million followers and is supposed to be used for White House communications. Using it to complain about how she was treated personally therefore constitutes a clear abuse of government power. She could and should have used her personal account, which, by the ways, has over two hundred thousand followers, so it’s not like she wouldn’t be heard.It is completely perplexing to me how people think that they can be associated with the administration and not have any personal responsibility. On Twitter someone actually rolled out a version of the “she is just doing her job” defense. I don’t think I need to provide the historical context for why that should not be allowed to stand. She has actively chosen to do this. And continues to do so every day that she remains the Press Secretary. Just to be clear: the same has been true for anybody working in any prior administration. It is a voluntary action and hence comes with personal responsibility.A business should be perfectly free to not provide service to someone on the basis of the actions they have taken. The “No shirt, no shoes, no service” sign at businesses in beach towns is perfect example of this. As is the case of my asking someone to leave our office years ago after being incredibly rude to one of our assistants. Not wearing shoes, making rude remarks, acting as the Press Secretary, these are personal actions that can and should form the basis for a legitimate decision not to do business with somebody. It is crucial to note that this is not discrimination based on beliefs, e.g. being a Republican, but entirely based on actions.And because several people have brought it up: this is also different from discriminating on the basis of someone’s identity, such as the color of their skin. Now there is not necessarily a bright line at all times between actions, beliefs and identity. For instance, I tend to be critical of some action resulting from religious beliefs and think people have some personal responsibility in those matters, but I also recognize that a lot of people see their faith as an integral part of their identity. Quite clearly being Press Secretary is not part of Sarah Sanders’s deep personal and difficult/impossible to change identity. That is an action she has chosen.So in summary: Your actions should have personal consequences (that, by the way, is the meaning of “skin in the game”). Being ejected from a restaurant is one of those possible consequences. And using an official government account (instead of a personal one) to complain about such consequences constitutes an abuse of government power.If you feel the same way about this as I do, I encourage you to support the Red Hen by purchasing a gift certificate.
  • Back (Well, Almost) June 17, 2018 1:34 pm
    After nearly four weeks of not posting due to shoulder surgery I am almost back. I am saying almost because even though I can type very well again, I am spending a fair bit of time every day on physical therapy. That is time I would have spent writing and, well, something has got to give. So for now I am planning on one post per week instead of the usual three, but let’s see where it goes.In the meantime though I want to thank everyone who kindly reached out, inquired how things were going, and wished me a speedy recovery. I appreciated every note! Hearing from friends and strangers helped a lot, especially in the early days post surgery when I was quite miserable. If you ever consider shoulder surgery for rotator cuff, just mentally prepare yourself for a really rough first week. You may wind up questioning whether it was a good idea, I certainly did. And while I am only four weeks out now I can feel improvements every day which makes me optimistic. If you care for a bit more background here is what happened. We went skiing in March to Verbier, Switzerland. On the first day in poor visibility I misjudged the distance from an off-piste run down to a cat track and there were about 5 feet of vertical. I hit the cat track hard, double ejected and pancaked into some very hard packed snow. I could hear a group of people standing near by go “Ouch.” I got up put my skis on an skied off but my left wrist and right shoulder definitely hurt. I skied the rest of the day but got fairly little sleep at night as my shoulder was throbbing. Given the great conditions though, I just took a lot of Advil the next morning and wound up skiing the entire five days we were there.When I got back to New York my shoulder continued to hurt and I had fairly limited range of motion when trying to lift my right arm. I was hoping the whole thing would just go away with time but after six weeks without improvement I finally caved decided to see a doctor. Easier said then done because my insurance company wanted me to first get an x-ray before approving an MRI. The medical reasons for this are dubious at best and I decided to pay for the MRI out of pocket (you can get a much better rate when paying on the spot, one of the great distortions of our medical system).With MRI in hand I went to two different doctors and got the same feedback: a mostly torn Supraspinatus tendon and a bunch of damage to the Glenoid labrum. Both required surgery to fix. The procedure itself was done at an outpatient facility and I was able to spend the night in my own bed (mostly not sleeping). Pro-tip: start taking the pain killers right away and don’t wait for the nerve block to wear off. Because of the nerve block you don’t feel any pain but when it wears off the pain is excruciating and pain killers take some time to work (file under: important note to self, should I have to do this again some time).Now off to do my physical therapy exercises. And: Happy Father’s day to all fathers who made it to the end of this post!
  • Shoulder Surgery May 23, 2018 12:15 pm
    No Uncertainty Wednesday today. I had shoulder surgery yesterday to repair a rotator cuff injury. That means I won’t be able to type for quite a few days. I am creating this post using Voice on my Android phone. Impressively I did not have to correct a single word.
  • World After Capital: Getting Past Capital (Attention) May 21, 2018 11:22 am
    NOTE: Today’s excerpt from World After Capital is about attention. It argues why attention is scarce in the sense of scarcity introduced earlier in the book. This section sets up the demands on attention and then talks about scarcity of attention for the individual (next time will look at scarcity of attention for society as a whole).AttentionThere is a limited amount of human attention in the world. We have 24 hours in the day and we need to spend some of that time eating and sleeping. For many people in the world much of their waking time is occupied by the job loop (both the earning and the spending parts). That leaves relatively little time for attention that we can freely allocate. This hard limit also exists in the aggregate, since—as I have argued earlier—we are headed for peak population.At the same time that our attention is limited, we are using the Internet to dramatically increase the amount of available content. The increase in content is well documented to be exponential, which means that most of the content that has ever been produced by humanity has been produced in the last few years [47]. For example, YouTube alone is adding 100 hours of new video content every minute [48].As a result, it is easy today to be completely overwhelmed by content. Our limited attention can readily be absorbed by ever refreshing content. Humans are maladapted to the information environment we now live in. Our brain evolved in a world where when you saw a cat, there was an actual cat. Now we live in a world of infinite cat pictures. This is analogous to our maladaptation to sugar for an environment that is now sugar rich (largely artificially so). Checking email, Twitter, Instagram, watching yet another YouTube clip or Snapchat story, or episode of one’s favorite show on a streaming service—these all provide quick “information hits” that trigger parts of our brain that evolved to be stimulated by novelty. As of 2017, the average person spends roughly two hours on social media every day [49].The limited availability of attention has become the key new source of economic rents. Companies such as Google, Facebook and Twitter are valued in no small part based on the amount of attention they have been able to aggregate, some of which they then resell in the form of advertising. As a result they invest heavily in algorithms designed to present ever more captivating content to their end users in order to monopolize their attention. Sites like Buzzfeed and Huffington Post that are nominally news sites do the same.Now even if you think this is problematic, does it mean attention is scarce in the precise meaning of scarcity that I defined earlier? That would require for us to not have enough attention to meet humanity’s basic needs. Is that really the case?Individual Attention ScarcityLet’s first consider attention at the individual level. All over the world people have constructed their identities around work and around firmly held core beliefs, whether religious or worldly. Both of these are undermined by digital technologies. We saw earlier how digital technology is putting pressure on labor. It is also putting pressure though on firmly held beliefs. Content is no longer easily contained in geographic boundaries and people are being exposed, many for the first time, to opinions and behaviors that diverge from their core beliefs.In combination, this pressure is leading to a large scale crisis of individual identity and rising aggression both online and offline. This crisis takes many different forms, including increased teenage depression, growing adult suicide rates—particularly among middle-aged white males, and drug overdose deaths. In the US, these have increased almost 60 percent, 20 percent and 40 percent, respectively, between 2006 and 2015 [need more up-to-date statistics]:This is not dissimilar from the beginning of the Industrial Age, when people had to leave the countryside and move to big cities. They were forced to give up identities that had been constructed around land and a historical set of professions. They were confronted with people from other regions who held different beliefs.Just as with the transition into the Industrial Age it is therefore not surprising that there is a rise in populist leaders with simplistic messages, such as Donald Trump in the United States and Viktor Orban in Hungary. A recent study found that throughout Europe, populist parties are receiving more than double their average share of the vote in national and parliamentary elections compared with the 1960s [50]. People whose identity is shaken want to be reassured. They want to hear that things will be OK and that the way of getting there is simple. “Make America Great Again” is an example of that. So is ISIS. In both cases the message is retrograde. Instead of a new identity that has to be built, requiring time and effort, these backward movements promise an easy return to a glorious identity of the past.Our attention to our most basic need, the existential need to make sense of the world as an individual by finding a purpose that makes our life meaningful, is scarce. Instead we let our attention be occupied by our job or by yet another video or worse by propaganda. This individual scarcity of attention is not confined to any one demographic. Definitely people who have to work multiple jobs just to make rent and feed their families are impacted. But so are many people in high paying jobs who are often working more hours today than they ever have.I do a fair bit of counseling for young people who want to work for a technology startup or who want to enter venture capital. Most of them are looking for tactical advice, such as how to apply to a specific position. After discussing that for some time, I usually switch gears and ask them a much more open question. “What do you want from your next position?” That often elicits answers such as learning a new skill, or applying a skill that they have recently learned. Sometimes people answer with a desire to contribute to some cause. I then get to the point by asking directly “What is your purpose?” Shockingly few people have an answer to that.Purpose is an individual need for which the Industrial Age had little use. Somebody with a strong sense of purpose does not fit readily into the job loop either as a worker or as a consumer. Instead work and consumption have become the de facto purpose for most people. Both the cultural and religious narratives adjusted from the Agrarian Age to the Industrial age to support this re-definition of purpose.With digital technology we can now exit the job loop and redirect attention to finding other sources of purpose. Instead though we are using digital technology to aggregate attention primarily for resale (advertising) and for entertainment. We do not identify this as a fundamental problem of the largest platforms, focusing instead on areas such as privacy and moderation of speech. That’s because we continue to see the world through the lens of capital scarcity instead of attention scarcity.
  • Uncertainty Wednesday: Updating (Intro) May 16, 2018 3:10 pm
    Now that we have spent the last few Uncertainty Wednesdays on modeling beliefs as probability distributions, we can now get to the topic of updating. Updating is what we are supposed to do with our beliefs when we have new observations. We first encountered a similar idea in the extensive example of a cancer test which we used to derive Bayes’ theorem. In that post I wrote that “[Bayes’ theorem] relates the probability of the world being in state B *before* we have observed a signal to the probability *after* we have observed signal H.” Now in that quote and in the example we used probabilities and not probability distributions. We had found the following formula, which is known as Bayes’ rule:P(B | H) = [P(H | B) / P(H)] * P(B)As a reminder P(B) is the probability of event B before we have observed anything, so in the case of cancer this would be the rate at which this cancer occurs in the relevant population. P(B | H) is the updated probability conditional on having received a positive cancer test (H as in high). We saw that the updating occurs through the factor P(H | B) / P(H) which consists of the sensitivity of the test P(H | B) divided by the total probability of seeing a positive test P(H).What we are looking for now is to come up with a similar version of Bayes’ rule for beliefs expressed as probability distributions. We want something that looks roughly like:posterior belief = update factor * prior beliefwhere again the update factor captures the likelihood of the observations, keeping in mind here that we are now dealing with distributions. The beliefs and the update factor are both functions which makes the formula for this quite daunting looking. We will write it – with some abuse of notation – as follows to keep things simple p(θ | x) = [p(x | θ) / p(x) ] * p(θ)where θ is the parameter we are interested in, such as the probability of Heads for our coin, and x denotes our observations. We see the numerator of the update factor now is p(x | θ) – this is a function, the so-called likelihood function, which maps θ into p(x | θ). The denominator is p(x) which is the probability of the observations. That in turn is quite complicated if we unpack it, since it is an integral over all the possible values of θ and their probabilities (what comes out though is a scalar, meaning just a number, not a function).So what we are really doing is multiplying two functions: the likelihood function and the probability density function of our prior belief which gives us a new function that represents our updated or posterior belief. This is complicated for the general case and along with calculating p(x) by evaluating the integral will require numerical approximations. Thankfully though it turns out that there are elegant and simple solutions for some types of probability distributions, such as the Beta distribution which I had introduced as an example of a possible belief. If you have a Beta distribution as the prior belief for the probability parameter in a coin toss then the posterior belief also takes the form of a Beta distribution! Next Wednesday we will use this fact to show how we can easily update our beliefs on a coin toss (provided we buy into using the Beta as the shape of our prior). 
  • World After Capital: Getting Past Capital (Labor) May 14, 2018 12:10 pm
    NOTE: Today’s excerpt from World After Capital is about labor. In it I describe what I call the “job loop” and how it has become central to both the economy and sadly also our view of human dignity.LaborBefore we can get to attention, though, we need to discuss the changing role of labor in the economy. Thinking about labor is hard because of an odd interweaving of cultural beliefs with economic history that I will try to disentangle. Over the last couple hundred years we have convinced ourselves that employment is essential both for the functioning of the economy and for individual dignity.Let’s start from the perspective of production. If you want to make products or deliver a service you require a series of inputs, including buildings and machines (capital), raw materials or parts (supplies) and, historically, human workers (labor). For much of history, capital and labor turned out to be complements. As the owner of a company you really couldn’t make use of the company’s physical capital without having labor to operate it. That was true for manufacturing and holds even more so for services, which often use very little capital and consist primarily of labor.But, and this is where it gets confusing, there is nothing in economics that says any particular production process has to require labor. The deemed necessity of labor happens to be an artifact of the production functions that were technologically available to us when economists started to develop the theory of production. If you, as the owner of a company, figure out through technological progress how to do something with less labor, or no labor at all, and that form of production is cheaper than before, that’s what you will choose to do. WhatsApp, when it was acquired by Facebook for $19 Billion had fewer than 50 employees!There would seem to be a catch though. While having no labor might make sense for any one company, for the economy as a whole, who is going to buy all these goods and services if people are out of work and hence don’t have any money? There is the famous story about an exchange between Henry Ford II and Walter Reuther who then headed up the Automobile workers union, which went as follows:Henry Ford II: Walter, how are you going to get those robots to pay your union dues? Walter Reuther: Henry, how are you going to get them to buy your cars? [42]Now if we all had inherited wealth, or sufficient income from capital, an economy without labor wouldn’t pose a problem. As a first approximation, we would have the same demand. But none of us would have to work and all of us could enjoy the benefits of cheaper products and services courtesy of robots and automation.The Job LoopFor a long time the possibility of a slump in consumer demand due to less labor seemed not just unlikely, but downright impossible. We had a perfectly working loop at the heart of economic growth, which I call the “job loop”In today’s economy the majority of people have a job. They sell their labor, producing goods and services for someone else and receiving wages in return. They then take those wages and go buy stuff. Smart phones. Books. Tools. Houses. Cars. Gas for their cars. They also buy services, the professional assistance of attorneys and doctors and auto-mechanics and gardeners and hair stylists and nutritionists. Most of the people who sell them goods and services, in turn, are employed and take what they are paid and live on that, buying goods and services from still other people.The job loop worked incredibly well in combination with competitive markets for goods and services and a properly functioning banking and finance system. Entrepreneurs would come up with new and improved offerings. They would use debt and/or equity to start new businesses which would employ people (often at higher wages than older businesses, giving employees more purchasing power). It was an amazing virtuous cycle that resulted in unprecedented prosperity and innovation.A quick aside, as some might say that many people these days are self-employed or independent contractors. For the purposes of this analysis that is irrelevant as long as they are fundamentally selling their time. For instance, a graphic designer who works as an independent contractor (freelancer) is still largely paid for the time they put into a project. It is only if the designer can develop something, say a graphics template, that is paid for over and over without further time spent that they exit the job loop.The problem with any virtuous cycle is that the effect of mutual re-enforcement applies just as much in the other direction when things contract. Take a small town, for example, in which local stores provide some of the employment. Now a big superstore comes into town, resulting in reduced total retail employment and lower wages. Yes, maybe the products they sell are cheaper also, but it is entirely possible to set off a contractionary cycle. Fewer store employees have income (and those who do have less). They start spending less on haircuts and car repairs. That means the hair dresser and car repair person earn less and can spend less at the local restaurant.Could this happen to the economy as a whole?The Great DecouplingWe are in the middle of a version of that playing itself out at the scale of the U.S. economy and potentially the global economy as well. It starts with what has become known as the great decoupling. For a long time as the economy grew, the share of GDP going to labor grew right along. Beginning around 1980 though GDP continued to grow while household income remained flat — hence the term “decoupling”But GDP continued to grow so what’s the problem? Well much of that growth was financed by consumers going into debt instead.Eventually there was a limit to how much debt households could support. Once we reached that limit, we had the making of a situation of insufficient aggregate demand in the economy. The first event that really drove that point home was the collapse of the U.S. housing bubble. There is a fair bit of evidence that we are hitting another such point right now. In theory, the dramatic decline in oil prices should put more money into the hands of consumers and stimulate demand. Instead, it appears that consumers are using it to pay off debt and even start to save.What’s driving the decoupling? Part of it may be demographics, but part of it is likely to be the impact of technology. To the extent that accelerates, as I believe it will, there will be further pressure on aggregate demand. From a traditional economic growth perspective what should be particularly worrisome is that jobs in developing countries have a high exposure to automation [43]. Put differently, these countries may skip the golden age of the job loop entirely or have a much diminished version.We don’t need an indefinite growth of aggregate demand to take care of basic needs (wants by contrast are unlimited). Nonetheless, a rapid demand collapse would be a bad thing for societies that, for now, are built largely on the job loop. That raises the question of whether it is at all possible for technology to depress wages over a prolonged period of time.Lump of Labor or Magic Employment Fallacy?With the job loop dominant, people have to sell their labor to earn a living. Until recently most economists didn’t worry at all about this ever being an issue. They believed that when human labor gets replaced in one part of the economy, say agriculture, it finds work in another part, say manufacturing. When manufacturing starts to get automated, labor is sought after for services. These economists refer to a fear of technological un- or under-employment as the “Lump of Labor Fallacy.”The argument goes something like this. We automate some part of the economy. That frees labor up to work on something else. Entrepreneurs use this newly available labor to deliver innovative new products and services. There is no fixed “lump” of labor, rather there are potentially infinitely many things to work on. As support for their argument they offer that this is exactly what has happened historically. And so they ask, why should this time be different?To understand how things could be different, it is instructive to consider horses. As recently as 1915 we employed over 25 million horses in the U.S. in agriculture and for transportation. By 1960 that number had declined to 3 million and then we stopped keeping track systematically [44]. What happened? Well, we figured out how to build tractors, cars, and tanks. There were no use cases left in which horses were superior to a mechanical substitute. The potential for the same to happen to humans was pointed out by economist Wassily Leontief in his 1952 work, Machines and Man [45].Some people will immediately object that, well, horses can’t think and obviously we humans can, giving us a far broader range of things to do. That is true and is also the reason why so far we have always found new employment for people. So what has changed? Well, as we saw in the chapter on Digital Technology, we now have computers and we have figured out how to have computers do lots of things that until quite recently we thought only humans could, such as driving a car.With digital technologies we have universal machines at zero marginal cost. All of the sudden the idea that we might be like horses, and have fewer and fewer uses, doesn’t seem quite so impossible.Those who continue to claim this is committing the “Lump of Labor Fallacy” immediately retort that this simply signals a lack of imagination. They argue that we just haven’t thought of some new set of human activities that will once again gainfully employ people. But that line of thinking could also be a fallacy. I will call it the “Magic Employment Fallacy.” Just because we have found new employment in the past, doesn’t mean we will in the future, especially when we have an entirely new set of technological capabilities.Yes we humans can be incredibly creative and think of new things to spend our time on. But the operative question for people selling their labor is not if they can think of something to do, but if they can get paid for it. Not just get paid something, but enough to cover all of one’s basic needs. It doesn’t matter what creative pursuit or new service we think of, the only thing that matters is whether a machine (or another human for that matter) is capable of doing it more cheaply.This, in particular, turns out to be a problem with the “Magic Employment Fallacy.” Nothing in economics says what the clearing price for labor ought to be (the wage level at which there is no unemployment, and no shortage of labor). It could happen to be well below what people need to cover their basic needs. And that means we have a problem even if everyone were employed, unless you want to make an argument that we should simply let that happen and eventually wind up with fewer people, just as we did with fewer horses.So in order for the “Magic Employment Fallacy” to, well, not be a fallacy, we have to find new high value things for humans to do for which there is both paid demand and machines are not effective substitutes. I don’t think we can rule that out entirely. We may find that the best candidate is a cultural shift that leads us to value goods and services produced by humans qua human production. The success of marketplaces, such as Etsy, that sell handmade goods, and the rise of artisinal goods more generally, are potential indicators of such a shift.Another area where we may value humans qua their being human is in caring for the young, the elderly and the sick. Given changes in demographics we will need significantly more care for the elderly. Yet while we may want to value human care more highly, there is a potential wealth distribution issue. For instance, many people in the U.S. (and elsewhere) don’t have the savings that would allow them to pay for human help as they get old.Whether it is Lump of Labor or Magic Employment, at a minimum we have to be prepared for a potentially long adjustment period. That alone is an argument for a need for increased economic freedom (see the later chapter) but there is a much more powerful one: we should prefer automation over human employment.Expensive Labor and InnovationSome people argue that unions were bad because they made labor expensive, which resulted in costly products and services that people could not afford. There is, however, a completely different way to look at unions raising the price of labor: it propelled us to become more efficient by creating a problem that entrepreneurs had to overcome, and the way they overcame it was through innovation—by building better machines that required fewer humans. One can still see the negative effects of abundant cheap labor in places such as India. There is little incentive to invest in a machine, if it is cheaper to have people do the work by hand.It is bad to be stuck in a low innovation trap. Now we face this risk globally. The combination of a fear of automation and some automation making labor cheap could have exactly that effect. For example, we could easily wind up with many more years of people having to drive trucks back and forth across the country, long after a machine could do the same job and do it safer [46]. Pick any other job, say toilet cleaning, and ask what the incentive is to automate that job as long as you can get someone to do it for minimum wage?Some will object to automation on a totally different ground though. They will argue that people require work as an integral part of their identity. That work is what gives humans dignity. If you have been a truck driver for a decade or more, who are you, if you can no longer earn a living driving a truck? This is an area where unions have historically been problematic: trying to preserve jobs for the sake of carrying out that job and also to preserve the union itself, which represents those employees. Today though it may just as easily be politicians who proclaim that jobs must be protected as a source of dignity.So now we see what we need to solve for with regard to labor: a way to embrace automation without a collapse in aggregate demand, while simultaneously getting away from the idea that a job is the source of human dignity. This may seem like an outrageous claim to some and is certainly a tall order. But the next section on the scarcity of attention will explain why it is critically important.
  • Uncertainty Wednesday: Beliefs (Part 3) May 9, 2018 5:19 pm
    Today’s Uncertainty Wednesday is a quick wrap up to the formalization of beliefs as probability distributions. Let’s first start with a simple question. What probability distribution reflects the least knowledge about a coin? How do you express “I don’t know, the coin could be anything from only heads to only tails to anything in between”? The answer is a uniform distribution as shown here:The horizontal axis is the probability of the coin coming up heads – ranging from 0 to 1 and the vertical axis is what exactly? Well this depends on whether you paid attention to last week’s explanation of probability density functions (pdf) versus cumulative distribution functions (cdf). Which one is this?Well it is a pdf, to be precise it is the pdf a uniform distribution over the interval [0, 1], which means that the vertical axis helps us measure the probability over any (sub)interval of the horizontal axis. The area under the curve is the probability. We can easily verify that the total is 1 because 1 x 1 = 1. Now consider the probability between say 0.4 and 0.6. That’s (0.6 - 0.4) x 1 = 0.2. So our belief here is that P(H) (probability of observing Heads) will be in the interval between 0.4 and 0.6 with probability 0.2.So between last Wednesday and today we have seen how to express a range of beliefs from knowing nothing to certainty as probability distributions. Starting next Wednesday we will get to the question of how to represent the updating of beliefs when we make new observations.
  • World After Capital: Getting Past Capital May 8, 2018 12:10 am
    NOTE: Today’s excerpt from my book World After Capital deals with how we have achieved the sufficiency of physical capital. This is capitalisms greatest accomplishment, but also means that we are now facing a new scarcity: attention.CapitalThe title of the book is World after Capital. One of my fundamental claims is that capital is no longer scarce. There is enough capital in the world to meet everyone’s basic needs. That means meeting the individual needs of 7 billion or more people, the collective needs of the societies they live in and the collective needs of humanity at large. Using the language introduced earlier, capital is sufficient. And because population growth is decelerating, while technological progress is accelerating (due to digital technology), capital will no longer be the binding constraint for humanity going forward.It is tempting to look at this in terms of financial capital, but that again would be succumbing to the veil of of money, as was the case with the definition of scarcity. Dollar bills don’t feed people. Gold bars can’t be used as smart phones. The capital that matters is productive physical capital, such as machines and buildings.Financial capital is not irrelevant. It is generally required both for the initial construction of physical capital and to meet the ongoing working capital needs of the economy. If I want to build a factory or a school, I need to pay the construction workers, the suppliers of machines, etc. before I can start collecting money. And in many businesses I pay some ongoing expenses every month before collecting revenues from customers. Cash outflows preceding cash inflows means a financing mechanism is required. To get the proper accumulation of physical capital, we therefore need to have effective ways of accumulating and allocating financial capital.In the history of financial capital there have been many important innovations, such as corporations with limited liability, debt and equity issuance and trading, bank lending and more recently market place lending. The allocation of financial capital to projects through markets has been enormously successful, compared to attempts at various forms of centralized planning. It is the very success of the market-based approach that has now given us a physical capital base in the world that is large enough to meet our basic needs.Many recent innovations in finance, however, have not contributed meaningfully to the proper creation and allocation of physical capital. Quite the opposite. They have contributed to the “financialization” of the economy: a growth in financial sector activities that is decoupled from or even harms the formation of physical capital. For instance, many derivatives and structured securities have resulted in severe misallocations by shifting risk. One example is the housing bubble that resulted in part as mortgage backed securities and CDOs appeared to remove all risk from capital flooding into construction.What is the role of “human capital” in all of this? Human capital is the subset of all knowledge that embodied in a group of humans. So the question is better asked differently: what is the role of knowledge? The answer is that advances in knowledge are essential for making capital more effective. Even more fundamentally, knowledge is necessary for having physical capital in the first place.You can theoretically have physical capital without financial capital but you cannot have physical capital without knowledge. You cannot build a machine, say an MRI, without a lot of knowledge in physics and engineering. In a world where everyone’s basic needs are taken care of it might, however, be possible to build the same MRI without the need for financial capital.Interestingly, you can also have financial capital without physical capital and without meaningful knowledge accumulation. For instance, you can develop financial capital through trade or war or simply by convention as in the case of the island of Yap [40].All of this is to say that we should never lose sight of the fact that financial capital ultimately serves no purpose in and of itself, other than possibly the gratification of ego. As great illustration of that imagine a Spanish Galleon full of raided gold sinking in a storm. The sailors aboard had ample access to financial capital, but what they really needed to survive was more knowledge and better physical capital.So now we will go ahead and examine whether physical capital is still a binding constraint when it comes to meeting basic needs. The approach I am taking is split in two parts: here in the main text I am applying logic based on observations; the Appendix contains much more data and calculations to back up the arguments.Individual NeedsMy claim is that capital is no longer the binding constraint for meeting individual needs, not just for one individual but for everyone. This is especially true for the developed economies but increasingly true globally.The primary strategies for meeting our power needs are breathing air, drinking water and eating farmed food.There is plenty of air to breathe (one time reminder: please see the Appendix for backup on this and the following assertions), the key challenge today is having clean, breathable air. China and India are both struggling with that at the moment, but this is due to rapid development using outdated energy sources. The clean air achieved in industrialized countries shows that this is a temporary development stage.Similarly there is plenty of water in the world for everyone to drink. There are distribution and access problems, including right here in the United States (e.g., the polluted water in Flint, Michigan). Again though, physical capital is not a binding constraint. We can even build new desalination plants in record time. [Example]We have also made dramatic progress in farming. In fact, globally the amount of land required for farming has started to decline as a result of higher per acre productivity. We have made recent breakthroughs in vertical and automated farming. For instance, the world’s largest vertical farm is currently under construction in Jersey City. The Japanese indoor farming company Spread is working on a fully automated facility that will be able to produce 30,000 heads of lettuce per day [155].The discharge need is primarily addressed through modern sewage technology. Here too capital is no longer a binding constraint per se, but again there is a global distribution problem. To see how quickly this has the potential to change, consider the migration that has taken place in China from the country side into cities.The Chinese construction boom also illustrates how quickly we can build shelter as a strategy to address the need for a controlled physical environment. In the U.S. too we had a prior construction boom which was powered by artificially cheap mortgage credit. While a lot of housing was built in the wrong places it powerfully demonstrated our construction capacity.Clothing is another strategy for addressing this need. The price of clothing has been falling in the United States and in many other parts of the world. Capital is not a constraint here and we can clothe everyone in the world many times over.Similarly we have become very good at providing light. There is a great study that shows how the hours of light one can earn with 60 hours of labor have exploded in the United States from about 10 in 1800 to over 100,000 by 1990 [CITATION?]. We have made further progress since with LED lighting. That progress has also come to other parts of the world, for instance in the form of off grid solar powered lamps.Now we come to a more difficult need, the one for healing. We read all the time how expensive healthcare has become and how it consumes an ever larger fraction of the economy, at least here in the United States. We have to ask though whether capital really is a binding constraint here. Again in industrialized countries this does no longer appear to be the case. We have plenty of hospital space and doctor’s offices. We have extensive diagnostic facilities and can produce large quantities of medicine. The binding constraint instead is one of insufficient knowledge. Our bodies are extremely complex and even seemingly basic issues, such as how diet relates to health, are poorly understood as a result.In learning we are also no longer capital constrained. This is rapidly true not just in industrialized nations but also globally due to the buildout of wireless networks and the increasing affordability of smartphones. We are not far away from a point in time when we have enough capital for anyone in the world to learn anything. The binding constraint here is not capital but the availability of affordable content and the time to learn (and to teach).The final individual need, the one for meaning, is not and has never been constrained by capital.Collective NeedsAt first it might seem difficult to see how capital even relates to our collective needs as defined in the earlier chapter. How could capital have anything to do with such abstract concepts as motivation and coordination? Was capital ever a binding constraint here?Capital clearly was not a binding constraint for reproduction, which societies thankfully accomplished a long time ago or we would not be here today.But when it comes to allocation, capital was the crucial binding constraint during the Industrial Age. Not only were we terribly bad at making stuff at first but we also lacked the communications and transportation infrastructure to easily get goods to where they were needed.Motivation might historically appear not to to be capital constrained as we had many strategies for the motivation need, including rewards and punishments. The development of markets with prices, however, turned out to be a crucial strategy for meeting the motivation need. High prices provide an incentive for the allocation of capital (and other factors of production). For a long time capital in turn was the binding constraint on the scale of markets. Today, however, we can broadcast supply, demand, and prices in any market globally in near realtime at zero marginal cost.Coordination, on the other hand, was quite obviously capital constrained for a long time due to limitations on communications. We can see this by considering that until fairly recently it was not possible to have a globally coordinated event. Today on the other hand we not only have a global nearly instantaneous communication network but also the ability to precisely position people or machines using GPS and other location services.Finally, our collective need for knowledge was capital constrained for a long time. Making books for instance was expensive and time consuming. Copies of books had to be made by humans introducing errors. The spread of knowledge was constrained by the need to create and move physical copies. We have now left all of those capital constraints on knowledge behind.EnablersOur progress on enablers is another way to understand why capital is no longer the binding constraint. We have had massive breakthroughs on all four during the Industrial Age: energy, resources, transformation, and transportation.The biggest breakthrough in energy was the development of electricity. It allowed us to apply energy in highly precise fashion. Our remaining challenges are all related to the production, storage and distribution of electricity. Further improvements in energy will let us solve needs in new ways, but we are not fundamentally energy constrained today. For instance, a relatively small percentage of surface coverage with solar (< 1% in the US) would cover all electricity needs at current efficiency rates [SOURCE?].Resources were also completely transformed during the Industrial Age through mining, which in turn was enabled by progress with transportation (rail) and energy (steam power). People, especially those motivated by a concern for sustainability, like to point to scarcity of resources as the primary constraint. But resources are sufficient when we consider three sources that we can tap in the future: recycling, asteroid mining and transmutation. For instance, today a lot of electronics wind up in landfill instead of the materials being recycled. We achieved the first soft landing on an asteroid as far back as 2001. And while transmutation sounds like modern day alchemy, we now routinely make phosphorus out of silicon (albeit in small amounts).Our ability to transform also improved radically during the Industrial Age. For instance, chemistry allowed us to make rubber synthetically which previously had to be harvested from trees. With machine tools, such as drills and lathes, we were able to rapidly transform wood and metals. Later we added transformation technologies such as injection molding and more recently various additive manufacturing technologies (often referred to as 3D printing).Transportation went from human powered to machine powered dramatically changing our capabilities. We went from walking to traveling to space in rockets. We can fly across continents and oceans on commercial flights and reach any major city by air in just a day (or two at most). While some have complained about a lack of progress in flight, pointing to the lack of commercial supersonic options following the retirement of the Concorde, we had extraordinary progress in flight safety. More recently work has resumed on new options for commercial supersonic flight and we have made tremendous progress with reusable rockets and closer to earth with autonomous vehicles (for instance drones and warehouse robots).The progress on these enablers has allowed us to produce more physical capital, do so more rapidly and cheaply, and transport it to anywhere in the world. One way to appreciate just how far we have come is to note that the first time smartphones became available was only in 2000. By 2017 over 8 billion smartphones had been produced and shipped and there are currently over 2 billion smartphone users in the world.As an important reminder before moving on. I am not claiming that everyone’s basic needs are being met today. Far from it. Nor am I arguing that governments should be using central planning or that they should be meeting people’s basic needs through government run programs such as food stamps or subsidized housing (in fact quite the opposite, as I will argue later when writing about economic freedom).The point of this chapter is simply to argue that physical capital is no longer the constraint in meeting everyone’s basic needs. We are not dealing with a problem of capital scarcity—in the sense of technological scarcity introduced earlier—but with one of allocation and distribution.Capital is no longer scarce but sufficient. We should consider that the great success of capitalism.We now face a new scarcity, however, that of attention, and capitalism will not solve it for us without changes in regulation and in self-regulation. Before we can examine the scarcity of attention though we need to understand how digital technologies have the potential to change the role of labor.
  • Skin in the Game by Nassim Taleb (Book Review) May 4, 2018 11:15 am
    I recently finished Nassim Taleb’s latest book “Skin in the Game.” Much like Antifragile previously, I highly recommend reading it. The subtitle of the book is “Hidden Asymmetries in Daily Life” and while I am not a fan of the obsession of publishers to add a subtitle to every non-fiction book (try finding one without), asymmetries are the leitmotif that runs throughout, including a wonderfully succinct table on “Asymmetries in Society.”The book is in the classical philosophical tradition of lessons that one can actually apply to one’s own life, ranging from how to pick a surgeon to how to maximize one’s freedom to act. Taleb is at his best when he ties together mathematical analysis with observations about present day society and then relates it all back to a long history of thought and the evolution of language. There are many chapters in the book, including one on the minority rule and one on the Lindy effect, where each one is worth the price of the entire work and deserves to be reread multiple times. Another example of a gem occurs early on in a discussion of the evolution of moral symmetry and why the silver rule beats the golden rule (I won’t spoil it here – buy the book for that discussion alone).Taleb is at his worst when he is at his most combative. One example is his dismissal of Piketty’s work on inequality. Taleb rightly argues that a dynamic measure of inequality based on ergodicity is far better than a static one. That’s insightful and elegant. But then Taleb goes on to dismiss all of the evidence as if it was just static and as if Piketty doesn’t understand a concept such as ergodicity. Knowing Piketty and having slogged through his book, I submit that both of these assertions are incorrect. A different model of engagement would have been to propose ergodicity as a better measure and then simply ask for evidence. That might open a door instead of slamming one shut.Slamming doors and picking fights is part of Taleb’s style, however, and is consistent with some of the arguments in Skin in the Game and in Antifragile. A fight gains more rapid exposure for an idea, as the pushback from the other side amplifies the original message (and based on book sales and Twitter follower count that strategy clearly works). A fight also risks reputation and that’s a way of putting skin in the game. That’s likely important to Taleb because otherwise he might leave himself open to the criticism that Skin in the Game borders at times on the kind of advice that he rightly criticizes for, well, not having skin in the game.This is a good moment to point out that we should all seek out writers with whom we disagree at least some of the time. If we only read books by authors where we agree with every one of their tweets, why bother? What are we expecting to learn? Too many times we are letting our emotional reaction to something an author has said or done stand in the way of engaging with their arguments. Taleb certainly provokes a strong reaction at times, but by all means read “Skin in the Game” nonetheless.
  • Uncertainty Wednesday: Beliefs (Cont’d) May 2, 2018 11:10 am
    Last Uncertainty Wednesday, I introduced the idea of beliefs. Today we will make this idea more precise. We started with an extreme belief, the one that a coin is so biased that we will only observe “heads” (H). More realistically one might belief that a coin is fair, but has some possibility of being slightly biased in either direction (e.g., more likely to observer H or more likely to observe T).So how do we formalize this? A belief is simply a probability distribution. For instance the one we just described might be modeled as follows where the horizontal axis shows the values of p from 0 to 1 (where p is the probability of observing Heads)This is a distribution with a mean at p = 0.5 where the probability decreases to 0 on either extreme (meaning at p = 0 and at p = 1). The chart is the probability density function (pdf) for the beta distribution with parameters alpha = beta = 2. You might wonder why the graph goes to values above 1, which would seem to suggest probabilities > 1, but the whole area under the curve is exactly 1. Probabilities are derived from the pdf as small slivers around a value of p (the horizontal axis). For instance between p = 0.45 and p = 0.55 if you imagine vertical lines you get an area of approximately 0.1 * 1.5 = 0.15. So with this belief we are saying that the coin has about a 15% chance of being pretty fair.Another way to show this belief is via the following cumulative distribution function (cdf):For each value of p along the horizontal axis, the cdf shows the integral of the pdf from 0 to that value of p, where p = 0.5 represents a fair coin. Looking at it this way we can see how much probability we attribute to the coin being less or more biased than a specific value of p.Contrast this with a belief that the coin is precisely fair, which would have a cumulative distribution function that looks like this instead:Here the entire probability is concentrated on p = 0.5! We believe with 100% certainty that the coin is exactly fair. We attribute no probability to it being biased in either direction. The bottom horizontal line ends at 0.5 with a blank circle ○ and the top horizontal line starts at 0.5 with a solid circle ●, indicating that the value of the function jumps from 0 to 1 at 0.5. So why not draw a probability density function? The reason is that technically we would have to show something different, namely a probability mass function. At a later point we will see just how extreme such a belief is, but even just looking at a discontinuous function should provide an inkling of that.
  • World After Capital: Getting Past Capital (Overview, Population) April 30, 2018 10:52 pm
    NOTE: As every Monday, I am continuing to post excerpts from my book World After Capital. Today, starts Part Two of the book, which is title “Getting Past Capital” with an overview and a section on population growth dynamics.Part Two: Getting Past CapitalDigital technology is shifting scarcity from capital to attention. That is one of the central arguments of World After Capital. With the philosophical foundation out of the way now is the time to back this claim up with some numbers.First I will examine trends in population growth to show that fears of a further population explosion are unfounded. Then I will look at how much productive capital exists in the world relative to the basic needs of humanity. While that section still needs work, it already contains interesting statistics that suggest we have sufficient capital.Besides capital, the other critical input to production in the Industrial Age is labor. Labor is provided through what I call the job loop: most people earn a living by selling their labor and then using their wages to buy goods and services, which in turn are produced by other job holders. That loop, which currently captures much of our attention, is being disrupted by digital technologies with important implications for how we could allocate our attention in the future.Finally, I will argue why attention is the crucial scarcity for humanity going forward. Capitalism, with its emphasis on markets, cannot be used to allocate attention due to intrinsic limitations. Prices do not and cannot exist for the most important activities we should be allocating attention to.PopulationIn 1798 Thomas Malthus predicted widespread crises of famine and starvation as population growth outstrips humanity’s ability to grow food [31]. Malthus prediction was half right: Global population did explode, with population growth accelerating right at the time of his writing around 1800.Since then, the human population has grown from about 1B to over 7B people here on planet Earth [32]. As an optimist, the thing to note immediately, though, is that Malthus’s most dire fears about the implications of this population growth have not been realized. There has been no global scale starvation and even the fear that most people would live in abject poverty has not come true. In fact, the opposite has happened recently. Around the world the number of people living in extreme poverty has been declining all the while population growth has been about twice as fast as what Malthus predicted as an upper limit of 1 billion people added in 25 years [33].What Malthus got wrong was the rate of technological progress. First, Malthus was wrong in being pessimistic about our ability to improve agricultural productivity. Here is just some of the amazing progress in agriculture since his writing. The percentage of the global workforce employed in agriculture has declined from more than 80% to 33% and is falling rapidly (in the US and other advanced economies agriculture represents 2% or less of employment). Globally in the last 50 years alone, the land required to produce the same output of food has declined by a stunning 68% [35].Second, Malthus could not foresee the scientific breakthroughs that made the industrial revolution possible. That revolution not only powered the agricultural productivity increase but also gave us dramatic advances in the standard of living, including much increased life expectancy, faster transportation, cheaper and better communication and so on.Malthus being wrong so far isn’t by itself a guarantee that his predictions couldn’t catch up with us. If population growth were to outstrip technological progress this would in fact be the case. We know this because we have seen it happen in India [36] and other places that have experienced population growth in excess of progress resulting in mass starvation.As it turns out though, population growth itself responds to technological progress. In particular there is a strong relationship between reductions in infant mortality and decreases in birth rates, as well as between increases in living standards and decreases in birth rates.Max Roser has produced some beautiful charts as part of his amazing project Our World In Data that show these two effects play themselves out in country after country across the world [37].So despite the extraordinary growth in global population over the last 200 years, simply extrapolating this growth out into the future would be a clear mistake. Instead, there are strong signs that peak population is a much more likely scenario.Now one can reasonably argue over what that peak number will be. Some will claim that this debate matters a lot because they strongly believe that the world cannot sustain, say, 11B people. But this misses a crucial point. The world cannot sustain 7B people either—i.e. the current population—if we don’t continue to make technological progress. The way we have managed to support 7B people so far has created all sorts of new problems. We cannot choose to stand still on innovation. Instead we need continued technological progress to solve the problems we have created, such as water and air pollution and climate change.The key takeaway should be one of curvature. All signs suggest that the global population curve is starting to decelerate (negative second derivative) whereas the rate of technical progress is continuing to accelerate (positive second derivative) [38] [39]. That is the basis for being optimistic about progress in relation to population growth.I have already described previously why digital technology is so disruptive. Later in the book we will see in more detail how it is contributing to an acceleration of knowledge creation and thus progress. My view here stands in contrast with much of the recent pessimistic writing, including the recently published book by economist Robert J. Gordon and the secular stagnation literature more generally. To show why my outlook is so different, I will now turn to how much capital there is relative to humanity’s basic needs.
  • Trump, Irrationality and Game Theory April 27, 2018 9:55 pm
    I have been openly critical of Trump as a president going back to before the election. While I want radical change I do not believe the price for this ought to be going backwards on foundational issues such as the rule of law, press freedom and science. Nonetheless it has been fascinating to observe how Trump’s potential or actual irrationality has opened the door for progress on some issues that were previously deemed intractable, such as North Korea.It is well known that even in relative simple games, such as repeated prisoner’s dilemma the set of sustainable equilibria grows significantly when there is some possibility of at least one of the actors being irrational (some of the time). In this regard, Trump is a stark contrast to his predecessors such as Obama, Clinton and the Bushes who cultivated an image of themselves as rational actors. For an opponent such as Kim Jong Un, Trump’s (potential/actual) irrationality ironically makes cooperation possible when it was not possible before.Conversely, continuing to pursue a strictly rational strategy in the face of an actor such as Trump can have disastrous results. That certainly played itself out in the Republican primaries and to some extent in the general election as well. The Democratic party leadership is continuing to operate by “rational” rules, which leads them to meddle in primary elections with the goal of fielding “electable” candidates. This may succeed in congressional elections in the near term but is likely a mistake with regard to their longer term national prospects.If you want a great science fiction read in which potential irrationality and the equilibria it can sustain is a major plot driver, I highly recommend the Three Body Problem Trilogy.