Take your pick

It’s been a while since I’ve penned a controversial post. Experience (and my web stats) have shown me that the most popular posts on this website are either slightly controversial (curiouser and curiouser, selection news, and on skating at altitude) or to do with photography (photo gear, and the truth behind the shutter are the most viewed articles on this site). This post will likely fall into the former category. Those readers who have been paying attention know that I’ve been very close to elite sport for a very long time now. I’m also quite an enthusiast when it comes to things like mathematics, and reading academic journals… which is not so common these days among professional athletes. I feel that this combination allows me to speak with at least a little bit of authority on these matters.

First up, I should mention that I can’t prove in a legal sense, any of the accusations that I will inevitably make or imply. I don’t think I’m going to get into any trouble for saying any of this, although if I were ever to become famous for whatever reason, I may be called up on it. If that happens, I won’t back down. You see, you don’t have to believe anything that I say. You could write me off as an embittered ex-athlete, except if you actually knew me, you would know that I don’t really care enough about sport, especially my own achievement in it, to ever really feel embittered about it. I’m just calling it as I see it, and those who know me well, know that I don’t miss much.

The first thing one needs to understand when one approaches sport these days is that, beyond amateur community league sport, sport has very little to do with all that “faster, higher, stronger” nonsense that you get fed as a kid, and really falls more under the category of entertainment (NBC’s budget for the winter games was north of a billion dollars). That is not to say that elite professional athletes aren’t faster, don’t jump higher, or aren’t stronger than your everyday club badminton player for example. But being good at sport, and I mean very good, is an expensive undertaking and only within the framework of sport-as-entertainment can that level of performance be sustained.

The Olympic Games, supposedly the pinnacle of sport, is basically a huge show. I apologize to anyone who still has any illusions about the Olympics being an amateur competition, because it is not. With very few exceptions (curling, for example), pretty much everyone who goes to the Olympics does their sport full time. How can they afford to do this? Easy – they are paid to. Often it isn’t much, and I would be lying if I were to give the impression that all professional athletes live very comfortable lives, but the truth of the matter is that hardly anyone at the Olympics is an amateur. Would Pierre de Coubertin have disapproved of what the modern Olympic games have become? Probably. But in a strange way, the influx of money into sport that comes with professionalism has become a great equalizer in the world of sport. Prior to this, participants at the games were mostly very wealthy people who could afford the “spare time” required to train properly for the games.

But what does this have anything to do with drugs in sport? Well, if I gave you some growth hormone, or EPO and said “here, take this” you probably wouldn’t do it. Why wouldn’t you do it? Well, you’re messing with your endocrine system, the viscosity of your blood, you might get caught, and the side-effects might leave you sterile or give you a heart attack. In short, it’s a risky thing to do. Maybe you can find a doctor to supervise your performance-enhancing drug taking, well then it starts to get expensive. All things considered, taking performance enhancing drugs effectively is an extremely expensive (the drugs themselves are also costly) and dangerous thing to do. In order for someone to make that kind of investment, and to take those kinds of risks, a very large reward is needed as incentive. So here’s where the money-in-sport equation starts to become relevant.

“Each one of the riders on the tour draws a salary of at least one million euros”

Take professional cycling as an example. The Tour de France is one of the most grueling and challenging sporting events ever dreamt up, and it is watched on TV by people all over the world. Because of this TV coverage, there is a huge potential for advertising on riders’ jerseys and, as a result of this, large and very well-run, and well-funded professional teams have formed who compete with each other. Each one of those bikes costs upwards of $10,000, and they have lots of bikes per rider for all kinds of situations and eventualities. Each one of the riders on the tour draws a salary of at least one million euros on top of all the free gear. Think about that for a second – one million euros a year just to get on a bike and ride all day. Riding is also fairly low-impact so a good rider can expect to have a career in excess of ten years. Six or seven good rides in le Tour during that time, and you may never have to worry about finances for the rest of your life. Does that create a strong incentive to dope? I would think so… and I would go so far as to say that everyone on the tour does it.

Don’t these people get tested? Of course they do, they just don’t get caught. The doping on the tour is systematic and the team doctors supervise it. Of course they do. Erythropoietin – better known as EPO increases your blood’s ability to carry oxygen, an obvious advantage in an endurance sport like road cycling. It also thickens the blood. I’m not exactly an endurance athlete (in fact, most would call me a “specialist sprinter”) and my resting heart rate is in the low 40s, a career endurance athlete would likely have a resting heart rate in the mid-to-low 30s. Think about that – that’s a beat every two seconds. Under normal blood pressure, if you’re running a beat every two seconds, if your blood is unusually thick, then it has a tendency to clot. If one of those clots ends up in a coronary artery, then your heart will stop. One of the roles of the team doctors these days is to wake up riders in the middle of the night, and get them onto the stationary bikes to keep their heart rates up to stop them from dying in their sleep. Of course, now that there’s a test for EPO, nobody uses it anymore, and another similar drug has almost certainly replaced it.

The trouble with tests is that you can only test for a known substance (you can obviously detect anything, but the quantities are so small that it would be impossible to show that any old anomaly was a performance-enhancing drug). Marion Jones doped for years on a designer steroid known as “The Clear” (tetrahydrogestrinone) and nobody would have ever known about it except that a sample of the stuff was turned in by a bitter coach and so a test was developed for it. If that sample had never been turned in, it would still be in use today, and remain undetectable. There is a very good chance that there are more designer steroids out there which may never be detected.

Does this ruin the world of sport? I don’t think so. It just makes it a little bit different. A lot of kids grow up thinking that being really good at sport is just a matter of training hard and being dedicated. When you slowly make your way up the ranks of elite sport, there is a point where you realize that this isn’t true, and a myriad of factors that are completely outside your control, like genetics, play a huge role in determining how successful you ultimately are at sport. Despite what he says, it is almost certainly true that Lance Armstrong, along with everyone who rides in the tour, is doped up to the eyeballs. That doesn’t make his achievement of winning seven tours any less remarkable. He still had to train very hard and be a bit of a genetic freak of nature to do all of those things. His battle with cancer is no less inspiring. There’s nothing “unfair” about the doping that goes on in the tour, because it is still very much a level playing field because everyone does it.

So which sports are rife with doping and which aren’t? As it is with most things these days, you have to follow the money. Anything that appears in the Olympics is a likely candidate because the exposure that the Olympics guarantee will raise the kind of money that makes doping “worth” it. Track and field is a good example of a sport in which not-doping places you at a severe disadvantage. Take Usain Bolt for example. I would contend that his world records are not “clean”. Of course, I don’t think any world records have been clean since the late 80s when athletics really started to become very financially lucrative because of sponsorships, endorsements, and the IAAF world athletics tour.

100m world record progression (try to ignore the background image lines)

As a side note, when viewing word record progressions in sports, it is always interesting to note that whenever a test is developed for a significant and widely used drug, such as testosterone, the frequency of world records suddenly drops, but always eventually catches up. The year before a sex test was developed for women there were about 15 women who ran 1500m in under 4 minutes. The year after the test was developed, that number dropped to 2.

The Jamaican case is an especially good example of doping evasion. One of the major advances in anti-doping efforts was the introduction of out of competition testing. Prior to this, people would dope for 3.9 years and then be “clean” for the Olympics (they often didn’t bother being clean for anything else – Carl Lewis, gold medalist in 1988 after Ben Johnson’s famous disqualification himself failed three tests in the two months prior to the Seoul Olympics). Out of competition testing involves randomly showing up to an athletes home or training facility and demanding a urine sample. This generally works very well, making it almost impossible to systematically take any detectable drugs. However, there is a flaw in the system – WADA, the world ant-doping agency requires respective countries’ IOCs to ensure that the testing is carried out. Countries like the USA have USADA and Australia has ASDA to conduct their out of competition testing. However, countries like Jamaica don’t have such an agency.

Again, I emphasize that I am not taking away from any of these guys’ achievements. In a perfect world where nobody doped, Usain Bolt would probably still have won his gold medals and set his world records. Those records would have been a little slower, sure, but no less impressive. The margins might also have not been so great because the absence of out-of-competition testing gives the Jamaicans a distinct advantage over their counterparts from other countries. One might be tempted to think that this advantage should be huge, and that the playing field is no longer level, but this isn’t quite true. Firstly, countries that have their own out of competition testing programs also tend to be a bit wealthier, and thus have better access to better drugs. Secondly, out of competition testing programs aren’t without their flaws.

Speed skaters get tested a lot. As do badminton players, I’m told. That’s because they don’t dope. I’ll get to why that is the case shortly. But my point here is that an out of competition testing program sets itself a goal of a certain number of tests. It them measures its “success” by how many positive tests it gets. Often (and I cannot prove this, but I’m pretty certain that it happens) when the doping is systematic and state-sanctioned, the “random” anti-doping program will be timed in such a way as to coincide with periods in a doping program where an athlete won’t test positive. During times when an athlete will test positive, the anti-doping agency will simply test other athletes. This way, they can still get to the end of their month or whatever, and say that they have a certain number of negative tests. Taking the randomness out of the system effectively renders it useless, and does so in a way that makes it seem like it still works.

So why don’t badminton players and speed skaters dope? Like I said before, not every elite athlete leads a luxurious life of multi-million dollar endorsements. Many sports also don’t benefit a great deal from doping. The greatest advantages to be had are in sports which require endurance, and muscle bulk. Badminton is great sport, and one must be quite fit to play it at the elite level, but the potential gains that doping would have on badminton, while they do exist, are probably not great enough to make the risks worth it.

Speed skating is an interesting example, and one that I’ve thought about for a while (for obvious reasons). I’m actually pretty sure that doping does exist in speed skating (apart from the obvious case of Claudia Pechstein) but that it is not very widespread. Curiously, Pechstein was only caught because of the introduction of the Biological Passport which doesn’t directly detect the presence of illegal substances in the blood, but rather it looks at the parameters of certain biological markers and sees how much they fluctuate over time. Strangely enough, Pechstein managed to get an injunction which allowed her to do one race at the Salt Lake City world cup in December 2009 (where I was also present, photos here) and, not surprisingly, she failed to qualify for the Vancouver 2010 games.

I mentioned before that riders on the tour earn upwards of a million euros a year, which over a long career can be a pretty strong incentive to dope. There are probably one, maybe two speed skaters in the world who make that kind of money. Everyone else kind of just scrapes by. The other factor at work here is income inequality. Speed skaters, by necessity, almost always come from fairly wealthy countries. This is because it is an expensive sport – the skates are expensive, ice time is expensive, the suits we wear are expensive. To even be able to compete, a huge amount of money needs to be invested first, over a long amount of time. The facilities also present a problem – I don’t know of a single long track in the world that doesn’t operate at a loss. Those things are extremely expensive to run, and most do it with government support, and a government has to be fairly wealthy in order to support that kind of sport.

This is why income inequality is important – it all comes down to a fairly simple equation: on the one hand, you have the enormous cost and risks, both legally and health-wise associated with taking drugs, and on the other you have the potential financial gain that may result from success gained by taking drugs. Most of the world’s speed skaters come from the Netherlands or Norway, both are very wealthy countries with high standards of living. In other words, it’s going to take huge amounts of money to make them want to dope, and while there is a lot of money in skating, there isn’t enough for that. Speed skating is also quite popular in many former eastern-bloc countries, and while the argument for doping in those cases is more plausible, it is still unlikely because, without the huge inequalities that used to exist, and without the massive state-driven systematic doping machine (whose last “product” was a young Claudia Pechstein) poor kids who want to make it in life have much better options (like internet scams) and the people who end up in speed skating tend to come from relatively wealthy families.

Contrast that to running, where athletes can come from very poor countries, and where entry-level equipment is very cheap. Compare a kid who is a talented runner in Jamaica with one from Norway. Who’s going to take the huge risks? Who stands to go from a life of poverty to one of unimaginable wealth? Who is going to receive help from their own sport’s governing bodies with systematic doping? Keeping this all in mind, I’m actually very optimistic about the eventual demise of systematic doping. Because in a perfect world, the monetary incentives just won’t be strong enough for people to want to take the risks. The only people left who will dope will be the crazy sociopathic people whose desire to win outweighs their sanity (at which point sport will obviously be only for entertainment purposes). Of course, such a world is still a very long way off. In the meantime, we’ll still have to put up with similarly crazy people who defend doping by being either ignorant of the way sport works (“but doping can only affect a 3% gain in performance at most”… uh duh, a 3m margin in a 100m race is kind of a big deal) or ignorant of the health risks involved, keeping in mind that those most at risk are also the poorest and least able to protect themselves from those risks.

At the moment, a lot of people “love” sport, but I suspect it is only because sport is their ticket out of poverty, which is what ultimately opens the door to the possibility of doping. In an ideal world, even though Olympic athletes would still be professionals, and would probably get fairly decent pay (as entertainers), it wouldn’t be so much that it would necessitate the need for performance enhancing drugs. In that sense at least, they would be doing it simply because they love the sport, which is where the word “amateur” originally comes from.

Further reading: “Positive” by Werner Reiterer, my own review here.

Of course, physics tells us that we cant pull ourselves up...

There’s a peculiar little saying that many of you have probably heard, and that is “to pull yourself up by your bootstraps”. The implication here is that, without any help from others, you can work hard and make it in the world etc. etc. It is an especially favourite refrain of libertarian and other politically-conservative movements who like to frame “I believe in hard work” against “I believe in government handouts”. Herein lies one of the fundamental problems with any kid of libertarianism-based economic doctrine, and that is that there is a tacit assumption of the independence of individuals in an economy. On the surface of it, this all seems great. Work hard and you’ll do well… and if you’re not doing well, then you’re obviously not working hard enough.

Of course, large scale economies inevitably have their ups and downs. When there’s a down, it’s all the fault of big bad government, and when there’s an up, it is all on the shoulders of the hard working people. It surprises me that such simplistic, and obviously incorrect, reasoning can still pass as an “argument” from a politician… although, having observed similarly simplistic “kindergarten politics” at work at the pointy-end of climate negotiations, maybe I shouldn’t be so surprised. The truth of the matter, is that no single person can be successful without the cooperation and help of many others. And I’m not just talking about the obvious sources of help, like your immediate family, or emotional support from friends or a spouse, I’m talking about countless numbers of complete strangers who you will never meet, and who may not even speak the same language as you.

This is the result of globalization, and it is a good thing. Globalization has allowed us to distribute labour and resources like never before. This allows for spectacular increases in efficiency, and therefore productivity. So why do so many people protest globalization? Well, the productivity pie has certainly gotten bigger, but the slices of that pie that people have been getting have not always followed suit. Why has this happened? It’s because of democracy. When people come to vote, it will always be for their own best interests and that will often mean that governments will be encouraged to pursue foreign policy which is “not nice” towards the interests of workers in other countries. I was recently in a discussion about an upcoming election (which may or may not have been mentioned previously on this website) and one of my friends asked me “should I vote for myself or for my country?”, implying that she had to choose between her own self interest and the longer term interest of the country. Of course, the choice of voting in the interests of “the world” isn’t even on the table.

Environmentalism pretty much never makes it to the table as far as election issues is concerned. Sometimes small pockets of voters will make it important to an equally small pocket of politicians, but it probably won’t become a major issue until the environment begins to affect everybody’s everyday lives in an obvious way. The economy is where it’s at. Anyone who’s had to sit through one or two elections in any country knows that the hip pocket is the surest way to any citizen’s vote. Whenever a politician has to frame a debate or a policy decision, it must always be in terms of a voter’s (often) first response – “what’s in it for me?”

Recently, something that everyone seems to be getting rather obsessed about is the budget deficit. I’m not referring to any country in particular in fact, as most countries run some amount of deficit. Everytime a government opens its purse strings to spend some money (as is inevitable in the running of a country), this falls under “deficit spending”. Deficits are easy tools for the politically-minded. First of all, the nonsensical comparison between personal debt and a national deficit is an easy one to make and use. It makes it easy to convince people that the deficit is “bad” and adding to it in any way is “worse”. The inability of most people to think much further than their own personal affairs only makes this psychological trick an easier one to pull off. Of course, if a government really needs to spend money, then this can be a problem.

I’ve been thinking a lot about what this actually all means. I have concluded that these deficits are simply “tomorrow’s money” being spent today. We shouldn’t be frightened of large numbers, which is something that deficit scaremongers have a tendency to try to make us scared of. Deficit numbers are often very big, but they should be taken in context of other things, like growth and GDP, and happiness index, for example.

I was thinking about what money actually means. We make stuff, and we have to exchange it, so we start swapping bits of gold. Eventually, it becomes too inconvenient to cart around lots of bits of gold, so we swap it for receipts, and just swap those instead. So by that logic, we should have stayed on the gold standard right? Well, no. Gold was only a convenient medium of exchange because it was rare and didn’t corrode easily (at the time that currency was invented, it may have been the *only* metal that man had access to). It is only a medium of exchange, it doesn’t *mean* anything. This is no compelling reason to tie up our money supply to gold. I think the only reason that the gold standard appeared to work as well as it did for as long as it did, was because the world’s economic productivity remained essentially the same up until the industrial revolution.

Of course, fiat money has its own problems. Nobody really knows how much it is worth. In fact, the only real definition for how much it is worth is “how much you can get for it”. During my time at Columbia University, we had many and frequent discussions about ending poverty. One of the more insane ideas that came up was to print lots of money and give it to poor people. Obviously, this wouldn’t work because as you print more money, with nothing to back it, it is effectively worthless.

What does back our money up? Is it the amount of stuff in the world? I don’t think so. When we take a raw material and make it into something useful, we add value to it. Perhaps the amount of money is somehow reflective of the amount of capital + labour in the world? Maybe. I was thinking about the growth in financial markets recently and about the value of speculating. I have determined that there really isn’t very much value to all the speculating, and that all of this extra growth in the economy which has supposedly come from the financial sector is actually a fraud. Moreover, all the extra money has gone into the coffers of some very mediocre people who think the world of themselves in the form of obscene bonuses which are not-at-all representative of their contribution to the economy.

So if the value in our economy doesn’t come from ego-inflated investment bankers and hedge fund managers, then where does it come from? If we go back to the econ 101 definition of economics as the way in which we distribute scarce resources, then perhaps the value in our economy just comes from stuff. Or stuff + the value that is added by labour. However, if you think about this deeply for a while, you come to the inevitable conclusion that the system will blow up in our faces because we will eventually run out of stuff. Oil, metals, and minerals will eventually run out.

Of course, one can argue that we can recycle a lot of those things, but the truth of the matter is that we don’t. Our economic system should make it prohibitively expensive NOT to recycle these non-renewable resources, but it doesn’t, because the system is created and shaped by myopic idiots. Of course, that’s not exactly fair, the people who dreamed up this economic system never had to deal with 6 billion people and lived at a time when these resources were virtually limitless. Also, everything is renewable is you take a long enough time frame…

So what is really happening? When we burn oil, we’re not burning money, we’re simply borrowing it from the distant future at a time when that oil replenishes itself. The same can be said of other supposedly non-renewable sources. So now we’ve reduced all consumable resources into practically the same terms. Obviously, fish stocks replenish themselves much more quickly than iron ore would (but that doesn’t stop us from overfishing, does it?). Perhaps an interesting intellectual experiment would be to consider this “borrowing from the future” in the same terms as taking out a loan from a bank. The interest rate would be tied to how quickly you could pay it back AND how quickly the resource replenishes itself, which in the case of something like iron ore or oil, would be extremely slow, therefore making these loans extremely expensive. (which is how they should be)

So, for all resources, we have some kind of “sustainable” carrying capacity and anything above that is borrowing from the future. What determines this carrying capacity? Now I get to use a common refrain of the climate science skeptics – it’s the sun, stupid! Those of you who paid attention in high school physics will be familiar with the concept of the conservation of mass. Thanks to gravity, very little mass from the earth escapes into space (the weight of all our artificial satellites is negligible) and even on very long time-scales, very little mass is ever added to the earth. The sun provides all the energy for converting one kind of matter into another kind, therefore the “budget” of the earth is ultimately limited by what the sun provides (there is a rather big exception here, in nuclear energy, but I’m going to ignore it for the moment).

So there you have it. Somewhat counterintuitively, the amount of value in the economy shouldn’t be determined by the amount of “stuff” in it. When you think about it, it actually makes a lot of sense. Under the current system if I dig a lump of gold out of the ground, I can sell it and become richer. If you really think about that for a while, you realize just how absurd the concept is. However, if I take the energy of the sun and use it to produce something that we can eat, then I am converting something that is useless into something that is useful and actually making a contribution towards the world economy. Likewise, any process requiring labour is using energy to add value to something and so contributes to the economy as a whole. Speculating can be useful to a point, because it encourages investment in (it is assumed) more efficient enterprises over less efficient ones (here, the questionable substitution of “efficient” for “profitable” is made) but we are well past that point.

Of course, you try explaining all of this to an i-banker… they’ll think you’re crazy, and you probably are. But this all sounds so crazy, it just might work.

“I was pushed” the left one said
“my colleagues and I, under pressure trapped
escape was easy, from underground I was led
more and more tunnels to fill a map
and out we burst to feed abundance”

The right one wasn’t quite so sure
“far more effort needed, to me extract
and though we look alike, I held greater allure
my drop quenching greater thirst to be exact
yes, we seem to be from different worlds”

Sure, drop to drop, they looked quite alike
though one was but a fleeting heartbeat older
and perhaps wiser too, coming after the spike
for the other, being the younger and bolder
recklessly cheapened and squandered its time

The younger drop, so energetic would give so much
that is, compared to what you gave to get some
but difficulties in getting the elder drop were such
that less would be got when you did the sum
but how important were just drops in an ocean?

This ocean is black like a starless night
and time separates these drops on either side
of a bell, they ascend to ring with all their might
to signal reaching the peak – the top of the ride
and the passengers: our economy, and civilization

So I want to save the world right. Turns out the world is a very complicated thing and, in order to have any hope of fixing its problems, one must understand many different fields at the one time. Due to the amount of time it takes to gain a good understanding of even a single field, it is difficult to have any amount of expertise in multiple fields, and individuals who possess this are rare indeed.

I am currently in the early stages of trying to accomplish the feat of being a truly multidisciplinary problem solver. One of the fields in which I am most lacking in knowledge is in economics. It seems surprising that I have not turned my attention to economics earlier, as it combines mathematics with the study of human nature – and both are areas which interest me. Formally, my training in economics consists of one course which I took while I was studying at Columbia University. It was “The Economics of Uncertainty and Information”, was fascinating, and very advanced. I’m not sure how I was allowed to take the course, since I technically satisfied none of the prerequisites and, in practice, only satisfied the mathematics prerequisites. In any case, I missed out on all the introductory stuff, and have slowly filled in the gaps (some of them) just as a side-effect of studying lots of other stuff.

Being able to approach this relatively young field with the perspective of someone who isn’t formally trained is a bit unusual, and probably an advantage. Most of the best-known economists started out in different fields, the most common being mathematics. So I certainly don’t feel that I’ve really missed anything by not having an undergraduate background in economics. In addition, I know plenty of people who do possess an undergraduate background in economics who are complete morons who are capable of getting good marks in courses, but not much else (this extends to majors other than economics, although it seems especially prevalent in this field). The purpose of this blog entry, I suppose, is to summarize the essential points to try and get things straight in my head.

The history of economics is fascinating. The very early history is poorly studied, mostly because it generally lies in the realm of archaeologists who are seldom trained in economics, while economists often don’t understand anything about archaeology. This became most apparent when I read a paper by an economist writing about early agriculture who had made a dog’s breakfast of interpreting the archaeological record. It is also difficult because any hypothesis about cause and effect must necessarily be speculative as these things are very difficult to determine from the archaeological record. Much of what follows is my own opinion, although I am sure that I am not alone in holding these opinions.

The development of economics is tied intricately with the development of human civilization. The process was not, as is often suggested, a very linear or predictable process. It was likely a very organic one. I tend to liken it to evolution – the same thing mostly keeps happening, and every now and then something different happens, and it either gives an advantage or not. If an advantage is to be had, then others adopt it or are defeated in some sense by those who do. All sorts of factors such as climate and physical geography determined which strategies did and didn’t work at different points in history. Detailed analysis of the aspects of physical geography pertaining to this can be found in Jared Diamond’s wonderful book “Guns, Germs, and Steel”. Indeed, many of my ideas regarding the early development of humankind are heavily influenced by this book.

So, we start off pretty much on par with all the other animals. We walk around, hang out, and eat when we’re hungry. We spend a lot of time hunting and gathering food and, like other animals, we form small bands, mostly determined by blood-relatives. Tasks are divided up in some way for increased efficiency. And we have our first major economic step – division of labor. It’s not a huge step; many animals also do the same, but it’s a start. Language would have developed by this time, but not written language. Concepts like personal property are probably just starting to develop, and basic stone and bone tools probably came about around this time as well. These small bands would have probably been highly mobile, although seasonal settlements, during times when food was plentiful, would have been common. Survival at this stage is a non-trivial affair, and we shouldn’t forget that there still exist small bands of people today who live like this.

What happens next? Probably a lot of things that failed. The next big step has to do with food production. We invent agriculture. It probably took a lot of tries, and I’ll bet it didn’t do much better than hunting or foraging for ages. Ultimately, it wins out, and here’s why: if you’re a band of hunter-gatherers you go out and hunt/gather your food. Let’s say you get very good at this, so you eat well and are able to support a larger population, and with more people, you can hunt/gather more. Of course, resources aren’t infinite, and eventually you reach a limit – there is a finite area that a large band of people can cover before it becomes too spread out. In the case of agriculture, intensifying food production leads to higher yields which leads to more people which will, in turn, lead to more food production. The key here, is that agriculture can sustain a much denser population than hunting-gathering can. There are huge advantages to having a lot of people in one place who don’t move much over a lot of people spread out over a very large area who move around a lot.

Communication is key. I’m currently forming a new theory on economics in my head, and information, the amount that is shared, and its costs, is at the center of it. A densely populated sedentary group is guaranteed to do one thing better than the same group spread out over a larger area – innovate. Perhaps I should be clearer, when I say “spread out” I’m referring to distance measured by some metric of communication cost. These days, I can talk to a friend on the other side of the world for almost zero cost, whereas back then, a distance of more than a few hundred meters would have been an obstacle. Better communication allows for more efficient division of labor. A sedentary lifestyle also equates to a lower expenditure of energy (in general) so we end up with more food than we need, or the right amount of food, and some leftover people with nothing to do. This all leads to specialization, where labor is divided up and allocated according to a person’s specialization where the choice of specialization is either determined by preference, or (more likely) by some measure of talent.

Which brings me nicely to my next point – comparative advantage. If Michael Phelps (the swimmer) and Gary Kasparov (the chess player) were to swap roles, we would end up with a mediocre swimmer and a mediocre chess player. I’m sure Phelps is a decent chess player, and I’m sure Kasparov isn’t bad at swimming either, but at the end of the day productivity is significantly lower for no other reason than because they swapped roles. Consider a slightly different situation, we start with two people who are equally talented at both swimming and chess. In one universe, they each spend the same amount of time every day doing each and, after some time and some improvement, the level of productivity levels off. In the other universe, one of them only swims and the other only plays chess. Because they are able to specialize, each of them ends up being much better at their respective tasks than they would otherwise have been, and we end up with higher productivity, seemingly for free.

So what do we have? Increasing productivity is all about becoming more and more specialized and dividing labor more and more. The next question that I naturally ask is whether or not there is some kind of inherent limit to this process. Early on, this could have only happened within a small village where everybody knows everybody else. This way, you can divide labor and reasonably trust everyone to do their bit and everything works. Just think, in a village of 5, there would have to be 10 relationships, in a village of 50, 1225 relationships would have to be maintained, in a village of N people, there would be relationships (the handshake theorem). Obviously, early humans were able to overcome this obstacle. How did they do it?

In a word, institutions. We tend to think of formal institutions like education and the legal system, but in this context an institution is basically “the rules of the game” which are followed to allow for complicated transactions to happen between strangers. Stratified structures of authority, such as an organized state is another example. Currency is another one that we don’t often think about. It is also ingenious in that it allows a large object of high value to be broken down into smaller bits. Curiously, currency is no longer tied to any fixed thing of value (previously, gold), but now is allowed to fluctuate in value according to supply and demand just like every other commodity. The cost of ensuring transactions that allow for more efficient division of labor would have surpassed the benefit of actually dividing that labor very early on but for institutions, which serve to lower transaction costs. What they really do is give each party a common ground, or “mutual information” on which to base their transaction, where otherwise establishing this would have been very costly.

So human civilization is doing pretty well, then what happens? There’s a big flood, everything is wiped out, and everyone has to start over. Maybe there’s a drought, or a plague, or the climate does silly things. There are always risks involved with everything, things happen which are completely beyond our control. Let’s take a less dramatic example, you’re part of a small band of people living on an island in a fairly predictable, temperate climate, cultivating the land. You’ve divided the labor well and are living comfortably. There are two “food specialists” who take care of your agriculture, Bob and Marley. They each manage a plot of land on opposite sides of the island. Collectively, they both grow more than enough food to feed themselves, or their half of the band. One day, a freak tornado wipes out Bob’s crop. What happens next? The obvious thing to do, would be for Marley to just eat a little less and sell some of his crop to Bob. But what if this band hasn’t yet evolved any currency or, more likely, what if Bob hasn’t got anything to trade with Marley? If I asked a politically conservative friend, they would tell me that it’s Bob’s tough luck, and that he should’ve saved up for a rainy day. My response would be, “you’re an idiot” (I’m starting to see why I don’t have many conservative friends). The not-so-obvious, but correct thing to do would be for Marley to give some of his crop to Bob on the understanding that Bob would do the same in return.

If a risk is shared among two agents, more risk can be borne than each individual agent can bear alone. This seems a very obvious statement. What is less obvious is how to pool risk. In examples like the one above, where there are a small number of agents, a contract is all that is required. When the number of agents becomes very large, mechanisms for risk sharing can become very complicated. Health insurance, and indeed all major forms of insurance are examples of large pools of people sharing risk. What is perhaps less obvious is the social welfare systems of many countries – taxes constitute a form of insurance premium and the dole can be seen as a form of “employment insurance” payout. Risk sharing also takes place on a very large (and very complicated) scale in securities markets. When the sharing becomes complicated, it is useful to actually understand the theory behind it lest we are plunged into another economic crisis like the current one which was triggered by the sub-prime housing bubble’s dramatic burst. A lack of regulation allowed a simple rule to be broken – that pooling risky assets decreases the risk if and only if the risk associated with each of the assets is linearly independent.

So we divide labor and share risk. That’s basically what it all comes down to. If you think about the way those two things work, you’ll see that they’re intricately connected. Everything else is basically feeding into the labor-dividing, risk-sharing economic machine. There are other things which I have glossed over, or ignored entirely which are fairly important, such as the role of technology, personal property, market-equilibrium, and information, but these are all just grease in the machine (actually technology has a separate significance which I may cover in a later entry). Ultimately, it’s about growing more food. The advance of human civilization can be summarized mostly by who could grow the most food and who could focus the greatest amount of energy into the shortest amount of time (think about that one). What’s the problem then? There are still huge problems with human civilization, we keep killing each other for a start. Mentally disturbed people aside, the main reason this happens (and I’m sure many people disagree with me here) is because of scarcity of resources. People are hungry and poor, and when you have nothing to lose and everything to gain by killing someone, or collectively, going to war with other people, then the choice is obvious. Until very recently, I would have said that all this was inevitable, but in the last 50 years or so (some think sooner) the global GDP (the measure of productivity in an economy) has increased tenfold, and food production easily exceeds the requirements for the ever-increasing global population. The distribution of these now not-so-scarce resources is the real problem and one that economics should be able to solve. Unfortunately, resources are about to become scarce again as population pressures leading to climate change threaten to undermine food and energy productivity.

That is my global view of the overall development of economics and how it basically functions. I would be glad to have any views on the subject from people who know better (and even those who don’t). As I said before, my understanding of economics comes from a very diverse and meandering experience which only ONCE specifically touched on actual formal training in the subject. Any and all feedback is welcome.

Joe Biden and she-who-must-not-be-named did debate recently on many issues. One of the issues that struck me was that of health care. It struck me so much, in fact, that my reactions to watching mentions of it on TV drew much attention at the bar at which I was viewing the debate. Any mention of the McCain health care plan made me want to vomit. I thought it would be a good idea to try to explain why.

First a bit of background. Healthcare in the US is pretty awful. An oft-quoted statistic in opposition to my claim is that the US spends more on healthcare than most other countries. When you consider that many Americans aren’t covered at all and most are only partially covered, this statistic is more indicative of inefficiency than anything else. Yet, as I have experienced, paying for health insurance here can be very costly, partly because the health care itself is very costly (although, admittedly, it is generally very good).

The concept that I will be invoking is known as “Rothschild-Stiglitz” equilibrium and it basically applies to situations of information asymmetry in insurance markets. Yes, this is the same “Stiglitz” as the one who hangs out at Columbia. In fact, this work eventually led to a Nobel Prize. The original paper on this is quite good and I would encourage the enthusiastic reader to peruse it. I will try to simplify the details and preserve the essence of what is being said while resorting to as little mathematics as possible.

For simplicity’s sake, let us take an imaginary population composed of two distinct groups of people – Red and Green. Red people are high-risk, prone to illness and such and green people are low-risk. It doesn’t really matter. If it helps, think of it as young male drivers vs older (but not senile) female drivers and substitute health insurance with car insurance – the concept is basically the same. So we have these two groups of people and they want to buy insurance. We will assume an insurance market with perfect competition (i.e. perfect information, zero profit, and no monopolies)

Now let’s say that insurers have some way of telling which people are Red and which are Green, like a test. Let’s also assume that Red and Green people know what colour they are. What will happen? This seems like a no-brainer, and that’s because it is: Red people will be charged more for insurance and Green people will be charged less. That is, their premiums (periodic payments) will be larger. The fixed deductible (the fixed amount that they MUST pay whenever they make a claim) will be relatively small but, importantly, it will be about the same for both Red and Green people.

As an interesting aside, making the test optional doesn’t actually make a difference to the end result. I will leave that as a simple exercise for the reader.

In real life, however, it is very difficult to tell the Red from Green. Maybe insurance companies are red-green colourblind, maybe there are anti-discrimination laws, perhaps testing technology isn’t up to it. If we present this population with the same choices as before, a very obvious thing will happen – everyone will buy the plans that were originally offered to the Green people, because it is cheaper. Since we have a market with perfect competition, the insurance companies will raise the premiums otherwise they will lose a lot of money to those pesky high-risk Red people. But is this the only thing that can happen? This is where it begins to get complicated.

There is another possibility. There can exist two types of plans – one with a very very high fixed deductible and low premium, and another with a much lower fixed deductible and a much higher premium. Can you guess which one is aimed at which group? The plans with a high deductible are aimed at the Greens, because in the end, their expected value (the probability of an outcome multiplied by the cost of that outcome) is the same, yet the high deductible would discourage Reds from buying those plans. The situation is essentially the same for Reds whose higher probability of having an accident favours the plans with a lower deductible even though it has a higher premium.

However, since we have a market with perfect competition, was can expect all of these possibilities to play out. In fact, when you put all of these supposedly stable equilibria in the same ball park, you get an interesting result – there is no stable equilibrium that gives full insurance to everyone. There is the trivial solution, where nobody is insured, and there are a handful of “special cases” which rely on specific ratios of Red to Green people.

What does this all mean though? Basically, my interpretation of it is that laissez-faire free market philosophy cannot work in insurance markets with asymmetric information. Nevermind the fact that coalition building and monopolies exist; even with perfect information and perfect competition it CANNOT work.

What does this mean for John McCain’s health plan? First he’s going to tax work-based health insurance more, which will basically kill it. He will deregulate the market… a bit iffy for very different reasons, but not entirely unreasonable on the surface. The real kicker is that he will give people a tax break in the form of money with which to go out and buy your own health insurance. The idea, or dogma rather, is that you’re giving consumers choice and creating a competitive market. This can only work at all if there is perfect information on both sides and there is not, nor can there ever be.

What would happen under the McCain plan? Well, health insurance is expensive. If you’re young and healthy and have just come out of College with a lot of debt, you’re going to want to save as much as you can, wherever you can. You might even risk not having health insurance, or not being fully-insured… what happens then? Well, older people, smokers, obese people, basically people who know that they need insurance will see their premiums go up, probably to the point where some can’t even afford it.

Basically, the McCain health care “plan” does what most of his policies and, indeed, most of his campaign seems to do – it divides America and leaves us worse off for it. Moreover, in keeping with Republican ideals, it favours the rich over the poor, which is ridiculous because very wealthy people are the ones who need health insurance the least.

For example, between me and my parents (my Dad’s a diabetic and they’re both quite old, mind) we could probably have afforded every single doctor’s appointment, prescription and operation that we’ve had done and not suffered greatly from it, but thanks to good foresight in ensuring that we have good health insurance (information that is generally more easily accessible to wealthy people, but that is a different issue), we’ve only paid a fraction of that cost. By contrast, poorer people cannot afford this and while Medicare in the US will pay for emergencies (because THAT’s a good healthcare strategy (I’m being sarcastic)) it will also charge an amount that would send most people bankrupt; which is exactly what happens a lot of the time.

The simple solution to all of this is to do what many other countries have done and nationalize it and charge everyone the same amount (taking it out of their taxes, basically). This also gives government incentive to promote preventative healthcare programs which improves everyone’s health (don’t forget that) and are also far more cost effective than waiting until emergencies to intervene. Currently, private insurers have no incentive to engage in promoting preventative strategies because they, in their competition with each other, will cut costs by under-insuring people. By making the market competitive, the equilibrium you end up with is (unsurprisingly) the competitive market equilibrium (read Gerard Debreu and Kenneth Arrow’s paper about this, it’s effing great). Sadly, the competitive equilibrium isn’t the optimal solution, at least as far as providing healthcare for everyone is concerned.

Many people argue for universal healthcare on the grounds of equity and appeals to standards of “fairness”, and there’s nothing wrong with that. However, at the end of the day, somewhat counter-intuitively, nationalizing healthcare actually (amazingly) makes it cheaper and the effect becomes more pronounced over time because the incentives are structured differently. Some may argue that the Green people get shafted in favour of the Reds, but if you think about it, first of all, there aren’t many Reds relative to Greens and, moreover, the spectrum is continuous. The average person begins life as a green and, as they age, become more and more Red. So, in the end, applying what is essentially the same plan to everyone makes a lot of sense.

It is a joke that the US doesn’t have universal health care, but John McCain’s health care plan is beyond a joke, it is an utter farce, and nothing good can possibly come of it. Barack Obama’s isn’t perfect either; it is far from it, but it is closer. (If he went as far as I do, he would probably lose support for being TOO liberal, or be accused of being a socialist/communist).

I would LOVE to hear anyone’s thoughts on this.