Conflict of interest and an Economic Separation of Powers

Last post I explored the central problem of conflict of interest in both right and left wing economics, through a story about a group of shipwrecked people trying to establish a new economy and democracy on an island. This post draws on that previous post, so you may wish to take a look if you haven’t already. In summary, the island failed because neither left nor right wing solutions fully faced up to the problem of structural conflicts of interest. Perhaps the fate of the island is not so unlike our own, even here in the midst of civilisation. After all, the problems of power, and in particular conflicts of interest, remain central in any human culture.

Though they’ve both done much for democracy, both the Left and Right of politics have made only minor contributions to the separation of power in the economic sphere. The Right’s contribution has been to point to the flaws of command economies and central planning. They explain that by “socialising” economic activity into government enterprises, we actually concentrate power in the hands of a largely unaccountable government bureaucracy. The solution, says the Right of politics, is to establish a free-market economy, where many commercial players compete with one another, ensuring that if one company performs poorly, another has the power to offer an alternative. This, the Right claims, is the efficient and safe approach to economics.

The Left points out that in a free-market economy, companies often wield immense power and, in practice, are not directly accountable to anyone other than their major shareholders. There is a strong tendency, the Left says, for market economies to shift from pluralistic competition to the domination of a handful of monopolies and cartels. These giants abuse their position, not just by buying up or locking out small players that might serve to decentralise power, but also by dominating and hood-winking both consumers and citizens through marketing and public relations. They ignore or gloss over the problems creating in public health, the environment, and the community. The Left call for a response that forcibly breaks up monopolies, sometimes by structurally separating them, sometimes by legislating top-down procedural improvement, and sometimes by placing enterprise in the hands of government that the Left hopes can be managed and kept accountable through democracy.

Yet proponents for both sides generally spend most of their time selling their message by pointing to the flaws of those opposite. In a way, both the Left and the Right are in business together, using each-other as an excuse to sell their flawed and half-baked solutions. Neither addresses the fundamental problem – conflict of interest. Both approaches lack an economic separation of powers or a serious attempt to deal with conflict of interest. For example, in both cases citizens receive information about economic products and processes from the powerful organisations that produces them, whether that be the marketing department of a company trying to push their wares, or government propaganda telling people that their government-issue goods are good for them. In both cases, the citizen is getting their information from someone with a fundamental conflict of interest. These organisations don’t want to give you an impartial, accurate, well-rounded report of the product and it’s externalities. They want you to just like the product and ignore its flaws, including whatever social, environmental, efficiency and power-related problems that the production and its apparatus bring.

Many people, realising the fundamental failure of both central planning and laissez-faire markets, make modest attempts to limit the damage. One response is to call for a mixed economy with a moderate combination of market and government involvement. This centrist, moderate solution is probably better than the more extreme alternatives, because although we still suffer the failures of not one but two flawed systems, we receive vastly moderated versions of the failures. These are somewhat manageable and in rare cases can offset or balance each-other. Still its an inadequate response and a failure to fully confront the challenge.

Other reach for less sensible answers of anarchy, or primitivism, or succession from society. This is a fundamental failure to even engage with the problem, because in the modern world, with modern technology we have unleashed, we will have institutions and industry regardless of whether we aim to or not. Even if it was possible for such entities to be removed, the loss of production would result in countless deaths. This chaos is less like a solution, and more like fixing your house’s structural problems by setting it on fire.

Still others throw themselves into advocacy for the Left or the Right, claiming that while their proposed solution may be flawed, but at least its better than its opposite.

democracy-separation

Democracy has a significant separation of powers

Humanity’s failure to address this problem needs to end. We have the solution. It’s a separation of powers that we use to address conflict of interest. We’ve already been using it through the rule of law, the independence of our democratic institutions, that, when we choose to uphold them, have successfully served to abolish the violent conflict and crushing oppression that trouble all undemocratic social groups of any signficant size. All we need is to have the vision and determination to let go of our conflicts of interest, so poorly addressed by the Left and Right, and apply the separation of powers to the realm of economics. If the model is clear before us, there’s no need for upheaval and chaos, simply sensible and determined reform.


 

The Standard Economy

economy-noseparation

The standard economy – both market economies and command economies have a poor structural separation of powers

The Advanced Economy – An Economic Separation of Powers

economy-separation

Economics needs a sophisticated separation of powers in order to navigate the twenty first century


 

If our goal is to apply a separation of powers to the field of economics, we should begin by noting the essential functional components of economic activity. There are six central functions that then can serve as the foundation of our separation:

  • Entrepreneurship
  • Labour
  • Labour assessment
  • Economic information
  • Contract
  • Investment

Combining these functions together creates conflicts of interest. This is the case in both the corporations of market economies and government controlled industry in command economies. This is undesirable. So, rather than surrendering to the blunt instrument of a debate about public versus private, we should strive to establish six new entities that correspond with the functions we have identified. According to our earlier principles, these should not just be divided, but also have limited well-defined powers, and be independent from each-other’s official or unofficial control. This helps us avoid at least nine fundamental, institutional conflicts of interest that could potentially arise without a separation.

  • Entrepreneurs/investors wish to maximise profit, labour wishes to maximise salary (industrial disputes – pay)
  • Labour wishes to work less, entreprenueurs wish labour to work more (industrial disputes – conditions)
  • Labour wishes to have a secure job, investors and consumers want unproductive busineses wound up (anti-protectionism vs job stability)
  • Entrepreneurs/investors psychologically or socially minimise/rationalise the harms their business does, the public wants accurate assessment of externalities and punishment of negatives (public relations deceptions, government capture, central-planning and authoritarianism)
  • Entrepreneurs/investors wish to overstate product quality to improve sales, consumers require accurate and unbiased information about products for market forces to work correctly (marketing vs production goals in industry) (flashy vs quality, product bias)
  • Training/education providers and labour wish to overstate the skill and qualifications of job applicants, businesses require accurate information about worker skill to hire the best personel (education and assessment need to be structurally separated)
  • Ideas may be seductively unrealistic, but implementation requires realism (entrepreneurs vs investors – central planning failures)
  • Contracts between unequal parties not honoured (contractees, legal representation and enforcement need structural separation)
  • Insurers wishes to understate coverage after an incident, while the policy holder (or investor/entrepreneur) wishes to overstate it. The opposite is true of risk before an incident. (eg. insurance fraud, insurance company cop-out on technicality)

Many of these kinds of problems are usually presented as zero-sum conflicts between people. If we understand them as conflicts of interest, we understand them as problems of efficiency and organisation, and so the solutions become positive-sum. Many are also subject to moral argumentation by the Left or Right, yet rarely is a significant structural solution proposed.

So how would these six institutions, based upon the six functions, work? To begin with, our aim should be for participants in these organisations to be immersed in a cultural and financial reward structure that aligns their self-interest, or rewards their altruism, in a way that matches the role of the organisation. For example, the entrepreneurial function should involve creative people with bold business ideas being given a financial reward based on the financial success of their business. We want this reward to always increase with improved performance of the individual, but we may wish it increase by gradually smaller increments to preserve a socially beneficial limit on the rich-poor gap (functioning the same way as a progressive taxation system). Thus we may wish to utilise a logarithmic formula or similar algorithm to calculate the appropriate financial reward, funnelling the difference into capital availability, community projects, start-up business assistance, or humanitarian resources as desired.

Where needed the institutions could have sub-institutions carrying out roles, but provided they do not have conflicts of interest with each-other, these sub-institutions can be under the direction of the main six institutions. We should be careful to apply rigorous criteria when considering institutional conflict of interest.

We also want to preserve the power of the free-market and price signals to harmonise and optimise our economy. This means several of the institutions or functions are optimally organised as marketplaces, such as marketplaces for investment or marketplaces for labour, though we would require participants to subscribe to the overall separation of powers to engage in any marketplace. We should also retain a generally free consumer marketplace (limited in extreme cases of safety), provided we can correct for errors in the price signal arising from poor handling of externalities, or misleading product information damaging the consumer ability to make informed choices on the demand side of the market.

Now, to describe each of the functions briefly:

Marketplace of entrepreneurship:

  • Marketplace of ideas – Creative individuals or groups with great ideas for business post their business ideas in the marketplace. This could be anything from a local paper delivery route to a billion dollar mining venture.
  • Marketplace of business development – Professional Business Developers (teams or individuals) with abilities to statistically assess and plan a successful business bid for the right to take an idea from the marketplace of ideas and develop it. They are responsible for projecting business revenue and costs and ensuring the venture will be profitable, as well as planning the business structure, its human resources, and equipment.

Marketplace of labour:

  • Marketplace of leadership – Charismatic leaders able to inspire workers, motivate teams and resolve conflict offer their labour as the everyday leaders for fully developed business plans from the marketplce of business development.
  • Marketplace of work – Workers offer their labour to the business, and are hired and paid based on merit. Position pay is set by an assessor from labour assessment (basically acting as HR department in the unseparated version), priced to attract an appropriate number of applicants in the current market conditions. Labour performance is also assessed by labour assessment, and the final financial reward adjusted from the base pay for each individual based on performance.

Institute of labour assessment:

  • Performance assessment – Professional assessors acting without bias assess the performance of each worker or leader and apply a adjustment rating accordingly.
  • Skill assessment department – Rather than workers misrepresenting their own skills, making the hiring process fraught with difficulty, the skill assessment department attempts to assess worker skill.

Institute of economic information:

  • Product assessment – Acting as a neutral party with no financial interest, product assessment rates all products and services on KPIs that reflect consumer demand, providing comparisons between products that allow the “perfect information” requirement for effective market forces to come to bear on product pricing.
  • Risk assessment – In order to inform insurance decisions and risk flattening mechanisms, this independent assessor. They also determine the validity of insurance claims in a way that is structurally separate from the insurers. Insurers are forbidden from interacting with risk assessors in any unofficial capacity.
  • Externality assessment – Professionals with the appropriate scientific backgrounds assess business impacts on external entities and prices them as accurately as possible, with the result being factored into the effective bottom line of the business. This includes things such as environmental and social externalities. Revenue raised this way does not go into “government coffers”, which may perversely incentivise regulation, but instead is applied as a revenue neutral redistributive “negative tax rate” to all business profits, rewarding those who are neutral or doing the right thing.

Investment consortium

  • Fund and asset management – Independent fund managers offer loans of financial capital to businesses being developed by Business Developers. Fund managers attempt to maximise their return on investment just as normal investors do. The fund managers receive a financial reward/incentive based on the return of the business. They exercise no control over the specifics of the business, and are forbidden from issuing instructions beyond the interest rates of the loans. The investment capital is allocated by the Business Developers, but is legally owned by the community, nation, member-controlled fund, or other citizen-orientated entity. All participants in the system qualify as equal shareholders.
  • Insurance / Risk management – While this is not necessarily structurally separate from regular asset management, the investment consortium may also have funds specialising in taking on risk for a fee.

Department of contracts

  • Contract negotiation and enforcement – Acts as a neutral judge and enforcer in contract negotiations and disputes.

 

Provided we can protect the separation of powers from being undermined through unofficial channels, we can receive the immense benefits of removing conflict of interest by implementing this economic structure.

Let’s take a brief example of the benefit. Normally companies waste significant amounts of resources on marketing. This is a individually necessary, zero-sum activity that produces nothing and does not boost the national economy. However with a good economic separation of powers, the business entity under the management of the Business Developer does not have the power to engage in marketing. Instead, the only function able to provide product information is the Institute of Economic Information. This does not mean it has to be a monolithic organisation. We can also organise this as a marketplace if necessary, with consumers selecting a source of information that addresses their needs or niche.

Or, as a second example, a separation of powers makes regulation is simpler, less burdensome, more efficient and less prone to perverse outcomes that undermine democracy. On the one side, the independent nature of the externality assessment means that an accurate figure that reflects benefits or costs not captured by the basic consumer price mechanism is made by an independent organisation that’s difficult to bribe or influence because it’s revenue source is independent of its pricing decisions. In other words, in cannot increase its budget by overpricing externalities, nor can it increase its budget by accepting compromising payments from businesses.

There are other benefits you may wish to consider by examining our earlier list of institutional conflicts of interest.

However, in each case we need to vigilantly protect the independence of this function, because if either business or government departments with a conflict of interest are able exercise control over it, then all the benefits of the system will be lost. This is particularly the case if the function is compromised secretly. For this reason we must require a significant level of transparency, particularly in the leadership and administrative roles of these institutions. No system can work without vigilance.

So, in summary, by separating out the six fundamental functions of the economy, ensuring they are both officially and unofficially independent, and then articulating discrete, well-defined roles to each, we can create an economic separation of powers with numerous benefits. In this unique way, we allow ourselves to gain the best of both worlds. We gain the market efficiency of market economics, but at the same time make the economy a little more human, and a little more driven by morally acceptable goals. Yet at the same time it’s a system that doesn’t require an unrealistic extreme conception of human behaviour. We can accept widespread pursuit of self-interest by turning into a force for good, and at the same time we can reward, instead of punish, altruism in a way that prevents our aspirations becoming perverted into something oppressive.

Of course at the heart of economics lies capital (in our model, the investment role in the separation). On this both the Left and the Right agree. So where could reformers concerned with an authentic separation of economic powers hope to find the capital to achieve such a separation? A community or nation utilising funds under this model have the possibility of making excellent returns, because this style of economic activity can adopt the power of prices signals and market forces without its usual drawbacks. There is also a powerful argument in this being an efficient but far more ethical alternative to existing methods. But there must be an agreement of minds, given that by contributing to this system, one preserves the capital but is swearing off meddling that compromises the separation.

There are several possible places where this is a serious possibility. The first is as a use for a nation’s sovereign wealth fund, such as those that exist in Singapore and Norway. These funds generally seek to maximise not only profits, but also to achieve social and environmental outcomes that influence the long term well-being of their nation. The second is the enlightened philanthropy of those entrepreneurs and captains of industry who see the flaws of central planning, but also understand the problems that pure self-interest is causing humanity. The third is member-controlled superannuation and ethical investment funds, who have a duty not only to their bottom line, but to the moral principles that guide both their management and their members. Finally there is crowd-sourcing, harnessing the power of the everyday citizen to achieve the remarkable.

Why would an economic separation be so remarkable? Why is it so vital to achieve? It’s the simple fact the where economics fails, so does humanity. It’s simply too vital to public health, to living standards, to our species future, for us to keep getting it wrong. It’s our duty, to ourselves, and to every person on this planet, to do everything we can to get it right.

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11 comments

  1. “◾Entrepreneurs/investors wish to maximise profit, labour wishes to maximise salary (industrial disputes – pay)
    ◾Labour wishes to work less, entreprenueurs wish labour to work more (industrial disputes – conditions)”

    I’m not seeing any issues here. The current system resolves this pretty well.

    “◾Labour wishes to have a secure job, investors and consumers want unproductive busineses wound up (anti-protectionism vs job stability)”

    The traditional solution to this is unemployment insurance and retraining.

    “Marketplace of entrepreneurship:”

    This only works if individual people
    -come up with a large number of ideas
    -a significant portion of them work

    If not, investors can’t tell the gold from the dross based on who is proposing it.

    “Marketplace of labour:”

    Why would this result in different salaries than what we have now?

    “Institute of labour assessment:”

    If this is an important factor, businesses would pay for individuals to be screened for skills.

    “Normally companies waste significant amounts of resources on marketing. This is a individually necessary, zero-sum activity that produces nothing and does not boost the national economy. ”

    Walden 2 had the same approach. If you haven’t already read it, I’d recommend doing so.

    Eliminating advertisements strikes me on the same plane as eliminating perfume- an attempt to get rid of a ‘wasteful’ activity that forgets advertisements are also price signals- they show a firm is rich enough to not be fly by night, they incentivize sales (which are economically useful when temporary gluts occur), they let new firms enter the public consciousness, and they provide a way to inform people about new products. Having information on some sort of website or book doesn’t successfully reach into people’s awareness as effectively.

    1. Thanks for the comment. You raise some fair points but I think we can address them without reference to anything particularly controversial.

      > I’m not seeing any issues here. The current system resolves this pretty well.

      Unions are currently incentivised to call a strike at the most crucial and damaging time, only limited by a fairly blunt factor of public outrage. Companies are incentivised to undermine worker pay through pressure in indivudal negotiation and undersupplying work hours to keep workers eager to please and hesitant to push for pay rises. In the overwhelming majority of cases, employees also have no stake in the outcome of the organisation’s work beyond keeping their own jobs. Unlike small business, in either government or big business the work culture can be cynical and not perfmance orientated, reflect this broken incentive structure. These are all major problems that do needless harm.

      > The traditional solution to this is unemployment insurance and retraining.

      I think the traditional solution to this is either protectionism, or throwing people to the wolves. I don’t think what you suggest is bad, but I think we need a more systematic and consistant approach.

      > If this is an important factor, businesses would pay for individuals to be screened for skills.

      They do, they’re called recruitment firms. But even though they’re often paid ten’s of thousands for each successful hire, the results are still often a disaster or mediochre at best. It’s too subjective to demonstrate in statistics, but that’s the opinion of people I’ve discussed it with across both business and government. This process is costly and broken and could use fixing.

      > If not, investors can’t tell the gold from the dross based on who is proposing it.

      I envisage the Business Developers acting as the repository for business experience and the filter for ideas. However, by separating out the various aspects, the creativity of ideas, the prudence of business development, and the charisma of selling the ideas to customers and workers, you’ve avoided several conflicts in skillsets and in interests. For example, whereas a uncharismatic creative genius might never get their idea off the ground because they have poor ability to convince people, this system incentives others to take up that role without the ability to steal the idea. In turn the creative idea workers can safely publicise ideas without fear of being financially forgotten. It’s about aligning incentives for all significant parties not just one interest dominating and deoptimising the system.

      > Walden 2 had the same approach. If you haven’t already read it, I’d recommend doing so.

      It’s certainly an interesting book, but I sometimes felt the Utopian approach it advocated didn’t fully grapple with the incentives required to align selfish goals with community needs. What was your opinion of the book?

      > they provide a way to inform people about new products

      I agree this is the goal of the marketing system. But its a really awful way to do it. The current system is designed not around maximising relevant information for the product decision, its a competition to seize space in the emotional mind of the consumer. Or to put it a different way, businesses spend large amounts trying to shout in the consumers ear louder than the others. This advantages established players, not newcomers. It also advtantages emotional appeals of information. The better alternative is having business’ put their product on the table and have a neutral party efficiently pursue the information the consumers report that they require to make their choice. Everybody, including business, wins. That’s what the new system proposes.

      1. “Unions are currently incentivized to call a strike at the most crucial and damaging time, only limited by a fairly blunt factor of public outrage.”

        The incentives seem to be working. Hasn’t time lost to strikes dropped significantly?

        ” Companies are incentivised to undermine worker pay through pressure in indivudal negotiation and undersupplying work hours to keep workers eager to please and hesitant to push for pay rises.”

        Companies undersupply work hours (in the US) because benefits are mandatory past a certain limit. This change will not alter that.

        ” In the overwhelming majority of cases, employees also have no stake in the outcome of the organisation’s work beyond keeping their own jobs. ”

        Pensions are the traditional solution. The company pays into it giving employees an incentive to insure the firm lasts beyond when they leave. It only works in oligopolistic fields; other industries experience too rapid turnover in companies.

        Your solution doesn’t really change that incentive for employee.

        “But even though they’re often paid ten’s of thousands for each successful hire, the results are still often a disaster or mediochre at best. It’s too subjective to demonstrate in statistics, but that’s the opinion of people I’ve discussed it with across both business and government. ”

        I don’t think its structural- I think good employees are really that hard to find.

        ” For example, whereas a uncharismatic creative genius might never get their idea off the ground”

        “It’s about aligning incentives for all significant parties not just one interest dominating and deoptimising the system.”

        I think you are missing the ‘knowledge on the ground’. In each of these cases with bad incentives, they remain this way because the individuals involved are the ones who have the relevant knowledge AND it is the kind of knowledge that isn’t easily transferable. The person who best knows how much value the employee is to the supervisor is the supervisor.

        As is, you have a system that lets things like Snuggies be produced (because the analysts can understand that), but not thermo-pad heat packs (because knowledge of chemistry and industrial engineering developed enough to pick it out of all the miracle chemicals isn’t common). There are an amazing number of useful chemicals that never get produced because they simply aren’t worth it

        “What was your opinion of the book?”

        Well, people tried to put into practice. Wiki lists several attempts, some currently existing.

        However the system mentioned in the book is not scalable. It can’t deal with high crime populations, large economies of scale and would struggle with an advanced industrial economy (since a large part of that relies on getting experts together in large numbers).

        “The current system is designed not around maximising relevant information for the product decision, its a competition to seize space in the emotional mind of the consumer.”

        They used to have advertisements like that (19th century is the switch period). Consumers like the new ones more. Its either a cultural shift or due to the increase amount of information individuals come in contact with everyday- need something to make it stand out in ones mind.

        “This advantages established players, not newcomers.”

        Emotional connections can get people talking about something, even if they see it once. Factual recitations require repetition in order to get through.

      2. Thanks again for the reply. I’ll still beg to differ on most of your points, however.

        > The incentives seem to be working. Hasn’t time lost to strikes dropped significantly?

        What incentives do you mean? I’m unable to find comprehensive statistics on this, but what I can find seems to indicate that the drop matches the decline in union membership. So it’s more that one side of industrial disputes in having difficulty putting up a fight. That problem, or actual striking, isn’t overwhelming in good times, but in bad times its dangerous. Take Greece – frequent major strikes at a time where their economy can least afford it, because the structural conflicts of interest haven’t been addressed, and for workers striking is the best method to pursue their interests.

        > Companies undersupply work hours (in the US) because benefits are mandatory past a certain limit. This change will not alter that.

        What benefits do you mean? Perhaps this is different in the US to many other places, where the government or the individual is generally responsible for health benefits etc. That makes more sense imo, because benefits obviously deincentivise labour investment over other types of investment (same as payroll tax). Either way its not the optimal structure.

        > Pensions are the traditional solution. The company pays into it giving employees an incentive to insure the firm lasts beyond when they leave. It only works in oligopolistic fields; other industries experience too rapid turnover in companies.

        I don’t object to pensions funds of this kind (again this is largely US thing), but I’m not aware of pensions being connected to performance. I think the structural solution is similar, but far more optimised. Also, the structural solution can handle the rapid turnover better than the pension system. The employee is incentivised for high performance, rather than entrenching themselves in their job, which is suboptimal.

        > The person who best knows how much value the employee is to the supervisor is the supervisor.

        If I get your meaning, you’re basically pointing to market demand for labour being the best pricing system for that labour. I agree. The point I think needs addressing is that a supervisor isn’t neccessarily going to be incentivised to accurately report performance. For example, in every workplace I’ve found there are personal relationships that mean good workers are not neccessarily the most likeable. And if the supervisor is also just trying to keep his job, he or she doesn’t want to make waves and doesn’t want employees to feel like they’re playing favourites. A neutral party has the potential to solves this in a way that optimises performance incentives, though I would expect that process would involve close consultation with the people involved, especally the supervisor, to connect the performance asessment with their requirements. This isn’t unheard of in industry – companies hire consultants to do this, except unsystematically, all the time.

        > However the system mentioned in the book is not scalable. It can’t deal with high crime populations, large economies of scale and would struggle with an advanced industrial economy (since a large part of that relies on getting experts together in large numbers).

        I’m inclined to agree. Cooperativism in general is great where it happens, but in my research I’ve found there is insufficent incentives for most people to take the effort to start them (which matches the cooperative startup stats I’ve seen), and like you say scaling is a massive issue. Mondragon Corp is the most successful I’m aware of, and while very impressive it seems from what I can gather that it generally has generally only scaled by keeping adding new small, structurally separate components opeating in mostly unrelated ways. Like you say, economies of scale, though I don’t claim enough expertise on the topic to be defnintive.

        > They used to have advertisements like that (19th century is the switch period). Consumers like the new ones more. Its either a cultural shift or due to the increase amount of information individuals come in contact with everyday- need something to make it stand out in ones mind …. Emotional connections can get people talking about something, even if they see it once. Factual recitations require repetition in order to get through.

        I believe this is false because (1) no-one LIKES advertising. The problem isn’t emotionality, it’s being exposed to it involuntarily (2) it doesn’t account for the fact that the benefits accrued by marketing are zero-sum. No-one’s saying that fact-based marketing is more effective for individual companies, but it’s a waste of resources from a system-wide perspective. Even worse, it destroys consumer ability to rationally assess product choices, which prevents market forces from properly coming to bear on the products. It also has fairly negative social/psychological effects. If you don’t believe that, you may be interested to read a marketing textbook, especially the chapters that describe how to create anxiety in order to get your opening. Its a rational strategy for the individual, but poor for all parties overall. The same as the prisoner’s dillema or a stag hunt in game theory. Structural separation of roles is the answer.

        Thanks again for your questions.

  2. Hi, I left this comment on slatestarcodex too, but I thought I’d post it here as well.

    How would you go about creating a market for economic information? That kind of thing is going to be difficult to monetize unless you get a cut of the sales – if people have to pay for the information out of their own pocket, they are just going to try and find ways of getting it for free; if they aren’t paying for it out of their own pocket, it will be difficult to know which institution is most effective (people might just register for all of the competing institutions.)
    Payments from general taxation based upon review scores? Then you get into the problem of stated vs revealed preferences…
    If, on the other hand, the government takes a more active role in determining the “best” economic information, then we’re already most of the way to central planning.

    Having said this, whichever system is established is fairly unlikely to be more wasteful than the one we have at the moment.

  3. –“What incentives do you mean? I’m unable to find comprehensive statistics on this, but what I can find seems to indicate that the drop matches the decline in union membership.”

    It was a bit more “they must be doing something right”, than any knowledge on my part. That said, the drop in union membership is tied to the fact people are changing careers more frequently- strikes occur when employees expect to be in their job for the long run (so it is worth it to engage in such activities). With that being less and less true, it drops in importance because if the wages or conditions are acceptable, quitting is a much easier choice. This means the importance of solving this problem are declines and alternate solutions have to be even better to get people to bother with them.

    –“Take Greece – frequent major strikes at a time where their economy can least afford it, because the structural conflicts of interest haven’t been addressed, and for workers striking is the best method to pursue their interests.”

    I don’t think this proposed system would help in such cases. You need high levels of trust in the system and both sides to buy in. If you have those already, you have Lincoln Electric and strikes don’t happen. You are trying to import trust but that only works if the determination isn’t subjective.

    Another book
    Bargaining with the Devil: When to Negotiate when to fight

    The author is a negotiator- he is essentially the kind of professional you are looking for. Its instructive and contains one example of a strike- specifically an orchestra. I bring this up because the conflict wasn’t over quantifiable metrics (who gets to be supervisor) and was a nonprofit (so the cost of all the inputs aren’t set by economic logic). Its not the sort of thing that easily can be decided (and in this case fell apart two years later).

    –“What benefits do you mean? Perhaps this is different in the US to many other places, where the government or the individual is generally responsible for health benefits etc.”

    Healthcare. The US had wage ceilings and high marginal tax rates in the 1940s-50s; the result was companies switched to providing benefits. In fact this is partially responsible for the oddness we see in income growth- it looks flat if you look at wages, but benefits have increased since the 1970s (in part because of rising healthcare costs, but that is another story).

    –“This isn’t unheard of in industry – companies hire consultants to do this, except unsystematically, all the time.”

    And companies also use temp firms, which are a similar way of solving this issue. I think the reason it isn’t done systematically is because it simply isn’t significantly more efficient than the current method. What would be the cost and what is the current maximum cost of inefficiency?

    –“(1) no-one LIKES advertising. ”

    People talk about superbowl ads and argue which was the most interesting/best. People certainly like interesting ads- they don’t like repetitive ones

    –“(2) it doesn’t account for the fact that the benefits accrued by marketing are zero-sum.”

    They convey information by their existence, the same way that the expensive buildings for banks do. People can look up products to look them over, but most don’t bother.

    –“Even worse, it destroys consumer ability to rationally assess product choices, which prevents market forces from properly coming to bear on the products.”

    Preferences are not rational. The goal of marketing is to get people to buy things they otherwise wouldn’t have. Products in store for Walmart has 71,000 hits. At a minute each and 8 hours a day it would take you almost half a year (40.5) to go through them all.

    Also part of the reason people buy some things is not because the marketing has changed them, but because they know everyone has seen the marketing. Buying a hot car doesn’t change you, but you buy it because marketing has made everyone aware that it is a hot car. Its why certain clothing styles are associated with certain subcultures. Marketing lets you signal certain things because advertisements have already put in the work establishing what it stands for. It provides a common cultural language.

    –“It also has fairly negative social/psychological effects. If you don’t believe that, you may be interested to read a marketing textbook, especially the chapters that describe how to create anxiety in order to get your opening. ”

    I did marketing (door to door business). It is stunningly ineffective- people get immunized to it over time.

    1. “It was a bit more “they must be doing something right”, than any knowledge on my part. That said, the drop in union membership is tied to the fact people are changing careers more frequently- strikes occur when employees expect to be in their job for the long run (so it is worth it to engage in such activities). With that being less and less true, it drops in importance because if the wages or conditions are acceptable, quitting is a much easier choice. This means the importance of solving this problem are declines and alternate solutions have to be even better to get people to bother with them.”

      My contention has that the problem wasn’t structurally solved, but rather that one side wasn’t fighting as hard. Your explanation seems to support that.

      “I don’t think this proposed system would help in such cases. You need high levels of trust in the system and both sides to buy in. If you have those already, you have Lincoln Electric and strikes don’t happen. You are trying to import trust but that only works if the determination isn’t subjective.”

      I’m afraid I can’t establish the meaning of the connected sentence, perhaps partly because I’m not familiar with US-specific industrial relations. I’d suggest though that high levels of trust occur in environments where people can be trusted, ie. they don’t have conflicts of interest.

      “The author is a negotiator- he is essentially the kind of professional you are looking for. Its instructive and contains one example of a strike- specifically an orchestra. I bring this up because the conflict wasn’t over quantifiable metrics (who gets to be supervisor) and was a nonprofit (so the cost of all the inputs aren’t set by economic logic). Its not the sort of thing that easily can be decided (and in this case fell apart two years later).”

      I think we can acknowledge that not all strikes are about money, but still believe that most strikes are about money. Likewise we do not have to hold that all strikes are a result of structural conflict of interest to hold that many or most are.

      “Healthcare. The US had wage ceilings and high marginal tax rates in the 1940s-50s; the result was companies switched to providing benefits. In fact this is partially responsible for the oddness we see in income growth- it looks flat if you look at wages, but benefits have increased since the 1970s (in part because of rising healthcare costs, but that is another story).”

      In many places outside the US, companies are not responsible for healthcare, yet still undersupply hours, especially in the retail/hospitality sector. Other factors may come into play in the US, but it’s not clear to me why the existence of those factors would stop this factor coming into play. Likewise, it wouldn’t negate the benefits we’d get from solving it.

      “And companies also use temp firms, which are a similar way of solving this issue. I think the reason it isn’t done systematically is because it simply isn’t significantly more efficient than the current method. What would be the cost and what is the current maximum cost of inefficiency?”

      I feel like in response to a radical solution, you’d be expressing concern that it was dangerous and risked collapsing the system instead of fixing it. Calling for moderate improvements, you’re saying it’s to trivial to be worth it. I disagree. I’ve provided a detailed argument why I feel so in my article, you’ll have to be more specific when you say it’s not worth it, because at the moment there’s not a specific claim for me to address.

      “People talk about superbowl ads and argue which was the most interesting/best. People certainly like interesting ads- they don’t like repetitive ones”

      I don’t mean to be rude, but I feel a little like you’ve taken on a absurd position here. I have never met anyone that claims to broadly like ads. We can cherry pick some incredibly rare cases where people like them, but it won’t change that. They dislike them for many reasons, but I’d personally highlight how annoying a real person would be if every five minutes they appeared and tried to use emotional techniques to get you to but stuff. A person on standby that provided the facts from a neutral POV when you asked them? Most people would pay for that if it was at a low cost. The problem is, at the moment, we have no structural mechanisms for that to systematically occur.

      “They convey information by their existence, the same way that the expensive buildings for banks do. People can look up products to look them over, but most don’t bother.”

      If you look at the sheer magnitude of marketing as a field, and consider how little people (including you and I) seem to know about most of their product choices, calling it an efficient way to convey product information is utterly utterly absurd. It’s not designed to do that, it’s designed to increase individual companies share of the consumer dollar, while the other company wastes resources doing the same.

      “Preferences are not rational.”

      You mean they are not ALWAYS rational. I would like to increase people’s ability to pursue their preferences rationally. Why would we deliberately to oppose this?

      “The goal of marketing is to get people to buy things they otherwise wouldn’t have.”

      Need creation is a poor way to grow an economy. It misallocates investment to useless production when it could be spent on authentic consumer desires or growing the capital base of the economy. We have savings reinvestment (banks) to keep money circulating, we don’t need to trick people into wasting their money.

      “Products in store for Walmart has 71,000 hits. At a minute each and 8 hours a day it would take you almost half a year (40.5) to go through them all.”

      That’s why we need structurally efficiency, where the consumer’s time is not wasted with anything other than the unbiased information they need to make the best purchase to fufill their needs.

      “Also part of the reason people buy some things is not because the marketing has changed them, but because they know everyone has seen the marketing. Buying a hot car doesn’t change you, but you buy it because marketing has made everyone aware that it is a hot car. Its why certain clothing styles are associated with certain subcultures. Marketing lets you signal certain things because advertisements have already put in the work establishing what it stands for. It provides a common cultural language.”

      Assuming we consider status-signalling a good thing (I don’t, but let’s assume we do), structurally solving the supply product information will not stop people associating certain things with status. Why do you think it would?

      “I did marketing (door to door business). It is stunningly ineffective- people get immunized to it over time.”

      I’ve known people that did the same – it’s a tough job and I tip my hat at the skill required for it! But I would make the point you were employed by a company to spend many many hours doing it at great cost to them. That suggests people aren’t immune. You seem like an intelligent and probably talented individual. My desire is an economy where more rewards are available to you in positive sum rather than zero or negative sum activities. I believe an economic separation of powers is the best way to achieve that.

  4. “I’m afraid I can’t establish the meaning of the connected sentence, perhaps partly because I’m not familiar with US-specific industrial relations. ”

    Lincoln Electric is a company that has a no layoff promise and has kept it for several decades.

    “I’d suggest though that high levels of trust occur in environments where people can be trusted, ie. they don’t have conflicts of interest.”

    You want promises to be credible- having no conflict of interest doesn’t insure that. Why would you be willing to commit if you have no stake in the issue? If the issue collapses into fighting, the negotiator still gets paid.

    “Calling for moderate improvements, you’re saying it’s to trivial to be worth it. I disagree. I’ve provided a detailed argument why I feel so in my article, you’ll have to be more specific when you say it’s not worth it, because at the moment there’s not a specific claim for me to address.”

    The cost of finding trustworthy people, training them and making sure the system doesn’t get taken over by any of the bargaining parties is a massive cost. I don’t see why it would be cheaper than what we have now.

    “I don’t mean to be rude, but I feel a little like you’ve taken on a absurd position here. I have never met anyone that claims to broadly like ads. We can cherry pick some incredibly rare cases where people like them, but it won’t change that. ”

    If people hated ads, companies wouldn’t run them because they’d be pissing off customers. On the whole we should expect people to be indifferent to ads. People could have muted the TV when ads come on, but for the most part they have historically chosen to watch. You can watch TV without ads, but there are still advertisements because not everyone takes that opportunity.

    ” Most people would pay for that if it was at a low cost. ”

    We already have that. There are plenty of sites that provide such information.

    “If you look at the sheer magnitude of marketing as a field, and consider how little people (including you and I) seem to know about most of their product choices, calling it an efficient way to convey product information is utterly utterly absurd. It’s not designed to do that, it’s designed to increase individual companies share of the consumer dollar, while the other company wastes resources doing the same.”

    The resources wasted generally go to property owners (for physical ads) or shows. The former is a rent and the latter is generally considered a good thing.

    “Need creation is a poor way to grow an economy. It misallocates investment to useless production when it could be spent on authentic consumer desires or growing the capital base of the economy. We have savings reinvestment (banks) to keep money circulating, we don’t need to trick people into wasting their money.”

    How are the customers wasting their money? If they buy the product, it works and they enjoy it, how is that different from any other purchase.

    “That’s why we need structurally efficiency, where the consumer’s time is not wasted with anything other than the unbiased information they need to make the best purchase to fufill their needs.”

    Unless you are choosing the products you think the customer will like, that doesn’t solve the issue. There are too many products for people to be able to find novel items on their own.

    “Assuming we consider status-signalling a good thing (I don’t, but let’s assume we do), structurally solving the supply product information will not stop people associating certain things with status. Why do you think it would?”

    Status signaling isn’t good, it is inevitable.

    Anyway the issue is we need everyone to agree on what status is signaled by products. Advertising accomplishes that- it tells everyone what kind of people the product is associated with. Having impersonal product supply information will not (and listing “these kinds of people use this” won’t work either).

    “But I would make the point you were employed by a company to spend many many hours doing it at great cost to them.”

    The jobs are generally commission- it costs the company nothing.

    1. I’m going to try to be brief as I think we’ve exausted progress and are talking past eachother.

      “Lincoln Electric is a company that has a no layoff promise and has kept it for several decades.”

      Thanks. I will look it up.

      “Why would you be willing to commit if you have no stake in the issue? If the issue collapses into fighting, the negotiator still gets paid.”

      I feel like this question almost answers itself, if you have a poor history of outcomes that can be established objectively, the organisation can easily align its financial and cultural incentives to discourage that, as I described in the article. But you need there to be no conflicts of interest to do that. If you have conflicts of interest, how do you align the incentives? Eg. Do you pay your marketing person on the accuracy of their information, or on the amount of sales they make? That’s the problem.

      “I don’t see why it would be cheaper than what we have now.”

      It’s a lot cheaper because of the much larger costs that occur when somebody DOES capture the process. And because we have an industrialised economy with large production runs, there isn’t many products to review per-person, and with the internet distributing information has a *tiny* marginal cost.

      “If people hated ads, companies wouldn’t run them because they’d be pissing off customers.”

      I didn’t say people hated them. People are annoyed by them, that’s why they have to be woven into the viewing of the main product to work. Otherwise it would be infomercial channels that got all the ratings. An trillion dollar industry capturing countless work hours of highly talented people, producing 95% mild consumer annoyance, with some possible negative social effects? Honestly, tell me you can’t see the problem there.

      “You can watch TV without ads”

      People typically will unless you design things carefully. That’s why part of the field of marketing includes research into things like the maximum ad-break length on TV you can achieve without people getting up to do something else.

      “We already have that. There are plenty of sites that provide such information.”

      Then why do you repeatedly object to my reasonable suggestions if partial implementations have been a success?

      “The resources wasted generally go to property owners (for physical ads) or shows. The former is a rent and the latter is generally considered a good thing.”

      You seem to be missing the fact when someone engages in economic activity that isn’t beneficial, those human work hours are wasted. It’s why we have markets – to try to minimise make-work jobs (digging holes and filling them in again) and other wastes of time, because you can’t get wasted hours back. Why throw away work hours in this case? I agree with what I suspect is your view – ideology shouldn’t blind us to the fact that government can be wasteful. Wouldn’t ideological blindness to stuctural waste in the commercial sector also be a mistake? Why shouldn’t we pursue efficiency and meritocracy across the board? Isn’t that the point of economics?

      “How are the customers wasting their money? If they buy the product, it works and they enjoy it, how is that different from any other purchase.”

      Simple – they don’t have the information to find what they want, so they make (by their own values) suboptimal purchasing choices. Why deny them accurate product information that allows market forces to work properly?

      “There are too many products for people to be able to find novel items on their own.”

      The work of product information and assessment has to be done no matter what the system is. Selecting a biased party to provide the information is a poor choice.

      “Anyway the issue is we need everyone to agree on what status is signaled by products. ”

      Why? This is a costly and useless goal. Why can’t people come to their own conclusions about status?

      “The jobs are generally commission- it costs the company nothing.”

      I think you’ve overlooked or aren’t familar with “zero-sum”. The commission effectively comes out of the reduced sale revenue of competitors.

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