Posts Tagged ‘Economics’

Why Information Grows

September 1, 2015

“Why Information Grows” is the first part of a title than continues “The Evolution of Order, from Atoms to Economies” is a new and highly creative book by Cesar Hidalgo, a statistical physicist at the MIT Media Lab.  Readers of the healthy memory blog should be aware of the problems of mainstream economics.  First of all, the assumption of rational man is wrong, and that problem is being gradually addressed by behavioral economics.  Then there is the problem of the inadequacy of the primary dependent variable used in economics, Gross Domestic Product (GDP).  Contemporary economics has also had difficulty  explaining how economies grow.   Dr. Hidalgo addresses this shortcoming in a remarkably creative manner.

The special sauce that Hidalgo offers is knowledge and knowhow, and knowledge and knowhow is defined in terms of physical order.  Hidalgo regards nature as a big computer that has been growing information for billions of years.  The physical incarnation is nature as we know it.  We humans further this growth via the crystallization of knowledge.  This crystallization  of knowledge is defined by physical order.  This physical order can be found in research papers and plans designed to take us to the moon.  The arrangement of atoms, their physical order, their crystallization of knowledge can be defined in the rockets, modules, and other materials developed to take human to the moon to return successfully.

Personbytes refer to the amount of information that can be contained in an individual human.  This information is constrained.  It can be aggregated at higher levels into firmbytes, which are also constrained, but much less so.  The success of countries or economies are the direct product of crystalized knowledge and knowhow.

These ideas are quite new, they are in an infant state, if you will,and they hold much promise not only for economics, but also for us humans and how successfully we are able to interact with the world.

At this point some readers might be thinking, this is all very good, but what has this to do with a healthy memory?   I summarize books for a variety of reasons.  I think they contain information that is useful.  Economics is a discipline that affects us directly and has some notable shortcomings.  So these reviews include information that I think would be good for readers to know.

However, they are also relevant to a healthy memory.    Keeping a memory healthy requires continual learning to build new memory circuits in the brain.  In this respect, this particular book not only builds new memory circuits, but also establishes new relationships among the sciences.  This book builds new relationships between physics and economics, so it is especially valuable.  Of course, there is significant benefit to be gained by not only regarding this blog, but also by reading the book.

© Douglas Griffith and healthymemory.wordpress.com, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

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The Wellbeing of Nations: Meaning, Motive and Measurement

August 26, 2015

This excellent text is by two researchers in England, Paul Allin and David J. Hand.  It is written in the spirit of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, which is usually abbreviated as The Wealth of Nations.  Smith is commonly regarded as the father of capitalism.  Although this is true, he is misrepresented by many politicians.  Smith was concerned with increasing the wellbeing of nations and their inhabitants.  Smith wrote an earlier book titled The Theory of Moral Sentiments.  He argued that moral sense was based on mutual sympathy, a term best captured today with the concept of empathy.   Smith advocated progressive taxation, in which the wealthier paid a higher percentage of their income to taxes than the poor.  Often politicians argue for a “flat tax”  for simplifying the tax code.  Progressive taxation is not responsible for the complexity of the tax code, but the many specific benefits and costs written into the tax code are.  The Gini coefficient is an index of the spread of wealth in an economy.  And healthier economies require that wealth be distributed among the citizens of a country.  As one Texan put it, “Money is like manure; it’s no good unless it is spread around.”

The authors note, “It looks as if the capitalist business model has evolved over the centuries into one that relies on population growth and expects economic growth.”  Clearly, this is a model for ultimate disaster.  There is no doubt that capitalism has been a success, but it is time for fine-tuning.  There have been several healthy memory blog posts wondering what has become of all the leisure time that was promised to be available today.  When I was a child few mothers worked.  Today, everybody works, and for longer hours.  Why?  John Maynard Keynes envisaged a time in which increased leisure time would enhance the quality of life for all.  Why has that time not arrived?

I believe that if Adam Smith were alive today he would have joined Allin and Hand in authoring The Wellbeing of Nations, or would have written his own complementary volume.  The starting point for this  volume is that Gross Domestic Product (GDP), although important, should not be the primary metric for economies.  Previous healthy memory blog posts had described the metric of Gross National Happiness (GNH).  Although this is a promising start, the problem is quite complicated.  It requires a variety of disciplines such as the social sciences and statistics that had either not yet developed or were still in the early stages of development when Adam Smith lived.

Although I am praising this work, I am not recommending that you read it.  It is technical and complicated.  For most of us understanding that this is a problem that needs to be addressed and is being addressed is enough.  However, if you are interested in the topic and are willing to expend the effort, this is an excellent text that cites many references and resources.

I do not mean to imply that a the solution to this problem will be easy.  One must always be aware of the dangers of unintended consequences.  When a psychologist who won a Nobel Prize in Economics, Daniel Kahneman, was asked about the speed of research and progress in this area, his advice was that it be slow and reversible.  That is, provisions should be made so that any mistakes could be easily reversed.
As the immediately preceding blog post, the Automation of Journalism suggested, many skilled jobs might disappear.  Now the disappearance of jobs could be good, if they resulted in increased leisure time where people could enjoy themselves and pursue their interests.  However, if significant proportions of the population become alienated, there will be trouble indeed.  As was mentioned at the outset, capitalism is in need of fine tuning.

© Douglas Griffith and healthymemory.wordpress.com, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Labor Day Message 2014

August 31, 2014

 

Regular readers of the healthymemory blog might receognize some striking similarities between this message and the 2013 message. Unfortunately, not much has changed. When I was in elementary school the predictions were that due to technology we would have much more leisure time (http://en.wikipedia.org/wiki/Leisure) in the future. I’ll remind you that at this time it was highly unusual for married mothers to be working. In my view, some of the technological achievements, particularly in computing and in broadband, have vastly exceeded these predictions. So I ask you, why are we working so hard? We’re working much harder than when I was in elementary school. And it’s getting worse. Americans now work for eight and a half hours more a week than they did in 1979.

I would further ask, exactly what are we producing? Suppose only those who provided the essentials for living and for safety went to work. What percentage of the working population would that be? Make your own guess, but mine would be less than 10%, so what is going on here?. Currently we are working hard to achieve an unemployment rate at or below 5%. But is this a realistically achievable unemployment rate? Remember that the previous two occasions when the employment rate was at or below 5%, the economic prosperity was bogus. There was the dot com bogus, when people expected to become rich via the internet. Then there was the bogus finance/real estate boom where riches were created via bogus and unsubstantiated financial instruments. So why, absent some other fictitious basis for a boom, do we expect to get back to 5% unemployment

To examine the question of why we are working so hard, I present the following study tht can be found in Kahneman’s Thinking Fast and Slow.It found that being poor is bad. Of course, this finding is not surprising. The surprising finding is that a household income of $75,000 represented a satiation level beyond which experienced well being no longer increased. And this was in high cost living areas. In other areas the number would be lower. So, it is clear that we are working more for no real benefit. Why?

The world’s environmental and resource issues also need to be considered here. As the undeveloped world develops, the demands on resources, the pollution of the environment, and the rate of global warming will increase as the developing world hops on the same exhausting treadmill that the developed world has been on.

I think the problem is that classical economics has outlived its usefulness and has become destructive. Economics needs to undergo a paradigm shift. Classical economics is based on the rationale theory of man. Socials scientists have debunked this theory quite well as have behavioral economists. Computing the Gross National Product (GNP) in terms of hard dollars might seem to b objective, but reminds one of the drunk who is looking for his car keys under the streetlamp rather than in the dimly illuminated part of the parking where he dropped them. Economists need to consider subjective, relevant measures as happiness and life satisfaction, but these measures are given only glancing consideration. Perhaps this is due to the extreme economics supermeme that plagues us and has been discussed in previous healthymemory blog posts.

Once appropriate measures and appropriate philosophies regarding self fulfillment and self actualization are adopted we can get off the treadmill and enjoy the fruits of technology and our lives.

You also might visit or revisit the Healthymemory Blog Post “Gross National Happiness.” There is also an entry on this topic on wikipedia.org.

Thinking, Fast and Slow

January 29, 2012

Thinking, Fast, and Slow is the title of the current best selling book by Daniel Kahneman. Kahneman has won the Nobel Prize, not in psychology as there is no Nobel Prize in psychology, but for his work with Amos Tversky in Economics. This work ushered in the era of behavioral economics and further debunked the myth of the rational human being. Kahneman has been misinterpreted for arguing that humans are irrational or seriously flawed. What he has been arguing is that our information processing capabilities are limited, and that we use clever heuristics to deal with this limitations. These limitations lead us astray.

The title refers to two systems we use for processing information. System 1 is fast and allows us to cope with high rates of information in a dynamic environment. Without System 1, we would not have survived as a species. But this fast processing speed has its costs, which sometimes lead to errors. System 2 is slow, and is what can be thought of as thinking. If you know your multiplication tables, if I ask you what is 6 time 7, you’ll respond 42 without really thinking about it. But if I ask you to multiply 67 times 42 you would find it difficult to compute in your head, and would most likely use a calculator or use paper and pencil (which are examples of transactive memory). This multiplication requires System 2 processing without or most likely with technological aids.

System 1 requires little or no effort. System 2 requires effort. It is not only faster, but also less demanding to rely on System 1 processes. Consider the following question.

A bat and a ball cost $1.10

The bat costs $1.00 more than the ball.

How much does the ball cost?

The number that quickly comes to mind is 10 cents. But if you take the time and exert the mental effort you will note that the cost would be $1.20 (10 cents for the ball and $1.10 for the bat). If you do the math, which takes a little algebra, you will find that the ball costs 5 cents (the bat costing a $1.00 more than the ball would be $1.05 and $1.05 and $0.05 is $1.10). System 2 must be engaged to get the correct answer. This question has been asked of several thousand college students. More that 50% of the students at Harvard, MIT, and Princeton gave the wrong, System 1, answer. At less selective universities more than 80% of the students gave the wrong answer. Good students tend to be suspicious of a question that is too easy!

If this example does not strike you as relevant, Kahneman provides many examples with clear relevance throughout the book. We shall be hitting some of these examples in future Healthymemory Blog posts. Kahneman’s Two System Theory is not new to the Healthymemory Blog (enter “Two System View” in the search block). Kahneman has already had a clear influence on economics. Additional behavioral and brain imaging research has further enhanced his view. Unfortunately it is still not the dominant view in economics, which still embraces the model of the rational man. An argument can be made that our current economic problems are due to an outdated paradigm in economics, and the wholesale adoption of behavioral problems could help us avoid these reoccurring disasters. I also think that the two system view is relevant to Political Science. I think a compelling reason why people do not vote in their own best interests can be found in the two system view. System 1 is automatic, whereas System 2 requires effort.

The Dumbledore Hypothesis regarding the effects of aging on the brain fits well within the two system view. According to the Dumbledore Hypothesis, we have learned so much as a result of our aging, that we rely on our old habits and do not make as many demands on our attentional resources. In other words, too heavy a reliance on System 1 at the cost of not engaging System 2 causes cognitive decline because we are not exercising System 2. It’s a matter of use it or lose it.

Thinking, Fast, and Slow is a must read for anyone interested in human cognition. Actually everyone should be interested because it provides examples and insights regarding the errors we make everyday. Although Thinking, Fast, and Slow is certainly not a cure all, it provides us with awareness and does offer some means of coping with our information processing shortcomings.

Note that the book is a best seller, so it is an easy read and not an imponderable academic tome. Kahneman also includes personal stories, especially of his relationship with Amos Tversky, that are interesting and entertaining.

© Douglas Griffith and healthymemory.wordpress.com, 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.