How to Avoid Gas Lines, Now and Forever

Let’s imagine for a moment what we want to happen when gas stations are all of a sudden faced with a shortage of gas.

We would want to encourage consumers to consume less gas. There are several ways they could do this. For trips they absolutely need to take, they could carpool much more often than they used to. There might be a whole set of trips that they decide they shouldn’t take right now, during this time of increased scarcity, so as not to reduce the overall supply further.

We would also want to encourage suppliers to divert from their usual routine to bring more gas to the area with the shortage.

So how do we get to a world where this is what happens during a shortage? Do we have to make laws about how gas is allocated nationally? About how many miles people are allowed to drive, or what the minimum number of passengers per car needs to be? Or more directly, how much gas per person we’re allowed to consume?

The Ideal Policy

In fact, there is a much more elegant solution, totally uncontroversial among economists and proven by the American experience of the 1970’s: just allow prices to rise. As soon as the price controls begun by Nixon were overturned, gas lines in America became something mostly confined to history books.

I say mostly because every so often, after a disaster like Sandy, we hear about gas lines cropping up temporarily again. But surely this is inevitable, right?

Wrong. What has happened consistently in these scenarios is that prices have not been allowed to rise.

You might ask how can economists be so cold and unfeeling as to say that the victims of a disaster should have to pay higher prices. Well, let’s do a little thought experiment.

What would happen if prices in New Jersey shot up to an astounding $20 per gallon?

The person who was thinking of doing a 5 minute drive instead of a 30 minute walk might opt to walk instead, since filling up will be so expensive. The group of friends all going to the same place a 30 minute car ride away or farther might all pool their money to pay for the gas. In other words, people will economize on their gas usage.

Meanwhile, since they are paying the cost in money rather than in time spent in gas lines, gas stations will be gaining more funds, which in turn will allow them to outbid gas stations outside of Jersey for additional supply. The influx of supply will eventually–and history has demonstrated that this can happen surprisingly quickly–start bringing prices back down.

In short, during a shortage the price system both forces people to reduce their consumption and bids additional supply towards the area that needs it the most. In other words, it accomplishes exactly what you would want to accomplish during a shortage.

Every alternative to the simple solution of relying on the price system has proven itself pathetically inept. In the 1970’s they tried a whole gamut of different regulatory allocation approaches, and nothing worked until the price controls were ultimately revoked entirely.

It is frustrating that we still have not learned this lesson. But I suppose history has also demonstrated that we are terrible at learning from repeated failure.

 

Suggested Further Reading:

Education and Culture

I have a story, which you may find plausible, about the nature of education.

Without touching on the loaded subject of education’s purpose, I think we can meaningfully talk about what its function has been, in practice.

Historically, the function of education has been to initiate young people from affluent families into a high-status culture. It has not been used to provide practical skills that would be put to use in the workplace. Leo Stein, one of Gertrude Stein’s brother, attended Harvard and then Johns Hopkins for college, yet he was rich enough that he never needed to work to support himself. He had no need or desire to accumulate human capital, nor to send any signal to the labor market.

Education is an extension of the universal human desire to be part of a group–especially if being part of that group makes you feel superior to those who are not.

Whether or not that is entirely still the case is a more complicated question. Since at least the progressive era, education has been viewed as an instrument for practical skillbuilding, and something that should be universal. Rather than rebuild education to suit that purpose, however, we have taken traditional education and tried to force it into a new role. Which may be one explanation for why it has been so bad at filling that role.

And we still look down on vocational schools, which are much more specifically tailored to skill building. That alone should tell you something about the true purpose of education even at this late date in its history.

I described previously how the economics department at George Mason University served as a hotbed for spreading a certain culture and ideas, and how most university departments played a similar role. Charles Nauert, Jr. has argued that it the emergence of the studia humanitatis curriculum in Europe played an enormous role in the cultural event that we have come to call the Renaissance. Education and culture have been inextricably linked for a very long time.

It seems possible to me that economists have entirely missed the source of the economic impact of education. Maybe it isn’t about getting skills or signaling that you’re a certain caliber of worker. Maybe it has sped up the diffusion of innovations by making more people more like one another in certain dimensions. Or maybe it’s about reducing transaction costs by giving people a common set of points of references, or building trust within the group of educated individuals.

Whatever it is, I’m coming to suspect that the economic impact of education is mostly indirect; and that the function it serves remains, as it was historically, a cultural one.

Our Lumpy Future

The total value of the companies we’ve funded is around 10 billion, give or take a few. But just two companies, Dropbox and Airbnb, account for about three quarters of it.

In startups, the big winners are big to a degree that violates our expectations about variation. I don’t know whether these expectations are innate or learned, but whatever the cause, we are just not prepared for the 1000x variation in outcomes that one finds in startup investing.

-Paul Graham, Black Swan Farming

The freelance writer has to hustle every day for gigs, and some months are better than others. The staff editor is always well fed; the freelance writer is hungry on some days. Then the day comes when print finally dies, the magazine industry collapses, and the staff editor gets laid off. Having built up no resilience, he will starve. He’s less equipped to bounce to the next thing, whereas the freelance writer has been bouncing around her whole life— she’ll be fine. So which type of career is riskier in the long run, in the age of the unthinkable?

-Reid Hoffman and Ben Casnocha, The Start-up of You

The Industrial Revolution was characterized by the rise of well-defined, specialized, routinized jobs. Adam Smith made his observations about pin factory workers more than a hundred years before Henry Ford’s assembly line became an icon of modernity and efficient industry.

With routine work came routine jobs, and routine paychecks. Modern industrial era employment, while taken for granted today, is something of a historical novelty. Before this Bourgeois Era we live in, an overwhelming supermajority of humanity lived on farms, and the rest were aristocracy or warlords of one stripe or another.

Farm life was lumpy–every year had the high point of the harvest, sometimes even with a subsequent festival in the nearby town. Then every year had its long, hard winters. Then there were particularly lumpy years; a bad harvest could wipe out a whole village while a very good one would be the subject of conversation for years afterwards, and might result in a temporary growth in the population.

Lumpiness in Modern Life

This is not to say that modernity has been all smooth trend lines and uninterrupted flow. Nassim Taleb would certainly protest such a claim. Even if we are speaking in strictly economic terms, there have been big, dramatic events of the negative and positive sort. The Great Depression comes to mind. The hyperinflation of Weimar Germany. On the flipside, the German and Japanese post-war Miracles. The sudden gentrification of American cities that had been in decline for decades.

And on a company by company and individual by individual basis, there has been a lot of lumpiness. Google went from a Stanford computer science project to a multibillion dollar company within a handful of years. Apple rose and fall and then rose far more spectacularly than ever.

Taleb has argued that the more informational economic activity is, the lumpier it will be. Thus, the content industries, and finance, have always been lumpy. The scalability of informational goods makes it possible for a book, such as Harry Potter, to be a best seller across the entire planet, raking in enormous amounts of money. Meanwhile hundreds of thousands of books that come out every year won’t sell more than a handful of copies; for we are a groupish species and we like to focus on a small subset of things that can create a common experience.

This latter piece is preferential attachment; if one person’s consumption of an informational good increases the odds that someone else will consume it “by even a fractional amount“, it will create extremely skewed distributions. And there are well understood reasons why the book business has always been skewed, and why globalization and digitization will only skew it further.

Also skewed, though not quite so dramatically, is income in a human lifespan–into your “peak earning years”. Then there is the well documented phenomenon of extremely skewed healthcare spending–dramatically backloaded into the last handful of years and handful of months of your life.

So we are no strangers to lumpiness. But it seems to me that we are blind to it. As Paul Graham notes, it “violates our expectations”. We expect life to be more like the smooth streams of compensation that the industrial revolution has provided us.

We are going to have to adjust, though, because there is good reason to think that those smooth streams are going away for good. Things are about to get a lot lumpier.

The Robots Are Coming

The paradox is this. A job seeker is looking for something for a well-defined job. But the trend seems to be that if a job can be defined, it can be automated or outsourced.

Arnold Kling

Our capacity to automate seems, at times, to be limitless. One thing is for certain, however, and that is that if it is repetitive and has clearly defined parameters, we can automate it. The Kling quote above actually understates the extent of the circumstances by bringing outsourcing into it. The fact is that even in China, where labor is much, much cheaper at a far higher scale than any developed nation, they are moving towards automation. Does this sound familiar:

China’s manufacturing output was over 70% greater in 2008 than it was in 1996. Over the same period, manufacturing employment in the country declined by more than 25%.

This is the exact same trend that we have been seeing in the United States for half a century, only, as with everything else, China is playing catch up and so the trend has accelerated there. While politicians and pundits in America blame outsourcing for the loss of manufacturing jobs, the fact of the matter is that our manufacturing output never stopped growing; it was only manufacturing employment that declined.

This trend, explored at length in Race Against the Machine, is not without historical precedent. Remember, we were an agricultural nation before we were an industrial one.

A century ago, 40 percent of Americans worked on farms. Today, the farm sector employs about 3 percent of our workforce. But our agriculture economy still outproduces all but two countries.

Some believe that the pattern will play out in a similar way all over again–manufacturing and anything else that can be automated will shrink down to single-digit percentages of our employment. But entrepreneurs will think up new ways to put people to work en masse.

A more pessimistic story, believed by Robin Hanson for example, is that there’s no going back. Automation has grown so good that the majority of people simply will never gain the skillset to be able to provide comparable value, in any sector. Anyone who has a successful company will be able to use automation to produce on an unimaginable scale and thus become unimaginably rich even by today’s standards, but a large segment of the population will not be able to find any way to contribute value whatsoever.

I am proposing a different story: we will all learn to live with ultra-lumpy incomes.

A World of Black Swan Farmers

Join me for a minute in our automated future. It only takes a few tens of thousands of people to produce agricultural and manufacturing output per capita on a scale we would consider absurdly large today. Delivery and postal workers have been put out of work by tacocopters. Maids, fast food workers and cooks have all been replaced with robots. What are we to do?

Well the first upside is that everything is extremely cheap. We can produce so much food, and so much stuff, and provide so many services, that our huge supply will drive prices straight down. So you don’t need a lot of money to maintain a standard of living that would be considered affluent by historic standards.

OK, but where does even that little bit of money come from?

We will all have to adjust to the lack of routinized and easily definable jobs by becoming a little like venture capitalists. We will put out blog posts, and Kindle books, and apps, and any other sort of informational good that we can, in the hopes that one blockbuster will support us for a while.

Since these black swans are, by necessity, very rare on a case by case basis, we will probably combine our efforts and share the spoils. The most obvious way would be for the member of the family who manages to get a hit to take care of the rest until the next hit comes along. But perhaps we will explore many more kinds of partnerships and legally binding revenue-sharing arrangements in order to cope with this radically different labor market.

And again, because of expanding supply and falling prices, you need not have a big hit in order to support yourself. Maybe 100,000 blog views will pay enough, through AdSense revenue, to feed you for a few months.

I can imagine a world where people have only periodic income and they have a higher standard of living than we currently do. I can imagine things would seem psychologically more tenuous in such a world, but it’s not as though anything was ever guaranteed under the old way. And maybe we will adapt, psychologically.

Do you think that you could live happily in a high volatility gig economy?

Capitalist Idealism

There is more to modern commercial culture than accumulating capital and mass production. Aspirations and ideals are not at odds with capitalism; they exist within it. As Deirdre McCloskey has argued and continues to argue at length, the Industrial Revolution and the resulting modernity have not hollowed out the human spirit, as many a sociologist and essayist have claimed from its early onset.

Ideals and aspirations must bend to prudence in the end; any attempt towards their realization must contend with scarcity. From this perspective capitalism does not crush ideals or push materialism more than any alternative; what discourages people in any system is the tragic but inevitable gap between reality and their ideals. Modern markets are no more relentless about this than any other system; indeed, as McCloskey would argue, they have made it possible for more people to devote themselves to the aspirational than any other systems at any other times in history.

Consider the great novelists of the 19th century; Dickens, Twain, and Dostoyevsky, for instance. All were deeply embedded in the commerce of literature of the day. Dostoyevsky wrote The Gambler to satisfy a contractual obligation, while simultaneously writing Crime and Punishment at night, a more aspirational work. Yet the quality of The Gambler did not suffer from being born of necessity; Dostoyevsky had his pride as a writer–which is another way of saying that he had ideals. Dickens, meanwhile, was famously paid by the word–yet unquestionably earned a place in the Western Cannon of English classes.

McCloskey complains that even the defenders of commerce seem to think that it’s all about prudence; that the story of modern markets is one of assembly lines that drastically reduce prices. And there is no doubt that this is a very important and much misunderstood aspect of the market process. But even there you can find the aspirational–Henry Ford stated as his explicit goal that he wished to take cars from being a luxury enjoyed by the wealthy to a commodity for those of more modest means.

Ideals and Practical Knowledge

Much of entrepreneurship begins simply with someone believing that they can do better. In what McCloskey calls a Prudence Only mindset, this would mean nothing more than being able to provide the same product at a lower cost, or a higher quality product at the same cost, or a higher volume of products at a lower cost, and so on. And certainly this is an enormous amount of what goes on that we would consider entrepreneurship–taking advantage of arbitrage opportunities for personal gain, in the end making everyone better off.

But there is another respect in which some entrepreneurs believe that they can do better. A sort of aspirational arbitrage. Take the slew of editors who left Engadget last year to form The Verge. They left, in the spirit of the traitorous eight, because they believed they could do better than employment at AOL would allow. Reading editor-in-chief Joshua Topolsky’s introductory letter to the new site, you can see the prudence as well as the aspirational.

They got away from AOL in part because they wanted to invest in better tools for getting their work done, certainly.

We’re going to do that on a new product that we’re really psyched about. A site that’s not just a stagnant, fixed entity, but an evolving, growing piece of technology. We think of The Verge (and its underlying CMS) as something akin to an app. A piece of software that is being constantly developed and updated. Today we’re launching with The Verge 1.0, but 1.1 and 1.2 are just around the corner.

But note also the idealism embedded in desiring a site that isn’t “just a stagnant, fixed entity” but is in fact “an evolving, growing piece of technology.” Moreover, in the context of the current state of online reporting, the letter contains some clearly idealistic features:

We’re focused on bringing you — our extremely savvy and frankly very handsome readers — the best and most comprehensive coverage of the consumer technology world. Not just the nuts and bolts, 24-hour news cycle stuff, but more in-depth coverage, bigger stories, and content that goes further.

The last couple of years in particular have increasingly seen the rise of the belief that the only way to make it in online content is through low quality, ultra high volume production.

It’s either a lolcats site or a content farm, or you’re out of luck. Or so the story goes. In any case, in an industry where advertising-subsidized free to consume products is the only model that appears to work, the appeal of the content farm approach is obvious.

Topolsky et al. aspired to something more than that, something more even than what they could accomplish at Engadget. I have speculated about how their costly feature pieces might pay off for them if you take a long view, but the point is that they are trying to make it work. They take one aspiration–professionally providing in depth and long form analysis of technology and society–and set to work attempting to make it work in practice.

From a certain point of view, all commercial culture entails is taking some ideal or aspiration and setting out to gain the practical knowledge of how to accomplish the closest approximation of that ideal they can. What makes it commercial rather than political is that it is accomplished through voluntary arrangements and exchange rather than through force.

And what the enormous growth in wealth since the onset of the Industrial Revolution has done is expand what is possible. Why some have taken this to mean that ideals were abandoned along the way for wanton materialism is beyond me. I stand with McCloskey in the belief that as our material possibilities expand, so too do the aspirations we are able to pursue.

I see examples all around me. Take the indie game developer Jonathan Blow. He worked in the video game industry for decades, and was frustrated by the constraints he faced at the big studios. He believed very strongly that video games could be a form of expression, that they could be up there with any art form. So he struck out on his own and worked on a game without institutional constraints for several years, and the result was Braid.

To any gamer, Braid clearly trumpets Blow’s aspiration for something more. It is full of allusions to the history of gaming, as well as to The Lord of the Rings and other such things. There was real innovation in the gaming aspect itself–the manipulation of time was not an entirely new thing (what is, in art or anything?) but nothing had taken it as far or made it as central to the gameplay as Braid did. Blow brought in David Hellman to make the game look like a gigantic, moving, interactive painting. And he clearly put a lot of thought into the soundtrack.

Whether or not Braid succeeds as art or even as a video game is one of those questions where the answer depends on who you ask. Roger Ebert didn’t think so, to no one’s surprise. But the reason he even mentioned it is because so many people have cited Braid as a counterexample to his claim that video games could never be art. Certainly, there are people who feel it is not just a good game, but a worthy artistic work.

Of course, it has been a tremendous financial success for Blow. Yet I find it difficult to believe that financial gain was his entire motive–with the low probability of success in indie game development, the expected return of going indie was probably break even with staying at his old job. But he had an aspiration, not just to create artistic video games but to push the industry in that direction. And his initial success means that he now has the practical means to pursue more such projects.

And I can’t see that as anything but a good thing.

Norms and Freedom

In his latest book, Luigi Zingales asks why economists aren’t more willing to talk about what the optimal norms are for a successful economy, rather than focusing exclusively on what the optimal laws are. Over at Modeled Behavior, Adam Ozimek asks:

Is this a libertarian, conservative, or progressive idea? If you view the pressure of social norms as a way to restrict individual freedom, then this can easily be seen as progressive or conservative, depending on the behavior being restricted.

This question has a history behind it. In On Liberty, John Stuart Mill made it clear that he considered social stigma to be a form of coercion. This was especially so when it influenced who people were willing to do business with:

For a long time past, the chief mischief of the legal penalties is that they strengthen the social stigma. It is that stigma which is really effective, and so effective is it, that the profession of opinions which are under the ban of society is much less common in England, than is, in many other countries, the avowal of those which incur risk of judicial punishment. In respect to all persons but those whose pecuniary circumstances make them independent of the good will of other people, opinion, on this subject, is as efficacious as law; men might as well be imprisoned, as excluded from the means of earning their bread.

Thomas Sowell, a Hayekian, spent a fair amount of space in Vision of the Anointed criticizing Mill for his anti-stigma arguments. For Sowell and Hayek, norms are the very fabric of the social order. They come from a school of thought dating back to Edmund Burke, Adam Smith, and David Hume. While Mill shared much in common intellectually with the latter two individuals, on this subject he is much closer to Rousseau, who believed we were born free, only to be shackled by social conventions soon after.

This debate centers on different ideas of what coercion is. On Sowell’s side of the debate, there’s a fairly clear line–if you are doing something because of the explicit or implied threat of violence, you are being coerced. The threat of refusing to do business with someone is not coercion because no one is entitled to do business with anyone; the right to choose who I do business with is an inherent part of my freedom of association. The fact that I am choosing not to do business with you because you have taken some action or hold some belief that there is a social stigma against does not make it coercion, any more than if I was motivated simply by the fact that I think you are ugly or something.

How Norms Change

The ancient Greek sophist Protagoras argued that morality is something that human beings are constantly teaching to one another, similar to how we are constantly teaching each other language. The moral sense theorists, and more recently cognitive scientists and moral psychologists, have given us an idea of the mechanisms through which this co-learning occurs.

Most of the time we are taught to stick to a set of norms that has existed for a very long time. But moral change does happen.

Take the American Civil Rights Movement as an example. I do not think that its progress should be measured in the laws it managed to get enacted. Its progress should be measured in the extent to which it moved our moral framework.

Moral changes, like all social changes, start with small groups and spread in a diffusion of innovations-like process. Most such innovations never spread at all. This social trial and error form the basis of the engine of all institutional change, moral or otherwise.

As moral change follows the logic of the diffusion of innovations, we would expect successful revolutions to have the advantages predicted by that literature. The activists of the Civil Rights Movement did not just give speeches and publish books; they engaged in many forms of verbal and visual rhetoric, and took many dramatic actions, which put their perspective in the context of traditional American ideals and religious doctrine. Though their success constituted a change in the norms of the country, it was more likely precisely because they framed the change within preexisting norms.

The Limits of Individual Influence

If you think that you can affect great changes as a lone individual, you are setting yourself up for disillusionment. In all of social life, everyone is but a tiny part of a much larger whole. Even the President of the United States, and others with even greater discretionary authority, face constraints by the very nature of the systems they are working within. Individual impact varies dramatically, to be sure, but even the most exceptional individual’s influence will always be small compared to the scope of the system that is acting upon them. It is also probably reasonable to assume that it is highly unlikely you will become the Martin Luther King, Jr. of your particular moral movement.

Once we have given up on individual exceptionalism, we are left with the same tools that human beings have been using for as long as we have formed groups. You cannot hope to shape the moral compass of a nation with a single blog post, but you are influential within the group of 100 or so people you are most closely associated with, and especially the 15 or so people in your inner circle–see Paul Adams on this subject, and his book for a more thorough review of the literature.

You must also accept that this group will have as much or more influence on you as you have on them. In both how you influence and are influenced by them, your social groups are the venue for your participation in all social change, including moral change.

Participating in Change

Dan Klein once said that he felt like he shouldn’t be in GMU’s economics department, where there were plenty of people who already agreed with him, but instead should go to a more mainstream department where he could work to change minds. This is a misunderstanding of how minds are actually changed. If Klein went to such a department, he would probably just become marginalized within that community. Rather than increasing his influence, it would almost certainly reduce it.

At GMU, a community of libertarians has formed, and a culture has developed within the department. Students who go to grad school there are immersed in that culture while they are pursuing their degree. They integrate into and are influenced by that culture to varying extents. Many then take that culture with them when they move on to other things. This is not unique to GMU’s economics department–all academic departments develop a culture of some kind, which acts upon and is acted upon by the students that pass through it.

We tend to have a broadcast model of influence in our heads–we think that by writing blog posts and going on TV we will change people’s minds. But the vast majority of influence happens at the level of a community. This is true even in exceptional cases–Marginal Revolution may be an influential blog, but the economics blogosphere as a community has more impact overall on the parameters of the discussions than any one of its members. Tyler Cowen’s biggest individual impact on this discussion is as a member of a community of high visibility individuals, such as Paul Krugman and Scott Sumner.

The norms developed within the communities of which we are a part are then subject to the dynamics of the diffusion of innovations–they could gain mainstream adoption, they could remain niche, or they could hit some middle point between the two extremes. They could persist for long periods of time at whatever level they attain, or they could flame out quickly and disappear.

To the extent that you are encouraging certain norms within your community which could eventually diffuse beyond it, you are participating in the process of moral change.