Thursday, February 14, 2008

Envy and irrationalism

In one easy lesson Michael Shermer explains both the appeal of socialism, and why contrarian investors are so often right. [Hat tip SubStandard]

Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same.
Surprisingly -- stunningly, in fact -- research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have. How irrational is that?

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18 Comments:

Blogger Matt B said...

I do wonder if this result is because talk is cheap. People hear as a question about the kind of society "we" want (I hate that word).

Faced with an actual choice of being shifted to Silicon Valley (median income $250,000) and being given the smallest, albeit very nice, house on the street, and being given a smaller house in a particularly rough suburb of Chicago (median income $25,000), what would the choice then be?

2/14/2008 11:30:00 am  
Anonymous LGM said...

"Socialists are sick bastards."

Excellent comment from Marty during a dinner conversation recently.

Faced with the choice to be an independent producer versus a non-productive leech, socialists necessarily choose to be leeches. They prefer to hold others down to low standards. Perhaps it isn't a matter of well-being and wealth that they consider at all, rather they posess a cruel malevolence directed against others.

LGM

2/14/2008 12:29:00 pm  
Anonymous Irrational said...

PC, the problem is this:
If

1 person earns $50,000 a year, while the rest only earn $25,000 a year

then it becomes extremely difficult to accept that this:

"Assume for the moment that prices of goods and services will stay the same."

can possibly be true.

If you earn twice as much as everyone else, you have twice the spending power. Goods and services don't have an absolute value - they are relative. That's why your holiday in Laos is cheap, and in Europe is not.

Therefore the decision to go with the $50,000 is entirely rational.

The problem is that the conditional statement is incorrect. Still, it highlights the problem with most libertarian arguments - they are too simplistic and ignore the fact that that reality exists in shades of grey, not black and white.

2/14/2008 07:26:00 pm  
Anonymous irrational said...

by the way, you might be interested, I think it was psychologists Daniel Kahneman and Amos Tversky who won a Nobel Prize in Economics for their work in this area.

2/14/2008 07:34:00 pm  
Blogger HORansome said...

I suspect, PC, that if you read Shermer's new book on the matter of the markets and economic agents you might be disappointed in his reading of how it all works.

2/14/2008 09:22:00 pm  
Anonymous Anonymous said...

Faced with a choice of turning the landscape into cash and creating a dung heap or more moderate option, a greedy person will choose the dungheap option as his perception of additions to personal wealth and status will be valued over the (more distant) environment.

2/14/2008 11:23:00 pm  
Anonymous LGM said...

irrational

Naah. You're just plain wrong. As is usual for your sort it's all about making excuses for your beloved socialist nonsense by twisting and turning and wordplay. Maybe you should get a real job.

LGM

2/14/2008 11:58:00 pm  
Blogger Luke H said...

This isn't irrational at all. The choice is between being the poorest person in a neighbourhood or being the richest (in a different neighbourhood). Easy.

A consideration of social status is hardly irrational.

2/15/2008 01:16:00 am  
Blogger AngloAmerican said...

I agree with Luke and Irrational.

There are evolutionary forces at play here - the inner reptile makes the correct choice for increasing the chances of being top dog and access to the best females. Females will choose the wealthiest over the most rational.

2/15/2008 05:41:00 am  
Blogger AngloAmerican said...

Sorry about the mixed metaphor!

2/15/2008 05:43:00 am  
Anonymous LGM said...

That's like saying you'd rather be a kapo than a lowly office junior.

Forget about the lizard brain stuff. This is a conscious choice to make, not something you'd do in a dream.

Think on it again.

LGM

2/15/2008 06:35:00 am  
Blogger AngloAmerican said...

It's more like saying I'd rather be the ruler of a small country than the only serf in another one. A big fish in a small pond.

I suggest you think about the possibility that there is more to life than monetary wealth.

Just imagine your fat, ugly wife constantly nagging you about how you only earn half as much as everyone else. God, it'd be a nightmare - think about it.

2/15/2008 07:06:00 am  
Blogger AngloAmerican said...

Ok I thought about it a bit more between exercise sets. IF the environment was limited to a single company then I think everyone would choose the 100K but the scenario doesn't make this clear.

2/15/2008 07:16:00 am  
Anonymous Anonymous said...

Gentlemen

The examples PC posted came from Michael Schermer. His question, which is the main point at issue here, is what should be most carefully considered. Don't evade it. Answer it. What is your answer? It will tell you a lot about yourself. It will also tell you about how you really regard other people and how you want to see them treated.

If you take a look at the two cases Michael Schermer outlined and apply the assumption he applied (namely that cost of goods and services are held constant), it is immediately apparent that the first economy is smaller and far less wealthy than the second. The second economy would be richer (materially and in terms of choice) than the first.

In the absence (or significant reduction) of government interferences (taxes, arbitrary regulations and imposts, fiat money, govt imposed monopolies and cronyism etc) the cost of goods and services declines in real terms over time. In reality there are two other effects that would be noticed. The first is while the cost of existing goods and services would trend downward over time, there would also be new, more sophisticated, better developed goods and services introduced into the market. These would tend to be more specialised and carefully targeted. They would be absent or severely restricted in the poorer economy. They would require investment and expenditure of wealth that was simply absent from the lesser economy. The second effect is that while costs fall, real incomes rise over time. The purchasing power of workers increases. Generally the level of wealth increases. Note that increased government interference in the economy acts against these trends.

The assumption made in the original post is thus reasonable and practical. Prices of goods and services could be the same in both economies (although certain goods and services would be completely absent in the poorer economy). Nevertheless the second economy would feature far wealthier people in general (including the person on the lower income) with more savings, assets, access to goods and services, better choice, more options in life, better education, better comfort and far superior quality of life (especially since the pursuit of happiness is far easier in this case).

Interestingly it is likely the first economy would suffer far greater overheads and depredations from government erosion of freedoms than the second. Either that or the first economy would not be as advanced or as developed as the second. Another way of considering this from the economic perspective is that the pie is bigger in the second economy then the first. That's due to the fact that the cook has more time to cook (does not need to spend so much time attending to the demands of govt fiat and regulation, like getting a consent to bake a pie etc) and also has access to a greater quantity of ingredients to make the pie (since the government and its mates haven't eaten heaps of them already).

Turning now to the "irrational" post. Notice the assumption made by this contributor is that an economy must be zero sum. His premise is that if someone has more, then all others must have less. Everything is "relative" and scales in exact proportion. Hence, if incomes rise, cost of goods and services rise in proportion. His view of economies is static, an applied equilibrium of sorts. His view is false. It is the socialist view; simplistic and irrational. No wonder Marty said what he did about those socialist guys. Still, it is extremely important to identify the socialist's deception. He applies jealousy and feelings of inferiority to make his appeal. Don't fall for it.

Returning to the question, the choice is:

do you want to live better, even when there will be many who will enjoy even more yet than you

OR

do you want to live with restricted prospects, limited opportunities and less wealth so long as you can see to it that all others are forced to bear even worse standards than you?


LGM

2/15/2008 11:31:00 am  
Blogger AngloAmerican said...

Well...when you put it like that LGM...the answer should be obvious.

I think that there is not enough information in the scenario to give a definitive answer. The "Assume for the moment that prices of goods and services will stay the same" statement speaks volumes. We should be told if the rule applies to everyone on the planet or in the country or whether it applies to a single small company.

If the rule is universal then it could be a very bad choice indeed to let everybody in the world have an advantage over you when you could have had it vice versa. That's just business isn't it?

2/15/2008 02:16:00 pm  
Anonymous still irrational said...

Turning now to the "irrational" post. Notice the assumption made by this contributor is that an economy must be zero sum. His premise is that if someone has more, then all others must have less. Everything is "relative" and scales in exact proportion. Hence, if incomes rise, cost of goods and services rise in proportion.

Actually, LGM, I said no such thing. I said that the example is far too simplistic to say choosing option 1 is irrational, as suggested. I can think of many scenarios where choosing option 1 is entirely rational.

"Let's assume that blah blah blah" statements are used in situations when the assumption is, in fact, not true. That is why it is there. If it was true, the statement would not be necessary.

do you want to live better, even when there will be many who will enjoy even more yet than you

OR

do you want to live with restricted prospects, limited opportunities and less wealth so long as you can see to it that all others are forced to bear even worse standards than you?


Well, I choose to live in NZ. I could earn a lot more in Europe, but chose to stay here. Why? Because I am happier here. How do I know? Because I have done both. I can do more with my lower income here, than I could with a bigger income in Europe.

So there!

2/15/2008 02:55:00 pm  
Anonymous Anonymous said...

still irrational (an appropriate tag line for the likes of you)

It's been demonstrated that your understanding of economics is faulty. Your assumption is clear to see and easy to identify (no matter how you try and deny it).

It is obvious what choice you would make and how you want to see other people treated. Shame on you.

Your attempts at denial and deception are feeble. You're not fooling anyone except yourself. Time to dump your malevolent socialist prejuduces. They are wrong. Reality deomonstates that consistently.

LGM

2/15/2008 08:06:00 pm  
Anonymous Anonymous said...

Angloamerican

Yes. It is obvious what the answer is. Very straight forward.

Interesting how difficult it is for the socialist to answer it directly. People like him will go to enormous efforts to decieve and evade the question put.

LGM

2/15/2008 08:11:00 pm  

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