Rational Choice: Carrotmob

Two fundamental concepts of economics that have always frustrated me are the following:

1. An economic choice is fundamentally a value decision made by an individual. An economic actor is making an observable choice, revealing their values and preferences.

2. A market (or the market) uses price as a mechanism to efficiently allocate resources, based on supply and demand, fundamentally driven by the sum of the collective individual preferences of each of the actors in the market.

That may be an oversimplification, and it has been a while since I've taken an economics class, but the gist is right.

So, what's vexing? Well, two things. First, while so many of us claim to believe in one set of things (say, environmental responsibility, or justice, or equality) our revealed preferences show a clear priority in valuing a different set of things (say, comfort, or convenience, or entertainment).

Secondly, while we may truly believe in one set of things, we generally do not feel that our economic choices actually can influence the behaviors of "the market." While we are all supposed to be economic agents, who's behavior, in sum, matters, we feel a complete lack of agency, as far as our ability to make choices that will actually change markets.


With these two points running around the back of my head, I comment Carrotmob, both as an ingenious embodiment of these core economic principles, and as a very cool and innovative approach of connecting the individual economic choices that we might make with real world impact. While my understanding is that Carrotmob is just getting off the ground, I fully recommend taking a look at the organization, which has the potential to be a powerful and exciting change agent, and has, at its core, a possibly sustaining business model (probably not making anybody a millionaire, but perhaps sustaining the platform for change that Carrotmob may grow into...)

Thoughts?

The Energy Bubble

RM over at Informed Reader summarizes an article on the next economic bubble -- supposedly being created as capital is moved into research, development, and marketing of new technologies in alternative energy. (Caveat: I haven't read the Harper's article.) Thoughts?

The small fashion among economic commentators that our entire trajectory of economic growth is a (wink-wink) sanctioned Ponzi scheme, shifting capital and hype from one sector to another, is pretty terrifying. Particularly when the debts and assets left behind from one level to the next are being bought up by foreign interests.

In general, I guess it is a good thing that this capital is being moved into alternative energy. Even if there is an eventual collapse, the initial investment should yield dividends in terms of new technologies and markets. Casualties of the Internet boom aside, that Google, Yahoo, Amazon, Facebook, Wikipedia, and all the online media were wrought from that initial investment surely has been a significant and positive change in our lives.

If the bubble is starting now, I guess I'm going to be late to the party again. Damn my timing!

Happiness Is...

An article from the New York Times a few weeks ago, about a growing gap in "happiness" between men and women, caught my eye. An excerpt:

Alan Krueger, a Princeton economist working with four psychologists on the time-use research team, figures that there is a simple explanation for the difference. For a woman, time with her parents often resembles work, whether it’s helping them pay bills or plan a family gathering. “For men, it tends to be sitting on the sofa and watching football with their dad,” said Mr. Krueger, who, when not crunching data, enjoys watching the New York Giants with his father.

This intriguing — if unsettling — finding is part of a larger story: there appears to be a growing happiness gap between men and women.

Two new research papers, using very different methods, have both come to this conclusion. Betsey Stevenson and Justin Wolfers, economists at the University of Pennsylvania (and a couple), have looked at the traditional happiness data, in which people are simply asked how satisfied they are with their overall lives. In the early 1970s, women reported being slightly happier than men. Today, the two have switched places.

Mr. Krueger, analyzing time-use studies over the last four decades, has found an even starker pattern. Since the 1960s, men have gradually cut back on activities they find unpleasant. They now work less and relax more.

Over the same span, women have replaced housework with paid work — and, as a result, are spending almost as much time doing things they don’t enjoy as in the past. Forty years ago, a typical woman spent about 23 hours a week in an activity considered unpleasant, or 40 more minutes than a typical man. Today, with men working less, the gap is 90 minutes.

I don't have much to say about the article itself, except that I found in generally interesting and I thought it rendered the challenges of achieving happiness a little too simplistically (not in a deeply philosophical sense, but in terms of achieving basic life goals, and as expressed through the necessary activities that men and women need to do). But the article did re-raise an interesting question that I had thought about in the past, although not much recently.

How can we measure happiness, and how can we make it useful as a way to make choices, and measure the impact of those choices? Can we make happiness a useful notion both for guiding personal decisions as well as political decisions? Or is it to subjective and ephemeral a notion?

Darren McMahon's Happiness: A History, a philosophical and historical investigation into what happiness means is an interesting launching point for this discussion, but one which I will avoid (see this brief review) except for a) recommending his book, and b) citing it as a reference for the otherwise obvious point that 'happiness' as a defining goal of human existence has been important through all of documented history, pretty much, although the relative meaning and importance of 'happiness' has not been held constant.

More recently, two attempts to measure happines, at varying degrees of quantitative precision, for use as a high-level indicator of human progress are interesting and worth checking out. I'll link only to the basic resources, and may revisit this topic in the future. But in the meantime, check out the Gross National Happiness indicator, put forth by the strange and progressive kingdom of Bhutan as an alterntive understanding of how a society is progressing, and the more economically viable Genuine Progress Indicator, created as an alternative to GNP which tries to properly value economic externalities (like environmental impacts) and 'negative' wealth (like the economic activity created by crime or ill health [think insurance company premiums increasing]). See also the World Database of Happiness, which I'm still trying to figure out, and a dense white paper from the OECD on the use of happiness as a political/policy metric of value. And perhaps another post to follow.

Photos from a Flickr search for 'happiness.' (Although you might get the impression that happiness is disproportionately the province of children...)

Sustaining Junk

In college, I studied economics and environmental science and policy. The two disciplines are very rarely harmonized, and people who think seriously about sustainability from an ecological perspective have been able to challenge a lot of assumptions core to economic modeling. When we consider the global ecological system, we are forced to account for behaviors, constraints, and outcomes that are generally ruled out-of-bounds for the purpose of economic decision making - for example, performing cost-benefit calculations and making rational choices where the consequence must be spread over long time horizons, recognizing and valuing all externalities in a system, creating an accounting system for resources, like air and water, than aren't traditionally paid for with money, but which are fundamental to all economic transactions, understanding scarcity in situations like extinction, and so on.

For all the challenges that environmental thinking can pose to economics, a key vexing question that economics posed to ecological systems was the ability of the market, through demand, competitive advantage, and ultimately price, to foster technology innovations that would, at the right time and over time, allow us to address environmental problems through technological solutions. A key example of this has always been in energy, where one line of thinking projects that, as soon as the market conditions exist that make innovation in alternative energy feasible, that market need will be filled. And perhaps we are seeing the beginnings of such a set of innovations in green energy today.

A recent Slate.com article got me thinking again about this issue:

In an act of macroeconomic karma, materials thrown out by Americans—broken-down auto bodies, old screws and nails, paper—accounted for $6.7 billion in exports to China in 2006, second only to aerospace products. Junkyards may conjure up images of Fred Sanford's ratty collection of castoffs. But these days, scrap dealers are part of a $65 billion industry that employs 50,000 people, who together constitute a significant arc of a virtuous circle. The demand of China's factory bosses for junk—which they recycle to make all the junk Americans buy from China—creates jobs, tamps down the growth of the trade deficit, and might help save the planet.

Is it possible that one nation's folly in managing resources can be another nation's opportunity, and that on a global scale, the market will be efficient in distributing resources (and managing the impact on those natural resources need to sustain economies and fuel innovation?) It seems folly to blindly say yes, although I believe many business decision makers believe this to be true, if not in this exact framing, then as evidenced by the way they behave.

Where this strikes me as folly is that it fails to create the right incentives, culture, or organization (switching from economics to business) to address more efficient use of resources. It puts us in the wishful position of hoping that the market will create conditions to clean up its mess, rather than avoiding the mess in the first place. Put another way, it puts the burden of sustainability on policy makers, influencing the outcomes of a business system, rather then as a design challenge, influencing the initial objectives and processes of the system.

It is as a design challenge that sustainability becomes a truly influential idea for business and the economy, and while I'd like to return in further detail to this topic, I will leave off by highly recommending you watch the Bill McDonough video hosted on the TED site, above, as well as reading a bit about McDonough's Cradle 2 Cradle design philosophy - which can be consumed as a very interesting book (in both the intellectual and physical sense, the book itself having been designed according to the Cradle 2 Cradle principles), as well as on many websites, including McDonough's own website.

Class Matters

I want to whole-heartedly recommend the collection of New York Times essays and reporting that has been published under the title Class Matters. Ranging from fairly data-driven studies of how people's perception and the economic reality of class has changed in America over decades, to closely studied features of a wide range of archetypes that populate the current understandings of class in America. The reporting and analysis is excellent, and paired with often moving personal accounts that give weight and texture to the more abstract data, make this collection very compelling. The Times has also made much of the reporting available online, here, a site which I have not yet explored in detail. I expect to address many of the specific themes raised by different articles in the collection on their own terms, when I am a little less side-tracked by work, but definitely recommend this book - perfect subway or airplane reading, and thought-provoking through and through.

Random Economic Follow-Up

Still on the great Harvard magazine article, which among things, is serving as a great Econ 52 refresher:

Money flowing into the United States injects purchasing power into the economy unevenly—it affects certain sectors, such as housing, more than others. “Assume the world is divided into things that are tradable and things that are not,” says Jeffry Frieden. Hard goods, clothing, and most foods are tradable: they are transported easily across borders and are therefore subject to international competition. Haircuts, housing, medical care, restaurant food, and public transportation, on the other hand, are consumed where they are produced. Because these kinds of goods and services can’t be exported or imported, they are considered non-tradable. When foreigners are buying our currency, the dollar appreciates, making international goods relatively inexpensive. That leaves consumers with even more money to spend on non-tradables, such as housing and land. And because housing and land are not subject to foreign competition, their price goes up.

Is it plausible, through a combination of an increasingly global distributed base of high-value knowledge workers, that some of the services (hair cuts, medical care, restaurant food) described as non-tradable become tradable? To borrow from the Greeks, what if the best barber lives in Italy, and technology enables him to cut your hair remotely, let's say with robotic arm? Is that simply far-fetched? Does it matter, in terms of how capital flows, and how we value services?

How Are We Paying For All Of This Stuff???!!!

Through all of the economics courses I took, there have been a set of first principles that have never exactly sat well with me - maybe because I just didn't get them or maybe because they aren't taught well because they are fundamentally impractical questions. Generally, these questions occupy the outer bounds of economic questions - extremely microeconomic questions, like how assumptions about rational actors could really be used when considering, you know, humans, to macroeconomic questions, like how is wealth created, how do you value good & services that aren't financially accounted for, or whose value must be factored over long periods of time, or what happens when societies fundamentally consume more than they produce over long periods of time.

These abstract economic questions take on puzzling forms in my day to day life. For example, commuting on the subway in Manhattan, it's apparent that everybody, everybody - ghetto kids, grandparents on social services, day laborers, NYU students with no jobs and lots of debt, teachers! - have upwards of $500 dollars worth of products on them at any moment, every day. Cell phones, iPods, shoes, handbags, designer clothes, digital cameras. It's crazy. Where is all the money coming from to buy all of this? To wit, Harvard magazine has an interesting article tying our macroeconomic troubles, in terms of foreign accounts balances and national debt, with our individual consumption habits:

“When a country gets a capital inflow [such as the United States has now], generally speaking things are pretty good,” observes Jeffry Frieden, Stanfield professor of international peace. “It allows you to invest more than you save, and consume more than you produce. There is nothing necessarily wrong with that,” he notes. Firms do it all the time, and so do households. They borrow on the expectation that they will be more productive and better able to pay the money back in the future. The United States, for example, was “the world’s biggest debtor for a hundred years,” Frieden notes, “but the money was used to build the railroads and the canals and the factories and to improve the ports and to build our cities. It was used productively, and it worked. The question to ask now is not, ‘Is the country living beyond its means?’ The question is, ‘Is the money going to increase the productive capacity of the economy?’ Because if it just goes to getting everybody another iPod,” he warns, “then unless iPods make people more productive, there is going to be trouble down the road when the debt has to be serviced.”

Well worth the read.

The Rich Have Inherited the Earth

And we are them. Or so goes my simple reading of this New York Times review of a new book being published by UC-Davis economic historian Gregory Clark. The central thesis of Clark's work, based on analysis of economic data from the Middle Ages, is that demographic trends in those years lead to a downward social mobility where the progeny of the rich, imbued with a certain psychological disposition and value set, began to form a larger portion of society, fostering the shift from a cycle of subsistence to economic cycles where wealth was created, consolidated, and enhanced:

Generation after generation, the rich had more surviving children than the poor, his research showed. That meant there must have been constant downward social mobility as the poor failed to reproduce themselves and the progeny of the rich took over their occupations. “The modern population of the English is largely descended from the economic upper classes of the Middle Ages,” he concluded.

As the progeny of the rich pervaded all levels of society, Dr. Clark considered, the behaviors that made for wealth could have spread with them. He has documented that several aspects of what might now be called middle-class values changed significantly from the days of hunter gatherer societies to 1800. Work hours increased, literacy and numeracy rose, and the level of interpersonal violence dropped.

I won't form an opinion from the review alone, and hopefully will get to the book in the near future. In the mean time, you can read along with the folks at the Marginal Revolution blog.
Thanks to DL for forwarding the original article.

Get Green: Design Leads the Way

In my mind, there are three keys to solving the "green equation" of how we can live more sustainably, particularly with respect to energy and natural resource consumption. The first is driven by science and public policy, and has to do with our ability to discover and develop fundamental advances in our ability (as a society/economy) to get the goods and services we need out of the primary inputs we consume, with minimal adverse impact. Clearly, research and development efforts in fields as disparate as biofuels, solar/fuel cells, genetic engineering, carbon sequestration and other core science and technology initiatives are targeting these fronts. To my inexpert eye, the investments we are making here are limited to-date, and the initiatives, though encouraging, are insufficient.

The second piece of the puzzle is cultural, and lies with the willingness of individuals, as consumers and political actors, to make decisions that take into consideration environmental consequences. These decisions include choosing to consume less, pay market premiums for goods and services that provide greater dividends in protecting environmental and natural resources, and promote, through voting and civic engagement, a political climate that supports policies targeting sustainable development. A political and economic climate created by an environmentally conscious public could more effectively create market opportunities for alternative, efficient technologies, fund research in core sciences and technology, re-aligning tax policy to create incentives environmentally responsible behavior, and create a baseline understanding of the values and ethics of "sustainable development." While the cultural sensitivity to certain issues like global warming and a potential energy crisis have been heightened in recent years, I don't think that a true ethic of sustainability is anywhere near close to existing in the U.S. Additionally, as a sometimes student of economics, I'd mention that much 0f what I discuss above is somewhat anathema to parts of economic theory - in that, I believe that people as consumers will have to make economic choices that aren't rational w.r.t. price because of a deeper core set of values, ethics, or understanding about environmental consequences. Consumers will have to shape the market, not vice versa.

The third piece of the puzzle is very much design-driven, and have to do with the ability of architects, engineers, product designers, and policy makers to create appealing consumer choices - in terms of what car to drive, where to live, what to buy, and so on - that align environmentally-positive consequences with benefits that appeal to other values, like status, cost efficiency, comfort, quality of life, aesthetics, and so on. Where I have a dim view of the progress we're making on each of the previous two fronts, I am excited about the cool new products, across all facets of life, that seem to come out every day. While the impact on the bottom line may be modest, it is tangible. And the further impact of these "green" products and policies, if successful may be a heightened environmental consciousness for individuals and greater investment from government and private capital in the fundamental technologies that can allow us to take big steps forward.

I lay out this somewhat abstract framework for two reasons: first, simply to put it out there, to solicit feedback, and to reference in future posts. I hope it is a useful framework. Second, as an excuse to post about a handful of interesting innovations in technology and design recently published in Wired magazine:

- A proposed new dorm at Stanford University, whose theme will be eco-efficiency, but which also proposes to be the "most desirable housing on campus." Thankfully, having gone through Stanford's undergraduate housing lottery, that claim is readily falsifiable. See here for more detailed plans;
- A Jetsonian plan for improving transportation efficiency and quality of life in San Diego, through the deployment of "robot buses." Cool if it works, and a great example of how environmental efficiencies and quality of life improvements can be made in one fell swoop;
- A proposed residential tower in Chicago that falls back on pre-Columbian building design to create a more energy efficient and more pleasant living environment. The simple decision to angle the buildings Southern exposure to maximize passive solar heating in the winter, and minimize direct sunlight in the summer helps keep electricity and heating costs down while letting more natural light in. Not the first time such a dwelling was built in the Americas, and hopefully not the last.

Slowing Online Sales

Like you, the NYT headline caught my eye last week "Online Sales Lose Steam!" What could it mean? Recession? The resurrection of the brick and mortar? The mom and pop? Bookstores? Record stores? Dubious, I bookmarked it - but before I could issue a takedown, Slate.com beat me to it.

While Jack Shafer gives the story the rod from a journalistic perspective, I'll issue my one and only piling-on: which is my general dismay at the way both market researchers and consultancies (like Jupiter, the issuer of the data) and the NYT are able to take the data-rich markets and behaviors of the web and gin up sensationalist stories that don't really add up to much. Do I have lots of evidence of this happening? No, not right now. Does it irk me, nonetheless? Yes.

Visualizing Development with Gapminder.org

A significant challenge for policy makers and academics interested in economics and public policy is to adequately quantify the impact of a given policy over time, isolating, to the extent possible, the relationship of policy to specific indicative variables, and to effectively communicate the conclusions and results of any analysis.

Often, the core challenge is a paucity of relevant data, an inability for social scientists to establish the sort of controlled experiments that may allow for true tests to be conducted on a policy or economic hypothesis. In other instances, much of the data has been collected and is made available, by a variety of governmental, inter-governmental, and NGO agencies. When the data is available, the difficulty often lies in reconciling disparate data sets, providing a coherent analysis, and presenting the analysis in such a way that a lay audience might make sense of it.

RM sent me a link to the following video, in which Swedish professor Hans Rosling presents some work of a very interesting initiative called Gapminder.org to make much of the available data about social and economic policy indicators available to students, policy makers, and similar audiences, and to provide an interface to the data and analyses that make the findings more relevant and less arcane. The 20 minute video is entertaining, and worth a look:


I will try to dig further into Gapminder.org, and report back with another post.