Got Optimal?

It seems to me that one of the most underrated notions in the world is that of the “optimal” arrangement.    You hear a lot of folks talking about things like  “exploitation”, “growth”, “fairness”, “maximizing profits”, etc, etc, but it seems to me we don’t talk nearly enough about how to structure the world in the way that best benefits the most people, ie to seek the optimal arrangement given the needs and contributions of all the players involved.

Nearsighted conservatives will sometimes mistake that kind of discussion as “socialist” because they see it as veering away from the competitive, individual forces that very effectively drive  highly productive economies, but they forget that in the game of economics we should generally be looking at metrics such production divided by number of people (GDP), and this number will be bigger if we optimize correctly.

The left in this sense is usually too “far sighted”, looking to distribute the wealth that may vanish if we eliminate those individual and corporate competitive structures that are the hallmark of industrialization and the spectacular rise in the average standard of living in the industrialized world over the past century.

So, how to optimize things?   Economist Vilfredo Pareto  (OMG he’s Italian?!  economic credibility challenge alert!) had some neat ideas with respect to optimizing systems where we’d examine them to find ways to increase the well being of some participants without decreasing that of others.

I think this simple basic idea should factor in a lot more, especially for those who fret a lot about the inequitable distribution of production towards the rich.    Those folks generally, and very wrongly, assume that redistribution won’t have negative effects on production.    It will, although that certainly does not mean we should not redistribute anything.   It just means we need to redistribute with *great caution* to avoid the catastrophic kinds of problems faced by basket case economies like North Korea.

I think the single greatest challenge of optimizing is the degree to which you factor in the needs of other nations.   Optimizing with the rural Pakistan peasantry in mind is different than if we draw our lines at the US border and say to heck with the needs of everybody else.   Although I believe we have a moral imperative to take the needs of the world into much better account than we do now, I also recognize that it’s not practical or even possible for those of us who enjoy the many benefits of industrialized capitalism to successfully integrate our economies with those of countries like North Korea or China or even very friendly “economic allies” like India.     Fortunately for those guys – and probably for us too – industrial globalization and the communications  and technology revolution are handling much of this task, often via the invisible hand of Adam Smith style free marketeering.

The future … is better optimized !

Stern on Climate Change: Act Now or Else

I think economic analysis should be a key part of how we seek action plans for Climate Change, and although I’m partial to what most economists suggest with respect to Climate Change mitigation spending – moderate to low mitigation spending until we know more about impacts and our ability to change things – I also respect the fact that … they could be wrong.

A prominent economist who suggests we must act now to avoid huge future costs is Sir Nicholas Stern who was commissioned by the UK Government to answer the most important question with regard to Climate Change.   That question is NOT “what’s up with the climate?” but rather “what’s up with what we are we going to do about it”?     

Here is a great executive summary of Stern’s view and by extension the official stance (I think) of the UK Government.      The key departure Stern makes from the more prevalent view of economist who study this relates to *discount rate*, which is  the interest rate used in determining the *present value* of future cash flows.   The gist of the discount issue relates to how we treat *current* cost and benefits vs *future* costs and benefits. 

In a nutshell, Stern argues that climate change can’t be treated with the same discounting assumptions we’d use in a business analysis, I think (not sure here), because the time spans are very long and the stakes are potentially very high.     This assumption is why in Stern’s model *acting now and acting big* is so important.

I’m still trying to digest the issues here, though intuitively I simply don’t understand why we should change the rules for Climate that we use so successfully in other economic analyses.

Risk saves lives

Just another in my ongoing rants about something I feel strongly about.  We need to accept a lot more risk in our lives so we can stop spending gazillions foolishly, and start allocating the spending to things that will actually do a lot of good and save a lot of lives here and elsewhere:

 Re: Lead in toys imported from China:

The whole anti china toy thing seems to me to be largely an overreaction and/or  an anti-China political scam.   Our standards are far, far too high here in the USA.    I’d like to see how you can make a case that standards that add billions in costs and save at most a handful of people are appropriate when we could reallocate that risk in such a way that the costs would save thousands of *the very same* people,let alone *millions* in developing world.    Did anybody bother to compare the (trivial) lead and toxics risks from those China toys with risks from wearing street shoes in the home (also probably trivial but not a costly approach to the problem.  And then compare those with the risks most families take by not containing the almost ubiquitous leaded paint on old American homes and by using leaded fuels?   THAT’s a lead risk folks, and it’s big enough to worry about.    Am I saying we should allow leaded toys in from China?   No, but we should not worry so much about these small risks and we should reduce the regulations such that the risks match up logically.    Mad Cow disease posed almost *zero* health risks given the existing inspection regimens, yet many called for *higher* standars to fight that almost immeasurably small risk of human problems from mad cow.  (Pop quiz – how many US people have died from the human complications that come from mad cow disease?)  Answer:  1 or less.   In fact there were only 3 cases of this in US cows! 

Would I vote to put myself and others at slightly greater risk – trivial greater risk – so hundreds of others could collectively live thousands more years?   Of course, it is a moral imperative to work for this.  

Silly people say it’s not a tradeoff.   They suggest we always need to fight for the highest safety standard, and the costs be damned.    That appeals to emotion but is downright stupid in terms of economics.  You *must* allocate resources because they are limited.   You can let whimsy guide you, or emotion, or evil, or logic, but you cannot escape the allocation of resources.   All I’m saying is, to rework and paraphrase John Lennon:

“Let’s give Peace REASON and ROI calculations a chance” 

 We desparately need to better match risk and cost, but political spending and emotion forces us to, for example, recall perfectly good beef and spinach when statistics suggest these were of sufficient quality.    The spinach thing probably led to a few more deaths from lowering dietary standards by stopping eating spinach than the 1? death from the bad spinach.

China redirects searches to Baidu? OR NOT!

TechCrunch is reporting today that China is redirecting internet searches from Google, Yahoo, and MSN and I assume all other engines – to Chinese search engine Baidu.   However I can’t find anything but little anecdotal posts to support this.   Looks to me like some videos and blogs have been affected, but that the big search engine issues may have related to a temporarily problem or testing of DNS stuff.

They suggest this may relate to the recent award given to the Dalai Lama I’d guess China is spending a lot of time thinking and experimenting with ways to maximize their search revenues, and this redirection, if it really did happen as dramatically as some suggest, would probably be testing ways to gather data on how well Baidu monetizes search compared to the agreements they have with other players.

Wait – here’s a blogger in Beijing, China saying that he’s getting to places TechCrunch says have been sent to Baidu, like Google.   Not sure what’s up …

Is this a false alarm?   I think so, though it might be another example of how China’s centralized socialist economy can create power and monopoly conditions the most ruthless old style US capitalists could only dream about.    Increasingly control of the online landscape is control of the business landscape, and as China’s massive economic expansion continues it will be very interesting to see how the China wields her power.

Note – I just edited this post quite a bit thanks to the new info.  Still dunno what’s going on.