Saturday, December 28, 2013

Three inequality analogies

With an interesting thought experiment, Nick Rowe makes inequality officially the issue of the week (see Noah Smith for another good take). Ever since I can remember thinking about it, I've always used evolution as an analogy -- but not as survival of the fittest!

See, that is the popular misconception about evolution. Those organisms alive today are not the "best" and they all didn't "out-compete" extinct organisms. Evolution is highly path dependent. Outside factors play a major role. Mostly, extant species are just plain lucky.

However, since this is a blog about using information theory to describe economics, I'd like to put forward a couple more analogies. First, money is basically a tool to allow the economy to move information around and solve an optimization problem. Think of money like beads on an abacus [1]. Spending money is like participating in a calculation. Now think of a person with an abacus the size of a room, but only ever uses a few of the beads to do any calculating. Now imagine she passes those beads on to her children. (Of course, no one lives with a pile of beads under a mattress; they give them to someone else to do calculations. And then they feel important for their ability to allocate beads for which they receive more beads.)

The second analogy has to do with bike/car sharing. I'm not sure if this is apocryphal, but there was a story about the free bike sharing plan in Austin. Basically, it initially fell apart (although it still exists) because the bikes were all taken from the dense downtown core and ended up in the sparse suburbs. The fact that car sharing like Car2Go has to deal with this problem by hiring people to bring the cars back to the downtown core gives some evidence that this apocryphal story might have been true. In any case, money, like a car, is a resource that chiefly enables you to do other things. Because the car sharing service lives in a world with cities and suburbs (themselves the result of government policy and regulations), the cars become mis-allocated and pile up in low density suburbs. The cars must be redistributed in order to make the car-sharing system work efficiently.

"Yes, but!" say they defenders of inequality, "the beads and the cars are not going unused. Prices for cans of soup and other things the 99% buy are fairly efficient already and don't need extra beads allocated to optimizing their allocation. And it could well be more efficient to have a Car2Go parked outside a member of the 1%'s mansion in case she would ever want to use it than parked near the 99%."

My response is that there is no way of knowing that without a complete macroeconomic theory! And in the case of this blog's raison d'être, we could potentially answer it by seeing how far from ideal information transfer we are versus e.g. Gini coefficient.

[1] I think bitcoin makes this analogy into a reality.

3 comments:

  1. More succinctly, we have to really understand the economy in order to know if the distribution of money is helping or hurting us.

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  2. Another analogy I had was comparing money to the pheromones ants use to organize the ant colony. If ants tried to save up pheromones rather than using them to build up the ant nest, the accumulated stock of pheromones would look pretty useless once the colony had failed to maintain itself properly.

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    Replies
    1. That's a good one; those pheromones are essentially conduits to transfer information around the colony.

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Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.