Hive Mind: How Your Nation’s IQ Matters So Much More Than Your Own is quite good, and definitely worth reading. It’s fast paced, clear, concise, and interesting throughout. It deals with controversial topics with honesty, openness, and care. I like Garett Jones’ approach of introducing a problem to be solved, giving the reader a few possible explanations, and going through the evidence for and against each one. I think that’s pretty much the best way to go about doing economics, since no story is ever perfect and it avoids the trap of having a particular hobby horse that you are attached to to the detriment of other explanations. This isn’t an easy topic, and there certainly aren’t easy answers, but Jones doesn’t pretend like their are and it always treats the reader like an adult. The book never lingers and any repetition of the same point is rare and never tedious.
The core mystery the book analyzes is that your nation’s IQ is about six times more important than your own IQ for your income. The book starts by covering what IQ tests mean, how they are performed, empirical problems with past studies and generally summarizing the IQ literature. The book then goes through why it might be the case that group IQs are so important and how group IQs might lead to virtuous cycles. Minimal time is spent on possible policy recommendations, which is probably for the best. Economic models are handled purely in descriptive terms and the book is very accessible to non-economists.
In response to my article yesterday, Eli Dourado responded:
“Suppose a billionaire decides he wants to get you a Christmas gift. He hires 10,000 skilled laborers to craft something. They spend hours and hours of their labor getting it just right. They use lots of fuel and other resources. Turns out the gift is a(n exquisitely crafted) version of this:
To be honest, you don’t really like it, and it doesn’t have much resale value. You thank the billionaire; take it home. Society had to forgo lots of other products to get you that gift. But you don’t value it. Isn’t that obviously DWL?”
Dourado defines deadweight loss (DWL) as: “DWL is about whether the dollar-value of social resources is maximized.”
I replied: Adding “as a Christmas present” to “billionaire does stupid thing” doesn’t change anything.” Which Dourado agreed with.
So, it’s not obviously deadweight loss to me. It’s obviously stupid and wasteful, but by whose standards? You can go full Veblen and say most of human spending is wasteful and therefore creates deadweight loss. Anything spend on luxuries is not strictly necessary and thus creates deadweight loss. The squirrel statues are frivolous, whether you spend $35 on them or a billion.
But then Dourado says “Whatever system maximizes the dollar value of social resources has 0 DWL. Everything compared to that base.”
Maximizes to whom? Value is inherently subjective and personal. Everyone disagrees with everyone else’s preferences. Should we have a vote, and anything that doesn’t get 50% approval gets labeled deadweight loss? Should there be a cutoff, like you can spend $1000 a year on stupid junk, but anything above that is deadweight loss? As human beings, we instinctually judge others and try to promote decisions that are good for the group. Extravagantly wealthy people really throw a wrench in our intuitions because once you have that much money, everything selfish they spend money on seems wasteful to the non-rich.
Kaldor-Hicks Efficiency was mentioned in an article Eli Dourado linked to.
“A re-allocation is a Kaldor–Hicks improvement if those that are made better off could hypothetically compensate those that are made worse off and lead to a Pareto-improving outcome.”
Preventing the squirrel present would not be Kaldor-Hicks efficient, since there would be no way to compensate the billionaire enough to convince him not to give me the squirrel. The billionaire would only give the present if he valued producing such a thing at least as much as it cost to produce. Preventing the squirrel present would not be Pareto optimal either, since the give recipient would be worse off, the billionaire would be worse off, and all the workers producing the squirrel would be worse off.
People want to have a way to disagree with other people’s choices. Economists have historically been very hesitant to say that certain people’s preferences are wrong and need to change in order to be efficient. Preference agnosticism has the advantage of being universal and viewpoint independent. I think at the end of the day, if you disagree with someone’s preferences, you just have to say so in plain language rather than trying to label it inefficient. It’s not an economist’s job to second guess the choices people make. It’s their job to explain them.
People don’t value gifts as much as they do things they buy for themselves, with a couple of exceptions: goods the recipient didn’t know about, luxuries that they don’t allow themselves to buy because of self-imposed rules, and gifts they would have trouble financing themselves (many people chip in to buy something big, gifts to people poorer than you, or gifts to children). For the most part, from a strictly homo-economicus maximize-utility perspective, the recipient would be better off getting cash. But that is emphatically not the same as a gift having a deadweight loss.
When theory and practice disagree, it’s the theory that’s wrong. The actor is the gift giver, not the recipient. It’s not the opportunity cost of the gift to the recipient that matters, but the alternate uses of the giver’s money. When you buy someone a present you are revealing that their affection is worth to you than anything else you could buy for yourself. Outright bribery for affection is normally a faux-pas, but for a few times a year. People engage in rituals to strengthen social bonds. Your family is not governed by the same norms that more distant economic relationships are.
Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within the different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e. of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of world at once.” – Hayek, from The Fatal Conceit
Why would a giver give?
1. Signal how well you know someone by getting a gift they want.
2. Signal how well you listen to them by getting them what they ask for
3. Watch them say thank you, appreciation.
4. Every time they use the gift they think of you, so strengthening a personal connection
5. Signalling group loyalty and generosity by giving nice presents
6. Getting a gift in return
7. Give a gift to someone less materially well off than yourself
8. Children don’t generally buy things for themselves.
1-5 are all about using money to strengthen social ties. You can’t buy that for yourself, no matter how much you spend. 6 is prehaps the most “selfish” but doesn’t really make sense. Gift giving is very costly relative to buying yourself things. You wrap presents, wait for a particular day (birthday, Christmas, etc), try to be secretive. All of this suggests signalling is the key reason, not efficiency. 7 seems plausible to me, but most social groups are fairly equal, socioeconomically. The biggest use of 7 is probably to reduce jealousy of more successful members, so once again, you’re back to strengthening social ties. Children (8) is also mostly about social ties. Children are often more materialistic than adults, they don’t have the information or opportunities to buy things as much as adults, they aren’t as opposed to being paid for affection, and they just seem to get much more excited about presents than adults. So, it seems to me that gift giving rituals are all about signaling and strengthening social ties.
Is gift giving euvoluntary?
(1) Conventional ownership – Yes
(2) Conventional capacity to buy/sell – No
(3) Absence of regret – Yes
(4) No uncompensated externalities – Yes
(5) Neither party coerced by human agency – Yes
(6) Neither party coerced by circumstance; the disparity in BATNAs is not “too large” – Yes
So, generally speaking, gift giving is euvoluntary. You can’t buy and sell presents freely, but since the whole purpose is signaling about relationships, that’s not surprising and it would defeat the whole purpose. You can resell presents, or take them back to the store (many people include receipts so the recipient can do just that). For the rest of the criteria, the answers seem obvious, but if readers think I’m wrong about any one of them, feel free to comment.
Dreaming of Better Worlds
Technically, a deadweight loss occurs when there is something preventing trades from taking place at the free market equilibrium price. It has nothing to do with there being a higher possible utility that exists only in the imagination of some third party observer. There aren’t price floors or ceilings for gifts. There is such a thing as a gift tax, but it’s not really applicable for Christmas presents for most people.
But Christmas deadweight loss isn’t about any of that. It’s a new animal.
Suppose I valued a red shirt at $5 and a blue shirt at $6, and someone gives me a red shirt, which cost them the same either way. Is that (this new kind of special) deadweight loss?
Information is scarce and costly. In a world of perfect information, the giver would’ve gotten me a blue shirt, but that’s not really meaningful outside of an economic model. Literally every purchase you make, theoretically there could have been a better thing to buy if you had perfect information. Maybe you bought a Honda Civic and you should’ve gotten a Toyota Corolla or vice versa.
Regret really isn’t critical, because all that means is that you found out about a better option in the future. Suppose you have three options A, B, and C, but you don’t know about A, so you pick B. Later on you find out about A, which is better, so you regret not picking it. But since you didn’t know about it, it’s irrelevant for the economic model of decision making.
All human action faces the uncertainty of the future. You buy things because you think it might bring you utility (whatever that means). All purchases face information problems. That gift giving has more information problems than normal spending isn’t really that insightful. People already know that. That’s why it’s so hard, and that’s why it’s a good signal. That’s also one of the main reasons why people mostly buy things for themselves.
What are the actual insights?
Get people things you know they will like (what they ask for, what you have seen them buying for themselves on special occasions).
Don’t lecture people about how their choices are wrong because of some model you just made up. Instead, observe the real world and try to explain what you see.