Category: Economics

Ramit had a strong email today talking about why people broke their diet and exercise routines. Here’s the highlight from the email (you can sign up for his newsletter here, I highly recommend!):

In short, people were trying to right their own ship by diet and exercise but suffered from the law of unintended consequences. In hindsight, it’s pretty obvious that if you go to bed two hours late, your day will be skewed but that wasn’t brought to the forefront of their minds. Instead, they believed they were failing because of binging on cookies at one o’clock in the morning.

The law of unintended consequences is an economic term that means every action has a reaction, sometimes those reactions are problems that couldn’t have been foreseen (or were purposefully neglected) before the action took place. This happens all the time in politics.

A politician implementing a tax on a product may inadvertently (or purposefully) raise the demand for a similar good that doesn’t have the tax. Similarly, a lower federal interest rate can cause loans to be given to people who otherwise shouldn’t be given a loan because of economic stimulus (quantitative easing).

People make choices every day that have a bevy of unintended consequences. The great thing about being human is you get the chance to make up for your bad behavior. If you have a Ramit in your life, somebody is there to tell you that what you need to fix is binge-watching Netflix until one in the morning.

The world economy doesn’t work in the same way. Unintended consequences in a globalized world create ripples throughout international monetary policies. We can’t have a Ramit overseer to our economic misdeeds. Instead, we have to shake out the unintended consequences through market means. This creates a boom and bust cycle.

Over the past 10-years, we’ve seen quantitative easing on a massive scale. The world economy is built on a massive ripple that’s been mostly trending upward. Eventually, the unintended consequences will have to catch up with us and lead to an issue of obesity (economic dysfunction).

Why are we so bad at sharing knowledge? As a society, it takes a really long time to integrate with culture, social cues, and pretty much every skill people need in adulthood. For most, it takes 18-22 years, at least within the convines of our society. There are outliers, the geniuses who graduate college at 16, but even they usually have a lot to learn from a social perspective.

If we were really good at sharing knowledge, I’d believe the time it takes to get people ready for adulthood would be a lot shorter than 18 years. Possibly a couple of days (if you have a machine like Neo in The Matrix) or more likely five to ten years. But it typically takes us 18 years to let someone off on their own.

Once you have “entered” adulthood, there are many more skills that need to be developed. Beyond the basics of keeping yourself fed, doing mundane chores, and getting enough sleep, you also have to put a roof over your head. For that, you’ll need to study (whether in college or via online material) a skill and find employment doing it. Skills are called “hard skills” for a reason. They’re very hard to develop.

Is it good for society to make things so difficult we can’t easily share knowledge? Currently, our best system is to reward people who bring the most prosperity (profit) to the most people. When you create value for others, you are rewarded with dollars. This breeds competition, and gives people a chance to improve on what they deem as opportunities. Those who succeed, bring more prosperity to the system and are handsomely rewarded. Those who fail, lose the money they tried to improve an opportunity with but gain valuable information. This information can then be used to find another opportunity for improvement. This is what we call an entrepreneur.

But, the only reason opportunities exist is because of imperfect information. If we were able to share knowledge better, wouldn’t we also live in a better world?

I’m not sure the answer to any of my questions but I am happy to live in a world where your ability to improve other people’s lives brings yourself an improvement of your own.

Comparative advantage, doing what you do best and trading for the rest, is a major benefactor of the new economy. Given the ability for people, and softwares, to focus on certain niches, makes each aspect of the economy better off. Instead of having companies focused on general problems, companies can focus on solving one solution. And, since everything is interconnected, companies can combine their solutions into multiple solutions depending on a problem.

With more and more companies focusing on solving specific problems, more efficient solutions will end up winning out. Thus, the world will become more efficient through competition. By allowing for comparative advantage to take place in every industry, we are building a more efficient place to live. The technology revolution allows for us to gain from what was once a trade-off of labors.  

I’m about to tell you a secret. This secret is so revolutionary that it strikes fear in the heart of the ones currently in control. The ones who have climbed the bureaucratic ladder in government, as government contractors, and big corporations. This secrets scares the daylights out of big banks too.

The secret: The future is decentralized and peer-to-peer. 

Bureaucracy, big business and “democracy” were all established as a ways of developing large swaths of people, typically formed as countries. In some ways, they were needed when they were first introduced. We needed middlemen, experts, to connect one person to another. If we wanted to sell a stock in the 1980s there was only one option. We had to find a middleman who’d buy our stock, sell it to someone wanting the stock at that price, and for their work the middleman would collect a commission.

Because of our technology limitations, a middleman was a requirement. Today, that requirement doesn’t exist. I can buy/sell stock for a few cent commission and invest in any company I want. All without interacting with anything but an app (I use Robinhood). There are also a ton of ways of buying equity in a company without even using a stock exchange (i.e. crowdfunding sites like Kickstarter, and ICOs).

Much like the means of buying stock, the middleman is disappearing from a lot of industries. No longer do you need a taxi firm to get from A to B. You can call your neighborly (peer) Uber/Lyft driver with an app. Big hotel chains face competition from peer-to-peer renting networks like AirBnB and VRBO. Banks are seeing their wire transfer fees being replaced by peer-to-peer money transfers in the form of cryptocurrency or replaced by non-traditional banking services like PayPal and Stripe. Almost every industry in the world is becoming more decentralized each and everyday.

What the big, “powerful”, bureaucracies have in common is a power derived from being middlemen. Banks have controlled money transfers for hundreds of years. During that time period, they’ve built up a ton of influence over government operations. From being a focal point of the Federal Reserve (which still hasn’t been audited) to creating thousands of regulations to increase barriers of entry (barriers of competition) for incumbent banks. The power they’ve established is threatened by a decentralized, peer-to-peer movement.

No longer will they be in control of the money. Consumers can circumvent the slow, headache-inducing issues with traditional banking. Once that happens, the money games banks currently play become unavailable to them. They also start losing money from charging overdraft and wire fees.

The same can be said for taxi owners, large hotel chains, and the big players in the currently centralized economy. That’s why they’re so scared of the peer-to-peer movement. 

No longer will they be in control. Like what Netflix did to Blockbuster, Uber is doing to taxis. Overtime, the middleman will be obsolete and the Uber movement will spread into every sector of the economy. And during this revolution, the peer-to-peer economy will boom while the bureaucractic leaders lose more and more of the power they derived as middlemen.

The secret is out. And it’s too late for the bureaucracies. The future economy relies on honest communication between the buyer and seller, no need for a third-party. The decision makers, those in control of money transfers, will be individuals eliminating the need for a centralized brain trust.

Today, I got $20 bluetooh Mpow headphones. They sound better than cheap in-ear headphones I’ve always bought and are about the same price. On top of that they’re wireless. It’s amazing to me the amount of inputs that went into the product, the way I found out about the headphones from a social media post, and could order them online to have them arrive in a few days. All for $20.

It reminds me of a great post by Leonard Read called I, Pencil. The invisible hand is beautiful. And technology releases the capabilities of mass commerce at a scale never seen in human history.

It’s a great time to be alive.