Survivorship and the Precautionary Principle

Hindsight and Confirmation biases aid each other dearly.

Surely by now you've chuckled into your sleeve at some of the preposterous historical claims about how the Internet would be a flash in the pan, or about how we'd all be living in geodesic domes, eating reconstituted foods, traveling by jet-car, and sending our kids to summer camp on the moon. Prediction is hard, especially about the future.

Note well however, what the Precautionary Principle attempts to do. It slings on the back of mulish regulators the saddlebags of not just ordinary prediction, but anticipation of Calliopic non-ergodic entangled threats, dolloping kaibosh after kaibosh atop the delicate sundae of human invention.

Shannon Chamberlain: Railroads: stopping deaths from turning into famines since 1775...

Lynne Kiesling: [nit picky economic historian] since 1815 [/nit picky economic historian]. Shannon, I may plagiarize you on that in my classes! 1815 is the approximate date when Stephenson's Rocket became commercially available, after Watt's low-pressure steam engine patents expired, which had thwarted the development of high-pressure steam engines since 1776.

Samuel L Wilson: Shouldn't it be 1827, when the B&O first started running?

Why do I adore this exchange? Shannon's claim is that the initial development of commercially viable steam powered travel was the significant evolution of rail. Lynne made the point that the bottleneck in the development of the technology was patent squatting. My approach is to refrain from counting chickens until they're hatched. Each of these claims has some merit, albeit from different approaches. I'd give credit on an exam for any of these, contingent on an appropriate defense of the claim.

"Inevitablity" is immutably ex post. It wasn't "inevitable" in 1602 that the following year Japan would ditch foreign trade, fold its arms, and lionize the warrior class till Commodore Perry crested the horizon, the ruddy light of the rising sun backlighting his sails. Similarly, James Watt's external condenser (this word still gives me the heebie-jeebies two decades after having worked in an engine room for my Naval stint) is a necessary development for intercity rail transportation, but it's not sufficient. Like Professor Kiesling notes, the regulatory environment influences which technologies flourish and which can end up throttled on the workshop floor.

And as I point out, there may be good reason ex ante to indulge patience. Can we count 2009 as quando ex for cryptocurrency? Or will 2014 and the rise of dogecoin matter? Regular circulation sometime in the future? Could the PP have killed rail in 1815? What can the PP kill today?

How much less euvoluntary will the world be if innovation is stifled from overactive applications of the precautionary principle?

Platykurtosis, Bounds, and BATNA

I have no attention span for movies but if that's what your family suggests doing, just go. quality of alternative activities varies WIDELY.
— Pamela J. Stubbart (@amelapay) December 26, 2013

 The "Best" Alternative To a Negotiated Agreement is a little mental fiction useful for considering soap-bubble moral puzzles, floating freely in the atmosphere, undaunted by the cruel shackles of practical gravity. In practice, life is a bit grittier, a bit more uncertain. A "best" alternative is just the #1 spot in a subjective rank ordering of plausible alternatives. For our thought experiments, we rig a guy stumbling through a desert or someone on the verge of being mugged, but actual alternatives out there in the actual world are largely unknown most of the time. If I don't go out to the movies (an odd example for someone with a toddler at home, but please bear with me), what shall I do instead?

If our beloved PJS is like ordinary people... okay, like ordinary people along this particular dimension, she'll be averse to both risk and ambiguity (see Ellsberg, 1961 for the OP, or go here for an overview) and the chore of searching for alternatives will be costly, even in the sweet land of peaches.

With that in mind, what is a BATNA when it's at home? It's a menu with orthogonal elements defined by a multi-dimensional probability distribution. Eek, that sounds gruesome. Fret not, for you're well-equipped to handle it. In your daily routine, you regularly make probabilistic decisions over orthogonal alternatives. Put to the point-blank question, you'd look at me askew if I asked to rank order eating an orange or inflating your basketball. They're not comparable. Yet you still choose between the two without too much fuss. Your mind is built to handle these kinds of decisions, even if categorizing them is daunting in a way that categorizing your favorite shoelaces isn't.

So here's one thing I do with my 2 year old daughter to overcome issues of poorly-defined alternatives. I expressly offer her a false dichotomy. Milly, would you like to watch one Kitty Show then go to bed or just go to bed right away? That way, instead of trying to pluck options from the phlogiston, she's better able to rank-order easily available elements. Until she's able to do this mindhack on her own, I see it as one of my duties as a parent to provide this valuable service for her.

Consider to what extent the Man of System wishes to duplicate my parental efforts for constituents in his jurisdiction.

De novo euvoluntary exchange opportunities arise from the Kirznerian weeds off the trail that's been scribbled on the well-worn menu slate slung like an albatross around our necks. Mind the tradeoff between exploring the platykurtotic edges of the world and œconomy of transacting. There ain't no such thing as a free elimination of search options.

Uncertainty and Harm: Goat Milk and the Precautionary Principle

From Maine, a curious tale of a young mother and her tussle with state officials. Her baby didn't much cotton to store-bought formula, so she swapped in a goats' milk confection. Her doctor reports this to DHHS and wouldn't you know it, they threaten to take her child away.

I'm still a little fuzzy on the arguments behind raw milk bans and the like, so I'll try to see if I can reason my way to this reaction from more elementary principles. Let's assume that there's some risk of harm that travels with consuming dairy products. When you combine that with illness severity, you can estimate roughly what the uncovered cost of raw milk is. If you're a fan of unintentional hilarity, you can check the FDA's site here to discover that between 1993 and 2006, a thirteen year period, well, let's let them use their own words:

[B]etween 1993 and 2006 more than 1500 people in the United States became sick from drinking raw milk or eating cheese made from raw milk. In addition, CDC reported that unpasteurized milk is 150 times more likely to cause foodborne illness and results in 13 times more hospitalizations than illnesses involving pasteurized dairy products.

See the dodge? See how to lie with statistics? We've got 1500+ folks who "became ill", then they moved right on to talking about hospitalizations, hoping that you'll assume that all those roughly 100 folks a year ended up in the ICU rather than with a case of the hershey squirts or upended over a porcelain throne barking their groceries to the Great God Ralph. I especially love that last bit, as if the base rates associated for pasteurized milk is something to incite terror in the great masses of men. Thirteen times close to zero is still pretty close to zero, people.

And really, that's like 115 people a year. Even if these were fatalities, and they're not, the numbers are still too small to be reported by the CDC. Link.

So here we've got a known problem: the baby can't handle store-bought formula, and we've got an unknown solution: homemade goat milk formula (and recall that the risk priors for raw milk are for cow's milk), so how does the cost-benefit calculus employed here justify coercive correction? What's the moral intuition?

For this to really stick, we'd need some way of showing that the mother (and by extension, all mothers) are systematically biased when it comes to risk assessment, that state officials are more accurate when it comes to dispassionately assessing the relative risk-adjusted costs and benefits of different menu options. This either assumes supernatural knowledge on the part of these officials or it relies on the moral warrant that children are the responsibility not of those who whelped them, but to the whole of the democracy. If that's the case, it's a moral warrant that seems entirely at odds with the everyday practice of moral behavior. Should children be removed from homes with pools? From homes with antifreeze in the garage? From homes with dogs? The CDC link above has a list of causes of infant mortality, maybe the state has an interest at minimizing all those risks, consequences be damned.

If this idea of the precautionary principle is to really have any meaningful teeth to it, and if you agree with the notion of equality in the eyes of the law, no one is innocent. No home is safe. If, on the other hand, you hold that the purpose of commercial regulation is to safeguard against manifest risk and extant fraud, you'll probably agree that these Maine officials and those of their ilk are a clowder of tax-funded bullies picking on a teen mother.

But then again, there's very little that has to do with children that could be considered euvoluntary. That's reason #1 to be wary of political speech that ever once references the little tykes.

Class M-3 Model B9, General Utility Non-Theorizing Environmental Control Robot

ERROR WILL ROBINSON ERROR.

John and Maureen Robinson survived their stint on Alpha Centauri, so Will and Penny never had to languish in foster care, cringing in the corner when Johnathan Harris would simper by to leer at the boy and sneer at the girl.

Virtue-Preserving Federalism

The Whitest Man on Earth ever so impishly guides my eyes to a Forbes piece of his from a few years back. In his tale, he buys ponchos cheap from dollar stores and sells them dear at sporting events.

Much like our ice truck yahoos or Adam Smith's sea merchant, Dubbers braves the maelstrom of uncertainty. Will it actually rain? Will he be able to move his entire inventory? Will the Crimson Tide roll far enough inland to justify snapping up more than one game's worth of ponchos?

Will university police throw him in an Alabama slammer for unlicensed sales?

There are two broad sorts of risk involved here: risks from nature and risks from man. Within each, we can find the finer taxonomies we're used to of risk, uncertainty, and non-ergodicity. There's not much anyone can do about the weather or the frequency of earthquakes or the likelihood of being swallowed by a sea serpent, but there is something we can do about our tolerance for the caprice of our legislators.

Anti-gouging laws, bans on genetic research, prohibitions against prostitution. These things prevent people from serving each other. Worse yet, the very notion that the scope of legislative power is broad enough to encompass virtually any activity that involves voluntary exchange between consenting adults chills the entrepreneur. From her perspective, it's bad enough that the ordinary risks of the market and the ever-shifting whims of her as-yet unidentified customers shake her confidence, so just imagine how much worse it is having to worry about whether or not the cops are going to upturn your stall, unplug your reefer and toss your tacos in the sewer. The threat of preemptive expropriation compounds upon fickle fortune in times when the simple dignity to try is subjugated in civil society.

But do we even need entrepreneurs? Do we need creative destruction? Innovation? Good question. I suppose we could be happy enough living in mud huts and plowing our subsistence farms by hand, but the fact that we see vanishingly few people actually doing this strikes me as reasonably good evidence that humanity cherishes those few of us who pack our bags for the hike out of Hobbes' jungle. It seems painfully obvious that the lot of humanity is advanced by the freedom to experiment, to search for the little ways we can find to strike mutually beneficial arrangements. Conversely, prosperity is retarded when the median constituent has granted political elites, either through inattention or active demands, the authority to meddle in private affairs.

If you don't want to buy what an entrepreneur is selling, that's great. Don't buy it. But that's no excuse to tolerate elected officials who have made it their business to go round smashing eggs in the nest before they even hatch. That's a great way to ensure the hens stop laying.

Entrepreneurship is far from euvoluntary. It's also the camshaft of economic growth. Its henhouse deserves to be free from the guardianship of elected foxes.

Markets in Exploitation: Insurance

Economists like to distinguish between "thick" and "thin" markets. The quick distinction is that thick markets have lots of buyers and sellers and high volumes, meaning that conditions in the market are likely to be closer to the textbook description of pure competition. In a purely competitive market, profits are dissipated, market clearing prices are stable, and production occurs at marginal cost. In a thin market, there are fewer buyers and/or sellers, lighter volume and the potential for monopoly rents. A typical example of a thick market would be spot markets in grain commodities: something like 20 billion bushels of corn are produced annually worldwide, much of which is traded in the CBOT. A thin market would be custom yachts or original fine art. Livestock auctions are thick; Sotheby's auctions are thin.

Unfortunately, something is missing from this standard description. Economists like to think of thick markets as efficient and it's a little embarrassing when efficient markets go awry. One way to save face is to invoke probability. If future events are not well-ordered (think Taleb's Black Swan or North's non-ergodicity arguments) or predictable according to a known probability distribution, then systematic bias has fertile soil. Seed that with some common cognitive errors and plow it with distorted nominal prices thanks to wobbly monetary policy and hey-presto, reap widespread market instability with or without piecemeal policy tinkering by the legislature.

So what's the connection between economic crisis and insurance? Plenty. Insurance is a way for people to hedge against disaster. I buy car insurance because, as an individual, I bear some risk for wrecking every time I get behind the wheel. I buy life insurance because I could get hit by a bus crossing the street. I buy homeowner's insurance in case... well, I'm not 100% sure offhand what's covered in my policy, but you get the idea: there are predictable risks out there and even if I don't know my own individual probability down to the fraction of a percent, when I'm put into an actuarial pool of people mostly like me, my probability can be reasonably simulated. That way, as long as the market is thick, we can get reliable prices for different insurance products. In the aggregate, most of the above-board insurance policies you can get (whole life, auto, home, renter's, et al) are euvoluntary.

Some aren't. Think of the sleazy used car salesman with the "so I'm sure you want the extended warranty, right?" line. Think of sketchy overdraft protection you can buy for some bank accounts. Think of shady ticket sales that have you paying out the nose for the privilege of canceling without heavy penalties. Some insurance is generally seen as wise and prudent, other as a sucker's bet or exploitative. These fools' policies could hinge on any one of the ingredients I listed above on the financial crisis farm: unknown probability distributions, cognitive error (or asymmetric information if you prefer), or distortions in interest rates. Usually however, they come smack-dab face-to-face with ex post regret. Sooner or later, so the assumption goes, the poor fellow who bought the extended warranty will look back on the folly of his error and be left feeling ripped off. Poor fellow. Poor, poor fellow betrayed by his own foolishness in the thin market.

Well, that's easy to say after the fact. The problem with Cassandra is that before Agamemnon lies dead, she's just another crazy person jabbering about the future. There's no way to distinguish her from false soothsayers. Ditto for people who wrung their hands over housing prices in 2007, ditto for Ralphie's mom chanting, "you'll shoot your eye out" and ditto for the well-intentioned paternalist clucking a manicured tongue at the rube signing up for a turtle invasion policy. Peering into the future is hard enough, peering into the minds of others as they peer into the future is impossible with current technology.

Claims that odd, thin or irregular forms of insurance demand regulation or prohibition require a substantial burden of proof. Evidence of coercion (by human agency) is sufficient, but what else might cut the mustard? What would you consider to be a sufficient burden of proof for you to interfere with a voluntary insurance sale?

Bonus question: if you squint your eyes right, insurance can be seen as a form of gambling. Do the same arguments that apply to weird or suspect insurance plans also apply to gambling?