Catching Up
A whole bunch of random thoughts, since I haven't posted in 2 months.
First, after 16 weeks, I'm still alive in all three of my fantasy football leagues. Heading into the finals in the two important leagues - the UPL league where I'm gunning for the second "Roland Slam," where I win all three sports, and my first ever cash league (albeit only $30 to enter), where I'm already up $55, with a $30 swing riding on the game. My other league was a bit of an afterthought, but I'm looking alright heading into the semis. The funny part is, if I had to choose one to win, it's not the $30, but it's the UPL league that's always for bragging rights.
In fact, we have a new UPL Baseball trophy, courtesy of the C-Lauff Dollar that I won from my now-famous bet that I would finish ahead of C-Lauff in baseball this past year (note, when I made the bet, I was in 10th place, and C-Lauff was in 1st, so there was a decent chance that my mouth was writing a check my fantasy team couldn't cash). And we recently have won, but have not yet acquired, a Curran Dollar, which will becomes the new UPL Football trophy. What's awesome is that I made C-Lauff sign the dollar, and he was kind enough to write the inscription that you see below. This is much like Greg Camarillo's idea from this week's Dolphins win over the Ravens, only we've had this baby made for a week now. 
I like the trophy. It's got a Stanley Cup feel to it. We'll have a lot of room to add the names of champions for the next decade or so before we have to expand it, maybe add an extra tier.
I still haven't written up my Illini Basketball preview, but will do so soon. Many of the regular readers already know my thoughts, after that awful 2nd half in the Illini-Arizona game up in Chicago.
I think that I'm going to pass on going to the Rose Bowl. Not only would it be sort of pricey, but spending those 5 days on the road would be bad for the dissertation (not that I'm getting much done here, but I could, in theory).
The weather got cold here, and we got some snow. I like the snow, but people become idiots who forget how to park when the snow hits the ground. Though, people on the roads to slow down, so oddly enough, it seems a bit safer. But what the heck happened to global warming?
Apparently we're having presidential debates and stuff. And apparently none of the Don King-Louis Farrakhan-Al Sharpton troika is running. I still think that a Don King/Suge Knight ticket would be hot. I mentioned something about candidates needing to have "it" to win a while ago in the comments of an IJAB posting. But we're seeing Obama, Hillary, and Edwards in a close race on the Democrat side. Those three all have "it" to varying degrees. But let's be serious. I'm not voting for any of those people. Obama bores me. Edwards bores me and seems shady. Hillary angers me and seems shadier.
On the GOP side, we're seeing a mess between Giulani, Romney, Fred Thompson, and Mike Huckabee, and maybe even Ron Paul.
Giulani's got a bunch of dirt on him, which would make for an ugly process. Romney's got that Mormon thing going, which along with being from New England makes for a tougher road in carrying the South. Fred Thompson's got the Law and Order thing going. Unfortunately, when someone told me that an actor from Law and Order was running for president, I just assumed that it would be Ice-T. But Fred Thompson's cool. These guys all have varying degrees of "it." Romney seems like a boring person. Giulani may be a little too interesting. And his name's hard to spell. Fred Thompson has the TV thing going for him, and his name even sounds like a presidential name. In fact, it's right up there with John Edwards as being the most presidential name in the race. This is crucial, trust me.
I'm not down with Ron Paul. Isolationism has never worked in the history of man. China and Japan were overrun by foreign technology when they tried this. The U.S. policy of isolationism helped fascism blossom in Eastern Europe in the early 20th century. This had to be discarded twice in 25 years. Plus, he seems stiff whenever I see him on TV. And most importantly, I don't trust people with two syllable names that aren't wrestlers (see Gore, Al).
I decided that I liked Mike Huckabee a while ago when he was on CNBC some random afternoon talking about his "fair tax" proposal. I like him even more now that Chuck Norris and Ric Flair (see? two syllable names have "it" in wrestling, much like Bret Hart or The Rock, of course I may have to reevaluate things in 2020 when Will Smith runs for president, though I may have to allow for a little bonus effect if DJ Jazzy Jeff runs for VP) have offered their endorsements. But even beyond that, he seems likable. Of course, people are wondering about his funding. Maybe he's actually running for VP? If you pair up one of the Northeastern guys with Huckabee to help with the Evangelical/South, you may have a winner. On the other hand, the Demcrats tried this with Kerry/Edwards last time around, which was a bit of a fiasco.
Of course, I'm still probably not voting, so I guess that it doesn't matter who I like. But if push came to shove, I'd vote for Mike Huckabee, based on the advice of Ric Flair. Of course, if Hulk Hogan endorses a different candidate, I may change my mind.
I'm sure that there's a bunch of random stuff going on that I'll write about over break. Maybe my renewed poker career or whatever random things pop into my head.
-Chairman
46 comments:
Remember, you were only the co-champion in UPL Baseball. In my book, that means you're out of the running for a UPL "Roland Slam." It would be more like a "Roland Lay-up."
I'm holding a title, as are you. I just happen to be going for the third one this year. And if you look at the UPL Bill, you'll find that you are on there for 2007.
The funny part was that you missed the discussion over at Westy's where even Westy admitted to the "unofficial collusion" that happens whenever I'm gunning for a championship.
According to Wikipedia isolationism contains two things. Non-interventionism and legal barriers to control trade. Ron Paul is more for free-trade than any other candidate out there. He has never advocated isolationism. This is a misunderstanding of his ideas.
RG, don't worry. I have closely inspected the C-Lauff Dollar many times to know that my name is on their twice--and there is plenty of open space for my name to be added many more times. Although, if history is a guide, back when I won in 2001 I thought I'd be winning every season. As it turned out, it took 6 long years to get back to the top...
I don't know, but I just saw Ron Paul on a Colbert Report re-run, where he was advocating American withdrawal from everything ranging from the WTO, to the UN, to NATO, to NAFTA, to UNICEF. I think that he was only half kidding about UNICEF. But that sounds pretty isolationist to me.
Tack on his thoughts on privatization of just about everything, save the military, and you're looking at taking things back to the late 19th, early 20th century, where unchecked corporate rule resulted in much poorer standards of living, and the disaster of the 1930's, which was only ended by a World War.
And more importantly, his name sounds more like a hip-hop DJ than a POTUS. In fact, if DJ Ron Paul was rocking out at a dance club here in town, I'd probably go. Of course, he looks like an old coot - not nearly as presidential as Reagan did.
Meanwhile, we've now had comments about fantasy sports and politics for the same posting. I think that I get style points for this.
Those trade agreements are more "managed free trade" than free trade. They benefit big businesses over citizens, exactly what you say you're against. Unchecked corporate rule is a result of corporatism, totally unrelated and once again something Ron Paul is very much against.
Robby - I'm not sure that I've made a stand as being particularly for or against big business. I think that corporations serve very crucial roles in many areas of everyday life, and frankly, I think that wise corporations are wonderful institutions in this society. Multi-national corporations that have an appropriate vision are in a unique position to do a lot of good, while making a ton of cash. Unfortunately, modern corporate governance, at both the theoretical and the applied level has failed time after time to take advantage of their unique characteristics (namely, their size, reach, and marketing channels).
However, I think that my original point from our IJAB discussion was that "true free trade" is the same as "unchecked corporate rule." I think that this has been the case in practice, and is predicted in theory, as well.
Ron Paul went into politics as a result of his study in Austrian Economics believing that the current path the US is on is bound for failure and an eventual end of the US empire. Austrian economic theory backs up basically everything he stands for.
In my opinion it makes sense that the free market can handle things better than government regulations. It is impossible for the government (or anyone) to make correct decisions all of the time. Tweaking with different rules that corporations must follow in the attempt to simulate free trade and avoid any negatives will result in unpredictable problems (monopolies among many others) that simply would not arise in a true free market. Giving more power to local governments and less to the federal results in a good approximation of a free market without government interference.
I do not know of examples of problems caused by corporations that weren't a fault of government regulations, also I would argue the benefits you see in corporations are in fact the benefits of capitalism and the free market in action.
It can be argued that intervening in other countries affairs is a cause of most of the problems for which the solution appears to be more intervention in other countries (For example, involvement in WW1 spurred actions which resulted in the Nazis/others getting control and forcing involvement in WW2). The main problem with this is it costs way too much money and will eventually bankrupt the US. Also, not understanding the whole situation just results in wasting money by propping up or invading the wrong countries and making other countries angry with our involvement.
Robby - An economist's point of view (in the sense of the assumptions made in approaching a problem) is often very different than what reality is, particular when they include individual decision making into their models. However, I'm not an economist. What does Austrian Economic Theory say, and what is it built on?
For truly free markets to work at a micro level, you have to accept the basic assumptions. First, that all people use simple greed as the key (and perhaps only) motivating factor. Second, morality is nonexistant. And third, only individual concerns matter. These all stem from how expected marginal utility is used in the models that I've seen.
This is, in part, why Keynesian Economics has run into a lot of problems, particularly those brought up by Kahneman and Tversky and their Prospect Theory findings, starting in the mid-70's.
I think that the notion of having a truly free market from the start of time is a very different point than changing the current system into a truly free market.
Well, I don't know about isolationsim, "true free trade", corporate governance, or the like, but what I do know is that the C-Lauff dollar is truly awesome!
C-Lauff. You damn right.
Oh, and I think I'll be voting for Huckabee for all the reasons you've stated and others... :)
Warning: may contain incoherent rambling as I just typed it up quickly.
Austrian economics is different from most other branches of economics in that they pretty much reject statistical methods and instead "focus on the idea that logical consistency of a theory is more important than any interpretation of empirical observations. (from Wikipedia)". Some economists are critical of this, I won't pretend I know who's actually right but the ideas behind what the Austrians are saying make much more sense to me at this point.
I'm pretty sure Austrians reject the idea that you have to assume those things you listed to understand free markets. Why would those assumptions be necessary?
I'm not familiar and am not sure what the Prospect Theory states but since Keynesians and Austrians disagree on a lot of things it may not be relevant to the discussion.
You are likely right that "the notion of having a truly free market from the start of time is a very different point than changing the current system into a truly free market". However, it is my opinion that Ron Paul's ideas are a good start on changing our system that of a truly free market. It is also my opinion that is something we absolutely do want to strive for as studies show that economic freedom is correlated to a countries avg standard of living. Also the ideas of freedom and liberty are very important to what I think has made this country successful, sadly the trend seems to be away from these ideas.
Social security, medicare and mostly our national debt (directly related to absurd war costs and overspending) will all be big problems in the not-so-distant future. I don't understand how every single presidential candidate besides Ron Paul can completely ignore these issues, offer zero solutions and people still plan on voting for them.
Robby - my basic assumptions are stated bluntly, but are absolutely crucial in economic theory.
Most importantly, a fundamental assume that each person's optimizing function is the maximization of their utility at that moment. Once you move away from a maximization of utility, your system becomes inefficient.
Next, you must be able to put a dollar value on anything, otherwise you have an inefficient system, since the basic conversion is from utility to some sort of monetary unit. This suggests that morality doesn't exist, but is simply a matter of preference.
This results in needing basic greed, and a lack of morality (in the technical sense) as anything other than a preference that you put a price tag on, as being basic assumptions.
The biggest issue here is the use of macro-level theories for micro-level problems (or vice versa).
With regard to what you said about the Austrian Economics, doesn't that scare the daylights out of you? As long as your theory is sound, it doesn't matter what you see actually happening? That's akin to fundamental, religious orthodoxy, which results in things like the Taliban, or bombing abortion clinics...
Switching gears, let's assume that you have a truly free market. That means that there is no protection for any good or service that is out there. There is still a fundamental issue, of the purpose of innovation. If anything that you spend on R&D can simply be reverse engineered or imitated by a competitor, why would anyone consider putting out a new product? This suggests that any existing company with greater infrastructure and capital can quash any newcomer.
Again, I have a suspicion that we're not arguing the same thing. Do you really mean that you support a completely unregulated market?
"Do you really mean that you support a completely unregulated market?"
Absolutely. As long as property rights are recognized. Minimum wage causes unemployment, "price gouging" is a good thing and would have saved lives during Katrina, etc... the free market handles everything better. All regulations have unintended consequences.
"As long as your theory is sound, it doesn't matter what you see actually happening?"
That's correct. If there are no flaws in the logic/theory the results will always be optimal and are much better than trying to patch potential problems and then dealing with all sorts of unintended consequences of those patches. If there are flaws in the logic/theory this obviously isn't the case.
"That's akin to fundamental, religious orthodoxy, which results in things like the Taliban, or bombing abortion clinics..."
The Taliban and bombing abortion clinics are a result of taking what may or may not be a good underlying logic/theory and applying misguided logic to try to obtain a desired result. This is not an apt analogy.
"Switching gears, let's assume that you have a truly free market. That means that there is no protection for any good or service that is out there. There is still a fundamental issue, of the purpose of innovation. If anything that you spend on R&D can simply be reverse engineered or imitated by a competitor, why would anyone consider putting out a new product? This suggests that any existing company with greater infrastructure and capital can quash any newcomer."
The idea that people will give up trying to innovate and develop new technology if they don't have a government-granted monopoly on their ideas is a myth. Our current copyright laws are a good example of taking a good idea (capitalism and property rights) and adding misguided logic which results in problems. Ideas/intellectual property cannot be owned... but this is an entirely different discussion.
Robby - Flaws in logic/theory are guaranteed simply because every theory in social science, and many in the hard sciences, has basic assumptions that are not fully satisfied. Conditions are simplified. Everything in the real world is much more complex. Even the very basic assumption of being able to monetize individuals' utility is tenuous in a simple thought experiment, as is the assumption of all parties employing a goal of utility maximization. In some sense, any attempt to work entirely off of theory is, as you say, "applying misguided logic to try to obtain a desired result." The analogy is very extreme, but very apt.
Even in relying on basic theory, you say that the stifling of innovation is a myth. However, you don't explain why. I'm not arguing that people won't try to innovate, so much as I'm arguing that the results of that innovation will be trivial in comparison to other forces.
I don't really see what your free market idea predicts. Walk through a hypothetical example, using free market concepts as a guide. There are some very basic questions that a sound theory should be able to answer. For example, what conditions would a free-market scenario allow for innovation, and not capital/infrastructure (or market power) to be the driving factor in the success of a business?
I'd argue against innovation as being crucial in a completely free market. This stems from basic corporate strategy - 1st week MBA stuff, really - teaches Porter's 5 Forces model. This is the prevailing logic from the corporate standpoint. It's a model that's based on market power - bargaining power over suppliers/buyers, ability to stop others from entering, etc. It's the power of a player within an industry that's the primary predictor of success. Innovation can be quashed by a superior infrastructure and superior capital. If you're a multi-billion corporation, you can afford to get into a price war against a $40 million startup. There's no competition in that matchup, both literally and figuratively.
In U.S. history, regulations come into play when reality gets off kilter, when free market ideas start having issues. The Emancipation Proclamation was an early one. Child labor laws are another. Other labor reform followed. Anti-trust laws are in there somewhere, as well. I think that reliance on the free market does not take advantage of the ebbs and flows that are normal in nature, and normal in human nature. For example, working conditions were bad, so labor unions were needed to improve basic conditions. Collective bargaining was a shift in the power of suppliers, if you will. However, over time, conditions have improved to the point where many unions are silly, like the various athlete's unions, the Film Actor's Guild, the writer's guild, etc. That's part of the backlash of many of the free market folks today.
Slaves and child labor are going against a free market as rights cannot be violated by defintion. All transactions must be voluntary. It is essential that property is defined correctly for a free market to work. People incorrectly saying that they can own slaves or force children to work is not a free market going off kilter it is incorrect logic.
As I've previously argued monopolies and barriers to entry are nonexistent in a free market (this is the Austrians position, other economists disagree). If people are violating others rights that is not the free markets fault and those people should be appropriately punished. Unions are fine as long as they have no special privileges not granted to normal people.
I've never heard of or seen one clear example of a free market failure. We would be much better off if we attempted to define rights to allow a free market to work, however the US has decided to go the other way in many situations.
I'm not sure if innovation or capital is the driving force or whether innovation is necessary. If it's necessary for further discussion I could give it some thought. I'm not really sure what our disagreement is exactly.
Either you don't agree free markets work, in which case I would like to hear an example of such, or you don't believe free markets can be set up in a way I'm describing or something else? Or you think regulations in violation of what a free market is are necessary, any examples?
I think it is quite possible for free markets to be allowed to operate very close to what I'm describing it just has not been a decision any society has chosen to go completely towards (Hong Kong being the closest and the US is 4th, http://www.heritage.org/Index/countries.cfm) even though basically every successful economy in history has been at least loosely based on the ideas of capitalism and those with more economic freedom trend towards more prosperity.
Areas where they have never understood the concept of property rights have never developed economically (for example Sudan and other African countries). Is it really a coincidence?
Robby - there a huge difference between a theoretical free market and what is practiced. A true theoretical definition of a free market is, in my mind, is no control in any form, which you have agreed with. I say with no hesitation that this is near sighted at best, and disastrous, at worst. I'm arguing that the use of a free market as the endgame scenario is theoretically tenuous, at best, and as a matter of practice, foolish to attempt.
Under a free market, the value of someone's rights are simply negotiated. In colonial times, the value of slave labor was typically some quantity of rum. There's no need to make any judgment about loss of rights. Theoretically, the market can decide that, and there's no need for law to intervene.
And the more "reasonable" example of child labor is more tenable for modern sensibilities. Child labor wasn't "forced" in the U.S. No one forced children to work, other than maybe their parents, who needed the additional income. Again, this was a market result, with changes accounted for by the market.
I don't believe that this was the case. Furthermore, I suggest that there's no prediction in a free market theory that would have resulted in those changes. What I'm essentially proposing is that a free market is bad for society. It was only when some regulations come into play (largely in the 20th century) that the quality of life of the masses improve.
Keeping it in a strictly business domain, historical business examples show that the free market results in the benefit of the few coming from the detriment of the many.
You still haven't addressed some of the fundamental building blocks of corporate theory. I don't think that I've clearly communicated how the issues that I've brought up matter. They aren't simply separate things. I'll be more explicit in how I'm laying it out.
The notion that barriers to entry don't exist is either a) delusional, or b) intentional ignorance. They are absolutely there. Simply because a theoretical argument says that something shouldn't be there, doesn't mean that it isn't. Most rational people would reason that the theory was bad, in some shape or form. It takes deliberate effort to see that something exists in reality, but still believe completely in the theory that says that what is seen can't exist.
What does it cost to start up a business venture? There are capital costs, knowledge requirements, etc. that are required to start a business. That is a barrier to entry. Some industries have relatively low start-up costs without much existing competition. Other are much higher due to the cost of machinery, equipment, etc. and/or have more competitors already in place. These are all barriers.
Why are barriers to entry important? If barriers to entry are high, then there will be reduced competition, resulting in oligopoly/monopoly. Reduced competition results in oligopoly/monopoly, which removes any incentive for internal improvement. A known oligopoly can collude without actually colluding, simply by following any pricing changes. At a purely theoretical level, oligopoly acts as a monopoly would act, simply by mirroring moves. Either way, this results in less choice for consumers and, at best, worse results for society.
Why does innovation matter? It is one potential trump card over capital and infrastructure. If someone can come up with something so new an advanced that they can compete for the same market with a new product at a reduced price, then a start-up has a chance. However, without some form of law-based protection, the only thing a competitor would have to do is to simply buy one, and reverse engineer it. A corporation with a massive capital advantage could remove any edge the first mover has by competing strictly on price, even selling at a loss, to drive the competitor out of business. Thus, without innovation, the only reliable free market competition to existing market power is lost.
I don't disagree about the notion of most successful economies being based on some form of capitalism. However, the notion of a free market is nearsighted. Regulations simply must exist to keep power checked and retain innovation as a tenable goal. However, for a free market to work, you need the basic assumption that no one has a starting advantage, as well as having a number of competitors that are sufficient to result in competition. If you don't have that condition, then if you were to implement a free market condition in an environment where existing entities have a starting advantage, then those with the advantage eventually will win, and destroy their competition.
This is all at the theoretical level, with simple thought experiments. The quality of a theory is measured by how generalizable it is, and how it works with other existing notions. It's useless to simply say what should be, without regard to what is, and what else is known.
What evidence is there that a free market is "bad for society"? What are these amazing regulations that have caused our standard of living to go up by 10-20X? I think there is far more evidence this increase in standard of living is a result of the good of the free market than regulations.
The use of child labor in areas where there are no regulations has dropped significantly as a result of the free market. Apparently a significant part of the market refuses to buy from companies that employ children, even though it is not a factor in my purchasing decision. For what reason do all sorts of companies make it known that they don't use child labor abroad? Much of the regulation the US has has probably gone too far because adults are in power and were complaining that children were stealing their jobs.
Yes, of course there are barriers to entry in that I can't start a huge business tomorrow if I don't have the capital. The barrier of entry I'm saying doesn't exist in a free market is if I do have the capital and knowledge and there is some other reason keeping me from having a chance as opposed to anyone else. Is it really a failing of the free market that I can't decide to place a bid on the Chicago Cubs tomorrow even though they're for sale? This is silly.
I should clarify. The only child labor I am OK with is voluntary labor with compensation where it is clear the child is able to make responsible decisions. If someone is taking advantage of a child it is just another form of slavery. Slavery is the use of violence to gain an advantage and is not a failing of the free market. Those who use violence should be punished appropriately.
Robby - To be fair, I have a much more easily argued position than you do. You are arguing for a theory based on a strict definition that has not ever truly existed. So, you don't have the luxury of pointing to true evidence, only theoretical arguments. What I'm suggesting, a mostly free market with enough regulation to provide a check and balance, is what we've experienced in the U.S. since at least the Industrial Revolution. All of the benefits to society have come under the condition of a mostly free market with regulation. Your argument simply can not include positions based on history because your arguments must hinge on theory.
Your best argument comes from saying that improvements to society have come despite the presence of regulations. I would argue against that, since the more regulated environment of the post-depression U.S. has yielded the greatest increase in wealth and standard of living in the history of man, particularly in comparison to the less-regulated environment of the 1870's-1920's, which, while better than previous eras, paled in comparison to the post-Depression era. Remember, the early 1900's was the era of the emergence of labor unions, labor laws, and anti-trust regulation.
Delving more deeply, I'll focus on the business side.
You're the one who claimed that barriers to entry and monopoly don't exist under a free market. My progression of logic builds off of the observed fact that barrier to entry do exist. I argued that within a free market system, the barriers to entry inevitably result in oligopoly/monopoly (O/M), because competition will be based on price and efficiency. I point out innovation as being the most obvious way to combat O/M. However, I offer a basic logic where the lack of intellectual property, innovation is rendered moot.
If we allow for that logic to stand, then you can begin to examine the effects of O/M on society. If not, we still have to discuss basic assumptions. Under O/M, you see less competition, less innovation, and a greater skew of utility in the direction of O/M, away from the consumer. I think that we agree on this part - O/M is bad for society. I argue that free markets result in O/M.
One way that my previous assumptions can be stated is with the assumption of a frictionless (some call is "efficient") market. This requires perfection that is not achievable and can not exist outside of theory. The logic of free markets hinges on this. Once you move away from a frictionless market, the predictions of free market theories are unachievable. You can't build a sound theory based on impossible conditions.
I was under the impression there was much larger economic growth in the 19th century than the 20th. I'll look for statistics, do you have evidence to the contrary?
Robby - that's mainly a question of how your define growth. If you go as a percentage growth, then my guess is that you would have seen the greatest grown immediately after the Industrial Revolution (probably the 1870's), more due to the small denominator, rather than the large numerator. If you go by sheer magnitude, then it's without question, the 20th century.
As far as barriers to entry go, it's a question of the amount of capital that you have. How does a start up compete with entrenched producers, when you can only compete on price/efficiency? I'm not saying that you don't have the right to compete. Obviously, in a free market, anyone can try anything. I'm saying that you're likely doomed if you try. I'm saying that within this system, it's access to capital that drives success.
It's the old example that probability instructors use when describing long run results. If you are forced to play until one player is broke, under pure chance, the player with the larger starting funding is favored to win. If the starting difference to large, it becomes a statistical impossibility for the player with poor funding to win. It's like trying to take down a $100,000,000 casino by flipping coins for $100 a pop, while starting with only $10,000. In the long run, the player is statistically guaranteed to go broke before the casino does.
The player is at no disadvantage to the casino. Sure 99% of the players will go bust but the casino will make absolutely no $ in the long run. They absolutely need to have the advantage to win the players money.
If a player (small business) has a competitive advantage over a casino (large business) it will take a surprisingly small amount of time for some player to overtake the casino. The casino absolutely must recognize their disadvantage and adjust or they will go broke no matter how large their head start was.
Robby - Re-read the scenario I put out about the player and casino. The condition is that they must play until one player is broke. It is absolutely a statistical truth that the casino (who has a large starting advantage) will break the player. If you would like to play a real-life game, where we flip coins for a dollar a toss, and I start with $10,000, and you start with $100, and we play until one of us is broke, I will do so until the end of time.
The casino has the additional advantage of having the games stacked in their favor. However, even for games of 50-50 chance, such as flipping coins, an advantage of capital matters immensely.
Why do I use the condition of playing until one player is broke? Because that's what a O/M would attempt to do to a newcomer in their industry.
I happen to love even money gambling and would be 100% up for this.
Would you be willing to rebate me 1 penny every time I lost my $100? Surely your huge $10,000 advantage would be enough to overcome one single penny. If so, would you be willing to use a computer program to simulate our flips so we could do this like 100 million times in a day? I would fly to where you live tomorrow and take you up on this offer if you are willing.
Robby - Obviously, you know this is a classic "gambler's ruin" scenario. (if not, Wikipedia has a nice, brief writeup).
For a fair game, the equation of interest is a/(a+b), where "a" and "b" are the amounts that the two players (call them A and B, respectively) start with. That equation gives you the probability that Player B goes broke. With a 100 to 1 starting advantage, I win 99.01% of the time.
But, now you're trying to change the game.
I obviously wasn't clear in the "until the end of time" part. I meant more "whenever you'd like to try," and not "let's do so repeatedly, until the end of time." Obviously, in the infinite time spectrum, the Central Limit Theorem takes over, and things wash out for the fair game.
However, for that to happen, you have to assume that there is infinite wealth, and/or the ability to go into debt, to continue to play the game. Of course, if infinity is never reached if one of us goes broke before that happens, then things never reach the predictions offered by the Central Limit Theorem. So be careful about the even offering the rebate condition.
Whether or not I would take the game under a rebate condition would depend on me knowing how many times you can reload your stack and how many times I can reload mine, and what level, if any, of debt is allowed.
If I knew that you only had, say $1500 to play, I'd obviously give you the rebate, since with only 15 reloads, I'd have a roughly .9901^15=86% chance of beating you 15 times before you beat me once. Once you get to the point where you have your 70th reload, then the rebate starts to matter, as the chances of you winning once in that timeframe goes all the way up to 50%. But effectively, what we're doing here can be reframed equivalently by changing the probability of victory, and the value of our bankroll.
Obviously, if everything were simply run on a computer, you'd end up ahead with the rebate, so long as you allowed yourself to go into debt. But, if you had the additional constraint that you couldn't go into debt to play, then the game changes again.
But back to the original point, take this back to the business context. This becomes overwhelmingly daunting, because typically, there is a 1 shot deal at work for a startup. And more likely, the efficiency and pricing power lies with the O/M, so that the hope for a "fair" game without innovation as a factor is only a hope.
That said, any time you want to show up with a stack of cash, and let me scrape 100 times what you have, I'd be happy to start flipping coins, until one of us loses our stack. I'd probably even give you a penny after I take your stack :-)
I will be certain to have plenty of cash on hand if an opportunity presents itself.
How much of a rebate would you be willing to give me if I was only going to reload 1 time? 20 times? 70 times?
This discussion has gone in a very different direction, but this direction is one I'm also immensely interested in, as we're starting to move into behavioral economics.
As far as the specific example I gave... We'd define a single game as one where you were to start with $100, and I started with $10,000, and we started flipping coins for $1 a toss, until one of us went broke.
If I knew that I would play you only once more, I'd be happy to give you some incentive to play again, as I am expected to win two consecutive games in a row 98% of the time. I don't know what my personal risk curves are with regard to money, but I'd certainly give you the penny that you asked for earlier. I could even see myself giving you $1 to play again. I have no idea if I'd go higher.
I'd still consider giving you a small incentive, if I knew that I had to play you 20 additional times, as I'd expect to win 21 times in a row 81.1% of the time, but at that point, your winning a single time becomes enough of reality that the incentives to play wold have to be decreased. Again, I have no idea about the specific numbers.
Obviously, once we hit 70 total games, to odds of me winning all of them consecutively decreases to around 50-50 (slightly in your favor), as would be expected, so there would be no incentive there to further shift the odds.
What I'm getting at is, say you have $500 that you're willing to play with. It's different to play 5 separate games where it's $10,000 vs. $100 than it is to play a single game where it is $500 vs. $50,000, or if you had $7000 and I had $700,000.
So, to flip the question, for a single game, what level of starting advantage would you let me start with, and still have you play? You seem almost eager to play when I have a 100x advantage. Would you let me have more than 100x, if it were only for a single game?
I just want to make one thing clear. You know that you're never in a profitable situation in this game, right?
Robby - I think that you're misapplying the Central Limit Theorem. You're correct, if we play a high number of games (basically anything over 25-30 games, and then the expected value of the individual events take over). However, for a single game, starting values become the dominant factor. The Central Limit Theorem should not be applied to single events, but rather a series of events (essentially, the mean of the means becomes normally distributed, so the expected value matches up in the long run).
Basically, think of it like this. If you were to, a)take your entire fortune, and compete against a casino, and a fair game, b) be in a situation where no individual bet was of a high amount, and c) could not stop until either you were broke or you owned the casino, the odds are significantly against you. This is statistical fact.
Run the Monte Carlo simulation. Set the conditions such that the one player starts off with a huge advantage (25 to 1 is big enough to make it daunting, but the bigger this ratio is, the higher the advantage goes). Each event results in either a +1 or -1 added to the previous total. The game stops immediately once either play goes broke, not before.
Even if we are talking only about a single event, given you are willing to offer me a rebate, it is mathematically guaranteed to be a profitable situation. I (or perhaps a venture capitalist) am external to the situation and would be happy to benefit from the profitable situation even if it was only a one time thing and I lost my investment 99% of the time.
Robby - A small rebate to entice players to play out their stack? That's the free drinks, and scantily clad waitresses, and the comp'ed rooms/buffets that the casinos dole out all the time. Granted, they're playing games that are tilted toward the house (with the exception being a play in craps).
VC is a different story. VC is set up as a diversified portfolio, where there are a number of games being played at once. No VC would ever dream of putting their entire stack out for a single startup.
On the other hand, an unfunded startup would be doing exactly that.
This is the difference between making your assumptions from the top down versus the bottom up.
From a macro perspective, you can easily say that a fair game would end up leading to competition, regardless of capital considerations, since from a macro level, you can assume that there will be enough competitors who will try that they will be indifferent to the daunting task ahead of them.
However, from a micro perspective, you would predict that there will not be enough attempts from the startups, putting up their personal fortunes in the face of daunting odds, for the Expected Value to take over.
Again, theories only make sense, if the assumptions that they are built on hold. The Central Limit Theorem is no different.
Comps don't even come close to the advantage that casinos have on the players. In the game you offered you had absolutely no advantage and offered a rebate on top.
In the real world more than one company can profit. The casino would never put it's entire fortune at risk (and certainly wouldn't offer a rebate on top of that) in order to bankrupt every single player left. Neither would a monopoly and if they did they wouldn't be a monopoly for long.
Why would we predict there will not be enough attempts from startups? How many is too few? Why is too many startups, as a result of the government stealing from the big guy to give to the little guy, not a problem?
Robby - casinos do that every day. The won't put their entire fortune at risk on a single bet, as evidenced by betting limits that they impose. However, they have to have funding to cover every bet that comes down.
In the game I offered, I obviously have no advantage in any given coin flip. You're either not understanding, or misusing long-run probabilities. This isn't a long-run game. The constraint that we must play until one of us is broke puts me in a overwhelming advantage.
With regard to you other question, simply flip the logic, and look at it from a corporate perspective. A monopoly would certainly try to crush any competitor that came along. Otherwise, they would no longer be a monopoly, and then they would have to compete on a different level. Working strictly on a theoretical level, if your goal is to maximize profits (and any reasonable corporate theory accepts this), then any rational monopoly would never let a competitor get a foothold. Once a competitor gets a foothold, then you have essentially delayed the game so that the competitor has a stronger starting position. This shifts the game away from the existing power of the monopoly. Any rational monopoly would anticipate the potential for that game to begin, so would crush competition. Knowing this, how many rational startups would put their personal fortune up to try? None. How many irrational startups would try? Who knows. Rationality is a key assumption, I'll grant you.
From a macro standpoint, how many rational players is too few? This is parallel to the question of how many guaranteed re-loads that I'd allow you to have. Based on the 100-1 starting scenario, if there were 20 competitors at once, a corporation would have to think twice about trying to crush all 20 at once. If there were 70, then they could not take that strategy, as they'd be just flipping a coin.
Why do drug dealers and organized crime kill for their territory? Would they let a rival set up shop? Of course not. They have every incentive to maintain their monopoly. They have an inherent understanding of how these theoretical games work in practice. At some level, you can argue that the practices of rational criminals is the purest form of the free market.
You're making a leap when you say that there's room for multiple players to make money. Why is that the case? I'd argue that it's anti-trust law. What I've been going at in the last few posts is that free market principles don't predict that outcome, if there is a player with a starting advantage.
You're not making legitimate arguments against my theoretical points. Competition has to come from somewhere. Where does it come from in a free market, with rational players?
I haven't even delved into any regulations from the government. I'm still working entirely off of a free market theories, so you can't bring in government effects, yet. Your theoretical argument needs to refute my points at this level. this is before we even start debate about whether or not the assumptions make sense.
You're the one who's misunderstanding probabability. I completely understand gambler's ruin and it does not give you any sort of advantage in that bet. It can only be applied to a very specific case which is never, ever, applicable to a real-world situation. There is no magical property that makes monopolies all-powerful. There is no rational reason for a monopoly to temporarily take a hit to maintain it's monopoly and if they choose to do so they are threatening continuing their entire business. It is true that in doing so they would lower a competitors chance of succeeding but it would never, and hasn't ever throughout history, worked.
Robby - when you say no advantage, you're simply applying the long-run, law of averages to it. What I'm throwing out there is actually a conservative test. In reality, the established player would have a better than 50% chance to win each individual skirmish. The equation for uneven games (as you know) swing greatly for the house.
There are many, many advantages to a corporation who has a monopoly. Correct me if I'm wrong, but free market folks hate monopoly, for good reason. How can you say that there is no advantage that's inherent to having monopoly status? If that were the case, then you wouldn't need to argue against monopoly status as being bad for society, which is actually pivotal for my argument..
Companies today, of their own volition will take temporary hits to attack competitors, simply to protect market share (the measure of monopolistic status). Look at any industry where there is fierce rivalry. Those products essentially are been reduced competition on price (commodity status). The rivalry there is fierce.
Economies of scale and efficiencies in production, power over suppliers and buyers, and not having to worry about competition are all characteristics of monopolies. These are all very good things for a business, but bad for the free market, and bad for society, because of the decrease in innovation, and other potential social ills that are not necessarily in the realm of business.
My position is that a monopoly is dominating a market only because they are offering a service much better than any competition can provide. They are neither good nor bad for society. It is not a problem if they remain a monopoly but because of innovation this tends not to happen. Anti-trust laws are a result of jealousy by other companies in their failure to compete. If a really small company can prove they have an advantage they will find investors and giving them artificial leverage is bad for the economy. If they don't have any advantage it is better that they use their resources elsewhere.
A monopoly being forced to take temporary hits, as you say they do, sounds like the free market at work to me.
So, free market economics is OK with monopolies? Or is this something separate that you believe in? I was always under the impression that free market folks don't like monopoly, but I could very well be wrong. I'm just curious, actually.
In any case, you're technically right when you suggest that monopolies being able to provide a good/service better than what any competition could provide. However, there are no competitors, and game theory suggests that it would be foolhardy to try to compete, if there were no protection for innovation.
Anti-trust laws do not come from jealousy. For example, when AT&T was broken up, there weren't other competitors waiting. It was broken up, and parts of the previous company were in a new industry competing against each other. Anti-trust laws are made because because the lack of competition have been observed to have negative effects on society.
This is part of why I'm a bit confused by your position. Free markets operate at their best when consumers have choice, and there is competition between producers. Free market theories are most applicable to commodity markets, where there is no emotional attachment to the things being bought and sold, resulting an a more efficient marketplace.
Definitely OK with monopolies if the government is not involved and they are not using violence to keep others from competing. If there is an opportunity to make money there will always be competition.
On the other hand, free market people are very much against government created monopolies. In AT&T's case the only reason they became so powerful is because the government had regulations guaranteeing they were the only ones allowed to provide service. I guess it may have been appropriate to use anti-trust laws in that case, but it was only to fix prior problems completely created by government regulations.
Robby - It sounds like your position is that the free market is okay with monopoly because there will be naturally occurring competition in any industry where there are profits to be gained.
Or am I misreading what you're saying? I guess what I'm really wondering is how pivotal competition is to the free market argument. Does the free market work in industries without adequate competition?
Wouldn't the lack of competition be evidence that consumers are satisfied? What is the appropriate level of competition?
Robby - Maybe. However, satisfaction and optimization are two very different things. If your criteria is simply customer satisfaction, you can go to a very, very low common denominator.
I'm more curious about the role of competition in the free market argument. Was what I was saying a correct interpretation, or was I putting words into your mouth there?
"It sounds like your position is that the free market is okay with monopoly because there will be naturally occurring competition in any industry where there are profits to be gained."
Sure. That sounds close enough.
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