Information doesn’t matter

The classical economists gave us three basic factors of production: Land (i.e. nature-given resources), Labor (i.e. human effort), and Capital (i.e. tools). Naturally this involves lumping together a lot of heterogeneous things. Capital includes a rock you might use to smash an assailant over the head as well as a particle accelerator. But prices do a brilliant thing: they provide information about the relative scarcity of goods and compress that information into a single dimension

This allows us to aggregate! It means that we can talk about how much capital per capita is available in a region (or better yet, provide a distribution of workers’ access to capital… a project I’m not sure if anyone’s done) and the like.

This whole intellectual project is necessary if we want to talk about the nature and causes of a particular economy’s well being. But the original factors have become less useful as the nature of economic activity has changed over time.

It gradually became clear that the concept of labor was too fuzzy: how do we compare the labor of a doctor with that of a stevedore with that of a professional wrestler? We could try to use prices, but for a variety of reasons that just won’t work very well. Household production and leisure don’t have market prices, market frictions are particularly pronounced, information asymmetries abound and are entangled with principal-agent problems (you don’t have to watch a wrench to ensure that it doesn’t slack off, but your administrator may very well cease to administrate while browsing Facebook).

Economists have dealt with the issue with the idea of human capital. In addition to physical tools, people also have mental tools (skills). This idea leads into the notion of social capital (people invest in relationships), and can be extended in any number of directions. It’s a wonderful lens through which to view the world because it lets us see the nature of what we do.

But it’s not the right way to think about the factors of production. Not because it’s difficult to measure human capital (I’m not convinced it’s really possible to measure much of anything of importance in economics… even though I keep trying to). The problem is that it doesn’t get us down to the core, atomic thing that we’re really interested in.

Boulding tells us [emphasis mine]:

It is much more accurate to identify the factors of production as know-how (that is genetic information structure), energy, and materials, for, as we have seen, all processes of production involve the direction of energy by some know-how structure toward the selection, transportation, and transformation of materials into the product.

And I think he’s on to something here. The basic stuff of our economy is information applied to objects (even information has to be physically embodied in writing, magnetic manipulation of hard drives, or the shape of our neural connections), which requires energy.

But we’ve got the information necessary to do far more than we actually do. What is it that stands between the vast amounts of knowledge at our command being applied to our enormous stocks of physical resources using our still plentiful and cheap energy? Why is there so much slack in our economic systems?

It could simply be transaction costs, but I think we can go deeper. Boulding’s factors give a more refined view of both labor and capital, but he’s still missing the fundamental kernel of labor. It’s not our know-how that matters–we all know we’re supposed to save for retirement and yet we don’t. It’s not that we don’t have enough energy. What’s missing is an appreciation of attention.

Attention is at the root of alertness which Kirzner tells us is the prime mover that sets in motion economizing behavior. Attention is what is necessary to learn. Most importantly, it is what is necessary to remember and apply what we learn. And it’s universal. Laborers have it and so will our future robot overlords. It’s easily as basic as energy and materials. The question then is how to tie it into the notion of know-how (the psychology of learning) and social sciences more generally.

The burden of imperialism, the virtues of immigration, and the importance of data

One thing I have noticed about the terrorist attacks in Paris is the relatively little that imperialism is brought up. The Muslims of France hail from parts of the world that were once a part of the official French empire. This empire is still a force in much of its old official boundaries. The British and the Dutch also have problems with Muslims that were once a part of an official empire. The Germans and the Turks are a different case, as the Ottoman and German empires had more of a deal between themselves in regards to cheap labor than the cases of Western Europe, but the relationship is still not one of immigration – not in the sense that is perceived by Americans, Canadians, and Australians.

I wonder how much of the tension between natives and immigrants is due to the imperial relationship of the sides involved. I would wager quite a bit. I also have to wonder about the role of land in all of this. Land, of course, is the ugly cousin of labor and capital, two of the three factors of production utilized by economics (there is a fourth sometimes cited, entrepreneurship, but I am not yet convinced that this belongs and neither are many economists).

Immigration is different than what the former imperial states of Western Europe are dealing with. I know the similarities are seemingly the same, but they are not. I would be happy to flesh this out more in the ‘comments’ threads if anyone takes issue with it.

Here is the abstract from an excellent article in Social Forces on the futility of deriving any conclusions about a society based on simple perceptions:

We investigate the thesis widely credited to Max Weber that Protestantism contributed to the rise of industrial capitalism by estimating the associations between the percentage of Protestants and the development of industrial capitalism in European countries in the mid- to late nineteenth century. Development is measured using five sets of variables, including measures of wealth and savings, the founding date of the principal stock exchange, extension of the railroads network, distribution of the male labor force in agriculture and in industry, and infant mortality. On the basis of this evidence, there is little empirical support for what we call the “Common Interpretation” of Weber’s The Protestant Ethic, namely the idea that the strength of Protestantism in a country was associated with the early development of industrial capitalism. The origin of the Common Interpretation and its popular success are probably derived largely from selected anecdotal evidence fortified, through retrospective imputation, by the perceived well-being of contemporary Protestant countries.

The article is titled “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe” and it can be read here (pdf). As you read through analyses of the terrorist attacks in Paris, be sure to keep this in the back of your mind.

By the way, the piece is co-authored by Jacques, who has failed to adhere to his own standards when it comes to discussing Islam.