Plumbing and indirect causation

In both my price theory textbook (webbed) and Hidden Order, I point out that one cannot safely assume that changing one thing in a system leaves everything else unchanged; the context there is the effect of changing one element in a transaction, such as the price, the terms the good is sold at, or the quality of the good, on the other elements. In order to figure out what will happen, you need to understand the causal links. My four examples can be found in Chapter 2, under the subtitle "Four Wrong Answers."

I recently encountered another example of the same principle, in a rather different context. Our shower had been persistently dripping. After the tenth time my wife reminded me of the problem, I decided to do something about it. My conjecture was that the valve needed to be replaced, adjusted, or cleaned out, so I attempted to disassemble the mechanism to get at the valve.

I was unsuccessful in my attempt, but managed, in the process, to fix not only that problem, without knowing I was doing it, but two others as well.

How did I work that miracle? I succeeded in disassembling the shower head,and discovered that its filter was clogged. Cleaning that out was easy. I reassembled it, making a mental note that we still had to do something about the dripping. Had I thought more about it, I would have made a further mental note that while doing so, perhaps by hiring a plumber, we might also try to do something about the low water pressure and how long it took the shower to heat up.

If I had, I would have been wrong—because I had just fixed all three problems. With the filter cleaned, the water could get through the shower head, so the low water pressure problem disappeared. As I should have expected, but didn't, the problem of heating up the water disappeared too. With the water free to go through the pipe and shower head much faster than before, it took much less time to empty out the cold water in the hot water pipe, so instead of waiting for a minute or two to start taking a shower, it now took only ten or fifteen seconds.

The dripping stopped too. I conclude that it wasn't a problem with the valve at all. Presumably, the stopped up filter meant that the shower head filled up with water, and that was what was dripping.

A nice lesson in interconnected causation.

I had thought of using this as a lead-in to a discussion of what might go wrong with current health care reform, due to the interrelated causation of that much more complicated system, but I think I will leave that to a later post.

The Motorola Droid

Friday I got a chance to play with the new Android phone at a local T-mobile store. For the most part, I like it. The one disappointment was the keyboard, which does not seem any better than the one on my G1. On the other hand, the D-pad on the Droid seems to work much better than the G1's tiny scroll ball.

I asked about tethering and was told that it would cost an extra $15/month. When I got home and looked for more information on the web, I got an unpleasant surprise. First, and less important, it's $30/month—less important because you can turn the service on and off, so pay for it only on days when you plan to use it, which for me would come to less than two months a year.

The serious problem is that the tethering option is to become available "early next year."

I could, of course, use third party software to tether without paying anything extra, as I currently do on my G1. When I asked T-Mobile's online technical support whether that was permitted, I was told that while they would not provide any support for tethering they didn't object to my doing it. Verizon, which seems to have a clearer idea than T-Mobile does of what tethering is, quite clearly and explicitly forbids it if you are not paying them for the privilege, something I confirmed over the phone with a (very helpful and well informed) representative.

So if I switch to Verizon now, I don't get to tether during trips over the next few months and can't be sure of being able to tether during my month long summer trip; in my experience, projected dates for high tech products and services not yet out mostly come down to "real soon now."

On the other hand, it does look like a very nice phone.

An Android Glitch

On the whole, I'm reasonably happy with the Android OS, but there is one problem I have observed in two unrelated applications and so suspect is coming from the operating system.

One of the applications is DocsToGo, which provides, among other things, a word processor that can read and write MS Word documents. I call up a document, perhaps edit it a bit, then switch to doing other things with the phone. Eventually I go back—and get a message telling me that the program was shut down improperly and asking if I want to retrieve the document I was working on.

The other application is Divide and Conquer, a mildly entertaining game. I get to level seven, switch to doing something else with the phone. Eventually I go back—and discover that I am back at the beginning of the game.

I suspect I know what is happening. Android only keeps a small number of applications open at once. After I switch from one program and run several others, the first gets dropped—forcibly shut down. My guess is that the process doesn't involve actually waking up the program and telling it that it is about to be shut down, so there is no way the program can respond by saving its present state. From the standpoint of DocsToGo, it is as if the computer crashed while it was suspended.

Perhaps someone out there who knows more than I do about the Android internals can tell me if this guess is right, and if there is some way of programming around the problem. Also whether the problem still exists on Android 2.0.

Trust Online: A World of Warcraft Anecdote

In World of Warcraft, some characters are, among other things, crafters, can produce useful objects such as pieces of armor that they or others can wear. To do so requires some level of skill, obtained by in-game activities, mostly crafting, and ingredients ("mats" for "materials"). At a high level, the required mats are very expensive in in-game money and the product is better—provides a greater improvement to the player wearing it—than most of what players can get in other ways.

A common arrangement is for the player who wants something made to provide the craftsman with the required mats plus a tip, an additional payment in in-game currency. The crafter makes the item and gives it back to his customer. The mechanics of exchanging goods involve each player showing what he is giving the other; the exchange happens when both approve. For ordinary trade, that provides automatic enforcement; if you don't put up what you offered in exchange for what I am offering, I don't click the relevant button and the trade does not happen. If, however, I hand over the necessary materials to a craftsman in order that he can make me something, there is nothing to keep him from walking off with them without giving me anything in exchange.

What started me thinking about this problem was my wife's account of a recent transaction . Her character is, among other things, a high level blacksmith with the recipe for a very high level piece of armor, one whose materials cost about 6000 gold. At current exchange rates—there is an active market trading WoW gold and other virtual goods for money, although Blizzard, the company that runs the game, tries to discourage the practice—that comes to forty or fifty dollars.

Someone looking for a crafter to make that item posted a query. I noticed it and referred him to my wife's character. He gave her the necessary materials plus some additional gold, she crafted his armor and gave it back to him. A satisfactory transaction for both parties.

So far as we know, she was a stranger to him. Why did he trust her? How did he know she wouldn't simply walk off with his materials, perhaps use them to make the same piece of armor for herself?

Part of the answer is that in order to be a high level crafter one must be a high level character, which normally means having spent hundreds or thousands of hours fighting monsters, going on quests, practicing one's craft. My wife's blacksmith is level 80, the highest level currently available in the game. If she cheated a customer, she risked a permanent black mark on her reputation. A single WoW server has a population in (I think) the tens of thousands, large enough to dilute but not eliminate reputational problems. I suspect that if the same transaction could be done by someone who had just created a new character and played him for a few hours, the level of trust would be much lower. The mechanism is the same one that explains why banks favor expensive buildings faced with marble and provides one explanation of why companies engage in expensive advertising campaigns—in each case, paying a sunk cost to make it clear to customers that it would be expensive for the firm to take their money and run.

There are possible substitutes for trust, but they are costly. The customer could, for example, offer to trade 6000 gold worth of materials for 6000 gold in one exchange, then give the gold back, along with the additional payment, in exchange for the armor. Doing it that way, however, would require the blacksmith to have that amount of in-game cash free for the purpose. In this case, at least, she didn't; she has not yet made the armor for herself because she cannot yet afford to do so. A customer who sets that requirement substantially reduces the number of potential transactions. That would be a serious problem for very high end crafting, where only a few crafters will have the necessary recipe. The customer also risks offending the person he wants to trade with by making his distrust obvious.

On one occasion, my wife noticed someone posting in search of a crafter with an additional requirement: "must be a member of a reputable guild." That is a way of improving the reputational mechanism, since guilds, in-game groups of characters who do things together, also have reputations. I am reminded of Adam Smith's argument in favor of a diversity of small religious groups—that they have an incentive to make sure their members behave well in order to keep up the group's reputation. But in World of Warcraft the practice is uncommon; my wife only remembers seeing one such post, and other people reacted negatively to it.

Trust mechanisms are not perfect—people do sometimes cheat. But I found it interesting that they work well enough so that the sort of transaction my wife's character engaged in, for an amount very large in in-game terms and significant even in dollar terms, is not uncommon.

Interesting Electoral Doings in Northern New York

A Usenet post earlier this evening called my attention to an interesting congressional race in New York's 23rd district. The incumbent congressman in a solidly Republican district resigned to become secretary of the army. The Republican party nominated Dede Scozzafava, a relatively left wing candidate, at least by Republican standards. Conservative Republicans objected, and threw their support to Doug Hoffman, the candidate of New York's Conservative party. Saturday, Scozzafava responded to the loss of Republican support by withdrawing from the race and throwing her support to Bill Owens, the Democratic candidate. For a while the race between the Democrat and the Conservative was too close to call, but it now looks as though the Democrat has won.

What I find interesting is not the question of who is going to represent the district but of what the effect will be on Republican politics. The left wing of the Republican party will surely use it to argue that conservatives, by refusing to support centrist candidates, are destroying the party—and it seems like a reasonable argument.

But politics is not entirely about reasonable arguments. The candidate of one party is not supposed to throw her support to the candidate of the other, however much she prefers his policies to those of his opponent. Seen in a certain light, doing so makes her a traitor—not to the nation but to the party, although party loyalists may not draw such fine distinctions. I conjecture that the Republican right will try to use the incident to portray the Republican left as untrustworthy villains not deserving of a voice in party affairs.

Two further points occur to me. The first is that Scozzafava, by withdrawing from the race, may actually have helped, not hurt, Hoffman, since in a three way election the two of them would have split the Republican vote. The second is to wonder what the effects would have been, again on intraparty politics, if Hoffman had won. Conservatives could have offered it as evidence that they are the real strength of the Republican party—although not very good evidence, given that the 23rd is apparently an unusually conservative district. On the other hand, treachery that fails has less of a bite, rhetorically speaking, than treachery that succeeds, so that half of their argument might actually have been weakened by victory.

Heinlein, somewhere in Double Star, one of his better if less well known novels, has a character comment that politics is ugly in a variety of (named) ways—but it's the only game worth playing for grown ups. I can see his point.

Controlling Corporations: Stockholders vs Stakeholders

In theory, private corporations are run for the benefit of their stockholders. Insofar as the theory is enforced in practice, it is through two different mechanisms. One is the fiduciary obligation of corporate directors, the fact that they are legally obliged to run the firm in the interest of its stockholders. How much effect that obligation has is not clear, given the obvious difficulties with having a court second guess the decisions of the firm. The second and more important mechanism is the fact that the board of directors, which has the power to hire and fire management, is itself elected by a vote of the stockholders. If holders of a majority of the shares are unhappy with how the corporation is being run, they can replace the existing board, and so the existing management, with people who will run it more nearly as they wish.

This mechanism, like democratic voting in the political arena, faces an obvious problem; the holder of a share of stock, like an individual voter, knows that his vote is very unlikely to change the outcome and so has little incentive to spend time and energy judging how well the firm is being run in order to exercise his voting power. But votes in the corporate context, unlike votes in the political context, are transferable; each is attached to a share of stock, and shares can be bought and sold. If a corporation is doing a sufficiently bad job of maximizing stockholder value, someone with the necessary assets and expertise can buy up lots of shares at a price reflecting the current performance of the corporation. Since owning lots of shares gives you lots of votes, he can then, perhaps in alliance with other large shareholders, vote out the board, replace management and, when it becomes clear to others that the firm is now doing better for its stockholders, sell his shares at a higher price and go looking for another badly run firm to buy stock in. Takeover bids generally get a bad press, possibly due to the efforts of incumbent managers who would prefer not to be replaced, but they provide people running corporations with an incentive not to deviate too far from doing what, in theory, they are supposed to do.

Some people—including a colleague of mine whose recent work inspired this essay—argue that the theory itself is wrong. Decisions made by a corporation affect not only the stockholders but other people as well, most obviously its customers and employees. Why not alter the legal rules in ways designed to give all "stakeholders," all people affected by the corporation's decisions, a voice—either by altering the legal rules to broaden the fiduciary obligation of directors or by changing the rules on how directors are chosen to give (at least) customers and employees some votes as well?

There are a number of problems with the argument; in this post I will focus on one of them.

Corporations are constrained in at least three different ways. Two of them are the legal obligations of the directors and the mechanisms for electing them. The third constraint is the market on which a corporation sells its outputs and buys its inputs. A customer who finds that the corporation is not serving his interests, that its products are more expensive or less desirable than those offered by competitors, does not have to intervene in the internal affairs of the corporation in order to solve the problem. He can simply stop buying what the corporation is selling. An employee who finds that the corporation is offering less money for a less attractive job than alternative employers can quit. Since the corporation requires customers to provide the money with which it pays dividends to its stockholders and salaries and bonuses to its management, and requires employees to produce the goods and services that it sells to those customers, it has a direct and immediate incentive to produce what customers want to buy and provide employment terms that employees are willing to accept.

Like most mechanisms, this one is imperfect. Customers are not perfectly informed about what they are getting or the alternatives, and some customers for some goods and services are to some degree locked in by previous choices. Having spent time and effort learning to use the hardware and software on which I am writing this, I would be willing to switch only if the quality went down quite a lot or the price up quite a lot, so the firms providing the hardware and software have some ability to benefit themselves at my expense without losing my business. Having accepted my current job, there would be significant costs to shifting to another—costs of learning my way around a different university, perhaps of moving to a different location. Hence my employer as well has some ability to benefit itself at my expense.

But my situation as customer and employee is very much better in this respect than my situation as a stockholder. It is true that, as a stockholder, I have the option of selling my shares of stock, which at first glance looks rather like my option as a consumer of not buying a product or as a worker of quitting a job. But the apparent similarity is an illusion.

If I choose not to spend twenty thousand dollars buying a car from Ford, Ford has one more unsold car and twenty thousand dollars less money. If I choose to sell twenty thousand dollars of Ford stock, on the other hand, the money I get is not coming at Ford's expense. Another investor has paid me the money and now owns the stock, leaving Ford itself unaffected. From the standpoint of the firm's incentives, it is as if, every time a customer wished to stop buying from a store, he was required to first find a new customer willing to take his place, or as if an employee could only quit if he provided a replacement willing to do the same job at the same pay.

The stockholder's view of the value of the stock directly affects the firm only if the firm wishes to raise capital by selling a new issue of stock. So far as existing stock is concerned, the shareholder is locked in, even if the fact is not immediately obvious. If the firm is being run in a way that fails to maximize stockholder value, he cannot escape that cost by selling his share, since the price he can sell it for will reflect the reduction in future profits and dividends, insofar as it can be estimated by other stockholders.

It follows that stockholders, unlike customers and employees, receive no direct protection from the market on which they deal with the firm. As a customer of Apple, I am to some limited degree locked in; I can switch to hardware and software from another firm, but only at a significant cost. The same is true of my situation as an employee of Santa Clara University. In both cases, I have born what are now sunk costs as a result of my initial decision to buy a product or accept a job. But as a stockholder in Apple, I am entirely locked in; all of my cost is sunk. If Steve Jobs announces tomorrow that he plans to run Apple entirely for the benefit of its employees and customers, never paying another dividend, the fact that I can respond by selling my stock provides me no protection.

It follows that the stockholder is dependent, very much more than the other stakeholders, on other mechanisms for controlling a firm to make it act in his interest. That is a strong argument in favor of the current mechanism for corporate control and the current legal rules defining the fiduciary obligation of the directors.

Indeed, it is an argument for more than that. It is an argument for strengthening stockholder control in order to provide more protection to the most vulnerable party in the network of relationships that makes up a corporation. One way of doing so would be by removing current legal barriers that make takeover bids more difficult, and so protect managers and directors from the consequences of serving their own interests at the expense of the stockholders whose interests they are supposed to be serving.

Long Tailed Schooling

I graduated from high school in 1961; the school I went to was and is a top private school, the same one to which Barack Obama later sent his children. While I have no hard data, the impression I get from a variety of sources is that top schools today work their students harder, and cover more advanced material, than my school did.

At the same time, my impression—based in part on hard data, but data that is now about fifteen years out of data—is that the average quality of American K-12 schooling had declined since then. A little googling found data on SAT scores from 1967-2004, adjusted to allow for renorming; over that period the average verbal score fell by thirty-five points, the math rose by two points. Of course, some of that might reflect changes over time in how many students took the test.

This suggests an interesting question: Is the dispersion of quality of K-12 schooling increasing? Are the best schools getting better (or more numerous) and the worst worse (or more numerous)? Do any of my readers know of data supporting or contradicting that conjecture?

It's relevant, among other things, to the ongoing issue of the dispersion of income, apparently increasing. Quite a long time ago the authors of The Bell Curve expressed concern that one result of an increasingly meritocratic society was an increase in assortive mating, increased correlation between innate ability and status, hence an increased division between social groups. In the old days, they argued, the students who went to Harvard and the students who went to Podunk U. differed a lot in parental income and status, not so much in innate ability. As the system got better at identifying kids who were poor but smart and offering them scholarships to Harvard, an opportunity to become doctors, lawyers, or professors, it increased the odds that high status people would not only believe they were smarter than those lower down but be right—with potentially unattractive social consequences.

If they were correct, it would not be surprising if the K-12 schools, public and private, that serve the upper end of the income and status distribution were getting better while the schools serving the lower end were getting worse—as measured by the quality of schooling provided, itself in large part a function of the characteristics of the students being schooled.

I should probably add, at a tangent to this, a note of skepticism that working students harder, one of the points I mentioned at the beginning of this, results in getting them better educated. Some years back, I attended a reunion of my high school at which members of the current staff took the opportunity to tell the alumni what a good job the school was now doing. One of their central points was the amount of the students' time being consumed.

My suspicion was that what I was hearing was "The Devil Finds Work for Idle Hands" theory of education. Keep the kids busy enough and they won't have time to do drugs or get pregnant.

I doubt it works. It might just result in eating up time they could have used to educate themselves. Reading science fiction, arguing politics, playing board games, even playing D&D or World of Warcraft are, I suspect, more educational than homework given for the purpose of keeping kids busy.

Wanted: Technological Revolutions

My seminar on "Legal Issues of the 21st Century" deals with technological revolutions that might happen and the legal issues those revolutions would raise. After teaching it for some years, I turned it into a book. I am teaching it again this spring and am in search of new material, new revolutions. I have one idea, am looking for more.

The one idea is the possibility of non-human animals with roughly human level abilities, including some way of communicating with humans. It is at least arguable that some species already have adequate intelligence and lack only a common language. That is the claim implicit in some highly publicized—and controversial—past work teaching sign language to non-human primates. The people who worked with Koko, for instance, a female gorilla, estimated her IQ at 75-90 and claimed she understood 2000 words and had a working vocabulary of over 1000 signs. Other possible candidates are cetaceans, especially dolphins, and, surprisingly enough, grey parrots. I am suspicious of such claims, since the primate experiments got a lot of attention quite a long time ago; if the results were as good as claimed, we should have seen a lot more evidence by now. But I could be wrong.

If suitable animals do not yet exist, perhaps we could get them via genetic engineering, a popular theme in science fiction. Or we might learn enough about the functioning of the brain to be able to improve the brains of other species (and our own, which raises another set of issues), perhaps by the use of suitable drugs. Whatever the mechanism, the existence of animals able to communicate with us on a more or less human level would raise many interesting questions, including lots of legal issues.

While I welcome comments on this idea, that is not the main reason for this post. What I am looking for are some more revolutions. What technological developments not already covered in Future Imperfect might revolutionize our world over the next thirty years or so?

Android Update

As regular readers know, I have long been in search of the perfect pda/phone/web browser. The latest Android phone, the Motorola Droid, officially announced today, may bring that goal a little closer. The screen is substantially larger than the screen on my G1, the keyboard is said to be a little better. The phone is not due to go on sale until November 6th, so until then I will have to be satisfied with pictures.

While gathering information on the Droid, I looked a little more carefully at the question of support for an external bluetooth keyboard, one of the features that my G1 lacks. Apparently the Droid will lack it too, at least for a while. Connecting such a keyboard requires the appropriate bluetooth profile, software telling the phone how to interpret the information coming in from the keyboard. Such a profile does not yet exist as part of the Android software, although developers appear to be working on the problem.

While on the subject of smartphones, I have an idea for a software product that, so far as I know, does not now exist—smartphone OCR. Use the camera on your phone to photograph a page of text, have software on the phone or, if the phone's processing power is insufficient, somewhere out on the net, turn the picture into text.

Did Carl Sagan Libel Christiaan Huygens?

"Consider the curious argument by which he deduced the existence on Jupiter of hemp. Galileo had observed four moons traveling around Jupiter. Huygens asked a question of a kind few astronomers would ask today: Why is it that Jupiter has four moons? Well, why does the earth have one moon? Our moon’s function, Huygens reasoned, apart from providing a little light at night and raising the tides, is to aid mariners in navigation. If Jupiter has four moons, there must be as many mariners on that planet. Mariners imply boats; boats imply sails; sails imply ropes. And ropes imply hemp. I sometimes wonder how many of our own prized scientific arguments will appear equally foolish from the vantage of three centuries." (From a Scientific American article by Carl Sagan)

I came across a reference to this claim in an online conversation and got curious enough to google for it. All of the references I found were suspiciously similar, suggesting that they all were based on the same source. I eventually concluded that the source was Sagan. None of them provided any evidence for the story in anything Huygens had written.

So I want looking and found a webbed translation of Cosmotheoros, a treatise on matters astronomical written by Huygens late in his life. It's an interesting work, combining what appears to be an accurate account of astronomical knowledge of the time with lengthy speculations about possible inhabitants of other planets. Huygens, living more than a century before Darwin, takes it for granted that living creatures are the result of divine design and, logically enough, tries to figure out whether and how a benevolent God would have populated other planets. That seems a bit odd to the modern reader, but the author makes it clear that what he is offering is speculation. There are lots of references to Jupiter and one to hemp, but nothing that even comes close to supporting Sagan's story.

Huygens writes, with reference to Jupiter and Saturn:

"This Position of the Moons, in respect of their Planets, must occasion great many very pretty, wonderful sights to their Inhabitants, if they have any: which is very doubtful, but may for the present be suppos'd."

Which does not sound like a statement from someone with the view of the subject that Sagan attributes to Huygens.

I see three possibilities:

1. I have somehow missed, in Cosmotheoros, the passage on which Sagan bases his story. I think that very unlikely; I haven't read the whole treatise, but it is webbed with a search engine.

2. Sagan is accurately reporting something Huygens wrote elsewhere, perhaps a theory he had rejected by the time he wrote the treatise.

3. Sagan's story is false. Either he is deliberately lying for the sake of telling an entertaining story about how foolish people were in the past or he never bothered to check something he misremembered or got from someone else.

I favor alternative 3, but perhaps one of my readers can provide evidence for one of the others. If the story is based on something Huygens wrote I suspect, after looking through Cosmotheoros, that Sagan is misrepresenting a speculation as a claim.

Facts Don't Speak For Themselves

Suppose, optimistically, that a year from now the current recession is currently over, the economy more or less returned to normal. There are two opposite ways in which recent events can be, and will be, interpreted:

1. The U.S. faced the risk of another Great Depression and was saved from it only by the prompt and courageous action of the Obama admnistration, in the form of stimulus and bailouts.

2. The U.S. was going into a recession, as from time to time it does. The Obama administration used exaggerated rhetoric to misrepresent it as an impending catastrophe in order to justify an extraordinary increase in government spending financed by enormous deficits. The money was mostly spent on the sorts of things politicians like to spend money on. The combined effect of rhetoric and policy made the recession more serious than it would otherwise have been but it still ended, perhaps a little later than it otherwise would have.

Both versions are, I think, consistent with the casual evidence available to most voters. Is there any basis, other than preexisting political preferences, by which voters can choose between them?