Author: mdmakowsky

You’ll Never Walk Alone…to the Moon🚀?

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As a dedicated supporter of Tottenham Hotspur Football Club, it is with much shame that I have referenced the anthem of Liverpool FC, but the sentiment implied by their club slogan is a powerful one.* To promise someone they will never have to suffer the torments of loneliness is to promise them a lifetime of riches. When we soft, vulnerable human beings find a source of community and support, we are loathe to give it up. Which is to say the promise of membership and threat of banishment are powerful means of solving collective action problems.

The promise of forever walking within columns of lockstep compatriots is a big part of why Gamestop (GME) went to the moon 🚀🚀🚀, but also why it came back down to earth. As Scott noted in his post, the story of the last, and most meteoric, stage of the Gamestop saga was the “short-squeeze”– short-sellers suddenly desperate to cover their positions found themselves needing more shares than existed, while the “unsophisticated” gamblers of r/wallstreetbets refused to sell their shares. Specifically, the large, but uncoordinated institutional short-position holders all pursued their independent self-interest, while the seemingly disaggregated redditors managed to solve their collective action problem. Which raises what, to me, is the most interesting question of the whole saga: if coordinating a short-squeeze is so lucrative, why doesn’t it happen more often? Put another way, why were a large number of strangers able to coordinate a complex financial gambit rarely pulled off by sophisticated institutional investors?

The answer, in part, is that they weren’t strangers. They may be anonymous to one another, absent recognition or connection in real life (IRL aka meatspace), but that doesn’t make them strangers. These men and women had built a community so deep they had their own (often incredibly offensive) language. Their own jokes. They had a culture and sources of status, going so far as to create their own within-group celebrities. And, absent any visible coordination, that culture had evolved in this moment toward a single idea: hold the stock. They were playing a massive prisoner’s dilemma game with each other. Can you form a group for the express purpose of creating a short-squeeze? Probably not – the very action of creating an identity around profit from financial speculation belies the prospect of building an identity valued more than pure profit by its members. That’s the rub – if you want to pull off a massive collective financial action, you’re going to have to build a group of people interested in financial collective action that nonetheless values the identity of the group above the profits of collective financial action. That’s what makes this Planet Money podcast about Gamestop so special– more than anyone anyone else, they seemed to understand that the absurdist emoji usage and language, the elaborate memes, the actual freaking sea-shanties, those weren’t just color for the story, they were the story. Hedge funds weren’t losing tens (hundreds?) of millions of dollars in a zero sum game to a bunch of idiots obsessed with chicken tender-centric memes and sea shanties. They were losing a millions of dollars in a zero sum game because of the memes and sea shanties.

https://blog.methodsconsultants.com/posts/the-prisoners-dilemma/

Put succinctly, at every stage leading up to and during the short-squeeze, each and every holder of Gamestock shares would have been better “defecting” on their r\wallstreetbets comrades-in-arms. Yes, the group is better off if everyone holds, but everyone knows the incentives faced by everyone else, which creates a seemingly irresistible economic gravity of self-interest (defect, defect). So how do we solve these collective action problems? Well, first and foremost, we change the payoffs. That’s what we do in successful families, mafias, and religious groups. It’s what we fail to do in our misfiring coups, cooperatives, and communes.

Yes, your bank account balance will increment upwards if you defect and sell your stock. But that also means you’re no longer a true Son of Gondor. Sure, no one else on the subreddit knows it, but you’ll know it. You’ll know it in your cold, lonely, traitorous heart. Sure, you can use the words and participate in the jokes, but will you ever know the same sense of fellow-feeling within the community as you knew before. That’s a real cost. Is it worth cashing in $5000 in profit a week early, especially knowing it might be worth more next week? Remember – the benefit of group identity doesn’t have to be greater than the profit at hand, it only has to be greater than the risk holding the stock bears for your future profit. Combined with a little motivated reasoning, and it quickly becomes clear how a community, formed independent of profit-via-collective-action, now suddenly becomes an engine of pro-social decision-making sufficient to create an existential threat to any institution over-leveraged on a short position.

The same payoff matrix, however, also demonstrates that a short-squeeze built around a group identity is living on borrowed time. With every short position that gets closed out, the price climbs both higher and closer to its (actually) inevitable peak. There are a finite number of short positions, and there is a finite number of days their share lenders will allow them to hold out, all of which mean a peak will be reached, after that point the price will begin to rapidly decline. Which all means that as the price rises the risk to holding also rises, both of which are increasing the opportunity costs of holding the stock, shifting the payoffs back to a classic Prisoner’s Dilemma. Sure, your group identity might be worth $5K, or even $50K, but there’s a point at which anonymous community is dominated by the prospect of material wealth. I’m not saying you can buy true friends, but eventually you can buy something that offers a close substitute for anonymous friends. Or an island.

*I mean, I personally believe “To Dare is to Do” is a far smarter and sexier slogan.

I Miss Paying Rent

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I’ve been a homeowner not quite long enough to watch the entire run of Parker Lewis Can’t Lose in one sitting, but I have already arrived at the incontrovertible conclusion that being a landlord is foolish. Renting is a blissful paradise that I am wistfully nostalgic for, a glorious time when I had only one job: feasibly above-average economist. Now I’m also the worst plumber, woodworker, mason, electrician, and landscaper I’ve ever met. To be clear, none of that is true. Rather, I am a poor home inspector and over-qualified errand boy who moonlights as the manager of a hastily assembled team of contractors to whom I write a litany of checks.

I know the rent is too d*mn high, but the interesting question is why? Thinking about high rise apartments, rowhouses, or detached homes, its seems pretty clear that there are significant returns to specialization and scale. Whether its 212 apartments or 25 detached homes, a team of salaried handymen, inspectors, and property managers offers considerable efficiency gains, a reality borne out by the inexorable rise of HOAs and their continuing growing reach into their constituents lives. But as anyone who’s ever attended an HOA meeting can attest, the limits to contracting and the value of our time provides the opportunity for an industrious individual or firm to bundle collective ownership and services into a single entity, selling the turnkey solution that is the modern rental residence, at considerable potential savings to the tenant in a competitive market.

So why are we so mad at our landlords? I see a couple possible answers:

  1. The rent isn’t too high, we’re all just greedy and would complain about the purveyor of any good that represented 40% of household expenses, regardless of how much value we were or were not receiving for the price.
  2. Landlords have considerable market power, allowing them to reduce supply and jack up the price, leaving us little recourse but to either nationalize housing or apply that sweet, never-ever-backfired rent control.
  3. The market is relatively well-functioning, but with incomplete contracts, leaving us all nervous that our tenants are going to bankrupt us while our landlords cast us out into the streets.

(1) likely has some behavioral truth to it, but isn’t a very satisfying explanation*, while (2) has likely more merit in the short run or in areas where landlords have solved their collective action problem sufficiently to stymie growth of the housing supply at every turn (<cough> San Francisco <cough>).

But perhaps (3) is underappreciated. Everyone who’s ever lived in a major city, especially when they were young, has a story about how they were screwed over by their landlord. At the same time, landlords (particularly smaller, independent ones) live in terror of tenants arriving at a cost-benefit conclusion that paying their rent is a suboptimal decision. Plenty of states and cities have enacted tenant bills of rights, creating considerable variation across states, often making it incredibly difficult and costly to evict someone. Regardless of state laws, however, I am comfortable saying without any evidence or additional research that landlords and tenants continue to have a strained relationship. Tenants think landlords are getting rich off their backs without any labor, only the property their wealthy parents no doubt handed them on a silver platter, property they themselves acquired by exploiting their employees while running a puppy mill. Landlords, meanwhile, find out real quick they’re not actually making that much profit trying to keep a home intact as their hippie tenants burn sofas and flush paper towels while the bathtubs been flooding the 2nd floor for a month.

The interesting question, to my mind, isn’t whether landlords are exploiting tenants or vice versa, but rather why have property tenant laws evolved to such an inefficient equilibrium, where there doesn’t seem to be any satisfied parties?** If no one feels protected by a contract, then it’s likely not a very good one.

* The behavioral answer in (1) shouldn’t be dismissed too quickly, to be fair. Given that size of rent as a fraction of most household budgets combined with profits to be had churning tenants in supply-restricted cities, its possible that all parties are constantly trying to scam each other, leading to the observed acrimony.

**Yes, I know people have become quite wealthy as landlords, but my read on that market outcome is not the profitability of property management but rather of property speculation, with equal parts winners and losers. Rental management is principally in service of subsidizing said speculation and lower property tax rates.

The Matriculant Theory of Value

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The Labor Theory of Value goes like this: the value of a good, and the price it should command in the market, will (should) reflect the amount of labor it takes to produce it. It’s a classic fallacy, but not one we should mock. Yes, Marxist thought still often cling to it as it chases its own Hegelian dragon, but Adam Smith and David Ricardo both struggled with understanding why something that yields so little predictive value could still feel so right.

Which brings me to the updated credentialist version of this fallacy:

Now, I apologize for picking on this person, and this tweet, in particular. Similar gripes appear appear regularly in social media and The Chronicle of Higher Education on a regular basis. The formula runs as such: I, and people such of myself, have spent many years in school, have successfully been credentialed with a BA/MA/MFA/PhD, but the labor market refuses to reward us appropriately.

To be clear, I understand the deeply intuitive appeal of the Labor Theory of Value– the more labor I put into making something, the more people should pay me for the product of my labor. The problem with this logic is the very core of the economic puzzle: goods are only worth what people are willing to exchange for them. If you spend a year molding rotting eggshells into a 25-foot statue of Mickey Mouse, it might earn you something at an art auction, but probably not as much as you would have earned working an equivalent number of hours at Taco Bell. At the same time, you could take an art class at a local community college, paint a soft focus acrylic of the local high school, and sell it to an alum for $100. Or you could find a dinosaur egg in your backyard the day after you bought the house and sell it for $2000. Which is the more compelling artistic statement or mantle centerpiece is debatable, but the price each commands in the market is entirely objective, and has nothing to do with the hours of labor that went into them.

Which me brings to me the Matriculant Theory of Value: the more labor and tuition money I put towards producing a more credentialed version of myself, the more people should pay for the product of my labor. I’m sorry to report that the market doesn’t care about your degrees, it cares about what you can produce and the value the market places on that product. If you didn’t acquire any skills valued by the labor market, then your degree is only worth however much the firm values any marginal prestige it might enjoy from your credentials or the interesting conversation you may offer in the break room. If I’m an academic drawing a salary from an institution of higher education (and I am), then I’m reading not as a sign that I should be angry we’re not getting paid enough, but as a sign that I should be terrified that employers don’t value educational product I am currently producing.

Now, unlike a lot of scolds, I am sympathetic to the academic misinformation that students often find themselves marinating in. Professors enjoy telling students who might be wary of joining the glut of PhDs applying for scarce academic jobs, “Don’t worry, you’ll get a job. You’re special and brilliant and you deserve a job.” Given that these professors need cheap labor, but often lack resources, they are all to happy to pay “in trade” i.e. with an advanced degree. For that deal to work though, you have to convince students that the degree has value. They are all too quick to valorize a “life of the mind” not unlike acolytes being invited to take a vow of poverty, and with more than a little implied denigration of more proletarian endeavors.

We also have a tendency to grossly overemphasize grades, academic status, and completion. Rarely do I see a student told that it might be better to get a C in a challenging technical class than dodge it for the sake of their GPA. Who is going to be better valued in the market: a 3.9 GPA student who glided on fluff for four years, or a student who took 5 challenging technical courses over 4 years, failing 2 of them, and collapses at the finish line with a 2.1 GPA and hard earned BS?

What I am less sympathetic to is the frequent failure to admit the other allures of degrees less valued by the market: they’re fun. For a certain type of person, there is pleasure bordering on euphoric to sitting in a comfortable chair and reading histories, grand theories, and poetics for 8 hours a day. If you love your job, you don’t have to work a day in your life. True, but that doesn’t mean anyone has to pay you for it. It should worry you if your anticipated vocation is what other people do on their vacation. Not that it doesn’t have social value (it may have significant social value), but you should be terrified of trying to make a career doing what someone else is willing to do for free. You’ll not be surprised to learn no one is paying me to write these rambling diatribes.

So, yes, $38k a year for 9 months of work giving 10 hours of lectures a week, plus prep, grading, and office hours maybe doesn’t seem like much in the way of wages to you. I was paid $34k (2003 dollars) for 10 months a year teaching 19 hours of lectures a week, plus prep, grading, and parent meetings when I was a high school teacher, so I guess I could make a snarky case that the professor in question is being overpaid, especially since I hold to the belief that public K-12 teachers are underpaid relative to the social value they produce, but that is another post. But I also have enough awareness to know not to complain too much about how an indoor job with no heavy lifting is underpaid, particularly if we are resorting to any version of the labor theory of value. I dare you to walk into any professional kitchen and tell them these exact contract details, the nature of your work, and then explain to them that you’re the one who deserves to be paid more.

One last gripe. If you are sufficiently talented, conscientious, and privileged to complete a PhD, but your field of study offers you no option better than $38k/year to teach, my guess is that you’ve been not just unlucky, but proactively diligent in dodging every bit of coursework that could lead to a higher wage in the market. And I don’t just mean all of that unpleasant math you hate. Or statistics. Or java/C++/Python/etc. I mean even the adjacent courses of study or research projects where the skill acquisition path is that much more taxing or unpleasant. You didn’t study computational anthropology or physical anthropology or field anthropology. You studied cultural anthropology, fine…but you were also careful to avoid data at every step, opting instead you to memorize soft theory jargon and write the kind of dissertation that tells everyone exactly how smart you are, but not much else. Make no mistake, if you spend 5-8 years getting a PhD you may have gotten bad advice, you may have suffered the fallacy of sunk costs, you may have been done a gratuitous disservice by the faculty guiding your education, and may have been deluded by the matriculant theory of value, but on the bright side you chose a safe and comfortable line of work.

And make no mistake, you did choose it.

The Minimum Wage as Capitulation

mdmakowsky5 Comments

It is an odd thing watching the pro-labor, pro-redistribution portions of our advocacy and activism classes capitulate to the notion that the welfare state must be channeled through employment. When did this framing become so dominant? One of you just yelled “the Welfare Reform Act of 1996!” through my office window, but I think that’s wrong. I think the game was lost when we decided the minimum wage was a core policy signifier. There’s something irresistible about it– if there is one thing median voters everywhere seem to agree on is that their wage should be higher and their rent lower. Everything else is policy nerd gobbly-gook.

To my mind, the minimum wage is a policy failure strictly on the terms of (my own) left-of-center preferences. It is a victory of both political framing and strategy for coalitions against economic redistribution and the social safety net. That most of the left doesn’t even see this as a defeat makes it all the more devastating. Those outside the workforce are quietly placed outside the discussion and, in turn, are of secondary concern. More subtly, and perhaps more importantly, though, it builds into the policy construct a bargain that must be repeated and updated as national and local price levels change. Those repeated bargaining events force supporters to expend resources in each new iteration while, at the same time, giving their antagonists votes they can dangle when trying to secure support for their own pet policies. You want a higher minimum wage? Well, I’ve got a military procurement bill coming up next month that is slated to build 4 more F-35s in my district...

I subscribe to the belief that the failures of the US healthcare system most frequently stem from its connection to employment. Instead of heavily (or, yes, even entirely) subsidizing its purchase by consumers, we instead opted to grant a tax break to insurance provision by employers and here we are. The Affordable Care Act tried to weaken this connection, but still we are here. If you believe that health care is a human right, then connecting it to employment is a grievous error. If you believe a “living wage” is a human right, then why would you advocate making the same mistake again? We don’t live off wages, we live off consumption. If you want to guarantee an adequate standard of consumption, why would you include my employer as a go-between?

Which is not to say there isn’t political value to be mined from the $15 minimum wage debate. It has certainly crested the threshold of credible threat. It could be used as a political cudgel to bargain for a Universal Basic Income (UBI), and then bundled with the carrot: repeal the minimum wage entirely from the US law books in return for a $1,000 a month UBI that every citizen receives once they are no longer claimed as a legal dependent. For all the theoretic struggles the market might have with distortionary effects of a price floor (unemployment, low-cost discrimination) and substitution effects of a more expensive labor force (robots), I have all the faith in the world it can handle broad income effects just fine, thank you very much.

When economists talk about the minimum wage in bars, amongst themselves, without cheering and jeering onlookers, it is almost inevitably turns into a story of technocratic calibration. If we accept there is non-zero monopsony power, but also eventual disemployment effects, given the observed numbers, the optimal minimum wage is X% of the Zth percentile of the wage distribution. When these conversations happen on twitter, onlookers and participants are frequently less interested in calibration or generous in spirit. I’ve been on Twitter long enough to know that animal spirits are real, particularly when blood and memes are in the air.

Arguments over the minimum wage nearly always include references to an empirical literature that sometimes finds negative effects on employment while other times finds little to no disemployment at all, quickly followed by the theoretical point that there has to be some minimum wage above which employment would decline (or, at least, shift out of the legal sector). Part of what lets this debate persist are the modest sizes of past minimum wage increases. The one glaring exception I know of is when the Fair Labor Act of 1938 imposed a minimum wage that was roughly four times as large as standard worker wages in Puerto Rico, resulting in 65% unemployment . An exemption for Puerto Rico did not arrive for over two years and it is fair to say large portions of the economy were decimated. Future hikes had similarly negative, but far less cataclysmic, effects on Puerto Rican employment.

When the Fair Labor Act smashed into Puerto Rico with all the technocratic precision of a drunken mammoth, ~65% of the workforce ceased to be employed. But… do we really believe that 65% of people stopped working for a living? Of course not. Rather, the island labor market went gray. Under a hypothetically crushing minimum wage, employers will pay people in cash, off the books. They will hire family members, take them out of retirement or out of school. Yes, they’ll hire robots too, but I’m not really worried about 2nd order employment shifts favoring upper-middle class engineers. What I’m worried about is when whole classes of people enter the gray market (or markets even less legal), they no longer operate under the layering of legal and regulatory protections we often take for granted, especially ostensibly pro-market types who think that labor and safety standards are emergent phenomena. This sounds suboptimal to me, and probably to most labor advocates, but you know who it might sound great to? Libertarians who want the government entirely out of the workplace.

The minimum wage has become a left wing shibboleth, but that doesn’t make it good left wing policy. If anything, its one of the great right-wing gambits of the last 100 years. A policy that undermines its own ambitions at semi-regular intervals and inoculates the political marketplace against superior policies that would help far more people but, yes, would demand a larger tax bill. What more could Republican’s have asked for than a policy that holds the welfare state tax bill at bay while handing ammunition to the Democratic coalition members purging their own ranks?

An Army of Fools

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Armies, both for violence and social change, are costly. Costly to recruit, to train, to provision. But what of mobs? Mobs are cheap, if difficult to plan. Born of the moment, more opportunism born of wildfire than carefully orchestrated arson.

When I see footage of the attack on the Capitol and threads of the angry anonymous on Twitter, I see something in between an army and a mob. At first glance they appear like mobs, phenomena emerging from countless micro-interactions, absent an organizing force. Within the chaos of recent years, however, we’re seeing increased evidence of organizing agents. Within the scores of angry teenagers on the social media warpath for a stronger welfare state and MAGA zealots pushing white ethno-nationalism, we’re finding incepting Russian trolls and coordinating Capitol intruders equipped for ghastly violent theater. These mobs offer evidence of ambition. Ambition to undermine US governance; ambition to prove true the prophecies of some guy from Jersey.

Social media has radically lowered the cost of rousing a mob. Even in the face of technological advancement, however, it remains an unmitigated truth that you get what you pay for. The rabble are filled to the brim with fools, absent leadership, pulling from the tails of distribution. Those with the lowest opportunity cost of time and risk. If democracies are ruddered by the median voter, what guides the mob? The people with the most time on their hands? The least to lose? The most rage? The most bored?

If the median voter is on social media, they’re listening to the mob and also getting what they paid for. What I’m curious about, however is more statistical in nature. One of the points in favor of the median versus the mean is it’s resilience to outliers. But what happens when the median is endogenous to the outliers? What happens when the median voter finds its information increasingly filtered through an army of fools?

Armies are expensive, but mobs have never been cheaper. Why bother with the risk and investment of raising an army, or build a social movement, when you can raise a mob without leaving your home?

Rules versus Discretion in Soccer a.k.a. Football

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It has been pointed out that the only thing funnier than “someone who never played the game” trying to improve soccer is someone who calls football “soccer”. Admittedly, the nomenclature I use is endogenous to my audience, but that is neither here nor there.

The rules of football are perfectly distilled examples of the merits of rules versus discretion in optimal policy. Historically, the “laws of the game” codified by FIFA was a relatively sparse tomb that made copious use of the phrase “in the opinion of the referee”. This reliance on referee discretion has contributed as much to the evolving game as globalization, nutrition, and greater athleticism. YouTube is a wonderful place to watch footage of older matches and stare aghast as the world’s very best players try to shatter each other’s tibias and femurs every few minutes. (Brief digression: to really appreciate this, watch this collection of George Best dribbling and note how to succeed at dribbling at any time meant the opposition would inevitably try to break his legs). As our cultural norms have shifted, away from preferences for ultraviolence on fields of play, so too have the enforcement norms amongst football referees. This is at the margin, mind you, with many inframarginal fans and participants left indignant by the cowardice imposed on the game.

I previously questioned the overreliance of the game on referee discretion, much the way I sometimes questioned discretion in monetary policy. My views on monetary policy have shifted somewhat away from pure rules commitment, in part because of what I have viewed in football, and the introduction of a massive institutional shift away from discretion in two dimensions has been nothing sort of disastrous for the experience of both watching and playing a high-level professional game. The introduction of Video Assisted Replay (VAR) and its application to the enforcement of 1) Offsides and 2) Handball infractions has changed not just how the game is optimally played, but the entire emotional arc of observing and playing the game.

  1. Offsides
Premier League are considering removing the drawn lines when using VAR for offside calls

The offsides rule is quickly defined as such: you may only pass the ball to a player who has between themselves and the goal either i) the ball or ii) two opposition players. The two player bit always confuses people until they remember that the goalkeeper counts as a player.

The rule is, historically speaking, revealing in its continued structure. First, it is on its face silly that they’ve never changed the rule to “one non-goalkeeper between the player and the goal” and make an already cognitively challenging rule to monitor that much easier to enforce. It seems like the kind of rule change easily smuggled in with little opposition, not unlike eliminating offsides for throw-ins, which happened roughly a century ago. Second, there has always been a looseness to what body parts can place a player offsides – in a sport where hands cannot be used, it seems odd that they might shift the imagined lines.

For the purposes of this discussion, what matters is that what might seem a rule with little gray area was actually rife with two forms of important discretion. First, the already alluded to application to body parts. Second, given that a linesmen 40 yards from the middle of the pitch must track the ball and players often 50 yards from it, the triangle of vision they must manage simply does not allow for fine-grained analysis. They’re not tracking limbs, they’re tracking center mass, and barely at that. All of this adds up to enforcement guided by the discretion of the referee and the norms that inform them. Those key norms over time boiled down to 1) Even is onside, 2) When in doubt, the benefit is given to the attacking player, 3) the only parts that should matter are those that can play the ball i.e. flailing arms don’t count. Defensive lines were welcome to play an offside trap i.e. a high line with a governing centerback managing the line and yelling “step!” when a key offensive player might be put in an offside position. But such a strategy came with the risk of relying on a cognitively overwhelmed linesman not leaving your hapless goalkeeper one-on-one against a marauding forward.

VAR was erroneously introduced on the false premise that the weakness of offsides enforcement was the fuzziness of observation when, in fact, the entire institution was predicated on that fuzziness. Without that fuzziness, the advantage shifts strongly to the defensive player(s) because they are facing the passer, giving them the half-second to step forward, placing the offensive player offsides. Such a strategy was too much of a gamble before – placing a player 3 inches offside was sufficiently unlikely to be acknowledged, and goals too scarce, to warrant frequent reliance. Further, as it turns out, the “even is on” norm is critical to offensive counter-attacking. Which leads to the single greatest error in the introduction of VAR: the comically thin 1-pixel lines with which positioning is assessed. Presented with the fallacy that video technology could assess position with <1inch precision, “even is on” ceased to exist because effectively no two players would ever be deemed even. Without additional explication, I will simply note that assessing when a pass was executed is sufficiently fuzzy that <1 inch precision is not on offer.

How to fix it

It’s actually fairly simple in this case – you reconstruct VAR to mimic the ideal referee of the past. You make the lines wider. If those lines overlap at all, the players are deemed even. The system should either a) assign the body parts that are relevant to the rule and make the lines 6-10 centimeters wide or, b) construct the lines at center mass and make them 15-25 centimeters wide. In this manner, we get the best of both worlds – the key elements revealed by 100 years of discretionary enforcement and the uniformity of computational augmentation.

2. Handball

FIFA's takeover of the handball law has led to greater controversy and uncertainty

There is this silly posture that players now frequently assume, with their arms hidden behind their backs, as they try to move about athletically without the balance of their arms (it’s really hard, try it some time). This posture is a product of the rule that any violation inside the your defensive penalty box results in a penalty kick which results in a goal roughly ~70% of the time. That’s a very high value event when fixtures average fewer than 3 total goals per game, and is actually even higher value when you consider that scoring opportunities are endogenous to the current score i.e. teams are more conservative with a lead.

In case you did not know, you can’t use your hands, or arms, in football. You’d be within your rights to imagine that players have always gone about pegging the ball at the other teams arms when in the penalty box, trying to draw penalty kicks. You’d have been largely wrong though, for the simple reason that referees have historically been reluctant to reward such tactics. Under the loosely codified rubric of intent of action, proximity to the strike of the ball that eventually contacted their arm, awareness of the ball, or other such language, referees repeatedly made it clear that the penalty they least desired to award was one for a nebulous handball.

VAR stepped in, along with some mind-bogglingly stupid reinterpretation of the handball rule and said “Nope, if it touches the defending player’s arm in the box, it’s a penalty, and absolute chaos ensued. professional players quickly realized that any outstretched arm was to be chipped at and any leaping defender was to be collided with, in the hopes of producing a random arm-ball contact and, in turn, seven-tenths of a goal. Everyone hated it.

So what went wrong? Once again, it’s a case where the equilibrium of the game had evolved to entirely depend on discretion. The penalty box, and its single-sanction system for violations, was designed to deter teams for being overzealous in defense, and give attacking teams fair opportunity to score. That single-sanction, however, was so strong, that it only held in equilibrium through its discretionary, and therefore unpredictable, application by the referee. Sure, it’s arguably the single most powerful referee tool in major sports, but given that soccer is the most popular sport in the world, it certainly warrants respect as a stable second-best solution.

When VAR robbed the institution of its discretionary fuzziness, however, the equilibrium was shattered and the combination of a single-sanction system with a rule that cannot be perfectly complied with, well, the game was sent into minor chaos. The de factor rules had shifted so rapidly and so completely that neither players nor fans understood what was happening. Everyone was thinking more about if and when balls were in contact with arms than if and when it might go in the net. That’s not the ideal equilibrium for a sport, particularly if you’d prefer highlights that are more than penalty kicks (which make for exceedingly boring viewing).

How to fix it

There’s no getting rid of the handball rule. There’s no way to eliminate random contact with arms/hands. There’s no way to adjudicate intent well. If you can’t change the rule and you can’t change the monitoring quality, there’s only one thing left to do: change the punishment. Football should walk away from the single-sanction system.

Indirect free kicks from the spot of the handball

Why Indirect free kicks in the penalty box?

  1. They offer lower expected value than penalties,
  2. The expected value that does emerge reflects the ability of both teams, rather than just the shooter and goalkeeper.
  3. They sneak in a little bit of referee discretion when they identify the spot of the foul i.e. location determines value.
  4. They are fun as hell.

Which obviously brings me to monetary policy

Classic arguments about rules versus discretion are typically about constitutional constraints of elected and appointed officials. Maybe the most salient to our modern lives is how the Federal Reserve should go about it’s policy of increasing or decreasing the money supply i.e. what is the optimal amount of inflation? Regardless of what that number might be, or whether it should be adjusted with the assessed stage of the business cycle, the underlying argument is really about whether or not the targeted number should be chosen by people or set by a rule to which we are bound by a codified pre-commitment.

I myself was once a hard line “rules” person, or at least as hard line as one can be without being a monetary economist by field or training (for an informed opinion, ask this guy). Over time, though, I’ve come to appreciate that rules only work if we know what we are doing when we set them and if we can credibly commit to them. These are big “if’s”. The reality is that there is no such thing as a “pure rule” setting – some amount of discretion is always baked in. If you can’t identify exactly where the status quo discretion is, or, more importantly, why we arrived at the current equilibrium level of discretion, you should proceed with extreme caution. You may find that the discretion you didn’t know was there was the only thing keeping the system afloat this whole time.

The Political Center is Endogenous to You

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I stumbled into a twitter conversation about this relatively innocuous breakdown of news sources:

Now there are plenty of ways to pick this apart. No, I don’t care that you are socially liberal and fiscally conservative. I also do not care that a one-dimensional political spectrum can’t capture the fine nuance of your political ethos. Yes, the farthest left and right bins equivocate between often very different levels of bias, but that’s mostly of a product of only having five bins. Obviously greater accuracy could be had by delineating into 9 bins (and yeah, there is some real weird stuff in tails of this distribution). But coarseness or inaccuracy at the margin is not what grabbed by attention. I don’t really care that the lunacy at OAN and largely evidence-based reporting at Vox are in bins of seemingly reciprocal bias, as I know that’s just an artifact of the 5 bin structure.

Rather, what I was intrigued by were the frustrations and bias attributed in the comments about news sources, such as the BBC and NPR, improperly classified as the center. I’m well aware that many people are annoyed by “centrists”. They are traitors to the cause who should know better than to side with the enemy and will, of course, be first against the wall when the revolution comes. There is, more seriously, a frustration that centrists think they can make a claim to the truth by simply splitting the difference of the political distribution, like using the mean surveyed number of jelly beans in a jar. This aggravates people partly because it is a gross misuse of the wisdom of crowds, but mostly because we often think our position is the truth against which all other political identities should be gauged. It’s an old George Carlin joke – everyone driving slower than you is an idiot, everyone driving faster than you is an asshole. The “right wing” is everyone to the right of me. The “left wing” is everyone to the left of me. As for the crazies, well, that depends on your social identity. If you think of yourself as a right (left)-of-center, well then the far left (right) is full of lunatic socialists (corporatist fascists) out to destroy everything we love. The far right (left)? Well, they are a bit much I admit, but they are just spirited activists doing their best in a hostile environment.

Everyone hates centrists in large part because so many of us, on some level, think of ourselves as the reasonable political center. For some right or left-wing yahoo to plant their flag in to the rich soil of the center and call it their own is not just an affront to our sensibilities, it’s an act of political war.

To be fair to the Twitterverse, one person did manage to bring to this cavalcade of frustration an excellent alternative chart that had 7 bins (!) and a second dimension (!!!) regarding the reliability of information. That should have calmed most people down, obviously social media is neither the time nor place for such things.

It’s in this wonderful figure that so much of the story really comes out. People are rightfully upset that honest news sources are being conflated with tabloid rags. They’re also upset, however, that excellent and reliable sources are being attributed centrist neutrality. How dare they attribute the power of veracity and truth to those well-known right-wing whackos at the BBC! We tell ourselves we ignore the BBC/NPR/Economist/WSJ because of its gross bias, but the reality is we ignore them because they’re boring and never tell us we’re smart and pretty and righteous.

The original post was trying to suggest to people they consider balancing their political diet. My suggestion would not be to balance the bias in your diet (we like what we like), but rather to focus on the most reliable sources (the green bullseye in the second figure) and cut out the fried BS. All of that rage and confirmation bias, it’s nothing but empty calories.

One Acceptable Truth or a Million Fantasies

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Humans are soft, slow, and (to the best of my knowledge) make for fairly nutritious meals. Brains for tool-making, and the opposable thumbs for using them, are significant evolutionary adaptations, but it is our capacity to act collectively that placed us at the top of the food chain.

By the end of a standard undergraduate economics curriculum, one couldn’t be blamed for coming to the conclusion that the failures of collective action are the greatest obstacle to mankind – Oh what we could have accomplished if only we had ever found a way to just cooperate. Alas, all those externalities, Prisoners’ Dilemmas, free riders, easy riders, market failures, government failures, they just stopped us at every turn…

I’m not doubting the pedagogical value of teaching any of these obstacles, I teach them myself, but I believe we spend insufficient time reminding students that humans have been solving collective action problems with great success for thousands of years. Every national government, book club, homeowners association, and sorority has managed to produce public goods. So has every military coup and angry mob (if only sometimes for fleeting moments), but collective action is collective action, regardless of how we may feel about the outcome.

More often than not the most interesting question to me isn’t can a collective action problem be solved, but rather i) how has it already been solved and ii) how is that solution going to be threatened or hijacked? When I look to the current political landscape and the only mildly-exaggerated state of political and social polarization, I see not just rival ideologies, but alternative strategies for engendering and ensuring cooperation. On the left, I observe greater recent emphasis on purity – there is a narrow band of acceptable truth and any deviation from that, be it however accidental or benign in intent, can lead to significant punishments, including purges colloquially referred to as cancellations. On the right, I see required public professing of incorrect, often seemingly absurd, beliefs. I might talk about purity tests and purges on the left another times. What I’m interested in at the moment are the public untruths of current right wing identities (broadly conceived) and how they fit into the sacrifice and stigma theory, or club theory, of religion.**

I’ve written a lot about sacrifice and stigma theory. It has become the hammer than has left me forever searching for nails. Originally put forth by Laurence Iannaccone in 1992, it is nothing short of brilliant to my mind. A tool for solving collective problems so profound that when it shows up we barely notice it, and where it shows up tends to be the most powerful clubs shaping our societies: the religious, martial, and extremist political groups that bend the arc of history.

Groups produce what we call “club goods” i.e. public goods only accessible to members of the group. What Iannaccone demonstrated was that a group could actually increase their production of club goods by burdening its members with completely unproductive costs. Why do religious groups require clothing, behavior, or language that could stigmatize their members in broader society? Why are members required to sacrifice their resources at the literal or figurative altar of the group? Because if you impair members’ private productivity, or if the fruits of that private production are skimmed away, they will invest more of their resources into the group. If all group members face these same altered incentives, guess what, you’ve solved the collective action problem!

When I see educated women and men declaring the earth is 5,000 years old, that evolution isn’t real, that climate change is a hoax, or that Donald Trump is a brilliant human being, what I see is public profession of beliefs that might limit social or even occupational opportunities and, in turn, further commit them to a specific subset of affiliations. In the constellation of beliefs that might end up as political shibboleths, of course, there stand to be some more costly than others. In fact, there might even be beliefs that impose negative externalities on others, such antipathy towards vaccines or mask-wearing during a pandemic. Excessive burden might hurt the group, of course – remember, club membership must to be a net gain to persist. In a polarized society, however, vitriol created in rival factions by the externality-generating belief could actually intensify the commitment of group members. The liberals hate real-Americans like me so much now, they’d never accept me as anything but a dumb redneck, so the rational thing to do is double down on my commitment to the only group that will have me. Beliefs that reduce private productivity, increase group productivity, and create long-run antipathy in rival groups can serve to create something incredibly valuable to the group: a captured membership. If there is one thing that is evolutionarily hard-wired into human beings it is the knowledge that isolation is death. A member so stigmatized by past public behavior that rival groups would never accept them stands to be very committed to the group going forward.

The vulnerability of sacrifice and stigma born of public adherence to false beliefs, however, is the capacity of leaders to incept preferred false beliefs into the dogma. This is one way that minority groups can become scapegoated, the carbon costs of fossil fuels denied, quack remedies pedaled, or the reliability of electoral institutions undermined. Religious texts exist (mostly) unedited for long periods of time for a very important reason: core rules of behavior, methods of tithing, and sets of beliefs must be inoculated against opportunistic actors who would hijack the club goods they produce.

Sacrifice and stigma through club-specific false beliefs is a dangerous strategy for political parties for the simple reason that without the constraints of fact or scripture, leaders will feel the pull of their own preferences. Far more dangerous however, is the megalomaniacal conman that any political party institutionally designed to demand cognitive dissonance of its members will eventually attract. Political parties need to solve collective action problems, yes, but they also need immune systems. One might point to social norms, both within and outside the group, as key means of protection. Recent years, however, would seem to suggest that norms are not sufficiently robust in the long run. The US court system has held up well, and has in many ways served as the nations constitutional immune system. Perhaps the major political parties should consider updating and reinforcing their own constitutions, and put in place mechanisms to protect themselves from the next inevitable invasion.

American political parties need to update and upgrade their immune systems.

Inspiring research:

Iannaccone, Laurence R. “Sacrifice and stigma: Reducing free-riding in cults, communes, and other collectives.” Journal of political economy 100.2 (1992): 271-291.

Aimone, Jason A., Laurence R. Iannaccone, Michael D. Makowsky, and Jared Rubin. “Endogenous group formation via unproductive costs.” Review of Economic Studies 80, no. 4 (2013): 1215-1236.

**Note: this is not to suggest that left-wing identity affiliations don’t utilize sacrifice and stigma mechanisms. There is no shortage of what I suspect are completely ineffective, but highly visible, ostensibly pro-environment behaviors that are demanded. But the “headline” mechanisms of herding left-of-center identities under the progressive banner look more like threats of exile than sacrifice and stigma.

Invasion of the Cooperation Snatchers

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If you can tolerate a moment’s grandiosity, there’s no more important application of game theory than the evolutionary transition from prokaryotic cells to eukaryotic cells. All due deference to every game theorist ever, but the solution to the Prisoner’s Dilemma is literally in our DNA. One day cells were swimming around the primordial soup competing with each other in a zero-sum fight to the death for resources, the next they’re bonding together to form tissues to jointly acquire them. A couple billion years later and you’ve got hyper-specialization to the point of which cellular differentiation remains a bleeding-edge subject of biological research.

But this isn’t a post about the miracle of a body when it’s functioning perfectly. It’s about what happens when a cell goes rogue. When it defects on its neighbors and a cooperative strategy literal eons in the making. It starts gobbling up resources and reproduces at rates that threaten the whole enterprise, growing into a terrible little tumor of defection. The cooperative strategy in question moved passed simplicity countless generations ago: tissues employing Tit-for-Tat disaggregated back into the soup the first evolutionary round through. No, the strategy now is so fine-tuned it hasn’t had to deal with a major defector in eons of its collective evolutionary memory. If it is to succeed, it will have to selectively cut out those defecting cells without abandoning its core strategy, and do it fast, before it’s too late.

Which naturally brings me to the Republican party.

Political parties succeed based on two achievements. 1) They solve the collective action problem and, in doing so, achieve a scale of cooperation and exceed some critical mass threshold sufficient to self-perpetuate through the electoral process. The number of parties that can succeed at once, and the critical mass necessary to get to that point, are determined by the governing political institutions. 2) They maintain their cooperation at a scale sufficient to thwart the emergence of an alternative rival party.

Staying a dominant party is much easier than becoming one, but that doesn’t mean continued success is guaranteed. The weakness(es) of a party will depend on how it got there in the first place. The strategies for solving the collective action problem of this scale will be far more complicated than Tit-for-Tat or “Walk Away” and similar solutions distilled to the point of abstraction. They will involve all the solutions employed by cartels, religious groups, military forces, and every other collective dependent on high-levels of persistent cooperation. With that complexity comes weaknesses. Fault lines and backdoors that are typically guarded through a variety of social and legal barriers.

And they must be guarded, because the combination of scale and success will never cease to attract defectors. Those roaming cells, ostracized and cast out, always met with a wary eye, looking for a way in. Just imagine you are that rogue cell and you come across a population trained to always cooperate no matter what so long as it is deemed a member of the group. They seems so naïve! So vulnerable. But that’s how we succeeded! Always cooperate within the group. How big might your greed grow knowing you could defect and defect for all eternity, growing fatter and fatter off this suddenly maladapted globule of political ambition that can’t help but tear itself to shreds while giving you everything you ever wanted? It’s not just about the weakness of the party, but the kinds of agents these prospects are likely to attract.

In the coming weeks I’ll revisit this and ramble more about discuss some of the specific strategies employed by political parties, and the kinds of invasive agents and strategies they should expect. I’ll also speculate on how groups might institutionally respond and better protect themselves from both invading sociopaths, as well as their own hubris.

Inspiring articles:

Aimone, Jason A., et al. “Endogenous group formation via unproductive costs.” Review of Economic Studies 80.4 (2013): 1215-1236.

Aktipis, C. Athena, et al. “Cancer across the tree of life: cooperation and cheating in multicellularity.” Philosophical Transactions of the Royal Society B: Biological Sciences 370.1673 (2015): 20140219.