Grade inflation in the US education system is a common observation, one that is, at least at the college level, largely undeniable. A couple recent interactions with students has brought it to the front of my mind again. When discussing their majors and what classes they were taking, there was considerable hesitation to take what were perceived as difficult classes. What I thought this called for, in the moment, was a bit of confidence building, for a professor such as myself to say “You can do it!”

It turns out confidence in their ability to learn the material was not the issue. What they were unsure of was their ability to get an A. No, to guaranteed get an A. It was the risk of a sub-A grade that concerned them (likely exacerbated by the fact that my university does not award + and – grades in undergraduate classes). So I went through my usual pitch:

You take 5 classes a semester for 8 semesters. That’s 40 classes. The cost of couple B’s or even a C will pale in comparison to the benefit acquiring more technical skills, which would pay out for a lifetime. A couple courses in computer science, econometrics and statistics, maybe real analysis for those thinking about a PhD in economics – these would all have huge payoffs. There was a problem with my logic, however, that quickly became apparent.

They weren’t sure what they wanted to do after their bachelors. They didn’t know what advanced degrees they might pursue, whether law or medical school was something they were interested in. What they did know, however, is that GPAs were really important. That students were applying to things they might be interested in, and doing so with 3.8 and 3.9’s. When they saw classes that regularly handed out C’s (not D’s or F’s mind you, just C’s), what they saw was pure downside risk. If they were great at something, no one would ever be able to tell. But if they weren’t, or if they had a bad day on a hard final exam, that it could close doors. What I inferred was that they were trying to maximize their expected outcomes, and in order to do so they had to minimize the number of hard classes in their portfolio. Each path had a handful of unavoidable hard classes, so to take a an additional hard class beyond the requirements of the path they chose was suboptimal.

I don’t know that they’re wrong.

I’ve told this story before. When I was considering getting a PhD in economics I planned on just going to my local school. I was visiting a friend on the opposite coast, though, and thought I’d stop in at a really good local school there. I met with the director of graduate studies in the economics department and was flatly informed that my application would not be read because my GPA (3.2, if you’re curious) was below their cutoff. I said thanks and left. It was some time later that it dawned on me that this was ludicrous. Did they simply never admit students from (the famously uninflated grades of) CalTech? Were they discriminating against math and engineering majors? Likely not. But this is deeper knowledge than that held by your typical undergraduate. All they know is the average admissions statistics and the implied (or in my case explicitly stated) cutoffs.

When we inflate grades and get rid of standardized tests, we put greater pressure on students to curate their education to expected grade outcomes and, more important, to minimize risk. There’s no upside to shining in a difficult class if the best 50% all get A’s. The signal value of success has been attenuated. The signal value of failure, however, has not just been left intact, it’s been heightened. There’s no positive variance to balance it out. There’s no way to be an excellent B+ student whose occasional C in risky classes are balanced out by some exemplary A’s. We’ve effectively raised the costs of taking challenging classes and in doing so discouraged students from acquiring the skills that are most rewarded in the marketplace.

The problem only becomes all the worse when we think about the cultural biases in the confidence we cultivate in different groups of students. If a deficiency in math and science has been low-key implied at every stage of your education, you’re that much less likely to incur the risk of “hard classes”. There’s much pearl-clutching over “everyone winning a trophy” and school being too easy from folks who walked to and from school through 12 months of snow, uphill both ways. Those arguments, which are often little more than a sort of grumpy money illusion, miss the real problem entirely. Undoing grade inflation to make school harder is like giving 7 points for every goal in soccer to make it more exciting.

The actual grades don’t matter. What matters is the the shape of the distribution of grades . If we bunch everyone in the A’s and then disproportionately select into institutions based on those grades, we’re incentivizing students to stay in the herd. To risk your GPA for the sake of hard classes is to risk being isolated. To risk being cutout by admissions committees trying to sort through 1000 applications, half of with have near-perfect GPA’s, and for whom the fastest way to make their workload manageable in an acceptable manner is cut out everyone with less than 3.7.

I’m not sure students are wrong in their grade-mongering. They got into college in many cases based on nothing but those GPAs. They’ll be able to go to grad school without taking the GRE. There will come a day, however, when the next step isn’t school, and after which no one will ever ask them their GPA again for the rest of their life. After which the only thing that will matter is what they know. And who will know more: the overconfident student of upper-middle class parents who graduated with a 2.8 BS in electrical engineering or the pragmatic student who curated courses to maximize their 3.7 GPA while preparing for the MCATS and medical school? I don’t know who will leave with more skills, but I also don’t worry about either. Who I worry about is the first-gen college student, the child of a working class household with a 4.0 BA and 4.0 MA in communications who, desperate to prove to others that they belonged in school, made sure to protect that perfect GPA at every turn. What have we done to ensure that they know enough when they enter the job market?

Upfront: I’m totally replying to a meme.

I sympathize with the sentiment of the meme. But friends of friends were quickly critical of it. Then I wasn’t sure what to believe. So, I crunched the numbers.

First of all, there is an inherent ambiguity in the meme’s claim, seeing as future tax rates, maximum taxable income, benefits, and plausible returns are unknown. But we can address the data so far. The meme is dated in 2019, but current data is even more charitable toward it.

What we know as of 2021:

The maximum annual benefit is currently $46,740. It was previously lower, but this is a charitable post.

We also know the historical tax rates and maximum taxable incomes. Currently, 12.4% and $142,800. YES, we’re about to assume that somebody met the maximum income criteria over their entire working life.

If someone worked for 40 years while making the maximum contribution each year, then they would have contributed $406,255.20. If we plainly calculate the rate of return on this amount, then we’d yield 11.5%, which is not too shabby ($46,740/$406,255.20). Of course, this is entirely unreasonable because the funds could have been earning interest in private hands during the contribution period. If the funds had been earning 5% throughout the entire period, then the 2021 value of the contributed funds would be $968,838.39. The annual benefit implies a return of 4.8% ($46,740/$968,838.39). Investing those funds in a private account that yielded 5% would have provided $48,441.92 per year, which is not a huge difference. In this light, social security appears not to be a terrible deal. Not as good as the private sector – but not far off.

Let’s be more charitable to the spirit of the meme. What about for 50 years of work? Then the total contribution would have been $423,905.38, yielding an implied return of 11%. Considering the time value of money changes the rate of return to 4.2%. Again, not terrible, but now noticeably less than 5%. If the funds had been invested at and paid out 5%, then the private annual benefit would be $55,846.56. In other words, the privately invested funds would have yielded an annual benefit that is 19.5% higher than what is currently paid. That is substantial. The social security investment is definitely not excellent.

How reasonable is the meme? Well, in order to get the $1.9M figure, interest rates would have to be 7.2% (assuming 50 years of work and that we don’t spend the principal). The concomitant annual retirement benefit would be $136,825.51 (Now that’s an exciting number). In order to get the $95k, we only need to assume 6.3% per year. The S&P 500 has yielded an annual return of 7.6% over the same period (not including dividends). The meme is reasonable. Not perfect. But not ridiculous.

One BIG caveat is that this entire analysis assumes that the employee could simply invest equivalent amounts if Social Security were abolished. This is very unreasonable. Currently, part of the contribution comes from employers. While employees would experience an increase in total pay if the taxes were abolished, the employer would also enjoy a lower cost of labor. Not all of the gains would go to the employee.  One could also argue that abolishing Social Security would improve growth and real incomes generally, but that’s a counter-factual beyond the scope of this post.

Here is the sheet where I show my work.

A disproportionate share of my influences have been, at least in track record if not in conscious intellectual identity, contrarian voices. Contrarians are to me those thinkers who have a persistent mistrust of conventional wisdom. They tends towards a certain amount of Burkean conservativism (i.e. the status quo is usually better than we give it credit for), though not necessarily economic or cultural conservatism. The last 5 years, specifically the Trump administration and the Covid-19 pandemic, have to my mind presented perhaps the single greatest challenge for contrarians in my lifetime for a host of (maybe) obvious and non-obvious reasons. To better understand why, I think it’s worth casually investigating the strengths and weakness of contrarian sensibilities.

Contrarians are an antidote to herding

The Banerjee model of herding behavior is a masterclass of parsimonious modeling that changes the way you see the world the moment you internalize it. To oversimplify and already simple model, it’s the classic business cliché of “Nobody gets fired for buying IBM” writ both much larger and much smaller. If you’re on Twitter, it means nobody gets cancelled reaffirming the shibboleths within your intellectual and political social network. Following the herd can insulate you from bespoke micro consequences (i.e. no one can punish you without punishing everyone), but it can’t protect you from macro consequences (i.e. if the herd runs off a cliff, you’re going over with them).

Contrarian’s are useful because they are seemingly less susceptible to such pressures to conform because their identity, and the product they sell in the intellectual marketplace is defined by their distance from modal positions. What’s interesting here is that whether they are right or wrong is almost beside the point – contrarians add value just by adding noise to the intellectual marketplace, jittering herding populations out of potentially suboptimal equilibria. This is a powerful consideration – contrarians can make the world a smarter place even if their actual intellectual goods are complete trash.

Contrarians maintain our intellectual hygiene

Similar to their ability to break herding equilibria, contrarians offer a custodial service for science. Through their constant devil’s advocation, contrarians serve up intermittent stress tests for old ideas that might otherwise survive simply based on past glories. Just because something is an old truth doesn’t mean it’s a good or useful truth. Contrarians force us to regularly consider our core models and assumptions. Is it annoying when someone asks whether or not NASA was actually successful? Of course, it’s always annoying to defend a position that is obviously true. But sometimes you get a Warren Nutter telling anyone who will listen that Paul Samuelson’s textbook is wrong and the Soviet Union is a shell of its industrial reputation. Sure, it probably wasn’t fun to get run out of academia <adopts the snarkiest Ivy-league-jerk-in-a-skit-voice>for being just so obviously wrong, but checking every now and then that we actually know the things we think we know is an underprovided public good. We need contrarians to tell use when fads and social shibboleths are masquerading as science.

There’s more wisdom than madness in crowds

Hygiene and herd-prevention are definitively good things, but it’s important to remember that most conventional wisdom is in fact wisdom. There’s a been a certain agony in watching my favorite contrarians tie themselves in knots trying to find the strategic genius to Donald Trump, the collective madness that must be behind Covid fears, the grand lie of that surrounds Joe Biden as he sells his secret Republicanism to Democrats. Sometimes things are obvious because they are obvious.

Most of the time, whether it’s guessing the number of jellybeans in a jar or finding the best pizza in town, the crowd gets it right. The reason that most politically informed people think Donald Trump is a wet-brained buffoon is that he’s a buffoon (I will forever hold to the believe that his buffoonery wasn’t a strategic choice, but rather an pre-existing attribute that the political marketplace generally, and the Republican Primary specifically, selected for in 2016 and may select for again. Politics, like any habitat, can be quite cruel in its amorality.) The reason most people are afraid of Covid is because Covid is a danger of sufficient magnitude that it warrants private and public action to mitigate it. The reason that Joe Biden seems like a mix of the modal Republican and Democrat is because that’s exactly what the median voter is. The mob is good any taking a million small clues and turning them into a big conventional wisdom.

Intellectual Serial Autocorrelation

We should all be careful of our own intellectual brands, doubly so for contrarians. Yes, I’ll admit that in the market for takes there is a strong incentive to differentiate, but most following the path of optimal differentiation end up being just a different flavor of one of the two or three dominant conventional positions. Contrarians are far more likely to stake out territory as lone(-ish) wolves, perhaps on the periphery of one or more of the major intellectual identity clusters.

For these thinkers and commentators, they can often find themselves repelled from the obvious. Cultivating too strong a revulsion to the wisdom of crowds is often foolish and sometimes dangerous. Don’t get me wrong, sometimes there is no spoon. Sometimes. But most of the time it’s just a spoon and you should move on to the next puzzle. Maybe your model of world of the world is telling you to keep plowing ahead, but if everyone in the car is telling you to stop, you should probably stop.

Topps lost the the licensing rights to Major League Baseball which, prior to it actually happening, is a thing that your typical baseball fan would not have previously acknowledged as even possible. Topps makes baseball cards. Not the only baseball cards, but for most of the history of baseball cards, Topps were the baseball cards. How can baseball cards exist without Topps?

Major League Baseball (MLB), of course, simply sold the licensing rights to someone else: Fanatics. Now, to be perfectly clear, I don’t care abou, any of the corporate entities involved here, imaging rights, or even baseball cards. What I am interested in is the concept of a purposely designed collectible–not something that becomes collectible, an item designed solely to exist as a collectible.

The markets for baseball cards rise and fall, and there was one definitive bubble in the early 90s. Like any commodity, prices are an emergent outcome of supply and demand, and while in the short run price movements are associated with fad and event driven demand, in the long run a collectible item’s price ascent begins and ends with supply. For an item to exist as a collectible with investment-grade price growth potential, it’s supply must be short-term limited and long-term fixed.

Fanatics just paid a lot of money for the MLB imaging rights, more than Topps was willing to bring to the table as a 70-year producer and stake holder. Part of Fanatics reasoning in committing so many resources to the rights is their ambition to produce non-fungible tokens (NFTS), which they will no doubt restrict the supply of to a profit maximizing level. NFTs, I suspect, offer Fanatics the opportunity to pursue a parallel product distribution that will allow them a new channel for price discrimination. Specifically, I expect the physical cards to be relatively inexpensive, sold at a price comparable to recent historical prices in an effort to serve price sensitive kids and hobbyists. The NFTs, on the other hand, I expect to be greatly limited in supply, a promise to hardcore collectors that the assets in question will offer the investment-grade inelasticity of supply that collectors covet in their aspiration to hold collectible items that hold value as art-adjacent consumption value while also being long term lottery tickets.

Fanatics believe the key to unlocking this is the image rights to Major League Baseball. Their cards and NFTs are the real ones, the official ones.

But that begs the question: why does the market care that they are officially sanctioned? The value of the image rights was to be able to use the names and logos of Major League Baseball without getting sued. The only way to profit off baseball cards previously was to produce at scale – you couldn’t capture the future collectible value nearly as well as the present consumption value. And there was no way to produce at scale without the imaging rights – there’s no good way to secretly print and sell a million baseball cards with images you lack the rights for. A person or company can’t sell a million black market bootleg cards without getting caught.

But someone could sell three.

A person can sell three cards without getting caught. A person could sell an unlicensed NFT without getting caught. And so can it’s next owner, and the one after that, ad infinitum. In the crypto world of NFTs these transactions, especially in the long term, are feasibly untraceable. If anyone can sell three baseball cards and associated NFTs, then anyone can make them as well.

Remember zines? Actually, maybe you don’t. In the before-times, aficionados of musical, artistic, or even just aesthetic subcultures would print their own magazines at home, pay for a 100 copies at Kinko’s, and then distribute them independently on their own through the mail or at small local bookstores. Not dissimilarly, many artists have for years produced “Art Cards, Editions and Originals” (ACEOs). Essentially baseball cards, but with small collectible works of art instead.

An independent artist that tried to produce baseball ACEOs and sell them on eBay would probably fly below the radar. But in the unlikely event that their card did become the card that the market chose as the most sought after, then yes, MLB and Fanatics would likely pursue legal action. The thing about pursuing a copyright so vigorously is, like many consumer goods for which distribution is illegal, restricted supply only increases their value. And an NFT transaction is considerably harder to trace than a physical or even traditional software good. It’s called “crypto” for a reason.

Sure, Fanatics will be the only company that can sell the “official” baseball card, the “real” one. But who’s to say that they’ll be selling the best one? In a world without enforceable image rights, the market is likely to care a lot less about the what’s official, and a lot more what’s the, always ephemeral and hard to anticipate, best. When you’re talking about a commodity where limiting supply is the key to unlocking value, NFTs and crypto technologies change the entire landscape, because copyright and image rights are only only enforceable to limit production at scale, which means any effort to do so just creates great incentive for small scale independent production.

This isn’t just relevant to baseball cards, either. This is relevant to anyone designing a product with the intention of it becoming collectible, where some portion of its value today is it’s predictable scarcity tomorrow. Twenty years ago downloadable music changed the entire market for music. Musicians at the highest levels of popularity found themselves returned to a world where the bulk of their income came from live performance, which had of course been the norm for musicians for most of human history prior to the vinyl record. It would be interesting if baseball cards, and other portable pieces of functional art (such as Magic or Pokémon cards) found themselves on a similar path, where large scale production of collectibles becomes outflanked by anonymous independent artists.

You’ll probably never own a $5.2 million Mickey Mantle 1952 rookie card. But you maybe you’ll paint Shohei Ohtani as a half-man, half-Gundam neo-noir warrior prince pitching a no-hitter the same night he hit three grand-slams. And maybe the market will say that the official photo cards of Ohtani are nice, but your image, and your NFT, are the one true image that captured the moment he became the greatest baseball player ever. Maybe the market will select your card.

(What I’m saying is…maybe the market will say your card is….topps. Yeah, sorry, I’ll see myself out).