[Dr Dirk Helbing, et al] set up an “ant motorway” with two routes of different widths from the nest to some sugar syrup. Soon the narrower route soon became congested.

But when an ant returning along the congested route to the nest collided with another ant just starting out, the returning ant pushed the newcomer onto the other path.

However, if the returning ant had enjoyed a trouble-free journey it did not redirect the newcomer.

The result was that just before the shortest route became clogged the ants were diverted to another route and traffic jams never formed.

Schiller hints at the rhetorical sleight-of-hand that politicians use to stir the class-warfare pot:

Both candidates portray America as a nation where the fruits of economic progress have been usurped by corporate CEOs, equity-fund managers, inside traders and international speculators.

The underlying assertion in the politicians’ portrayal is that the “fruits” are somehow just out there, waiting for somebody to walk up and pick them. No production — planning, risk-taking, or investment — required. This sort of conflation of production and consumption has become so common that vigilance is required to keep it from slipping into one’s reasoning. Later in the same article, Schiller writes:

Two observations grabbed the headlines. First, the data indicate that the top-earning 20% of households get half of all the income generated in the country, while the lowest-earning 20% of households get a meager 3.4%.

This seems to concede, at least weakly, the demagogues’ point: The income was out there, and some people were able to “get” more of it. Putting aside the judgments of how reasonable the pay is for any given occupation (say, $55K honorariums for a hedge fund consultant to discuss poverty with a bunch of college kids), in a free society one produces income. One does not simply “get” it.

A similar problem pops up a little later:

All the Census Bureau tells us is that the share of the pie consumed by the poor has been shrinking (to 3.4% in 2006 from 4.1% in 1970). But the “pie” has grown enormously. This year’s real GDP of $14 trillion is three times that of 1970. So the absolute size of the slice received by the bottom 20% has increased to $476 billion from $181 billion.

The Census data under discussion, of course, tell us little about what is “consumed” or even, one could argue, “received”. At best it paints, with a broad statistical brush, what is produced.

… a species can be conceived as a firm that’s grown to specialize in tapping certain energy reserves throughout nature. In the case of bumblebees, one could think of them as a hedge fund that specializes in micro-arbitrage opportunities — available profits that are too small and costly for most firms to exploit.

There’s no reason to insure yourself against the ordinary expenses. We do that now, and just end up paying for it in premiums instead of retail, but with the extra costs of insurance paperwork. By paying for most care with insurance, we also get waits for appointments, and services/drugs denied by the insurance company or government program. There’s no retail competition by providers, since the customer is the insurance company, not you.

Goodfellow writes from the perspective of someone with lifelong health problems. The entire piece is worth a read.

His conclusion is gloomy — the leviathan creeps forward, slowly grinding down innovation. Given the fact that, for example, better cancer treatments will have little impact on average life expectancies, slumping innovation is unlikely to be particularly visible at the aggregate level.

UPDATE: Peering into the future a few years:

The reason you can’t be allowed to eat an egg is that, because of the lack of real choice in healthcare provision, you’re no longer responsible for the financial consequences of your own actions. If you get heart disease from too much cholesterol, the State, collectively known as the NHS, will have to treat you; and that costs the State more and more money so the State will have to stop you from doing it in the first place.

(Via Instapundit)

In Our Brave New World Gave, Kaletsky, and Gave describe the rise of “platform companies” that specialize in design while outsource manufacturing. Taleb comments on this phenomenon as well:

… globalization allowed the U.S. to specialize in the creative aspect of things, the risk-taking production of concepts and ideas, that is, the scalable and fat-tailed part of the products, and, increasingly, by exporting jobs, separate the less scalable and more linear components and assign them to someone in more mathematical and “cultural” states happy to be paid by the hour and work on other people’s ideas.

The interesting part of Taleb’s argument is this brief piece is not that, for example, designing iPods has higher margins and less volitility than building them, but that it is in the creative work that people are likely to accidentally encounter good new ideas.

(Article found by way of not particularly positive review over at Mahalnobis.)

Wales’ latest venture, Wikia, is a service that allows users to set up their own wiki communities. The rules (or lack thereof) appear to be roughly the same as those of Wikipedia. I’m not sure that Wikia directly helps with issues of bias and competition, but it at least provides another place where niche wikis can form.

Where existing capital is merely duplicated (’widened’), operated by a given labour force, diminishing returns will soon appear. Where new capital resources, but of the type employed before, are being substituted for labour (’deepened’), we may have to wait a little longer for diminishing returns to make their appearance, depending on the elasticity of substitution, but appear they will in the end. The only way in which we can hope to resist the pressure of diminishing returns is by changing the composition of capital and enlisting an indivisibility which, with fewer complementary capital resources, could not have been used.

This seems like a useful way to think about the potential value of a software project.

In the ‘widening’ category are systems that provide access to an established capability for a larger number of people. The cloning of a popular tool’s functionality may be a good example. Such systems may increase output, but will be limited by demand and preferential attachment effects for existing systems.

‘Deepening’ efforts improve on existing functionality in such a way that each user can be more productive. I’m sketching these notes in Scrivener, a tool that I find allows me to be much more productive than, say, Microsoft Word, even though they both support the same core task.

The final category, ‘lengthening’, is maybe the most interesting. Lachmann’s explanation gives us a way to think about a specific kind of “doing something new” by stressing the importance of indivisibility and complementarity. From earlier in the same chapter of Capital and Its Structure:

Complementarity plus indivisibility are the essense of the matter. It will not pay to install an indivisible capital good unless there are enough complementary capital goods to justify it. … Economic progress thus requires a continuously changing composition of the social capital. The new indivisibilities account for the increasing returns. … We must note that the introduction of new indivisible resources, feasible only when the volume of complmentary capital reaches a certain size, will as a rule also entail a change in the composition of this complementary capital…

One of Lachmann’s examples of indivisibility is a railroad: It will not be practical to construct a railroad until the amount of goods in transit reaches a certain threshold. Once the railroad is in place, it is complementary to a wide array of other capital goods. New opportunities are created and old ones destroyed, often in a discontinuous fashion.

The advent of VisiCalc is an analogous scenario. Developing a spreadsheet would have made little sense until computing power had increased (and price decreased) to a certain threshold. Once spreadsheet software was available, a computer suddenly became a useful tool for businesses that before would have never considered bothering with one. This was a huge win for those businesses and for the providers of the new technology. (This Schumpeterian shift, of course, also meant that the producers of and specialists in the old techniques and technology had to adapt the new world.)

More recently, we see systems like Google, which would have made little sense before the mass of available web content reached a certain threshold. Similarly, YouTube made little sense in a world of dial-up internet and expensive digital video cameras. Google, of course, bought YouTube, following the somewhat lackluster response to its own video site. At least to the casual user, there appeared to be little technical difference between the original Google Video site and YouTube. I vaguely recall that at one point, Google Video seemed more stable on my Mac. Ultimately, though, Google Video may have succeeded in widening the technology (introducing more people to the idea of an online video community, supporting a broader range of platforms) or deepening it (by providing a better interface, easier uploads, etc…), but YouTube had already recognized and taken advantage of the lengthening opportunity.

In the case of practically any other human endeavor, a throng of enterprising individuals would jump in to try to take advantage of this discrepancy. If the pattern found in the study holds, the difference would likely be arbitraged away. While the effect could be as simple as a gradual adjustment of the salaries of both kinds of health care professionals, a more likely outcome would be a shift to a more efficient pattern of interactions among doctors, NPs, and patients. The transition to a more efficient division of labor is often disruptive and painful, but in the end we’re all better off.

There is, of course, some progress here. Walk-in clinics are becoming more common, and those responsible for launching them clearly see the gap:

[MinuteClinic CEO] Howe, [Revolution Health Group founder and former AOL chairman Stephen] Case and others stress that the clinics aren’t intended to replace but to complement doctor’s offices; they don’t treat chronic ailments or serious health problems. Still, there’s little question that they’re siphoning away some business by offering lower prices, shorter wait times and longer opening hours.

From the other direction, the number of Americans with health savings accounts is projected to grow to something like 6 or 8 million by 2008. This should fuel a lot of consumer-directed health spending, outside of the structure of traditional insurance, encouraging more providers to try new ways to get in front of that demand.

Will this actually lead to better health care? Time will tell. A rigorous study like the one comparing outcomes from doctors and nurse practitioners can shed light on opportunities and anomalies, but the knowledge-aggregating power of the market can eventually give us a more definitive answer.

(H/T to The Stalwart.)

A key point that postcast host Russ Roberts and guest Mike Munger raise is the distinction between David Ricardo’s and Adam Smith’s perspectives on specialization. The Ricardian view revolves around comparative advantage: Two entities (nations, individuals, etc…) will be better off if they specialize and trade, even if one is better than the other at all productive tasks. Smith’s view is more focused on opportunities for specialization based strictly on the size of the market. From the podcast summary:

When you have one hunter, he has to do every task for himself. When you have 100, all equally skilled, one hunter can open a service making breakfasts and lunches to go. All the hunters can be equally skilled at hunting and running a restaurant but when there are a lot of hunters, it becomes profitable to run a take-out food service that can’t be profitable when there are only a few. So 100 hunters are more than 100 times more productive than one hunter because of the economies of scale in making the breakfast and lunches, freeing up more time for the hunters to be productive in the field. Four times as much resources can mean more than four times as much output even without Ricardian reasons for specialization.

Two factors are important in this scenario. First, the market is large enough to support specialization. Second, the hunter who switches roles is able to discover the fact that he can successfully switch. He faces uncertainty that may only be remedied by experimentation. Experiments succeed if the market proves large enough and his skill and productivity are adequate. His customers must also overcome their half of the knowledge problem and discover that by buying lunch rather than making it themselves they free up time for more hunting.

It is sometimes argued that an advantage of peer production is that it makes it easier for individuals to self-identify for a task. This is certainly plausible, but it has always struck me as being matter of degree. In a free society, we all essentially self-select for our productive activities. This does not guarantee success, of course, as bad luck, bad choices, shifts in the structure of the economy, etc… may leave us in unsatisfying jobs (or worse). Blogs, wikis, open-source software projects, and other peer-production efforts are buffeted by the same forces, and differ primarily in that the stakes are generally much lower.

The self-selection argument, however, seems to be based on an essentially Ricardian model. As such, it assumes the presence of a large market: Not only is there enough demand for something that people will try to produce it, but enough people will try to produce it that comparative advantage among them will be revealed. In the world of open-source software, there is no doubt that this sometimes happens. Large projects like Apache and Linux are driven by extremely talented, and specialized, developers. The market for these projects is large and transparent.

Below the level of Apache, Linux, and the like are countless smaller niche efforts, undoubtedly comprising the bulk of the 147,000 projects currently registered on SourceForge. It seems plausible that at this level, developers are operating in a more Smithian world of specialization. In the worst case, they are the lone hunter in the example from the podcast, forced into self-sufficiency. Where market extent is greater but knowledge of the extent is limited, comparative advantage need not matter: A suboptimal implementation of a tool is better than nothing. Self-selection, in this case, may not matter with respect to skill, but only to initiative in actually trying.

The ultimate effects of price controls on something that has the substitutability properties of labor will largely consist of things that don’t happen, things that we can’t see. It may be useful, though, to think about exactly what it might be that we aren’t seeing. Here’s Mises (from Chapter 3 of Human Action):

What happens is that labor is rendered more efficient by the aid of machinery. The same input of labor leads to a greater quantity or a better quality of products. The employment of machinery itself does not directly result in a reduction of the number of hands employed in the production of article A concerned. What brings about this secondary effect is the fact that — other things being equal — an increase in the available supply of A lowers the marginal utility of a unit of A as against that of the units of other articles and that therefore labor is withdrawn from the production of A and employed in the turning out of other articles.

So resources get misdirected, we’re all a little worse off, but (particularly given the apparently tight labor market) those who are displaced by technology end up doing something else. Enterprises that can invest in technology that makes their workers 30% or so more productive can probably absorb the hit. Wal-Mart and the other big box retailers will probably be fine. Their employees will just have to do more. If the change drives enough of their smaller competitors out of business, the big guys may not even have to reduce the size of their workforces. Whoever makes those wretched self-checkout machines will probably be ok, too.

This last point is where it gets interesting: Figuring out how to make minimum wage labor more productive isn’t a bad thing. This is, however, where I think the unseen effects get us. If it is suddenly (and artificially, by coercion) more profitable to build scanners for automating checkout than, say, building the next generation of MRI machines, we’ve lost out. Critics — or proponents, depending on perspective — will point out another possible unseen, that the more mundane technology will lead to advancements in areas that are ultimately more valuable. These are the kinds of vaguaries that blunt the will to fight against really horrible ideas.