Notes on Invisible Heart

Invisible Heart
by Russ Roberts

Thinking like an economist: Second Order

Price modulates supply/demand

Suppose the world has 531 billions of barrels of oil in reserve and on balance consumes 16.5 billion barrels a year. How long before we run out of oil?I’ll give you a hint. You don’t need any more information. If you know the answer it is because you reasoned like an economist. I never said it required more horsepower to think like an economist. It’s just a different lens. 

If you are stumped then consider Robert’s thought exercise.

I gave you a room full of pistachio nuts in the shell. It’s a big room, say the size of a classroom. The room is filled with pistachio nuts up to a height of five feet. There are millions of them. Welcome to the Nut Room. The nuts in this room are yours for the taking. Any time you want to come in here and help yourself, there is no charge. Bring your friends if you’d like. Just wade in and have a pistachio party.

“You’re happy because you love pistachio nuts. Outside the Nut Room, they’re expensive. Inside, they’re free. There’s only one rule in the Nut Room. As you eat the nuts, you’ve got to leave the shells in the room. You can’t take them out with you. At first, that’s no problem. For the first few days and maybe weeks and months, the pistachios are plentiful. But as the years go by, it takes longer and longer to find a pistachio. The shells start getting in the way. You come in with your friends and you spend hours wading through the shells of pistachios you’ve already eaten in order to find one containing a nut. Your friends say, we’ve got to stop meeting like this. ‘Why?’ you ask. ‘Don’t you like free pistachio nuts?’ And what do your friends say in response?”

The nuts aren’t free anymore” In other words, the price of finding the nuts has exceeded the price of just getting them at a store. The price rationed demand. 

So what about the oil?

“Remember the pistachios!”

You will never run out of oil. The price of finding the marginal barrel will become high enough that people will find cheaper sources of energy before they ever extract the final barrel. By thinking like a microeconomist you were able to see that the relative price of substitutes meant the supply of oil was not headed to zero with a slope of negative one. It’s a curved line that never approaches zero.

Being a nanny state

“Children don’t anticipate the future very well, so we treat children differently from adults. But when we start treating adults like children, we start taking away the essential human challenge of coping with uncertainty and making decisions”

  • A life without consequences and costs has no meaningful choices. A life without meaningful choices is the life of a “child, animal, or robot”
  • The connection between choices and rewards is the essence of responsibility

Chapter 13: The Rules of the Game

  • Thought experiment about designing the perfect law highlights the reality that every choice is a trade-off. If you had access to a “Dream Machine” a construct referenced from Nozick’s Anarchy, State, and Utopia then you would fast forward to the goals and prizes but the seeking, trials, failures and risks of the world would never be endured but remember without valleys, there are no peaks.
  • When people are laid off it sharpens our focus on them. What’s blurred is the competition which rose to combat the cost-cutting company. The employees of those competitors get to have jobs.
  • Maimonides thoughts on charity. The giver and receiver must be considered.

On an ascending level, they are as follows:

8. When donations are given grudgingly.

7. When one gives less than he should, but does so cheerfully.

6. When one gives directly to the poor upon being asked.

5. When one gives directly to the poor without being asked.

4. Donations when the recipient is aware of the donor’s identity, but the donor still doesn’t know the specific identity of the recipient.

3. Donations when the donor is aware to whom the charity is being given, but the recipient is unaware of the source.

2. Giving assistance in such a way that the giver and recipient are unknown to each other. Communal funds, administered by responsible people are also in this category.

1. The highest form of charity is to help sustain a person before they become impoverished by offering a substantial gift in a dignified manner, or by extending a suitable loan, or by helping them find employment or establish themselves in business so as to make it unnecessary for them to become dependent on others.

  • A key to the self-regulating property of economies is private property. Regulation can make far more sense when dealing with a common resource that nobody owns. How did Zimbabwe turn such a resource into a form of ownership, thwart poachers and increase elephant populations? Making the villages able to charge to hunt them. This gave villages an incentive to care for the elephant population since elephants were now a source of revenue. While some conservationists found it reprehensible others found it practical. If you care more about elephant populations it turned out to be an effective strategy.
  • “The human heart has its reasons that reason cannot know”. A divorce is complex and its cause is never as simple as one reason (ie infidelity). A divorce is the “product of a thousand misused moments”. The legal system is smart enough to recognize this and not try to determine whose fault it is. This is a good lesson when thinking about using courts to adjudicate discrimination. While some cases may be cut and dry most will not be and the ability of courts to intervene leads to changing incentives and potential for unintended consequences.

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