HO HO HO

Subject: Charity
Economic Principle: Dead Weight Loss

Christmas is wonderful. Hot chocolate, sweets, music, giving. There is an irreplaceable magic that comes with the season. Now, I hate to rain on the Christmas parade, but it is these times that my inner economist comes out.

Christmas is one of the most inefficient holidays that exists. Economically it's great for vendors and producers, but we, the consumers, are getting crushed. Dead Weight Loss is when purchase happens when it shouldn't or doesn't happen when it should. In the case of Christmas, we have the first. Gifts are purchased when they shouldn't. Now let's breathe a little before everyone thinks I am opposed to giving. This is what happens:

I love board games. Let's say I want a new board game. I am willing to pay $10 for it. It costs $15. My friend knows I want this board game. He buys it for $15 and gives it to me. I am happy. This board game makes me "$10-happy" but not "$15-happy".

Now Let's use the same situation for my friend. He likes ugly t-shirts and is willing to pay $10 for an ugly t-shirt. I buy him a $15 ugly t-shirt for Christmas. The ugly t-shirt makes him "$10-happy" but not "$15-happy".

What happened? We both spent more than the receiver would have spent or would have been happy receiving. We have lost $10 altogether of potential happiness. This is dead weight loss. If you don't quite understand this, remember the story of The Gift of the Magi (Here's a Sesame Street version: http://www.youtube.com/watch?v=o2VFgHGKzx4).

To an economist, there would be lost happiness, but I believe that this happiness actually goes to the giver of the gift.

"Only when you lift a burden, God will lift your burden. Divine paradox this! The man who staggers and falls because his burden is too great can lighten that burden by taking on the weight of another's burden. You get by giving, but your part of giving must be given first."  (Spencer W. Kimball)

Perhaps the giver in this instance is "$5-happy" from giving. 

Merry Christmas

The Captain America Concept

For those who haven't seen Captain America, the moral of the story was that super-human powers do not make someone good or make them a hero. The truth is that powers will only magnify what is already present. (This theme can also be found in Megamind)



So what do superheroes have to do with economics? Capital and Labor.

Capital is defined as sums of money or assets put to productive use. Labor is production that is associated with physical human work. Think of it this way: Santa owns a factory making toys. He essentially has two things, machines/tools and elves. Alone, the machines or tools cannot make toys. These objects are useless alone. The elves could make toys without tools; however, that would be very difficult. Thus a combination of the two is best for maximum production.

Even though you need a little bit of both, it is better to have labor over capital.

How does this relate to the gospel?

Labor is a human soul. Each soul has enormous potential. However, the laborer alone can do very little. With tools and assets production escalates. Which is better assets or character? Just as in the factory example, assets are useless by themselves. It is the human being that gives it life. In this same way, the human spirit gives life to all things physical. Our money means nothing by itself. It is just a cotton blend with ink. But when attached to hard work it takes on the value of that work. Therefore it is not the piece of paper that matter but the labor itself.

(back to Captain America) The building of character is more wise than the obtaining of assets. With assets the person of character can do many great things. However, those of little character will waste the assets. This is similar to comparing a child with money to a parent with money. The child is more likely to spend it all on candy whereas the adult (hopefully) chooses to invest the money to improve lives or society.

President Ezra Taft Benson (1899–1994) said: “The world would take people out of the slums. Christ takes the slums out of people, and then they take themselves out of the slums. The world would mold men by changing their environment. Christ changes men, who then change their environment. The world would shape human behavior, but Christ can change human nature.”

And we will end with Captain America because I can:
Steve Rogers: Can I ask a question?
Abraham Erskine: Just one?
Steve Rogers: Why me?
Abraham Erskine: I suppose that's the only question that matters.
Abraham Erskine: [Displaying a wine bottle] This is from Augsburg, my city. So many people forget that the first country the Nazis invaded was their own. You know, after the last war, they... My people struggled. They... they felt weak... they felt small. Then Hitler comes along with the marching, and the big show, and the flags, and the, and the... and he... he hears of me, and my work, and he finds me, and he says "You." He says "You will make us strong." Well, I am not interested. So he sends the head of Hydra, his research division, a brilliant scientist by the name of Johann Schmidt. Now Schmidt is a member of the inner circle and he is ambitious. He and Hitler share a passion for occult power and Teutonic myth. Hitler uses his fantasies to inspire his followers, but for Schmidt, it is not fantasy. For him, it is real. He has become convinced that there is a great power hidden in the earth, left here by the gods, waiting to be seized by a superior man. So when he hears about my formula and what it can do, he cannot resist. Schmidt must become that superior man.
Steve Rogers: Did it make him stronger?
Abraham Erskine: Yeah, but... there were other... effects. The serum was not ready. But more important, the man. The serum amplifies everything that is inside, so good becomes great; bad becomes worse. This is why you were chosen. Because the strong man who has known power all his life, may lose respect for that power, but a weak man knows the value of strength, and knows... compassion.
Steve Rogers: Thanks. I think.
Abraham Erskine: [Gesturing toward the wine] Get it, get it. Whatever happens tomorrow, you must promise me one thing. That you will stay who you are, not a perfect soldier, but a good man.

Gambling

What's so bad about gambling?

Being from the Las Vegas valley, I am no stranger to gambling. With the first step taken off a plane one can hear the tune of the slots in McCarran Airport. As members of the church, we refrain from gambling. But why? Isn't life a gamble? We take risks all the time. Sometimes resulting in loss, other times in gain.

My first thought always considers how gambling is very similar to investment. The New York Stock Exchange is probably one of the biggest casinos. Where are the differences between the two? You put money in, maybe get it back, and do pretty much nothing.

Here is the difference between the NYSE and a casino. When an individual chooses to invest, they are making an economic contribution. The money involved can be used to further production and efficiency of a company. This contributes to the general welfare.

Risk is not inherently evil. Neither is money. They are amoral. The evil comes from the intention behind it.



If I put a quarter into a slot machine, I am not adding to society. I act out of a selfish or an naive desire for money. This is money that grows on trees except that I'm pretty sure a money tree requires more diligent labor and contributes more to society!

Here is what True to the Faith has to say:

"The Church of Jesus Christ of Latter-day Saints is opposed to gambling, including lotteries sponsored by governments."

"Gambling is motivated by a desire to get something for nothing. This desire is spiritually destructive. It leads participants away from the Savior’s teachings of love and service and toward the selfishness of the adversary. It undermines the virtues of work and thrift and the desire to give honest effort in all we do."

Risk and Preparation

The past few weeks I have thought much about the economics of risk. It may have been spurred by the fact that we are studying it in Price Theory right now. I think what really triggered these thoughts was an idea proposed by a student in the econ lab this week. His argument was something along these lines:

Is college really worth it? Of the top 10% of the richest people in america, most never graduated from college or high school. I'm only here because my wife wants me to be. I don't need to be here to be successful. By staying here, I'll probably end up working for one of those top 10%'s.

I don't know if those stats are true, and his whole argument hinges on money being the only incentive to get a college degree. Personally, I disagree. The facts are clear. A college degree gives me greater probability of a better-paying job. I am happier avoiding risk when possible. Economists would say that a degree has a greater "expected utility" or that on average the happiness of those with college degrees are happier financially. [For the nerds reading this, I have to point out that I am assuming that people are risk averse meaning they don't like risk]

While college and high school dropouts may have better chances at earning serious cash, they also risk a lot more. They pretty much can have one extreme or the other. They may end up mopping floors the rest of their lives, or they may be the one hiring the college graduates.

The restored gospel teaches all to be self sufficient and ready for emergencies. We avoid risk when possible. We are advised to keep food storage, avoid debt, and live worthily. Each of these acts as a form of insurance against the storms of life. Why are we advised to do so? Because we are more likely to succeed under most circumstances

“We encourage you wherever you may live in the world to prepare for adversity by looking to the condition of your finances. We urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt. … If you have paid your debts and have a financial reserve, even though it be small, you and your family will feel more secure and enjoy greater peace in your hearts” (lds.org/topics/finances?lang=eng).

“He has lovingly commanded us to ‘prepare every needful thing’ (see D&C 109:8) so that, should adversity come, we may care for ourselves and our neighbors and support bishops as they care for others... We ask that you be wise as you store food and water and build your savings. Do not go to extremes" (lds.org/topics/food-storage?lang=eng).

Even worthy living can be seen as a safer "investment" than careless living. Should loss occur, we are prepared. This is the principle behind Expected Value and Expected Utility.

Game Theory and Post-Mortal Existence

Game theory is the study of strategic interaction between two individuals. Take two people playing rock-paper-scissors as an example. Two players have three choices each: rock, paper, or scissors. The objective of one player is to choose the option which dominates the option of their opponent  Example: Paper beats Rock, Rock beats Scissors, Scissors beats Paper. There is no best option for a given player because the best option is relative to their opponent's choice.

A classic example is the Prisoner's Dilemma. Two men are arrested, but the police do not have enough information for a conviction. The police separate the two men, and offer both the same deal: if one testifies against his partner (defects/betrays), and the other remains silent (cooperates with/assists his partner), the betrayer goes free and the one that remains silent gets a one-year sentence. If both remain silent, both are sentenced to only one month in jail on a minor charge. If each 'rats out' the other, each receives a three-month sentence. Each prisoner must choose either to betray or remain silent; the decision of each is kept secret from his partner. What should they do? If it is assumed that each player is only concerned with lessening his own time in jail, the game becomes a non-zero sum game where the two players may either assist or betray the other. The sole concern of the prisoners seems to be increasing his own reward. The interesting symmetry of this problem is that the optimal decision for each is to betray the other, even though they would be better off if they both cooperated. (wikipedia, prisoner's dilemma)

The Prisoner's dilemma shows us that the option which offers the most overall benefit is not chosen due to selfish desire for more personal benefits. This pattern of choice can be seen in the world around us. A child chooses to not do the dishes. Both benefit if they take turns. Both lose if no one does the dishes. One wins more if one does the dishes every time. Taking turns is the best overall option, but the second the child refuses to do them, the parent is forced to do so, or live with worse consequences with the dirty dishes.

This example of game theory is very difficult to overcome in the real world, but not impossible. One of the best ways to over come the lose-lose option (which in this example is called Nash Equilibrium) is to make the game repetitive. What this means is that the actor will answer for his actions. If a prisoner confesses, and they happen to be in the same situation sometime in the future, his accomplice will not likely trust that he will remain silent. Knowing that they might replay this scenario in the future or that one prisoner will be held accountable for his choice, he is more likely to choose the option with the most collective benefits (Socially optimal outcome)

Why do people keep commandments? Certainly not because it is easy or most rewarding to our egos. Easy is Nash Equilibrium. Nash Equilibrium is what we might call the default option or the "natural man" option. It's where the water will pool if left unaltered. Our choices pool to certain positions. Sin is easy. If we are left unattended, our choices collect in the pool of the natural man.

Believing in a post-mortal existence and judgement is key to making "socially optimal" choices in this life. Knowing that I will answer for each choice, I will choose options with the most benefits and least eternal consequences. A life after this one denotes a "repeated game." Thus, our knowledge and belief change our actions. “And now, as the preaching of the word had a great tendency to lead the people to do that which was just—yea, it had had more powerful effect upon the minds of the people than the sword, or anything else, which had happened unto them—therefore Alma thought it was expedient that they should try the virtue of the word of God” (Alma 31:5). Teaching others to believe changes incentive more that coercion.

“We live in perilous times when many believe we are not accountable to God and that we do not have personal responsibility or stewardship for ourselves or others. Many in the world are focused on self-gratification, put themselves first, and love pleasure more than they love righteousness. They do not believe they are their brother’s keeper. In the Church, however, we believe that these stewardships are a sacred trust.” Quentin L. Cook, “Stewardship—a Sacred Trust,” Ensign, Nov. 2009, 91