“All motion is an illusion”- Zeno

Zeno, like your average ancient Greek philosopher, loved to come up with grand statements and theories that people second guess the world in which they live in. Little is known about Zeno’s life, and only a handful of his work survived to be handed down to us. He believed that we should not rely on our senses and experiences to judge the world, but rather pure logic and mathematics. This theory, albeit cold and sound, would lead Zeno down the wrong path. Let’s explore the most famous works of Zeno and how they have been debunked using modern(ish) science.

ACHILLES AND THE TORTOISE

Meet our two contestants in a race; Achilles- the most formidable warrior in Greek mythology; and the tortoise- one of the slowest land mammals around. This is similar to the Hare and the tortoise story; but rather it’s not the tendency to get lazy and overconfident that makes Achilles lose, but more the fact that he gave the tortoise a head start. According to Zeno, however fast Achilles runs, the tortoise will always win. This is because, if the tortoise gets a head start of, say x meters, then by the time Achilles reaches point x, the tortoise has moved on; and so by the time Achilles get to the tortoise’s new position, it again has moved on (but by a smaller amount). Achilles will never overtake the tortoise.

It is important to remember at this point in history, the Greeks had no idea of converging infinite series or the equation speed=distance/time. These two ideas are crucial if are to redeem Achilles’ honour and pride. The statement ‘will never overtake the tortoise’ is of course wrong. Both racers are travelling at constant speed, therefore the ever-decreasing distances between each stage (the point where Achilles catches up the tortoise’s old position), also involve ever-decreasing time intervals. And even so an infinite number of stages doesn’t equal to infinite time length. The stages all add up to an infinite time, the time it takes for Achilles to catch up to the tortoise. This idea that an infinite number of values adds up to a finite number can be explained by a geometric sequence. If you take the example:

1+1/2+1/4+1/8+1/16…  It is clear that you can keep halving the fractions and making them smaller and smaller. What many people fail to realize that the longer you do this, the closer you converge to a total of 2. If you do infinite times then you do get a total of 2.

If the tortoise got a head start of 100m, and Achilles travels at 10 m/s, then we can say that it takes him 10 sec to catch up to the tortoise, using the formula s=d/t. Look at this from the point of view of Zeno, after 5 sec Achilles has covered 50m, and then another 25m in 2.5 sec, and another 12.5m in 1.25s.  Of course without the knowledge of converging infinite series, Zeno had to say that Achilles couldn’t overtake the tortoise, but if you do add 5+2.5+1.25+…. You get 10s.

With the help of s=d/t and a geometric sequence, we have saved Achilles’ reputation.

THE DICHOTOMY

In order to reach your destination you must cover ½ the distance first, but in order to cover ½ you must first cover ¼ of the distance and in order to cover ¼ of the distance you must cover 1/8 of the distance; and so on. If you keep chopping the distances in half forever, then you never reach the first distance marker, and so you never reach that first distance marker. This never-ending series of ever-shorter distances is infinite; so to complete the task you need to complete an infinite number of tasks, so you would never finish nor start; therefore motion itself is impossible’

Simple but elegant, this is the statement that Zeno proposed. He used pure logic to push and push an idea until it leads to a logically absurd conclusion- reduction ad absurdum. Logically you can immediately disprove Zeno, simply stand up and walk to other-end of the room. By sheer logic and the help of your body, you have proven Zeno wrong. But I like to solve it mathematically, with the water-tight application of physics- so there is no doubt left that Zeno must be wrong.

First of all, we need to convert this argument from one about distance to one about time. Assume as well you are travelling at constant speed at the moment in time when you reach the starting point of your journey. The idea of constant speed is important, for if you reduce the distance needed to cover, then the time taken to cover that distance also reduces. And the distance and time always divide to give you speed. We can think of time as a line that can be infinitely divided, but it’s too crucial to understand that time marches on regardless of what we do, we can’t take ourselves out of time’s stream, yet we can view distance from an outside perspective, distance doesn’t march on. Therefore, you travelling at constant speed will cover a distance, no matter how small the time interval, for the time interval can never be 0; time doesn’t stop.

Before I leave you, I should point out that Einstein did regard time in a similar way to space- indeed he called time the 4th dimension of what is called space-time. This would argue that maybe the flow of time is an illusion, therefore motion is an illusion, and our friend Zeno is right. But that’s not the case here. Of course, I’m not saying Einstein’s theory of relativity is wrong, but it only truly manifests when things move near the speed of light. At everyday speeds, we have every right to ignore relativistic effects.

Schrödinger's Cat- Is it Really Alive and Dead?

Many of you who are interested in science, or watched The Big Bang Theory, know about the Schrödinger’s cat paradox. Simply stated, inside a box, there is a cat and a tiny amount of radioactive material, as well as a Geiger counter which triggers a poisonous gas if it detects an alpha particle. The box is completely opaque and shut. When the lid is shut, we don’t know whether a particle has decayed or not, and therefore we are forced to treat each atom as being in two states at once, both decayed and not decayed.

Schrödinger here argued that because the cat was also made of atoms, each obeying the laws of quantum mechanics, its fate becomes entangled with that of the radioactive atoms. And since the radioactive atoms are in a state of both decayed and not decayed, the cat itself must be both alive and dead simultaneously. It will never be truly alive or dead, but in an unphysical ‘in-between’ state that is only resolved when we open the box. Although it sounds like nonsense, because we never see the cat in this dead-alive state, quantum mechanics states that this how we must describe the state of the cat before we look.

QUANTUM SUPERPOSITION

Before proceeding to go head to head with the most cat in science, it is important to understand why physicists believe that an atom can be in two states at once. Superposition simply refers to things being in two or more places at once. As an idea, it isn’t unique to the quantum world, for it’s a general property of waves. When you drop a rock in a lake you see the circular waves travelling outwards from the centre, the wave is in multiple places at once because it’s going in every direction. If we complicate things and drop two rocks at the same time, we see two sets of waves, which will overlap in some places. This interference can be ‘constructive’ if they work together to form a bigger swell in some areas; or ‘destructive’ if they cancel out each other.

Using the ideas of interference in waves, scientists created an experiment where they wanted to find what path an electro would take in a track made up of mirrors and semi-mirrors (reflect half the light and transmit the other half). Much to their surprise, they found that if an electron was forced to choose between two paths, it would somehow split up and go down both paths at the same time. The single electro was behaving exactly how we would expect a wave too. Therefore quantum theory leads to suggest that a quantum entity will behave like a wave when we aren’t observing it and will be a particle when we do observe it because we are disturbing its quantum behaviour.

In the quantum world things are in a state of superposition, but as soon as we look, they are forced to make a choice between the options they have and believe in a way which makes sense in classical physics. The radioactive atom in the box is in both states, not because of our ignorance, but because it’s in a combination of both decayed-not decayed.

QUANTUM LEAKAGE

We have to ask if Schrödinger is right to say the cat will become entangled with the radioactive atoms, because it is made up the same atoms, despite the millions of them inside the cat versus the singular radioactive particle.

In a 1990s experiment, scientists considered what happens when an isolated quantum system, such as a single atom, ceases to exist in solitary superposition and becomes entangled with a macro measuring device, which could even be in the surroundings. You’d be right to assume that the millions of atoms in the measuring device also exist in superposition, and this adheres to the quantum mechanics theory.

But, these delicate quantum effects become far too complex to be maintained properly in a macro body; and indeed leak away, much like heat from a warm body. ‘Decoherence’ is the name given to this process and is recognized as a very real phenomenon in physics. Another way of getting your head around it is to say that the individual superposition gets lost amongst the massive number of other positions from the millions of possible combinations in a macro system.

The reason we don’t see Schrödinger’s cat both alive and dead at the same time is because decoherence takes place within the macro-structure of the Geiger counter, far long before we open the box itself. The Geiger counter forces the atom to decide which state it is in because the counter can register whether an atom has decayed. So during any given time interval, the counter would have counted an atom decaying and hence killed the cat; OR it won’t. It is simply one or the other, not both.

Therefore it is decoherence that not only tells us why we never see Schrödinger’s cat both alive and dead but why the cat never exists in the ‘in-between’ state in the first place.

Entropy- The Time Line of the Universe

Entropy is a term often associated with randomness and disorder. In the language of physics, it is the measure of how disorderly a system is, an actual quantity, shown the symbol ‘S’. Furthermore, it is used in statistical mechanics, as it is related to the number of microscopic configurations that a thermodynamic system can have when in a state controlled by macro variables. The entropy of a system is the natural logarithm of the number of said configurations. This is all very complex and heavily advanced, that’s why I will focus on the simple meaning of entropy, along with its relation to the second law of thermodynamics.

The second law of thermodynamics says that in any cyclical process, entropy stays the same or increases. In terms of heat transfer, it states that heat flows from an area of high concentration to an area of low concentration, i.e. heat goes from a hot place to a cold place until it reaches equilibrium. Think about putting a hot cup of coffee on a table, the heat from the cup warms up the air and table beneath it, not the other way around. The second law of thermodynamics is an observation of such phenomenon, as we see that heat will never flow from cold to a hot space, within an isolated system.

Complex coffee...

Complex coffee...

You might think that a fridge violates this law, but this isn’t the case as the fridge isn’t isolated. To have a net flow of energy from a cold to a hot area, you need to have work done. External energy is required for heat to flow to a hotter place; hence a fridge running on electricity. When the electric supply is stopped, no work is being done; therefore heat will start to flow to the colder area. The link to entropy is that in terms of the physical world, a concentration of heat symbolizes high levels of organization, and an absence of heat shows disorder.

An alternative definition of the second law of thermodynamics is that it is impossible to have 100% efficiency; you can’t extract an amount of heat, Q, and use it all to do work, W. A proportion of the heat is lost to the environment. It is this law that forbids the perfect heat engine. There is a limit to how efficient a heat engine can be, as it is bound by the second law; and this is the Carnot efficiency.

However, it is important to note that the Carnot efficiency is just a theoretical figure, real like machines are far less efficient. Theoretically, the most efficient heat engine cycle is the Carnot cycle. In order to approach the Carnot efficiency must be reversible and no change in entropy. This statement shows how the Carnot cycle is an idealization since no real engine processes are reversible and all real physical processes involve an increase in entropy. Furthermore, Carnot engine cycle isn’t practical because the heat transfer in the isothermal process is far too slow to be practical. The engine whilst being extremely efficient would be so slow that there really is no use to it.

We have seen how entropy has many meanings, from being a measure of disorder to being a measure of the amount of energy which is unavailable to be used for work. But its most impressive definition is its use of a timescale. Since entropy gives information about how an isolated system has changed, concerning its particles and their energy, it gives us the direction of time. If we are given two snapshots of a system from two different time scales, we can tell which one came last, as it will be the most disordered one. Any isolated system in the universe, ‘flows’ with disorder, in the sense that events will take place on a course that leads to higher entropy.

Other examples of entropy are all around us in our everyday lives. An ice-cube sitting on a table top will melt into water. Ice is a state of order because the structure of the molecules is organized and fixed, whereas water represents a state of disorders, as water molecules aren’t fixed and can flow wherever.

Entropy is all around us yet we never notice.

Entropy is all around us yet we never notice.

Cleaning up your room is an example of how you need work done to get to a state of high order. In your everyday actions, you place objects randomly around your name, because it is the easiest thing to do, in terms of energy used. This increases how disorderly the room begins. When you decide to clean your room, you use a large amount of energy and work done to achieve a state of order. Similarly with a car, if you don’t drive it for a number of years, it will break down and achieve a state of disorder.

Entropy is all around us and governs what we can and can’t do, and how much energy we need to carry out such actions. It is the universe’s natural timeline and is a cruel master; because it tells us that we will always lose out when using energy. There will never be a 100% efficient isolated system because the universe simply won’t allow it.

Karl Marx: The Revolutionary Thinker of the 19th and 20th Century

karl-marx-2026379_1280.png

Karl Marx (1818-83) was a philosopher, economist, political theorist, sociologist, journalist and revolutionary socialist. He studied political economics and Hegelian philosophy, which was followed by him developing his ideas and theories with German thinker Friedrich Engels in London. His most famous work was The Communist Manifesto and was published in 1848. Marxism, Marx’s theories about economics, politics and society, reflected the idea that human societies develop through class struggle. In the case of capitalism, this is shown in the conflict between the ruling classes which control means of production and the working class who are willing to sell their labour for wages. Marx predicted that capitalism would fall victim of its internal tensions and be toppled and replaced by socialism. 

Marx and Mainstream economics
Ideas that have been generated from Marxian economics have contributed to the mainstream understanding of the global economy. Aspects such as capital accumulation and the business cycle have been fitted for use in capitalist systems. Marx backed up Adam Smith’s idea that the most important economic benefit of capitalism was a rapid growth in productivity abilities. He also expressed that laborers could be harmed as capitalism becomes more productive. 

Labor theory of Value
The labor theory of value is a major pillar of Marxian economics. The theory’s basic claim is that: the value of a commodity can be objectively measured by the average number of labor hours required to produce that commodity. E.g. If a pair of shoes takes twice as long to make as a pair of trousers, then the pair of shoes will be worth double the pair of trousers, regardless of the value of the physical inputs.

Marx argued that the theory could explain the value of all commodities, including the commodity that workers sell to capitalists for a wage; he called this commodity ‘labor power’. Labor power is the worker’s capacity to produce goods and services. Marx, using principles of classical economics, explained that the value of labor power must depend on the number of labor hours it takes society, on average, to feed, clothes, and shelter a worker so that he or she has the capacity to work.


Marx then asked the question, if all goods and services are sold at a price which reflects their true value, how can it be that capitalists earn a profit, how do they manage to squeeze out a residual between total revenue and total costs? His answer to this was that they must exploit workers and make them work more hours than needed to create the worker’s labor power. Essentially he believed that capitalists extract “surplus value” from the workers and enjoy monetary profits. However this was a major flaw in his thinking. He was right in claiming that classical economists failed to adequately explain capitalist profits; but mainstream economists now believe that don’t earn profits by exploitation, but by forgoing current consumption, by taking risks, and by organizing production. 

Alienation
This was Marx’s theory that bound together his views on economics and philosophy to a construct a grand theory of history and social change. He believed that humans are free, creative beings who have the potential to change the world, but the modern world is beyond our control. Marx condemned the free market, for instance, as being “anarchic,” or ungoverned. He maintained that the way the market economy is coordinated; dictated by the laws of supply and demand—blocks our ability to take control of ourselves. Marx condemned capitalism as a system that alienates the masses. This was backed up by his reasoning that although workers produce things for the market, market forces, not workers, control things. People are required to work for capitalists who have full control over the means of production and maintain power in the workplace.

Karl Marx was a revolutionary thinker and shaped the way that people and governments think about politics and economics as a whole. His original ideas have carried on through history and some are still relevant today, in countries such as Cuba and North Korea. Although his ideas had many flaws and gaps in logic, they still massively impacted the 20th century as seen by the Russian revolution and the rise of the USSR.

The World of Creative Destruction

coins-2558185_1920.jpg

Before we start talking about creative destruction and what it means, it is essential to understand that a market economy inspires hard work and progress, not just because it rewards winners, but because it crushes losers. An example would be the 1990s, which was a great time to be involved in the internet, but bad years to be involved in the electric type-writer. 


Taken from the idea of Adam Smith’s invisible hand, Austrian economist Joseph Schumpeter coined the term ‘creative destruction.’ Capitalism can be, and often is, a brutal cruel process. Looking back at great breakthroughs such as the steam engine and the spinning wheel, we talk about such inventions in admiration and awe. But it was the same breakthroughs that made times difficult for blacksmiths and a seamstress.

Creative destruction must happen in a market economy, there is no choice. In the early 1900s, almost half of Americans were farmers or ranchers, now the figure is less that 1/100. But, the American people have not starved to death and neither nor do they have an unemployment rate of 49%. What has happened, however that is the farmers have become more productive, meaning that less farmers need to work to produce the same amount of food. Those individuals, who would have been farming 100 years ago, are now designing new software and teaching in schools, etc. 


In the long run, creative destruction is a marvelous positive force, but the problem is that people don’t pay their bills in the long run. The banks are often very strict about getting mortgage payments every month. When a factory or sometimes an entire industry is wiped out by competition, it can take numerous years and generations for the affected communities and workers to recover. An example of this is the north of England after the closing down of mines and some manufacturing plants. The people in these communities are still feeling the effects of events that happened years ago.


Competition leads to losers, which in essence explains why we embrace the idea in theory, but fight it in practice. Competition is always best when it involves other people. Take the industrial revolution for example; weavers in rural England demonstrated, petitioned Parliament and ever burned down textile mills in a failed effort to fend of mechanization. But in today’s society, would we be better off if they had been successful and all out clothes were made by hand?


Competition always creates interesting policy trade-offs. Inevitably, governments are under pressure to help firms and industries under attack from competition and protect workers who might be at risk. Yet many of the ways the pain of competition is reduced-bailing out firms or making it hard to lay of workers- hinder creative destruction.


Ultimately, creative destruction allows a market economy to progress, to grow, to develop and to become more efficient. And as unappealing it is in the short run, it is invaluable in the long run. We might not like the idea of creative destruction but we definitely need it, because in simple terms ‘ no pain, no gain’

The Curse of Externalities

industry-1752876_1920.png

In essence, that is an externality because the private cost of an action > the social cost. An example would be someone buying a new SUV, which has very poor mileage. The buyer’s decision to buy the SUV affects everyone on the road, yet none of these individuals had a say in his decision. He doesn’t have to compensate the asthmatic children that suffer from his excessive CO2 emissions, nor does he have to compensate the people in Bangladesh whose houses might someday be underwater due to melting ice caps, caused by his CO2 emissions. Yet all these are real costs of driving a less fuel-efficient SUV. All these are costs of buying a new SUV, but none of them have to be paid by the driver, thus they don’t affect their decision. 

When an externality is large, individuals have an incentive to do things that make themselves better off at the expense of others. In this sense, the market fails because it will do nothing to fix this problem. Instead, it encourages individuals and firms to cut corners in ways that make society worse off.

An everyday example would be people who don’t pick up after their dogs. In a perfect world, we would all carry scoopers and pick up the waste as we derive utility from behaving responsibly. But we don’t live in a perfect world, and it is easier for dog walkers to leave the waste there. The god owner weighs the costs and benefits of behaving responsibly and then decides to scoop/not scoop. But nobody speaks for the school kid running for the bus next morning, who takes one wrong step and is about to have a very bad day. 

One crucial role for governments in a market economy is to deal with externalities- those cases in which individuals or firms engage in private behavior that has broader social consequences. In all market transactions, there are voluntary exchanges that make the involved parties better off. The problem here is that not all the individuals affected by the transaction are involved in the negotiation. 

There are also positive externalities, where an individual’s behavior has positive impacts on society for which they aren’t compensated for. An example would be a beautiful building built by a private company. The workers in a city might look at that building and, but these individuals don’t pay for this utility. Similarly, a business might invest in a run-down area, consequently attracting other investment which leads to an economic regeneration, the business isn’t compensated for anchoring this revitalization. 

There are a few activities that have both positive and negative externalities. Cigarettes kill people who smoke them, pretty standard knowledge. But the smoke affects those who might be unfortunate enough to be around the smoker. Furthermore, smokers generate health costs which must be recuperated by the government. Basically, your tax money goes towards removing a part of a smoker’s lung.

At the same time, smokers do benefit us in the fact that they die early. Their pensions that they have saved their whole life are now split between the rest of us. In 2001, the Czech Republic saved $28 million a year in pensions and old-age housing and benefits, due to premature deaths from smoking. 

This is the curse of externalities. They can’t be solved by market forces because the market is the problem. 

How the government tries to cure the curse? (tbc....)

Government: The Perfect Cure?

pexels-photo-260907.jpeg

Externalities are a problem, and they will continue to be as long as the consumption of goods and services has third-party costs. The reason why they are such a big problem is that because no-one is accountable to deal with and lessen the effect of such externalities. No individual or firm is required to spend their resources, whether it is money or time, to reduce the extent of the externalities, in a completely free market economy. Here is where the government has to step in and impose ideas and regulation to deal with externalities. The government has a duty to make everyone in the country better off and thus they have to come up with ways to limit the impact of externalities.


Firstly governments can regulate the affected activity. The government issues thousands of pages of regulation every year on everything from groundwater contamination to meat inspection. Some regulations restrict the extent to where a house can be extended to, or how much CO2 a factory is allowed to release into the air.


However the idea of taxing the off-ending behavior, instead of banning it, is an idea that is favored by many economists. Taking the example of SUVs, the problem is that it is too cheap to drive them, as is the case for all vehicles. The essential idea is that the private cost is smaller than the social case. So raise the private cost. The only practical remedy, given the fact that driving SUVs causes damage to others because of pollution, is to give ourselves an incentive to take the damage into account when deciding what vehicle to drive. Impose a tax such as a gas tax, or emissions tax, in order to raise the private cost. 


This however raises the question if it is appropriate to allow some drivers to pay for the privilege of driving a six tonne, pollutant spitting, and 4 wheel drive vehicle. Yes. The environment requires the same trade-offs as everything else in life. We should raise the cost of driving a SUV to reflect its true social cost and then let individual drivers decide if they want to still drive a SUV everywhere. 


Taxing behavior that produces negative externalities creates a lot of good incentives. First of all it limits the behavior. Those who continue to drive SUVs after a tax has been imposed are those who value driving SUVs the most, and those who don’t, will stop, thus the extent of the environmental damage is limited. A tax also raises revenue, which a ban wouldn’t do. This revenue can be used to pay for the costs of the externalities, such as research in alternative energy. Or the extra money could be used to decrease other taxes such as income tax, which discourages behavior we would rather encourage. 


In essence, taxing externalities is far from a perfect solution. The biggest problem is getting the size of the tax right, and this problem roots from the idea of government failure. The lack of information or information asymmety, of the exact cost of global warming to each driver means that the government doesn’t know how to much tax.

An exact value can’t be determined and thus taxing doesn’t work as a perfect solution. The problem of equity also arises because you have assumed that those who value a behavior more will keep doing it regardless of the tax. But our measure of how much we value something is based on how much we are willing to pay for it- and the rich can always pay more than everyone else can. 


In conclusion, it is evident to see that the markets alone fail to make everyone better off when there is a big gap in social and private cost. The government is essential in fixing the rough edges of capitalism. But the government does more than that. It makes markets possible in the first place. Government is important in today’s market economies as they solve problems that the market would otherwise worsen.

Government: The Umpire of the Free-Market Economy

stock-1863880_1920+(1).jpg

Good government makes a market economy possible, period. And bad government ruins the positives of capitalism, which is one of the many reasons why people around the world are in poverty.


Firstly, countries without functioning governments aren’t a utopia of free market prosperity. The government makes the rules. Around the world, there are places where it is near impossible to conduct the simplest business due to the lack of a functioning government.

A first example being Nigeria, which hosts one of the worlds’s largest oil reserves, yet businesses face the problem of BYOI- bring your own infrastructure. This means that it is very difficult to do business even though there is wealth of raw materials at hand. But this isn’t an example of how the free market has failed; it’s an example of how the government has failed to develop the infrastructure needed to support a market economy. Without good governance, the effect of trickle-down economic development will be minimal. 


The harsh reality is that no one really like the umpire, but the umpire is essential, regardless. Firstly, the government defines and protects property rights. You own things, and, to an extent, you can do what you want with them. You can sell it, rent it, whatever. And most importantly, you can invest in your property with full confidence whatever return you get, will also belong to you. No one else is going to claim your property as their own.

The same idea works with ownerships of art, ideas and inventions. Take the example of a book, from the stage of writing it, and then publishing it, and then selling it; only private parties are involved, and logically any government intervention would only be an inconvenience. You might even think the government is hindering the business by taxing the income of the author. But, the whole process is made possible by copyright law, which is a crucial form of property rights. No one can steal the contents of the book and publish it without playing royalties. 


Similarly the government enforces rights such as patents to the company that invented Viagra, for example. The ingredients inside a Viagra pill cost pennies to make, but because Pfizer has a patent on Viagra giving it a monopoly on the right to sell the pill for a number of years, charging $7 for a pill. This huge mark up, which also happens with new HIV/AIDS drugs and other essential products, is referred to as social injustice by many.

If everyone else was allowed to make Viagra, the price of the pill would fall drastically due to the availability of immediate substitutes. The reason that Pfizer is still overpricing its customers is because if Viagra didn’t get patent production, then Pfizer would have never invested the massive amount of money and resources necessary to invent the pill initially.

The real cost of breakthrough drugs is the research and development that goes into them, rather than the production of each individual pill. The average cost of bringing a new drug into the market is somewhere in the ballpark of $600 million. The government could buy out the patent when a new drug is invented, in an effort to supply low cost drugs to the people and keep the incentive for firms to innovate. But this could cause problems in the fact that is very expensive and who gets to decide what drug remains patented and what doesn’t. Regardless of that, this idea lays in line with the basic economic reality that individuals and firms will only invest if they are guaranteed a return. 


Effective regulation makes markets more credible. Because of the government, you can buy shares in the FTSE 100 with confidence that neither the company nor the traders are participating in fraud. The government is responsible for the law. The institution that is the government allows us to undertake complex transactions with people we don’t know.

We give our hard-earned money to a person at the bank, who we have never met before; and we do this because we know that there is infrastructure in place to that means the person won’t pocket the money for themselves.

Information- The Key to Economics

silhouette-1632912_1920.jpg

Let’s start with a defining statement; what we don’t know can hurt us. Economists study how we get information and how we use such information. They also study how we make decisions when we have incomplete information. There are many scenarios when rational individuals are forced to make decisions with incomplete information, or when one party knows more than the other. 


Consider a firm interviewing two recent Oxford graduates for a job, both are equally qualified and the only difference is that one is male and the other female. Rationally the firm, considering it is profit maximizing, would hire the man. The firm has no prior information about the family planning of the candidates, but can infer that women will bear the majority of the child bearing duties. Both candidates are likely to start a family in the near future, but only the female will take maternity leave; and more importantly may not return to work after having the child, imposing a cost on the firm.


However none of this is certain, the man might dream of staying at home and taking care of his 3 kids; and equally the female might have decided not to have children. But these aren’t the likely scenarios. The female candidate is still at a disadvantage. This isn’t fair but the firm’s logic makes sense, it is rational to discriminate. But the whole idea of discrimination is that it’s usually irrational. A patient, who refuses to see a black doctor purely because he’s black, is stupid, and so are firms who pass up employing well skilled foreigners just to employ less qualified white people. 


From an information point of view, there are many insights to this problem. Firms aren’t the only villains, when a women decided to take paid maternity leave and then not come back to work, she imposes a cost on the company. More importantly, they impose a cost on other women as firms are more likely to discriminate against young women. Of course this can easily be fixed, make the maternity package refundable, meaning you can only keep it if you come back to work. 


When the asymmetry of information becomes too large, whole markets can break down. The Market for Lemons is a term coined by a Nobel laureate, George Akerlof. He used the example of second-hand car markets to make his main point. The seller of the car obviously knows more about the car than the buyer. Using this idea, used-car buyers anticipate hidden problems because car owners are less likely to sell their car if they are happy with their vehicle.

The buyers demand a discount because they anticipate a problem, but once discounts are built into the market, owners of high-quality cars are less likely to sell them. This idea of Market of Lemons can also be used in healthcare, where the doctor has more information about your current life than you do. This asymmetry of information creates a massive problem, especially in America where healthcare is privatized. The patient who doesn’t pay the bill, demands as much care as possible; the insurance company maximizes profits by paying for as little care as possible; and it is very expensive for both the firm and patient to prove the right course of treatment. 


But things change when you look at long term health; you know more about your long-term health than insurance companies do. You know if you lead a healthy lifestyle, whether or not you smoke; and whether or not you exercise regularly. This information advantage can wreak havoc in the health insurance market. Insurance companies calculate the average health cost for a 50 year man let’s say, and come to the figure of $1000 a year, so they charge $1100 in order to make profit. This $1100 figure is very bad deal for the healthiest 50 year old, but a brilliant deal for 50 year old smoker with a family history of heart disease. Therefore the healthiest guys are likely to opt out, and therefore the firm revaluates the market and now charges $1300.

At this price the next healthiest guys are likely to opt out, and once again the unhealthiest males will happily comply. This carries on until the market inevitably fails. Obviously this doesn’t happen as insurance companies sell their packages in large numbers to other firms who sign a contract to cover their employees. 


This begs the question, how much information is too much information? With one strand of your hair or a swab of your saliva, it is possible to determine what diseases you have and what diseases you are likely to develop later on in your life. And if this genetic information is passed on to insurance firms then it means it becomes near impossible for those who need cover the most, to get it. The people who need health insurance the most are those who are least likely to get it.

Similarly, if companies are forbidden from gathering such information, they will be crushed by adverse selection. Individuals likely to get sick will load up on generous policies.
All of this concludes to the point that economic decisions are based around information, and too little information can be as devastating as too much information. Information is the key to all our decisions.