On July 8, 2018, during his Fourth Enlightenment Salon, Gennady Stolyarov II, Chairman of the U.S. Transhumanist Party, invited John Murrieta, Bobby Ridge, and Dr. Bill Andrews for an extensive discussion about transhumanist advocacy, science, health, politics, and related subjects.
Topics discussed during this installment include the following:
• What is the desired role of artificial intelligence in politics?
• Are democracy and transhumanism compatible?
• What are the ways in which voting and political decision-making can be improved relative to today’s disastrous two-party system?
• What are the policy implications of the development of artificial intelligence and its impact on the economy?
• What are the areas of life that need to be separated and protected from politics altogether?
Join the U.S. Transhumanist Party for free, no matter where you reside by filling out an application form that takes less than a minute. Members will also receive a link to a free compilation of Tips for Advancing a Brighter Future, providing insights from the U.S. Transhumanist Party’s Advisors and Officers on some of what you can do as an individual do to improve the world and bring it closer to the kind of future we wish to see.
How Not to Fall for the Sunk-Cost Fallacy – Article by T. Norman Van Cott
My wife and I frequently vacation near Asheville, North Carolina. Perhaps it’s the economist in me, but an interesting spot that I visit is the Western North Carolina Farmers’ Market. The WNC market is large (36 acres) with vendors selling every seasonal fruit and vegetable item you can imagine. Georgia and South Carolina peaches are always a highlight. Therein lies the basis for a teachable moment in economics.
While returning to Indiana one year, we decided to stop at the market to buy peaches for ourselves and friends. Going west on I-40, we exited for the market. Turning left, we took the bridge over I-40 toward our intended exit. Since the on-ramp for I-40 east and the entrance to the market are not that far apart, we accidentally missed our exit. That was about a 6 mile mistake for me. Unavoidable costs should not figure in the decision about whether to pursue peaches.
By the time we had gotten back to the exit for the WNC market, the question arose whether we should (try again to) buy peaches. I pointed out to my wife that had we known the first time that getting to the peaches was going to entail an additional 6 or so miles of driving, we might not have ever tried to stop.
However, the gasoline, traffic delay and self-incriminating frustration associated with the 6 mile mistake were what economists call “sunk costs.” That is, there was no way to avoid them at that point. Being unavoidable means they should not figure in the decision about whether to pursue peaches. The only costs that matter at that point are the costs of exiting a second time, not both times. So we exited, bought peaches, and continued on our way.
In retrospect, the net benefits of the peaches were less than what initially motivated us to try to buy them. The net benefits could actually have been negative, but had we not exited the second time, the loss would have been greater!
Let’s consider another example. Living in rural Indiana, I’ve heard farmers complain at harvest time about how the price of corn and soybeans has fallen so much during the summer. Seeing as they’re going to lose money for the year, “why even harvest” is the lament of some. This is bad thinking. At harvest time many of the costs associated with their crops are “sunk.” That is, the cost of the seed, pesticides, herbicides, fuel, etc. associated with getting to harvest time has already been incurred. Nothing can be done to get that investment back so it should be ignored. The only costs that matter at harvest time are the costs of harvesting itself. The only issue is whether lower prices will cover these costs.
When it comes to tax time those costs, previously labeled sunk at harvest time, suddenly become important in figuring farmers’ taxable income. The accountant is going to want to know them. Moreover, the IRS is going to be interested in their accuracy.
The following spring yields yet another issue. Those seeds, pesticides, herbicides, and fuel costs that didn’t matter last fall now matter, and not just for tax reasons. With planting not yet started, these costs are no longer sunk because they have yet to be incurred. If expectations are that the coming fall is to be a repeat of the previous fall, the farmers will be planting something different than corn and soybeans in the coming spring.
Sunk Costs Might Cost You a Championship
One final example. As a sports fan I have long noted the gargantuan salaries with multi-year, guaranteed contracts for professional baseball and basketball players. What’s interesting is the responses of team owners and general managers when “their” players perform below expectations. More often than not the owner or general managers will say something like “this guy’s contract means we’re paying him umpteen thousands of dollars for this season, so we have to play him to get our investment back.” Another case of bad thinking. Don’t put a bad player in the game just because you paid for them.
The player’s salary for the duration of his contract is a sunk cost. It has to be paid regardless of whether the player plays; it therefore shouldn’t figure in the decision about how much play time needs to be utilized from the player. What matters at this point is whether you can find somebody who can play better. If your favorite team(s) have owners and general managers who think sunk costs matter, I recommend you switch your allegiances.
I’ll admit that ignoring sunk costs is difficult to do. It seems like people have an innate desire to include them in their business and household decisions. But doing so can result in less than optimal decisions, which can include not being able to enjoy those large, juicy Georgia and South Carolina peaches.
T. Norman Van Cott, professor of economics, received his Ph.D. from the University of Washington in 1969. Before joining Ball State in 1977, he taught at University of New Mexico (1968-1972) and West Georgia College (1972-1977). He was the department chairperson from 1985 to 1999. His fields of interest include microeconomic theory, public finance, and international economics. Van Cott’s current research is the economics of constitutions.
I heard it again from this year’s commencement speaker: the common mistake of thinking economics is just about business and making money. I know I’m not the only economics teacher who every year has to disabuse his students (and many of his own colleagues from other disciplines) of that same error.
Economics is not business administration or accounting. Economics is a science that studies how people interact when the means at their disposal are scarce in relation to their ends. That includes business, of course, but a whole lot more as well.
Where Does That Notion Come From?
Well, for starters, perhaps from one of the greatest economists in history, Alfred Marshall. He opens his highly influential textbook, first published in 1890, with this statement:
“Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.” (Emphasis added)
This definition more or less prevailed until 1932, when another British economist, Lionel Robbins, defined economic science as being concerned with an aspect of all human action insofar as it involves making choices, not with a part of individual action. Economics, in other words, is the science of choice. Its starting point is not the “material requisites of wellbeing” but a person’s subjective valuation of her circumstances. Ludwig von Mises got it, which is why he called his magnum opus, simply, Human Action.
Similarly, Libertarianism Isn’t Pro-Business
An equally common mistake is to think that supporters of the free market are “pro-business” and favor so-called crony capitalism. But a consistent free-market supporter is neither pro-business nor anti-business, pro-labor nor anti-labor. A free market to us is what happens when you safeguard private property, free association, and consistent governance and then just leave people alone.
Part of the misunderstanding here might stem from the term “free market” itself. Since people tend to associate markets with buying and selling, jobs, and making (and losing) money, it’s perhaps understandable that they would think that advocates of the free market must be concerned mainly about business-related stuff: profits and losses, efficiency, and creating and marketing new products.
Indeed, I’ve met quite a few who claim to favor “free-market capitalism” merely because they believe in making as much money as possible in their lifetimes. It’s not surprising that many of these folks do tend to be pro-business and supporters of crony capitalism. I want to ask them not to be on my side.
Connotations aside, the free market encompasses far more than the stuff of business or a money-making scheme. Yes, it does include the essentials of private property, free association, and stable governance. But a dynamic market process that generates widespread material prosperity and promotes the pursuit of happiness would not be possible if it were based solely on the relentless pursuit of one’s narrow self-interest. Markets would not have gotten as far as they have today (with per-capita GDP up more than fiftyfold since 1700) if people didn’t also follow norms of honesty and fair play, trust and reciprocity. Such norms are without question partly the result of self-interest; few would trade with us if we weren’t honest and fair. But, as Adam Smith taught us, these norms also arise in large measure from a sense of sympathy, of fellow-feeling and fairness, that comes from our ability to see others as we see ourselves, and vice versa. This is why in most contexts I usually prefer the term “free society” to “free market.”
But I think one good reason the association between business on the one hand and economics and classical liberalism on the other has been so persistent is that business and the free society arose together. That is, the liberal idea—that certain fundamental individual rights exist prior to and apart from the State—sparked one of the most momentous social changes in history: the commercial revolution and the emergence of the modern urban middle class.
The triumph of liberty, of personal freedom, unleashed the creative potential of people, who found expression in art, religion, literature, but most of all—or at least most visibly—in the Marshallian “ordinary business of life.” The changes that have taken place in the past 500 years—scientific revolutions, religious reformations, political upheavals, artistic rebirths—were driven by the same human propensities as the commercial revolution and fueled by the wealth it produced. Indeed, the social and political changes of the past century—for women, workers, and minorities—would not have been possible without the entrepreneurial pressures of competition and innovation that forced radical changes in conventional thinking and socially conservative attitudes.
Tradition’s Worst Enemy
In short, business is the most dynamic social institution known to mankind. The critical and competitive attitudes that enable business to flourish erode custom and break old ties even as they foster new ones. The products of business tend to offend people whose sensibilities were refined by generations of tradition. The free market is tradition’s worst enemy.
Business has become part of the default mode of modern society. We take it for granted. We don’t realize what a radical, subversive force it is, to the point where it sounds strange to say so. But try to imagine a world without businesses and commerce. A world like the Dark Ages of, say ninth century Western Europe: static, grindingly poor, strictly hierarchical, socially intolerant, and, apart from the occasional battle or beheading, boring like you wouldn’t believe.
So, while it’s still a mistake to think economics and classical liberalism are somehow about studying and promoting business, maybe at a deeper level it’s not such a bad one to make after all. Business is subversive.
Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.