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Applying sub-Dunbar thinking to super-Dunbar level problems
One common pattern of argument you often see from people who have not been doing too well in life is that they often blame rich/powerful interests for why they have not been successful, or alternatively why a certain social institution does not seem to work in the best interests of all of society. Their thinking is that to fix the problem, all we need to do is bring these rich/powerful people to heel. The problem according to such people is that fundamentally these small interest groups are disproportionately sucking up value from society and to fix this, they need to be punished.
The quintessential example I can think of is the problem with rising rents here in the UK. Rents have been going up faster than wages due to decades of underbuilding and general NIMBYism. Things are not quite as bad as say Ireland or Berlin (thankfully we've managed to not fall for the populist poison apple of rent control) but they're still becoming quite the issue with ordinary couples in London spending close to 40% of their take home pay on just shelter.
Recent regulations putting additional burden on landlords and making it harder for them to generate a profit (e.g. energy rating requirements and the removal of mortgage interest deduction from taxes) have led to them selling, further reducing supply more than demand goes down (renters who buy tend to buy bigger than what they were renting, thus reducing the total amount of supply in aggregate, e.g. a couple living in a 1 bed rented apartment may buy a 2 bed one, thereby reducing rental demand by 1 room but supply by 2 rooms, leading to a net loss of 1 room) which then pushes up prices even further.
This has gotten to the point where there are now over 20 prospective tenants competing over each property, which naturally leads to people having to bid over the landlord's asking price/paying months of rent in advance/submitting references if they want to actually get the place for themselves. This has lead to cries that landlords are "exploiting" poor tenants who have nowhere else to go and that they are capital-B Bad People who society needs to give a stern scolding to so that they go back to acting in pro-social ways.
If you were to point out that the current situation is in part caused by society making it harder to be a profitable landlord and that the correct remedy is to make things easier for landlords to make a profit (the real correct remedy is to build more, but good luck doing that in NIMBYland) that standard refrain is that the landlords are already doing far better on average than their tenants, so why should society do even more to help them out? Indeed, they say, we should be playing the world's smallest violin for such hard done up landlords who have hundreds of thousands of pounds to their name. No, what is happening here is that Landlords are capturing a disproportionately high percentage of the fruits of the labour of ordinary tenants (true, compared to historical values), and the solution is to do something that prevents so much of the hard earned money of your average Joe ending up in their hands, ergo Rent Control.
This type of thinking is something that actually works pretty well when we're dealing with small groups of up to 250ish not very technologically advanced people you couldn't just easily get up and leave for a different one like those humans spent most of their evolutionary history in. In such a group it is very well possible to use social shaming and exclusion to ensure a more balanced distribution of resources instead of having a few people hog it all. The lack of advanced technology means that there are no large economies of scale to the group as a whole (and thus eventually you) from having resources concentrated in a few hotspots rather than being more widely spread out. Thus in a small, sub Dunbar's number sized group, ostracism and gossip about how someone is behaving selfishly is the correct course of action to take for the betterment of everyone.
Unfortunately it fails catastrophically when applied to our modern society. It doesn't matter one bit that landlords are richer than tenants for why the current rental market in the UK is as bad as it is. Every single property could be owned by Elon Musk, right now the richest man in the world, and if he was selling off his portfolio because it was no longer profitable the situation would be just as bleak for renters (no more, no less) as it is right now with many disparate landlords independently coming to the same conclusion. Equally they could all be owned by a mutual fund investing the life savings of the poorest half of the planet and if that fund was leaving the rental market due to poor returns it would cause rents to rise just as much as they are doing now. The outcomes for the tenants are the exact same in each of the three cases.
The idea of shaming and making life harder for the people who are disproportionately capturing the economic surplus in an area to shame them into being more altruistic and thus improve outcomes for all of society just does not work in environments where people have a lot more freedom of association than you would get in a typical pre-industrial society. As we see in the example above, that can often be quite counterproductive.
The correct way to fix the issue in our large, super-Dunbar sized societies is the mirror opposite of the sub-Dunbar solution, namely we need to make it easier for landlords to make a profit so they enter the market (hopefully through building new units, but even switching a house form owner-occupied to "for rent" helps relieve the pressure on rents) and increase supply. The correct metric to look at here if you care about the tenants doing well is not how badly the landlords are doing, of the difference in how much value the landlords get vs the tenants from renting out their units, but quite simply "how much value are the tenants getting for what they pay" with zero reference to the sum total welfare of the landlords. And the way to increase tenant welfare? Increase rental supply in the area that people want to rent so there is competition amongst landlords and tenants are able to command more market power than the mere morsel they have today.
Another example of where sub-Dunbar level thinking fails in modern society can be seen in funding for technological advancement. Modern research and development has large capital costs, which requires large pockets of concentrated capital to progress. In a smallish society of 250 people where nobody can really get away from the others, if one of the members has a large windfall it makes total sense for the members of the society to want its fruits to be spread out for their own benefit.
Imagine a world where 250 people each have $2,000, but one person suddenly wins a lottery worth $1,000,000,000 (and gets access to goods worth that much, so it's not like the extra cash causes massive demand pull inflation). As a non lottery-winner, it is in your interest to agitate for the money to be distributed equally amongst everyone, giving everyone $4,000,000 rather than letting the winner keep it, even if they protest that they intend to use the money to fund the development of a drug which will add a year onto everyone's life expectancy (most people will take $4M over 1 QALY). Plus, if your society is not technologically advanced, the chances of that drug being successfully developed in the first place are extremely low, even if all the money is spent finding it. It makes complete sense to redistribute the money, the lottery winner will be pretty unhappy about it, but who cares about 1 person vs 249 and anyways that person's survival is strongly tied to the group's success, and he can't just take his money and run elsewhere.
On the other hand if instead of 250 people, your society has modern day technology and consists of 1 billion people each having $60,000 and someone comes into $1,000,000,000 and promises to develop a +1 QALY drug, it makes total sense to let them keep the money. Even if you took it all and redistributed it amongst everyone that's only $1 per person, which is worth a lot less than an extra QALY (compare to the small society case where everyone got $4M instead). Also the existence of modern technology makes it more likely they'll be able to find and manufacture the drug in the first place.
Indeed here is a case where even the famous Egalitarian philosopher John Rawls would have been in favour of the inequality, as his difference principle permits inequalities where their existence is beneficial to the worst off in society as it is here: for a non winner $60,000 + new drug is a better world than $60,001 but no new drug (a crowdfunding effort to raise money to publicly develop the drug isn't going to raise an extra $1 billion if everyone in society has $60,001 vs $60,000; you really need to have the concentration of wealth in the hands of an actor who's willing to embark on this project). The correct course of action for everyone in the super-Dunbar sized society is to let the lottery winner keep his money, the exact opposite of what they should do in the sub-Dunbar sized society.
Given all this, why is it still the case that many people in our modern world are big proponents of sub-Dunbar level thinking? After all, they would all agree with you that we are quite technologically advanced and no longer live in small societies where you can know everyone else who has a significant influence on your life. For most of human history, sub-Dunbar type thinking would have yielded better results for you and yours instead of the opposite, so it sort of makes sense why deep down we default to it so much, but equally for most of human history violence was extremely common and today we're by far the most peaceful we've ever been as a species.
I would say that this aberration is due to a pernicious effect of modern communications technology. We humans have an availability heuristic where we categorize how common something is in the world based on how often we see it. This works quite well when we're deciding between whether there are more yellow berries or red berries in a valley when the last few times we went foraging we saw around twice as many red berries than yellow ones, but it works a lot less well when modern communications deliberately amplifies rare events (after all, you're a lot more likely to hear "man bites dog" on the news than "dog bites man", despite the latter being much more frequent - ironically this is not true at the moment here in the UK due to the XL Bully dogs rampaging around, but the general idea is valid).
As a result of this amplification, modern day humans who are bombarded with media stories of the rich and powerful think deep down in their subconscious that such people are a lot more common than they actually are, and even worse, that such people are in the same 250ish Dunbar "tribe" as themselves (because the frequent updates about such people make one think these are genuine interactions between them and ourselves), in which case it makes complete sense for why they default to their instinctual, limbic thought process and feel that the way to make the modern world a better place for everyone is very similar to the ways that made life better for antediluvian man.
I don't think either of your examples work. The problem of sub-Dunbar thinking certainly exists, but when the stakes are as high as they are in housing or healthcare, actually-existing democracies make better decisions than pure monkey politics would suggest. In both cases, I am happy to defend the policies we are seeing as sane way of pursuing the goals of the median voter (which I do not share in the case of housing). This is an effortpost on the pathologies of UK housing policy that I am structuring as a fisking of your post in order to make it quicker to write rather than because I think your post is bad - I suspect we agree on all the substantive issues and the double crux is about the motivations of our political opponents.
UK housing policy is a simple problem (policy-induced scarcity) with a simple solution (build more houses) that is politically difficult to implement. The various deckchair-rearranging policies to "fix" the housing market while retaining an artificial scarcity of housing are mostly supported by people who know exactly what they are doing, and are likely to succeed at their stated goals within the limits of what is possible by rearranging deckchairs.
The problem is MUCH less bad in Berlin than in London - the whining is worse in Berlin because Berliners got used to low rents in prime central neighborhoods during the period when the city was recovering from the Cold-War era partition, but rents in Berlin are about half London and incomes at a comparable skill level are higher. There was a short period when the legal market didn't clear due to rent controls (a quick Google suggests that people willing to pay illegal key money had no trouble finding flats) but they were struck down by the German federal courts.
These rules were brought in by the Conservative government, and the stated purpose was to encourage homeownership at the margin by forcing amateur landlords to sell out to first-time buyers, not to make life easier for marginal tenants. You can say that encouraging homeownership at this margin is a bad idea because homeowners are more likely to under-occupy (FWIW, I disagree with you), but the consequences of this change were thoroughly intended, and popular (partly because the marginal tenants losing out are disproportionately likely to be non-voting immigrants).
The UK does not have rent control. If the market isn't clearing, then rents need to rise further until it does. The fact that oversubscribed tenancies are allocated by sealed bids (rather than paperwork races) suggests this is happening.
Then you would be wrong, as you yourself acknowledge in the next sentence.
CORRECT. I guessed you were basically sound. If we don't allow developers to build the homes that there is demand for (and that could be built profitably), then millions of prospective Londoners, who have a reasonable want to live in London, will have to go away. Once you let the NIMBYs win, that becomes a matter of arithmetic and not a policy choice. Neither the free market nor the welfare state can alleviate the pain, because at the relevant margin the pain needs to be bad enough to make people leave. Even Gavin Newsome has started to get this - the fact that the UK in general and Sadiq Khan in particular don't is scary for people who have to live here.
That passive investment in land is a form of social parasitism is Econ 101, going back to David Ricardo. We tolerate it because (1) it is too hard to distinguish passive investors in land from passive investors in the structures built on the land, who are socially valuable in the same way as other capitalists, and (2) a lot of them are homeowning boomers, who are ludicrously entitled and vote. In England this is explicit - page 1 of every English Land Law text says that English Land Law is based on the doctrine of tenure and the doctrine of estates. The doctrine of tenure is that William the Conqueror stole all the land in England in 1066, King Charles still owns it as William's heir, and whatever rights you may have in your "own" land are based on stolen property.
Apart from the Corbynite usual suspects, I am not seeing a powerful faction in the UK calling for Berlin-style rent controls, largely because there is no powerful faction in British politics who wants a world where people with a long-term stable address rent from private sector landlords. We don't want the landlords to suffer - we want them to stop landlording and invest in new assets rather than bidding up the price of existing ones. The anti-landlord faction of the Conservatives thinks that people with long-term stable addresses should be homeowners and wants to tax landlords until they are forced to sell out to first-time buyers. The dominant faction of the Labour party thinks that poor people with long-term stable addresses should live in social housing, but that allowing an overpriced spot market to exist for the niche of people who need it is, on balance, a good thing (Sadiq Khan did call for rent controls in a vague non-committal way, but he was slapped down by Keir Starmer. The underlying politics of this is that the post-WW2 housing policy was built around social housing for the working class and homeownership for the middle class, to the point where even after the Thatcher-era selloffs the UK has an unusually high percentage of social housing (see p2 of this OECD report), so the political machines running off long-term low-income tenant voters are focussed on social housing and not rent control.
Without the bold word, this is obviously correct. But the supply issue is the supply of housing, not rental housing. Given the way the UK housing market works (and in particular the lack of dedicated rental buildings where a single private landlord owns the whole multifamily building), there is a single market for housing services in which private renting and mortgaged ownership are effectively different financing options. Because of undersupply, the market for housing is a brutal zero-sum competition which someone has to lose. If policy favours mortgaged ownership as the way of financing the purchase of housing, then the competition is rigged in favour of people with stable jobs, good credit scores and parents able to put down deposits for them. If policy favours private renting, then the competition is rigged in favour of people able and willing to live with multiple employed adults per bedroom in order to cover the rent. Which of these groups of people you prefer is a far stronger motivator for which housing policy you support than whether you hate bankers or landlords more (FWIW, the sub-Dunbar idiotarian left seem to hate developers more than either).
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You seem to be assuming your conclusion here. If what you state above is true, the rest of your argument may follow, but it seems to be a classic case of applying economic theory and then assuming that everyone is a moron for not going along with your conclusions, rather than disagreeing with your analysis.
From where I’m standing, houses have some fairly unique attributes: the supply is zero-sum in the UK as you note, everyone needs one (or a part of one, I’m including flats and things), realistically nobody needs more than one.
It is not obvious to me that making it very difficult to be a landlord would make it harder to obtain shelter. A plausible consequence of increased tax would be for landlords to sell up and the available housing stock to rise, thus lowering house prices.
As it is, we have a situation where it is entirely viable (though becoming less so) to get somebody else to pay your mortgage for you, and property serves as a useful asset for native or foreign oligarchs to store wealth. I’m not sure that this is innately desirable.
This isn’t an ‘eat the rich’ argument, or an argument for rent control. I’m just dubious about facilitating the treatment of shelter as an asset class and would like to hear your reasoning on the matter.
The whole point of the post is discussing why people disagree with one of the most agreed upon concepts (rent control is bad) in economics...
Perhaps I phrased it too harshly with respect to the OP, I didn’t mean to. My hypothesis is that disagreement is not down to Dunbar’s number but down to a widespread suspicion that most economic theory is bunk. Modern monetary theory does actually lead to inflation, outsourcing your manufacturing to China is not a free win and immigration reduces wages. So when economics say ‘slaving to pay off somebody else’s mortgage is actually good for you’ the response is not supine acceptance but suspicion.
I’m also interested in discussing the case for taxing landlords on its merits, since I have a stake in both sides of the divide and the topic interests me.
Which stems from? That would be an actual response to OP's post.
To give three examples where economists sagely assured us that the obvious conclusions were wrong and then events (global inflation, hollowing out of American manufacturing, the big rise in worker bargaining power when immigrants couldn’t be brought over during Covid) made it clear that they were wrong. I’m not saying that all economic theory is wrong, any more than all psychology is wrong, but I don’t see how you can look at the history of failed predictions and see it as anything more than a very flawed science.
MMT does not fit with the other two, because it was explicitly arguing against the economic consensus, and the economic consensus ended up being correct.
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This is explicitly what the OP said was happening several times during their post, except according to them it makes the shortage worse because the former renters buy more rooms than they were previously renting.
This may lower housing prices, but it seems like it would, paradoxically, raise rental prices for those that can't buy for some reason (don't make enough money/make money irregularly, can't get a loan, lack of documentation, need to move frequently, etc).
But each person who buys a house is taken out of the pool of would-be renters, so how is the shortage worse? The number of houses is the same, the number of people living in them is the same.
How are these people better off renting rather than paying off a mortgage? If they don’t have money or documents they’re screwed anyway. A certain number of people are not going to be able to manage in either system and will either be homeless or in government housing. I don’t see how that varies between our two scenarios.
The final about needing to move house regularly is a concern for me too. I speculate that a bigger market with more buyers and sellers might make things easier in this regard but I can’t know for sure. And at least these people would be able to get a property when they settle down rather than have spent a lifetime subsidising other people’s.
This argument presented is these people are buying formerly rented units, so those units are now forever denied to future renters. And also people occupy more square feet per person when buying than renting. And NIMBYism prevents significant amounts of new units, so we aren't going to build to make up for the loss.
Things just get a bit worse for renters. They get to fight over fewer rented square feet of living space.
Thanks, that’s an interesting nuance that I missed. It seems to me like an unfortunate consequence of large mortgages and housing-as-assets in that people usually buy houses as a conscious investment now and take out large amounts of money to do so, thus they get as much as they think they can get away with. Houses for sale also tend to be built differently from rentals because people assume that owner occupiers are starting a family.
A larger, more flexible market with less borrowed money might reduce this problem. However, I concede that’s a self-serving assertion and I can’t back it up.
This argument only works if the majority of people are renters by choice, ie that the pool of buyers and the pool of renters are inherently separate. I don’t think they are. They appear to be because of financial pressure on house buying. If you assume that would be buyers and would be renters are mostly the same people, a house being bought by someone is no different from a house that is being rented by someone. It’s removed from the pot either way. If anything, it’s an argument for punishing people who buy too much, which is the underlying logic behind most anti-landlord resentment.
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Maybe England is different but I would expect people having more rooms to result in individual rooms for rent, which trades off against demand for two bedroom and studio apartments.
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This is seen in regard to blaming the FDA and peer review for impeding progress of new ideas and treatments. The FDA does not impede progress and peer review does not stop news ideas. Treatments that fail the FDA are not denied because of bureaucracy, but because they simply do not work, not because there is some conspiracy by rich people, drug companies, or governments to deny treatments. That is what a clinical trial does. But very few experimental drugs yield a successful treatment, especially for cancer. it does not even make business sense for a drug company to 'horde' treatments given that the government is paying for it anyway under Medicare or Medicaid. Regarding peer review, the process is not to block new ideas but block things which are unscientific to begin with, poor fit for the journal, or not written in a logically coherent way.
The denial of a drug isn’t the problem. The problem is the decades long process of very expensive, repetitive testing that can often add billions of dollars in research costs and delay the deployment of the drug. There’s also the issue of the drugs that don’t get released because the expected costs of bringing them to market isn’t that much less than the profit they can get for the drug, either because the disease is too rare to profitability treat, or because the disease is mild enough that patients won’t buy the drug if it costs too much.
If the disease is rare then the drug becomes absurdly expensive and covered by Medicaid .
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I feel like you could have chosen literally any other example and had a more compelling argument, particularly given our history here. Reverse Voxsplaining: Drugs vs. Chairs, Did A Melatonin Patent Inspire Current Dose Confusion?, etc, etc, etc. Sometimes high costs are because it takes billions of dollars to sift through millions of candidate chemicals and determine their effects on a noisy sample of thousands of people. Sometimes the high costs are because "Epipen" is easier to write than "Epinephrine Autoinjector".
Gleevec was approved to treat acute leukemia and was a major breakthrough. I would say that was progress. The vast majority of trials yield no improvement or even make the patient worse. yeah, regulation imposes a cost, but so does actually developing the drugs. There needs to be some firewall against useless or harmless treatments. A generic EpiPen was approved in 2018 https://www.fda.gov/news-events/press-announcements/fda-approves-first-generic-version-epipen
Okay? The FDA does not perfectly impede progress isn't a contentious claim. How about bromantane from my last link (An Iron Curtain Has Descended Upon Psychopharmacology):
Does that count as impeding progress?
It only took them nine years! Congratulations to Teva Pharmaceuticals on their achievement.
I suppose it also comes down to the baseline we're discussing. Does the FDA impede progress relative to what, and by how much?
I think that the FDA impedes progress relative to a theoretical-within-punishing-the-elites pharmaceutical regulator, and the difference is enough to make a material impact on a decent fraction of people.
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This would be a better argument if we didn't have plenty of evidence of peer review being used to sabotage new ideas for all manner of reasons from moneyed interests to petty university politics.
Besides, the idea that the current publishing process' point is to root out unscientific publications is both ahistorical (this is not how it came about) and practically risible (it has not in fact succeeded in doing so, and has produced more unreplicated garbage than ever).
There is no general rule. Institutions aren't inherently trustworthy or untrustworthy. The men that make them are probably much more important than the stories they tell about themselves.
you'd have to consider the counterfactual of no peer review though... lots more papers disproving Einstein, proving/disproving the Riemann hypothesis, etc. based on demonstrably wrong arguments . Peer review, as imperfect as it is, is better than the alternative. One can argue "let the community decide" in which case the communtiy is flooded with a deluge of unscientific junk and only a finite amount of time to process it.
The thing is, we do have the counterfactual, which is what happened before the reification of scientific publishing and what still happens in novel disciplines: it was a free for all with all manner of cranks and yet the quality of scholarship people actually cared about wasn't worse, on the contrary. Nor indeed was it any harder to parse than what journals have now become where most of what is published is garbage and even the most prestigious ones are not what they used to be.
I hint at it in my previous post but the point of journals and peer review was never originally to credential knowledge production (which is actually anathema to the scientific method) but to solve a logistical problem for institutions that had to rely on paper and its very narrow and expensive bandwidth. A problem that no longer actually exists in any meaningful sense.
If you snapped your fingers and took all of Elsevier out of existence tomorrow, I'd wager the lives of scientists would actually become easier by a large margin. And I submit as evidence the fact that most scientists in most disciplines actively circumvent copyright laws on the daily.
I also submit to you that it is in fact the credentialist approach that produces the greater incentive for fraud as the rewards of State funding are much easier to game when they are behind a list of bureaucratic checkboxes than behind a genuine need or the true esteem of one's peers.
time is a finite resource. so is manpower. people who read journals do not want to have to sift through piles of crud. peer review is not just about saving space but about curation.
The crank ideas fell out of favor because of peer review. Otherwise we'd still be seeing papers about luminiferous aether, spontaneous generation, and perpetual motion machines. It's not so much as a 'free for all' , but that competing ideas can coexist and then one wins out as being correct and the other is discarded.
This entire line of argument is a post-hoc rationalization. Again this isn't actually how peer review came about, this is the excuse to keep it going, but regardless of the merits of peer review, that excuse is nonsense, because the process has proven quite unable to filter out garbage science.
What it does do is prevent heterodox publication, which is completely different
What's you're describing here is paradigmatization as conceptualized by Kuhn, the process in which a discipline becomes more structured and predictable by producing more incremental work based on an assumed theory or framework until it becomes so untenable that some crank show it all to be wrong and the process begins anew.
Now if you want to say that this process is necessary for science to move along, that's fine, and I'll agree. But if you want to say that increasing the level of control on publication to exclude the bad stuff is how you get new discoveries then that's just plainly wrong. It's quite the opposite actually. Scientific revolutions come from the margins.
And in that light, it makes attempts at sorting out the cranks from the serious people by establishing some bureaucratic authority and process quite futile.
Yeah, maybe if we'd tightened it a little more we would even not have to see papers about semiconductors, aerodynes, and other such discredited impossible things. What a great win for humanity that would have been.
Again, to bring this back to my main point, peer review , contrary to popular belief here, does not suppress new or fringe ideas. The only criteria is the ideas must follow some guidelines, like be mathematically or logically consistent. For example, Alcubierre Miguel's 1994 paper about warp drives, which is speculative even by the standards of theoretical physics, was published in a peer reviewed journal, and the idea has now gained mainstream attention from that original publication. Same for ADs-CFT, in 1997. or theories in which Newtonian physics is modified.
Speculative and heterodox are different concepts.
But I mean, you're not going to convince me something I have witnessed first hand doesn't exist.
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For the same reason humans have most of our cognitive blind spots: humans brains spent 99%+ evolving in Dubar-sized environment. Dub Dunbar level thinking is the cognitive status quo. What is amazing is that we have built systems and institutions that - far more often than not - don't employ disastrous rent control policies.
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To add a bit of a Jungian lense, I would say the problem is that the vast majority of people aren't very capable of rational abstraction, and instead understand the world through stories. I include myself and many other 'wordcels' in this category as well. To truly grasp large numbers we're working with is the province of autists, savants and mathematicians.
Unfortunately there simply hasn't been enough time for stories of large societies to reach archetypal status. With focus, dedication, a propensity for rationality and a high starting point of intellect one can bootstrap oneself into a sort of hodge-podged understanding of what is required at these large societal levels. But the idea that the everyday person could get to even a basic understanding is ridiculous.
The terrifying truth of the modern world, which most don't dare to speak out loud, is that there are only a handful of humans on Earth who can even glimpse the full complexity of human society. Not to mention the world itself. It's the old Redditism, "even adults don't know what they're doing, lol!" writ large, and without the ironic and detached humor.
I'd agree that modern communications technology makes this problem far, far worse as well.
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Uneducated, low IQ people don’t understand economics. This isn’t news. Nor is it news that they’re disproportionately likely to be poor(and in fact, the few very successful individuals who are poorly educated and low IQ are notorious for the same thought patterns). Down on their luck people tend to be more interested in looking for solutions to their problems than people who are making it(a factory maintenance supervisor in Iowa does not care about housing costs or technological dividends no matter how little he understands economics- he simply has too high of a purchasing power to give much of a damn). These solutions are often stupid, because they don’t understand economics. They would probably work better if everyone knew everyone else, true, but it’s not quite dunbars number that makes the difference, it’s trust. Ultra-Orthodox Jews manage to evade the issue with exceeding dunbars number just fine(and no, they don’t understand economics either, 115 average IQ or no- it has to be studied and they don’t).
I dunno if it's so much about being low IQ but rather laziness. Many people don't research the issues that well. They default to superficial or easy narratives as a heuristic to save time. Its like 'Paul Krugman is smart and has a Nobel Prize ,so he must be right. Ill take his word for it instead of doing further research', for example.
The IQ threshold for doing your own research, especially as a layman, is very high. There is a reason ‘do your own research’ is mostly associated with conspiracy theorists- if you aren’t 130 IQ, then researching as a layman leads you to trying to figure out which crank is lying to you less.
I mean in a lot of cases this is true, but I think that's actually a step up from simply accepting that Ibram Kendi is an authority on history and should be respected and listened to, or believing that historical Britain was a diverse and multicultural society with the demographics of modern day New York. Figuring out which crank is lying to you less is a step up from just accepting the lies of the more popular and socially acceptable cranks. Even when you start getting out of obvious horseshit like grievance studies, there are enough "studies" produced by people with commercial, social or political incentives motivating their reasoning that the various cranks actually start looking pretty reasonable.
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I think there’s a lot of cognitive biases that cause this.
First of all is the “fair” notion. The idea that life is ever supposed to be equal or that people are supposed to get roughly equal amounts of reward and that there’s some ceiling cat to appeal to when someone has “too much” which is actually in practice “has more than ME.” And really, that’s never been reality. In fact, it’s the opposite. If you’re doing more, or providing necessary services, you deserve more. But, that’s not “fair”.
Second is that people always have the wrong idea about just how much work their betters actually do. I’ve seen this when people talk about the CEO. They assume that their work is easy, that they do slacker work and go play golf. Or they assume that it doesn’t take any more intellectual capacity than they themselves have. Again, this isn’t true. Anyone who has run a business— even a small one — can tell you that the business runs your life. Your “vacation” simply means working from a beach instead of an office. Slacking off means working 80 a week instead of 100 a week. You can kiss family time and friend time goodbye unless you can work while hanging around with them.
And it requires serious smarts as well. If you’re not smart enough to understand cultural trends properly, new technologies, regulations, emerging markets, competition, and the entire operation of the business from top to bottom, then chances are you won’t actually have a business in five years. One bad marketing decision cost InBev billions. Misunderstanding digital photography killed Kodak. One reputation killing bad product can tank you. And it’s a constant thing. Technology alone moves so fast that a person who cannot understand emerging technology from day one is at a huge disadvantage. Being too slow to adapt is deadly, but so is backing the wrong technology.
Given that the first half of the OP is defending landlords, this isn't really relevant. There is an active component to landlording (finding tenants, arranging repairs, etc.) but in the UK market most landlords hire agents to do this for them (and in fact most lenders insist on some degree of professional management of rental property). Collecting land rents is the closest thing to zero-effort moneymaking there is. When most capital was agricultural land, there really was a leisure class that worked less and spent more than the rest of us - see Jane Austen. In the future when most capital is residential land, the same will probably be true - see Thomas Piketty.
Actual capitalists who invest in productive assets have to do a lot of work creating those assets and ensuring they retain their value (and hiring someone to do it for you will cost you 2-and-20 if they know what you are doing, which doesn't leave much for you). But landlording is basically having a piece of paper saying "I, Charles III, by Grace of God and by virtue of my ancestor William the Conqueror having stolen this land in 1066, will cut the head off anyone who deigns to use the land without paying you off first". You need to collect the toll, but the work that makes the land valuable (including the violence incidental to making the promise meaningful, which can get very expensive indeed) is done by Charles's government and the community that support it.
Not really, because landlords assume all of the cleanup and maintenance and repair for every unit and the common areas as well. He’s the one finding a guy to fix the leaky roof, fixing the wiring, maintaining the building, providing security, working out the landscaping, fixing the parking lot, and making sure the garbage is collected and the utilities are paid. All of the things that go into ownership is on him for however many units he owns.
This isn't actually true, at least not in the country where I live.
Incorrect, when I was renting I was liable for damage to the property. I had to threaten taking the affair to the rental tribunal when they tried to charge me for a problem I reported when I moved in.
They did not find a guy to do any of those things, the utilities were still paid by me the renter and the garbage collection is done by the local council (technically the landlord paid rates - however this cost is passed onto the renter so it doesn't actually matter).
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I do think simultaneously that being a CEO is hugely demanding in terms of mental ability and time consumption, but also there's a ton of Fisher Kingness attributed to whoever happens to have the top job and they're largely fairly interchangeable.
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I think these is some truth to this though. I agree with 'the left' that many CEOs and managers are way overpaid relative to the value they create and compared to effort or skill. Look at the horrible performance of Cathie Wood's funds or Chamath SPACs. These people are worth billions or hundreds of millions of dollars, yet for piss-poor performance and bested by buy and hold of index funds or 60/40-bond mix to show for it. These people are not often "better's" --they just had maybe better networking, better school, better luck etc. Except for maybe the CEO of tech companies, they are not necessarily that much smarter. They just took more risks, which paid off, ignoring survivorship bias.
OTOH, extremely high CEO pay is not so much about doing more work, but as an incentive to encourage others to work hard in the hope of becoming promoted.
Plain old supply and demand drives CEO pay, for the most part, not value-over-replacement.
Even sub-replacement-level CEOs require an extremely unusual skill set. Large companies are like Game of Fucking Thrones. Running one is like herding cats where one of every three animals is actually a serial killer, a thief, or a company-destroying liability risk and three out of four would sell you for a sandwich, must less a shot at your job. On top of that, you're steering (at best) half-blind in a hurricane, an earthquake, and a tornado at the same time (macro-economically speaking).
There are certainly problems, like back-scratching boards determining compensation, but I don't see obviously superior alternatives.
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Tangential nitpick because this always really grinds my gears when I see it...
The index funds versus hedge funds comparison is insanely dishonest. Warren Buffett started it decades ago and it's an argumentative sleight-of-hand.
Broad market index funds (anywhere from 100% equity allocation to the 60/40-bond mix) pretty much track "the economy" as a whole. You're betting on all of the horses. Across cap size, across sectors. If you're including bonds, then you're covering the two largest asset classes on earth. If you can stay in the market long enough and tolerate bouts of down years, you're going to do just fine because the "oh shit" scenario is literally a 20-40 year sustained depression for the United States and very probably the rest of the world. Which, if it happens, fucks everyone including hedge funds and techBros. For generations.
Hedge funds are always much more narrowly constrained in what they invest in, and they often target very specific return profiles. "We long/short large cap non-financial equities and forecast capturing 80% of broad market upside in outperformance years while avoiding draw downs of over 20% in down years, with high annual liquidity but low turnover." That's contraint-on-constraint-on-constraint that index funds don't have to deal with at all. And hedge funds call their shots in that they predict a return profile within a given timeframe and aren't allowed to take excessive risk or leverage to get there. They actually can't "bet it all on black" again and again. Simply allocating to a portfolio with too elevated risk metrics constitutes something close to a breach of contract.
Why do hedge funds do this? Because most of them are trying to appeal to institutional investors (retirement funds, university endowments, etc.) that have really specific needs for performance, risk management, and cash disbursements for every single year. If you're CALPERS and you need to - every single year - push out $10 billion of retirement cash to your members to avoid a massive class action lawsuit, you need to find a hedge fund that has a reasonable chance of delivering part of that return profile. And they have to (try to) guarantee (part) of that return no matter what the rest of the market does. If there's a bad year, neither the hedge fund nor CALPERS can say, "Hey, sorry, we'll just wait a couple years to get back even." Nope, those retirees want their cash on the first of the month no matter what - and they probably have the legal language to back it up.
Why only part of the total return? Because no large institutional investor is allowed to give all of its money to a single fund / general partner. Diversification is always (nowadays) written into their charters. So, maybe the first chunk of money goes to the hypothetical fund above. That means that anybody else who's doing long/short in large cap non-fin equities is automatically off the list to receive another chunk of the institution's money - there's too much correlated risk. Pretty soon, you're investing in ARK Innovation because it's the only fund left who can take $100m - $1bn [:1] of capital that doesn't look like it's correlated to the rest of your portfolio.
Hedge funds are providing a very precise service at scale to a clientele that needs that precision within a time bound box. Index funds are providing general returns that track an economy over large cycles. It's pretty close to the difference between looking for a general practitioner doctor for health advice ("diet, exercise") and looking for a brain surgeon with tumor removal expertise that can also guarantee your blood pressure won't spike and your body temp won't fall too low during the surgery. Yep, that second guy probably has more dead patients on him, but that first guy has mustard on his shirt and likes to watch Mad Money in the afternoons.
[:1] Another thing people like to point to is that smaller funds often outperform their larger peers. That's because you have way more flexibility as a smaller fund and it's easier to deploy smaller amounts of capital. Big funds are a special monster because there are only so many things you can plow $1bn into and NOT move the market on your own.
The idea of the bond allocation is that bonds tend to do well relative to stocks when the economy is not doing so well, like in 2008 or 2001-2002. The problem is this failed massively in 2022.
Hmm but there have been many notable hedge fund failures of supposedly safe strategies, notably the collapse of LTCM.
"The market can remain irrational longer than you can remain solvent." That's LTCM in a nutshell.
There's no such thing as an omni-safe investment. What you have in the strategies employed by firms like LTCM are situations that, when identified, have a very high if not perfect chance of doing exactly one thing eventually.
LTCM modeled spread convergences. You can look up the mechanics on your own. The problem is that in order to take advantage of this strategy, LTCM had to pay what amounted to insurance payments until the spread did, in fact, converge. The longer that doesn't happen, the more you pay. And if you're liquid capital dries up, sucks to be you - even if you turn out to be right! Additionally, LTCM eventually succumbed to the attraction of using leverage when the spreads themselves started too narrow. Leverage amplifes both returns and losses so if the spreads stopped narrowing and widened, even just a bit, LTCM would potentially be blown up - which is what happened during the 90s Russian debt crisis.
All of this is to say that even the risk-free rate of return (most often 10yr or longer Treasury Bonds) isn't static and isn't actually risk free if you layer it with leverage, derivatives, etc.
In terms of hedge funds "calling their shots" - I didn't mean to imply hedge funds sell "safe" strategies or that they always hit their anticipated performance. This is actually one of the brutal realities of the industry - if you're a senior analyst or a portfolio manager and you miss your targets even for one year, there's a really, really good chance you will get fired and, at best, only be able to find a new job a step down from where you were. While hedge fund compensation is pretty insane, it's a lot like professional sports in that you might only make it for 3,5,10 years before being close to unemployable. A lot of blowout types tumble down to financial consulting or fair valuation opinions or just market analysis and equity research. Still (mid to high) six figure jobs, but a far cry from some of the 7/8/9 (it happens) figure payouts people see in single years.
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The quality of tech CEOs is pretty mixed too. I’ve known glorified conmen whose only skill is getting people to put money into obviously unworkable startups, sages with astounding achievements (from 30 years ago) who don’t have a clue about the area they’re trying to break into, and consultants who just sit there and brainstorm new slogans while the whole edifice degrades.
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Does the stereotypical CEO work hard? I don't doubt that small-business owners and startup CEOs work hard. But what about CEOs like the head of a big bank or an oil company, where there are profits semi-automatically coming in?
Mostly it seems to be the work of a king to me. The king doesn't work hard. But the king is the final authority, he makes decisions between war or peace, he deals with the Papacy, he arbitrates between feuding nobles, he directs that royal funds be spent on bridges or cathedrals, he creates institutions... All 'work smart' stuff rather than 'work hard' stuff. Nobody has the power to make him work hard because normally things are going well and he's the boss.
Fortune 500 CEOs aren't working bone crushing hours the way a small biz CEO might. (More on that second part later).
But, being an F500 CEO is incredibly hard.
I had the opportunity to meet and interact with one at the F500 I worked for in my mid 20s. This was a non-trivial interaction that occurred because a series of events led me to being on this big strategic thrust planning team that the CEO was half-personally overseeing. Another series of events led to a bunch of us being at the HQ on a Saturday. Right before lunch, the CEO walks into the main "war room" and literally rolls up his sleeves to help out. He was there all day. In that setting, everyone was talking with everyone at some point or another and the various "ranks" that usually created some deferential distance were not as palpable. It was easy to talk to the Big Guns, so I just sat down and started talking with the CEO.
The conversation can pretty much be summed up like this:
TollBooth: "So .... what do you actually do?"
F500 CEO: Chuckling, "I make about four decisions per year and, the rest of the time, am on call to answer questions that the board and wall street investors have. That's the easy part. I'm basically a financial psychotherapist. The first part is way harder."
TollBooth: "Why?"
F500 CEO: "Because those four decisions dictate the 16 - 20 decisions I can possibly make for the next 4 to 5 years. If I make the wrong ones this year, we, as a company, have fundamentally worse options in the out years."
TollBooth: "So, just make good decisions this year"
F500 CEO: "Well, yeah, that's the goal. But these 4 or so decisions I make rely on, without exception, massively incomplete information that I then have to use as part of a decision making model that incorporates what I think our competitors are going to do, what the market will support, and what won't cost us customers. All of those things are interdependent and you can't really say which one comes "first" in the decision making chain. It's like hitting a half dozen moving targets that are all moving in random directions - if you time it right, you can blast three of them at once, and that's a really great year. If you don't, you miss everything and it looks to outsiders like you were shooting randomly."
TollBooth: "Why are we doing this strategic thrust thingy right now?"
F500 CEO: "Because I screwed up one decision two years ago and I think I can salvage it with this. If I can't, I probably am gone 2 years from now."
I'd add one personal/emotional level consideration to this; you have to live with the uncertainty and lack of control leading up to and following making these four big decisions each year. One thing I learned in my first technical sales engineering team was that a sales process might be long, but you can sort of see it developing day to day and week to week. So, you can reduce your overall anxiety by just doing the next obvious thing in the process, even if that thing is banal (scheduling a follow up meeting, asking for a how-to guide review, whatever). A good analogy is training for a sports meet. You put in the work day in and day out, and then, all of a sudden, it's the big payoff day / week and you go out and get it (or don't). All your nervous energy along the way, however, you can divert into the training (or the development of a sales cycle in this case).
The CEO can't do that. There's no training cycle that builds up to something. It's literally four decisions made on four different days across a year. I think he could, and did, think about the decisions a lot before he made them. And I also think he probably had a team of smart people digging through a mountain of data and projections. But, like he said / I wrote above, these decisions had really incomplete information - you can't brute force your way through them even with a million spreadsheet runs. And, there isn't really a way to test and the iterate - you're calling out a new direction for the Battleship and you have to live with it until you hit the iceberg or don't. (Sorry for throwing in another unrelated metaphor)
I think the personality type that ends up as an F500 CEO definitely isn't "work like a dog 16 hours a day" but is, instead, "Be comfortable with weeks and months of utterly not knowing. Then pull the trigger." Is that hard work? You tell me.
Returning to small/medium CEOs working crazy hours. In my experience, that's 90% of the time a failure mode of a founder type CEO who can't give up micro levels of control and build the durable systems you need to scale. I've been in tech startups where the founder was very much the engineering genius type but then there came a time where the best answer was to "hire the MBAs." Everyone's life got better. Everyone made more money. The founder saw their big dream flourishing, albeit without direct control.
Great write-up, thank you. I knew a CEO of a big bank, and I think the biggest barriers to making good decisions were:
For example, there's a shareholder meeting and one of the directors tells you "Bank X used to be #5 retail bank in the country 4 years ago and now it's #8, while Bank Y, your closest competitor, grew from #6 to #3". This basically means you are already on your way out, so let's rewind the time.
There's a board meeting and your trusty advisory office has prepared a memo for you that shows that you'll soon lose your #5 spot in the ranking of retail banks. Your chief retail officer of course has a slide deck that explains that this is a temporary setback mostly driven by a big drop in car sales this year. What do you do?
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Very interesting commentary. I personally think it's 'work smart' stuff but the meaning of what you say does extend beyond anything a two-word platitude can cover.
Reminds me a little of my experience in crypto, few decisions, lots of stress, lots of waiting on events. Easy things that are difficult to do. Of course, much less money at stake.
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agree. a small business CEO is busting his or her ass off, probably way more so than the McDonald's ceo who is assured a fat pay package regardless of what happens
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They; at least, appear to work hard. I'm not sure how much value they produce; but, they try to look like they are producing value. They spend the effort on the appearance of the thing. I won't debate the actual product, because how could anyone without info into the goings on of the business make any real verdict except the one given by the stock price.
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Maybe not just a cognitive bias at this point. It's reinforced/encouraged by rights discourse which is a neat frame for any situation where you're not getting something you want. It allows/encourages obscuring the logistics of any service and the fact that the laws of economics and physics don't get suspended for anyone. Which then makes it easy to claim an injustice.
You'd think people don't actually believe-believe that but I do find it weird how many people think declaring something a human right means anything. I suppose it does, it means: it's your job to provide it for me even if it costs you (or the government's job to force you to do so).
You buy into that and someone eventually has to be to blame for why you don't have something you "deserve". The rich are always a good bet.
We do see it where fairness in the most obvious sense isn't expected: a lot of the talk around immigration seems to lean on "rights" of asylum seekers as if it resolves a single logistical issue for anyone. The entire discussion then necessarily becomes who's denying these rights.
I agree. I’ve long been skeptical of “rights” discourse because it approaches human dignity in a very narcissistic and narrow way. What you’re implying when you say you have a right is that you have a claim to something regardless of your connection to the wider society. If I have a right to food, even if I’ve done nothing or even been a net drain on society, then I still get that, I have the right to demand it through channels as provided by society. I could have destroyed the entire ability of the rest of society to eat. I’m much more in line with the idea of reciprocity especially in Confucius. The ruler owes his ministers, but those ministers owe the ruler. The teacher owes the students, but the students owe the teacher. On it goes, of course through all of human relationships.
What I think this does better than modern notions of rights is that it undercuts the narcissistic tendency to see society as a thing that’s supposed to cater to me as an individual. Instead it puts me in a series of relationships that each come with benefits and duties. I get more respect as a senior leader, but as a senior leader, I’m expected to help juniors to achieve and teach them what I know. As a younger sibling I’m expected to obey my older siblings and in return they protect me. And thus I cannot simply wave my fist and demand something— goods, respect, or protection— without being in relationship and providing something to other people.
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