Saturday, May 26, 2007

Maximizing utility

From a purely economic standpoint, maximizing utility with fixed resources amounts to splitting the pie equally amongst everyone. Yet a good deal of utility comes not from ownership of pie, but rather from the potential of ownership of pie. The lottery is a good example of this (I'm drooling right now, thinking about the range of pies behind this ticket!). Thus cockeyed optimism produces a permanent utility bubble for which we are all better off. To answer Raymond Chandler's question "What do you expect from life—full coverage against all possible risks?", even a theoretical utilitarian must answer no. Perhaps these theoretical utilitarians should form a country after rounding up all the willing cockeyed pessimists. ;-)

From a practical viewpoint, resources are never fixed, so maximizing the size of the pie is overwhelmingly important in maximizing utility, as opposed to dividing the pie equally.

Right to reduced productivity?

If your personal balance sheet has more debt than assets, do you have an obligation to maximize your productivity in order to avoid default? An explicit example: are you allowed to commit suicide when you are debt laden?

Reducing productivity can be done in many ways. You can work less than full time, take a job that you enjoy more but that pays little, not wear your seat belt, not use a condom, practice various dangerous activities.

Obviously the non-defaulting parties pay either more interest or an extra insurance to cover the odds of default.

The moral of the story: forcing people to wear their seat belts can be fair because it reduces the cost of borrowing for others. However, this measure seems quite marginal as compared to the total potential of reducing productivity by other means.

Friday, May 25, 2007

Problems with previous post

Prices going up. Insurers can default on their obligations if these are badly managed, or if these are unsustainable in light of unforeseen macro events. For example, the scarcity of future labor makes inflation adjusted fixed benefit insurance vulnerable to inverted pyramid demographics. If there is only one barber left in town with twice as many customers as he can handle, everyone has to live with their hair growing twice as long!

Prices going down. Many remedies to insurable events become cheaper–or possible even–over time. Planning for such decrease is even more difficult than planning for prices going up. Deciding which risks should be covered over a period of 100 years right at the start is impossible.

Non-mandatory private and self-insurance plans are the only way to get around these uncertainties, with all the unfairness linked to such plans.

Socialism - well done

Socialism, well done, is simply the selection of mandatory insurance that a society imposes on its members, and how to pay for it. Traditional insurance is obvious: medical, dental, death, disability, employment. Add to this intellectual capacity, propensity to commit a crime, laziness, luck and you have yourself a government. You can even add aesthetic insurance, to put that nose in just the right place!

If you want to change country permanently, it becomes necessary for the ensuring parties (and yourself) to balance. If you want to change your insurance policy (the change would be collective in the case of mandatory insurance), it is necessary to balance also. This is because you will necessarily want to drop insurance that does not apply to you, and increase insurance for afflictions that will affect you. Because of this, it is very tricky to balance in fairness.

The solution seems to be that a new generation can only negotiate their collective insurance policy before birth. After birth, only a unanimously agreed change in the law is fair.

Saturday, May 5, 2007

A great quote from Seinfeld

Jerry: Ah, you're crazy.
Kramer: Am I? Or am I so sane that you just blew your mind?
Jerry: It's impossible.
Kramer: Is it? Or is it so possible that your head is spinning like a top?
Jerry: It can't be.
Kramer: Can't it? Or is your entire world just crashing down all around you?
Jerry: All right, that's enough.
Kramer: Aaaaaaahhhhh!

You should feel like Jerry after reading this blog. Enjoy!