Wage Slave

I now have my first regular full-time job. It's right and proper that I should get paid, of course, but it also feels strange.

I've pinpointed the awkward feeling to three things:

1. Many of the activities of my new job are very similar to things I used to do in college for free. If I were an undergraduate, I would probably be expected / willing to do this job for free, if not even pay to have the opportunity. But once I pass the magical boundary of Commencement, I suddenly get the right to demand payment for providing these services. That's strange, isn't it?
2. When you're working in large group projects, it's hard to tell how much your labor is worth. When your contribution gets mixed in with everyone else's, how do you tell how much your contribution is worth? The wage you receive seems strangely detached from your work.
3. Participating in the labor market doesn't just mean getting money for your service. It also means refusing service if there's no money. Otherwise how would people take your fees seriously? If the work is tedious and unpleasant, refusing service is rather easy. But if you go into work that you love, and which you would probably do for free anyway (which is what they tell you to do in all those Commencement Addresses in the first place, right?), then you're trapped between your natural instinct and your need for money, which can make you feel either cheap or unappreciated, depending on whether the former or latter feeling is stronger.

Why are stock prices related to company performance?

Like electricity or semiconductors, the stock market remains a mysterious invention of the modern world, something that few of us understand entirely even though we depend upon it everyday.

I hadn't given the stock market much thought myself until I watched Niall Ferguson's excellent documentary The Ascent of Money (available to watch free online here), which shows how some of the most pivotal moments in history (the victory of the North in the Civil War, the coups of Latin America, the defeat of Napoleon) had important financial backstories to them.

This sparked my curiosity to really get a grasp of what the stock market is about. Not just that layman's wisdom of "buy low, sell high," but to really understand why the stock market exists, the value that it contributes to society, and the fundamental forces that drive stock market prices (the first and second points have gotten rather lost lately, so much so that Robert Shiller has had to write a book defending the idea that finance is useful and good).

I found the answer to most of my questions in this really good guide by HowStuffWorks.com, which walks the reader through IPOs, stock exchanges, incorporation, brokers, and the like.

But there was one question I had that I couldn't seem to find an answer for anywhere: why does the stock price have anything to do with company performance?

Often the lay explanation of how the stock market works is trapped in a circular logic. You buy stock, the thinking goes, to sell it to someone else for a higher price. But then that person, thinking the same thing, wants to sell it to someone else for an even higher price. Neither person in this scenario is thinking of profiting from the company per se. But surely it can't be that the only value of a stock is to unload it onto someone else later. So is there any value in holding on to the stock? Does the stock have any value on its own, even when most modern companies do not return profits to its shareholders?

The answer is, of course, yes. I owe (what I think to be) my understanding of the answer to the discussion at this forum, whose contributors seem to be pretty well informed. I haven't seen any discussion of this question hardly anywhere, let alone an answer, so I'm sharing it here, in case others are also curious.

But before we begin this explanation, it's worth taking a step back and establishing the mechanics of the simplist kind of stock, dividend-paying stocks. This detour will be useful to those with less background in the stock market, and will help me cement my new-found knowledge. If you already know this stuff, you can skip down to the next section.

Beginner's Detour

Although the modern stock market is incredibly complex, the earliest system of stocks was rather straightforward. The stock market was invented for two reasons: to raise money for the company, and to spread risk. The Dutch East India Company, widely regarded as the first company to issue public stock, was in great need of both of these benefits. Its voyages to the Orient were not only very expensive, but also very risky and dangerous. Without the stock market, the company would have to borrow at interest, which would have been a bad move given that the outcome of its expeditions was so uncertain. Stocks offered an ingenious way around this problem by spreading risk (and reward) amongs many, many private owners. And people gladly offered up their money, anticipating the massive profits that the company would soon earn.

In the Dutch East India Company, shares entitled their holder to two rights—a portion of the annual profits, and the right to cast a vote in company decisions. Modern stocks are much more complex (by, among other things, dividing stocks into different "classes," which entitle their owners to varying degrees of benefits). But even still, these two rights are the principal benefits that shareholders can expect. 

When shareholders receieve a portion of the profits (called dividends), as in the case of the Dutch East India Company, it is clear why trading is based on company performance. The more profits the company reaps, the larger the dividends will be, and the return will be.

Some people who did not get a chance to buy a stock in the company when they were first being sold wanted to get into the action later; and others who bought the stock wanted to get rid of it. Thus a stock market was born. Note that none of the money trading hands in the stock market went to the Company. It was strictly private agreements who were trading commodities, like people buying baseball cards from each other.

Valuing the stock is a subjective calculation. The stock yields a stream of annual dividends, of an uncertain amount, for the lifetime of the company. As long as the present value of the stream of money is more than purchase price, then it's a good investment.

The idea of present value is of central importance to valuing stocks; stocks, like all investments, return money in the future, money in the future is worth less than money in the present.

This is because of interest rates. Suppose someone offers you $100 today or $100 next year. Suppose also that the generally prevailing interest rate is 5% (say in a savings account, or buying government bonds). Then if you take the $100 today and put it in the savings account you'll have $105 next year. So because you lose that year of not collecting interest, $100 in the future is worth less than $100 today. The present value of a future sum of money is the amount you would need to invest today to collect that sum of money at the future time. To collect $100 next year, one would need to invest $100 / 1.05 = $95.24 today. This is the present value of that money.

Here's a numerical example to show how this works with the Dutch East India Company. Suppose you buy the stock for $30. Suppose the interest rate is 2% and suppose that these are your annual returns for the stock.

Year 1: $20                            Present Value: $19.60
Year 2: $15                            Present Value: $14.42
Year 3: $25                            Present Value: $18.85

Total Present Value over 3 years: $52.87

So the stock pays for itself, even though each year the return is less than the purchase price of the stock.

However, just knowing that you get a return on the stock is not enough. The question you should ask on an investment is not whether you'll get a return at all, but whether you'll get more return here than you would collecting interest on safe investments (i.e. U.S. government bonds, the standard that modern markets use). It only makes sense to take on the additional risk of buying stock if there is potential for making more money. This is why interest rates are so important.

This Dutch East India type stock—the kind that returns dividends—is the simplest kind of stock. But even if we have just a couple dozen companies with this kind of stock, we already have a pretty robust stock market. Some stocks may give small but steady returns; others may be more volatile; a start-up may just be taking off that in the future will return vast sums of money; and the uncertainty around predicting how companies will do at the end of the year will lead to tons of buying and selling. When there are more buyers than sellers of a particular stock, that stock price goes up. When there are more sellers than buyers, the stock price goes down.

Non-dividend paying bonds

Most public companies, as I noted earlier, don't pay dividends to their shareholders. So why do shareholders care about company performance?

The crucial point is that all companies will eventually pay dividends. Paying dividends is the default option. The reason that companies don't pay dividends is because they believe they can generate a larger return for their shareholders by expanding the company than the shareholders could if they took their dividend and invested it themselves. But no company can grow forever (at the very least, scale problems will get in the way). As the company starts to reach its growth limit, it will run out of profitable uses of the money. At this point, the profits will come back to the shareholders, and when this moment comes the profits will be enormous (relative to the company's starting point).

This kind of stock, you'll notice, is different. When you buy this stock, you don't get anything in the short run. But eventually, say after 10 years, when this company does start issuing dividends, it's dividends will be gigantic. So even though you don't get anything for a while, it's worth buying. In the meantime, people buy and sell depending on how much they think the company will eventually be worth.

It's not an automatic process by which the company starts to issue dividends. The company may resist returning profits to its shareholders (e.g. see Apple). But once the shareholders feel that the company doesn't need the money for investment, or can't invest it better than the going interest rates, then they'll start calling for dividends, and vote for such measures at shareholder meetings.

Even if stocks never paid dividends, they would still have some value, because of a stock's ownership power. If someone amasses a controlling stake in a company (usually 51% of stocks), then they can decide how the company will be run. This power, in turn, allows someone to make a lot of money. Take an extreme example: suppose you have a company with $1 billion worth of assets, and 3 stocks, each trading at $1 each. I buy two of the stocks for $2. Then I can go and sell off the company's assets—their buildings and machines and land and other property—and pocket all the cash. This way of making money is called "corporate raiding," and is generally frowned upon. But it's another way the performance of the firm is reflected in its share price.

What I have described is the underlying fundamental forces that move the stock market. Everything else is just people trying to game the system. The layman's understanding of the stock market is based on this gaming of the system—taking advantage of people's expectations, betting on what other people think will happen, or even betting on what other people think other people will think will happen.

But this isn't what the stock market is about. The stock market is about financing companies that will be profitable, and wanting to partake in company profits and ownership. Everything else is, I think, secondary.

Some Confirmation That I'm Not Crazy

In the seventh grade, after learning that I wasn't the first one to figure out that (a + b)² = a² + b² + 2ab, I was convinced that I would never have a novel idea in my life. At the time, this was a sad thought, because I wanted to be original, and make discoveries. But since I began writing this blog, I've enjoyed finding some of my thoughts in other places. Here's a metaphor to explain why:

When I sit down to write my blog, sometimes I feel like the commander of a small space vessel, zooming through vast galaxies of ideas.

Most of my journey passes in solitude—just me (and what appear to be) parsecs and parsecs of uncharted territory. The world of ideas seems so vast. At first, because of the thrill of discovery, I preferred the emptiness. But after a while I started to wonder whether I was just lost. So when I happen to chance upon another traveler, out in the reaches of a distant nebula (where I imagine some of my ideas tend to lie), I find welcome confirmation that really I'm not as lost as I thought.

Regular readers of the blog will know that a little under a year ago I wrote a blog post entitled "Why Profit Doesn't Work in the Media Business," which tried to link the blatant biases in today's journalism with the fundamental economic structure of the business. The idea was that profit, which is supposed to encourage firms to do the socially optimal thing, actually skews their incentives away from it (where in this case the social optimum was a perfectly informed and unbiased electorate).

When I wrote this blog post, I felt I was the only economist arguing that markets may make the news industry more biased. After all, Ronald Coase (1974), Timothy Besley and Robin Burgess (2002), Besley and Prat (2002), Djankov et al. (2003), David Stromberg (2001), and Alexander Dyck and Luigi Zingales (2002) have all advance arguments for why increased competition in the media should result in greater accuracy.

But it turns out I actually wasn't alone. In a working paper called "The Market for News," Harvard economists Sendhil Mullainathan and Andrei Shleifer (M & S) agree that market competition doesn't give us a fair and balanced news media, though their argument is much more detailed.

In my blog post, I developed had two separate explanations for why competition didn't lead to unbiased news, depending on whether consumers of news were either witlessly or willfully misinformed. In the first case, I argued that consumers get biased news because they don't know it's biased. This was more of a power-elite type explanation, which assumed that the owners of the media had certain political reasons for advancing bias, which consumers weren't savvy enough to figure out. Consumers in the media industry today, I said, may be like consumers going to grocery stores before the advent of health standards, not knowing whether the meat was tainted or not.

My argument in the second case was much more straightforward. Basically (if I'm to tease the empirical argument out of the highly normative argument I was making), I said that biased news was a particular kind of product that news media could sell, and that if demand was sufficiently high companies would provide it. This seemed intuitive enough, but I didn't have any model of how that worked.

That's where M & S's paper comes in. M & S propose a simple model of how firms bias their news by essentially constructing a variant of a Hotelling model. In a Hotelling model, customers are distributed over some space, and firms position themselves in the space so as to "catch" as many of them as possible. In this case, the relevant space is ideology. Firms compete by announcing their "slanting strategy" and the price for their product, and customers choose the news source that most aligns with their bias, for the lowest price.

In M & S's framework the way competition leads to bias is that it causes firms to segment the market. To avoid competing for the same customers, firms find it optimal to maximally distance themselves from their competitors. Practically, this means separating themselves ideologically as much as possible—even if that means taking more extreme positions than even their most biased readers. The average reader will find, then, more and more extreme positions (a.k.a. bias) in the news after competition.

This model helps explain the perception that the media has become increasingly biased in recent years. Since the entrance of competitors in the market increases bias, one important contributing factor could be that

changes in media technology have lead to significant entry, especially in television. If these media sources divide the market along ideological lines, we expect them to become more biased than they were in the regime of moderate competition.

Unfortunately, the model also suggests that news bias is very difficult to remove. No firm would find it advantageous to become less biased; but even if one firm credibly committed to ending bias, the other firm would still gain more profits by choosing to bias. This is more or less the conclusion I reached, and why I argued that the only way to reduce bias was for firms to commit do so based on moral or ethical reasons.

Competition Inflation

In some places in the U.S., especially on the coasts, the competition in schools is absolutely insane. In Manhattan, for example, moms are enrolling their toddlers in gifted kindergarten test prep classes, in hopes that their child will make it into the "best" kindergartens in the city. In Southern California, it's common that kids will make hour-long commutes every day to attend the gifted magnet school, or will start studying for the SAT their freshman year, or hire private counselors to help them craft the perfect college application. All of this is a far cry from life in Arizona, where, for the most part, pretty much no one bothers with any of that.

All this extra competition, though highly stressful, might be worth it if it produced brighter, more able, students. But in my experience that doesn't happen. Students from the coasts aren't, on average, any smarter than those from other parts of the country. Even the brightest students from the coast are no brighter than the brightest from Arizona, or any other laid-back state. They've just done a lot more work. So ultimately all this extra work seems to amount to a tax on students with ambition in highly competitive environments. Society doesn't gain, and these kids are certainly made worse off.

Why, then, does it continue? And what accounts for the discrepancy in competition between places like Arizona and places like New York, or California?

Asking these questions has led me to a fascinating synthesis between monetary and labor economics. The idea is this: labor markets, like the macro-economy in general, can also suffer from inflation. And some of the insights about inflation that we've learned from monetary economics apply to this labor version of inflation, or what I'll call "competition inflation."

In this analogy, we can think of the jobs, positions, fellowships, etc. (i.e. the total available number of positions to which we can allocate people), multiplied by its prestige factor, as representing the "real output" of the labor market. To illustrate, suppose the labor market wealth is 100. This sum could be achieved either through 100 jobs with a prestige factor of 1, or 5 jobs with a prestige factor of 20. But by this metric, in both cases the labor market has the same level of output.

One's resume is the price one pays for a position. The more prestigious the position, the more it costs, i.e. the better the resume has to be. Like money, resumes have relative, and not absolute, purchasing power; to get a good position, not only does your resume have to be good, but it has to be better than everyone else who applies for the position. This makes resumes like a nominal asset, a kind of currency in the labor economy.

Regular inflation, you'll recall, occurs when the money supply increases faster than the total value of goods and services in the economy. Similarly, competition inflation—or the phenomenon of an escalating resume-price to achieve any given position—occurs when more people have good resumes than there are positions in the labor market to support them (i.e. to draw a more complete analogy, when people's resume holdings outstrip real labor market wealth).

One direct implication of this formulation is that competition inflation isn't inevitable: as long as labor market output increases with the rate of resume improvement, then inflation should stay close to zero. Labor market output is a function of prestige, and job availability. Clearly, if there were an expanding number of prestigious positions to go around, then inflation would be low. But inflation could also be kept low if the number of not-so-prestigious positions expanded at a fast enough rate as well. The reason is that the more plentiful and easily available not-so-prestigious positions become, the less and less motivated people will be to put in the effort for the prestigious positions. That will, in turn, slow the rise of ridiculously lavished resumes.

(We can think of each person as having a tipping point at which they abandon striving for a prestigious position and settle for less, depending on the relative availability of jobs. That tipping point will be radically different for different people. Some people will only work for the prestigious job if there are no other jobs available, and some people will never work in a less-than-prestigious job; most people will fall somewhere in between. Incidentally, this tipping point may be a way of assessing people's subjective prestige valuations.)

Like regular inflation, competition inflation is something that occurs naturally from generation to generation. Baby boom Ivy Leaguers "love to talk about how they would have been turned down by the schools they attended if they were applying today," perhaps in the same way they talk about 25 cent comic books [source]. Since their time, there has in fact been several "devaluations" of the resume. Test scores used to be enough to get into a good college. But when there were too many kids with perfect test scores, admissions officers started looking to extracurriculars, and touting the benefits of the "well-rounded" students. Now they're seeing so many "well-rounded" students that the new fad is "pointy-ness"—being well-rounded plus having some achievement spike in a particular area. No doubt, within ten years the standards will shift again. Each time this shift happens, someone who builds his resume according to the old model will find that their achievements no longer mean as much.

In general, a modest amount of inflation is a good thing, and the same holds true here: as the economy becomes more complex, and as modern jobs require more and more skills, it's a good thing that our institutions push people to become more skilled. The problems come with hyperinflation, as is the case on the coasts. When resume-building ceases to represent any greater skill or talent acquisition, people start to lose faith in the currency. Employers become more skeptical, and students begin to think of the competitive process as arbitrary, or unfair, or meaningless. Having a good resume loses its respect. (Note, for example, the tone of this NYT piece).

In the face of high inflation, people switch to more durable assets. In the labor market, those durable assets are relationships, and networks. When everybody speaks three languages, and has volunteered in orphanages in Peru, employers need some way to make a decision, so professional networks do the work that resumes used to do. In highly competitive environments, then, networking becomes essential, and those people who are highly capable but without contacts lose out the most.

With inflation, there are always winners and losers. The losers are everyone in training, the young and the inexperienced. The winners are the people who already have jobs, i.e. the people who have cashed out their resumes. Someone who starts working may find that twenty years later the average resume required to achieve the same position has increased substantially. In that case, the person has experienced a capital gain; when they leave their job, they will have a job experience more valuable than what they paid for.

With this framework, we can explain some generally puzzling phenomena. For example, we see that competition inflation is most intense at the high school level, but peters out post-college, and is virtually zero for the most demanding positions. (The President's resume has remained about equally impressive on average throughout our country's 200+ years.) The reason for this is that early in our career, the relevant labor market that we face is more closed and restricted. High school students compete only within their city for the prestige positions, which they need in order to get recognized by colleges. But if the city happens to be a hotspot of ambition (because, say, all the kids' parents are investment bankers, or highly successful government officials), then the same ambitious kids will be competing against themselves—and so the resume price will be bid up. After college, however, students compete nationally, and internationally, for jobs. That spreads the ambition around and helps keep competition inflation more stable. Imagine, for example, if Harvard kids were only allowed to get jobs in Boston: competition inflation would be through the roof!

Of course, the major, elephant-in-the-room difference between monetary and competition inflation is that the latter has no central authority that issues currency from the outside: there is no Federal Reserve of Resumes. Instead, resume creation is a highly decentralized process that depends mostly on people's ambitions. However, there are several smaller authorities that set resume standards. For example, ETS, the company that administers the SAT, could increase the value of a perfect score by making the test harder. At an extreme, passing high school (or university) could be made a very difficult, demanding task. These measures would be equivalent to cutting the supply of currency in the labor market, and would curb inflationary pressures. But this solution would be very temporary. Soon enough, there will be enough people mastering the new standard that it will have to be set higher still. (There's also a question of what would happen to the kids who DGAF, and will just stop trying when the standards are raised. It's a question I'll have to explore some other time.)

Is there any resolution to the problem? Ultimately, it seems that controlling resume creation will have no long term effects, since there are enough ambitious kids willing to do whatever it takes. That means the only option is to expand the number of positions available—we need more places for these ambitious high school kids to go. But that won't happen unless there is some miraculous boom in job-creation in this country, or a number of good universities suddenly open up, or ambitious students suddenly gain another route to prestigious position besides college. None of these seems particularly likely.

Update (October 7, 2011):  One important implication of this framework, which I didn't mention earlier, is the presence of an inflation tax. In the normal economy, inflation works like a tax. Suppose the government needs to spend an extra $100 million dollars. Then it can raise that money either by collecting it in taxes, or by just printing it. The latter spares the government the hassle of dealing with angry taxpayers, and makes everyone feel richer, but it still costs them in the end: by printing enough money, the government makes each dollar have less purchasing power, which in effect takes a cut of real wealth away from people proportional to the amount of money they hold.

The labor-resume economy has the same phenomenon. Suppose that the government wants to boost the employment opportunities that people enjoy. It can do so by making it easier to graduate high school and college. In the short run, people will find better jobs. But in the long run, if graduation becomes too easy, the value of the degree will just become worth less, and you end up with situations like this:

“I was in a taxicab a couple days ago, and this is a story that really exemplifies how the economy is changing.  Over the two-way radio, the dispatcher’s voice comes, and he says, ‘Gentlemen, I’m looking for someone to pick up one extra shift on the night shift, a new taxicab driver.  If you know someone, they need to have experience.  And I also need a college education.’  And I thought to myself, ‘If you need a college education to drive a cab in this country, what job don’t you need to have a college education for?’" [from this Freakonomics podcast]

Update (October 13, 2011): Caveat: Thinking of a resume as currency only makes sense when we think of it as a homogeneous product. In actuality, though, what happens is that experience that some employers value applicants experience differently, depending on how it matches with the skills necessary for the job for which they are applying (e.g. as an extreme example, having 10 years of solid experience in engineering will not help you get a Broadway gig).

There are some ways to work around this. For one, we could focus on just (near) universally valued qualifications, like college graduation. Alternatively, we could focus on what happens within specific industries, where all applicants are competing on the same resume, and where it is easier to make apples-to-apples comparisons on qualifications. Either of these would do the trick to preserve the integrity of the analysis.

As one of my professors pointed out, models aren't meant to explain everything at once. So naturally this one can't either.

Update #3 (October 15, 2011): More evidence for my thesis, from this NYT article:

Moulshri Mohan was an excellent student at one of the top private high schools in New Delhi. When she applied to colleges, she received scholarship offers of $20,000 from Dartmouth and $15,000 from Smith. Her pile of acceptance letters would have made any ambitious teenager smile: Cornell, Bryn Mawr, Duke, Wesleyan, Barnard and the University of Virginia.

But because of her 93.5 percent cumulative score on her final high school examinations, which are the sole criteria for admission to most colleges here, Ms. Mohan was rejected by the top colleges at Delhi University, better known as D.U., her family’s first choice and one of India’s top schools.

Ms. Mohan, 18, is now one of a surging number of Indian students attending American colleges and universities, as competition in India has grown formidable, even for the best students. With about half of India’s 1.2 billion people under the age of 25, and with the ranks of the middle class swelling, the country’s handful of highly selective universities are overwhelmed.

This summer, Delhi University issued cutoff scores at its top colleges that reached a near-impossible 100 percent in some cases. The Indian Institutes of Technology, which are spread across the country, have an acceptance rate of less than 2 percent — and that is only from a pool of roughly 500,000 who qualify to take the entrance exam, a feat that requires two years of specialized coaching after school.

The problem is clear,” said Kapil Sibal, the government minister overseeing education in India, who studied law at Harvard. “There is a demand and supply issue. You don’t have enough quality institutions, and there are enough quality young people who want to go to only quality institutions.”

Islamic Liberation Theology?

This passage from an article in the Monthly Review by Qalandar Bux Memon suggests that liberation theology may not just be confined to Catholic Latin America. The article is called "Blood on the Path of Love: The Striking Workers of Faisalabad Pakistan," which you can read in its entirety here.

Bawa Lalif Ansari is famous among workers for his oratory and in particular for leading an energizing tarana [a call and response between leader and crowd.]. He is an entertainer and pedagogue, who hosts most of the workers’ rallies for LQM [Labour Quami Movement]. Bawa is of short and slim stature, with long black hair carefully combed backwards and a small and trim jet-black beard—a look that made more sense to me as our conversation developed.

“I used to be part of Lashkar-e-Taiba. I joined them when I was young.” LeT is a militant Islamist organization, suspected of involvement in the 2008 Mumbai attacks. It is banned in Pakistan but continues to operate openly in many areas. Sipah-e-Sahaba, another extremist organization, he tells me, was founded in the Jhang area, which neighbors Faisalabad, and is where he has been working with the LQM. He explains,

They have a strong grip on the people and tell the poor to direct their frustration against the Shi’as. The local feudals and zamindars, who are extremely rich, are generally Shi’a, while the common bounded laborer is Sunni. The hate manifested over years of exploitation can easily be directed by these originations against all Shi’as. But many Shi’a are also laborers and workers, as are Christians. I came across Mian Qayyum and the LQM and their analysis made more sense. The religious parties wanted me to merely seethe with rage but didn’t tell me how my material situation was going to change. What good does it do me to hate someone for being a Shi’a or a Sunni or a Christian? They too are poor people trying to work and feed their children. What good does it do a worker to fight a worker. I didn’t agree with this.

Bawa believes in Islam, but for him, it is a radical philosophy of liberation [my emphasis]. A few hours later, at a workers’ gathering he said, “God is sovereign and god asks us to fight for justice. The bosses are nothing; we will not bow to them, these pharaohs. What we work we should be paid fairly for.” Lashkar’s loss has been the Labour Quami Movement’s gain.

Religion, with its concern for the poor and disadvantaged, is a natural ally of Marxism. Surely Catholics aren't the only ones that have made the link.

Update (April 12, 2011): It turns out I was right; there is Islamic liberation theology out there! Dr. Ali Ashgar Engineer, a Pakistani Islamic scholar, has a book, available online, with just that title.

Where Liberals and Conservatives Are Born

Liberal vs. Conservative in Abstract

For the past couple months I've been applying for various summer internships and other research opportunities. With applications on my mind, I've had a lot of time to think about how we allocate scarce opportunities.

Obviously, any allocation scheme has to have some criteria for picking candidates. Do we focus only on the applicant's recent work, or do we weight all of it equally? Do we focus on tests/scores/proven results, or do we look for potential?

Once we come up with certain criteria/weights for considering the application, then we automatically favor certain applicants and disfavor others. Some people will have a natural ability in the chosen criteria, so their application will be favored; meanwhile, other applicants will have natural abilities in other aspects, which they will likely to consider also important and relevant, but they will be disfavored. (To put this in concrete terms: colleges favor strong extracurriculars in the undergraduate admissions process, which advantages extroverts and suck-ups, and disadvantages introverts.)

So it doesn't seem possible to come up with a system which doesn't disfavor anyone. Someone has to lose out—and when they do, it's likely that they'll feel that the process was unfair, that they were structurally disadvantaged. But when things go well for them, then they're likely to think the system works just fine, and that they deserve the rewards they get in some way.

I say that because that because that's been my own experience. In and through this application game, I've found my attitude towards the process shifting between these two extremes, depending on whether things worked in my favor or not. When I get the opportunities I apply for, then I see myself as the deserving recipient of it. But when I lose, and especially when I lose consistently, then I start to feel maligned and cheated. I start to think the whole selection process is arbitrary and meaningless, and the person who got selected as just lucky.

I have a hunch that this thought process is both natural and widespread. For one, it matches very well with the discourse that divides liberals and conservatives. On an issue like poverty, for example, conservatives will likely say that the poor can escape poverty if they just work harder; many conservatives have rags to riches stories (i.e. the system worked for them); and they likely feel deserving of their place in the social order. Liberals, meanwhile, will argue that certain people, no matter how hard they try, cannot better their position, and point to structural disadvantages of race, class, and gender. We're accustomed to thinking of these differences as purely ideological, but I think the source of these contentions is that people have a natural tendency to think their personal experience accounts for the way the whole world works. (Including myself, since, after all, I'm arguing this post based on my own experiences. What else do we have to go off of?)

If this is correct, what's remarkable about the story I've told is that it's impossible for a liberal/conservative split not to exist. It seems to be a product of the very act of choosing an allocation scheme, which inevitably favors some qualities and disfavors others. Obviously, the full story is more complicated than this (e.g. Asians, though they do well, tend to vote liberal), but it's a starting point, I think, for a potentially rich understanding of politics.

The Right Kind of Ambition

There are different kinds of ambition, and some are more right than others. We are entitled to have ambition over what we accomplish—the lives we change, the things we bring about, the results of our actions. What we're not entitled to, though, is ambition over the means to achieving those ends. We're not entitled to covet certain posts or positions or prestige in order to effectuate those goals.

What I mean, in short, is that we are entitled to ambition over ends, not means. When we have ambition over the ends, then people come to our aid, and rally to support us. But when we think otherwise, when we treat positions and posts as ends in themselves, then we're thinking purely selfishly, and people will distance themselves from us for it. Being an important person or having an important role should be seen only as a liability to the things that you're yearning to do.

Limiting your ambition to the ends of your action is a freeing feeling. It means you're no longer worried about whether you get a certain position or not, whether you get promoted or not, whether it's even you who's the one that brings about the change that you want to see or not. At any given position, you can contribute what little or lot that you have to advancing the goals that you care about; and if the goal—and not your personal involvement in it—is what you truly care about, then you'll be happy with that.

The Mathematics of Social Life

Introduction
We can think of a person's personality as a vector in Fⁿ. The dimensions of F represent the dimensions of the goals and interests that one might entertain—what one values, broadly speaking. Some people are more interested in pursuing money than others; some people have more an inclination towards spirituality than others; some people give more importance to their family than others. Thus, we can say that money, spirituality, and family represent some of the nearly infinite dimensions of this space (but we think of n as finite for simplicity). The zero vector would signify balance within all dimensions.

Like R, F is continuous, infinite, and contains postive and negative values; just as value traits come in shades of grey, have no known limits, and always work in pairs of opposites. Although personality doesn't just include values, they are its most important component. Values are what drive action and shape our life's trajectory, which is what we're interested in modeling.

These personality vectors represent a static snapshot of a person's personality. However, people's goals and interests are, of course, constantly changing: at any given moment, a person has a certain place she's at in life, and a certain place she'd like to go. This defines what we'll call a change vector in Fⁿ. The vector points towards the new personality vector one wants to have, and the magnitude represents the rate at which the change is happening. Continuing the previous example, we can say that a person with a penitant heart who wants to focus more attention on his family rather than on money would have a change vector that points 1) less on the money dimension 2) more on the spirtuality dimension and 3) more on the family dimension.

Over the course of our lives, the personality vector traces a trajectory through Fⁿ that describes how our goals and interests have changed. These trajectories are useful in describing, characterizing, and categorizing people's lives. When we say, for example, that someone has meandered through life, we may mean that the distance traveled along the trajectory is much larger than the distance traveled in Fⁿ.

The change vectors are first derivatives of our life's trajectory. At each moment in time, the vectors are tangent to the trajectory, and mark where we're immediately heading. Because our personalities have inertia, our life's trajectory follows the vector unless the vector changes: until we receive some new information, or have some new experience, our thought pattern will not change.

Society
A society is a well-defined set of people. Societies can be both big and small, ranging from small towns, to nations, to the entire world. Societies can also be defined in terms other than geography, such as national origin, occupation, or marital status.

Societies do not have a uniform distribution of personalities. Instead, they tend to cluster in certain regions of the space (this is where stereotypes come from). We can describe the distribution of personalities of a society with a density map on Fⁿ.

Not all people within a society are equally important to us; we tend to think that some have more of a claim on our consideration than others. A social network is thus defined as a graph of all social claims on oneself that one considers meaningful. The graph is organized as a series of concentric rings, with us at the center and each progressively farther rings representing more distant/less valued relationships.

Hypothesis on Nature vs. Nurture
When we are born, we have an initial personality vector in Fⁿ. This is the nature component, since it limits the possibility of our life's trajectory to within the neighborhood of that point. However, once that point is established, we can move in any direction. This is the nurture component.

An analogy is a cow tied by a rope to a tree: the cow can only move as far as the rope will let her, but within the radius of the rope she can move in any direction.

It's hard to say whether babies are born with change vectors as well, i.e. whether they have a conception of what they want to do with life. But even if they did, it would be almost inseparable from the immediate influence that the family exerts on the newborn.

Interaction
Interaction is comprised of two components: liking and influence. They are separate matters, since we are often influenced by people that we do not necessarily like.

We often gauge how much we like something or someone by how much it aligns with our goals and interests. That is, liking is a measure of the similarity between two vectors, i.e. the angle between them. An angle of 0 measures complete liking and an angle of pi measures complete dislike. If a vector is perpendicular to another, then it is neither heading in a similar direction on any dimension, nor is it heading away; perpendicular vectors thus signal indifference.

Note that we are talking about personalities, not genes. People with very similar personalities may look completely different, talk different, and manifest their goals and interests in different ways—but their goals and interests are similar.

Liking, like influence, happens not just through face-to-face encounters with other people, but also by learning about the work they produce. Our work crystallizes our personality in time, making it possible for distant, unknown people to like and be influenced by us, even without directly meeting. Reading the works of an author reveals the idea vector of the author at that time; learning about the social works of a great leader is a way of meeting their vector.

Influence is a question of what influences the change vectors. Since influence can occur to varying degrees, we can think of it as lying on a spectrum. One one extreme, we have complete influence, where both parties fully and equally influence each other. In complete influence, two people leave the interaction with the same new "goal" personality vector, one that is the sum of their previous individual personality vectors: components of the vector moving in opposite directions would cancel out, and components moving in the same direction would build on each other. However, because personality change is continuous, and occurs over time, the change in personality vector is not instantaneous. Instead, after the interaction, both parties leave with change vectors that now point towards their new goal personality vector. Over time, if these change vectors are unaltered, then their personalities will become the same.

On the other end of the spectrum, we have a complete lack of influence, where the interaction does not affect the change vectors at all. Most interaction is either of this latter type (since we can't afford to constantly reevaluate ourselves every time we interact), or somewhere in between.

Because individuals have free will, personality change is a stochastic event, and hard to pin down. However, we do know that a person is more likely to be influenced one direction or another based on the distribution of her social network within Fⁿ.

We can simplify the process of influence by thinking of it as a random event where a person chooses to be influenced from someone in her social network. That is, every t periods a person decides to be influenced. She samples someone at random from her social network and is influenced, let's say completely influenced. Because her social network is unevenly distributed, she is more likely to sample certain people over others, causing her to be more influenced in a certain direction. The family, as a child's first social network, has the first say in influencing the child's change vector. However, as the child begins her process of socialization within larger society, the familial claims weaken and other people gain stronger influence.

Social Life
When we find ourselves in good company, it is because the personalities of the people involved complement each other. Similarly, in tight knit circles of friends, the personality vectors are linearly dependent on each other.

Social cliques are subspaces of Fⁿ. These cliques are, by definition, closed and bounded, and represent clusters of a socially defined personality type.

Large social gatherings, such as parties, are also home to the formation of subspaces. Like-minded people tend to gravitate towards each other and form social circles, and at times these circles don't even mix. A good party, though, is one where the maximal subspace of the party includes every member, meaning that everyone has interest in each other.

History
We can think of all the people in the world as also representing a bounded region in Fⁿ. The edges of the space represent the boundaries of the present human experience. As people have interacted more and more throughout history, they have provided more and more opportunities for ideas to change, pushing personality vectors in new directions and expanding the human experience.

The region of high density of a density map on all of humanity is the zeitgeist of the era. It represents the certain general paradigm of thinking, acting, and being for people at that time.

A Hypothesis on Poverty

I recently read a paper for class entitled "Destitution and the Poverty of its Politics—With Special Reference to South Asia" by Barbara Harriss-White. Harriss-White analyzes destitition, the state of the poorest of the poor, and finds that it encompasses three aspects: first, "having nothing"—that is, old-fashioned economic poverty, or lack of access and control over assets; second, "being nothing"—having no political rights, being marginalized and outcast; and lastly, "being wrong"—having the law work against you.

As an economist, I was used to thinking of extreme poverty in terms of the first aspect, material deprivation. But these latter two caught my eye. The paper made me realize that true destitution (far beyond ordinary relative poverty) is not just an economic process, but also a social and political one; that is, market processes alone aren't enough to drive people to destitution—it takes people actively excluding others for such a dire situation to exist. As Harriss-White puts it:

Destitution is a process in political economy. It is not simply that the technical requirements for labor processes require some kinds of bodies to be denied access [...] It is not simply that revenue for social sector spending is simultaneously squeezed, and thus eligibility for social protection by the state will need to be restricted (Russell and Malhotra, 2001). It is also that the exclusion of people from exploitation is culturally legitimated; society actively allows oppressive practice and, it is argued here, the state is often complicit in this process.

If she's right, if societies do truly actively allow and legitimate exclusion, then why do they do it? My hypothesis is that it is a culturally evolved way of dealing with overpopulation: societies that have exceeded their carrying capacity exclude groups of people to preserve scarce resources. If the carrying capacity can only support 70% of the population, the social norms evolve to exclude the other 30% from competition.

The people who engage in exclusion obviously do not think in those terms. They think of morality, or personal responsibility, or not having to deal with addicts, or the "unclean." But these tensions only manifest themselves and get worse when people are pressed. I suspect that as societies become wealthier, they become more willing to include formally marginalized peoples, simply because they can afford to; the pretexts formerly used to legitimize the exclusion lose support, lose importance, and slowly drop away.

[The biggest problem with the hypothesis is figuring out what "overpopulation" means. How do we distinguish between "overpopulated" societies and those that are merely very crowded? What standard of living does each person in the society "need"? By whose standards?]

Paradigm Shift

When I arrived on campus this semester I noticed a marked difference in the way I thought about the university compared to when I first arrived. As a freshman, and even as a sophomore, I'd think of the university as a separate entity from me—an institution that runs by the grace of other people, with programs designed and run by other people, and a culture set by other people. I'd evaluate the university as an outsider would: What are U of A kids like? Are the clubs run well? Do they offer fun programs and activities?

Now that I'm a junior, neck-deep in activities and programs, I realized that I'm no longer on the outside looking in. The incoming freshman class must be evaluating the university the same way I did (What are U of A kids like? Are the clubs run well?...), but now I realize that whom they're judging is really us, the upperclassmen. The questions I used to ask of others are now directed at me—What are we like? Do we run our clubs well? Do we come up with new, fun, and innovative programs and activities?—because in your junior year you realize that there's no one else who make the university run but ourselves. Our culture is the university's culture. Our brains are the university's brains. Our drive is the university's drive.

Here's an example of what I mean. Currently the International Studies program offers a colloquium series on various regions of the world. It's an innovative idea, most of all because the colloquia are taught and designed by undergraduate students who have visited the regions they discuss. As a freshman or sophomore, I would have thought it was the university who was giving the opportunity, and students were simply receiving the benefits. However, when I learned that the colloquium was actually the brainchild of a student here at the U of A, I saw the student-university relation in a broader light: The university may provide opportunities to students, but students can also provide opportunities to the university. The plethora of programs and activities that we have exist because of someone, and continue to exist because someone is working to maintain them.

Every part of the university is supported by the students that form it. On a more day-to-day basis, take for example the tutoring center. If I were a student who came for help and had a bad experience, I would think that the university had a bad tutoring center. I'd tend to interpret the faults of individuals as the faults of the university. But since I work at the tutoring center, my thinking goes the other way. The quality of the university's tutoring center becomes partly my responsibility when I realize that students anxiously waiting for help at the tutoring center are relying on meto do a good job.

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I think this personal shift in thinking also represents a broader sociological principle. Although we like to think of institutions as formal, abstract concepts, when you get into the details, as in this example, you realize that everything about an institution remits back to the people who form it. Some people are, of course, more involved than others, and that seems to influence the degree to which you identify yourself with the institution. But everyone plays a role, whether they realize it or not; and perhaps the bigger the stake that everyone has, the more successful the institution will be.

Med School

Recently I fell sick, and since it was the first time I had to take care of myself, I quickly realized that I didn't know what to do. Should I take fever-reducing medicine or not? Do I just have a cold or something worse? How can I tell? Will it just pass with time or will it just get worse?

Conventional wisdom says that when in doubt just go and see a doctor, but that can't be practical, and plus it's very expensive. We may leave the real medicine for doctors, but we shouldn't be so helpless that we have to rely on them for everything. It strikes me as strange that we have a system of societal organization where the knowledge most essential to our own well-being is also the most outsourced and divorced from our control. I feel the complete asymmetry of information in the doctor-patient relationship is dangerous, because a clueless patient has no way of defending herself against an insincere, mistaken, or scheming doctor.

That's why I think it would make a lot of sense to teach medicine in K-12 schools. Why not? After all, it's the most practical thing to learn. Teachers spend all of elementary school trying to convince us that math is useful, but the benefit of learning medicine is self-apparent. If there's any guarantee in life it's that every man, woman, and child is going to fall sick.

We already offer general health courses here and there that educate mostly about nutrition and STDs. This can just be another component. There's no need to pass the MCATs to be able to understand that a viral infections go away with time whereas bacterial ones don't; or that a nice hot, ginger tea works well for clearing out mucus and wet coughs.

Maybe Not a Leap Forward for Mankind, but At Least a Quantum Leap for Me

I don't know about you, but I don't find myself learning, as they say we should, one new thing everyday. I try to keep my mind open for learning at all times, but alas the actual act of learning seems to be more the providence of Fortune and the Gods than me—for as much as you may struggle to understand something, there's no guarantee that the concept will sink in, that it will penetrate the soft, fleshy cerebral membrane and become part of your bones (I have a deep conviction that all true knowledge resides in your bones; the rest is fluff to impress, or soups of facts that we regurgitate mindlessly).

That is to say, my knowledge doesn't seem to grow gradually and steadily, but rather in quantum leaps of tiny epiphanies. The thing—the problem, you could say—with epiphanies is that no matter how small they are, they bring such a burst of clarity that it's easy to forget how private and personal the whole experience is. You walk outside after an epiphany and the blue sky suddenly feels more blue and humanity seems somehow more enlightened and less hopeless. It's hard not to think of the experience as anything other than a leap forward for mankind.

Well, in true postmodern fashion, I think I've had an epiphany about epiphanies, and this one (unlike the others, which were more like lighting bolts of Zeus) can be pinpointed back to its source: writing this blog.

I'd always be on the lookout for topics for this blog (which, for some reason, always seemed to come to me in the shower), and the little epiphanies I had seemed like exciting and worthwhile stuff. But when it came to putting those thoughts to blog, I'd always have a problem of recreating that excitement and novelty of discovery. I'd work it around, try this or that, but it'd just end up sounding like common sense, nothing knew, stuff that everyone knew, constantly begging the question: what took you so long?

I don't think this necessarily reflects on my writing skills, but rather shows how the epiphanies that I thought were news for humanity were in reality just news for me (I hear a unison chant from the world of "what took you so long?"). But you know, that's fine. The thrill is still the same, and I still see the sky more blue.

P.S. The astute critic may have noted that this blog post itself seems to treat this epiphany about epiphanies as news to the world; which would make it seem as if I haven't learned my lesson after all. I assure this critic that my purpose is no longer didactic but confessional and self-disciplining, and if it benefits anyone else, all the better. (But to be truly honest, that didactic bug is hard to shake off.)

Marriage

If you think about it, marriage is a funny institution. Two young people decide they want to spend the rest of their lives together. This is a very momentous decision, of course, so they think long and hard about it. They consider all aspects of a person: their looks, their personality, their wit, their charm, their earning potential, their character, their goals and beliefs. Of course different people place emphasis on different things, but mostly the decision comes down to the fact that there is something about the other person's body, mind, or intellect that's appealing.

The irony here is that these people are making supposedly permanent decisions based on entirely temporary things. When they make their decision they're at the prime of their lives. They're young and fit and sharp and as attractive as they're ever going to be. From there they have some years of youth left and then, for most people, it's all downhill. The body sags, potbellies form, the intellect dulls, the mind gets set in annoying habits, moods become more irritable—in other words, their spouse no longer become the person they married. If they were to reevaluate their spouse 10 years later, they probably wouldn't marry them.

This may sound like a sad thing, but I think it gets at the essential beauty of marriage. They say a true friend is one who knows your faults and sticks around anyway. I think that's the point of marriage. When you grow old and no one else is willing to put up with your bodily noises and forgetfulness and all the other problems of aging, at least you can have your spouse; and, likewise, they have you.

Fascination of the Abomination

"In some inland post feel the savagery, the utter savagery, had closed round him—all that mysterious life of the wilderness that stirs in the forest, in the jungles, in the hearts of wild men. There's no initiation either into such mysteries. He has to live in the midst of the incomprehensible, which is detestable. And it has a fascination, too, which goes to work upon him. The fascination of the abomination—you know. Imagine the growing regrets, the longing to escape, the powerless disgust, the surrender, the hate."

- Joseph Conrad, Heart of Darkness

The horror, the horror:

The cast of MTV's new reality show, "Jersey Shore."

I'm not joking; here's a review of the first episode.

Hippies

I was thinking about hippies today and realized that really they're just Americans who have adopted elements of Indian culture. I started going down the list of things I think make a hippie a hippie, and I came up with:

1. Practicing yoga rigorously (not that stuff at the gym)
   
2. Sympathy or explicit belief in an Eastern Religion (Hinduism, Buddhism)
3. Belief in relative morality
4. Pacifistic or non-violent bent
5. Tendency to prefer natural remedies and cures over chemicals (exemplified in, e.g., ayurveda)
6. A tendency to renounce the world (derived from the concept of sannyasa)
   

Notice how all of these ideas have roots in, or are affiliated with, India and Indian culture! Of course, there are fundamental differences, and [full disclosure: I'm Indian] I think hippies understand these ideas in more naive ways than Indians (epitomized by the hippie saying "Why can't we just all get along?"). But still I'm fascinated by the connection.

From my personal experience, I always thought Indian culture was confined to the Indian culture, mostly because no one around me knew anything about it at all. But now that seems not to be the case—and it makes sense. Although Indians and Americans have begun to interact only recently (beginning, chiefly, with Swami Vivekananda), the effects of this interaction cannot just vanish into thin air. I think today I found at least one of the effects.

Private Schools

Recently I've been finding out that quite a few people I know go to private preparatory elementary and secondary schools. This, to me, is quite a perplexing discovery, since it seems that as long as you don't live in a bad area (and these kids don't) the public schools are quite good. I naturally started to wonder what made these schools special, what made them worth the extra commute, extra money, and extra hassle, but I didn't get around to finding out.

Today, however, my curiosity got the better of me. My only research method involved browsing the schools' websites (which, out of courtesy, I'm withholding), but that was enough for my purposes.

For the most part, I saw what I expected to see: small classroom sizes, a "personal commitment to your child," various high-flung language classes, and robust drama and arts programs. The websites seemed like they could do with some Mozart in the background (after all, research proves his music enhances learning!), but the general aura was of class and refinement.

As I said, this was all expected. But I was completely floored when I saw the price: Tuition alone costs at least as much as my total cost to attend university! And that's for the cheaper school. The more expensive one costs twice as much, and fees, textbooks, and food are extra.

Now, I get the idea that education is the most valuable thing that you can give to your child, and that this is about their future and everything. But I don't understand how that much money can make a worthwhile difference in the way a kid learns his ABCs, or long division, or even middle-school algebra. At the college level you can talk about spending on the "university brand," but that's only for when you get there.

In college, no one gives a damn where you went to high school, let alone before that. In the end, it really all washes out. The private-school kids sit next to the public-school kids, and any stamp of distinction is immediately worn away.