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Andres Aullet


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Trickle down vs. trickle up

The more businesses are left alone to do what they do best (sell a product or service), free from regulations, external influences and excessive taxation, the better they will be.

Loans and extra profits can be then used for more business creation and business growth, which in return drive more economic prosperity for investors, and that also "trickles down" to workers (as jobs and better salaries) and consumers (as lower prices) and everybody benefits in the end.

Or so the story goes.

Although the theory says that when investors gets richer, they use this extra wealth to promote more businesses, and in the process creating more jobs and driving prices down through specialization; there are many examples where the extra wealth is either just accumulated, or it is invested in ways that do not create jobs nor drive prices down.

Would things work in reverse?

What if individuals rather than businesses were the recipients of loans (micro), left alone to do what they do best (which i contend is creativity), as free from regulations, external influences and excessive taxation as possible.

They would then require raw materials and more people to put their ideas into action, they would need products and services offered by bigger businesses. In the end, everybody would benefit and the economic prosperity would trickle up

Obviously, this is an idealization.

But, could we benefit from a balance of both approaches?


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    Nov 3 2012: The free market is indeed free. It's free of responsibility, accountability and liability. It's free of giving any value to natural resources, ecosystem services and all of the 'commons' we share living on this once garden planet. This disconnect is getting bigger every year with the eventually outcome of inter-generational civil war, as our children and grand children understand how selfish we have been. We need new analysis that understands these new dynamics, not looking backwards into the rear view mirror. Wake up...
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      Nov 3 2012: The truth is timeless. If you look into it will be brand new to you.
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      Nov 3 2012: Hi Craig,

      Many discussions here on ted quickly fall into a believers of free market vs. non believers of free market. I have rarely seen people switch sides or give up on convictions.

      Problem with many of these discussions are that they are mostly philosophical. Economics is considered a science, but (and I will be considered blasphemous here), i do not see it nearly in the same category as mathematics, physics or chemistry. I see economics more sided towards philosophy than science

      I am not sure if it is a problem of new or old. I don't agree with people who try to dismiss something because it has been tried before.

      But i agree with you. The commons is something that worked for thousands of years before capitalism (look at the history of the native americans), and was successful for a period much longer than market economy has been in in practice. So it is false to try to dismiss the commons as tried but unsuccessful. These new dynamics you propose would actually involve going back to the past. Just a bit more distant past.

      Whether pure free market works or not, i do not know yet, as i have not seen it at work (not without external influences). And i am not optimistic that it can be tried anywhere. So even though the theory is well developed, it still remains to be confirmed

      However, both you and I live in some sort of market economy, and money is used, at least for now, to facilitate transactions between individuals.

      By trickle down or trickle up I am trying to focus on how money would flow if investment were to be made differently (in individuals and micro businesses rather than big businesses)

      I realize it is a mental exercise, but I am trying to use it to highlight the way money actually flows in the type of economy we have today, and maybe find ways to improve it

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        Nov 3 2012: It is a lot more science than art. The art part might stem from ignorance of the subject?
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          Nov 3 2012: Hi Pat,

          Interesting concept. I was thinking philosophy and not art.

          I must agree with you, economics is further from art than it is from science, but so is psychology, and yet i consider psychology easier to test scientifically than economics (based on ease of repeatability)

          Mind you that i don't consider art (or philosophy for that matter) as deriving from ignorance. I value both and as a musician, i am well aware of the value art brings into my life. I never considered economics would have much related to an art, but for those who do (even if it is in the sense of considering it some kind of magic and obscure art), i think i get your point about ignorance and concur

          I lack a formal education in economics, but i do have a formal education in physics. And the way one tests science in physics is rarely seen in the field of economy.

          That was the basis of my assessment of economics as more related to philosophy than science
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        Nov 3 2012: My mistake.

        Keeping with the art analogy though, both are an exercise in communication. Art through the medium of stories, painting, movies, etc. The economy through the medium of exchange and money. Either way they fulfill the communication through understanding in the case of art or exchange in the case of the economy. With the artist his goal is to hear the observer say oh I get it. With the seller it is yes I want to buy that. Does that make sense?

        The reality is that the economy has predictable elements to it. E.G. the government makes a lot of money available for housing the price of housing goes up. The government makes a lot of money available for education the price of education goes up. The government subsidizes ethanol the price of corn goes up. The government prints money the value of money goes down. The government set the interest rates lower than the market indicates money becomes more plentiful. The government lowers the money supply you have deflation for 15 years. Do you see a pattern?

        It is less predictable when you look at the human element. By definition money requires confidence. When the confidence is lowered so is the value.
      • Nov 3 2012: Not philosophy...psychology. Economics is based on belief and fear underlying processes that we have developed over the centuries to keep everything running.
        A free market is a market free from control. This is an acknowlegment that the market, even a simple one, is too complex to be completely controlled. When it is controlled, underlying fears that the processes of the market can't be trusted and it all collapses.
        It's not a science in my opinion because when the 2007 collapse started, all the technical predictors suddenly disapeared after realizing that their predictions were as accurate as horoscope predictions and based on a science as real as alchemy.
      • Nov 4 2012: About the science of economics, I'll quote from http://wiki.mises.org/wiki/Austrian_School
        Austrian School economists advocate strict adherence to methodological individualism – analyzing human action from the perspective of individual agents.[25] Proponents of this method, praxeology, argue that the only means of arriving at a valid economic theory is to derive it logically from basic principles of human action. Proponents of this method hold that it allows for the discovery of fundamental economic laws valid for all human action. Alongside praxeology, the school has traditionally advocated an interpretive approach to history to address specific historical events.
        Austrian economists reject empirical statistical methods as tools applicable to economics, saying that while it is appropriate in the natural sciences where causal factors can be isolated in laboratory conditions, the actions of human beings are far too complex for this "numerical" treatment as passive non-adaptive subjects. Instead one should isolate the logical processes of human action. Von Mises called this discipline "praxeology" – a term he adapted from Alfred Espinas (but which had been in use by others).[26]
        The Austrian praxeological method is based on the heavy use of logical deduction from what they assert to be undeniable, self-evident axioms or irrefutable facts about human existence. The primary axiom from which Austrian economists deduce further certain conclusions is the action axiom, which holds that humans take conscious action toward chosen goals.[27]
        END QUOTE

        Of course, you'll have to follow the real literature if you want anything more than the samplers I can provide in TED chats.
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          Nov 6 2012: Hi John,

          indeed the mises.org has a lot of great information on the free market. I have spent many an afternoon reading there.

          However, I have also read the work of Kahneman and Tversky regarding the process of decision under uncertainty, cognitive biases, framing and anchoring effects. I have also followed the work of Dan Ariely in behavioral economics.

          There seems to be strong evidence against the theory that people decide and act as individual rational agents.

          How does this fact change the standard free market theory? Has anybody adjusted for it?

          In addition to the not-so-rational behavior of individuals, I was discussing with Bob (below) two other open questions i still have regarding the free market theory: 1) what about human survival in the thousands of years before money was invented?, and where are the commons in the theory? 2) what about the fact that demand can be easily altered by an agent with enough capital or access to resources? what does that say to the demand based value?

          I'll be glad to read specific docs at mises.org if you have suggestions, i am always up for learning something new

      • Nov 6 2012: Mises has written quite a bit about rationality and irrationality, and about uncertainty -- all in his "Human Action". Try the subsections called "Rationality and Irrationality; Subjectivism and Objectivity of Praxeological Research" and chapter 6, "Uncertainty".

        Completely unrelated to Mises, the psychologist, Carl Rogers said "Man's behavior is exquisitely rational, moving with subtle and ordered complexity toward the goals his organism is endeavoring to achieve. The tragedy for most of us is that our defenses keep us from being aware of this rationality, so that consciously we are moving in one direction, while organismically we are moving in another."

        Is there anything specific by Kahneman, Tversky or Ariely that you could refer me to?
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          Nov 6 2012: Thank you for the pointers John, i'll be doing my homework

          For Kahneman/Tversky you can find some starting info in wikipedia:


          There is also an excellent book i am still reading by Kahneman called Thinking Fast Thinking Slow which contains a lot of his research way beyond prospect theory

          As for Dan Ariely, you can start here:


          Or if interested, his book Predictably Irrational talks in depth about his research in decision making

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        Nov 6 2012: some time ago ariely himself appeared in one of the TED conversations. he specifically asked why we, free market guys, believe that with all that weird things going on in the human mind, people can make right choices. my answer was that in a democratic setting, if 51% of people are wrong, we will do the wrong thing. in the free market, if 1% of people want to do the right thing, they can, and if it works, others will copy it. alas, he didn't reply to that, probably had better things to do.

        so my take on that: i love what he is doing, but it is in fact in favor of free markets. the free market has a strong correcting effect, as it provides immediate feedback. on the other hand, complex systems like the state distances bad decisions from their consequences, and therefore lack this corrective force.
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          Nov 6 2012: I agree with you Krisztian, in the sense that there are indeed self correcting forces in the free market. I guess the difference is that i think those correcting forces are not all pervasive.

          I do criticize the free markets, but that does not mean i think the theory is completely wrong or should be just discarded. Only today (thanks to John) i learned about what Mises wrote on rationality and irrationality. I do think that a comprehensive free market theory should take into account behavioral economics as well, specially when behavioral economics can make specific predictions and be tested systematically

          You say that in the free market if 1% of people want to do the right thing they can, but i propose that even for that 1%, in order to do the right thing they need to absorb a fair amount of information and to be aware of their own decision making bias (if by doing the right thing we mean a making a decision that will maximize their gain)

          Not saying it is impossible. You, for example, know much more about how the market works, and you sound quite rational. So i can imagine that you would have less trouble being in that 1% doing the right thing. But I cannot say the same about every actor participating in the economic system.

          And even being careful enough, and compensating for incomplete information, etc, we cannot avoid but to receive some of the economic effects of decisions by other people not being so rational

          I fully agree that distance decreases the likelihood of self-correcting mechanisms (hey i am for government as small as it can possibly be!)

        • Nov 6 2012: @Krisztián Pintér: "if 51% of people are wrong, we will [all] do the wrong thing" is an excellent reply to Ariely! But IMO, it only works against Ariely and his sympathizers because they seem to have fallen into the trap of believing that:
          1. Irrationality is ubiquitous.
          2. Therefore irrationality is the rule, rather than the exception.
          3. Except, mysteriously, in governments. (the fault that you pointed out)

          I think Ariely has to put in a lot more work to even make 1. convincing. (This is my understanding based on just his talks -- I haven't read his research papers.)
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        Nov 6 2012: "I do think that a comprehensive free market theory should take into account behavioral economics as well"

        and i think it should not. just as it should not take personal values into account. economics takes people's preferences and choices as granted. we don't need to further examine that, it is enough to say that people do pursue their own happiness, so some of their actions are aimed at those. that is all we need.

        "but i propose that even for that 1%, in order to do the right thing they need to absorb a fair amount of information"

        first: no they don't have to. people just act differently, and some of them randomly does the thing that works. evolution does this, and it works. second: no doubt understanding is better than random chance. some people did the research, and acquired the necessary information to make the right choice. that is enough. we don't need to appoint such people. we just let them do their stuff, and see what works.

        it does not matter of other people don't do the right thing. they use their own stuff, so they only can ruin that. the loss will tell them that they should change tactics.

        and one more note: there is that thing called the "nirvana fallacy". it is an error dismissing an idea for it is not perfect. the alternative is not perfect either. we don't need perfect solutions, we need the best solution. and it is not too hard to show that freedom is a better solution than a state. after all, all the problems individuals face, the state also faces. what makes them less susceptible to errors? nothing. every organization is susceptible for errors. success lies in the correction mechanisms, not in fallibility.
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          Nov 6 2012: One of the biggest issues i see with free market theory is a particular instance people call "the corrective forces or the market", referring to the way stock markets work today

          Maybe if individuals bought their own stock, making personal gains and taking personal risks, i would give the idea of this exchange of stock a bit more credit as a corrective force. But the fact is, most exchanges in wall street are subject to human factors: fears, rumors, conflict between benefiting one customer over another (I think Dan Ariely is onto something here). And the effects of brokers' decisions usually "trickle down" to third parties

          Even if individuals were the sole players in the stock market, we would still have to account for the fact that our brain is incapable of having an intuition about small vs large probabilities, that is correct enough to trade stock successfully. So even individuals would fail to make rational decisions most of the time

          There is little we can do to change our brain physiology, evolution does not work that fast

          On people's preferences, I disagree with you. I can consider the idealization of individuals as having preferences and choices granted, but i know it is a mental exercise, useful for the theory to remain solid. But at the end of the day, one must step back from the idealization (just as we must step back and see nirvana for what it is, not a destination but a useful pointer), and accept that humans are not such ideal creatures. And i do see the imperative of further examine it

          As I have said, i am not for dismissing free market theory just because it is not perfect. i am trying to see it as a scientific theory (this, too an idealization) and follow the same example i've seen thousands of times in the history of science: when facts remain unexplained by a theory, it is not always necessary to discard it, but to incorporate it into a bigger, more general theory

          As to freedom vs state, i still fail to see it black and white

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        Nov 6 2012: " But the fact is, most exchanges in wall street are subject to human factors: fears, rumors"

        we can elaborate it all day long, but the bottom line is the same: those that sell or buy out of fear or misconception, will lose money. either they mend their ways, or lose everything. at the end, irrational elements will be eliminated from the marketplace. we can dig deeper how to avoid such traps, but we don't have to. just with the trial and error, we will find the right people for the job.

        another question would be the proposed solution to that "problem". how would a state fix this? how would laws fix this? what would make the legislator free of such influences? why would any other solution based on people any better?

        "I can consider the idealization of individuals as having preferences and choices granted"

        it is not what i have said. i said this is granted from the POV of economics. of course it is a forever changing input, but we should not care. there is a reason why we should not care. the reason is we can't override what people want according to what is "good". it is an evil way of thinking. the only moral way to change what people want is through arguments. but then, if we did that, people just have a new set of values, and economics should not care about the reason, it is enough to deal with the new situation. whatever people want, the economy can provide.

        " i am trying to see it as a scientific theory"

        free market is not a theory. it is an artificial construct. we claim that it is the best arrangement for humans to live in. that claim is based on theories, namely economics and ethics. but in fact we can argue from purely ethical standpoint too. so i'm not sure what you are talking about here.
      • Nov 6 2012: Thanks for the links. At the risk of sounding arrogant, I'll confess that I had come up with the idea behind Prospect Theory by myself, a few years ago. :-) But, I do not mean to imply that I had worked out all its repercussions and done existential research that Kahneman and Tversky might have done.

        The reason I bring it up is to explain that I had already factored this into my understanding of economics, but this seemed to have no bearing at all to whether or not free markets are good. Of course, if someone else has done an analysis, I'm open to reading it.

        However, Prospect Theory has a good deal to say about the voting system: http://www.youtube.com/watch?v=s7tWHJfhiyo (This video does not make the connection explicit, but keep it in mind as you watch the video.)

        I just finished watching Ariely's talk, "Are we in control of our own decisions?". The message it brought me was "question your choices, especially your defaults". Another thing it highlighted was that marketers (of subscriptions to The Economist, in this case) had already figured out what psychologists are only discovering now. :-)

        All this is fine... I can see that these things may influence /some/ things: like my choice of shirts to buy, or brand cooking oil I use. It seems to have had no effect at all on my professional life. When I built robots, for example, it was always things like technical suitability, availability, cost, existing tool-set, and other hard facts. Companies did send marketing material, like the coolest new voltage regulators, ADCs, flash memories, etc., but none of it ever swayed me or any other engineer I have worked with. I must add that I had complete authority on what could go into my systems. Similar hard-factors applied when interviewing people to work on my teams, etc.

        Ariely's message seems to have been pointless in my professional life. But I have not read his book. Since you have, I ask you: can you see that kind of irrationality in your own professional life?
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          Nov 7 2012: it is of key importance to mention that all these experiments always have mixed results. we marvel at the 80% or 55% that make weird decisions. it is a ritual now among many people to recite such result like some mantra. but nobody seems to talk about the 20% or the 45% that did not fall for the trap. we don't hear about it. everybody knows about these experiments, but let me ask a few questions about those rational percentage.

          1. some people always rational, or many people are rational sometimes?
          2. what circumstances help or hinder rationality?
          3. what are the personality traits, gender, age, profession distribution of rational people?

          where is the data on that?
    • Nov 3 2012: "The free market is indeed free. It's free of responsibility, accountability and liability. It's free of giving any value to natural resources, ecosystem services and all of the 'commons' we share living on this once garden planet."

      Exactly, as long as the rich can retreat to gated communities at locations of their choosing they will not be concerned with what happens to the rest of the planet.

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