How can I have another chapter? It is easy, economics is a lot more complex than most Professors think. This one has to do with "Optimization" and "Risk". I have mentioned brittleness before in systems. That is when some structure or system is optimized and in the process, the structure or system has become brittle. Brittleness is a measure of risk in the system. Often people only look at one aspect of a decision or a system. Some people have earned a lot of money in the stock market by taking very large risks while others have lost big. I think we understand risk, but not how much there is or where it can arise from. This blog is not about staying away from risk or minimizing risk, it is about understanding where and how risk may exists. Here I am going to explore a risk that most never considered.
Look at this example. We have two deserted islands where we are going to introduce dogs for the first time. On one island we put a bunch of mongrel dogs and on the other we put pure breed Golden Retrievers. After a period of several years, we go back and check on how the dogs are doing on the islands. What do you think we will find? The island where we released the mongrels, they are doing very well. On the other island where we put the pure breeds, they are "not" any dogs. What happened? That is the point of this blog and how it relates to economics.
Next, I want to define a couple of items related to the dogs. The pure breed dogs are all very much alike which means that, as a group, there is little variance between them. The mongrel dogs are much different. No two look much alike or are of similar size or color. That means that, as a group, they have much more variance, This variance is what made it possible for the mongrel dogs to flourish on the island. There were a few odd balls in that group who could flourish on the strange types of food that were on the island while none of the pure breed dogs had the trait needed.
Are you starting see a message here? If not, I will go on. Specialization is one of the key items used in most systems to optimize them and it works. The problem is that specialization also introduces risk into the system too. Urbanization is one of the most significant optimization actions, but it also creates risk. During our Great Depression, the people in large cities were much worse off than those in small towns or on farms. This is because people who thrive in big cities need or have special skills. If the demand for their skills change, it has a big negative impact on these people.
As pointed out in a prior blog, intellect is the most important economic factor people need for the future. If we have a population groups who have the same "average" intellect, does that mean that each group will have similar risk of being competitive in the future? Many be not. Like the example with the dogs, a group that has more variation in intellect may do better in the changing future than a group that has less variation. The group will more variation will have more very smart people than the group with less variation. It will have more stupid people too. It many also be that variation could be more important than the "average". That means a group that has a lower intellect "average" may be better off if they have more variation. In the case of the dogs, it was variation that accounted for the survival of the mongrel dogs.
It is a subtle point, but uniformity may be bad. Look at schools. Would it be better if they were more alike or different? What about Obama care where we all have the same medical system? Look at cars. Would we better off if all cars were made the same way? What if farmers all grew the same variety of corn? Would that be good or very risky? It is a fact that farmers are tending to fewer and fewer varieties of crops and it is a big risk for out future food supply while in the short term we get more food. I could go on and on with examples where uniformity brings risk and in many cases it out weights the benefits. The point of this blog is to bring this important point to your attention so that when you see something that looks good in the short term, in the long term, it may be very bad.
