The Price of Inequality

Recently, the United States has had a glut of school shootings, and you may be wondering what that has to do with the title. I am going to suggest, quite a lot, indirectly. It also illustrates society’s inability to reason. There are continual calls for gun control, and while I agree there is a rather bizarre lack of responsibility in the ability to buy guns in the US, I do not think that is particularly relevant to what has happened. When I was a boy, I had access to a 22 calibre rifle that I used to go rabbit shooting (rabbits are a real pest in Australia and New Zealand because there are no controlling predators) and yes, I went out and shot rabbits, as did some of my friends, but nobody even thought about going out and shooting a person, let alone a bunch of school children. Why not? Because we all were looking forward to joining society, and we had ambitions. Not big ambitions, but we saw our future place. Of course it did not turn out as we envisaged, but it never does.

So, what is different now? My guess is that too many of the younger generation do not see a future they want. In the US, they see the rust belt, they see the jobs have gone to Asia. Of course the more capable ones see a future, but my betting is the shooters are the very disgruntled ones that see themselves heading to the bottom of the heap. They see nothing to live for, so their warped thinking says they should take out some others first.

And here I come to inequality. What can a young person aspire to, if they are of the pessimistic style nature? In many places, house costs have risen hopelessly so as to price out such ownership from the below average income earner, and worse, more and more people are becoming below average. That is because all the wealth has rocketed into the hands of a few. They see the elderly coming to the point where they cannot retire because they cannot afford to. It is all very well to say that the elderly like working. Some do, but many have started a decline in their health and can’t. Too many people spend most of their income balancing a debt problem. Now you may say, that is their fault, and to some extent it is, but what sort of society are we if there is no way out for the tolerably useful?

An added problem is that as the general income declines, and governments seem determined to lower taxes on the rich, who, by and large, pay surprisingly little anyway, then we see a decline in social welfare, like healthcare, pensions, and an increase in education costs. And what is bizarre, and shows that in a democracy you cannot go wrong by assuming the general population is mathematically illiterate, we find the poor voting for a tax cut that will save them the odd few dollars a week only to find their costs for social services have risen astronomically. And a further odd thing about this is that governments tell their people that they are making progress by privatising such social requirements. “The private sector does things more efficiently,” the economists say, without bothering to check whether the private sector is actually doing it for any but the rich. If you don’t believe me, check the US drug prices, and compare them with many other countries with a state-run single buyer system. Of course the private sector is more efficient but that is at making money, its only real objective.

So, what we see are a few who are making money in truly gross amounts by taking from the many. By and large they are not adding anything to society. Since when did credit default swaps increase the general well-being? And this is what the young see. Something needs to be done, but they feel helpless. Except for the unfortunate monster with a gun.

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Are drug prices fair?

Recently in the Huffington Post, Allen Frances wrote a blog asking, “Why are most cancer drugs so expensive and so ineffective?” The link is below for those interested.
(http://www.huffingtonpost.com/allen-frances/why-are-most-cancer-drugs_b_8294392.html?utm_hp_ref=science&ir=Science )
That is most certainly a good question. A summary of his points includes that the pharmaceutical industry is essentially a monopoly, in that only one company will make any given patented product. In the US, it exerts far too much political pressure, and as an example, he claimed Congress denied the Medicare program the right to negotiate drug prices. He claims there is a price monopoly, for even when generic drugs can be made, the pharmaceutical companies buy up the companies. He claims patent lives are extended with phoney variations. But in my mind, even worse, drug companies test their own products, but do not have to release the data for analysis by neutral observers. The companies hype the benefits and minimize disclosure of any risks.

He then cites some data from a Dr Prasad. Some of his findings include, the price of Gleevac rose from $30,000 in 2001 to $70,000 today, despite the fact the cost to make it is $200 (for a year’s course). However, at least Gleevac actually works. According to Dr Prasad, the median improvement in survival for 71 drugs for solid tumours produced in the last decade is 2.1 months. That may well be an overestimate because only 36% of those over 65 yrs old were in the trial, but that age group represents 60% of the patients in the wider community. Another interesting question is, given that many of these drugs have very severe consequences to the patient, is that 2.1 months worth it?

So, how do the companies do? Seemingly, remarkably well, with returns of between 10 – 42%. I saw a recent article that stated one product that had been sold for $20 per prescription had it raised to $1,000. When asked why, a spokesman said they wanted to make more money. Well, yes, I suppose they do. Don’t we all? The products are grossly overpriced, and only too often it appears they don’t really work all that well. There is the argument that research costs a lot. Yes, it does, but despite this, these companies are hugely profitable. In my view, this is simply price gouging, and it shows the ugly side of capitalism. A further interesting question would be, how much tax do they pay on these profits? Given that some large companies pay very little, one suspects the answer is, not much.

Usually, economic theory works on the basis that if there is a bad product, people will not buy it. However, with cancer drugs, that theory goes out the window. The average person has no hope whatsoever of deciding whether the product is any good, and you find out it is not when you die, or come close to it. Earlier this year, my wife died of cancer, so I know the pressure on the relations. Who can tell someone dying that product B is a waste of money, and it will bring penury to the remaining family members? And no, this situation did not arise for me. Claire was diagnosed in November, some simple treatment was provided as a holding measure while various things were done, and proper treatment was to start after Christmas. As it happened, her funeral was on the day scheduled for the start of treatment. Nevertheless, when someone you love is dying, you cannot really think rationally. There is a temptation to grasp at straws, but think what the grasping is like if you hear promising things from the drug companies? The very least we could ask for is a fair and open discussion of the prospects, and the basis for saying that. And we should expect that where there is little to substantiate the claims, at the very least the straw to be grasped should involve only reasonable expenses. Price gouging for performance is, in my view, not justifiable, but price gouging for what may be little better than snake oil is in my view criminal.

Economics and self-interest

A significant part of my science fiction writing involves matters of economics, and one of the things that often annoy me on many discussions of economics, and the positions people take, the advocates do not take themselves out of the picture. In short, their positions tend to be in their own self-interest. Ha! you say, what is so different about me? The simplest answer is that in my novels, I am not advocating the answer, but rather I am pointing out some things that can go wrong. One obvious source of fraud is when there is shortage of accurate information. Fraud thrives when the real situation is difficult to uncover. The most obvious source is obfuscation.

Stock fraud is often accompanied by a plethora of different companies, but deep down, they are essentially the same, and only there to confuse. This situation is difficult to pin down early because there are often good reasons during the start of a venture for a number of companies. During the initial period entrepreneurs may not know where they are going, and may want to plant different assets in different companies to protect themselves, and this is quite legitimate. Another good reason can come from international trading. As an example, I am associated with a company that makes skin gel products. They started out under the name “Sports Essentials Ltd”, but now they are “Nemidon Ltd.” The reason – the first name had been taken by another company in part of the US, so we needed another name for the same organization, and not to sell in the US makes little sense.

When writing a novel, of course, the author tries to accentuate the points he is trying to make. Thus in my Red Gold, which was about the colonization of Mars, a basic problem arose because one of the characters was involved in floating stock relating to new Martian ventures on the Earth stock exchange, and he had the basic problem that he did not have anything that was particularly legitimate. The problem I was showing was the effects of the lack of proper information. On Mars, of course, verification of anything from Earth was very nearly impossible, so the door was open for fraud, and if anything has been shown relating to money, if there is an opportunity for fraud, there will be fraud.

Just recently in Britain, a trader, Tom Hayes, has been convicted of manipulating the Libor (London interbank offered rate, which determines interest rates on interbank lending) so that he could manipulate trades and make quite a bit of money while doing so based on his manipulations. One way the rates can be manipulated comes from the way the Libor is calculated, which involves banks estimating what they would pay to borrow currencies. Because the rates are then calculated and do not involve actual transactions, faulty information alters the rate, and it is alleged that a number of banks conspired to submit false rates, and then take advantage of the result. This type of fraud is simply a consequence of the financial system finding an easy way to operate, and thus giving a limited few a remarkable advantage in transactions. A handful of people in a special position in a bank and operating for themselves could generate the opportunities to make millions. Wherever there is such advantage, people will take it.

Another thing that annoys me is the hypocrisy of the privileged. The following link contains an example:
http://arstechnica.com/science/2015/08/editorial-utilities-love-the-free-market-until-they-dont/
The basic point was that when it suited it, FirstEnergy Corp., an Ohio-based utility, was strong advocate of deregulation and the free market. As it got what it wanted, it made big bets on coal and nuclear, as these were sources of electricity with stable prices. However, since then, in part due to fracking, which it did not foresee, gas prices have plunged. It bet heavily and lost so what does it do now? It wants ratepayers to cover the full costs from some of its biggest generating plants, even if other sources of electricity would be cheaper for consumers. Apparently FirstEnergy has also lobbied strongly to slow the adoption of energy efficiency technology and to stop implementation of renewable energy requirements. In other words, such advocates of the free market want the market to be free while they are raking in the cash, and to have rescue packages imposed on all and sundry when they are not.

This is not a one-off event. Now that President Obama has signaled the requirement for the reduction of carbon dioxide emissions, we see the coal industry lobbying strongly to overturn this advance. This is an overall problem for governance, and now, confession time, everything I have advocated in my books relating to economics has been the subject of the plot in which every good system I can come up with ends up subverted subverted. And that, I suspect, is the real message from economics: no system will work better than its participants will let it, and where money is involved, letting it work is not a priority for some. Not a pleasant thought.

Geoengineering: to do or not do?

For those interested in science, and in global warming, a recent issue of Nature (vol 516, pp 20 – 21) showed some of the problems relating to geoengineering, which involves taking action to change the climate. Strictly speaking, we are already doing it. By burning fossil fuels we are warming the planet through the additional carbon dioxide in the atmosphere. The question is, can we reverse this warming in a controlled fashion? The argument behind geoengineering is simple: we can either try it or not try it. If we do, we have the potential to create massive new problems; if we do not, sea levels will eventually rise somewhere between 20 – 50 meters, drowning all our coastal cities, destroying a surprising amount of some of the most productive farmland, and altering rainfall distributions quite dramatically. Then, of course, there are more violent storms. So, what are the options?
One is to try to increase the amount of light reflected to space, which can be achieved by forming more clouds. One way to do this is to spray salt water into the air. This has the advantage of being easy to do, and easy to stop doing. It is harder to know the consequences, but we should be able to predict to some extent because volcanic eruptions will do something similar to what is being proposed. Climate scientists, however, complain that this may reduce rainfall in some regions and possibly worsen ozone depletion. Of course they also warn that rainfall will be reduced anyway. Meanwhile, a computer simulation produced results that indicated changes in rainfall consequent to geoengineering “could affect 25 – 65% of the world’s population”. Charming! No comment that the changes could be beneficial. No comment either about the fact that any given model has consistently failed to predict details of weather.
However, from my point of view, the most bizarre outcome came from the proposal to seed the oceans to grow microalgae, which grow very rapidly and take up carbon dioxide in doing so. When the algae die, they should sink to the ocean floor and trap carbon. Trouble was, in some of the few experiments, it seems they did not, possibly because the algae did not die, or possibly because the experimenters did not count it properly. One other outcome might be that they get eaten by fish, thus improving the world’s food supply, and another might be that they give off dimethyl sulphide (and use up quite a bit of solar energy in doing so) which goes to the atmosphere, gets oxidized by absorbing more light, and then forms clouds, which reflects light. Ideal?
As a potential means of fighting climate change, I admit to liking this idea, nevertheless there is a problem, but not what you might think. Or maybe you would. Yep, it is financial embarrassment. Entrepreneurs decided to seed the oceans this way to generate large volumes of carbon credits, which could be sold to those who wanted to burn more coal, a sure way of reducing greenhouse gases! Yeah, right! Anyway, that was headed off by an international treaty, in which this activity was stopped by labeling it “ocean pollution”, and no further experiments have taken place. Talk about useless politicians!
The problem is as I see it that the politicians cannot seem to recognize that a technical problem needs a technical solution. The economists cannot solve this, as shown by that response to an emissions trading scheme noted above. The problem is, changing the prices of forms of energy cannot in themselves generate energy. Conservation may be encouraged, and that is good, but ultimately our lifestyle requires a very high fraction of what we currently use. Worse, there is no point in denying the fact that the planet is warming, and the only solution is to cool it. Cutting emissions is definitely desirable, but it is not enough to retain our previous climate because the gases currently there produce net warming, and this extra warming would continue for at least a hundred years if no further gases were emitted during that time. If we do not want to do something, who pays the price for what happens?

Scottish secession? A failure of governance?

In the previous post, I discussed the issue of secession, admittedly, because it was a blog post and not a book, in a very oversimplified way, but the question remains, why join, or why secede? First, union. Groups unite because together they are stronger than when separate. Historically, strength was important to save the citizens from being exploited, or even pillaged. The US is now so strong militarily that probably nobody can defeat it, but that would not be the case if it comprised fifty squabbling separate countries. Similarly, the fact that the US has such a strong economy means that it alone of all countries can print the world’s reserve currency. However, to form a union, the various disparate groups have to give up things. Why secede? My guess is, at least one of the various groups feels it has been discriminated against. Thus in Iraq, the main problem is probably not religion, but rather the corruption of the various leaders who use religion to support their positions and suppress others. We see that at present in Iraq where the US set up a “democracy”, and al-Maliki set about suppressing the Sunnis. But shortly, Scotland will vote on secession. What could have led to that? The question is important because it shines some light on the nature of governance. Points to note are that the Scots have not been deliberately treated differently from any other citizens in the UK, which in turn has been quite reasonably governed. There has been no selective discrimination, and no clearly bad governance or corruption. So why? 

My guess is the ignition point came from Margaret Thatcher. Her ultra right wing policies caused the end of heavy industry in the UK, which in turn was largely in Scotland. The problem was not restricted to Scotland, as the Welsh coal industry shutdown, and the English automotive industry was effectively ended, but the damage to Glasgow was probably far greater than anywhere else. So, why did Thatcher do that? It most certainly was not just to deal to Labour party constituencies. The problem was that the industries in Britain had become very inefficient, and could not stand on their own two feet.

There were various villains. First, the cost of labour was not competitive with the cost in places such as Korea. The options for Clyde shipbuilding, for example, were to pay workers on Korean levels (that was not going to happen), sell their ships for higher prices (how?), or they had to make them more efficiently. The German automotive industry faced the same challenges, and it succeeded by accepting it would have to sell cars at a higher price, but they would make them better. The key was to give value. Many British industries did not follow this strategy, which required intense investment in R&D, and in modernizing their factories. Management failed Britain, and management is also part of governance.

The Unions were also part of governance, and were part of the problem. To protect employment, they demanded over-manning. The classic example involved changing a light bulb. It has been stated that an electrical worker had to change the bulb, a rigger had to hold the ladder, and there had to be someone from stores to bring the new bulb. This in turn has given rise to a range of jokes. One of the more biting examples is:

How many theoretical physicists are required to change a light bulb?

Answer: Two. One to hold the bulb, and one to rotate the Universe.

The joke has nothing to do with light bulbs, or employment.

Another problem is that union requires sharing, and agitators leap on the advantages of not sharing, when there are such advantages. Thus if Scotland secedes, Scotland will get the oil money. That will make some Scottish politicians salivate. There will be a price, and whether the voters hear about such prices is another matter. I have no idea what the Scottish voters will decide, but it raises the issue that as the size of a union grows, what matters most? Economic efficiency or fairness? What should be done to promote what you choose? Any thoughts?

Inequality in Society

By now, just about everyone will have heard about Thomas Piketty, who has claimed that the world inequality is getting worse and inevitably it will get much worse, on the grounds that wealth generates wealth. He has been attacked from various quarters, usually on relatively irrelevant details, for example that some of the data in his statistics are not quite right, but so far nobody has provided a knockout blow. Now, in

a recent edition of Science, where a number of articles addressed this issue of inequality of income in the world, one particular item took my attention: it arose from some physicists who argued such inequality is natural and arises from considerations similar to those of the second law of thermodynamics. Very specifically, they consider the statistical origin of entropy, and argue that a distribution of wealth where everyone has the same is just one of very many distributions, so it is extremely improbable when one considers how wealth evolves. 

One way to illustrate the concept is to construct a simple model, and this is instructive (in my opinion, anyway) because it also shows something about models. Consider a game with these rules. There are 128 participants, and they play in rounds, and every round the players earn one credit. At the end of the round they may spend any of what they have, or they can save. If they get four credits, on the next round they get a bonus credit (return on investment) and they also have the choice of borrowing a further four credits. To further simplify, assume there is a fifty per cent chance of taking a specific option from the choice of two, and if the option is to spend, the choices of how much is evenly divided amongst the options. Now, watch how this game evolves.

At the end of round 1, each player has 1 credit, and half elect to spend it, which gives 64 with 1 credit and 64 on zero. Following round two, half of the first 64 continue to save, and half of those who choose to spend use one credit and the other half both credits. So we now have 32 with two credits, 48 with 1 credit and 48 with none. The reader can keep this going for himself, but it soon becomes apparent that 8 soon reach the 4 credit mark, at which point they get their bonus, then two will further invest, and of these, 1 will take the option of borrowing, and that one gains two each round, even though by borrowing he effectively has to repay at some stage. So, after five rounds, out of 128 originals, 1 has got ahead of everyone else, and only one other is close behind.

 

The analogy with entropy is as follows. In statistical thermodynamics, the entropy of a state is proportional to the logarithm of the number of ways of forming it, and the more ways, the higher the entropy. The second law says a system tries to maximize entropy. There is only one way to get to maximum wealth, while there are many ways to get a low wealth.

You may protest that this game is too crude, and you would be right, but it shows something about models. The first point about models is you have to get all the equations (a numerical statement of the rules) down and you have to accurately fix all the constants and functions. In this example, all earnings are in units of 1 (a constant) but in practice, it will be a distribution. Similarly with investment returns, and there are a number of other problems. Nevertheless, this simple model gives a qualitative result that matches reality: the distribution of wealth will always be unequal because different people make different decisions on what to do with what they earn, and the effects become very pronounced quite quickly. What this model has really done is not to predict social behavior, but rather to show the effects of a proposition, and that is where models are strong.