May 30, 2010
Human Brains Not Wired For Consumer Credit
An article in the The Star of Toronto about Canadian debt quotes CalTech behavioral economics researcher Colin Camerer on how we just aren't adapted to modern consumer credit and humans clearly can't handle it. Governments, also made up of humans, similarly can't handle debt rationally either.
How were consumers expected to fare in, if not a free-money environment, certainly an easy-money environment here at home? “The idea that you can walk into a store with a piece of plastic — you may even be a college student with no income — and buy $5,000 worth of stuff is unbelievable,” Camerer continues. “Thinking like a neuroscientist, nothing in our brain evolution has equipped us to make the right decision in that case.”
When we buy on credit the part of our brain that registers that we are acquiring some good experiences a stronger stimulus than the part of our brain that registers that we are taking on a debt or future obligation.
The brain, in other words, isn’t really up to the task. “We’re not well equipped to say if I give this piece of plastic to this person and scribble my name, 10 years from now I might owe $67,000. It’s sort of a battle between this highly evolved acquisitive nature and the ability to imagine owing a lot of money years from now. The acquisitive nature part of the brain wins.”
When he says “imagine owing,” Camerer is referring to the magic of compound interest. “We’re pretty good intuitively at linear extrapolation,” he says — if you pay $100 each year for 10 years how much will you have paid at the end of that period? “But we’re not very good at the numeracy of compound interest.”
From an evolutionary perspective this is not surprising. For only a very very small portion of our evolutionary history did most goods and services come to us as a result of market transactions. Middle Ages subsistence farmers did not have bank accounts or credit cards.
The article quotes another researcher who argues that humans tend to overestimate good things happening to them and underestimate bad things happening to them. That sounds about right. For that reason humans have failed to prepare one of the worst coming developments of the next 20 years. How can things possibly go that bad? There's the expectation of continuity in a good way.
Our failure to prepare is not due to excessive discounting of the future, it's due to resistance to change on the part of those whose careers and investments are dependent on the status quo. We depend on experts for such things as oil supply forecasting, but those experts are captive to the oil industry.
Unfortunately, that leaves the realm of independent forecasting up to people who are excessively afraid of the future, and therefore willing to put in an "unreasonable" amount of time on analysis. So we get the apocalyptic visions of The Oil Drum.
Peak Oil is a difficult thing, but it's far from apocalyptic.
I read a book called: Gut Feelings: The Intelligence of the Unconscious by Gerd Gigerenzer.
It's basic premise is humans work of off heuristics or rules for almost everything. Much of civilization is simply good sets of heuristics/rules/traditions we teach our children to properly deal with life.
I'm betting that a good set of heuristics/rules/traditions would probably allow people to use credit cards properly. Unfortunately our entire society is geared around abandoning traditions in favor of the latist fad science we produces.
What a B.S. generalization!
I've had perfect credit for two decades without ever buying something I didn't need or couldn't afford. It's not an intrinsic property of the "human brain" - some people are just dumb, undisciplined and self-indulgent. This study is the reason why I'm starting to believe scientists are as incompetent and untrustworthy as journalists.
Haumea has got it. I own my house free and clear, and my two cars. I pay off my credit cards every month so I pay no interest to anyone. I have never run up a big bill, even as a teen with my first card. Some people, even really smart ones, are just dumb. I also know plenty of low income, moderate intelligence people who don't abuse credit.
This is science? Take the least responsible 10 or 20 percent of the population and generalize to the whole?
lot of smokers don't quit smoking until they start coughing ... i think we can say humans don't do well at long term thinking ... look at our economy, for example
There was/is a whole generation who profoundly understand consumer credit. My grandmother was in her 20s during the Depression. She understood credit and its dangers. All this study indicates is that we need to let the consequences of over-extending be more severe to the debtor and creditor. Of course, there are benefits to having a well formed bankruptcy system rather than a punitive one.
Haumea, as Men in Black pointed out, "A person is smart. People are dumb, panicky dangerous animals and you know it." I like this one better. If your parents poverty spend, you'll poverty spend (unless acted upon by an outside force). If your parents are both old money you'll likely end up acting like old money. Its the poverty spenders that find their way into money that tend to have the problems. (It seems like i could say you could be of old money but make minimum wage, as its a mindset and not the numbers in your checking account.) Now my dad, being an accountant, drilled the rule of 72 into our heads starting with getting change for allowance at the age of 6. My peers were blowing it on candy and garbage pail kids, but i was saving up so that it would double a handful of times before i retired at 65. And can a toddler really get their head around being 65? Let me stick baseball cards into the spokes of my bike to make it sound like a motorcycle, as nobody ever gets the values listed in the price guide. I cut the tags off the beanie babies and let my kids destroy them to make up for it.
Then again, if your parents saved a dollar a day from the day you were born to when you turned 21, we all wouldn't be in this bind. Congratulations son, you are a millionaire. Go buy a 6 pack, and go to a temple and knock over the tables of the moneychangers. Or better yet, you can make a buck off the sops while you still can, before we end up in a state of overproduction and underconsumption. Jesus and Marx knew what was up, but did we all listen? Agreed on modern science missing out on what the mystics, prophets, and observational comics realized long ago.
If a significant proportion of people used credit cards rationally, consumer credit could not exist in its current form. By NEVER carrying a balance from month-to-month, but by using my credit card for almost every purchase, I accrue "points" and pay no interest. Surely this is not the intent of the entity that floats these very convenient short-term loans. The ethical dilemma is this: is it right for me to allow the willing victims who carry a balance and pay the ridiculously high interest on these instruments subsidize my freedom from the checkbook?
"This study is the reason why I'm starting to believe scientists are as incompetent and untrustworthy as journalists."
Switch on your bullshit detector anytime you hear "behavioral economics." Unfortunately, the field is being taken over by left-over academic Marxists seeking a new platform from which to assault traditional economics, "dialectical materialism" having been relegated to the "dust-bin of history," rather than elaborate traditional economic models of behavior.
A good primer:
Nudge Nudge, Wink Wink
Behavioral economics—the governing theory of Obama’s nanny state.
BY Andrew Ferguson
April 19, 2010, Vol. 15, No. 29
"This grounding in the real world, confirmed by social science, is supposed to make behavioral economics superior to traditional economics as a guide to regulating human activity. Traditional economics—rational choice economics, or neoclassical economics—gets a rough going over from behavioral economists. By their reading, its gravest error is to accept homo economicus, the notion that man is a rational economic actor who is acting always and everywhere in his own best interest, however conceived. Traditional economists don’t really believe this, at least not with the dogmatic insistence they’re accused of, but pretending that they do allows behavioral economists to position themselves as hard-headed realists trying to correct the airy abstractions of out-of-touch dreamers—a clever reversal of the cliché that usually makes liberals out to be the softies and right-wingers the no-nonsense types. Behavioral economics, wrote a smitten correspondent for the New York Times, “is the study of everyday life as it actually happens, not as some textbook says it should.”"
SOME humans can't handle it. The problem is when society goes "collective" - and we are all held hostage to our fellow citizens who can't handle money, and who elect politicians who can't handle money - and force us to face the consequences of their imprudence.
I think Haumea's and Michael's point are both valid. The fact that individual societies can go from prosperity to collapse and then back to prosperity again over the course of a couple of generations rules out the effect of genetics or hard wiring. Essentially, prosperous societies walk a tight rope from which they can be easily pushed by a change to their prevailing value system.
Despite Randall Parker's citation and approval of this article's findings, I bet he has at least one credit card to his name. I also think it's likely--albeit not certain--that he either has a mortgage or car payments.
So, clearly, some people can handle credit.
Maybe there ought to be an academic test--like a driver's test, but harder--wherein you demonstrate that you understand the principles of credit before you can get yourself a magic plastic rectangle.
To the best of my knowledge, none of these studies in behavioral economics explicitly controls for the IQ of the participants. I should think that's a rather large and confounding problem. Robert Frank, in his book Passions Within Reason gets about as close as any respectable social scientists will these days by noting that the only subjects consistently found to adhere to the homo economicus model of rationality are economists themselves. Gee, what else could there be that people with the a strong quantitative background share? The Godfathers of the field, Tversky and Kahneman set the parameters of the field by largely working on university undergraduates--still the preferred method. But within those students, IQ is never used to discriminate. So it's at least plausible that those with less intellectual horsepower are even more irrational than the behavioral economists think, but that all they're discovering is that intelligence makes people more rational in all phases of life.
So I propose to explicitly name a rule that's implicitly held by many in these parts, but that I've never heard called out by name. Call it Deckin's Desideratum: Never, Ever, Believe Any Result From a Social Science Study That Doesn't Control For IQ.
This is a hopeless generalization. I handle credit just fine. My wife used to be terrible with money but has gotten better and definitely spends LESS with a credit card than with cash.
On the other hand, my future son-in-law is oblivious with anything but cash. For him, if has the item, he owns it. If you sit him down and go over everything, he'll understand his debt intellectually, but not internalize it. Fortunately, due to late manifestation hereditary scrooginess, my daughter is getting their financial house in order.
One of the problems is that the study is done with college kids; people who have no concept of time, or change, because they think that the way it is NOW is the way it always HAS BEEN. They are unable to appreciate balancing the immediate pleasure of spending with the future pain of PAYING.
To extend my remarks. I believe genetics plays a role. My paternal side is extremely frugal and it goes way back. On my maternal side, they have no concept of money. They have very high IQs (several doctors and college professors. My grandfather was a college president) yet they go/went terribly into debt.
In my immediate family, all the boys are scrooges of various degrees (but nowhere near as bad as our father) while the girls have a real hard time with money, though they have enough common sense and dad's frugality to not go into debt.
Among my children, my oldest son is oblivious about money. My daughter was, but as I said, is getting much better. My two youngest save like crazy.
My wife and I refuse to buy anything on credit (with exceptions for priority purchases, ie: professional clothes for a new job), problem solved.
There are certain words that should immediately be responded to with skepticism; One of those words is "study".
Certain people or groups of people should not be allowed to borrow money; One of those is Congress!
Porkov suggests that their may be an ethical problem with paying one's credit card balance in a timely manner in that thereby one is participating in the separation of fools from their money. I could not concur with such a judgement. On the contrary, a system which favors the wise and provident is most ethical in that it favors and rewards the wellsprings of progress. By reinforcing foresight and discipline in this waym we gently apply nature's stern discipline, which is a little cruel that ir nmay be very kind.
Thinking about consumer credit in evolutionary terms should take us to consideration of human development in response to seasonal climate variation. Mankind first evolved, we theorize, in hot, lush climate where immediate gratification was the winning evolutionaly strategy. But in the northern latitudes, failure to prepare and provide for the coming cold meant death. Whether or not biological evolution, some physical change in brain structure, can be linked to such evolutionalry pressure is doubtful.
Genetically-based profligacy and thrift? I find that doubtful. Much more likely is the evolution of cultural patterns tending toward discipline and thrift. Systems of folkways, of thinking and acting, are in competition with one another. Not only are the winning ways propagated by the success of the folk who bear them, the ideas themselves prevail as ideas. The very technologies supplant and displace more primitive ways by processes of cultural diffusion. New Guinea natives hunt with shotguns now.
Stupid use of credit is like stupid use of one's time in hunting and gathering. It is part of a broad cultural pattern of short-signtedness and inattention to the demands of existence. Such a way of living may get by in the jungle, but where warm shelter must be built, food and food set by, the need to live by a plan is issential to life itself.
No mortgage. Every car I ever bought I paid cash. I hate being in debt. Absolutely hate the feeling. Probably I have some strong genetic aversion to debt.
Yes, elected officials can't handle credit. Good point.
The fact that the vast bulk of social scientists ignore IQ in their research is a tragedy and a waste. Some small number of basically dissident social scientists use psychometric measures and get much more meaningful results. Certainly higher IQ enables greater ability to see the long term effects of one's decisions. Smarter people probably handle credit more wisely than dumber people on average. But some smart people can't handle credit just like some smart people can't handle gambling or drugs or alcohol.
There's a lot of genetically caused variation in human nature. The ability to handle credit varies greatly due to differences in IQ and other innate differences in cognitive processes. So your own ability to handle credit does not mean that everyone can handle it.
There's an interesting trend in the people who are using "i've used credit cards and I'm not in debt so it's hogwash arguments": I haven't heard anyone say explicitly that they actually have a good "intuitive feel" for abstract interest, just that they aren't in debt. Other than university I've never been in debt, but I think that's because I have a general feeling "things could always go very wrong, so pay off every bill as soon as possible". This is probably just as much a poor prediction about the world as "I'll be able to deal with credit cards bills tomorrow", it's just a bit more protective "incorrect attitude". I'd be interested to know if anyone actually claims that at 19 they did have an intuitive understanding of credit rates (as the article talks about), as opposed to an inclination to pay bills on time "because that's what I do". I DON'T have an intuitive feeling about credit rates; I have to explicitly calculate thigns and semi-formally analyse about things.
From my viewpoint, it's not surprising that if you give people credit cards without teaching them to how to think about the consequences that they end up learning by experience (that's what happens in other areas of life). The question is whether this is one of the things one should be educated about in school rather than through experience (with real money).
The question is whether this is one of the things one should be educated about in school rather than through experience (with real money).-Bane
Before talking about loading yet another task onto school institutions, Bane, better go find out if that task is one of the things one can be educated about in school. I am wary of the liberal's temptation to suppose that education can solve all personal and social ills.
In response to your statement, and at the risk of sounding trite, I'll say it explicitly. I have a good intuitive feel for abstract interest, or any other exponential system. Of course, the reason for this is that I am a physicist by training, and thus I have years of practice at it.
The good news here is that, if my experience is anything to go by, this skill is one that can be taught. The bad news is, of course, that our school system is terrible at teaching when it comes to imparting skill in anything analytic. I cringe every time I hear someone say "I'm bad at math" to excuse some failing or another.
The thing about general intelligence from an evolutionary psychology perspective is that is domain-general utilizing explicit processing, while other modules utilize implicit processing, domain-specific, and do not require executive function resources. I sometimes cringe when I read Randall's post since he is an extreme genetic determinist and does not leave any room for the environment or measurement error. But my main question is what causes the variation in the ability to handle consumer credit? Are the variations environmental or genetic, and how can environment optimize this ability? But regarding the genetic aspect, how much of the variation to handle consumer credit is due variance in general intelligence and what portion is to due other processes not related to general intelligence. It is intuitive to expect that the ability to handle consumer credit is correlated to general intelligence since general intelligence by definition enables people to deal with novel problems and search for novel solutions utilizing executive function resources such as working memory capacity. Heritability studies show that the variance is genetic intelligence is highly due to genetic variance, but that is narrow-sense heritability is high, meaning that the phenotypic variance of general intelligence is due to the cumulative effect of additive genetic loci, not dominant or recessive loci or epistasis gene interactions. High IQ people are not wired to do physics since the ability to understand high energy physics research is not tied to "fitness" because this obvious was irrelevant to human evolutionary history and heritage. Instead, they happen to possess a high concentration of additive alleles favorable to general intelligence that were concentrated by natural selection in the human lineage and are the right tail of the normal distribution for the number of general intelligence alleles possessed, not because humans evolved the domain-specific capacity to understand physics. The same could be said with consumer credit.
Evolution is lazy and myopic, and according to Fisher's Fundamental Theorem of Natural Selection, the rate of the increase of fitness acting through changes in allele frequencies is equal to the variance in a population. With that in mind, if, for some weird reason, natural selection defines fitness as the capacity to handle consumer credit, then I wonder whether natural selection would increase the capacity to handle consumer credit through the evolution of a risk-averse domain-specific module or by augmenting general intelligence. In order to answer this question, one must know whether the genetic variance in the ability to handle consumer credit is more impacted by general intelligence or other factors. The standard deviation of general intelligence is defined as 15 IQ points, and as one knows by simply observing the world, there is a lot of phenotypic variance in general intelligence since we all observe brilliant people capable of facile understanding of intellectual topics, or remember children in our elementary school experience unable to understand rudimentary arithmetic while you are trying to master basic algebra. Fisher's Theorem says there is a lot of genetic variance in intelligence that natural selection can work with.
Thank you for kindly answering my questions, but you omitted one. Do you have a credit card?
"I DON'T have an intuitive feeling about credit rates; I have to explicitly calculate thigns and semi-formally analyse about things."
That's the problem!! You have to explicitly process information, and explicitly processing is limited by executive function resources such as working memory capacity (which I believe is what primarily limits general intelligence) and not many people have plentiful executive function resources. Explicit processing enables one to control and suppress implicit domain-specific modules such as the tendency for immediately gratification. Here is a paper about explicit processing by Kevin MacDonald that provides a deeper discussion.
Nate Hagens pointed out that people are more impulsive if their working memory capacity is saturated:
Cognitive load theory suggests humans have a maximum capacity of working memory. At around 7 'chunks' of information, our working memory maxes out and we can't accept anything else without losing some of the previous 'chunks'. Try remembering the following numbers 1-9-1-4-7-6-7-5-9-5-9. Its quite hard to do. But if they are rearranged in chunks 1-914-767-5959, it becomes much more manageable. Numerous studies have measured this phenomenon - a notable study by Shiv and Fedhorkhin(1) asked a group of people to memorize a two digit number, walk down a corridor and at the end choose a dessert - either chocolate cake or fruit salad. A different sample of people were then asked to memorize a 7 digit number and walk down the corridor (while internally reciting this 7 digit number) and also choose a dessert. When required to memorize the 7 digit number, almost twice as many people chose the chocolate cake as in the sample only memorizing the 2 digit number - the implication being - 'my short term memory is full - I cant access my rational, long term decision-making hardware - just give me the damn cake'.
In my previous comment, I meant to say: "High IQ people are not "wired" to do physics since the ability to understand high energy physics research." I did not properly emphasize the word "wired" as in an teleological sense.
"By reinforcing foresight and discipline in this waym we gently apply nature's stern discipline, which is a little cruel that ir nmay be very kind."
Eugenic programs are controversial because they negatively discriminate against individual persons while the goal of eugenic programs is evolution -- a change in allele frequency in a population for heritable socially-valued trait (usually intelligence and to a lesser extent "character" also known psychometrically as "conscientiousness"). In other words, eugenics is supposed to discriminate against genotypes, not phenotypes where alleles are the unit of selection, not individuals who have the capacity to suffer. However, embryo selection where a couple can create tens of embryos can select for embryos with the genes associated with desirable traits (while discarding embryos that do not met the standard) would impose a fitness value of socially-valued traits since the possession of an allele associated with the trait would increase an embryo's odds of surviving the selection process, giving the allele a relative fitness advantage of other alleles at the same locus. Embryo selection embraces the mechanism of natural selection (exploiting the differences of relative fitness of alleles at certain loci) while avoiding the ethical issue of killing individual persons since most people would not regard embryos as sacrosanct except those who are religious.
The problem that many in society have with credit (let's forget individuals for a minute) is the result of their education, and the education of their educators (those who educate them more than most) --their peers. Each generation seems to have its own 'standard'. True, their parents had a little to do with shaping that standard, I'm not ruling them out of the equation entirely. But, taken as a 'glump', it's a generational thing. Stupidity and immaturity are generational things conferred by peers and society. Parents are up against some pretty tough opponents in the life fight to 'save' their kids from the boogy man. Most revert to prayer soon after the process starts and formal education begins. We've two types of smarts, let's call one IQ and the other Common Sense. Now, lets say that each generation has an overall IQ and a certain baseline amount of Common Sense too. Based on education and experience the generation moves through life. What's going to tilt the table for a generation, one way of the other, more than any other it will be the 'life experience' side of the coin --its the "Common Sense" not the IQ that counts here. Ergo: give them a Great Depression and watch them grow up.
I am a physicist by training....The good news here is that, if my experience is anything to go by, this skill is one that can be taught.
The bad news is that your experience isn't anything to go by. Most people aren't smart enough to learn physics. Your own experience is not indicative of what is possible for the larger population.
I think I'll refrain from going into great detail about my finances in a public forum. In an era of identity theft one can't be too careful.
Certainly as the historical memory of the Great Depression has faded some have become much bigger risk takers. Many laws changed that made credit access easier to get too. I hope that we do not get another Great Depression learning experience to help make people more debt averse. That's an awfully costly lesson for us to collectively get.
Well, I have been screwed twice by Government interference in the market.
First under the Bush admin when they required Credit Cards to require more than minimum interest payments on existing loans.
(I had just purchased my first house, and had my first child born right at that time)
And Secondly when the Obama admin passed this "consumer" credit act - which caused some of my 10% interest cards to go to 30%.
I mean WTF!?!! - neither of these two Government interferences in the marketplace really helped consumers - but they blew my budget out the water both times - although I had a financial contract with my lenders that I was in good standing with.
(as to why I had credit debt in the first place - that is a different tale altogether - but be assured it was never obtained to live outside my means)
So - I think many consumers like myself - have not been a victim of the free market - but rather of unpredictable Govt. intercession in the market - usually just for superficial appearences.
But real families get adversely affected by such arrogant meddling.
And - I agree with many of the above posters - that since wealth building is often highly path dependent - even those with high IQ's can find themselves in these onerous, usurious, unhealthy financial arrangements.
There is a math lecture series on youtube by Albert Bartlett (a professor emeritus of Physics at Univ of Colorado-Boulder) where he talks about the inability of the human brain to understand the exponential function. It relates to compounded percentage growth, and I think that it underlies one of the major problems people have with credit.
The Most IMPORTANT Video You'll Ever See (part 1 of 8)
It might be a little dry for some, but after 3 minutes I was riveted, and I ended up watching the whole series.
you say "Most people aren't smart enough to learn physics. Your own experience is not indicative of what is possible for the larger population." I'd be very careful about making statements like that. It's debatable whether the majority of the population are genuinely not smart to learn physics to a reasonable level enough as opposed to actively not interested in physics and not organised enough to do rigorous study even if coerced. On the other hand, if you eavesdrop on people talking about why they chose their cell phone call plans (at least in the UK) you hear people who I wouldn't expect to be making subtle distinctions being quite analytical about something they are actually interested in. There are lots of other examples.
It's certainly something that should be studied. However, I find it quite bizarre that the school system (in the UK) teaches compulsory history in order to "teach cohesive national values", geography in order to "let people understand the wider world", Shakespeare in order to "understand the richness of historical English drama", etc, (I believe they're even teaching "citizenship values" these days, motivated by the right-wingers as much as liberals) to people for whom these may be of virtually no interest and often little chance of using in later life, and yet a subject that most of them would be interesting and useful to many children is not even mentioned outside occasional maths exercises. (I'm not saying those subjects shouldn't be taught, and might be taught purely for their own sakes, just it's strange how weak the justification is compared to having ten/twenty lessons on modern financial practices).
I'm a mathematician but I don't have an intuitive feeling for compound interest (in the sense that I couldn't look at my credit card bill and the monthly interest rate and give you an estimate how much it owuld be after a year of minimum payments without actually calculating things).
The lessons of The Ant and The Grasshopper have been taught essentially since mankind could use language.
Excellent point about science Red/Michael and it is worth repeating. Tradition has a much better track record than science in many things that are difficult to make fully quantifiable like human behavior, nutrition, psychology.
Unfortunately there is much knowledge that was built up through centuries of trial and error that has been slowly fading from public consciousness. We need to approach the future with the wisdom of the past.
>Then again, if your parents saved a dollar a day from the day you were born to when you turned 21, we all wouldn't be in this bind. Congratulations son, you are a millionaire. Go buy a 6 pack, and go to a temple and knock over the tables of the moneychangers. Or better yet, you can make a buck off the sops while you still can, before we end up in a state of overproduction and underconsumption. Jesus and Marx knew what was up, but did we all listen? Agreed on modern science missing out on what the mystics, prophets, and observational comics realized long ago.
And if everyone did that our currency would collapse!
>Then again, if your parents saved a dollar a day from the day you were born to when you turned 21, we all wouldn't be in this bind.
And if everyone did that our currency would collapse!
"There is a math lecture series on youtube by Albert Bartlett (a professor emeritus of Physics at Univ of Colorado-Boulder) where he talks about the inability of the human brain to understand the exponential function."
That Bartlett video is hilarious. Here is is talking about how people don't understand exponentials, he goes through an hour of alarmist future trends like peak oil as Randal does (neither understand basic economics) and yet by the end of his presentation he has said nothing at all about the Mother of Exponentials, computer acceleration - an expoential that transforms every imaginary crisis he put up. And he's a physicst!
The inability for people to internalize what twenty years of expoentially increasing power means to their own financial situation is likely a reason that those under 45 are overly frugal. They incorrectly assume they are saving up for retirement, but there is no retirement in the 2030s. Lots more wealth than today, but no retirement.
This was a silly article. One may as well opine that as humans are not hard-wired with knowledge, they are helpless to deal with reality at a conscious level.
When deciding to borrow money on credit it is simplicity itself to calculate the cost of the transaction. One must realise that the money has to be paid back (surely that is obvious even to those poor souls suffering with the disadvantage of a conventional college education) and one must realise that the interest (the rent on the borrowed money) has to be paid as well. It's not a matter of such knowledge being "hard wired" into a human brain. It's a matter of finding out the facts of reality- in this case, all about the rules of borrowing money. Find fact, calculate, make conclusions, plan and execute said plan.
If you are intending to enter into transactions where you will be borrowing money there are two rules.
1/. Understand the terms and conditions of the transaction. Calculate your position over the term of the deal. Decide if it's worth the total cost.
2/. Understand the nature of central banking fiat money and associated practice of fractional reserve banking.
The first rule is trivial. The second rule requires more effort. An understanding of it reveals that, in practice, in specific context, the nature of the present economic system (a distinctly non-Capitalist one) makes heavy borrowing a more beneficial behaviour than saving (indeed saving can be a devastating loser). It also means the risks associated with a big borrowing strategy can be very low and that it is possible to borrow without ever needing to pay for bulk of the value borrowed. This persists not only for too big to fail financial institutions and US car makers etc. but also for individual borrowers, assuming they can be bothered to find out what they need to know before entering transactions...
This is interesting,
"homo economicus, the notion that man is a rational economic actor who is acting always and everywhere in his own best interest, however conceived."
As we both are aware such a model of man is false. Still, traditional economists do base their prognostications upon that and other erroneous notions (like perfect information, the nature of monopolies, what inflation is, externalities, market failure, the pollution of economics with scientism dressed up in mathematics etc.). Fundamentally the traditional economist is an expert in positing government interventionism and distortion of markets for the political advantage of his patrons. He lacks serious understanding of the economy as it is (consider how many accurately forsaw the collapse of 2008 or even the Great Depression, let alone devined the cause) or what deleterious effects his favoured prognostications would have if applied (well, not until they are applied and in most instances, not even after that!).
Anyway, each man makes evaluation on an individual basis, as an individual. Evaluations are subjective, as is the decision to maximise value, let alone the decision whether to pursue a value. Homo economicus doesn't exist in reality. Pity is, he lies at the heart of many economic theories.
If the "Peak Oil" catastrophe you allude to actually occurs, it will be due to political interference in the energy market.
The Peak Oil catastrophe will be due to using up most of the extractable oil.
Actually, Sione is right in a perverse way.
Peak Oil wouldn't be a problem if it weren't for the excessive influence of car companies and oil companies on public policy. The US, under Carter, fully recognized the problem and took pretty adequate steps to address it. Sadly, Reagan and his industry-dominated successors either stalled or dismantled those policies. Similarly, Clinton started the PNGV program, and an industry-dominated Bush W dismantled it.
We need more democracy, not less.
There would be no catastrophe if there were no political interference in the energy market.
Your error is to put cause and effect back tp front. Government lobbying, cronism, influence peddling, bribery etc. would be un-necessary were the government to avoid engaging in that which it should not. Just as there must be a separation of religion and state, so there must be a separation of economy and government (assuming the goal is a civilised society). Were the government not exercise the coercive power to distort the market economy with arbitrary regulations and rulings, then there would be no possibility of any "influencing"...
I was surprised at your closing statement. It reminds me of the Mongrel Mob gang at the Hapu St fortification. They had a big party there one weekend. During the festivities they took a vote about whether to rape a young virgin who happened to be in the vicinity. You should be able to imagine what occurred. THAT was democracy in action. Where the majority vote away the rights of the individual you'll inevitably find tyranny, violence and crime. Surely you don't really want that.....?
Interestingly enough the founding fathers of your United States of America were, in the main, concerned about democracy as an ideal. They well foresaw the problems inherent within it. Initially they tried to avoid the problems of democracy by setting up the USA as a de-centralised federation (read the the Articles of Association and associated correspondence between the key players to see for yourself). This was not acceptible to those who wanted a central seat of power (Hamiltonians and the like minded). Hence the Constitution was erected. This was an unstable and imperfect compromise between the Federalists and the Anti-Federalists (read the Federalist and Anti-Federalist papers, also Jefferson's letters of the time, Washington's as well to see) amongst others.
Three final points:
1/. The officially sanctioned myth of US history as taught in US educational institutions is inaccurate. Reading the source documents will soon demonstrate that.
2/. The US was based not on the ideal of "democracy". It was set up as a Constitutional Republic which is not the same as a democracy. The fundamental was that of protecting Individual Rights (see Locke), not "one man one vote".
3/. In the absence of government exercise of coercive power to interfere and distort the economy, there is no point in market participants wasting precious resources by engaging in influence peddling of government.
Trying to sustain an aggressive response to Peak Oil when oil prices were falling so far was not going to happen. It didn't just take the auto industry to reverse Carter's policies. People didn't want smaller cars. Carter associated energy conservation with being cold in the winter. He brought a distinctly non-fun approach to problem solving. Never mind whether he was right or wrong. He came across as a downer. He also undermined his credibility by taking a position that suggested a much earlier peak than what's happening.
There will be an economic depression due to Peak Oil with or without government intervention. Liquid hydrocarbons are so incredibly useful that they account for 95% of transportation fuel in the United States. The costs of shifting away are very high. The market is not omnipotent.
There IS an economic depression occurring in the USA presently. It is THE disaster for the USA. Its direct cause is government action. It has NOTHING whatsoever to do with "Peak Oil". This present economic adjustment is the disaster that is going about the business of reallocation of the US population to a lesser economic position than was previously enjoyed. US residents will continue to get significantly worse off than they were. This will play out over the next decade or so (remember Japan's lost decade? What you guys are in the process of experiencing is more severe than that).
Don't worry about Peak Oil, it will be about as much of a problem as Peak Pooh was in London. Back in the day people worried that there would soon be so many horses in London it would not be possible to extract all the horse manure each day- but Peak Pooh came and went, few noticed, fewer commented, no disaster occurred.
No government is omnipotent, let alone being anywhere near as effective in providing what people want as the free market. Remember this: no government is as competent, as powerful or as effective as the free market.
This is getting a bit abstract -let's bring it down to earth.
Do you agree that things like pollution are real problems, and require some kind of group planning and regulation? Would you agree that Peak Oil requires some kind of planning (meaning looking forward more than the next quarter or two), either private or public?
I'm not the one being abstract here. You asked about the automotive industry. I have direct experience of it and told you what occurred. The reality of the situation is that government interference in the market causes dislocations. That has consequences. In the end the government's arbitrary policies failed to achieve the publically STATED stated aims and the justifications were false (lies). They remained extremely costly, consuming wealth for no net economic gain (which more than outweighs the political gains for certain insiders).
In response to your questions and assuming your premise is the need for government interferences in people's voluntary transaction, the answers are no and no.
What is required is the simple recognition of individual property rights. If your action damages someone else's property or person, then they have a case against you. They must prove you were the cause of the damage. If their case is proven the remedy is for you to cease and desist your damaging behaviour and make them whole (which does not allow for punative damages to be awarded, only for restitution of actuals). That is more than sufficient for dealing with "pollution."
Would I agree that Peak Oil requires some sort of planning (assuming it is a real problem- which it isn't)? No I wouldn't, not unless you are referring to individuals planning their affairs on a purely voluntary basis. Hence it would be improper for government to have any policy or regulation in this regard whatsoever. The only valid argument for government existence would be for it to be restricted to the defense of individual rights and nothing else- no market interferences and distortions. That does not prevent any individual or voluntary association of individuals from making their own arrangements, relationships, plans etc. for dealing with the opportunities they may happen to believe will occur in the future.
For example, a group of people may expect that they can bring to market a new device that will be useful for home heating or vehicle transportation or whatever that does not rely on oil. Further they may believe that there is going to be a big market for their idea since they believe they can provide their devices for lower cost than those dependent upon oil or because they may believe that oil is running out. What an opportunity that could be! They could do very well if they act on their belief, they opine. It is proper that this group act on their ideas. Planning, in the sense that they are going to build upon the opportunity they perceive, is fine. Planning, in the sense that they demand all others are coercively forced by various means (that is, government) to subsidise their scheme or employ it, is wrong. Planning, in the sense that competitors including oil users are handicapped is wrong. They should be free to pursue their ideas and persuade people to voluntarily buy into their scheme (purchase the device or services etc.). Similarly those who prefer to choose an alternative, such as oil, should be left to do as they choose.
In the solution of "problems" government interference is inferior to the free market. After all, there are billions of market participants. Government has only the ossified minds of the self-appointed few.
The correct short form is "Caltech", not "CalTech". Just FYI.