War Fatigue

Armchair warriors often fail
And we've been poisoned by these fairy tales
--Don Henley

Governments wanting to engage in war with foreign entities must win consent of the citizenry to do so. If they view the war as illegitimate, the people have capacity to shut the war down via several avenues, including voting officials out of office, withholding funds for military resources, or even overthrowing the regime prosecuting illegitimate war.

Consequently, governments must convince people that their war is just. They must do so at the outset of the conflict, and then continue to do so. Because war requires ongoing sacrifice in order to fund the war effort, it is possible that enthusiasm for war will wane as people increasingly regret what they must forfeit as conflict drags on.

It appears that support for US involvement in the Ukraine conflict is already waning. Surveys suggest that the American public is increasingly wary of US efforts to harm Russia in manners that hurt the domestic economy.

That, of course, is precisely what sanctions do. Any effort to restrict production and trade with entities abroad damages standard of living at home.

As more Americans realize that sanctions are not unilateral, this administration loses its public grant of legitimacy for engaging the country in war.

Administrative Overhead

Brantley Foster: What's this department? What do they do here?
Fred Melrose: Who knows? This place is a zoo. Nobody knows what anybody else is doing.
--The Secret of My Success

Administrative staffing (a.k.a. 'overhead') generally increases with organizational size. Small organizations are characterized by decision-makers who wear 'many hats.' A manager might make a production decision one minute, then an HR or accounting decision in the next.

As organizations grow, it usually makes sense to divide up decisions among specialists. Specialists focus on a narrow functional domain, such as R&D or marketing, which increases their decision-making productivity as they benefit from learning effects and lower switching costs. 

Moreover, sheer size and complexity makes large organizations difficult for any one person to understand. The number of decisions that must be made on a daily basis could number in the tens of thousands and easily exceed any single decision maker's capacity for rendering them. 

There are technical reasons, then, why we should expect more staff and administrative overhead as organizations get larger. More staff can improve productivity.

However, staff could also grow for social reasons. Because they seek to maintain or improve legitimacy in their institutional environments, organizations seek to score points with external social entities. Stated differently, organizations might add staff to 'look good' rather than to 'do better.' 

Coercive social pressures might drive organizations to hire regulatory or compliance personnel. Think environmental, safety, and legal departments. 

Social pressures might also be normative in nature, motivating organizations to staff in manners that signal awareness and caring about particular social issues and causes. For instance, many organizations have recently staffed departments of diversity and sustainability in response to those popular movements.

Meyer and Rowan (1977) seminally observed that administrative additions of this type may not be accretive to the organization's technical core at all. Adoption of staff for legitimacy reasons is instead largely ceremonial in nature. It is meant to satisfy the social needs of outsiders rather than the economic needs of buyers.

This is the price to be paid for increased social standing. More resources that could be invested toward productive ends, such as process and product development, are allocated bureaucratically for the sake of appearance. 

Some have argued that organizations must strengthen their legitimacy in the eyes of others in order to acquire the resources necessary to achieve greater economic performance. However, it is straightforward to theorize that excessive attention paid to looking good robs resources from the technical core, thus decreasing the likelihood that socially conscious organizations will do better and survive over time.

Perhaps this pathology increases with the strength of the institutional environment.

Reference

Meyer, J.W. & Roward, B. (1977). Institutional organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83: 340-363.

Petrodollars to Petroyuan

When situations never change
Tomorrow looks unsure
Don't leave your destiny to chance
What are you waiting for?
--Swing Out Sister

Courtesy of the 1944 Bretton Woods Agreement, the US dollar has enjoyed reserve currency status for the better part of a century. A reserve currency is a money that circulates extensively internationally. It is deemed the standard used to price and execute financial transactions. As such, it is constantly in demand. Banks worldwide must keep piles of reserve currency on hand.

Strong international demand for the USD has been a boon for the federal government. Money can be printed and debt can be issued without having to worry about destroying the value of the currency. 

It is safe to say that the financial position of the United States would be in a much different place were it not for the USD's reserve currency status.

No market demonstrates USD reserve currency privilege more than the international oil market. For decades, Saudi Arabia has priced barrels of crude in USD. Any non-US entity seeking to buy crude from the Sauds has to pay in USD, which lights a fire under dollar demand in forex markets.

Plus, the US gets an extra kicker. Because it can print gobs of USD with little penalty, the US can do so to buy oil on the international market. Let's see...paper dollars printed out of thin air versus a barrel of crude. 

Who gets the better deal? 

The USD's use in oil trade has led to the term 'petrodollar.' The US has reaped huge gains from the petrodollar.

However, the age of the petrodollar may be coming to an end. Financial system warfare currently being waged as part of the Ukraine conflict is awakening countries to their vulnerability, and prompting them to investigate ways to reduce dependence on the USD. By doing so, these nations could sidestep crushing sanctions that might be hurled toward them in the event that they cross the US in some manner.

Seeking alternatives to petrodollars in oil markets would constitute  a significant step in that direction. 

It should not be surprising, then, to learn that countries are experimenting with pricing oil in yuan rather than in USD. In an uncertain world, it makes sense to diversify--even more so when some of that uncertainty involves a country that might decide to weaponize its currency against you.

By engaging in financial warfare the United States appears to be looking the proverbial gift horse in the mouth. The gift of reserve currency status may be rescinded as countries scramble to increase their sovereignty in a sanction-heavy world.

Movement from petrodollars toward petroyuan demonstrates.

Sanctions

"You arrogant ass. You've killed us!"
--Andrei Bonovia (The Hunt for Red October)

Over the past couple of weeks, Western governments have levied countless sanctions on Russia. In this context, sanctions are trade restrictions against a foreign country meant to punish that state for behavior deemed undesirable or bad. Russia's invasion of Ukraine sparked a deluge of sanctions ranging from curtailing or banning trade of particular commodities to freezing Russian bank accounts.

Sanctions aim at achieving various political objectives. One is to make the sanctioned country's population hurt to the point where it demands that its ruling regime cease enacting policies that outsiders find objectionable. Another objective is to weaken a country economically and financially so that it depletes resources for conducting belligerent activities. A third objective might be to weaken a state to the point where it can be overthrown by direct attack.

Despite their popularity, sanctions have marginal track records of success. One reason for this is that sanctions require solidarity among outside states in order to be effective. If only a few countries honor the restrictions, then the targeted state can reconfigure its supply chains toward other countries open to trade. The economic strain of sanctions can therefore be mitigated by developing alternative trade channels.

Sanctions also fail because they commonly strengthen resolve in sanctioned states. When freedom to trade with outsiders is forcibly restrained, then nationalistic tendencies increase among a country's population. Rather than creating animosity toward a domestic regime, sanctions often unify nations behind that regime.

It also seems lost on politicians that the economic penalties imposed by sanctions work both ways. When trade is restricted, the productivity benefits of specialization decline as countries diversify to become more self-sufficient. Less output is produced, and standard of living falls--not just for the sanctioned target, but for all countries--even for those who decline to honor the sanctions. In this manner, sanctions behave like tariffs. 

Who is hurt the worst? The world's poor. Because those at the bottom of the economic pyramid have the most to gain from specialization and trade, they become 'collateral damage' when prosperous countries impose trade sanctions. 

Consequently, sanctions themselves may be seen as acts of war. Although they are often levied in response to violence, sanctions are also violent in nature. They forcibly restrict trade--often in manners aimed at hurting others--particularly civilians. In this sense, trade sanctions bear similarity to wartime policies such as the Allied bombing of German and Japanese cities during WWII. 

While sanctions seem to satisfy popular urges to 'do something,' they possess capacity to do more damage than the bad behavior that those restrictions purportedly aim to punish.

Credentialism Corollary

Well, the years start coming and they don't stop coming
Fed to the rules and I never stopped running
Didn't make sense not to live for fun
Your brain gets smart but your head gets dumb
--Smash Mouth

Previously we proposed that in societies that value credentials, people will be prone to outsource their brains to so-called 'experts'--i.e., those with important credentials. The greater the credentialism, the more likely people are to be misled.

An interesting corollary is that the more educated, and thus the more credentialed, a society becomes, the less able that society is likely to be at reasoned, independent, and integrative thought. 

Because that kind of thought is critical for coping with novel, disruptive change, the implications are paradoxical if not ominous. As a society becomes 'smarter' via credentialed education, its capacity for adapting to major change declines.

Played by Credentialism

"Back where I come from, we have universities, seats of great learning, where men go to become great thinkers. And when they come out, they think deep thoughts and with no more brains than you have. But they have one thing you haven't got: a diploma."
--Wizard of Oz (The Wizard of Oz)

In a society that values credentials, critical thought and reason will be prone to decline. A person with a degree, license, certification, etc is liable to be believed even if what they say is flat out wrong. Essentially, people outsource their brains to so-called experts. By not thinking for themselves, those people are likely to be played.

Proposition: The higher that a society values credentialism, the more that people will be misled by those with credentials.

Original Antigenic Sin

Lt A.T. Waters: For our sins

Sgt Ellis 'Zee' Pettigrew: Hooyah.
--Tears of the Sun

When a virus infects the body, white blood cells called B lymphocytes (a.k.a. B cells) imprint on specific virus proteins (a.k.a. antigens) presented to them. Subsequently, many of those B cells become 'memory B cells,' specializing in producing antibodies to combat those antigens. 

When different viral infections arrive in the future, memory B cells quickly pour forth antibodies that they learned to produce in the original case, essentially hogging areas around antibodies that slower moving naïve B-cells would use utilize to learn about new viral features. Although the immune system continues to adapt, it does so with 'path dependence.' Stated differently, immune system responses are shaped by the early stimuli that B cells encounter.

This is the central notion of original antigenic sin. Original virus infections during childhood govern antibody responses thereafter. 

The concept of original antigenic sin carries important implications. Different age cohorts in a population are likely to have overlapping or layered immunity to different viral strains. For example, children exposed to the swine flu develop immune responses that differ from a childhood cohort exposed to the Hong Kong flu. Consequently, different generations interlock to attenuate the influence of a particular pathogen.

One reason that flu shots lack effectiveness is that they may have limited power to redirect the adult immune systems against novel influenza strains since those immune systems have long since been primed along a different path by childhood infections.

The influence of original antigenic sin on vaccine effectiveness has been contested, however. Opponents point toward studies suggesting that all cause mortalities decline after administration of flu shots. Counter studies suggest that such research is subject to confounding variables that produce spurious relationships between flu shots and effectiveness.

To the extent that the theory of original antigenic sin is valid, it suggests ominous consequences for policies that encourage or require vaccines across large swaths of populations. Instead of layered, population-wide resistance to successive SARS-2 strains that are certain to evolve as the virus adapts to its environment, inoculating the majority of a population with a vaccine designed to combat narrow strains of the virus is likely to attenuate antibody responses to future variants. Most people will have their primary immune responses to SARS-2 conditioned to the spike protein of the vintage 2020 configuration, leaving them less adaptive capacity moving forward.

Vaccinating children would be particularly problematic. The virus is not a threat to them, and as they become naturally infected with future CV19 strains they will help the entire population develop the layered immunity essential to long term resistance to the virus. By narrowly conditioning childhood immune systems to current strains via the shot, these policies risk creating a perpetual pandemic state.

Of course, it is not outside the realm of possibility that this is precisely what some policymakers may have in mind.

Specialization and Adaptive Strategies

If I go there will be trouble
If I stay it will be double
--The Clash

Last time we discussed the relationship between specialization and the external environment. Essentially, the higher the degree of uncertainty in the external environment, the lower the appropriate level of specialization. 

How can producers manage the tradeoff between productivity and adaptability inherent in specialized work? Two strategies seem plausible--both involving reduced degrees of specialization (or higher degrees of diversification) as uncertainty increases. 

The first strategy we'll call static diversification. The concept parallels portfolio theory in finance, except that instead of a portfolio of securities, producers deal with a 'task portfolio.' The narrower the task portfolio, the fewer the skills and the more specialized the portfolio.

In certain environments, task portfolios should be very narrow so that producers can reap the productivity benefits of specialization without concern for having to alter the portfolio to cope with environmental change. 

However, in uncertain settings, producers must spread it around, investing in various skills to hedge risk that some skills will be obsoleted by disruptive change. By embracing the adage of not putting all eggs in one basket, producers operate in various lines of work and perhaps in various markets so that they are not dependent on one specific skill set. This variety improves adaptive capacity.

How much static diversification is necessary? Returning to our core proposition that degree of specialization is inversely proportional to level of environmental uncertainty, the more turbulent and uncertain external contexts are, then the more diversified the task portfolio should be.

The second strategy is dynamic diversification. Using this strategy, producers broaden their task portfolios with learning skills that allow them to quickly adapt to changing environments. Ability to sense change, skill in new product and process development, and prowess in organizational change management all constitute 'dynamic capabilities' (Teece et al., 1997) that can be developed or acquired to improve adaptive capacity.

Such dynamic skills may not be directly useful in the production of output for today's market. Instead, they constitute resources that enable timely reconfiguration of production for tomorrow's markets. 

Because payoff associated with dynamic diversification is often delayed--perhaps for extended periods of time, managers may be reluctant to invest in it, preferring instead the immediate and visible fruits of static diversification. On the other hand, due to its potential for quickly shaping new, relevant skills when environments change, dynamic diversification may tie up smaller fractions of an overall task portfolio in diversification--allowing producers to specialize more in the here and now--and reap the associated productivity benefits.

So, if both static and dynamic diversification strategies are both viable approaches for dealing with the productivity/adaptability tradeoffs of specialization in uncertain settings, then which one is more preferable? Perhaps the better way to ask the question is this: Under what situations are static or dynamic diversification preferable?

That, my friends, constitutes an interesting research question--one that scholarship will hopefully help us answer at some point in the future.

Reference

Teece, D.J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7): 509-533.

Specialization and Uncertainty

Do you remember
When you got your lucky break?
You're looking back now
And it seems like a mistake
--John Waite

In previous missives we discussed the benefits and risks associated with specialized work. Specialization promotes higher productivity through learning by doing and lower switching costs. Fully realizing these benefits requires free trade with other specialists in order to satisfy each producer's spectrum of needs. If trade is restricted, then some needs will go unmet--unless producers diversify into multiple lines of work, thereby reversing in full circle fashion the productivity gains from specialization.

Specialized producers also face elevated risk of obsolescence compared to more diversified producers. Due to technological change, competition, or evolving consumer tastes, particular lines of work may, at some point in time, no longer be necessary. Because specialized work typically requires commitments such as expensive schooling, investment in expensive narrow purpose equipment, and engrained work routines, adapting to changing environments can be difficult.

How can producers manage the risks associated with specialization? 

First, let's note the crucial role that the environment--particularly environmental uncertainty--plays in answering this question. While many conceptualizations of environmental uncertainty have been developed, an important one in our context involves what is called state uncertainty. Specifically, environmental uncertainty can be seen as the extent to which current or future states of the world can be understood or predicted. When events are understood or foreseen with less clarity, then environments are said to be more uncertain.

The central proposition for our purposes can be stated as follows:

Proposition: The higher the level of environmental uncertainty, the lower the appropriate level of specialized work.

If environments are completely certain and predictable, then high levels of specialization are appropriate. There is little risk of change, or at least surprise change, that could not be anticipated in ways that would place specialized producers in vulnerable positions.

As uncertainty increases, however, so does vulnerability. Due to the irreversibility of their production commitments, specialized producers may be incapable of responding to unforeseen events or conditions in a timely manner, thereby threatening their adaptability to changing conditions.

Consequently, degree of specialization should go down as level of environmental uncertainty goes up.

But what implications does the relationship between specialization and uncertainty have on production planning and work design? What strategies are available to producers that allow them to be as productive as possible--while maintaining adaptive capacity essential for coping with uncertainty?

We'll discuss next time.

Deference to Experts

I'll get all my papers
And smile at the sky 
For I know that the hypnotized
Never lie
--The Who

What unquestioning deference to experts looks like.

Reliance on the learned ignoramus leads to being misled and, ultimately, to tyranny.

Don't be duped. God has blessed you with a brain. With it, you can develop functional expertise on any matter.

Lower Hospital Capacity

It's been such a long time
I think I should be going
And time doesn't wait for me
It keeps on rolling
--Boston

One difference between manufacturing and service operations involves their composition of productive resources. In manufacturing processes, equipment serves as the primary factor of production. Equipment leverages the amount of output that workers can produce. Capacity, defined as the maximum amount of output possible from a production process, is generally determined by how much equipment has been installed to support labor.

In service-based operations, people are usually the primary factor of production. Although facilitating equipment may be employed, people generally control the pace and composition of output in service operations. Obtaining more output in service sector settings commonly requires hiring more workers.

With vaccine mandates now being imposed in many organizations, workers are being fired for non-compliance or leaving in advance of compliance deadlines. Several recent headlines have highlighted the situation in hospitals, where large groups of nurses and other workers are resigning or or threatening to resign in defiance of vaccine directives in their organizations.

Hospitals are prime examples of service sector operations that depend on people to produce output. The fewer doctors, nurses, and other staff personnel, the smaller the number of patients that hospitals can treat. By imposing vaccine mandates that cause workers to hit the silk, hospitals are essentially reducing their productive capacity.

When you hear that hospitals are being 'overrun' with patients, recognize that this may be due to self-imposed capacity limitations. Vaccine mandates may lead to fewer workers. Fewer workers mean fewer patients can be treated. Therefore, hospitals may reach capacity limitations when far fewer patients seek treatment than in the past. 

Risks of Specialization

Max Kellerman: You and me, Tito. We've seen it all, eh? Bubba and Zedda serving the first pasteurized milk to the borders. Through the war years, when we didn't have any meat. Through the Depression, when we didn't have anything.
Tito Suarez: Lots of changes though, Max. Lots of changes.
Max Kellerman: It's not the changes so much this time. It's that it all seems to be ending. You think kids want to come with their parents and take fox trot lessons? Trips to Europe, that's what the kids want. Twenty two countries in three days. It feels like its all...slipping away.
--Dirty Dancing

Previously we discussed the benefits associated with specialized work. What about potential downsides? One risk is restriction of trade. In order to realize gains from specialization, specialized producers must be able to trade with each other. By engaging in trade, specialists can satisfy needs that they are unable to fulfill themselves. They also benefit from the increased productivity of other specialists. Prices should be lower and quality should be higher when specialists trade.

When trade is restricted (e.g., tariffs), then specialists must either forego some needs or diversify. Either way, standard of living is likely to decline. 

Another risk is obsolescence of one's specialty. Due to competition, technological change, or evolving buyer preferences, certain lines of work may longer be valuable on the market. To adapt to such disruptive change, specialists must learn new skills.

While the 'switching costs' associated with changing jobs may be relatively low for some specialists, they may be extremely high for others. Much retraining may be required. If large commitments were made to build previous now-obsolete skill sets (expensive schooling, investment in expensive narrow-purpose tools, etc) then those specialists may have difficulty justifying a career change due to high sunk costs. Moreover, the repetition associated with specialized tasks can be habit forming...and old habits sometimes die hard.

How can workers cope with the risk:reward trade-off associated with specialization? We'll discuss in a future post.

Benefits of Specialization

Treating today as though
It was the last, the final show
Get to sixty and feel no regret
It may take a little time
A lonely path, an uphill climb
Success or failure will not alter it
--Howard Jones

Specialization is the extent to which individuals or organizations perform narrow groups of tasks, with commensurate limitations in variety of output produced. Specialization generally leads to higher productivity (i.e., output/labor hr) because of learning effects, lower switching costs, and other economies. The benefits of specialization explain why dividing tasks among workers (i.e., division of labor) is among the most intuitive of economic acts.

In order to realize those productivity gains, however, trade must flow freely. Because they produce limited variety, specialists are unable to produce the broad array of goods that they need to advance their standard of living. Those goods must be acquired from other producers--most likely from other specialists. 

When specialists can trade freely, then the economies of specialization are collectively realized. Prosperity improves for all.

The prospective reward associated with specialization is therefore high. But we also know that there is a positive relationship between reward and risk. Generally, endeavors that offer the prospect of higher reward carry more risk as well.

We'll consider the risks of specialization in an upcoming post.

Lagging Value

Then you say
'Go slow'
I fall behind
The second hand unwinds
--Cyndi Lauper

In trending markets like this one, finding value is difficult. However, there's usually a name or two on an investor's watchlist that has been lagging. Sometimes for good reason. But often for trivial reasons.

On my watchlist, Merck (MRK) fits this profile. The company just spun off some over the counter assets which subtracts from its market cap a bit. Plus, investors seem constantly worried about the staying power of its blockbuster oncology drug Keytruda.

The spinoff means that the remain Merck is more focused on high impact medicines. Very much inline with the company's historical mission.

Short term chart show the stock as oversold and on support.

Longer term chart suggests a rounding top pattern (bearish), but with a couple layers of support below.

As a long term investor, I've always liked this stock as an anchor position. The stock currently yields 3.6% to boot. Have been adding here and there.

position in MRK

Homesteading

"Do you mean to tell me, Katie Scarlett O'Hara, that Tara, that land, doesn't mean anything to you? Why, land is the only thing in the world worth working for. Worth fighting for. Worth dying for. Because it's the only thing that lasts."
--Gerald O'Hara (Gone With the Wind)

Today, if you want to own some land, then you generally have to buy it from someone who already owns it. But how did it work back in the day when land was not yet owned? Could you be like Christopher Columbus and just claim it? Finders, keepers?

That's often how it starts--claiming ownership of large tracts of land in your own name or in the name of someone else if you're that someone else's agent.

But claiming ownership by fiat is difficult to sustain for long periods of time. You have to defend the land against intruders. You have to maintain it. Most importantly, you'll likely want to elevate your standard of living by production on that land. 

You'll need guards, workers. You'll need tools and other resources. How to fund it? You'll probably have to peel off property to fund your interests. Those who receive land in payment have similar goals and needs. They undertake a similar process.

It may take a bit of time, buy hopefully you see where this leads. Gradually, apportionment of land approximates the ability to use it productively. Owners with too much unproductive land have to surrender some until they reach a scale that they can manage efficiently. The allures of specialization and trade drives even finer apportionment.

This early process is called homesteading. Land is apportioned according to productive capacity of the owners.

After the primary markets of homesteading wane, land begins to trade in secondary markets (like today).

However, in unhampered markets, the relationship between productivity and land ownership remains. The amount of real estate owned tends to be proportional to the owner's productivity.

Under Thumbs

Claire Standish: What's bizarre about you?
Allison Reynolds: He can't think for himself.
Andrew Clark: She's right
--The Breakfast Club

Attraction between rulers and intellectuals (including their intelligenstia media channels) is unavoidable. Rulers figure that they can rule more effectively when their policies are supported by 'experts.' 

Intellectuals think that they know how others should live, and having the ear of rulers provides them with an ideal channel to do so. The government pay and associated perks aren't so bad either.

Thus, rulers employ credentialed experts who will tell them what they want to hear and tell citizenry what rulers want the citizenry to do.

Why does such a corrupt system work? Because rulers assume citizens generally don't think for themselves. And when they outsource their brains to experts, citizens are under the thumbs of rulers.

Why This and Not That?

It's poetry in motion
She turned her tender eyes to me
As deep as any ocean
As sweet as any harmony
--Thomas Dolby

In an age where work is increasingly specialized and societies are increasingly politicized, people have been conned into thinking that they must leave scientific thinking to so-called experts. Of course, those heavily credentialed 'scientists' are subject to political influence--and are often retained by political factions who benefit from a particular 'scientific' viewpoint.

The simple truth is that anyone can think scientifically. At its core, scientific thought is reasoned thought. Reasoning requires considering alternative explanations of a phenomenon (sometimes referred to in scientific circles as 'propositions' or 'hypotheses'), and then selecting the one that makes the most sense. Selecting the most sensible alternative is done by using a combination of logic, previous theory, and empirical evidence.

Consider, for example, the well-publicized proposition that face masks help 'stop the spread' of viruses COVID-19. Proponents of this proposition claim that it is grounded in 'science.' However, instead of presenting the various arguments in favor of and against masks, and why their arguments are superior, mask proponents merely defer to the recommendations of the so-called 'scientific community' in this regard. 

This blind deferral makes any reasoning mind suspicious. 

A truly scientific explanation considers the various theories of masking and outcomes. The prevailing theory in favor of masks is some variation of: face masks filter out virus particles in inbound and outbound airflow, thus reducing viral transmission. Let's call this hypothesis H0.

But what are some plausible rival theories? Let's list a few, primarily grounded in filtration theory when applied to masking:

H1: CV19-laden particles are too small to be effectively filtered by face mask substrates.

H2: Inbound and outbound air escapes between the mask and the face allowing virus-laden particulates to circumvent the filtration process.

H3: Covering the nose and mouth with a filter obstructs normal respiration (e.g., reduced oxygen intake, increased CO2 in local air mixtures, and breathing contaminants lodged in dirty masks), which can lead to health risks more significant than the risk of the virus itself.

The duty of true 'science' is to evaluate all plausible rival hypotheses in search of truth. If H0 is to be true, then the scientific mind not only has to explain the validity of H0, but also why H1, H2, and H3 are not valid.

It should be noted that plucking one published research study out of the literature that supports H0 does not necessarily suffice--particularly if there are other studies available that favor H1, H2, or H3. 

To the reasoning mind, science is rarely if ever settled. True science is obligated to consider what else could it be? Why this and not that?

Theories of Viral Response

"I hate losses, sport. Nothing ruins my day more than losses."
--Gordon Gekko (Wall Street)

As strange as the past few months have been, there are actually theories that help explain the unusual behavior of people and policymakers. These pages have been documented a few. Let's review some of them here.

Social identity theory. Behavior of out-group members is criticized while behavior of in-group members is largely given a pass. Because leftists tend to be, by definition, more collectivist, we should expect in-group/out-group norms to be more prevalent among those on the political left. Helps explain division of CV19 discourse and policies along political lines.

Institution theory. Institutions are rules and norms that exert pressure for sameness and compliance. Pressure for 'isomorphism' can be classified in one of three types: coercive (laws, regulations), normative (customs, common practices), mimetic (imitating behavior of others). Mimetic isomorphism is particularly prevalent in uncertain times--which helps explain quick spreading policies such as lockdown and mask wearing.

Agency theory. Agents are supposed to work on behalf of their principals, but often pursue their own interests at the principals' expense--particularly when principals are unable to monitor/assess agent work. Helps explain behavior of public health officials as well as efforts to manipulate data to hide error.

Resource dependence theory. Entities are rarely self-sufficient. Instead, they must trade with others to obtain resources necessary for survival and growth. Larger resource providers exert more power over smaller dependents. Helps explain why sectors highly dependent on government funding, such as health care, are likely to fall in line with CV19 policy mandates.

Threat rigidity theory. Facing conditions of threat, individuals, groups, and organizations tend to do two things. One, they restrict information processing channels to reduce information overload and to economize attention on lessons learned from dealing with past threats. Two, they tighten control processes by centralizing decision making authority. These actions combine to rigidify response to threat. Creative solutions are shunned in favor of customary responses that worked well to quell previous threats. When the nature of the threat differs radically from previous episodes, then failing to consider novel responses results in a reinforcing loop of maladaptive behavior. This theory, coupled with the next one, says much about collective response to a new virus.

Fast and slow thinking. People posses two decision making processes. System 1 is emotional and reactive. Instead of deliberately processing information which takes time and effort, this 'fast thinking' processes makes snap decisions. The vast majority of decisions are made using fast thinking processes. System 2 is rational and data driven. It collects evidence and deliberates before deciding. This slow thinking process--the truly rational one--is rarely used. It is easy to surmise that most people have been engaging their fast thinking system 1 brains when making sense of the CV19 pandemic and associated policy responses.

Transaction cost economics. Econ 101 assumes that exchange is cost-free. In reality, 'transaction costs' accompany trade. Search, contracting, arbitration, translation, regulation. The higher the transaction costs, the less likely people trade on the market (outsource) with other specialists. Instead, they will pull more activities in-house (insource) and diversify. Higher transaction costs associated with CV19, particularly those imposed by regulation (mask wearing, hand washing, sanitizing, spacing), are keeping people from trading with each other.

Prospect theory and escalation of commitment. You plan out what seems like a great strategy. You begin implementing it. But it doesn't work. What to do? Rather than cut your losses and change course, you will be prone to keep going and perhaps even escalate your commitment. A key reason: loss aversion. People hate losses more than they like gains. This theory says much about why officials are unlikely to reverse failing CV19 policies.

My sense is that these threads could be woven into an interesting theory of viral response.

Functional Expertise

"Jo, talk to the doctors. Find out everything there is to know about lactic acidosis."
--Lt Daniel Kaffee (A Few Good Men)

Nice point here. Determined minds are capable of developing high degrees of proficiency on a subject in a short amount of time.

Litigators become experts in every case’s subject matter. They have to in order to depose scientific experts. It’s not a remarkable skill.

— Stacey Rudin (@stacey_rudin) August 2, 2020

One does not have to be a credentialed 'expert' to develop functional expertise.

After all, if lawyers are capable of doing it, then it is within the grasp of anyone.

Transaction Costs and Regulation

David Larrabee: It's all beginning to make sense. Mr Tyson owns the sugar cane. You own the formula for the plastics. And I'm offered as a sacrifice on the altar of industrial progress.
Linus Larrabee: You make it sound as if the son of the hotdog dynasty had to marry the daughter of the mustard king.
--Sabrina

Oliver Williamson passed away last week. Professor Williamson was a giant in the field of transaction cost economics. Building on the pioneering work of the late Ronald Coase, Williamson sought to explain why we see different organizational forms in the marketplace.

On one extreme we find granular trade between small independent contractors producing narrow ranges of output and trading with each other with little or no organizational overhead. Lots of 'outsourcing.' On the other extreme we find huge corporate hierarchies that do much of production and exchange internally rather than on the market. Lots of 'insourcing.'

What factors drive markets versus hierarchy?

Williamson theorized that a primary factor was contracting cost--i.e., the costs associated with governing transactions between parties. When contracting costs are low, then trade tends to happen between granular entities on the market as portrayed in many introductory economics textbooks. As contracting costs increase, more organizational hierarchy becomes necessary to govern trade. At some point, the bureaucratic costs of governing exchange become so high that firms will look to take those transactions off the market and manage them internally.

One source of transaction costs is regulation. For instance, if traders are required to pay a tariff, or meet mandated product or process requirements before a market transaction can be consummated, then entities will consider alternatives such as engaging in production themselves if regulatory costs can be reduced. Of course, these efficiency gains must be weighed against efficiency losses from less specialized/more diversified production.

Currently, regulatory burdens imposed by COVID-19 'regulators' are certain to drive transactions off the market. For example, if goods and the transportation modes that move them must be sanitized before they change hands, then that increased cost of trade will reduce volume associated with contracting out.

Consumers will behave similarly. For instance, if masks are required to go to a gym, restaurant, or sporting event, then that increased cost of trade will motivate some consumers to stay at home and become more self-sufficient.

If regulatory burdens do not lift, then Oliver Williamson would likely agree that motivation for outsourcing will continue to decline, and motivation for insourcing will continue to rise.