"Collective Intelligence"

Hi all,
This is a lesson in Economics 101, hopefully a different kind of lesson. It seems our country is in a lot of turmoil over health care, cash for clunkers, etc. I know why and I know the solution. The beginning of the solution is to understand economics, but specifically, HOW people respond to economic issues.

I know you have heard of the law of supply and demand, yada yada yada... but HOW does it work?

Let's assume you are a politician and (here's the part where suspension of disbelief takes over) you are the smartest person in the world! by any measure - Ivy league degree, an attorney or MD, (funny how few business people are politicians, maybe there is no profit there). You try to make a law and all of a sudden there are unintended consequences, which occur frequently. That is because our politicians are making a fundamental mistake of assumption. They assume that since they are so intelligent they can make a law which everyone will follow because it is "good for them". My argument with this logic - it is a non-sequitur - (Latin for "it does not follow").

It is impossible to assume that because you are so smart that your law is also smart enough to apply to all circumstances, so somewhere, someone will be losing out. When that happens, they will not comply and try to go around the law in their own self interest. It may be true that a few of our politicians are truly very bright paople and, one-on-one, they may win a battle of intelligence against the average American. I grant that.

However, there is NO WAY that the smartest person in the world can possibly compete with the "collective intelligence" or "collective consciousness" of the 1,000 average people standing next to him or her. The laws of large numbers favor the group of 1,000 average people. Can you imagine any game in which one smart person would compete against 1,000 others like Trivial Pursuit? They would fail miserably.

from Wikipedia- the law of large Numbers-
The LLN is important because it "guarantees" stable long-term results for random events. For example, while a casino may lose money in a single spin of the roulette wheel, its earnings will tend towards a predictable percentage over a large number of spins. Any winning streak by a player will eventually be overcome by the parameters of the game. It is important to remember that the LLN only applies (as the name indicates) when a large number of observations are considered. There is no principle that a small number of observations will converge to the expected value or that a streak of one value will immediately be "balanced" by the others. See the "Gambler's fallacy". (I bet if you research this you will see why politicians are fools). Think of "levelling the playing field".

Note that the LLN speaks of a "guarantee" and "stable" results - NOT beneficial results, in fact, it guarantees an AVERAGE result. It is impossible to get 100% compliance (wins) using this method. The LLN does not apply to "outcomes" or results because my definition of success or prosperity is most likely very different from my neighbor's. There is no specific single result that is considered a win, but politicians don't think that way. They want a specific defined outcome for all. Health care is unique, not because of the "outcome", we all want to be healthy, but because of the mechanisms required to achieve that outcome.

A brief history lesson - Adam Smith, a very famous economist wrote a book in which he said there was "an invisible hand" controlling the world's economies. This invisible hand is the action part of how people respond to economic conditions.

This collective consciousness or collective intelligence is HOW capitalism works. The actions of this invisible hand are guided by the collective intelligence of the large numbers. This is what our founding fathers meant when they wrote "pursuit of happiness". This is HOW we achieve it. We search for different outcomes using a common part of humanity. Another reason why the government needs to create the environment for the pursuit of happiness and not operate it - it is mathematically impossible. My inner geek is happy.

my next post will be Econ 201 and the mistakes car dealers made in the cash for clunkers program.