Remarkable Conceptual Frameworks
With all thy getting, get understanding.
The purpose of this list is to commemorate brilliant and crucially important ideas that form a way of thinking or seeing the world. These range from observable forces acting upon us to powerful tools we can wield, from inescapable truths to rules to live by.
This is a partial list for sure. My highly anticipated regret is the many things that I have inadvertently left off the list. Perhaps I'll make additions as time goes on.
Not all stand as tall as others, but all strike me as remarkable in their own respect.
I present them here in alphabetical order based on the last name of the source.
Strong-Link versus Weak-Link Problems (Chris Anderson) - In some realms success depends on maximizing the strength of the weakest link while in others it is the reverse—success stems from maximizing the strongest link. For example, food safety (weak link) and Olympic success (strong link).1
Arrow’s Impossibility Theorem/Condorcet’s Paradox (Kenneth Arrow and Marquis de Condorcet)2 - Majority rule is inherently self-contradictory (Condorcet’s Paradox) and rational-choice theory cannot be satisfied by any ranking-based system (Arrow’s Impossibility Theorem).
What Is Seen and What Is Not Seen, a.k.a. the Broken Window Fallacy (Frédéric Bastiat) - People too easily consider (see) the obvious benefits yet do not easily conceive of the hidden costs. I recognize opportunity cost distinctly below, but this is the quintessential argument and application of the concept.
Baumol Effect, a.k.a. Baumol's Cost Disease (William Baumol and William Bowen) - Wages in occupations that do not incur major productivity gains relative to the broader economy will nevertheless see increases proportional to those in other occupations. Because of this compensating differential for opportunity costs to producers, this results in greater cost to consumers without any associated gain. Typical examples are barbers and four-string quartets but extendable to the education and health-care sectors.
The Assumption of Criminal Rationality (Gary Becker) - Despite the desire to dismiss criminals as irrational actors, it is provably fruitful to consider them as rational in their behavior. Hence, criminals respond to incentives including reacting to the probability of being caught and the severity of punishment.
Public Choice (James Buchanan and Gordon Tullock, et al.) - "Politics without romance"; the motivations of people in the political process are no different from those of people in the private sector.
“Mass Production is the Secret to Mass Consumption.” (Bryan Caplan) - “…I urge my fellow economists to adopt: ‘Always keep your eye on production.’ Whenever analyzing an economic problem, you should, by default, ignore long chains of social causation and ignore distribution. Instead, remember that mass production is the root cause of mass consumption. Then ask yourself, ‘How will whatever we’re talking about change the total amount of stuff produced?’”
Chesterton’s Fence (G.K. Chesterton) - “Do not remove a fence until you know why it was put up in the first place.”
The Coase Theorem (Ronald Coase) - If transaction costs are zero, then it does not matter which of two conflicting parties is assigned property rights. In both cases the economically efficient (desired) outcome will emerge. Hence, the case for government regulatory intervention is limited to the degree to which transaction costs inhibit market-efficient exchanges.
The Iron Law of Prohibition (Richard Cowan) - “As law enforcement becomes more intense, the potency of prohibited substances increases.”3
Ergodicity and Non-Ergodicity (as explained by Luca Dellanna)4 - “If the outcome of an activity done many times by one person corresponds to the outcome of the activity done once by many people, then the activity is ergodic; and otherwise, it's non-ergodic.” Experiments in probability like throwing dice are ergodic. Real life situations are non-ergodic. When expected outcomes are changed or influenced by time horizon or repeating experiences, it is non-ergodic; hence, the risk of ruin or opportunity for windfall is present.
Nirvana Fallacy (Harold Demsetz and Voltaire) - The fallacy of comparing an “ideal norm with an existing ‘imperfect’ institutional arrangement” or more generally comparing actual things to unrealistic, idealized alternatives.
Dunbar’s Number (Robin Dunbar) - This is the maximum number of people for which an individual can maintain a personal relationship—roughly approximated at 150.5
Efficient Market Hypothesis (Eugene Fama, on the shoulders of others) - Asset prices reflect all available information. We can argue about weak, semi-strong, and strong-forms including in specific markets where one applies more than the other. One cannot dispute the general principal. When you've found an “anomaly” to the hypothesis, you've conceded the general argument. Exceptions do indeed prove the rule in this case—in both senses.
Local Maximum Problem (unknown; perhaps Pierre de Fermat) - When progress gets halted at a point where any change would be a worsening (the local maximum) despite the fact that there are better outcomes (higher non-local maxima including a global optimum).
Tragedy of the Commons (William Forster) - Simply put: When everybody owns it, nobody does; therefore, this community property will likely be poorly cared for to the point of destruction.
“Inflation is Always and Everywhere a Monetary Phenomenon.” (Milton Friedman) - True inflation is a systematic decrease in the value of money and thus cannot be the result of an increase in the rate of spending (velocity) or a decline in material wealth (lower productive capacity). The implication is that it is the money supply that ultimately governs the state of inflation.
Lindy Effect (Albert Goldman) - The theory or proposition that the longer something has existed, the longer it should be expected to exist—future life expectancy is a positive function of current age. Nassim Taleb has related this to ergodicity (a.k.a. absorbing barrier), and it has a relationship to The Great Filter hitting two other items on this list.
Goodhart's Law (Charles Goodhart) - When a measure becomes a target, it ceases to be a good measure.
Gresham’s Law (Sir Thomas Gresham) - “Bad money drives out good.” This certainly applies beyond just the realm of monetary specie. In many areas of life we withhold the better stuff and more freely use the worse stuff. Rather than FIFO or LIFO governing our inventory management, it seems that WIFO (Worse) is dominant.
Hanlon's Razor (Robert J. Hanlon) - Never attribute to malice that which is adequately explained by stupidity.
The Great Filter (Robin Hanson) - As an explanation of the Fermi Paradox, the absence of evidence for intelligent extraterrestrial life despite its likelihood, the Great Filter proposes that there exists a barrier between the development of such life and its ultimate propagation and expansion to the point of detection. In other words something happens along the way that very likely ends intelligent life.6
WEIRD: Western, Educated, Industrialized, Rich, Democratic (Joseph Henrich) - The variation in human societies and the outsized role and prosperity enjoyed by those in the west can largely be explained by key cultural features. Dominant among these is the Catholic Church and later Protestantism dissolving Europe’s kin-based institutions.
The Ratchet Effect, a.k.a. Crisis And Leviathan (Robert Higgs) - The growth in size and scope of government comes from episodes of crisis being seized upon by politicians and bureaucrats and works to establish new baselines from which government almost never shrinks.
Exit, Voice, and Loyalty (Albert Hirschman) - When faced with a decrease in quality or benefit, members of a group (consumers, employees, citizens, etc.) can choose either to leave the group (exit) or to attempt to change it (voice). Their loyalty plays into which method they choose and how they go about doing it.
Jevons Paradox (William Stanley Jevons) - A phenomenon characterized by when an increase in technological efficiency for a resource's use creates a cost reduction that then drives more demand for the resource thus increasing its use despite the efficiency gain.
The Kelly Criterion (John Larry Kelly, Jr.) - There is an optimum bet size (in gambling) and diversification rate (in investing) such that expected value is maximized.
Contingency versus Convergence (as a explained by Brian Klaas)7 - Outcomes may result from a very specific path and set of choices or prior results such that any change or even a repeated experiment (rerunning history and allowing some randomness) would not produce the same outcome. These are contingent outcomes. Other outcomes result regardless of the specific path. These are convergent outcomes. Contingent outcomes to a meaningful degree require certain prerequisites. Convergence outcomes to a meaningful degree are indifferent to prior circumstances.
The Three Language of Politics (Arnold Kling) - The three tribal coalitions that make up America's political landscape (progressives, conservatives, and libertarians) speak different languages interpreting the world along their own axis (oppressor-oppressed; civilization-barbarism; or liberty-coercion, respectively). Hence, the inability to communicate as each speaks past the other.
Firm Incentive and Accountability Alignment/Misalignment [my terminology] (Arnold Kling) - For-profit organizations respond to what customers and owners want. Not-for-profit organizations respond to what donors and employees want. While nonprofits may be equally suited in terms of wisdom, they are starkly worse in terms of incentives and accountability.
Kuznets Curve (Simon Kuznets) - Economic development through market forces first increases and then decreases unintended negative outcomes like economic inequality and environmental degradation.
Marginalism, a.k.a. Solving The Diamond-Water Paradox (Carl Menger, Leon Walras, and William Stanley Jevons; all separately) - The total value or utility of something is not what matters in terms of trade or production. Rather the “marginal” or additional value is what governs. Hence, additional glasses of water have less and less value as we drink, and winning a diamond is a much more valuable prize than is winning a bucket of water even though in the extreme water, in aggregate, is much, much more valuable than all diamonds.
The Knowledge Problem, a.k.a. The Impossibility of Socialist Calculation (Ludwig von Mises and F.A. Hayek) - Knowledge of wants and needs and preferences are hidden within each individual and revealed through prices as discovered through the market process. Because central planning lacks all three vital components (knowledge of preferences, derived prices, and a process from which to derive prices), it cannot possibly make allocation and production decisions properly.
Directionalism versus Destinationism (Mike Munger) - A political economy version of the perfect being the enemy of the good, this is the decision between supporting change that is an improvement but less than the full goal (directionalism) or only settling for the full goal (destinationism).8
Rational Expectations (John Muth and famously refined by Robert Lucas and Thomas Sargent) - Individual decisions are based on the best available information; hence, outcomes cannot differ systematically from decisionmakers’ expectations in aggregate.
High versus Low Decoupling, a.k.a. Decoupling versus Contextualising Norms (John Nerst) - The ability, disposition, or standard of separating ideas from the context in which they arise or exist. Essentially high decouplers can set aside bias and do not as easily fall victim to fallacious thinking like the ad hominem circumstantial, etc. Low decouplers tend to see an interweaving narrative or cannot see past irrelevant attributes.
The Logic of Collective Action (Mancur Olson) - As a collective gets large, the free-rider problem becomes important such that the people within the collective work at cross-purposes despite having common interests. This is exacerbated by the phenomenon of concentrated benefits and diffused costs leading to more disunited action.
The Overton Window (Joe Overton) - The range of subjects and positions that are politically possible and acceptable is limited to a certain “window” of options. One strategy for those seeking change is to capitalize on that which is currently within the window. Another is to move the window to allow for that which is not currently available.
The World is Growing More Peaceful (Steven Pinker) - The historical evidence is quite strong that the world is more peaceful today than in the past. This does not mean setbacks and major conflict will not occur in the future nor that self-annihilation is not a risk. But the overall trend is for more peace—slowly with ebbs and flows but eventually.
The Illusion of Asymmetric Insight (Emily Pronin, Justin Kruger, Lee Ross, and Kenneth Savitsky) - Claiming to know more about others including their motives than they know themselves.9
The Cobra Effect10 (An anecdote from the British Raj) - A potential result of perverse incentives, cobra effects are when an attempt to solve a problem brings the unintended consequence of making the problem worse. Subsidies increase that which is subsidized. Payments and prizes for evidence of problem eradication are effectively subsidies for the evidence. When the evidence can grow by an increase in the supply of the problem rather than the evidence resulting from a decrease in the problem, we risk The Cobra Effect. This is most but not exclusively problematic when the evidence providers, the one's “solving” the problem, are directly able to pull either lever—creating more supply of the problem, which is obviously bad, or more progress against the problem, which is obviously good.
Comparative Advantage, a.k.a. The Gains From Trade (David Ricardo) - Trade is a positive-sum gain where both exchangers benefit due to the fact that as long as they have some difference between them, each can produce more in total by each specializing. Importantly this holds true even if one is inferior to the other in every aspect of production.
Wild Problems (Russ Roberts) - Traditional decision-making techniques and the use of big data and algorithms can be unhelpful if not fundamentally misleading in trying to solve a certain class of problems.
Revealed Preference (Paul Samuelson) - The best method of ascertaining the true preferences of people (as consumers or simply their broader opinions) is by observing their actual behavior (purchasing decision or actions more broadly), which stands in opposition to simply asking them—stated preference is subject to social desirability bias.11
Schelling Point (Thomas Schelling) - An inability to communicate or coordination failures more generally can be solved by choosing defaults and common, perhaps obvious, focal points. When I know what you’re trying to do . . . and you know what I’m trying to do . . . and I know you know that I know what you’re trying to do . . . we can often reach the same destination (both figuratively and literally).
Creative Destruction (Joseph Schumpeter) - A reversal of a charge made by capitalism’s critics, this is the proposition that a successful market process involves the constant churning and reworking of the economic landscape to bring about progress. Thus, it is not a bug but rather a feature.
Motte and Bailey Fallacy (Nicholas Shackel) - A bad-faith arguer or just one making an fundamental mistake in reasoning can attempt to advance a controversial or problematic position (the bailey) but when challenged retreat to a modest or easily held, hence easily defended, position (the motte). This allows the arguer to pretend (to himself if not others) that he has successfully defended the more difficult position or that he was not ever advancing the more difficult position to begin with.
Elephant in the Brain (Kevin Simler and Robin Hanson) - Often we hide our motives including from ourselves. This deception and self-deception allows us to engage in behavior that would be otherwise undesirable. This covert behavior goes beyond the personal and into our connected lives and institutions.
The Ultimate Resource (Julian Simon) - The human mind is the ultimate resource implying that population growth is a positive feature and that human ingenuity in a free market overcomes all other resource scarcity.
Division of Labor (Adam Smith) - Through specialization and compartmentalization of tasks, production from a group of workers can be magnificently improved from what they could produce in total by each completing the full cycle of tasks on their own.12
Behavioral Economics (Adam Smith, et al.) - Psychological factors are involved in the decisions made and processes used by individuals. Therefore, these can thwart an assumption of strict rationality.
No Solutions, Only Tradeoffs (Thomas Sowell) - Perhaps the essential implication of opportunity costs, this adage encapsulates much in few words with vast applicability. Keeping it readily in mind will prevent mistakenly pursuing “the” answer in favor of correctly evaluating among answers. It is a progression from what (to do) to why (to do it or not do it). This reasoning immediately raises three other Sowell classics: “Compared to what?”, “At what price?”, and “And then what?...” The last of which would be a good preventative to The Cobra Effect.
The Signaling Model (Michael Spence) - In order to overcome asymmetric information challenges, people use signaling techniques to credibly convey information to others.
“Never Reason From a Price Change.” (Scott Sumner) - One cannot draw conclusions nor should they make assumptions about market behavior in regards to a change in price. One must first consider why the price changed—what caused it. A lower price for oil might result in more people driving if the change was caused by an increase in supply (higher quantity given movement along the demand curve from a shift in supply). However, if the change were due to a reduction in demand (lower quantity given movement along the supply curve from a shift in demand), it is very likely less driving will result (has resulted) in conjunction with the price change.
Regulatory Capture (George Stigler) - Firms invite government regulation thereby “capturing” the regulator so as to limit competition including to the extent of creating monopoly.
Related: Commandeering Theory (Carl Danner) - An extension which includes pure reverse capture
Dominant Assurance Contracts (Alex Tabarrok) - This is an extension of assurance contracts, a system in which contributors commit money that is used only if the fundraising goal is met. A dominant assurance contract layers in an additional incentive to make a successful outcome more likely. That additional incentive is a bonus paid by the organizer to the contributors if the goal is not reached but retained by the organizer if the goal is reached.
Antifragile (Nassim Nicholas Taleb) - Antifragility is when strength or ability to thrive is increased by stress, shock, volatility, damage, or failures. A fragile object never gains from these. An antifragile one will up to limits. Dropping a wine glass onto concrete from three feet up never improves the wine glass. Dropping down from a three foot elevation onto concrete does strengthen people (especially children). Dropping down from a three-thousand foot elevation would not strengthen either wine glasses or people.
Skin in the Game (Unknown, not Warren Buffett, and as applied and popularized by Nassim Nicholas Taleb) - Shared risk in major decisions is vital to achieve fairness, commercial efficiency, and risk management. The conditions for there being skin in the game also is essential to understand the world.
The Theory of Black Swan Events (Nassim Nicholas Taleb) - An event of great impact that is very difficult to predict or model especially under normal circumstances or typical assumptions and that appears inevitable in hindsight.
Rent Seeking (Gordon Tullock and Anne Krueger) - People and firms seek “rents” (benefits) for themselves from government and this seeking is costly leading to economic inefficiencies and resource destruction.
Moral Dyad13 (Daniel M. Wegner and Kurt Gray) - The perception that a entity whose mind is not of the same nature as our own is incapable of either experiencing feelings (a guilty doer) or making intentional decisions (an innocent feeler). The result of this perception is to assume apathy or remove agency.
Opportunity Cost (Friedrich von Wieser) - The true cost of anything is what you have to give up to have it.
Bootleggers and Baptists (Bruce Yandle) - In political action there commonly exists a hidden or inadvertent coalition that on the surface would seem unlikely if not downright contradictory. However, the alignment of interests allows for strange and often unwitting bedfellows who work to serve each other’s interests even if those interests at their core conflict. The classic tale is that of bootleggers and Baptists regarding alcohol prohibition (on Sunday’s for example)—bootleggers benefit from the very prohibition of alcohol sales that the Baptists desire; thus, both are supporters.
Spontaneous Order, a.k.a. Emergent Order (Zhuangzi as well as F.A. Hayek and Adam Ferguson) - The market creates an unplanned order that is the result of human action but not of human design.
Adam Mastroianni has a great post on this.
This applies to all prohibitions in one way or another. For drugs and alcohol it is straightforward. For employment (everything from below-minimum-wage to illegal immigrant and of course sex work) it is more subtle. It pushes these activities into the shadows and black markets where the dangers to those engaging in them grow intensely and the power dynamic shifts asymmetrically often in favor of the employer/buyer. Therefore, the employee/seller is pushed into ever more difficult and unfavorable conditions. There is a feedback loop in the illicit drug market (among others) of this shifting power dynamic as sellers seek to have buyers bear more of the burden for the difficulties they increasingly face.
Theoretical physicist Ludwig Boltzmann deserves credit for the original formulation of this as well as the naming.
The implication is as Arnold Kling puts it, “Dunbar’s number predicts the point at which organizations cannot function effectively without bureaucratic structure.”
It may be a misappropriation, but I think it is useful to apply this concept more broadly. I think it's a good exercise in trying to understand the world that we live in versus the world we would like to live in and possibly could.
I believe Stephen Jay Gould (contingency) and Simon Conway Morris (convergence) deserve credit for the origination of each of these concepts at the very least as applied to evolutionary biology.
See also: David McRaney
Important even if the original story is itself apocryphal.
An argument could be made that social desirability bias should have made the list.
Perhaps worthy of its own recognition is the observation by Smith that specialization is limited by the extent of the market—the bigger the market, the more specialization is possible.
See also: Two Theories of Mind