Economics and Ethics

Mont Pelerin in the Rear-View Mirror?

Jonathan B. Wight

David Warsh, in a column entitled, "Still an Overgoverned Society?" reports on the beginnings of the Occupy Wall Street movement and its connection with anarchists, and contrasts that with the rise of the Mont Pelerin society.

Anyone who appreciates long cycles of historical analysis will recognize that success eventually breeds over-stretching and hence an inevitable backlash. I've never studied Hegel, but the dialectic of thesis, anti-thesis and synthesis seems to be at work. For example, I remember being somewhat shocked when a Nobel Prize was created in economics (technically it's the Sweden's central bank's Prize in Economic Sciences in Memory of Alfred Nobel). In the powerful sway of Keynesian economics in the 1960s, it appeared that economists were glorified as the new physicists. How little they knew!

One group likely did know the Nobel was something of a sham, and this was the Mont Pelerin Society (even as several of their members won the prize). The hutzpah of economists claiming to know enough to do discretionary fine-tuning is now accepted as a fantasy, and led to the rise of the Austrians and other skeptics. But the Pelerin's own ideological excesses (or those of their followers) may lead to a similar backlash.

Here is David's conclusion:

Believing that societal norms move in long pulses, that a gradual turning has begun, I have to say I am still heartened by the excitement with which Occupy Wall Street has been received.  Its inner story is certainly a disappointment:  the tenets of "contemporary anarchy" are a weak foundation on which to build, but they express a powerful longing for a time in which the power of money will be reduced. Maybe it's a spiral instead of a zigzag; but the direction is slowly changing.  The road from Mont Pelerin is in the rear-view mirror. The next part of the journey has begun.

--David Warsh, www.economicprincipals.com (early edition, November 27, 2011, emphasis added)

The next part of that journey will not renounce markets, I believe, but will introduce pragmatism in establishing institutions that work with markets to achieve various goals of society. I interact each semester with excited, energetic future entrepreneurs: let's not kill that flame even as we seek to address issues of inequality and justice.

On Literature and Liberty: Mario Vargas Llosa

Mark D. White

In today's Wall Street Journal, Mario Vargas Llosa, the winner of the 2010 Nobel Prize for Literature, writes very eloquently (of course!) on the connections between liberty, dignity, and human flourishing. He describes how these ideas, as those of any writer, are an essential and crucial part of his work:

It is the function of the novelist to tell timeless and universal truths through the device of a fashioned narrative. A story's significance as a piece of art cannot be divorced from its message, any more than a society's prospects for freedom and prosperity can be divorced from its underlying principles. The writer and the man are one and the same, as are the culture and its common beliefs. In my writing and in my life I have pursued a vision not only to inspire my readers but also to share my dream of what we can aspire to build here in our world.

More substantively, he describes the different understandings of the word liberal around the world, as well as how the term, along with the associated belief in the efficacy of the free market, have been abused or obscured in various ways:

There are those who in the name of the free market have supported Latin American dictatorships whose iron hand of repression was said to be necessary to allow business to function, betraying the very principles of human rights that free economies rest upon. Then there are those who have coldly reduced all questions of humanity to a matter of economics and see the market as a panacea. In doing so they ignore the role of ideas and culture, the true foundation of civilization. Without customs and shared beliefs to breathe life into democracy and the market, we are reduced to the Darwinian struggle of atomistic and selfish actors that many on the left rightfully see as inhuman.

The market does not operate in an ethical, political, or cultural vacuum, which responsible proponents of it recognize (but for which few get credit).

I'll allow Mr. Llosa the final word (would that I could do that more often!):

The search for liberty is simply part of the greater search for a world where respect for the rule of law and human rights is universal—a world free of dictators, terrorists, warmongers and fanatics, where men and women of all nationalities, races, traditions and creeds can coexist in the culture of freedom, where borders give way to bridges that people cross to reach their goals limited only by free will and respect for one another's rights. It is a search to which I've dedicated my writing, and so many have taken notice. But is it not a search to which we should all devote our very lives? The answer is clear when we see what is at stake.

What Motivates Economists?

Jonathan B. Wight

I've recently stumbled upon two interesting articles that explore the question of the motivation of economists.

1. Richard T. Ely, "The Founding and Early History of the American Economic Association," The American Economic Review 26 (1), Supplement (Mar., 1936), pp. 141-150.

Richard T. Ely was one of the self-described "rebels" who founded the American Economic Association in 1885. In 1936 he looked back and wrote this article for its 50^th anniversary. 

Ely was a renegade German Historical School member, who placed emphasis upon historical, statistical, and inductive research in economics. By contrast, the orthodox view of the mid 1880s was of laissez faire and free trade, and the orthodox methodology was deductive reasoning. According to the orthodoxy, virtually all questions in economics had pretty much been solved!

The rebels, by contrast, thought that our understanding of truth evolved; and in particular, public policies had to be adapted to conditions of time and place (143). Accordingly, "economics was not a dead thing of the past, but a live thing of the present, inviting young men to put the best they had into this field." (146)

Ely's father tried to warm him off a career in economics, particularly as an underdog fighting the orthodoxy: "Richard, you are a young man. Some day you will want to get married and have a family. How can you expect that economics will support you?" (142)

Ely notes that he and his co-conspirators were "humanitarians" who "wanted to help bring about a better world in which to live." (145) Moreover, motivated in terms of agency, he says, "We wanted the right to exist scientifically and to express ourselves in writing and in teaching." (145) He recounts several cases of people trying to get him fired, so his fear here was not manufactured.

2. Brent A. Evans, Paul W. Grimes, and William E. Becker, "What Led Eminent Economists to Become Economists?" found here.

This interesting paper was presented at the AEA National Conference on Teaching Economics, held at Stanford University in June 2011.

The authors obtained data for 89 prominent economists, 62 of whom are Nobel Laureates. Based on a variety of sources, the results show that about a third of the sample became economists out of a humanitarian desire to "make the world a better place" or from an agent motive to "make a difference" in the world. Only 2 of the candidates directly cited monetary incentives as motivators, but this likely underestimates the case for employment and remuneration considerations. Other important factors were exciting coursework and peer influences.

More than half (53%) of the sample enrolled in college without any interest in economics. One reason to be excited about teaching is the idea that one of your student's careers will be permanently changed for the better by the introduction to the discipline of economics.

What's interesting about both these articles is the nuanced account of the motives of economists in an area of great interest—one's careers. Economists, like most people I suspect, are driven to some important degree by a desire to create meaning in their lives. Meaning comes from seeing and valuing one's place in the wider social and moral universe. As Adam Smith noted, it is wonderful to be viewed by others as being a great person; but true meaning comes when we see ourselves as being worthy of approbation. In short, moral accounting often matters in personal choice.

Nobel Prize a Collective Effort

Jonathan B. Wight

At 87, Robert Solow (Nobel Prize 1987) recently gave up his office in the MIT Department of Economics.

Finance and Development caught up with him before his move to survey his career of more than 60 years. Solow's parting comment is worth repeating and discussing:

"[T]he most important thing in intellectual success is being part of a high-morale group. I think that progress comes from intellectual communities, not from individuals generally. That's what's wrong with Nobel Prizes and all that."

Social economics explores the ways in which group interaction and ethics contribute to the creation of (among other things) trust necessary for change and growth. Most intellectual markets involve autonomous--but not anonymous--agents whose group interactions alter preferences and influence choices through framing. Among other things, our colleagues help us reduce procrastination by according (or withholding) status and other social rewards (see The Thief of Time: Philosophical Essays on Procrastination, edited by Chrisoula Andreou and Mark D. White, Oxford, 2010).

The "fallacy of composition" is the widespread but mistaken notion that what is true (or works) in the individual or group situation is also true (or works) in society at large. Applied here, there is a dichotomy between the evolutionarily-adaptable emotional instincts for sociability (and the resulting ethical rules that evolve) and the more abstract and logical duties that are owed to anonymous strangers. The production of intellectual capital has been modeled as an anonymous quest for profit maximization. This is, at best, misleading; the micro-micro foundations of success may have more to do with emotional commitments and duties than with pecuniary motives.

Not that more money hurts -- but it might. A long time ago when I was serving on a search committee for the Dean of a new school that had just been endowed, a top candidate for the job asked about the facilities. "Don't worry," said the provost. "We're building a brand-new building and you'll have the best office in it." The candidate shook his head ruefully and eventually turned us down. He stated: "That's not how you build camaraderie when starting a new program. All the fancy offices and money create jealousies and petty spitefulness, destroying morale. If I start a new program like this, it should be housed in the basement of the worst building on campus. And all of the new hires will draw together as a team, focus on the important things, and get those things done!"

(P.S. -- Don't show this to my Dean, because I like my corner office and can swear my productivity is higher in it. J )

Nature or Nurture?

Jonathan  B. Wight

My previous post on bin Laden highlighted Jonathan Haidt’s argument that contradictory human instincts (for self, for others, against others) can help explain the outpouring of sentiment at the death of bin Laden. 

Jason Antrosio of Hartwick College disagrees:  “Haidt's commentary is a diversion from the real issues and real reasons for the celebrations” about Osama bin Laden’s death. 

Antrosio points us to a fuller account of his critique at his Living Anthropologically blog. 

In this post, Antrosio argues that the study of natural instinct is something anthropologists have to fight against:  “What is disturbing is all the people who call themselves social scientists trotting out to claim such celebrations express ‘natural urges,’ whether as bedrock human instincts or as shaped by human evolution.” 

Antrosio says that anthropology needs to “deny any instincts exist outside the current of history.” 

This is an intriguing but difficult claim—particularly as advances in human brain imaging, experimental economics, and other techniques bring out a more nuanced understanding of human behavior across cultural boundaries. 

One can commiserate with anthropologists who are feeling the sting of budget cuts and the intrusion of other disciplines into their domain.  Yet that doesn't let them off the hook.  By failing to engage with new science, will anthropologists be left behind over the next few decades?

Below, the first two points (I hope) celebrate Antrosio’s key point:  that human behavior is greatly shaped by human institutions, including culture. 

1. Institutions

 Since Douglass North won the Nobel Prize in 1993 there is scarcely any economist who is unaware of the importance of human constructs: 

Institutions are the humanly devised constraints that structure political, economic and social interaction.... [they] create order and reduce uncertainty in exchange (1991, 97).

North, Douglass C. 1991. ―Institutions,‖ Journal of Economic Literature 5(1):97-112.

2. Experiences

Human experiences -- rather than innate biological differences – are the distinguishing factor determining many outcomes and behaviors, at least according to Adam Smith, who notes:

The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education…. (Wealth of Nations, 1776, Chapter I.ii).

Hence, the world of an isolated tribesmen studied by anthropologists is different from the world of London, but the differences observed are largely due to experiences and human constructs, not to differences in human nature or capabilities.

3. Instincts

Having thus identified institutions and experiences as key factors shaping human behaviors, is there anything left for instincts?  Antrosio seems to argue no.  In this, is he passing up the opportunity to flesh out the key interactions between human instincts and institutions?

Paul Zak, for example, a neuroeconomist, is doing fascinating work identifying how the experience of market interaction releases the same kind of hormone (oxytocin) as does breast feeding.  In both cases oxytocin serves as a bonding agent to create long run trust needed for group success.

The release of hormones in certain circumstances is an autonomous reaction—not under one’s direct control.  This is not to say that cultural practices cannot create circumstances that reliably trigger certain instinctual responses.  Anthropologists could be uniting with researchers like Zak to ask: what kind of rites or ceremonies reliable produce certain hormonal responses, and what is the origin or evolutionary purpose of these? 

Further, scientists may have identified a "mirror-neuron" system in the brain that instinctively (again that dreaded word!) allows humans to imagine experiencing what others feel--which is a strong endorsement of Adam Smith's theory of moral sentiments. 

There can be deep criticism of the experimental methods used--which in psychology and economics often relies on 20-year old college students in Western countries--making inter-cultural (or inter-generational) comparisons suspect.  Much work will have to be redone to overcome these biases. 

But understanding the interplay between nature and nurture seems exactly the direction that social scientists should go.  Why would anthropologists wish to avoid being part of this exploration? 

(Thanks again to Jason Antrosio for his comment.)

Nobel prize in economics for analysis of search costs

Mark D. White

Peter A. Diamond, Dale Mortensen, and Christopher Pissarides were just award the 2010 Nobel Prize for economics for their analysis of markets with search costs and the application of this framework to labor markets in particular. Congratulations to all three!