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January 2010 posts

Federal Belt-Tightening and the Fallacy of Composition

Jonathan B. Wight

Paul Krugman criticized President Obama for “pretending to be stupid” in the State of the Union address last night.  President Obama said:

“[F]amilies across the country are tightening their belts and making tough decisions. The federal government should do the same.” (emphasis added)

By contrast, the Keynesian revolution discovered that federal authorities should use counter-cyclical policies, not pro-cyclical policies.  Since Obama and his administration know that, Krugman argues they are only pretending to be stupid.

Adam Smith may be guilty of the same fallacy of composition when he wrote, “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom” (Wealth of Nations, Glasgow edition, 456-7). 

Herein lies a great question in ethics: Is virtue at the family level also virtuous at the national level? 

Families generally allocate resources like good communists: from each according to ability, to each according to need.  Hence, if son Peter needs braces, daughter Emily may have to forego going to summer camp.  A family makes substantive welfare evaluations when assessing claims on resources.  By contrast, economists generally make instrumental welfare claims about the overall economy; these dollar claims cannot distinguish between Peter’s “need” for braces and Emily’s “need” for camp. Both are treated simply as preferences.

Those who favor markets must avoid the fallacy of composition.  The economy does not need to be run like a family, nor would the federal government necessarily need to act like a family in times of recession. 

Paternalism Reconsidered

Jonathan B. Wight

Mark White made an excellent post below (“Nudge meets long-term health care”) that essentially boils down to this:  “Do gooders should not be manipulating the choices of unsuspecting citizens.”  Let me offer three rejoinders.  Mark noted:

“What is or is not in a person’s interests is known only to that person, and cannot be judged by anyone else. If someone expresses dissatisfaction or regret after her choices, then she is free to seek help, and others are free to offer help to her. But it is insulting for someone else to impute irrationality to her choices, and then follow up with any type of manipulation to “guide” her to the “right” ones. This new style of paternalism is no less threatening to liberty for its subtlety—it’s worse.”

1.  Mark essentially argues that individual autonomy is violated when government paternalists structure a choice.  But doesn’t every choice have to be structured?  It’s not a question of “structure” or “don’t structure.”  If paternalism is not being used to structure a choice other options will be used.  These include:  random selection of choices manipulation for some purpose other than paternalism (e.g., special interests seeking economic gain). 

There is nothing to indicate that a paternalistic structuring of choices would be judged (by that individual himself or herself) to be any worse than any other form of structuring. 

2.  Second, Mark may be implying that something anti-democratic is going on.  It’s reassuring to think that everyone, all the time, is fully engaged as an autonomous personal decision-maker.  But in a Republic, we elect representatives to make many decisions for us.  Some of those decisions relate to framing our choices in a paternalistic way.  That’s not anti-democratic as long as there is transparency, good information flows, and so. 

In the “enrollment” debate Mark specifically mentioned, the provision he objects to is not being hidden under a rug: it’s out there for all to debate (as Mark is doing).  There is transparency, there is accountability. 

I don’t see anything wrong with structuring a health care or retirement system in a way that’s designed to encourage people to take care of their own health or retirement needs.  In saying this I am explicitly assuming that competition and good information exists.  Mark’s concerns are more valid in say, Japan, where savers were basically forced to use the government postal saving system.  The Japanese over-saved and had few options.  Likewise now in China, the under-valued exchange rate is forcing the Chinese people to over-save.  Making paternalistic choices is far more acceptable when people who are interested and care enough have real options, when there is transparency, and when there is accountability through elections.

3. From a virtue-ethics perspective, Mark’s argument is a good one—that we should learn and progress on our own, through making mistakes.  Depriving someone of mistakes doesn’t make that person better off.  But this argument only works so far.  People are malleable.  Even Adam Smith noted the need for paternalism, to inculcate good habits in people.  In TMS he wrote:

“The civil magistrate is entrusted with … promoting the prosperity of the commonwealth, by establishing good discipline, and by discouraging every sort of vice and impropriety; he may prescribe rules, therefore, which not only prohibit mutual injuries among fellow-citizens, but command mutual good offices to a certain degree.”  (p. 81, Glasgow edition).

In the Wealth of Nations, Adam Smith advocated limiting paper bank notes issues to £5 and larger, which would limit their circulation to wealthier merchants.  Such paternalism would keep the poor from suffering “a very great calamity” in the case of bank failure.  Paternalism must be exercised with “propriety and judgment,” and should not be pushed to the point that it is “destructive of liberty.” But to ignore the need for paternalism exposes the society to “many gross disorders and shocking enormities.”

In considering paternalism, it is necessary to weigh the degree of transparency, accountability, and competition in the system.  If these are present, some paternalistic structuring may be acceptable—even desirable. 

Sen on Smith's Theory of Moral Sentiments and Wealth of Nations

Mark D. White

Thanks to Pete Boettke at Coordination Problem (formerly known as The Austrian Economists), I now know of a new edition of Adam Smith's The Theory of Moral Sentiments from Penguin, featuring an introduction by Amartya Sen. According to Pete,

Sen argues that the consequence of this was not only that The Theory of Moral Sentiments was under-appreciated for the fields of ethics and philosophy, but that the interpretation of The Wealth of Nations was constrained and distorted to the detriment of economics. The neglect of the common framework between the two books resulted in a failure to appreciate the demands of rationality, the plurality of human motivations, the connection between ethics and economics, and the "co-dependent -- rather than free standing -- role of institutions in general and free markets in particular in the functioning of the economy."

This will not come as news to readers of this blog, of course, but it can never be said enough.

Also, I got a kick out of the cover, which is oddly reminiscient of Accept's 1985 album Metal Heart. But I'm sure I'm the not only one that noticed that either, right?  :)

TMS Metalheart

LSE public debate: What kind of economics should we teach?

Mark D. White

Just received the following message from Geoffrey Hodgson:

What kind of economics should we teach?

LSE public debate

Date: Wednesday 20 January 2010 
Time: 6.30-8pm
Venue:  Sheikh Zayed Theatre, New Academic Building, LSE, London, UK
Panellists: Paul Ormerod, Professor Geoffrey Hodgson; Professor John Sutton; Professor Albert Marcet   
Chair: Professor Tim Besley

The recent global crisis has lead to questions being asked about whether the kind of economics being taught to students in leading economics departments was responsible for the widespread failure to predict the timing and magnitude of the events that unfolded in 2008.  Critiques range from an absence of historical context in mainstream teaching of economics to excessive reliance on mathematical models.  This panel brings together four leading economists to debate this issue and to discuss what changes in the economics curriculum and the way that it is delivered are desirable.


Adam Smith and the Great Mind Fallacy

Mark D. White

From the latest issue of Social Philosophy and Policy (theme: Ownership and Justice) comes the following article:


The abstract follows:

Adam Smith raised a series of obstacles to effective large-scale social planning. In this paper, I draw these Smithian obstacles together to construct what I call the “Great Mind Fallacy,” or the belief that there exists some person or persons who can overcome the obstacles Smith raises. The putative scope of the Great Mind Fallacy is larger than one might initially suppose, which I demonstrate by reviewing several contemporary thinkers who would seem to commit it. I then address two ways the fallacy might be overcome, finding both wanting. I close the paper by suggesting that Smith's Great Mind Fallacy sheds interesting light on his “impartial spectator” standard of morality, including with respect to the specific issues of property and ownership.

Lots of fascinating papers regarding the moral, legal, and political philosophy of private property in this issue by Gerald Gaus, David Schmidtz, George Sher, and others - well worth checking out.

Ethical robots?

Mark D. White

Thanks to Orly Lobel at Prawfsblawg for pointing out this New York Times Magazine piece on new ideas. The one he points out in particular involves "ethical robots" (scroll down in the piece a few items), which will be programmed with basic ethical tenets and will perform more reliably (according to this programming) on the battlefield than humans would.

The idea that robots can be programmed for ethical behavior is based on the false impression that morality boils down to rules, a view that Deirdre McCloskey lampoons so well with her 3x5 index card metaphor. (The fact that the writer of the article mentions Kant's categorical imperative, often mistakenly interpreted as generating easily applicable rules, serves to reinforce this.) Anyone was has read Isaac Asimov's R. Daneel Olivaw novels knows that even a handful of "simple" rules (such as his Three Laws of Robotics) creates endless conflicts and conundrums that require judgment to resolve - and even Asimov's robots, with their advanced positronic brains, struggled with judgment.

The article does say that ethical robots would work "in limited situations," which suggests that the researchers have some idea of the minefield (pun intended) that they're getting into. But my concern is that people will read this piece, appreciating (as I do) what the researchers are trying to do to improve battlefield conditions (though I remain skeptical about the real-world prospects), and this will reinforce the "morality-as-rules" idea of ethics, and that the only reason people fail to follow these "rules" is weaknes of will, not that ethical dilemmas are complicated, contentious, and often irresolvable.

Even more curiously, the article claims that the robots ar programmed to "feel" guilt, in order "to condemn specific behavior and generate constructive change." Certainly, guilt (as with emotions in general) are essential to reinforcing moral behavior in imperfect humans (as well as being an integral part of the human experience), but why would robots need them - are they going to be tempted to resist their programming? One would think the point of developing robots was to guarantee "ethical" rule-based behavior - so where does the guilt come in?