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October 2011 posts

Grand Theft Auto

Jonathan B. Wight

Quote of the week, in reference to events of the Great Recession of 2008-09:

"Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart."

--John Kay, The Map Is Not the Territory: An Essay on the State of Economics

Kay metaphorically wags his finger at excessively deductive economists whom he says played absurd general equilibrium games while Rome burned. These non-scientists were unwilling to confront the anomalous facts of our world, preferring instead to stay inside the make-believe world of their models.

Induction plays an important part in science, and the attempt to eradicate it (e.g., by marginalizing history of economics and history of economic thought) in favor of pure deduction is a mistake. This explains why, for example, Kay says the corporate community makes very little use of economists—except as spokespeople to talk to other economists. In Kay's view the self-proclaimed high priests of the discipline only talk to other high priests, and are thus totally out of touch with the real world.

It takes a lifetime to master the intricacies of one's niche within economics; how many of us would turn on this labor history to proclaim it all rubbish? Whether consciously or unconsciously, we adopt a reverential posture towards our own labors of love. Kay calls us out of that complacency.

[Addendum: David Warsh reminds us in his column today that Karl Marx never visited a factory!—surely another great irony and tragedy for science and the world.]

Lying to Ourselves

Jonathan B. Wight

Radiolab produced a fascinating show on self-deception—or, why lying to ourselves is good for you (click here).

Adam Smith also hypothesized that self-deception was a normal part of the human experience, and in fact drove us to greater progress:

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life…. (Theory of Moral Sentiments, Liberty Fund edition, p. 183)

On the radio show, scientists report that people who perform at the highest levels in swimming routinely lie to themselves. They think they are invincible and they believe it when going out to compete. One swimmer said it would be impossible to win without telling yourself such lies.

On another show called Placebos, a WWII doctor reports that soldiers shot on the battlefield experienced markedly less pain than people shot in civilian life. What accounts for the difference? One theory is that soldiers are tough guys who bear pain more stoically. But that theory doesn't hold up under scrutiny. What appears to be happening is that soldiers feel less pain because of the background circumstances in which they are shot.

"It's not just about the bullet, it's about the story that comes with the bullet." In short, context matters.

A soldier's mental context of being shot might be something like this: "Okay, I'm still alive, and if I survive I'll be moved to a hospital … which means I'll be getting a medal and ultimately I'll likely get out of this war!"

By contrast, a storekeeper shot by a robber has perhaps a totally different mental context: "Okay, I'm still alive, and if I survive I'll be moved to a hospital… which means I'll have major health bills and no one to run my store and ultimately I'll likely go bankrupt!"

Two different "stories": The soldier feels relief, which lowers stress levels and perceptions of pain. The shopkeeper feels heightened stress that exacerbates the experience of pain. Identity is constructed by such stories: our narrative creates meaning with huge repercussions for health care, productivity, and other indicators.

If context matters to our perception of pain, it seems understandable that soldiers returning from WWII reintegrated to society more easily than in modern wars, since today so few people serve that returning soldiers may feel isolated and forgotten.

"Lying to ourselves" creates a context or narrative for experiencing pain. By lying to ourselves we artificially create a background for lowering the experience of pain.

While predicting the future is impossible, this discussion reminds me of a strong intuition I have that in 30 years there will no longer be a discipline called "economics." Instead, there will be a megadiscipline melded from biology, psychology, and economics—biopsychonomics, or some such thing.


Occupy This!

Jonathan B. Wight

How do newcomers to America—particularly those recently under the yoke of communism—view the protesters on Wall Street?

Iwona Kuraszko is a Visiting Scholar in Leadership and Ethics at the Jepson School of Leadership Studies at the University of Richmond. Normally, Kuraszko is an associate professor of business ethics at the Business Ethics Centre at Poland's Kozminski University's. She also teaches Corporate Responsibility and Social Communication at Warsaw University. She earned her doctorate in political science from Warsaw University and a master's degree from the University of Commerce and Law in Warsaw.

Professor Kuraszko recently traveled to NYC and had a chance to visit with the protesters. Here is her report:

I joined the protesters at Wall Street with the assumption that there would be some clear thought what we could change currently in the reality we live in. I felt sorry for people who had banners with Lenin and Marxism thoughts!!! I was trying to explain [to] them what it really means...I must admit I was disappointed because the group had no idea about the history and the systems which exist in Europe for example. In Europe, especially in EU countries the socio-economic system is normal daily routine. People protesting at Wall Street think that there is only Marxism and Capitalism as its opposition, which is narrow-minded because in a truly democratic system everything is mixed – people have equal chances and the government protects their rights, so many trends exist in the same time without mutual exclusion.

I had the impression that they have no necessary knowledge about the social and philosophical fundaments of American system, some of them admired Marxism and Lenin's ideas…so it is visible that for them there only two systems: capitalist and socialistic, so they do not understand that for example in Europe there is socio-economic (mixed capitalism thoughts with social feeling of community, nation, nature, culture) and in USA there is mostly the economic one. There are no socialistic systems today, everything is mixed and the history shows that socialism was extremely harmful for people. Poland, Czech Republic and many Eastern European countries were firstly bloodily attacked and then forced to implement this system (no civil rights, no freedom of speech, no economy development because of lack of entrepreneurship). So what I want to explain is that people at Wall Street do not understand the origins, the history and the evolution of the systems which they talk about. Why don't they admire A.Smith and J.Rawls? Why don't they have a look at their works? It is about freedom and social justice. The thing is that pure socialism can exist only in kibbutzes in Israel, I went there and saw it, it really works because the participants are tied with blood, family, cousins and they live for God.

Anyway, most of those nice young people at Wall Street just want to protest against the system but without having any clear vision how the current one should look like in their opinion, no leadership or leading thought. Some of them told me that religion is horrible because it closes people's freedom… The thing is that in Poland the Church was the main place where people heard about: individual freedom, about their dignity, about freedom to take decisions, about the right to have faith and hope, about the responsibility for their lives, about being individual unit, so how can we tell that religion always closes people's mind? What about opening people's hearts?

I saw many volunteers helping with food, some doctors who wanted to see patients without insurance… but my cousin, who is cardiologist in NYC, told me that those doctors will be probably sued to the court by those patients if they feel worse. Strange, so it means that the system encourages the doctors not to help the patients in need who are without insurance, so what about the social mission of being doctor? It is gone with the wind? But still I do not think that Lenin has an answer to that challenge, the answer is in people's hearts.

Thanks, Professor Kuraszko, for sharing your insights!

Inequality Revisited

Jonathan B. Wight

In contrast to my recent post on inequality, Richard Epstein argues that greater inequality is a good thing (PBS's Newshour "Does U.S. Economic Inequality Have a Good Side?").

Epstein bases his entire argument on the incentive effect that greater inequality provides for innovation. This is a weak—a very weak—claim. The average CEO made 40 times as much as line workers in the 1980s. Can anyone seriously argue that this ratio needed to rise to 300X today before managers had a strong enough incentive?

The Global Entrepreneurship and Development Index (GEDI), compiled by the Small Business Administration, captures the qualitative and quantitative attributes of entrepreneurship comparing 71 countries. Guess who's at the top of the entrepreneurship list? If you believe Epstein's argument, entrepreneurship and innovation are driven mainly by the desire to earn higher incomes than others. Hence, the leading entrepreneurship area should be the U.S. But that's not what the study found. Denmark and Canada come in ahead of the U.S., and both these areas have significantly more income and wealth equality. Surprise, surprise!

One explanation for this is that people's work efforts are driven by social desires for recognition, for status, and so on. In addition, people are driven by the intrinsic desire to create order through perfection, as discussed by Adam Smith. Many of the 20th centuries most profound innovations came about because of non-pecuniary motives (see John Kay's fascinating book, Culture and Prosperity: The Truth About Markets—Why Some Nations Are Rich But Most Remain Poor, 2004). The bottom line is that entrepreneurs are motivated by complex desires, and that social recognitions (acknowledged as being the first, being the best, etc.) are as important—probably more important—than money alone.

Epstein also fails to address any of the evidence suggesting that high levels of inequality are associated with higher levels of stress and indicators of social dysfunction. No one—certainly not me—is arguing for perfect equality. Inequality is a necessary, desirable, and natural feature of society. But inequality taken to excess can degenerate into a bad outcome. East Asian countries grew rapidly while narrowing income and wealth gaps (see the World Bank's report, The East Asia Miracle, 1993). One does not need greater inequality to stimulate rapid economic growth.

The Mysterious William Shakespeare

Jonathan B. Wight

Charlton Ogburn was a wonderfully gifted writer, who left the State Department to pursue the love of words in a number of exquisite books: The Marauders (1959) is a moving autobiographical account of Ogburn's time fighting in Burma during WWII, made into a movie Merrill's Marauders (1962). The Winter Beach (1990) is a nature book. Both of these are highly recommended.

My favorite book of Ogburn's, however, is The Mysterious William Shakespeare: The Myth & the Reality (1992). The book reads like a detective story you can't put down. Layer upon layer of facts and ideas are organized and beautifully written. Ogburn presents compelling evidence that the Earl of Oxford is the one and only true bard. Ogburn faithfully explores alternative theories and shows why they are all lacking. Ogburn's unvarnished honesty—which shines through all of his books—is his most powerful investigative tool.

Of this book, David McCollough wrote: "This brilliant, powerful book is a major event.  The scholarship is surpassing—brave, original, full of surprise,—and in the hands of so gifted a writer it fairly lights up the sky." 

If you are going to see the movie Anonymous (2011), get this book afterwards to check the facts! One of the interesting questions that arises is why so many traditional English Departments have failed to explore this evidence. Ogburn's thesis is that entrenched professors and commercial interests want to protect their reputations, and will try to quash any ideas that threaten the status quo. After all, a huge tourist industry has been built up to project (and profit from) the view that Shakespeare the author was the actor from Stratford-on-Avon. What is created is a Disneyland-story of the author, lacking in historical substance.

I haven't yet seen the movie Anonymous (it opens October 28) but anticipate that it will both disappoint and delight. It will disappoint because it will flagrantly distort history to make an engaging movie. And it will delight because it will pull back the curtain and expose the questionable claims about the actor from Stratford and put forward the case for the Earl. Edward de Vere—the 17th earl of Oxford—had the means (access to the court), the motive, and the talent to write the exquisite plays attributed to Shakespeare. He also had a powerful motive for concealing his identity (preserving his life). The economics of attribution points us in only one direction.

How economic inequality harms societies

Jonathan B. Wight

Richard Wilkinson is the co-author with Kate Pickett of The Spirit Level: Why Greater Equality Makes Societies Stronger (2009). He recently posted an interesting TED talk ("How economic inequality harms societies", http://www.ted.com/talks/richard_wilkinson.html).

The provocative thesis is that inequality makes us physically sicker and emotionally more vulnerable, giving rise to higher homicide, alcoholism, and other rates of mental illness. In other words, inequality is positively correlated with substantive measures of health and social interaction, as shown in the chart below:


Children are particularly vulnerable to the impacts of inequality, as shown here:


The data hold up not only internationally, but also comparing inequality between U.S. states:

The Model: Wilkinson uses a Smithian-type moral sentiments model in which people care about how others perceive them and how we perceive ourselves. Issues of superiority and inferiority, respect and disrespect, trust and distrust, and status competition are important elements in psycho-social health. Greater inequality, according to Wilkinson, generates greater stress (as measured by release of stress hormones). Chronic stress from social concerns lowers one's immune system responses leading to health problems.

There is obviously much more to be done making the link between inequality per se and the biological impacts on health, controlling for a host of other factors. What Wilkinson has accomplished is to make the correlations visibly apparent and to draw attention to the need for more research.

Personal aside: I grew up in highly unequal societies—South Africa, Mozambique, Libya and Brazil—all poster cases for inequality. Our house in Brazil had a large wall with shards of glass embedded in the top. It was a relief to come back to the United States, which in the late 1960s still had fairly equal incomes. As income inequality has grown in the U.S. since the 1970s the gated communities have flourished, and with it the same fear and distrust I remember so well from my time in Brazil. For lots of reasons, including huge current account deficits, fiscal deficits, political dysfunction, and ever-increasing inequality, the U.S. is looking more and more like a developing country.

[Thanks to Nabila Rahman for sharing this TED link.]

David Brooks on Daniel Kahneman and the complexities of the mind

Mark D. White

KahnemanDavid Brooks has a wonderful piece in today's New York Times prompted by the publication of Daniel Kahneman's new book, Thinking, Fast and Slow (a review copy of which I saw at Strand last weekend and in my ignorance failed to pick up). Of particular note is this passage of Brooks' referencing the impact of Kahneman's work (particularly that done with the late Amos Tversky):

Kahneman and Tversky were not given to broad claims. But the work they and others did led to the reappreciation of several old big ideas:

We are dual process thinkers. We have two interrelated systems running in our heads. One is slow, deliberate and arduous (our conscious reasoning). The other is fast, associative, automatic and supple (our unconscious pattern recognition). There is now a complex debate over the relative strengths and weaknesses of these two systems. In popular terms, think of it as the debate between “Moneyball” (look at the data) and “Blink” (go with your intuition).

We are not blank slates. All humans seem to share similar sets of biases. There is such a thing as universal human nature. The trick is to understand the universals and how tightly or loosely they tie us down.

We are players in a game we don’t understand. Most of our own thinking is below awareness. Fifty years ago, people may have assumed we are captains of our own ships, but, in fact, our behavior is often aroused by context in ways we can’t see. Our biases frequently cause us to want the wrong things. Our perceptions and memories are slippery, especially about our own mental states. Our free will is bounded. We have much less control over ourselves than we thought.

I am pleased that Brooks did not venture into normative territory here (for the exception of the word "wrong" in the last paragraph above). All in all, a very nice article by Brooks about a truly groundbreaking thinker.

The Darker Side of Steve Jobs and Apple

Jonathan B. Wight

Amidst all the accolades—for he surely was an inspired genius—Steve Jobs is also getting a fair bit of ripe criticisms for his personal and professional vices.

Gawker reports ("What Everyone is Too Polite to Say About Steve Jobs") that professionally he was a managerial bully who demeaned people and showed a lack of basic respect for others.

The charge is also that Apple as a company stifled free speech and had authoritarian labor relations in its Chinese factory that approached sweatshop conditions. Apple admitted that its suppliers used underage workers, a practice Apple has been attempting to eradicate, including firing one factory supplier.

In his personal life Jobs allegedly had a child out of wedlock, initially denying paternity before later admitting it.

These are the stories of a complicated person whose inspiration for beauty inspires billions. But he was no saint.

[Thanks to Remo Kommnick, co-founder of imprvd, for providing the link.]

“Mad as Hell”

Jonathan B. Wight

The wonderful movie Network has a climactic scene in which the protagonist, a television anchor played by Peter Finch, goes nuts on the air proclaiming, 'I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!'

That could be the theme for both the Tea Party and the Occupy Wall Street groups.

The 1976 movie sounds right off the front pages today:

I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth, banks are going bust, shopkeepers keep a gun under the counter. Punks are running wild in the street and there's nobody anywhere who seems to know what to do, and there's no end to it…. 'I'm a HUMAN BEING, God damn it! My life has VALUE!' So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell, 'I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!' (click to play)


Below the Occupy Wall Street folks are saying essentially the same thing: a desire for respect and "fair" treatment (click to play):

Paul Ryan confronts Jeffrey Sachs

Jonathan B. Wight

Mark White alerted me to Paul Ryan's review of Jeffrey Sachs new book, The Price of Civilization: Reawakening American Virtue and Prosperity in a recent Wall Street Journal. I haven't read the book but several points in the review did strike me. Ryan notes that:

In "The Price of Civilization," Mr. Sachs is asking the right questions. What is a life well lived? What should our government's role be in building a more virtuous society? What policies should it pursue to promote fulfilling lives for its citizens? If such questions direct us to the moral wisdom of our cultural traditions, they can indeed help to balance the excesses of capitalism and so help us to extend its benefits to all.

Unfortunately for Ryan, Sachs promotes big government, high taxes, and a Benthamite view of utilitarian paternalistic ethics—instead of promoting the intrinsic rights promulgated by the nation's founders.

Oliver Wendall Holmes likely gives Sachs the title of his book. According to one historical view, Holmes rebuked a secretary's query of "Don't you hate to pay taxes?" with "No, young fellow, I like paying taxes, with them I buy civilization." "Taxes are the price of civilization" is a common rejoinder to those who complain about the growing intrusion of government in our lives.

Ryan summarizes the essence of Sach's pessimistic view:

It is through this prism of decline that we may better understand Mr. Sachs's calls for an overbearing government to take more earnings from you and make more decisions for you, as well as his instructions for hard-working Americans to restrain their ambitions and accept their current place in life. He seeks nothing less than to replace the vision of the Founders—the ideals of individual liberty that have enabled America to achieve the unrivaled social, material and spiritual flourishing of the past two and a quarter centuries—with one that relies almost solely on the wisdom and beneficence of an intrusive, unlimited government.

Jeffrey Sachs has contributed substantially to our understanding of the suffering in Africa. He has not yet found a solution to poverty that celebrates the complex mechanisms of discovery that are beyond the wisdom of any self-styled "wise" planner.