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March 2016 posts

Changing Our Minds

By Jonathan B. Wight

Richard Rohr is a Franciscan monk, a noted writer, and like Bishop Jack Spong, a revolutionary thinker about Christian theology in the 21st century.  Change is upon us.

This quote sticks out:

“People who are in early stage religion …. seem to be drawn toward anything that's punitive, shame-based, exclusionary of "wrong" people, or anything that justifies the status quo, which just happens to be keeping them on top socially, economically, and religiously. They start by thinking that's what religion is about--maintaining order and social control. They see God as a glorified Miss Manners.

“Once you idealize power and being at the top, you tend to emphasize the almighty, all-powerful nature of God, who is made into the Great Policeman in the sky to keep us all under control (or at least everybody else under control!). Frankly, you are totally unprepared for Jesus. He is a scandal and a disappointment.”*

Which is why, at this time of Easter, a man of peace was murdered.

Last time I counted, there were several thousand politically-inspired murders of journalists around the world over the past decade. These brave souls were pointing out uncomfortable truths to the powers that be. Rather than use this information for repentance, the powerful simply silenced these voices.

In Greek, to “repent” actually means to “change your mind.” But changing one’s mind isn’t all that easy, because it first involves changing one’s heart. That is, moral sentiments guide our openness to transformation. This is a hard lesson.

*Adapted from Richard Rohr, Gospel Call for Compassionate Action (Bias from the Bottom) in CAC Foundation Set (CAC: 2007).

The Rise of Moral Sentiments            

By Jonathan B. Wight

Earlier in my career I attempted to quantify the growth of interest in all academic matters relating to Adam Smith. The result was “The Rise of Adam Smith: Articles and Citations, 1970-97,” published in the History of Political Economy 34(1)(Spring 2002): 55-82.

Brandon Dupont at Western Washington University recently sent me a paper in which he revived that interest by doing a Google Ngram search for the “invisible hand.” The result was a spectacular rise in interest in the use of that phrase.  Brandon attempts to explain that rise (and the resulting misuse of the phrase compared to what Smith intended).

Inspired, I did a search for “The Theory of Moral Sentiments” and found this meteoric rise: Tms

Luckily, people in the 21st century are reading Smith more thoughtfully, and his old myths and misunderstandings are falling away. What new ones are we concocting in their place?

Is Cost-Benefit Analysis Judgment Free?

By Jonathan B. Wight

There is a movement afoot to make all regulations affecting banks and financial markets subject to cost-benefit analysis. The purpose is ostensibly to make more sensible rules; the hidden agenda may simply be to gut reforms that arose out of the 2008 debacle.

I am sympathetic to the claim that bankers feel harassed by regulations. There are presumably much simpler rules (e.g., about leverage) that could substantially lower risk. 

But asking all rules to abide by cost-benefit calculations is a fool’s errand. Much depends upon our imaginations of things unknowable—such as contagion effects and financial interconnectedness. As Tolstoy notes in War and Peace, “What theory or science is possible when the conditions and circumstances are unknown and the active forces cannot be ascertained?”

What is required in making rules is some degree of judgment or wisdom, based on experience and a heady dose of common sense. When Adam Smith proposed regulating financial markets by imposing an interest rate ceiling at 5 percent, he noted:

“In a country, such as Great Britain, where money is lent to government at three per cent and to private people upon a good security at four and four and a half, the present legal rate, five per cent, is perhaps as proper as any.”  (WN pp. 356-357)

This is his judgment, based on history and common sense, and subject to change should circumstances require it. It is not a scientific determination of the correct regulations, which would require omniscience that is not in evidence in the human species.

A more formal analysis opposing the proposed cost-benefit law is found in The Yale Law Journal, by John C. Coates, IV, entitled “Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications.”  Here is the abstract:

“Some members of Congress, the D.C. Circuit, and the legal academy are promoting a particular, abstract form of cost-benefit analysis for financial regulation: judicially enforced quantification. How would CBA work in practice, if applied to specific, important, representative rules, and what is the alternative? Detailed case studies of six rules—(1) disclosure rules under Sarbanes-Oxley section 404; (2) the SEC’s mutual fund governance reforms; (3) Basel III’s heightened capital requirements for banks; (4) the Volcker Rule; (5) the SEC’s cross-border swap proposals; and (6) the FSA’s mortgage reforms—show that precise, reliable, quantified CBA remains unfeasible. Quantified CBA of such rules can be no more than “guesstimated,” as it entails (a) causal inferences that are unreliable under standard regulatory conditions; (b) the use of problematic data; and/or (c) the same contestable, assumption-sensitive macroeconomic and/or political modeling used to make monetary policy, which even CBA advocates would exempt from CBA laws. Expert judgment remains an inevitable part of what advocates label “gold-standard” quantified CBA, because finance is central to the economy, is social and political, and is non-stationary. Judicial review of quantified CBA can be expected to do more to camouflage discretionary choices than to discipline agencies or promote democracy.”

The New Republican Party

By Jonathan B. Wight

According to David Brooks, this is an exciting time to witness the Republican Party re-inventing itself along updated, modern lines, shedding the hackneyed symbols and ideologies of the 1980s. Brooks

He doesn’t say it specifically, but alludes to it—that the failed policies of supply-side economics are top of the list. The idea that tax cuts that mainly benefit the top 1% can magically trickle down to the masses (at at time when the world is awash in savings—indeed, we are in a global savings glut) seems ludicrous.  

Brooks ties in this argument with ideas of moral psychology:

“This is also a moment for redefined compassion. Trump is loveless. There is no room for reciprocity and love in his worldview. There is just winning or losing, beating or being beaten.

“It is as if he was a person who received no love and tried to compensate through competition. That is an ugly, freakish and untenable representation of the human condition. Somehow the Republican Party will have to rediscover a language of loving thy neighbor, which is a primary ideal in our culture, and a primary longing of the heart.”

There is one minor way in which Brooks is wrong. He conflates the Reagan revolution and its embrace of “the conception of the human being as a rational, utility-driven individual” with Adam Smith!  He notes “the Adam Smith necktie was the emblem of that movement.”

He goes on to say that “today’s problems relate to binding a fragmenting society, reweaving family and social connections, relating across the diversity of a globalized world. Homo economicus is a myth and conservatism needs a worldview that is accurate about human nature.”

But where would you start to repair this failed worldview of homo economicus?  You would start with Adam Smith’s Theory of Moral Sentiments!  Don't throw out that AS necktie just yet.

Do Scientists Exaggerate?

By Jonathan B. Wight

Apparently so, according to a paper published in the British Medical Journal (BMJ) and brought to my attention by Chris Blattman’s blog.

Over the past four decades, authors of journal articles in medicine have turned to using loaded words to sway editors and reviewers that this article deserves publication in the ever-more crowded top journal sphere.   Positive words

The data set is not new it is novel and unique and innovative. The results are not confirming they are unprecedented and robust.  These superlatives have become now part of the scientific culture, and I guess someone who doesn’t exaggerate may have a lower rate of acceptance.

Rhetoric matters!

All this overselling may lead to the rise of cynicism, or perhaps our inability to now distinguish something spectacular from the banal.  Did all of this seep into the political culture?

Ethics and Technology

By Jonathan B. Wight

Vivek Wadhwa has an excellent article on the intersection of law, ethics, and technology. Wadhwa is a Fellow at the Center for Corporate Governance at Stanford University.

The basic idea is that “The Apple-FBI battles are a prelude of things to come. Laws and ethics simply can’t keep up with technology.”

He makes a point I’ve thought of, which is that Apple’s stance to emphasize privacy (read profits) over national security is a shortsighted gambit. The war on terror, made more intense after the attack in Brussels, requires that we develop new tools of defense. Controlling technology as part of that war effort seems like a no brainer, if indeed we wish to treat it seriously as a war effort. 

Wadhwa notes:

“Imagine if there was a terror attack in Silicon Valley — at the headquarters of Facebook or Apple. Do you think that Tim Cook or Mark Zuckerberg would continue to put privacy ahead of national security?

“It takes decades, sometimes centuries, to reach the type of consensus that is needed to enact the far-reaching legislation that Congress will have to consider. Laws are essentially codified ethics, a consensus that is reached by society on what is right and wrong. This happens only after people understand the issues and have seen the pros and cons.”

He points out that laws on privacy evolved over 200 years, co-evolving with technology.

“Thomas Jefferson said in 1816, ‘Laws and institutions must go hand in hand with the progress of the human mind. As that becomes more developed, more enlightened, as new discoveries are made, new truths disclosed, and manners and opinions change with the change of circumstances, institutions must advance also, and keep pace with the times.’

"But how can our policy makers and institutions keep up with the advances when the originators of the technologies themselves can’t?”

The Lives of Deirdre McCloskey

By Jonathan B. Wight

Most everyone who has an interest in ethics and economics knows the delightful Deirdre.  Alex Kafka now has a charming portrait of her in the latest Chronicle of Higher Education Review

“The Lives of Deirdre McCloskey” covers the span of her early, mid-, and late careers and, since retirement, her post-teaching career that keeps on going steadily. 

She notes that since her gender change she has become “more compassionate and less doctrinaire.”  Couldn’t we all learn from that?

Her latest book on Bourgeois Equality will come out next month.

Go Deirdre!

The Evolution of Cooperation

By Jonathan B. Wight

Philip Coelho and James McClure have an interesting article, “The Evolution of Human Cooperation,” in the latest issue of the Journal of Bioeconomics 18(1)(2016): pp. 65–78I.

The article argues that the strategic behavior predicted in game theory (the essence of homo economicus) reflects just the last evolutionary step in human evolution.  A much older primitive brain system relied on the necessity of cooperation without cognition. Simple organisms cooperate all the time without engaging in strategic behaviors. Such is our primitive past.

That is, humans are mainly an old-brain system with deep instinctual behaviors for cooperation.

Over time this old brain grew with evolution, adding layers of calculating possibilities—feints and deceptions.  The more modern brain is the problem child, fallen from the Garden of Eden. The modern brain knows evil through plotting treachery toward others in an effort to selfishly gain more resources and propagate faster.  But this later system relies upon that earlier system that cooperated without conscious plan:

"Strategic behaviors are a consequence of large brains and cognition, while these in turn are the results of the success of hominid cooperation in the ancestral environment that allowed the acquisition of protein and the resultant growth in brain-power." (p. 76)

This is an interesting idea, and helpful to think about. My query is: I was under the impression that the growth and evolution of the human brain did not mainly enhance human logic or rationality.  Rather, the growing human brain was needed to discern human intentions—picking up subtle clues in body language, tone of voice, and other characteristics that would indicate whether the another person is sincere or fraudulent. This gives rise to intuition about others, as well as strong emotional reactions to things we dislike.  

Adam Smith’s model was based on human instincts, operating within human institutions, that gave rise to institutional rules. It isn’t the big rational brain that takes us to economic development, it is the big emotional brain that does, by grounding exchange and institutions in human sentiments.

Review of Ethics in Economics

By Jonathan B. Wight

An author awaits in trepidation for reviews to come in.  Happily, George DeMartino did a wonderfully thoughtful analysis of Ethics in Economics: An Introduction to Moral Frameworks in the current edition of the Erasmus Journal for Philosophy and Economics.

DeMartino writes: “For the sake of the many students who have passed through my courses over the years, I only wish the book had appeared a decade or two earlier.”

Me too!  I wish I were a faster writer, but gestation time is also important for ideas to coalesce.  And a key idea of the book—pluralism in ethics—is controversial.  It took time for my courage to catch up with my convictions, and a lot of people deserve my thanks for that.

Click here for a link to the review.

Truer Costs of Trade Liberalization

By Jonathan B. Wight

It’s too bad that most teachers continue to ignore transactions costs. This is most obviously true when discussing the benefits and costs of liberalizing trade.

The gains to trade through comparative advantage are demonstrated assuming that resources easily and costlessly move from one industry to another. We wave our hands and claim that all will be well (and the world a richer place) after opening up to trade.

This is a story I love, but not in its pristine form. Transition costs from one point on the PPF curve to another are really, really high.  Economic justice requires that these costs be identified and debated when discussing trade liberalization.

If the U.S. has a comparative advantage in intellectual property products and not in manufacturing, then resources have to flow out of Detroit and into San Francisco or Austin or Boston.  When workers leave Michigan they leave behind sunk investments in schools, hospitals, roads, shopping malls, houses, and so on.  All these investments have to be rebuilt in the area of growth.  We are paying twice for sewers, electrical hook-ups, and so on. That’s a huge write-off of both public and private investments. We are also assuming that everyone laid off can retool their human capital and find a new job in the growth sector.

Adam Smith was more pragmatic. He worried about the transition costs and cautioned to head toward freer trade only slowly, so that these investments could be depreciated.

David Warsh points us toward a new paper by David H. Autor, David Dorn, and Gordon H. Hanson, “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade.”  The article notes that the frictions to reach a new equilibrium are high—much higher than previously estimated:

"Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. Better understanding when and where trade is costly, and how and why it may be beneficial, are key items on the research agenda for trade and labor economists."

It would not be the first time that economists came to common sense late in the game. Economists have pontificated for decades that trade deficits with China play only a small role in the decline of U.S. manufacturing. New estimates seem to suggest what blue collar middle-aged males (Trump and Bernie supporters?) have known for some time: the rise of China came at a much larger expense to the middle class than previously imagined.

Moreover, the decline of manufacturing came coincident with the rise of finance, and the two are related: U.S. current account surpluses were financed by foreign capital inflows to our financial markets, with the expected effects on income and wealth distribution. The rage grows.