Thursday, February 26, 2009

What will it take to get sustainable recovery?

As readers of this blog will know already, Jim often asks me questions that I can’t answer. This morning he asked me how long it will take for the Australian economy to get back on a sustainable growth path. I was not able to answer directly. I suggested that what happens to economic growth in Australia will depend on what happens in the rest of the world. I added that if the U.S. starts to grow again in 2010 then that will have a positive impact on growth prospects for Japan and China and for commodity exporters like Australia.

Jim asked: “How confident are you about the U.S. starting to grow in 2010?” I started making excuses about my lack of knowledge of the U.S. economy and my poor knowledge of short term macroeconomics. That was when Jim said: “You know that political leaders all over the world have been saying that they will do what it takes to restore confidence and get sustainable recovery.” I nodded as Jim went on: “What they seem to be implying is that they will just keep increasing government spending until people become more confident. Does that make you feel confident?”. I shook my head. Jim then asked: “So what will it take to restore investor and consumer confidence and get sustained recovery?”

I told Jim that was a very good question. That only bought me about a second to gather my thoughts. The only sensible answer that I could think of was that restoring confidence was a matter of establishing a general expectation in the U.S. (and other major economies) that GDP would grow at about the same rate as the trend rate of growth in their productive capacity.

Jim interrupted: “That means boosting aggregate demand. Isn’t that what governments are trying to do now?” My response was that our focus should be on establishing the expectation of sustainable growth in the monetary aggregates rather than just a short-term boost in aggregate demand, with the expectation of a subsequent contraction as soon as inflation raises its ugly head again.

Jim interrupted again: “Next you will be telling me that Milton Friedman was right and what we need is a rule requiring the monetary authority to maintain a specified rate of growth in the stock of money.” I admitted that I still thought Friedman was on the right track, but technical difficulties involved in targeting the money supply would make it more sensible to target growth in nominal GDP (i.e. PY rather than M).

Jim said: “So what you are saying is that if the U.S. central bank were to announce a target rate of growth of nominal GDP and start making appropriate adjustments in monetary policy to achieve that target, then this would restore confidence and promote a sustainable recovery.”

I wish I had sufficient confidence to tell Jim that he had hit the nail on the head. Instead I suggested that rather than trying to put words in my mouth he should take a look at Scott Sumner’s blog: TheMoneyIllusion.

I particularly liked the following posts on Sumner's blog: Why did monetary policy fail?; and The Economics Babel.

Thursday, February 19, 2009

What are the links between freedom and flourishing?

I think the best way to summarize the links between freedom and flourishing is by trying to answer the following questions.

1. What is the relationship between happiness, well-being and flourishing?
If happiness is viewed as a positive emotional state (involving, for example, peace of mind, optimism, uncompression, exuberance, flow, joy and cheerfulness) then well-being (utility) cannot be the same thing as happiness. (See: What is happiness? and Do good decisions always make us happy?) Well-being (utility) involves several other factors - including personal security and security of property, health and longevity, access to goods and services – as well as a positive emotional state.

Flourishing can be described as authentic well-being. I am attracted to the idea that flourishing involves self-fulfillment as well as to the idea that it involves a meaningful life and actualization of human potential. It seems to me that the highest level of reflection of a flourishing person would be in harmony with his or her emotional nature, and vice versa (but I don’t claim to know a great deal about this ideal frame of mind or meta-state).

2. What is the relationship between freedom, classical liberalism and rationalistic individualism?

Freedom (liberty) is the condition of society in which the coercion of some by others is reduced as much as possible. It seems to me that classical liberalism is essentially about the rule of law and the protection of freedom. It is the view that people can live together in peace and to their mutual advantage bound only by abstract rules of conduct that protect the life, liberty and property of each person.

It is important to distinguish between rationalistic individualism and classical liberalism. Whereas rationalistic individualism maintains that a person’s wellbeing always increases when he or she has more options to choose from (liberal optimism), classical liberals have a more sober view of human nature. For example, Adam Smith accepted human fallibility but believed that the desire that individuals to better their own condition would generally prevail over their tendency to be prodigal and imprudent. (See: Liberal sobriety plus contextualism equals classical liberalism? and Is freedom a necessary condition for human flourishing?)

Various attempts have been made to measure freedom. The most relevant for present purposes are economic freedom indexes that measure the extent to which economic policies support private property, personal choice, voluntary exchange, freedom to compete etc.

3. What is the relationship between freedom and happiness?

People generally have a passion for control of their own lives. (See: Does inner freedom link liberty with flourishing?) Most people enjoy exercising competence in the face of the challenges that freedom poses. Exercising such competence is no easy matter; people often become unhappy as a result of the poor choices they make. But people whose life stories that are full of challenges, setbacks and triumphs may be happier than those whose lives are uniformly secure, comfortable and tranquil. (See: Does a challenge make us happy?)

The exercise of freedom can result in economic developments that disrupt communities, cultures and lifestyles, and leave many people unhappy. Such problems can be minimized under appropriate constitutional arrangements that decentralize political decision-making (See: Do we have to choose between lifestyles and liberty?)

Inner freedom – the extent to which people feel in control of their own lives – seems to be closely related to the emotional states involved in happiness. The proportion of the population with high levels of inner freedom tends to be higher in countries with higher levels of economic freedom. (See: Is inner freedom related to economic freedom?)

4. What is the relationship between freedom and well-being?
Freedom (as defined above) is inextricably linked to security of persons and property.

The relationship between economic freedom and other aspects of well-being was discussed in my post: What do objective measures of freedom and flourishing tell us?.

Saturday, February 14, 2009

Do we have to choose between lifestyles and liberty?

As noted in my last post, Dan Haybron suggests that our prospects for flourishing may depend importantly on living in the right kind of setting, with the right sorts of people (“The Pursuit of Unhappiness”, p 267) . Haybron is concerned that liberal optimism (the presumption that well-being increases when people have more options to choose from) can result in damage to community attributes that are important to the happiness of many individuals.

One of the examples that Haybron gives has to do with a proposal for intervention in the education of Amish children to give them a wider range of options to choose from in their adult lives. Haybron makes the point that “the Amish are not crazy to fear that such a policy would threaten one of their most cherished values, that of community” (p 266). It seems to me that it would be possible for a classical liberal to take a position on either side of such an issue, depending on the facts of the situation e.g. whether a strong case can be made that the rights of the children are being breached and whether it is likely that government intervention on their behalf would actually improve their chances of having a happy life.

Haybron’s example of the possible harm that could be done to community well-being through economic development of an island is worth considering at greater length. The residents of the island are assumed initially to have relatively low incomes but to enjoy, on average, a high level of happiness, due to strong community bonds and a culture that emphasizes the enjoyment of life. It is possible for any one resident to obtain a substantial net benefit by selling land to developers who wish to develop the tourist potential of the island, since the incremental effect of any one sale on the community lifestyle is minimal. But, taken together, many such sales may have an overall negative effect on the average happiness of the island’s long term residents. Should the development be stopped?

A different example, concerning the views of Justus Moser about the impact of global commerce on local culture, might help to clarify the issues involved. Jerry Muller tells us that Moser was a leading citizen in Osnabruck, a self-governing region in western Germany, in the 18th century (“The Mind and the Market” pp 84-103). Moser, like some modern-day opponents of globalisation, was concerned about the effects of trade on local lifestyles and culture. He condemned the growing taste for new, imported commodities, such as coffee, tea and sugar, especially among the lower ranks. He viewed shopkeepers as the local agents of the new international economy who robbed artisans of their customers and their livelihood. He reserved his greatest condemnation, however, for foreign peddlers who were selling small quantities of imported goods to peasants who were largely outside the market economy. According to Moser, these activities were causing the rural population to be “stimulated, tempted, led astray and deceived”. He argued that the public needed to be protected from the temptation of buying products that they didn’t need like leather gloves, wool stockings, metal buttons, mirrors, cotton caps, knives and needles. Women also needed to be protected from local markets where they would chat and waste money on snacks and pleasantries, while ignoring their household duties. Should trade restrictions be imposed to protect local lifestyles and culture?

What is the main difference between these two examples? It seems to me that it is possible that there could be close to a unanimous view among the long-term residents of Haybron’s island in favour of restricting certain kinds of economic development, but it is unlikely that Justus Moser, and the modern day opponents of globalisation, could persuade many of their fellow citizens that they need to be protected from the temptations of international commerce.

Can the legitimate interests of communities in preserving lifestyles of their members be met without making unacceptable encroachments on liberty? Dan Haybron evidently does not think so. At the end of his book he seems to be suggesting that we have to choose between paternalistic interventions that might, or might not, promote happiness and the individual’s right to pursue unhappiness (like the Savage in Aldous Huxley’s “Brave New World”).

I think that view is too pessimistic. Robert Nozick’s concept of a framework for utopia (briefly discussed here) seems to me to provide a good way to begin thinking more optimistically about these issues. People who want the opportunities that economic growth provides should be able to choose to live in communities that provide those opportunities, while those who value a more simple lifestyle should be able to choose to live in communities in which economic development is restricted in various ways. Do you think that idea is too utopian?

I would like to draw attention to Dan Haybron's comment below.

Friday, February 13, 2009

Liberal sobriety plus contextualism equals classical liberalism?

I have now finished reading “The Pursuit of Unhappiness” by Dan Haybron and haven’t modified my view that it usually does people good to take responsibility for running their own lives. (See earlier posts relating to this book: here and here.)

What is more surprising, however, is that I find that the author’s position is in some respects fairly close to my own view. Why am I surprised? I think it is because I originally thought that Haybron’s foreshadowed attack on liberal optimism was shaping up to be an attack on classical liberalism. In the final chapter of the book, however, he defines liberal optimism more specifically as the presumption that a person’s well-being will increase if she/he has more options to choose from. (I think that is the essence of what he is getting at in his lengthy definition on pages 256-8.) In the end it turns out that Haybron’s main target is actually atomistic (or rationalistic) individualism rather than classical liberalism.

Haybron’s conclusion is that the balance of evidence may favour both “liberal sobriety” and “contextualism”. Liberal sobriety initially brought to my mind thoughts about the desirability of respecting the rights of others by being temperate in one’s consumption of alcohol - but it is actually the view that although people should not be presumed to fare better if they have more options to choose from, they usually do fare better under those circumstances (p 263). Contextualism is the view that well-being is better served when individuals’ lives are shaped by an obliging context, i.e. communities, cultures etc. conducive to human flourishing.

Haybron writes: “We should take neither liberal optimism nor individualism for granted. Indeed, perhaps the pursuit of happiness will prove to be mainly a societal matter: our prospects for flourishing may depend less on personal wisdom than on living in the right kind of setting, with the right sorts of people” (p 267). The main problem I see with that statement is that in the modern world a person usually needs considerable wisdom to choose to live in the right kind of setting with the right kind of people. (Haybron implies that there is also another problem, namely that people who consider that they are living in the right kind of community may not be able to prevent economic development that will damage the lifestyle that they value. I will discuss this in my next post.)

Dan Haybron’s position regarding liberal sobriety and contextualism seems close to that of Friedrich Hayek (and Adam Smith). This might deserve some explanation, since there has been a tendency - including by some politicians who should know better - to confuse Hayek’s views about individualism with those of Gordon Gekko.

Hayek supported the classical liberal view that humans are very irrational and fallible beings. In supporting the views of Adam Smith he wrote: “It would scarcely be too much to claim that the main merit of the individualism that he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system that does not depend for its functioning on our finding good men for running it, or on all men becoming better than they are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. Their aim was a system in which it should be possible to grant freedom to all ...”.

Hayek noted that the classical liberal view affirms the value of the family, community groups, voluntary associations and conventions that have evolved for the mutual benefit of community members. He argued that voluntary cooperation enables coercion to be kept to a minimum. He condemned “false individualism which wants to dissolve all these smaller groups into atoms which have no cohesion other than the coercive rules imposed by the state ...”. He even suggested: “It must remain an open question whether a free or individualistic society can be worked successfully if people are too ‘individualistic’ in the false sense, if they are too unwilling voluntarily to conform to traditions and conventions, and if they refuse to recognize anything which is not consciously designed or which cannot be demonstrated as rational to every individual”. (The quotes are from: ‘Individualism: True and False’, a paper written in the 1940s and published in various places including: C Nishiyama and K Leube (eds.), “The Essence of Hayek”, 1984.)

I’m not sure whether Dan Haybron would appreciate any further attempts on my part to associate his views with those of Friedrich Hayek. So, I will end this post with a quote from Haybron’s book:
“Accepting contextualism does not require us to follow communitarians in rejecting liberalism. Contextualists might insist that governments promote substantive goods only when doing so enjoys sufficient popular support, and that they not infringe on individual rights in doing so” (p 265-6).

Tuesday, February 10, 2009

How close is the relationship between life satisfaction and happiness?

This post is a continuation of discussion of issues raised in Dan Haybron’s book, “The Pursuit of Unhappiness”, and my last post, ‘What is happiness?’

I ended my last post suggesting that Dan Haybron overstates the difference between positive emotional states and being satisfied with one’s life.

My objection relates specifically to an example in which Haybron attempts to separate a person’s emotional condition from her dissatisfaction with her life in order to show that if you take away the former it is not clear that the latter involves unhappiness.

Haybron writes: “Consider a small-town resident, impressed by television depictions of city life, who believes her environs dull and unsophisticated. Dissatisfied with her life she wants to get out. Later, having done so, she realizes that her old life was actually rich and fulfilling with none of the anxiety and loneliness of urban life. She might conclude that, while she had indeed been dissatisfied in her former life, she was nonetheless happy” (p 150).

It seems to me that this attempt to separate the person’s dissatisfaction with life from her emotional state doesn’t work. It seems to me that she was clearly not happy in her former life because she thought she had the option of living a happier life in the city. Her problem was that the comparative judgement that led her to feel dissatisfied with small-town life was made on the basis of inadequate information. If she had followed Dan Gilbert’s advice (“Stumbling on Happiness”) and talked to some of her friends who had moved to the city, she would have been in a better position to know how she would feel after she moved. In possession of this better information it is reasonable to suppose that she would make a more favourable judgement about small-town life and feel happier.

Is it ever possible for individuals to make the judgement that they are satisfied or dissatisfied with life without referring to their emotional states? Perhaps it would be possible for some individuals to judge themselves to be satisfied with life from a purely intellectual point of view, without being happy. But would such people actually feel satisfied with life? I don’t think so.

This still leaves doubt about the relationship between life satisfaction judgements and happiness. Does it make sense to define happiness as “lasting and justified satisfaction with life as a whole”? (Charles Murray adopts this as his working definition of happiness in what I have previously described as the best book about pursuit of happiness and good government). It seems to me, however, that this definition encompasses factors that contribute to human well-being and flourishing that are additional to the positive emotional states involved in Haybron’s definition of happiness.

Perhaps “lasting and justified satisfaction with life as a whole” should be viewed as a definition of well-being rather than as a definition of happiness. Haybron might be right that life satisfaction is a dubious candidate for a major life goal because it is “too easy to come by” (p 99), but I think the requirement for justification meets this objection. The requirement for justification also has the virtue of recognising that human well-being requires the exercise of practical wisdom.

What is happiness?

I am currently reading “The Pursuit of Unhappiness” by philosopher, Dan Haybron. My interest in the book was aroused by some quotes in a post on one of Henry Scouteguazza’s blogs, which suggested that Haybron’s book presented a challenge to classical liberal optimism, i.e. optimism about the capacity of individuals to achieve happiness if they have the liberty to pursue it. I had previously read articles by Haybron and was favourably impressed by them, so decided to read the book even though it might cause me to re-think my views yet again (and despite my aversion to the title).

A lot of the material that I have read and commented on in this blog seems to question the case for classical liberal optimism. I think that is because much of modern writing on this topic tends to view individual rationality in setting and pursuing goals as conventional wisdom that should be challenged. Since I began reading in this area I have become a lot more aware of the potential for individuals to fail to pursue happiness effectively. (For example, see posts discussing views of Dan Gilbert, Dan Ariely, Richard Thaler and Cass Sunstein, and Colin Camerer.) I still believe, nevertheless, that not only is it good to respect the liberty of others – to allow them to live as seems good to themselves - but it also usually does people good to take responsibility for the running of their own lives. It is possible that I might modify these views after I have finished reading “The Pursuit of Unhappiness”.

At this stage I have only read the first half of the book, discussing how happiness can most usefully be perceived. Very briefly, Haybron argues in favour of an emotional state view of happiness rather than either the hedonic view or the life satisfaction view. He rejects the hedonic view (that happiness is pleasure) largely on the grounds that pleasure is something that happens to a person (having pleasant experiences) whereas happiness is a deeper psychological condition. He rejects the view that happiness is life satisfaction for two main reasons. First, he argues that the attitudes that people have toward their lives tend to be unstable - influenced by whatever events come to mind. (I think he overstates this point because of evidence I have discussed in an earlier post that life satisfaction judgements can be fairly stable.) Second, he argues that life satisfaction judgements are inherently ethically loaded e.g. our judgement about our lives may be influenced by such factors as whether or not we think it is admirable to count our blessings.

Haybron argues that happiness consists of a person’s overall emotional condition. A happy person’s emotional condition is broadly positive – involving stances of attunement (peace of mind, confidence and inner freedom), engagement (vitality and flow) and endorsement (joy, cheerfulness).

My initial reaction is that Haybron has presented a persuasive argument that the happiness label belongs on the jar containing positive emotional states rather than on the jars containing pleasures or life satisfaction. This does not rule out the possibility that hedonic considerations and life satisfaction may still be important and closely related to happiness even though they are not the same thing as happiness.

However, I have two reservations. First, Haybron’s argument about the nature of happiness will not prevent the continued generic use of the term to cover a variety of influences on well-being as in the phrase “gross national happiness”. Some potential for semantic confusion will remain even if Haybron’s argument is widely accepted by happiness researchers.

My second reservation is that in the process of his labelling exercise I think the author overstates the difference between positive emotional states and life satisfaction. I will explain why in my next post.

Thursday, February 5, 2009

Why is Rudd's essay like toxic debt?

When Jim asked me what I thought of Kevin Rudd’s lengthy essay on the global financial crisis (published in the February 2009 issue of “The Monthly”) I said it was like a CDO. He said: “I agree. Its just a heap of garbage.”

I replied: “No, that’s not what I meant. What Rudd has done in writing this essay is like constructing a CDO. He has taken some reasonable stuff, combined it with some garbage and then dressed it up to look like gold. No-one knows what it is worth.”

Jim interrupted: “We have to pay $7.95 to get a copy. How is that for unrestrained capitalism? We actually have to pay to read the views of our prime minister.”

I ignored Jim’s comment. I continued: “The problem is that I can’t work out whether he is full of crap or just pretending. For example, if we can believe that his praise for the Hawke-Keating governments’ economic liberalisation is sincere, then we can be reasonably confident that his attack on what he describes as “the great neo-liberal experiment” is just a political labelling exercise designed to make Australia’s former government and current opposition look responsible for the world financial crisis. If we can believe that then we don’t have too much to worry about. But what if Janet Albrechtsen is right? What if Rudd’s claim to be a fiscal conservative before the last election was just a charade? What if his social democratic dream all along was to engage in an orgiastic spending spree on borrowed money?” (This is a reference to Janet Albrechtsen’s article ‘PM dumps facade for his ideological dream’, in “The Australian”, 4 February 2009.)

Jim looked puzzled. He said: “I thought the writing was on the wall before the 2007 election that Kevin’07 was no Paul Keating. Did you think his anti-market rhetoric at the time was just labelling? Can you imagine Rudd ever coming clean with the public, like Keating did before the recession in the early 1990s, and telling them that the Australian government can’t spend its way out of a world recession?”

I said: “I thought Rudd’s stuff before the election about not having to choose between Brezhnev and Hayek was just differentiating his product from John Howard’s. I didn’t like his misrepresentation of Hayek, but I thought Rudd was just a kinder and younger version of John Howard.”

Jim replied: “Well, the proof of the pudding is in the eating. What do you think of Rudd’s latest package of spending measures?”

I picked up my copy of this morning’s Financial Review and said: “I can’t say it any better than this.” I pointed to the following passage in an article by Mark Latham, former leader of the Labor Party:
“In an open economy, Keynesian pump-priming drives down national savings and increases reliance on costly forms of foreign debt. It is a Band-Aid policy that does nothing to enhance long-term demand conditions and productive capacity. Its lasting legacy for Australia will be a return to deficit budgeting, government indebtedness and tax increases to pay for the spending spree” (Australian Financial Review, 5 Feb. ‘09).

After he had finished reading Jim said: “Yeah, Latham had his problems, but if we had to have a Labor government – and couldn’t have Keating as leader – then I would feel a lot more confident about Australia’s economic future if we now had Latham at the helm instead of Rudd.”