Thursday, December 23, 2010

Was the industrial revolution caused by bourgeois dignity or institutional change?

Bourgeois Dignity: Why Economics Can't Explain the Modern WorldDeidre McCloskey’s important new book serves to establish that if we want to explain the industrial revolution we need to explain why so much innovation occurred in England from the late 18th century and through the 19th century. She suggests that we should dismiss attempts to explain the industrial revolution in terms of such factors as thrift, accumulation of capital (physical or human), transport, geography, natural resources, the slave trade, business organization, imperialism, eugenics and even foreign trade.

The style of the exposition suggests, at times, that Deidre may not suffer fools gladly (or has a wicked sense of humour): ‘If someone claims that foreign trade made possible, say, economies of scale in cotton textiles or shipping services she owes it to her readers (as I have already said twice: I wish you would pay attention) to explain why the gains on the swings are not lost on the roundabouts. Why do not the industries made smaller by the large extension of British foreign trade end up on the negative side of the account?’ (p 221).

Well, I’m not sure Deidre, perhaps there is a link between international trade, specialization and scale economies - but you may have discussed that possibility somewhere else in the book when I wasn’t paying attention. In any case, I agree with you that innovation must have been a lot more important than scale economies.

I was a little more concerned that I didn’t see any recognition of the possibility, as discussed in Eric Jones’ recent book (reviewed here), that clustering of manufacturing in the north of England – as a result of trade and specialization within England - provided an economic environment conducive to subsequent innovations. Perhaps middle class enrichment resulting from trade and specialization could also help to explain why the bourgeois revaluation occurred when and where it did. (The bourgeois revaluation is the greater approval of the middle classes - and of innovation and markets - that began to occur in thought and talk in Holland and England three centuries ago.)

My main concern, Deidre, is that in attempting to clear the field prior to sowing a new crop of ideas (or the old ideas you want to propagate anew) you may be inadvertently slashing and burning some other ideas that are worth preserving. This applies, in particular, to the relationship between institutional change and economic performance as discussed by Douglass North (‘Institutions, Institutional Change and Economic Performance’, 1990). I agree with you that North could not have been correct in attributing the industrial revolution to more secure property rights following the Glorious Revolution. There is, however, more to institutional change than more secure property rights. I reject your attempt to dismiss appeals to institutional change as ‘still another attempt to reduce one of the greatest surprises in human history to a materialist routine’ and to claim that changes in institutions did not have much to do with the industrial revolution (p. 354).

In fact, evidence that you cite in your book seems to conflict with your claim that changes in institutions – the rules of the game - had little to do with the industrial revolution. You acknowledge that ‘the norms of antibourgeois aristocrats and clerics did discourage innovation’ (p. 267). You also suggest: ‘Had the Ottoman or the Qing empires or the Japanese Shogunate admired trade and innovation sufficiently to overcome their worries about the maintenance of state power – encouraging innovation and having a go rather than crushing it – then they, not the Europeans, would have come first’ (p. 371). You note that in France and Spain in the 18th century a nobleman caught engaging in commerce could be stripped on his rank’ (p. 387) and that in France it was necessary to apply to the state for permission to open a factory (p. 395).

I think your true position may be that bourgeois dignity and institutions (economic freedom) are both important in explaining the industrial revolution. This comes through fairly clearly when you write: ‘By adopting the respect for deal-making and innovation and the liberty to carry out the deals that Amsterdam and London pioneered around 1700, the modern world was born’ (p. 397). In such passages you seem to be offering an encompassing theory incorporating both bourgeois dignity and institutional change.

So far so good. I can understand that ideology (an amalgam of perceptions and values) influences the climate of opinion toward commerce and innovation which in turn influences both informal institutions (conventions and codes of behaviour) and formal institutions (regulations, laws, constitutions) which may or may not provide a climate conducive to innovation. Is that all there is to understand?

Perhaps not. The missing element is a sense of personal identity. As you say: ‘In truth, the agent wants to act because she attributes meaning to her life ... She is a human with an identity, not a Max U calculating machine like grass or bacteria or rats’ (p. 307).

That gets me thinking again about identity economics – the idea of George Akerlof and Rachel Kranton that people gain utility when their actions conform to the norms and ideals of their identity (which I first discussed here). Even a person with great potential to be innovative might find that difficult if the norms and ideals of their identity dictated that any attempt to innovate would be futile. If we start thinking in terms of identity economics, however, we might have to question the sub-title of your book – perhaps economics can explain the modern world after all.

Saturday, December 18, 2010

'Extract the digit': a vulgar expression?

This question has arisen as a result of use of the expression in a speech made at a public speaking club a couple of months ago. The speech was made by a relatively new member of the club who said something like: ‘The time had come for me to extract the digit and get on with it...’. The subsequent reaction of some members to use of this phrase has made it extremely difficult for him (and several other members including myself) to continue their membership of the club. Members have been told by one of the longest-serving and most distinguished club members that it is not appropriate to vote for people who use such expressions as ‘best speaker’ at club meetings.

If the issue had been raised for discussion in general business, I would have made the point that I cannot remember hearing the expression before Prince Philip, the Duke of Edinburgh, told British businessmen that it was time they pulled their fingers out about 50 years ago (when I was finishing secondary school). He was reported as saying:
‘Gentlemen, I think it is about time we “pulled our fingers out” … If we want to be more prosperous we're simply got to get down to it and work for it. The rest of the world does not owe us a living’: Speech in October, 1961.

I am not sure that mentioning Prince Philip would have been persuasive, however, since the role of members of the royal family in setting social standards is now less widely accepted than it was 50 years ago. Given Prince Philip’s reputation for making social gaffes, some members of our club would possibly consider him, also, to be too rough around the edges to be voted as best speaker.

How can we judge whether or not ‘extract the digit’ should now be viewed as a socially acceptable use of language? It might be relevant to consider whether use of this expression still ranks amongst Prince Philip’s biggest social gaffes. It doesn’t. It is not even included in this long list compiled by BBC news.

A Google search for the phrase ‘pull your finger out’ reveals widespread current usage in Australia. The contexts suggest that it is usually intended to be offensive, but I think most people who are told to pull their fingers out are more likely to be offended by the implication that they are wasting time or procrastinating than by the vulgarity of the expression.

The origins of the expression do not necessarily support a vulgar interpretation. One theory, noted here, is that the expression originated during the times of the Men'o'War. When a cannon was loaded, a small amount of powder was poured into the ignition hole near the base of the weapon. In order to keep the powder secure before firing, a crew member pushed one of their fingers into the hole. When the time came for ignition, the crewman was told to pull his finger out.

Perhaps the apparent vulgarity of the expression lies solely in the imagination of those who think that the metaphor must refer to removal of a finger from a bodily orifice.

Wednesday, December 15, 2010

Does big government result in more housework?

Government Size and Implications for Economic GrowthI found this to be the most interesting question explored in ‘Government Size and Implications for Economic Growth’, by Andreas Bergh and Magnus Henrekson. Before I explain, however, I want to provide some comments on the author’s conclusions about the effects of size of government on economic growth.

Bergh and Henrekson base their conclusions about the effects of size of government on economic growth on a review the recent econometric literature using panel data for high-income countries. They conclude: ‘In rich countries there is, indeed, a robust negative correlation between total government size and growth’ (p.30). They qualify this conclusion by noting that, as with many other econometric studies, the issue of causation has not been completely settled (p.33). They explain the ability of the Scandinavian welfare states to maintain modest economic growth despite big governments in terms of relatively strong performance of those countries with respect to other aspects of economic freedom. These conclusions are consistent with my own review of the relevant literature (background paper for the NZ 2025 Taskforce) and modest econometric efforts.

The reservation I have about the review of the literature by Bergh and Henrekson is somewhat technical – so some readers may prefer to skip this paragraph. My reservation concerns the authors’ enthusiasm for Bayesian Averaging of Classical Estimates (BACE), a technique used to deal with possible sensitivity of parameter estimates to the inclusion of different control variables in regression models. A recent paper by Antonio Ciccone and Marek Jarocinski suggests that margins of error in international income estimates are too large for such agnostic growth empirics to be reliable. In any case, in my view the economic reasoning that tells us that the economic costs of taxation rise approximately in proportion to the square of the tax rate provides a more powerful case against big government than the results of cross-country econometric studies. (The authors appear to attribute this insight to the Swedish economist, Jonas Agell (p.17), although it should more appropriately be attributed to much earlier work by Arnold Harberger, or possibly even to Alfred Marshall.)

It is well known that the economic cost of high tax rates arises in part from the substitution of leisure for income. Some would argue that this is beneficial because many people obtain more happiness from spending time with family and friends than from working. One reason why the argument is spurious is because it may be rational for individuals to sacrifice some current happiness to provide their children with a better education, fund early retirement or pursue any number of other objectives that are important to them.

Another reason why the argument is spurious is that what economists talk about as a choice between income and leisure is often actually a choice between time spent on paid work and time spent on unpaid household chores. It is doubtful whether people obtain much more pleasure from housework, weeding the garden and childcare than from working for pay. Bergh and Henrekson make the good point that high rates of labour taxation provide an incentive for consumers to produce such services themselves in the home rather than to work longer hours in order to purchase them in the market place. The authors suggest that this explains why hours of unpaid work are substantially greater in Sweden than in the US and hours of paid work are correspondingly lower in Sweden than the US.

The authors also provide a graph comparing average hours worked per person in Sweden and the US over the period 1956 to 2003. It shows that while average hours worked in Sweden were substantially higher than in the US during the 1950s, when Sweden’s tax rates were much lower, the situation has been reversed in recent decades.

Over the last couple of centuries the ancestors of the vast majority of people in high-income countries have managed to obtain the benefits of participation in a market economy – the benefits of exchange and specialization on the basis of comparative advantage, resulting in much higher living standards and providing greater opportunities for skill development and incentives for further innovation. High taxes associated with big government provide the opposite incentives - encouraging people to shun the market and to produce services for themselves. Self-sufficiency is not without its attractions, but I doubt whether many people would freely choose the poverty experienced by their ancestors, even if that was the only way they could ensure a supply of fresh, organically-grown vegetables.

1. An error in the second last paragraph has now been corrected. Thanks very much to BW for noticing that!

2.When I think again about the final paragraph, the ancestors of the vast majority of people in high-income countries were living in market economies even prior to the industrial revolution. A move to self-sufficency would entail a move much further back in history.

Sunday, December 12, 2010

When does greater economic freedom promote distrust?

There are some fairly obvious reasons why societies characterized by low levels of inter-personal trust tend to be highly regulated. In a society where people tend not to trust each other there is likely to be less adherence to social conventions and there is likely to be more political pressure for the use of government regulation to deter anti-social behaviour. Causation can also be expected to work in the other direction. In a society where it is impossible to conduct market transactions without breaching some regulation it is only to be expected that many people will wonder whether those with whom they are dealing can be trusted not to dob them in to the authorities. Regulation promotes low trust.

So, what is likely to happen to levels of inter-personal trust following substantial deregulation in a highly regulated, low-trust society. As a general rule I think it would be reasonable to expect that greater reliance on market disciplines would generally promote more trustworthy behaviour. Individuals and firms would find that it pays to develop a reputation for trustworthiness and this would result in higher levels of inter-personal trust. Such attitudes could be expected to be associated with public support for deregulation policies.

However, evidence presented in a paper by Philippe Aghion et al, entitled ‘Regulation and Distrust’, suggests that an opposite tendency was more common in countries undergoing transitions away from socialism in the 1990s. Data from the World Values survey indicates that levels of inter-personal distrust increased in most of these countries during that period. There were also substantial increases in distrust of civil servants, justice systems and business. Most households perceived that corruption had increased. The surveys suggested that there was also an increase in tolerance of corruption (bribe taking) and a reduction in the proportion of the populations who considered tolerance and unselfishness to be important attributes to teach children. Not surprisingly, there was also an increase in the proportion of the populations who disliked competition and private ownership of firms.

The authors suggest that those findings are a consequence of low levels of social trust prior to transition. Their model predicts that in a low trust society entrepreneurs will tend to be less civic-minded (because they need to pay bribes in order to enter the business) so liberalization of entrepreneurial activity will tend to result in an increase in negative externalities (e.g. pollution) and an increase in corruption. They conclude: ‘Liberalization of entrepreneurial activity starting from a low level of social capital has increased corruption, invited a demand for greater state control of economic activity, and reduced trust’. At the end of their paper the authors suggest that public education might provide a way forward for transition economies by leading the way toward greater ‘civicness’, lower regulation and higher productivity.

One of the merits of the model put forward by Aghion et al is that it is capable of explaining why many people in countries with bad governments may want more government intervention. The benefits of liberalization of entrepreneurial activity are perceived to be outweighed by the costs.

I am not convinced, however, that the poor outcomes of reforms in transitional economies should be attributed to low levels of social trust prior to transition. An alternative explanation is that the reform process was poorly managed so that instead of a transition from socialism to competitive markets – permitting mutually beneficial exchange that had previously been prevented - these countries underwent a transition from socialism to crony capitalism following the collapse of communist governments. The evolution of attitudes to business may reflect the rent-seeking entrepreneurship to which people were exposed. Under the prevailing circumstance it may not have been possible for the reform process to have been better managed in the transitional economies, but this means that their experience may not be of much relevance to other low trust, high regulation countries.

Rather than focusing on the transitional economies as a group it might be interesting to consider whether different reform strategies adopted in different countries (including other countries such as China and India in the analysis) have had different effects on levels of social trust.

Wednesday, December 8, 2010

Would a fair-minded person say that devastation of the Australian apple crop is a price worth paying for cheaper apples?

‘I don’t think any fair-minded Australian would think that the devastation of the Australian apple crop is a price worth paying for cheaper apples.’ Please discuss.

That might be a reasonable examination question for an introductory economics course. The weaker students would probably be distracted by the allusion to fairness and the images that the word ‘devastation’ brings to mind and forget all the economics they had been taught.

There are several ways the stronger students could answer. One point they could make is that a fair-minded person would be open to weighing up the economic benefits and costs of the proposed policy action. They could raise the question of how large the value added by the Australian industry might be after making appropriate adjustments to remove price distortions, such as those resulting from import barriers. A further point they could mention is that market systems have evolved because fair-minded people have been persuaded in the past that the outcomes of market competition were generally preferable to outcomes that applied when governments attempted to protect local producers from external competition. In that context the relevant issue is whether individual consumers would voluntarily pay a higher price for the Australian product in order to prevent devastation of the Australian crop.

There are other relevant considerations, but they do not alter the general point that fair-minded people would accept that the price that needs to be paid for preservation of local industries is not always a price worth paying. If that were not so, our living standards would probably not have improved since the 18th century when regional communities within all countries were all largely self-sufficient.

How does it change the way we view this issue if we are told the quoted statement was made by Craig Emerson, Australia’s Minister for Trade, in commenting on the WTO’s recent ruling against Australian quarantine restrictions preventing apple imports from New Zealand? (The quoted statement was in an article by Geoff Kitney in the Australian Financial Review of Wednesday 1 December, p 49.) The Minister was talking about the possibility that the Australian apple industry might be devastated by a plant disease rather than by price competition from New Zealand apples. Does that make a difference?

One relevant consideration is that the part of the Australian industry that is most vulnerable to import competition from New Zealand will not need to be protected from imported diseases. It will no longer exist.

A paper entitled ‘Australia’s quarantine mess’, by ANU academics Malcolm Bosworth and Greg Cutbush, suggests that the annual cost to Australian consumers of the ban on apple imports was around $250 million per annum. This represents a very large proportion of the domestic industry’s gross value of production of around $300 million and perhaps 10 times more than local growers’ profit in a normal year.

These figures suggest that even if the introduction of apple diseases from New Zealand resulted in devastation of the Australian apple crop it is highly unlikely that any associated losses would exceed the $250 million per annum cost that the ban imposes on Australian consumers. As Bosworth and Cutbush point out, however, the probability of an incursion of any of the relevant diseases is very low under normal orchard hygiene practices, and even in the unlikely event of Australia-wide infection, annual costs of coping with the problem would be in the range of $3 to $10 million per annum. Bosworth and Cutbush also note that the apple diseases present in New Zealand have not prevented it from being one of the world’s top apple exporters.

I have previously thought of Craig Emerson as one of Australia’s most economically literate politicians. It is disappointing that he has seen fit to use his considerable rhetorical skills to imply that fair-minded Australians should always be in favour of protecting domestic industries, irrespective of cost.

Saturday, December 4, 2010

Can the industrial revolution be attributed to economic freedom?

Locating the Industrial Revolution: Inducement and ResponseBefore reading Eric Jones book, ‘Locating the Industrial Revolution’, I had thought that the reasons why the industrial revolution began when and where it did would have a lot to do with relative levels of economic freedom in England in the 18th and 19th centuries. The book seems to me to reinforce that view, even though it does not argue strongly in favour of it. The message I get from the book is that the political forces favouring greater economic freedom prevailed over opposing forces in those areas of economic policy that were most critical to economic growth at that time.

My prior view that the industrial revolution would have had a lot to do with relative levels of economic freedom was associated to some extent with dissatisfaction with alternative explanations such as that offered by Gregory Clark (discussed here). I admit, however, that my prior views were most strongly influenced by contemporary econometric evidence that greater economic freedom tends to promote higher economic growth. I would not be surprised if Eric Jones considers that such reasoning displays ‘too great a willingness to accept dubious data as proxies for the real thing, and too much of a preference for neat solutions’ (p. 6). He uses those words as a general criticism of economists.

The main question that Jones considers in this book is why the location of manufacturing industry shifted from the south to the north of England prior to the industrial revolution. This is an important question because the clustering of industry in the north provided an economic environment conducive to subsequent innovations, including use of coal-fired steam engines as an energy source.

Jones suggests that the economic history of England does not provide neat solutions to the problem of locating the industrial revolution. He claims:
‘There is no determinate solution to the puzzle of why the industrial revolution took place, and when and where it did so. All that can be achieved is a narrowing of the range of possible mixes’ (p. 245).

Jones sees problems with a simple explanation in terms of levels of economic freedom:
‘Ordinarily we might expect that economic growth would be spurred by market freedoms but there are problems with this line of argument. A number of the outcomes do not seem to have been stable. Free-market preferences within the judicial system were inconsistent, since the judges reverted to precedent when it suited them – not that every law was enforced. Protective duties were raised precisely when “a modest flow of works” was starting to extol the virtues of free trade. Nor was corruption decisively reduced until some way into the 19th century’ (p. 243).

However, similar objections have been raised against attempts to explain China’s economic growth in recent decades as a consequence of market freedoms. A point that is often overlooked is that in considering the potential for economic growth offered in a particular economy by a particular level of economic freedom the most relevant comparison is with levels of economic freedom generally prevailing in other economies with similar income levels. An improvement in economic freedom in a low income country can provide an impetus to more rapid growth even though economic freedom remains heavily restricted.

Jones suggests that the main factor responsible for the redistribution of manufacturing activity to northern England was market integration associated with improvements in transportation. The merging of markets led to greater competition and specialization on the basis of comparative advantage – with a greater focus on agriculture in the south and manufacturing in the north. He points out, however, that these improvements in transportation often had to overcome substantial political obstacles from wealthy land-owners, whose concern to protect the social status that land ownership offered (linked to landscapes, recreation and privacy) often outweighed their interest in increasing the rental value of their land. He suggests that privatising of rights of way – described as ‘judicial theft of the subjects rights’ – was an ‘astonishingly common’ adverse effect of the enclosure of the commons (p. 153). The merging of markets was only possible because the judges and parliament together increasingly embraced market ideology and overlooked, rejected or struck down local protectionist measures (p. 185).

It seems to me that Eric Jones has provided strong evidence that the industrial revolution occurred when and where it did because market ideology prevailed sufficiently to enable market integration, specialization on the basis of comparative advantage and the clustering of manufacturing industry. I am conscious, however, that he might suggest that in offering that summary my preference for neat solutions has gotten the better of me.

Tuesday, November 23, 2010

Is progress history?

Over the past year I have read five or six books about progress. Matt Ridley’s book, ‘The Rational Optimist’ (discussed here and here) was the most optimistic. Ronald Wright’s book, ‘A short history of progress’, is probably the most pessimistic.

A Short History of ProgressWright’s book has the virtue of being short and easy to read. His message is that past civilizations have generally failed and that we are making the same mistakes. He notes that we have the advantage of knowing where those past societies went wrong. As you might guess, however, he suggests that we haven’t got much time to mend our ways. He says that if we don’t act now, ‘this new century will not grow very old before we enter an age of chaos and collapse that will dwarf all the dark ages in the past’ (p.132). Wright’s book was published six years ago, so if his analysis is correct the age of chaos and collapse will soon be upon us.

Cartoon by Nicholson from "The Australian" newspaper:

Anyone interested in a summary of Wright's book will not find it too difficult to find one elsewhere. What I want to do here is to attempt to identify what makes Wright so pessimistic about the future of civilization.

An obvious starting point is his view of human nature. Wright doesn’t believe in the innate goodness of humanity. He suggests that ‘prehistory, like history tells us that we are at best the heirs of many ruthless victories and at worst the heirs of genocide. We may well be descended from humans who repeatedly exterminated rival humans – culminating in the suspicious death of our Neanderthal cousins some 30,000 years ago’ (p. 31). Furthermore, an inability to foresee – or to watch out for – long range consequences of our actions may be inherent in our kind (p. 108). We are doomed by hope. Hope drives us to invent new fixes for old messes, which in turn create ever more dangerous messes (p. 123). Homo sapiens is still ‘an Ice Age hunter only half-evolved towards intelligence; clever but seldom wise’ (p. 132).

Wright acknowledges that humans have been influenced by culture. In fact, he suggests that culture is a key to our success: we are ‘experimental creatures of our own making’. Yet culture also poses risks to us: ‘As cultures grow more elaborate, and technologies more powerful, they themselves may become ponderous specializations – vulnerable and, in extreme cases, deadly’ (p. 30). He describes this as a ‘progress trap’. The wreckage of past civilizations litters the earth because their populations grow until they hit the bounds of food supply, while the concentration of wealth and power at the top of large scale societies gives the elite a vested interest in the status quo.

According to Wright’s view, all large-scale societies are locked into some kind of path dependency – leading them to outrun natural limits and collapse. How then does he explain the success of modern civilization despite all the failures that have occurred in the past? His explanation seems to be that nature has been forgiving. When societies failed there was natural regeneration and human migration to lightly settled areas. Civilization has been exceptionally long-lived in Egypt and China as a result of ‘generous ecologies’ - extra topsoil brought in from elsewhere by water and wind.

I think Wright’s pessimism stems from his views on both human nature and culture. His model doesn’t seem to recognize that humans have biological instincts that encourage cooperation and that this enables rules of conduct to evolve to meet changing circumstances. His model fails to take account of cultural evolution. Our ancestors may have helped destroy mega-fauna through their hunting practices, but hunting and gathering rules evolved in the more successful societies to avoid wanton destruction of valuable resources. Further rules followed including those relating to ownership of animals, grazing rights, land ownership etc. – all serving to encourage more efficient use of scarce resources.

Whether societies collapse or survive and prosper depends largely on the rules they live by. People in advanced western societies live by rules that have evolved to encourage mutually beneficial exchange, specialization and innovation, to ensure valuable resources are not wasted and to avoid environmental degradation.

Is modern civilization locked in to a path that will lead to chaos and collapse if we don’t immediately mend our ways? I don’t think so. Once the hyperbole about running out of resources is cleared away, the only real concern that remains in my view relates to environmental pollution that cannot be controlled by any one government acting alone. Even here there are grounds for optimism. Despite their many failings, the governments of major countries show enormous goodwill toward the future of humanity. We can be reasonably confident that concerted international action will be taken if a major environmental catastrophe ever actually threatens the future of humanity.

Thursday, November 18, 2010

Did the ratchet effect apply to post-war government spending in Australia?

The ratchet theory suggests that government spending tends to ratchet up in times of crisis (wars, social upheavals, recessions) and then to remain at the new higher level. It has been put forward as an alternative to Wagner’s law (discussed in an earlier post).

In terms of the ratchet mechanism, the explanation for upward movement in government spending may appear straight forward, reflecting public demands for the government to ‘do something’ to help solve a problem. The process is not entirely mechanistic, however, because public demands for government action can vary depending on ideological factors e.g. changing perceptions about the role of government in helping people who are adversely affected by a recession and about the effectiveness of deficit spending. It is also possible for the upward movement to occur for opportunistic reasons e.g. politicians with an ideological leaning toward big government ‘never want a serious crisis to go to waste’.

A variety of reasons have been put forward to explain why public spending might remain at the new higher level after the end of the crisis. The most mechanistic explanation is status quo bias – the tendency of people to choose to maintain the status quo rather than to change a policy. For example, once tax rates have been increased to fund war time spending, status quo bias may favour retention of higher tax rates.

In addition, new programs created during a crisis may tend to develop a life of their own by creating interest groups with a vested interest in their continuation - including newly created bureaucracies that will fight to prevent themselves from being eliminated.

However, the ratchet theory does not provide a complete explanation of the growth of government. In his review of Robert Higgs’ book, ‘Crisis and Leviathan’, Gary Anderson notes that while most historians argue that the Civil War was the pre-eminent crisis in American history, ‘following this particular crisis, government sank like a stone relative to the growth of the private economy’.

Dick Durevall and Magnus Henrekson did not find strong support for the ratchet theory in their recent study of trends in size of government in the UK and Sweden from the beginning of industrialization until the present:
There is no consistent evidence of a ratchet effect in either country. There is some evidence of an asymmetric effect in both countries in the post-war period, but this is reversed in subsequent periods. Hence there is no clear evidence that government exploits recessions and crises to permanently shift the government spending ratio upwards’ (p. 22).

In New Zealand, government spending as a percentage of GDP seems to have fallen during WW2 as well as in the latter half of the 1950s and the 1990s. At the same time, as noted by Bryce Wilkinson, ‘the timing of the increases in the state’s share looks opportunistic’. Wilkinson suggests that growth in government spending reflects ‘changing ideas about the role of the state and the increasing power of vested spending interests’ (‘Restraining Leviathan’, 2004: Figure 5, p.41).

It is also difficult to see a consistent ratchet effect in the following chart for Australia showing estimates of government spending as a percentage of GDP over the period from 1939 to the present. The increase that occurred in the 1970s has not been reversed, but during the 1950s the Menzies government seems to have managed to defy the ratchet effect by reducing government spending to levels close to those in 1939.

I have never previously thought that I might one day have reason to praise the economic achievements of the Menzies government. It seemed to me that the Menzies government’s greatest claim to support free enterprise was to have removed war-time price control, rationing and import controls (more or less and belatedly). However, the efforts of this government in reducing the size of government during the 1950s deserve high praise.

Summing up, it seems to me, to be important not to downplay the role of ideology in influencing trends in government spending. During some periods there may be a tendency for government spending to ratchet up in response to crises. Changes in government spending may also be influenced by changes in the power of interest groups (for example as changes occur in the age structure of populations). In the end, however, ideas about the role of government matter a great deal.

Saturday, November 13, 2010

How important is the 'size of government' component of economic freedom indexes?

A few months ago a guest blogger on ‘The Baseline Scenario’ blog, StatsGuy, wrote a post entitled ‘Good Government Versus Less Government’. It was described as a ‘must-read’ in a post by Tyler Cowen on ‘Marginal Revolution’ and received a great deal of attention on a range of other blogs including Scott Sumner’s (here).

StatsGuy draws attention to the fact that the size of government component of the Heritage Foundation index of economic freedom is negatively correlated with the other components of this index. He concludes that the Heritage Freedom index is really a composite of measures that get at two different things: good government, and less government. His bottom line:
Overall, the Good Government factors tend to dominate, and drive a lot of the correlation with good economic and quality of life outcomes. When one splits out the factors, the case for Less/Weaker Government weakens substantially, and the case for Clean/Non-Corrupt/Efficient government strengthens considerably’.

Some other researchers have similarly objected to the inclusion of size of government in economic freedom indexes. For example, Peter Lindert describes this as ‘guilt by definition’ on the grounds that it tends to make big government and the welfare state look bad merely by describing this national attribute as contributing to lower economic freedom (‘Welfare states, markets and efficiency: the free lunch puzzle continues’, 2007: 6).

At least one contributor to the discussion of StatsGuy’s post made the point that if economic freedom has two different dimensions, a lack of correlation between those dimensions does not necessarily mean that one of them is irrelevant. For example, it is possible for both size of government and quality of government to be important to economic growth.

I recently had an opportunity to test whether this is so in preparing a background paper for the 2025 Taskforce, which was established by the New Zealand government to advise how average incomes in that country could be raised to equate those in Australia by 2025. The analysis provides some support for the view that size of government is an important component of economic freedom indexes.

The analysis uses the Fraser Institute’s index of economic freedom because this provides a consistent measure of institutional quality over a longer time period than the alternatives. The data set relates to ‘advanced economies’ as defined by the IMF – this data set includes high income jurisdictions with small governments, such as Hong Kong and Singapore, as well as OECD countries. The regression, based on panel data, explains average per capita GDP growth in each decade in terms of several variables including two components of economic freedom at the beginning of each decade, the size of government index and ‘other economic freedom’. The relevant regression results are presented in Table A 2.3, p 43 (the right hand column).

The coefficients on both the size of government and ‘other’ economic freedom variables were significantly greater than zero - suggesting that smaller size of government has a positive effect on economic growth. The magnitude of the estimated coefficient on size of government is about half that on ‘other’ economic freedom, but that is about twice as large as I had expected it to be on the basis of the weight of size of government in the economic freedom index (20%).

One fairly obvious question that might be asked is that if size of government is so important, how is it that some countries with big governments, an obvious example is Sweden, have managed to maintain relatively strong economic performance. I have attempted to answer this question in the chart below which compares per capita incomes in Sweden and Australia (Penn World Tables, rgdpch with some extrapolation using IMF growth estimates). The results of the simple analysis presented in the chart suggest that if Sweden had not undertaken substantial economic reforms (including some improvement in the size of government component of economic freedom as well as other components) it would have performed poorly. The chart also suggests that Sweden’s economic growth performance could have been much better if it had a smaller government.

This analysis doesn’t tell us that every country could become a paradise if only it had a small government, or that countries with big governments are dreadful places to live. It just suggests that big government is not a free lunch . The lack of correlation between the size of government and other aspects of economic freedom is interesting, but it doesn’t mean that size of government doesn’t matter.

A colleague has suggested that I should have mentioned that the size of government of most of the countries included in this ‘advanced’ country data base used in the regression analysis reported above is now much larger than it was prior to the 1960s.
It might also be worth noting that recent World Bank research suggests that in low income countries government spending on infrastructure, education etc. can have a positive effect on economic growth if (a big if) the countries concerned have favourable institutional characteristics.

Sunday, November 7, 2010

Can New Zealand catch up to Australia?

Is New Zealand disadvantaged by economic geography to such an extent that it cannot hope to catch up to Australia’s average income levels, even with further improvements in institutions and policies? That is probably the most important question considered in the second report of the 2025 Taskforce that was released a few days ago.

The 2025 Taskforce was set up by the New Zealand government after the 2008 election to recommend how the gap between average incomes in Australia and New Zealand could be closed. Incomes of New Zealanders have generally risen less rapidly than those of Australians over the last 40 years, resulting in a gap between average incomes of around 35 percent in recent years. After the 2008 election, the NZ government committed to closing this income gap by 2025.

Since the Taskforce presented its first report last year, Philip McCann - an economist with expertise in economic geography – has advanced the view that New Zealand’s geographical disadvantages prevent it from becoming a high productivity economy. McCann has implied that structural features that are advantageous in the current era of globalization differ so much from those exhibited by New Zealand that this economy could not reasonably be expected to have relatively high productivity. He suggests ‘this is true irrespective of the degree of flexibility in the domestic labour market, the degree of transparency in the local institutional environment, or the levels of cultural aspirations for success’ (‘Economic geography, globalisation, and New Zealand’s productivity paradox’, New Zealand Economic Papers, Dec. 2009: 299).

The particular aspect of geography that McCann considers to be most disadvantageous to New Zealand is its relative lack of agglomeration economies associated with large cities. These agglomeration economies arise from knowledge exchanges, better networking and coordination, a nursery role for new enterprises, improved labour market matching processes and greater competition.

McCann argues that agglomeration economies can explain the decline in New Zealand’s per capita incomes relative to Australia because of the way the world has changed. One strand of the argument has to do with the increasing importance of knowledge-intensive activities that can often be undertaken at lower cost where face to face contact is possible among the various participants. Another strand is that with closer economic integration between Australia and New Zealand the economy with relatively larger agglomeration economies, i.e. Australia, has become a relatively more attractive location for capital investment and employment of highly skilled workers.

McCann sums up: ‘ ... although New Zealand underwent fundamental institutional reforms in the 1980s and 1990s, at exactly the same time as this was taking place the landscape of global economic geography was shifting in favour of other places. It may well be that the deregulatory reforms limited some of the most adverse aspects of these shifts, thereby minimising the productivity gap. Yet the point still remains that the world changed, and the world of the late 20th and early 21st centuries is very different from the world that provided New Zealand with almost a century and a half of productivity advantages’ (p. 300).

How does the Taskforce respond? The Taskforce acknowledges that both New Zealand and Australia have been disadvantaged by geography. It notes that according to recent OECD research the impact of greater distance to markets is equal to around 10 percent of GDP per capita for both countries. However, it judges the evidence in support of the view that New Zealand’s small population limits the potential to obtain agglomeration effects to be weak. In particular, Auckland’s position within the regional hierarchy of Australasian cities is not declining – the population of Auckland has been growing faster than the populations of Sydney and Melbourne. The Taskforce also points out that there is no evidence that New Zealand suffered an adverse shock from globalization during the 1980s; that migration from New Zealand to Australia is disproportionately of highly skilled workers as agglomeration theory implies; or that the relative performance of small countries has declined in the past 20 years.

The Taskforce concludes: ‘... modern growth theory provides stronger support for the importance of institutions and policy than it does for geography, especially in the deterministic interpretations of economic geography’ (p. 41).

Sitting in Australia, current concerns in public policy discussions about the emergence of a two-speed economy in this country make the agglomeration theory of relative decline in New Zealand’s economic performance seem rather odd. Rather than a concern that agglomerations centred on Sydney and Melbourne are leaving the rest of Australia behind, the main concern is that New South Wales and Victoria (along with other states) are being left behind as economic growth steams ahead in Western Australia and Queensland, as a result of rapid expansion of the minerals sector and related industries. There is also reason for concern that, over an extended period, the particularly poor performance of the New South Wales government has detracted from the substantial location advantages that Sydney should enjoy.

If we reject the idea that Australia’s alleged agglomeration advantages make it impossible for New Zealand to close the income gap, where does that leave us in terms of explaining New Zealand’s relatively poor economic performance? The Taskforce pours cold water – correctly in my view - on another geographical explanation, namely Australia’s good luck in having plentiful supplies of mineral resources to export to rapidly growing markets in China and India. It is only in the last few years movements in Australia’s terms of trade have been much more favourable than in New Zealand. Moreover, New Zealand also has substantial mineral and hydrocarbon resources.

I think that leaves us with having to explain New Zealand’s relatively poor economic performance in terms of policies that are less favourable to economic growth. That also poses a problem because the impression given by various international comparisons of institutions and policies is that since the mid-1990s there has not been much to choose in overall terms between the economic policy environments in New Zealand and Australia. It seems likely, however, that New Zealand has not performed so well in the areas that have mattered most from a growth perspective. For example, one major problem discussed by the Taskforce is the effect of relatively high levels of government spending in discouraging investment in export industries - via impacts on the real exchange rate as well as tax rates.

The Taskforce has expressed the view that closing the gap in average income levels by 2025 will require policies that are superior to those in Australia in their focus on growth. It seems to me that those who believe that New Zealand has geographical disadvantages should logically be strong supporters of that view (unless they reject the objective of closing the income gap). The greater the geographical disadvantage, the greater the policy superiority New Zealand will need in order to meet the objective of closing the income gap by 2025.

Wednesday, November 3, 2010

How much does over-work affect happiness?

The results of a survey conducted recently by the Australia Institute apparently shows that half of Australians (61 per cent of those working overtime) were prevented from spending enough time with family in the preceding week as a result of over-work. According to the press release (which is the most detailed description of the study I could find) a lot of people don’t have time to exercise, eat healthy meals or go to the doctor when they should.

If we take the results of this survey at face value it would appear that over-work is a huge problem in Australia. I suspect, however, that the problem or over-work is not as widespread as the Australia Institute suggests. I also suspect that over-work has a much smaller adverse impact on happiness than does under-work.

Cartoon by Nicholson from "The Australian" newspaper:

The results of a study by Bruce Headey, Ruud Muffels and Gert Wagner, based on a long-running German panel survey, shows working hours to be one of the factors that has a long-term impact on life satisfaction. One of the things I like about the study is that the variable used is a measure of the extent to which respondents achieve their preferred tradeoff between work and leisure, rather than divergence of working hours from some arbitrary standard chosen by researchers. The relevant variable was the gap between the number of hours a week respondents said they would prefer to work and the number of hours per week they actually work. Those who worked over 3 hours per week more than they preferred were treated as overworked and those who worked over 3 hours per week less than they preferred were treated as underworked (‘Long running German panel survey shows that personal and economic choices, not just genes matter for happiness’ PNAS, 2010).

The results indicate that the negative impact of under-work on life satisfaction was about four times greater than the negative impact of over-work. The authors suggest that this ‘is presumably because lost consumption rankles worse than lost leisure’. (It would seem that the regression analysis does not control for income levels.) The study suggests that the negative effect of unemployment is much worse than that of either over-work or under-work (about four times greater than for underwork).

Some of the other results of the study might help further to put these findings into perspective. The study shows that social participation – a measure of frequency of meetings with and helping out friends, relatives and neighbours – has a substantial positive effect on life satisfaction of around the same magnitude as the negative effect of under-work. The positive effect on life satisfaction of frequent exercise is of about the same magnitude as the negative effect of over-work. The adverse effect of having a neurotic personality is about ten times greater than that of being overworked, but having a neurotic partner has only about half the adverse effect of being overworked.

What should we make of these findings? One obvious qualification is that it isn’t clear to what extent they might apply outside Germany. Leaving that aside, it seems to me that the most important implication is the importance to individual happiness of having the opportunity to work as many hours as the individuals concerned want to work. Under-work is not as bad as unemployment, but it is likely to be a much worse problem for the individuals concerned than is over-work.

It is hard to see how anyone could argue that overwork could be a huge problem when people are free to choose among jobs on the basis of hours of work along with other employment conditions. Some individuals may make bad choices, allowing themselves too little time for social participation and exercise, but that is not a systemic problem.

The Australia Institute report has now been published. It has some features that I like e.g. over-work and under-work are judged relative to respondent's desired hours of work. However, I think the findings on percentages prevented from spending enough time with family tend to overstate the extent of the problem. The percentages who always feel rushed or pressured for time are relatively low. It seems that having children living in the household is as great a source of time pressure as working overtime (Figure 4). Finally, the study doesn't tell us much about the emotional well-being of those who work more or less than their preferred number of hours. This seems to me to be an area where data on life satisfaction can be useful.

I have posted more information on this subject, including subjective well-being data for Australia, in a more recent post entitled: Is work-life balance a big problem in Australia?

Monday, November 1, 2010

How should we respond to a small risk of catastrophe?

I try to remember to pay house insurance premiums. Otherwise, I tend to avoid thinking about small risks of catastrophe. There are plenty of other things to worry about.

This avoidance strategy usually helps me to maintain a positive state of mind - atleast, until someone manages to ambush me with the thought of how dreadful it would be if one of those catastrophes actually occurred.

The last time such an ambush had a lasting impact on me was in March this year when I was reading ‘The Science of Liberty’ by Timothy Ferris. This book contains an excellent discussion of the historical links between liberty and the advance of knowledge. I tend to trust Tim Ferris’ judgement on scientific matters. (I have previously written about his book here.)

The Science of Liberty: Democracy, Reason, and the Laws of NatureTim Ferris’ discussion of the science of climate change begins in a fairly low key fashion until he reaches the point where he suggests that greenhouse gases generated by human activity constitute the most plausible explanation for the gradual increase in the earth’s average temperature since the beginning of the 20th Century. Then, in the following paragraph, he proceeds to suggest progressively less benign consequences of further global warming until, at the end of the paragraph, he mentions the possibility of runaway warming. The next paragraph reads:

On which point it may be useful to contemplate Venus, the brightest planet in the sky. Venus is virtually Earth’s twin – the two planets have the same diameter and the same mass – but while much of the earth’s carbon is bound up in its oceans and plants and in fossil fuels like coal, oil and natural gas, the carbon on Venus resides in its atmosphere. The surface temperature on Venus is 457 degrees Celsius, hot enough to melt led. Should the earth be pushed into runaway greenhouse warming, it might wind up resembling the Venus of today’ (p. 282).

This wasn’t the first time I had heard about the possibility that Earth’s future could be like Venus. On previous occasions, however, it was obvious that scare tactics were being employed and my defences were activated well before the Venus card was played.

Cartoon by Nicholson from "The Australian" newspaper:

The Rational Optimist: How Prosperity EvolvesI was reminded of Tim Ferris’ invitation to contemplate Venus while reading ‘The Rational Optimist’. Matt Ridley, the author of this book, adopts a very different position. He begins the discussion by mentioning Martin Weitzman’s argument that if there is some possibility of a huge disaster resulting from global warming, the world should take steps to avoid it. He then suggests that the problem with this reasoning is that it applies to all risks, including the remote possibility of collision with a large asteroid.

I agree with Robin Hanson’s view, in his review of Ridley’s book, that some action may be warranted to reduce the potential impact on human well-being of any potential catastrophe. How we should respond should depend on the nature of the potential catastrophe, the probability that it will occur and what can be done to avoid it.

How should we respond to the small risk of runaway global warming? A fairly obvious answer is to put a tax on carbon emissions in order to provide incentives for development of technologies that generate less CO2, accompanied by an appropriate subsidy for activities that remove CO2 from the atmosphere. In many countries it would be possible to do this at little or no economic cost by substituting a carbon tax for other taxes that impose greater economic distortions. It is important to emphasize, however, that the main aim of the exercise should be to put in place incentives for development of better technologies.

Matt Ridley makes a strong case that climate mitigation is currently being mismanaged and that this mismanagement could be more damaging to human well-being than climate change itself. By encouraging a return to the medieval practice of using biofuels as an energy source, governments have added to misery in poor countries by raising the price of grains and have provided incentives for the further destruction of rainforests. In addition, incentives for greater use of costly wind and solar technologies are raising the cost of electricity substantially and/or requiring substantial subsidies from taxpayers, for little benefit in terms of reduction in CO2 concentrations in the atmosphere.

It is possible that solar technology will become competitive at some time in the future, but subsidizing use of current solar panel technology will not make that happen. If solar panel technology ever becomes competitive it will not need to be subsidized to enable scale economies to be achieved.

I think the current mismanagement of climate mitigation is attributable to scare tactics and panic. Some of us have grown so accustomed to environmental scare tactics that we find it difficult to take seriously the idea that a small risk of catastrophe is worth considering. Others have been too easily panicked into supporting costly policy responses that seem to be directed toward reducing CO2 as rapidly as possible irrespective of cost. The outcome of these conflicting forces in Australia has been a policy to encourage increased use of existing renewable energy technologies that are still highly inefficient. This policy achieves only a small reduction in CO2 emissions per additional dollar spent. (My test of how genuinely concerned enironmentalists are about reducing CO2 emissions in the short term is whether they are in favour of the nuclear power option, which seems to be the best alternative to use of fossil fuels that is presently available. )

There are signs now emerging that people in Australia are becoming concerned about the cost of rising energy prices attributable to the silly policy of encouraging greater use of high cost renewable energy. Hopefully similar concerns in other countries will result in adoption of sensible strategies to encourage development of less costly technologies over the next few decades.

Friday, October 29, 2010

Can progress be attributed to exchange and specialization?

'Somewhere in Africa more than 100,000 years ago, a phenomenon new to the planet was born. A Species began to add to its habits, generation by generation, without (much) changing its genes. What made this possible was exchange, the swapping of things and services between individuals. That gave the Species an external, collective intelligence far greater than anything it could hold in its admittedly capricious brain. Two individuals could each have two tools or two ideas while each knowing how to make only one. ... In this way, exchange encouraged specialization, which further increased the number of different habits the Species could have, while shrinking the number of things that each individual knew how to make. Consumption could grow more diversified, while production grew more specialized' (Matt Ridley, ‘The Rational Optimist’, 2010: 350).

The Rational Optimist: How Prosperity EvolvesRidley’s bold claim is that human progress can be explained mainly in terms of exchange and specialization. Eric Jones, a scholar who has written extensively on the history of human progress, considers that Ridley makes the case very well, based ‘on the few knowns of early pre-history’. Jones also considers that Ridley gets the story of the industrial revolution ‘mostly right’ (Review in ‘Policy’, Spring 2010, 26 (3)).

The weight that we can place on exchange and specialization as explanators of human progress depends importantly on the extent to which advance of knowledge and innovation can be attributed to exchange and specialization. It is possible to go some distance in explaining technological progress as a consequence of specialization. As Bill Easterly points out in his NYT review, however, many breakthroughs come from creative outsiders who combine technologies generated by different specialties.

Ridley mentions that government actions of various kinds in different countries have often inhibited innovation, particularly the introduction of new products and new ways of doing things that threaten the survival of established patterns of production. The implication is that freedom is a necessary condition for progress comes through clearly in Ridley’s recent contribution to Cato Unbound:

‘I am saying that there have always been liberals, who want to be free to trade in ideas as well as things, and there have always been predators, who want to extract rents by force if necessary. The grand theme of history is how the crushing dominance of the latter has repeatedly stifled the former. As Joel Mokyr puts it: “Prosperity and success led to the emergence of predators and parasites in various forms and guises who eventually slaughtered the geese that laid the golden eggs”. The wonder of the last 200 years is not the outbreak of liberalism, but the fact that it has so far fought off the rent-seeking predators by the skin of its teeth: the continuing triumph of the Bourgeoisie’ (p. 252).

I can’t help thinking that this sounds more like rational pessimism than rational optimism. According to Ridley, the industrial revolution is largely a story about coal - and progress since then has been possible mainly because of abundant cheap energy from fossil fuels. He notes that his optimism wobbles when he looks at the politics of carbon emissions reduction and the potential this has to load economies with further rules, restrictions, subsidies, distortions and corruption (p. 347).

Cartoon by Nicholson from "The Australian" newspaper:

The optimistic note on which Ridley ends his book comes from his view that innovation is such an evolutionary, bottom-up phenomenon that it will continue as long as exchange and specialization are allowed to thrive somewhere in the world.

In the end, it would seem that the gains from innovation, exchange and specialization all depend on liberty – liberty is the key to human progress.

Monday, October 25, 2010

Once a neurotic always a neurotic?

Martin Seligman’s view that authentic happiness comes from using your character strengths makes sense to me. For example, it seems reasonable to expect that activities that would bring lasting happiness to a person whose strengths are curiosity, love of learning and zest would differ from those that would bring lasting happiness to one whose strengths are kindness, fairness and a forgiving nature, or to one whose strengths are judgement, perseverance and leadership. (In his book ‘Authentic Happiness’, Seligman identifies 24 strengths under the general headings: wisdom and knowledge, courage, humanity and love, justice, temperance and transcendence.)
Authentic Happiness: Using the New Positive Psychology to Realize Your Potential for Lasting Fulfillment

This idea of playing to signature strengths also appeals to the economist in me because it involves specialization on the basis of comparative advantage. Thinking in those terms, specialization doesn’t necessarily enable a person with little education or poor health to achieve a high real income – merely a higher real income than he or she would be able to obtain by attempting to be a jack of all trades. Similarly, a neurotic person – one who has an enduring tendency to experience negative emotions – may not have a life full of joy even if he or she plays to character strengths and focuses activities that do not necessarily require a sunny disposition.

Seligman recognizes that some people whose inherited characteristics make them low in positive affectivity are less likely to be happy. His recommendation for such people is that they should learn to exercise greater control over their emotions by using techniques such as recognizing and disputing negative thoughts.

Happiness: The Science behind Your SmileDo people who successfully follow such advice become less neurotic? From what I have read, the standard answer given by psychologists is ‘no’. For example, Daniel Nettle tells us:

High neuroticism scorers will always be vulnerable to negative thoughts and feelings. That they cannot change. However, there are techniques in which they can train themselves that seem to have quite a marked effect on how they deal with this vulnerability, which can make a great deal of difference to their being in the world' (‘Happiness’, 2005: 113).

Timothy Pychyl has a relevant post on the ‘Psychology Today’ blog in which he notes that some leaders in the field of positive psychology have outed themselves as neurotics. (When I did an online test I discovered that I also have a tendency to be somewhat neurotic – but that would probably be only too obvious to readers this blog as well as to everyone else who knows me.) Pychyl suggests that while neurotics can learn to act out of character they can’t change their personalities.

Survey data suggests that personality traits for the vast majority of people tend to remain stable after age 30. End of story? Well, not quite. Such studies also indicate that a small proportion of individuals undergo significant changes in personality (see: Terracciano, Costa and Mc Crae, ‘Personality plasticity after age 30’, 2006).

There is some recent evidence of personality change during treatment for depression both using drugs (Paxil) and cognitive behavioural therapy (CBT). The results of one study, led by Tony Tang, suggest that both the drug therapy and CBT outperformed a placebo and had similar effects in changing neuroticism and extraversion scores.

There has also been some research relating to changes in the brain that might be produced by meditation. A study led by Richard Davidson, which examined changes in brain electrical activity following an eight-week training program in mindfulness meditation, found that the program resulted in significantly larger increases in electrical activity in areas of the brain associated with emotional regulation (‘Well-being and affective style’, 2004). A more recent paper by Davidson includes the following remarks:
‘Mindfulness training can be hypothesized to change an individual’s relationship to his or her emotions so that they are not viewed as fundamental constituents of self, but rather as more fleeting phenomena that appear to the self. We would not necessarily expect mindfulness training to alter the neural circuitry of emotional responding in response to a challenge per se, but rather we might expect a change in the connectivity between emotion circuits and those used for the representation of self. We would predict decreased connectivity between emotion processing and self-relevant processing regions’ (‘Commentary: Empirical explorations of mindfulness’, 2010).

I don’t claim to know a great deal about neuroticism or meditation (apart from my own limited experience) but if meditation helps people to be calm and composed, and less likely to panic, or feel threatened, stressed out, frustrated, or bothered in the face of challenges, then I would have thought that would probably be reflected in lower neuroticism according to standard measures used by psychologists.

Finally, as an economist, it seems to me that revealed preferences are worth considering. As I have discussed previously, the self-help industry seems successful according to the usual market tests. When people engage in meditation or other forms of contemplation instead of sleeping longer or indulging in more immediately pleasurable activities, this suggests to me that they may actually obtain some of the benefits that they claim in terms of desired changes in personality traits.

There is an update of this post entitled: How much does personality change over time?

Tuesday, October 19, 2010

Does one form of sensation-seeking substitute for another?

In the last post Ruth, a mental health nurse, discussed how she had been more willing to participate in risky activities such as bungy jumping while she was working in prisons. This led to a discussion of changes in perception of identity that may be associated with drug taking by young people who are seeking to escape from emotional pain. Ruth discussed how mental health patients with a history of drug use could be helped to perceive a wider set of possibilities for their future lives.

This post explores implications of evidence that some adolescents take drugs as a form of sensation seeking. A literature review by Jonathan Roberti notes that sensation seeking individuals tend to engage in behaviours that increase the amount of stimulation they experience. Sensation seeking is more common among young males than other groups. While risk-taking is involved it is not a primary motive – high sensation seekers tend to appraise risky and stressful situations as less threatening than do low sensation seekers.

Sensation-seeking is associated with stimulating occupational choices e.g. a desire for greater novelty and flexibility in work and with choice of risky vocations such as fire fighting. It is also associated with a preference for arousing music e.g. hard rock; travel to less familiar places; participation in relatively risky sports e.g. bungy jumping, white water rafting, surfing, snow boarding, scuba diving and parachute jumping; gambling; crime; impulsive behaviour; and health risk behaviours e.g. unsafe sex, unsafe driving, binge drinking and use of illicit drugs (‘A review of behavioral and biological correlates of sensation seeking’, Journal of Research in Personality, 38, 2004).

Roberti has high hopes that adverse consequences of sensation seeking traits could be reduced by substituting sensations with low health risks for sensations with high health risks:

‘Early identification of risky behaviors, attitudes, and preferences in young adults, such as engaging in promiscuous sexual activities, reckless drinking habits, use of illicit drugs, gambling, and high-risk sports and replacing those with non-risky options is essential in reducing negative health consequences. Recommending appealing, non-risky forms of sensation seeking to individuals that once engaged in risky behaviors is one way of reducing negative health consequences. The effectiveness of using alternative arousal sources that are non-risky but are equally stimulating has yet to be determined and would be a fruitful line of research’ (p 274).

When I consider this from an economics perspective, it is not entirely clear whether, or to what extent, sensation seekers would view such activities as substitutes. It would be nice to think that an afternoon engaging in an extreme sport would satisfy a sensation seeker’s desire for thrills until the following week - and that the culture associated with all extreme sports would tend to encourage healthy living. It might be possible, however, for a sensation seeker to spend an afternoon engaging in an extreme sport, followed by an evening of illicit drug use and gambling, and then to end the day participating in a sex orgy (although I can’t verify this from personal experience). More research may be required. (Perhaps I should clarify that I am suggesting surveys of the lifestyles of people who engage in various extreme sports.)

Jonathan Roberti draws attention to research suggesting that sensation seekers prefer certain types of friends and tend to surround themselves with others who have similar sensation seeking characteristics. I expect that the behaviour of sensation seekers in this respect would be strongly influenced by their own sense of identity.

How can parents ensure that children with sensation seeking tendencies develop a sense of identity consistent with adopting healthy lifestyles? My previous consideration of this question suggests that the main environmental shaper of personality is a child’s peer group. Parents may not be able to choose their children’s friends for them, but parents do make decisions about where they live and what schools their children attend.

There seems to be increasing evidence linking cannabis use among young people to mental illness. Some recent research is reported here. That suggests that it is stupid for young people to use cannabis. However, that does not provide sufficient reason for cannabis use to be illegal.

How can we explain the attitudes of young drug users towards the risks involved?

This post is the sixth in a series of discussions with Ruth, a mental health nurse who has worked with drug users in prisons and hospitals. There is a brief summary of earlier post in the series, on my other blog.

Ruth began the discussion by considering whether her own history might help us understand why kids engage in risky behaviour:
When I worked in the prison system, I participated in activities such as bungy jumping and solo trekking through the Himalayas and so on. These are risky activities. They differ from drug taking because they are socially acceptable. But they are similar because they involve a risk of being injured or killed. I saw myself as capable in extreme situations. It felt good!
My attitude toward risk-taking has changed since I stopped working in the prisons. I now experience greater fear of heights and tend to allow that fear to dictate my actions. For example, I was walking down some steps – the open variety – descending about 100 metres underground last year. I was terrified, simply of the height, as I looked down to see where to put my foot next. Vertigo had got me – and not for the first time in my life. Yet, only a few years prior, I had bungy jumped off the side of a swing bridge over a river.
The only difference I can point to is that I am now engaged in less risky activities on a daily basis. I experienced great fear on both occasions, but it seems to me that I was accustomed to taking risks back then. Now I am out of practice, so to speak.
This makes me wonder if young drug users see drug-taking as a measured risk - just as the risk of trekking solo through the Himalayas or bungy jumping or so many other things I did, mirrored the risks I took working in the prison. A lot of drug users may consider that the risks involved are not out of the ordinary, relative to the risks that are part of their daily lives. This might explain why so many argue that drug use is quite safe.

I expect that many could relate some of what Ruth has been saying to their own experience. I know that when I took on new roles at work that required me to get out of my comfort zone, this also affected other aspects of my life. If we think in terms of identity economics, a change of role may be associated with a change of perceived identity, which in turn has implications for the satisfaction we obtain from different kinds of behaviour and the choices we make.

Tammy Anderson, a sociologist, has developed a cultural-identity theory of drug abuse which suggests that drug abuse is the outcome of an identity change process. The process may involve a range of factors relating to personal circumstances, identification with sub-cultures and economic opportunity. For example, at a personal level some kids may feel out of place and different from others, or a loss of control in defining their own identity because of unrealistic parental expectations. This may lead them to identify with alternative social groups i.e. a drug sub-culture. In turn, this provides a new identity, with acceptance by a peer group and associated economic opportunities to fund drug use. (‘A cultural identity theory of drug abuse’, here)

In my view, while such a cultural-identity perspective makes sense, it would be desirable for it to be embedded into an identity economics framework in order to recognize the role of individual choice in these personal changes.

Ruth comments:
My experiences mostly centre around drug takers after their habit has become a noticeable problem. Although I know less about the introductory phase of drug taking or experimentation, I have worked with many teens (mostly girls but some boys too) who have lived through sequential painful experiences and have given up on the idea of living free of ongoing emotional pain. Young people in these situations may welcome any mind numbing activity just to escape the hurtful lives they live. This is not about immaturity or lack of worldliness or some other non-reality oriented scenario. I'm referring to situations where there are real reasons for the emotional pain they feel. Many are still too young to leave home and are therefore doomed to continue living in circumstances that are painful to them until they come of age.
The young people I've had most regular contact with have long dispensed with the idea that they can change themselves, or their life circumstances. They have usually had limited exposure to the idea that they can consciously create a life for themselves and much less exposure to ideas about how they might do such a thing. In their own eyes their identity is defined and absolutely limited to what they are now and has been determined indisputably and irrevocably by the circumstances of their birth and upbringing.
From the therapy side, I see these self-perceptions as an excuse to avoid dealing with what the individuals see as an unchangeable future. As these limiting perceptions change then they see that they have greater potential to change their lives than they realized. It would be helpful if the community as a whole could adopt a similar approach to these people.
I found that talking to these patients about travel adventures like trekking the Himalayas and Swiss Alps and so on can make a difference to their long term projections for their own lives. The potential to have that kind of adventure can be enough for them to think it is worth getting through their ordeal. They often turn off drugs as a direct result - not always, but often. What is happens is that their confidence builds in a natural way. I could point out how 'ordinary' I was, much like themselves, and how I went about achieving my goals – the usual methods of planning, practicing and reading relevant material and talking to others who had done similar things. This led the patients to see a whole new set of possibilities - which in turn opened options and gave them confidence to act differently, and with choice.
Confidence and choice are at the heart of every behavioural decision. I suspect identity building is limited by an assumption of 'who I am' in the world around me.

The discussion continues here.