Saturday, October 27, 2018

Why don't all sides of politics agree to pursue Wealth Plus?

It would be great if the major political parties in all countries of the world were to pursue Wealth Plus as a national objective. However, I don’t think that is likely to happen soon, even in the wealthy countries that have implicitly pursued similar objectives in the past.

Wealth Plus is the objective advocated by Tyler Cowan, in his recently published book, Stubborn Attachments: A vision for a society of free, prosperous, and responsible individuals. Tyler defines Wealth Plus as:

‘The total amount of value produced over a certain time period. This includes the traditional measures of economic value found in GDP statistics, but also includes measures of leisure time, household production, and environmental amenities, as summed up in a relevant measure of wealth."

Tyler also suggests that we should aim to “maximize the rate of sustainable economic growth, defined in terms of a concept such as Wealth Plus”. He suggests that we should think more broadly about economic growth as an ongoing self-sustaining process that produces goods that contribute to human welfare, rather than in terms of growth in GDP as conventionally measured.

I think the objective that Tyler is writing about could better be described in terms of pursuing growth in opportunities for human flourishing – growing opportunities for people to live the lives that they aspire to have. I prefer that terminology partly because it fits neatly with the view I expressed in Free to Flourish that good societies are characterised by widespread opportunities for human flourishing. In my view, progress is movement toward better societies, with growing opportunities for human flourishing.

An emphasis on human flourishing raises a question, touched on in an appendix, of why human flourishing should be prioritized above the flourishing of non-human lives. One good reason is that flourishing humans show greater consideration for non-human lives than do humans who are struggling to survive. Discussion about what constitutes ethical behaviour toward non-human lives is a feature of modern life in prosperous countries. More fundamentally, if ethical behaviour is intrinsic to human flourishing – as Aristotle argued persuasively long before modern psychologists took up the idea - then human flourishing must encompass ethical behaviour toward all other living creatures.

Tyler makes a strong case that we should care about the well-being of people in the distant future just about as much as we care about the well-being of the current generation. His argument is based partly around the implications of discounting the value of future human lives. Under any positive discount rate, one life today could appear to be worth as much as the entire subsequent survival of humanity if we use a long enough time horizon for the calculation.

The argument for using a low discount rate seems to me to have considerable force when we are considering the benefits of public investments to protect future generations from potential catastrophes. As previously discussed on this blog, that argument is pertinent in considering what discount rates should be used for public investments to avert or mitigate climate change risks.

I am not persuaded by Tyler’s argument that the well-being of future generations isn’t adequately considered today in the choices “we” are making about “how rapidly to boost future wealth”. The “we” Tyler is referring to is the collective “we” that makes public policy choices. As I have previously suggested, the argument that positive externalities cause free markets to produce too little economic growth does not appear to have any more merit than the argument that negative externalities cause free markets to produce too much economic growth. Tyler hasn’t persuaded me that government intervention can improve on the growth outcomes of the savings and investment decisions made by individuals and families in a free market.  

In any case, the choices that governments make about “how rapidly to boost future growth” seem to be largely implicit rather than explicit. Boosting economic growth may be a motive for public investment in research and some forms of education, but I can’t think of many other examples. Perhaps what Tyler has in mind are the choices that governments make that unintentionally reduce the rate of economic growth. For example, he notes that when government spending is cut, investment spending is often the first area to go while entitlements for the elderly remain intact.

Tyler is on firm ground in arguing that the strengthening of good institutions today can be expected to provide benefits for centuries into the future. There is strong historical support for the view that growth promoting institutions and a history of prosperity tend to have enduring effects.

Tyler suggests that three key questions should be elevated in their political and philosophical importance, namely:

1.       What can we do to boost the rate of economic growth?

2.       What can we do to make our civilization more stable?

3.       How should we deal with environmental problems?

He goes on to observe:

“The first of these is commonly considered a right-wing or libertarian concern, the second a conservative preoccupation, and the third, especially in the United States, is most commonly associated with left-wing perspectives. Yet these questions should be central, rather than peripheral, to every political body. We can see right away how the political spectrum must be reshaped to adequately address these concerns. Politics should be about finding the best means to achieve these ends, rather than disputing the importance of these ends."

I agree that is what politics should about, but I am not optimistic that political leaders can pursue those ends diligently, even if they can be persuaded to embrace them. Liberal democracy has been weakened in recent decades by widespread failure to adhere to the norms of self-reliance and reciprocity that underpin it. As predicted by James Buchanan (see this post for explanation) failure of the liberal democracy is becoming increasingly likely as a higher proportion of the population becomes dependent on government, and voters increasingly seek to use the political process to obtain benefits at the expense of others.  

It is difficult to escape the conclusion that we are heading toward a tragedy of democracy. When interest groups view the coercive power of the state as a common pool resource to be used for the benefits of their members, the adverse impact of tax and regulation on incentives for productive activity produce outcomes that a detrimental to just about everyone. The process seems to be intensifying with the fragmentation of broad interest groups supporting the centre left and centre right of politics.

As Henry Ergas has noted recently, with particular reference to Australia, it has become “increasingly difficult for “catch-all” parties — as both our main parties have been — to position themselves in such a way as to aggregate a winning coalition. The concept of the ‘average’ or ‘median’ voter, which used to help orient the parties’ choices, has lost its substance, as has the notion of ‘the centre’. (“The Australian”, 25 Oct. 2018).

Similar problems are evident in other mature democracies. The process of fragmentation of broad interest groups has accelerated in many countries over the last decade or so as innovations in the social media have greatly increased the power of the rabid sports fans of politics - aptly referred to by Jason Brennan as Hooligans. Hooligans tend to seek out information that confirms their pre-existing political opinions and ignore or reject information that contradicts those opinions. They tend to communicate in echo chambers that reinforce their outrage when the leadership of the major parties is unresponsive to their concerns.

In some countries we are seeing ill-informed Hooligans taking over major parties and the reins of government. In other countries splinter parties comprised of Hooligans are attracting supporters away from major parties and making it more difficult for them to pursue coherent policy agendas. No matter which way it is happening, the growing political influence of the Hooligans makes it increasingly difficult for political leaders to pursue Wealth Plus, or any goals relating to the future well-being of the broader communities who elect them.

As more people come to recognize that liberal democracy is confronted by deep problems, perhaps some of them will attempt to make concerted efforts to reform political institutions so that they produce better outcomes. However, it is not obvious what reforms would stop the rot or how reforms could be achieved. A major economic crisis might help to focus the minds of responsible political leaders, but it could just as easily further strengthen the hands of the Hooligans.

I now think the best hope for future generations lies in the potential for new technology to enable people to circumvent the obstacles created by the Hooligans of national politics. As Max Borders has suggested (see discussion on this blog here and here) technological innovations provide us with the potential to “reweave the latticework of human interaction to create a great reconciliation between private interest and community good". The social singularity has potential to enable people to enjoy growing opportunities to live the lives that they aspire to have.


Stephen Clively said...

Winton, interesting post. I haven’t yet read a copy of the book but have listened to three hours of Tyler being interviewed about it in two podcasts (Reason, and Tyler’s own). I think his plea for more recognition of the importance of economic growth is very worthwhile but I am somewhat nervous about zero discounting.

It’s understandable that for thinking about far off generations a zero discount rate would be appropriate for to avoid catastrophes. But who decides what these events are? From the interviews, it is clear that Tyler does not regard all situations with negative impacts on the environment as catastrophes. In addition he also states that he wants smaller government. He states that zero discounting is applied to thinking about future welfare but not for financing of projects.

I think this is too confusing and open to capture by rent seeking players who stoke up everything as a catastrophe, that only government investment proposals can be scored against zero discount rate, but that this opens the door to almost any mad scheme being found viable, that the money to finance such proposalts comes at the expense of the pursuit of private objectives and could lead to an ever growing public sector and hence less freedom.

So, I think we are on fairly common ground on this one. It seems enormously difficult to operationalise Tyler’s concept (and Stern’s and Garnaut’s) of zero or near zero discount rates and it carries huge risks to freedom. Can you suggest any way through this morass?

Winton Bates said...

Hi Stephen
You are right that zero discounting does open the door to almost any mad scheme being found viable. Unfortunately, the state of politics at present is such that mad schemes seem to get government support irrespective of their economic viability.

Leaving cynicism to one side, if I was asked for public policy advice in this area I would be looking for ways to achieve a more efficient allocation of existing public research funds. I would be asking is whether too much public research money is going into ventures that are capable of being funded commercially and which would provide little benefit if climate change outcomes turn out to be much worse than expected over the next 50 years or so (e.g. improvement in efficiency of renewable energy generation). I would also be asking whether there could be potential benefits in devoting more funding to research into ways to take greenhouse gases, particularly methane, out of the atmosphere should the need arise to do so quickly.

There is, of course, a risk that a lot of public funds could be poured into such research without producing any useful result. Nevertheless, it would be a shame for future generations to get into a situation where they had to shoot the cows to avert a catastrophe, when some more research now might find a way for methane-eating microbes to avert the catastrophe at lower cost.

As a final thought, perhaps funding of research of the kind I have in mind would be more amenable to funding under the Elon Musk approach. Some investors seem to apply a very low discount rate to future returns on private investments when they perceive, rightly or wrongly, that their investment is helping to save the world.

Unknown said...

Thanks for the response, Winton.

Basic research into new and challenging areas would seem to be a relatively harmless and possibly fruitful way to tax payer channel funds. I’m quite attracted to the idea of prizes, a la Harrison’s clock for dealing with longitude. But the overwhelming evidence is against Evie me on that one. And Harrison had to spend many years to receive his prize. That said, prizes allow society to also benefit from the discoveries of those who do not come first in the hunt for the prize.

The Musk Case is illuminating. Most VCs probably have a high appetite for risk but typically take a portfolio approach so that many loss makers are more than covered by a few big hits. Musk, of course, is a mixed bag. He has received billions of USD for some projects, but at the same time faces state government opposition to Tesla setting up direct sales. And his vanity pushes everything along.

I’m not sure where that leaves us. It doesn’t see, to reduce the likelihood of bigger government and less freedom.

Should I buy Tyler’s new book?

Winton Bates said...

I enjoyed watching the story of Harrison’s clock on TV. Great story!

I can’t remember reading much about the contribution prizes made to the industrial enlightenment. They possibly made a useful contribution in signalling that the prince was favourably disposed toward invention and innovation.

Musk certainly is a mixed bag. As the owner of 8 shares in Tesla I have come to the view that a lot of the other stock holders have something on their minds other than speculative gain. I can only justify holding the shares at the current price because I think the true believers are likely to push them higher.

Buy Tyler’s book! At times the argumentation is tedious. The style of writing is non-ideological almost to the point of appearing naive. From an economist’s perspective the message is fairly conventional. I enjoyed the book because Tyler manage to make the journey through familiar territory seem interesting.