Monday, April 8, 2019

Can subjectivism and objectivism be reconciled?




Readers who don’t recognise the faces depicted in my amateurish artwork might be thinking that the question is absurd because opposites can never be reconciled. That is a feature of the real world. However, subjectivism and objectivism are labels that have been attached to different schools of thought. We need to look at what lies behind the labels to assess whether the schools of thought can be reconciled.

I have previously struggled with related issues when considering whether human well-being is subjective or objective. I will return to that question later in this post.

Edward Younkins has little difficulty in reconciling subjectivism and objectivism in his excellent book, Flourishing and Happiness in a Free Society, 2011. The book is subtitled, Towards a synthesis of Aristotelianism, Austrian Economics and Ayn Rand’s Objectivism. The subtitle accurately summarises what the book is about. This is a scholarly work that should be read by anyone who has reasons to be interested in whether such a synthesis is possible. Readers of this blog will have observed that the approach to freedom and flourishing adopted here is eclectic, but strongly influenced by Neo-Aristotelian classical liberal philosophy and Hayekian economics. Ed’s reconciliation of objectivism and subjectivism goes part of the way in helping me to think about the coherence of my own views.

Reconciling Mises and Rand

The Austrian economist to whom Ed devotes most attention is Ludwig von Mises. Mises observed that all human action involves choices that are made subjectively by individuals having regard to their internal purposes, ends or goals. Valuation reflects the acting person’s internal scale of preferences. Mises held that economists should study the implications of individual human actions without regard to their motives or causes, which are the objects of study for psychologists.

Ayn Rand argued that the minds of the individual humans are competent to achieve objectively valid knowledge of the real world. The senses, aided by reason in accordance with the rules of logic, enable us to obtain objectively valid knowledge of reality. When a correct cognitive process has been followed, it can be said that the output of that process is objective. It is up to individuals to discover what will further their own lives and what will harm them. Values reflect facts as evaluated by persons with respect to the goal of living. The objectivity of value derives from the fact that some actions tend to promote human life and others detract from it.

Ed Younkins points out that the claim of Miserian economists that values are subjective is compatible with Rand’s claim that values are objective because “they exist at different levels or spheres of analysis”:
“The value-freedom (or value-neutrality) and value subjectivity of the Austrians have a different function or purpose than does Objectivism’s emphasis of objective values. On the one hand, the Austrian emphasis is on the value-neutrality of the economist as a scientific observer of a person acting to attain his ‘subjective’ (i.e. personally-estimated) values. On the other hand, the philosophy of Objectivism is concerned with values for an acting individual moral agent himself”.

Ed provides a more complete explanation in his book, but the quoted passage is a good summary.

Did Hayek claim that morals are not rationally justifiable?

Ed’s reconciliation of Objectivism and the subjectivism of Austrian economists doesn’t get me off the hook entirely regarding the compatibility of Hayekian and neo-Aristotelian philosophies. A decade ago, after re-reading Rand’s warnings (via John Galt in Atlas Shrugged) about becoming “an abject zombie who serves a purpose he does not know for reasons he is not to question”, I re-considered my support for Hayek’s view that there is merit in observing long-standing norms of behaviour that serve purposes beyond our understanding.  My conclusion was that both views deserve consideration. Hayek was correct to emphasise that societal norms may deserve respect even if we don’t fully understand their purpose, because they evolved through an evolutionary process in which groups that adhered to superior rules were most successful. Rand was correct to emphasise that the purpose served by rules protecting lives, liberty and property are usually capable of being understood.

There are some passages in Hayek’s final book, The Fatal Conceit, that are incompatible with neo-Aristotelian philosophy (and my own views) but it seems likely that those passages were written by W.W Bartley, the book’s editor, rather than by Hayek, whose health was deteriorating at the time. For example: “Moreover, while it is true that traditional morals, etc. are not rationally justifiable, this is also true of any possible moral code …”. Bruce Caldwell suggests that the assertion that our morals are not rationally justifiable is “a position that clearly derives from Bartley” (Hayek’s Challenge, p 317). Here are another sentence for which I hope Hayek was not responsible:
There is no reason to suppose that the selection by evolution of such habitual practices as enabled men to nourish larger numbers had much if anything to do with the production of happiness, let alone that it was guided by the striving after it” (The Fatal Conceit, p 69).

I think that statement is false. Without downplaying the importance of survival as a motive, a realist would acknowledge that until recently human reproduction has been largely an outcome of the actions of humans striving for happiness via the habitual practice of sexual gratification. Moralists have long argued that people can’t find happiness by seeking pleasure, but that doesn’t seem to have stopped many from striving to do just that. Furthermore, the literature of the distant past, as well as more recent times, suggests that those who were most successful in passing on their genes would generally have been living in societies providing relatively good opportunities for individual human flourishing, and they would generally have been flourishing individuals enjoying good health and relative prosperity. It also seems likely that persons with happy dispositions have generally been more likely to form lasting bonds and to care for their offspring.

The objective nature of human flourishing and happiness

Ed Younkins clearly views human flourishing as an objective state of life:
“Flourishing is a successful state of life, and happiness is a positive state of consciousness that flows from, or accompanies, a flourishing life. The legitimate function of every human person is to live capably, excellently and happily. This involves an ethic of aspiration toward one’s objective well-being that is actively attained and maintained”.

Ed introduces the concept of metalevel happiness to distinguish “enduring and justified contentment with one’s life as a whole” from transitory feelings. His description of metalevel happiness seems to have firm roots in antiquity:
“Metalevel happiness requires a proper perspective that comes from the serenity or peace of mind that one gets from knowing that: (1) one is free to rationally choose among alternatives; (2) a person’s potential for happiness is oriented in some particular way and with some particular nature which is not a matter of choice; and (3) nothing external can harm the core of one’s self. Serenity requires wisdom, a sense of proportion, and the ability to deal with pain and emotions in a balanced and rational manner. Happiness means being serene in the face of the unchangeable, courageous before the changeable, and wise enough to determine which is which”.

It seems appropriate to end this post here, leaving you to ponder how best to follow Edward Younkins’ good advice about cultivating the serenity required to be objective about subjective feelings.

Friday, March 29, 2019

Why do many individuals voluntarily moderate their contributions to global environmental problems?



I think serious consideration should be given to the question of why many individuals voluntarily moderate their own contributions to global environmental problems. Prospects for human flourishing may well depend on the increased willingness of many more people to moderate their individual contributions to climate change. Voluntary contributions may not be enough, but what people are willing to volunteer to do themselves can be expected to have an important influence on the extent to which they are willing to impose regulation on others.

A decade ago I suggested that people who voluntarily reduce their contributions to climate change deserve our respect, but I referred to them as environmental puritans. I remember being told that terminology wasn’t respectful. Religious zealotry certainly doesn’t provide a complete explanation of  such behaviour.

Voluntary action by individuals to moderate their contributions to global problems is difficult to explain in conventional economic terms because people must know that their personal actions will have a negligible impact on global problems.

So, why does it happen?

The most cynical explanation I can think of is virtue signalling. Some firms and individuals engage in the behaviour because they obtain additional profit, or just personal satisfaction, from admiration they receive by appearing to be virtuous. Even though virtue signalling isn’t particularly commendable, good outcomes can flow from it. If companies can make higher profits by presenting an environmentally friendly image, good luck to them. If community organisations can further their objectives by bestowing honours on people whose motive is to be admired by other members, good luck to them too (provided, of course, we are not talking about organisations that infringe the rights of non-members e.g. terrorist organisations).

Leaving cynicism aside, the most obvious explanation is that people are willing to moderate their behaviour because of genuine ethical intuitions or considerations. It feels like the right thing to do and/or they consider such behaviour integral to their values and their flourishing as individual humans. It is reasonable to speculate that such ethical feelings and considerations are strongly linked to perceptions of personal identity.  Those who perceive themselves as giving a high priority to environmental protection tend to see themselves as citizens of the world. For example, of those U.S. respondents to the World Values Survey conducted a few years ago who identified with the proposition “looking after the environment is important to this person”, 83% saw themselves as “a citizen of the world”. The corresponding percentages were much lower for people who didn’t perceive looking after the environment to be important.

As shown in the chart at the beginning of this post, the percentage of people who perceive of themselves as citizens of the world is quite high in many countries. I don’t claim to know much about what is going on in the minds of those people. My guess is that when people say that they see themselves as citizens of the world, they are recognizing that they have a common interest with other humans in seeking solutions to global problems. It seems reasonable to expect people who see themselves as citizens of the world would be more likely to moderate their personal contributions to global environmental problems without requiring inducement than those who identify solely as members of local communities, ethnic or religious groups, or nations.

As implied earlier, some people who moderate their own contributions to global environmental problems seem to be puritanical in their beliefs about appropriate behaviour towards the environment. That could be because of they are deeply religious, whether as followers of contemporary religions or as Gaia worshippers. It is hardly surprising to see religions urging their followers to have regard to the global environment and the well-being of future generations of humans, and to see some of adherents become environmental zealots.

It also seems reasonable to speculate that more people will voluntarily moderate their personal contributions to global environmental problems when they observe others doing likewise. They know their own personal contributions will have a negligible impact on global problems, but they don’t consider them to be futile because they feel that their contributions are part of a collective effort. Those who seek to provide an example for others, by making an unusually large contribution, may see their contribution as having a potential snowball effect.

The motivations of many of those who voluntarily modify their contributions to global environmental problems are only weakly contingent on the behaviour of others. Their behaviour seems to be motivated primarily by benevolence towards future generations of humans and other species. There is no social contract regarding voluntary moderation of contributions and there is no possibility that every human would agree to moderate their behaviour in this respect in the absence of regulation. An individual cannot induce others to moderate their greenhouse gas emissions merely by threatening to cease moderation of their own behaviour if their example is not followed. By contrast, Elinor Ostrom observed that in a successfully managed commons where access to shared resources is limited, individual participants make contingent self-commitments. The willingness of participants to follow a set of rules that has been devised collectively is contingent on other participants making a similar commitment and acting accordingly.

An important factor involved in voluntary moderation of relevant behaviour is belief that human action is causing detrimental climate change. People, like me, who believe that there is a low probability of catastrophic climate change within the next 30 years, or so, might also be willing to moderate their behaviour voluntarily as an insurance policy for following generations, provided the cost of insurance – for example, use of renewable energy in place of fossil fuels - is relatively low. More people can be expected to join the movement to moderate their behaviour if they perceive that environmental catastrophe is becoming imminent and/or if it becomes less costly to reduce the exposure of their children and grandchildren to global environmental risks.

Is coercion ever justified?

The benevolent private behaviour of environmentalists with respect to global environmental problems is often combined with advocacy of government action to compel others to modify their contributions. Any lover of liberty would find such coercion difficult to endorse, but there are strong precedents for it. One readily defensible movement that has acted similarly in the past is the movement for abolition of slavery in the 19th Century. As well as endeavouring to ensure that they did not profit from slavery, members of anti-slavery organisations advocated government action to abolish it.

If concerted government intervention is needed to avoid a global climate catastrophe, and if there is enough support by governments and citizens of enough countries to ensure that effective action can be taken, it would be difficult to argue that no action should be taken that would infringe the liberty of those individuals opposed to the intervention. Please note that there is more than one big “if” in the preceding sentence. I just want to make the point that it does not make sense for anyone to insist on the primacy of liberty if human survival is really at stake. In order to flourish, our descendants need to survive.

Do conservatives understand the motivations of world citizens?

The observation that environmentalists often combine benevolent private behaviour with advocacy of government action, seems somewhat at odds with a claim made by prominent conservative philosopher, Roger Scruton, in Green Philosophy: How to think seriously about the planet, published in 2012. Scruton suggests:
"Nothing in politics stands still, and increasingly left-wing environmentalists are dissociating themselves from the campaigning NGOs, and preferring the small-scale work that both supports and expresses the low-impact way of life. The movements for low carbon communities, slow food and permaculture have recruited many who identify themselves as ‘on the left’. Indeed, this shift away from radical, government-shaped solutions should be welcomed by conservatives, since it promises the thing that environmentalists of both persuasions need, which is a way of sharing our problems and co-operating in solving them."

I think that may be wishful thinking. From where I sit in Australia, I don’t see left-wing environmentalists increasingly dissociating themselves from campaigning NGOs. There are some environmentalists who would identify as having leftish views who are disgusted with the antics of environmental NGOs and Green politicians and want nothing to do with them. But I don’t see a general trend in that direction. I do see a trend toward more alliances between radical environmentalists and people who could be considered to hold conservative views. I see alliances between farmers and radical environmentalists to prevent fracking to extract of coal seam gas, because that may contaminate ground water. I see alliances between residents of leafy suburbs and radical environmentalists to prevent higher density housing projects. I also see more people with conservative views supporting independent political candidates who want a greater national contribution to international efforts to combat climate change.

It is easy to understand why Roger Scruton would like to see left-wing environmentalists dissociating themselves from campaigning NGOs. He suggests that oikophilia, the love of the oikos, or household, is the motive that captures what conservatism and environmentalism have to offer each other. He explains:
“It is a motive in ordinary people. It can provide a foundation both for a conservative approach to institutions and a conservationist approach to the land. It is a motive that might permit us to reconcile the demand for democratic participation with the respect for future generations and the duty of trusteeship. It is, in my view, the only serious resource that we have, in our fight to maintain local order in the face of globally stimulated decay”.

However, Scruton’s response to the slogan, ‘think globally, act locally’, seems odd. He suggests that while many environmentalists acknowledge that local concerns must be given a proper place in our decision-making, they tend to balk at the suggestion that “local loyalty should be seen in national terms, rather than as the small-scale expression of a humane universalism”. He suggests that were conservatism to adopt a slogan, it should be ‘feel locally, think nationally’. He argues that doesn’t mean that conservatives are all belligerent nationalists: They think in terms of the nation state because “they recognize that, in the current environmental crisis, there is no agent to take the needed measures, and no focus of loyalty to secure consent to them, other than this one".

I am uncomfortable with the idea that local loyalty should be seen in national terms. National loyalties overlap with local loyalties in some respects, but most environmental problems seem to be either local or global. Humane universalism seems to me to be a mark of civilised behaviour.
Nevertheless, I accept that the national state is the only governance system available which has potential to deal with global problems that cannot be resolved by the voluntary actions of individuals. That doesn’t mean that I have a great deal of faith in the capacity of nation states to resolve such problems.  Perhaps voluntary action enhanced by blockchain technology offers more hope over the longer term.

Roger Scruton is correct in his assertion that conservatives think in terms of nation states. They are statists. But that is also true of Green politicians and their ardent supporters, who argue vociferously for greater action at a national level to reduce emissions of greenhouse gases. In attempting to push individual nation states to rapidly reduce greenhouse gas emissions at a national level, Green politicians have caused a backlash from voters concerned about rising energy prices and the unfairness of being asked to make greater sacrifices than those being made by people in other parts of the world. If Green politicians want effective action to avert the global climate change disaster that they greatly fear, they will need to adopt more effective political strategies that are capable of winning support from voters who are sceptical of claims of claims of imminent environmental disaster, but are prepared to make modest contributions to global efforts as a form of insurance for the benefit of future generations.

How does Roger Scruton make a useful contribution?

Roger Scruton’s comments about the difficulty of negotiating and enforcing international agreements to combat climate change are insightful. He notes that the Montreal Protocol concerning action to combat depletion of the ozone layer of the atmosphere was successful because CFCs could be eliminated “without seriously disturbing the economy or the way of life of any signatory nation”. He notes:
“Greenhouse gases are not like CFC gases. As things stand they can be eliminated only at great economic and even greater social cost, and few nations are prepared to pay that cost. By devoting their sparse supply of global goodwill to negotiating futile treaties against emissions, the nations are wasting assets that could be spent on co-operative research into renewable energy."

I think Scruton is both too optimistic and too pessimistic in suggesting that “unilateral action on the part of a competent and law-abiding state”, such as the U.S., may end up being the only way the global environment can be defended. I take his point that the British Navy played a crucial role in ending the transnational market in slaves, but it is too optimistic to think that the U.S. could achieve much to combat climate change by acting alone. It seems too pessimistic to imply that there are no circumstances where international cooperation could result in effective action against climate change.
Roger Scruton actually points to a potentially productive avenue for international cooperation:
 “If treaties are to be effective at all they must surely be of this kind – treaties that offer only benefits, which minimize the incentives to defect, and which compensate for the principal failure of markets in the matter of global environmental problems, namely that they do not invest sufficiently in the needed research.”

Where does this lead?

The important point is that if we want individuals to moderate their contribution to global environmental problems – either through voluntary action or by supporting regulation – before environmental catastrophe is universally accepted to be imminent, then we need to make it less costly for people to take that action. A greater research effort is required to ensure that more efficient technologies become available as soon as possible.

Wednesday, March 13, 2019

How can we compare climate change and public debt risks?



It seems to me that, over the next 20 years or so, people in Western democracies are likely to suffer to a greater extent from the consequences of an explosion in public debt than from climate change. At the same time, I acknowledge that climate change could possibly pose a serious threat to civilization and perhaps human survival. The chart shown above is my attempt to illustrate how those risks might be compared.

I make no claim to expertise in assessment of climate change risks. My reading on the topic suggests that the theory that increasing concentrations of greenhouse gases in the atmosphere are contributing to climate change is widely accepted by scientists. However, people with relevant expertise obviously have different views about the rate at which climate change is likely to occur, the contribution of human activity, the political feasibility of various forms of remedial action, and the adaptability of humans and other living creatures.

In my view, too little attention has been given to “tail risk” associated with climate change – the low probability that climate change will result in a great deal of human misery, as shown in the chart above. As I have written here previously, if you are concerned about climate change, you (like me) are likely to be more concerned about the remote possibility that your great grandchildren might suffer from having to live with potentially catastrophic climate change outcomes than about the more probable outcome that climate change might cause their incomes to be somewhat lower than economic modelling suggests they would be otherwise. I have also previously expressed agreement with Nassim Taleb that there are some risks we should avoid if possible, even though there is a low probability that they will occur at any point in time. In order to flourish, future generations need to be able to survive.

The reasoning behind the rest of the chart requires more explanation. Why do I think there is a 95% probability that the citizens of western democracies will suffer as much or more over the next 20 years from an explosion in public debt than from climate change? Since I don’t have either the inclination or expertise to weigh up the technical evidence on climate change for myself, I tend to rely on the IPCC’s assessments. I suspect the authors of IPCC reports are still somewhat biased toward attempting to present a view favouring urgent international action to reduce greenhouse gas emissions. Nevertheless, after they have been modified in the light of expert public scrutiny, the IPCC reports are probably the most authoritative source of independent assessments of the relevant evidence.

The IPCC’s assessment of likely climate change outcomes in Chapter 3 of its recent special report, Global Warming of 1.5 ºC, implies that we can expect some fairly serious adverse consequences over the next few decades:
The impacts of climate change are being felt in every inhabited continent and in the oceans. However, they are not spread uniformly across the globe, and different parts of the world experience impacts differently. An average warming of 1.5°C across the whole globe raises the risk of heatwaves and heavy rainfall events, amongst many other potential impacts. Limiting warming to 1.5°C rather than 2°C can help reduce these risks, but the impacts the world experiences will depend on the specific greenhouse gas emissions ‘pathway’ taken. The consequences of temporarily overshooting 1.5°C of warming and returning to this level later in the century, for example, could be larger than if temperature stabilizes below 1.5°C. The size and duration of an overshoot will also affect future impacts.

However, a recent OECD report on Greece, which is fairly optimistic about the future of that economy, seems to me to illustrate that public debt crises are likely to result in much more human misery than climate change over the next few decades:
Despite these positive developments, challenges abound. GDP per capita is still 25% below its pre-crisis level. The public debt is still high and a source of significant vulnerability. Poverty rose sharply during the crisis, especially among the young and families with children. Though poverty has stabilised, it remains near a record high. Skill mismatch is also high and investment remains depressed. This contributes to low productivity – which has fallen further behind other OECD countries – and low wages – resulting in high in-work poverty. Though improving, female labour participation is among the lowest across OECD countries. The recovery in investment is held back by a dearth of finance – due in part to high levels of non-performing loans and to capital controls – high cost of capital relative to wages, cumbersome regulations and low demand. These problems weigh on people’s well-being”. 

As I explained in a recent post, there are strong reasons to expect that the failure of governments in most OECD countries to restrain the growth of government spending is likely to cause debt servicing to become a more widespread problem in the decades ahead.  I think the most likely outcomes in most western democracies will probably be much worse that the outcomes of climate change, although not be as bad as the experience of Greece over the last decade. The chart above is drawn to acknowledge that there is some possibility that democratic governments will lift their performance, or world interest rates will remain low, so debt servicing may not be a problem.

The modest adverse outcomes depicted on the right side of the chart might well be offset by positive factors. There is a good chance that over the longer term the positive impacts of technological advances will be sufficient to offset the negative impacts of both public debt accumulation and climate change, but it would be excessively optimistic to expect rapid technological progress and productivity growth in western democracies over the next 20 years.

Some readers may object to my attempt to compare the risks associated with climate change and public debt explosion on the ground that these are very different risks when viewed at a national public policy perspective. There obviously isn’t much the government of any country can do to reduce climate change risk by acting alone.

However, I have drawn the chart with individual well-being in mind. From an individual’s perspective, the risks surrounding climate change and public debt are quite similar. Nothing that individuals do by themselves will make much difference to national or global outcomes. Voting might appear to provide an avenue for individuals to influence national outcomes but, as others have observed, voting in a national election is like ordering a meal from the menu in a restaurant and being served the same meal irrespective of what you order.  

There are options that individuals can consider to reduce their exposure to both climate change and public debt risks. For example, consideration of climate change risk might influence decisions about housing location and construction, and consideration of public debt risks might cause individuals to reduce the extent that their families rely on government for health services, education and retirement incomes.

It strikes me that climate change and the risks of public debt explosion also pose similar ethical issues for individuals. Does the fact that an individual’s actions, considered in isolation, has a negligible impact on global and national problems absolve him or her of an obligation to moderate his or her contributions to those problems? I think not, but I will leave consideration of the issue for another time.  

Monday, February 25, 2019

Is subjective-predictive morality consistent with the template of individual responsibility?


This question arose while I was reading Josh Bachynski's book The Zombies, subtitled On Morality.
Josh explains subjective-predictive morality as follows:
You all know and have seen it (and used it too!). It is the simple morality we commonly use when giving a gift, throwing a party, or trying to predict and ensure how well things will end up for others. When we are practically good. When we seek to help and not hurt others, for no other reason than this is good. What we currently call being courteous or nice, for the sake of just being courteous or nice. When we are not trying to do what’s “Right” per se. When we are trying to do what’s right by them”.

Doing right by others is encompassed in the ethics of doing right by yourself. What is good feels good.  Josh explains the process of subjective evaluative judgment as involving (1) pleasant or unpleasant feelings (2) cognitive reactions concerning the value of those feelings (3) predictions as to whether we will have reason to regret the action contemplated. Josh suggests:
This is the way we naturally insert quality control into our valuations.

He goes on to observe:
“As it turns out, in searching for the moral, we have actually made a powerful discovery. And this is in what is also rational or prudent”.

I suggest that readers who are interested in learning more about Josh’s philosophy should read Leah Goldrick’s review at Common Sense Ethics, which contains a link to her interview of Josh, and then begin to read the book itself. This is a long book. I found the authors chatty writing style entertaining at first, but tedious after the first few chapters.

Josh Bachynski’s ethics of doing what is right by oneself and others seems quite similar to the template of responsibility, advocated by Douglas Den Uyl and Douglas Rasmussen in The Perfectionist Turn. The ethics of responsibility is based on “the existential fact that we must make something of our lives”. This is explained in a passage I have quoted previously:
For the template of responsibility, the basis for determining worthiness is human flourishing or wellbeing of some sort. Its ultimate value is integrity. Integrity expresses itself interpersonally in honour but when applied to the agent herself, the term ‘integrity’ signifies a coherent, integral whole of virtues and values, allowing for consistency between word and deed and for reliability in action”.

There are some differences between the two approaches. Pleasant and unpleasant feelings are not given a great deal of prominence in Den Uyl and Rasmussen’s view of human flourishing. They define human flourishing as consisting of “activities that both produce and express in a human being an actualization of potentialities that are specific to the kind of living thing a human being is and that are unique to each human being as an individual”. At one point, Den Uyl and Rasmussen suggest that “an objective account of human flourishing can be characterized as a life of right desire”. They argue that the value of something to a person “is not necessarily a mere matter of “its being desired, wanted, or chosen” because a person “is more than a bundle of passions and desires”. That is still consistent with the view that emotions such as joy and disgust provide important information to help us to decide what we value.

Another possible source of difference is in respect of naturalism. From my reading of The Zombies, it seems likely that Bachynski would be suspicious that Den Uyl and Rasmussen’s teleological naturalism could be seeking to perpetuate ancient errors about human nature that scientific advances have given us reasons to question. I don’t think such suspicions would be well-founded because Den Uyl and Rasmussen present a view of human flourishing that is explicitly individualistic, agent-relative and self-directed.

As I see it, the differences between the philosophical approaches discussed above have parallels in the differences between some psychological therapies. Subjective predictive morality seems to have much in common with rational emotive approaches (REBT) in which people use reasoning to moderate their emotional responses. The template of responsibility seems to a lot in common with an acceptance and commitment approach (ACT) in which people ask themselves how they can actualize their potential in the given situation to act in accordance with their values, whatever their current emotional states might be. Perhaps there may also be parallels in the differences between philosophic approaches of the Stoics and Aristotle.

Subjective predictive morality and the template of responsibility both involve the use of practical reason. The question of which approach is better should probably be viewed as an empirical matter. In your experience, which approach has been of greatest help you in doing the right thing by yourself and others? The correct answer could well be different for different individuals.

In the light of similarities between subjective-predictive morality and the template of individual responsibility, it may come as a surprise to some readers that the authors have vastly different political perspectives. Josh Bachynski describes himself as “a left-leaning liberal democrat” and his book begins with a rant to the effect that he sees “ecological/economic disaster” as “disturbingly likely” because of “wasteful and self-destructive profit structures”. Douglas Den Uyl and Douglas Rasmussen are classical liberals who have proudly given one of the chapters in their book the title: “The entrepreneur as a moral hero”.

I find it impossible to believe that those vast differences in world view stem from differences in their philosophical views about ethics. There may be some differences in the value they place on individual liberty, but they don’t seem to be huge. Their different world views must stem from different perceptions about the way the economic system works and the likelihood of ecological/economic disaster. It is a matter of who is right and who is wrong about relevant aspects of the real world.

For what it is worth, I think there is a very high probability that Josh is wrong, but I acknowledge that we shouldn’t be ignoring low probability outcomes that would be disastrous for humanity. Unfortunately, as I observed in my comments on Nassim Taleb’s book, Skin in the Game, when it comes to consideration of potential Black Swan events that threaten the survival of humanity, the political systems we have inherited do not ensure that political leaders have enough skin in the game for their minds to focus appropriately. Political leaders tend to focus on their survival at the next election rather than on the survival of humanity. It is up to citizens who are concerned about potential Black Swan disasters to initiate appropriate action themselves.

Tuesday, January 29, 2019

Where did I go wrong in writing about the greatest threat to human flourishing?





Chapter 8 of my book Free to Flourish, published in 2012, is entitled “The Greatest Threat to Progress”.
The concluding paragraph of that chapter now seems like an exercise in wishful thinking:
“There is an urgent need for innovations to promote a better balance between the responsibilities and effectiveness of government. The best hope is that, as more people perceive the threats that democracy is facing, they will unite to foster the development of better norms of political behaviour."


Do you perceive that a growing proportion of voters in your nation are using politics opportunistically to obtain benefits for themselves at the expense of others? If so, do you perceive that such behaviour is a threat to the democratic political system? Are you willing to commit to promoting mutual benefits for all citizens in your participation in political discussions and in casting your vote?

If you answered “yes” to all those questions, how much time and energy are you prepared to invest in encouraging others to unite with you in fostering restoration of better norms of political behaviour?

I still think it is commendable for individuals to foster better norms of political behaviour, for example in their activities on social media. However, the idea that citizens might unite to restore better norms of political behaviour now seems excessively optimistic.

Where did I go wrong?

I haven’t changed my view that the failure of democratic governments to cope with their expanding responsibilities is the greatest threat to human progress – the ongoing expansion of opportunities for human flourishing - in coming decades. Democratic failure seems likely to be particularly traumatic for people who have become heavily dependent on government.

My analysis in Chapter 8 of what determines whether democracies can cope still looks sound. The democratic governments that are highly effective in raising revenue and managing provision of services with little corruption (e.g. Sweden) are able to cope with greater responsibilities than can governments that are less effective in performing those functions (e.g. Greece). The ability of democratic governments to cope depends on the balance between responsibilities and effectiveness.

It still seems correct to argue that there is an inherent tendency in democracies for the size of government to expand and for the effectiveness of government to falter. That is a natural consequence of unrestrained politicking by interest groups.

I still think Joseph Schumpeter and Bryan Caplan were correct to argue that citizens are prone to irrational prejudice in political matters. My empirical work helps illustrate the nature of the problem. It shows that the percentage people who seek an expanded role for government is higher among citizens who claim to have little confidence in the civil service and no interest in politics.

My argument that democracy has survived because it has been constrained by constitutions, rule of law and federal systems of government still looks ok. If writing the chapter now I would also emphasise that norms of reciprocity have helped to restrain interest group opportunism in the past.

I think my discussion of changes in democracy brought about by increased citizen involvement through talk shows, social media etc reached the correct conclusion. The changing political environment seems to have provided greater incentives for political parties to become involved in identity politics, and to seen to be doing more to deal with all the problems of modern life:

"The realm of personal responsibility has shrunk as more personal problems have become transformed into social problems. The net result in most high income countries has been an aggravation of the tendency for governments to take on more responsibilities than they can cope with effectively. Yet governments are constantly pressured and tempted to accept additional responsibilities."

That quote from Free to Flourish is followed immediately by the heading: “A basis for hope”. That is the section in which I made a valiant attempt to persuade myself that citizens might unite to foster the development of better norms of political behaviour.

There was nothing wrong with looking for a basis for hope. In retrospect, I was just looking in the wrong place.

Developments over the last few years suggest that there is a basis for hope in two different directions.

First, it looks to me as though the consequences of democratic failure might not be quite as dire as I had envisaged in 2012. At that time it seemed to me as though democratic institutions were coming under threat in some countries of southern Europe because of increased public disorder associated with government debt crises and resistance to government spending restraint. I was concerned about democratic governments being replaced by authoritarian regimes, as has occurred under similar in the past in Europe and Latin America.

What has happened is that democratically elected leaders have remained in place to administer the austerity that was imposed by the European Central Bank. The failure of democratically elected governments to control government spending resulted in external imposition of constraints on fiscal policy. This has been accompanied by a great deal of economic misery in the countries affected, but outcomes have been better than I had expected.  

As discussed in a recent post, I expect that in most OECD countries the failure of democratic governments to restrain the growth of government spending is likely to cause debt servicing to become a more widespread problem in the decades ahead. Perhaps there are grounds for hope that when they see the writing on the wall, a sufficient proportion of voters in most wealthy countries will be supportive of political parties proposing economic reforms, rather than waiting until they are imposed by creditors (or institutions such as the ECB and IMF).

Second, there is now a stronger basis for hope that the faltering institutions of representative government could one day be replaced by superior institutions. I was sceptical about that possibility at the time of writing Free to Flourish. Since then, however, it has become evident that blockchain technology and smart contracts may have potential to enable people to act together to produce some public goods cooperatively without central government involvement. I became enthusiastic about the potential for that to occur a few months ago when reading The Social Singularity, by Max Borders.  I have learned a little more about blockchain and smart contracts since then, and am still enthusiastic about the potential it offers.

A transition from government to cooperative provision of services cannot be expected to prevent the human misery likely to occur as a result of failure to constrain government spending before debt servicing problems become acute. Over the longer term, however, it may become possible for people to enter voluntarily into real social contracts that offer better opportunities for human flourishing than the hypothetical social contracts of political theory.

Perhaps it would have been better for Chapter 8 of Free to Flourish to have concluded by focusing on ways in which individuals might be able to protect themselves and their families from the consequences of democratic failure.

The most obvious way for people to protect themselves and their families is to avoid becoming heavily dependent on government. I acknowledge that for many people that is easier said than done. Few people choose to become heavily dependent on government. Hopefully, safety nets will continue to be available for those who need them most.  Nevertheless, self-reliance and voluntary cooperation for mutual benefit will provide most individuals the best hope for economic security in the years ahead.

Saturday, January 19, 2019

Which of the western democracies will be able to cope with future growth in government health spending?




The chart shows that those OECD countries with the greatest burden of debt servicing a decade ago have subsequently had the lowest growth in government spending. It isn’t hard to understand how that might happen when we think about the consequences of accumulating debt in our personal lives. If we go heavily into debt, a higher proportion of our income must be devoted to servicing debt and less is available for other spending. Our creditors are likely to be reluctant to extend further credit if they become concerned about our ability to service existing debt.

At a national level, there are additional complications including the potential for governments to inflate away the real value of debt denominated in local currency and possible ‘bailouts’ by the IMF and ECU. Nevertheless, governments that become poor credit risks must pay a higher risk premium than is normal for government bonds, in order to obtain access to additional credit.

There is evidence that rising government debt to GDP ratios are associated with lower economic growth, which in turn, leads to lower growth in government revenue. That obviously has potential to further squeeze non-interest government spending. The results of a recent study published by the Dallas Fed (‘Rising Public Debt to GDP Can Harm Economic Growth’, by Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran and Mehdi Raissi) suggest that over the longer term persistent accumulation in debt as a percentage of GDP at an annual rate of 3 percent is eventually associated with annual GDP growth outcomes that are 0.2 to 0.3 percentage points lower on average. To put that in perspective, the average growth rate of OECD countries has been about 1.5 percent per annum over the last decade. Causality could run both ways. Lower GDP growth can lead to higher debt levels, which, in turn, can lead to lower economic growth.

You might be wondering why I think the chart shown above has much relevance for western democracies other than Greece, Italy and Portugal, which had high government debt servicing burdens a decade ago. The relevance stems partly from the continued increase in government debt as a percentage of GDP in most OECD countries over the last decade. On average, net financial liabilities of those countries have risen by around 23 percentage points of GDP over the last decade to around 67% of GDP in 2018.

Those looking for reasons to be complacent can obtain some reassurance from low world interest rates. With interest rates paid by governments lower than the rate of economic growth in most OECD countries, debt servicing is not yet a widespread problem. At current interest rates, it would be possible for the debt to GDP ratio to decline in most OECD countries, even if governments pay interest on their debts by borrowing additional funds.

How likely is it that world interest rates will remain at low levels over the next few decades? In their recent OECD paper, The Long View: Scenarios for the World Economy to 2060, Yvan Guillemette and David Turner suggest that relatively low growth in investment is likely to keep downward pressure on world interest rates, even though population ageing is likely to reduce savings rates. Nevertheless, they note evidence that reversals of the relationship between world interest rates and economic growth rates have been “fairly common” in the past. They warn that a sustained rise in interest rates relative to growth “could eventually make large debt stocks costly to service and unsustainable”.  Their projections suggest that some decline in economic growth rates is likely to occur in most parts of the world over the next 40 years.

My concerns about the potential for debt stocks to become costly to service in many more OECD countries are related to the implications for government spending of the ongoing increase in the proportion of elderly people in the populations of these countries. The implications of demographic change have been much talked about over the last few years, but the magnitude of the likely impact on government spending doesn’t yet seem to be widely appreciated. The study by Guillemette and Turner projects an increase in annual public health and pension spending of about 5 percentage points of GDP for the median OECD country between 2018 and 2060. The bulk of that increase is for public health spending, which is projected to continue to be pushed up by technological change and government health policies, as well as demographic factors.

The methodology used by Guillemette and Turner produces estimates of the increase in the revenue to GDP ratio needed to pay for projected government spending increases without any further increase in debt to GDP ratios. An increase in revenue as a percentage of GDP of 6.5 percentage points of GDP is projected to be required for the median OECD country over the period to 2060. A much larger increase is projected to be required in some countries. For example, the required increase in revenue for the U.S. is projected to be 10 percentage points of GDP.

I think the baseline scenario presented by Guillemette and Turner is too optimistic because their modelling takes no account of the disincentive effects of higher taxation on GDP growth. The possible magnitude of this excess burden of taxation is discussed in an Australian context in an article posted on this blog a few years ago.

Leaving that aside, it seems to me that ongoing increases in debt to GDP ratios - and hence substantial increases in government interest payments as a percentage of GDP - are a much more likely outcome in most OECD countries than tax increases in the years ahead. In those countries where debt servicing isn’t yet a problem, there seems likely to be much less political opposition to further increases in public debt than to tax increases. That suggests to me that over the next few decades most OECD countries are likely to increase their debt to GDP ratios until debt servicing does become a more widespread problem.

Guillemette and Turner present scenarios that would require smaller increases in government revenues than in the baseline (no-change) policy scenario, but those scenarios involve health policy and labour market reforms that have been difficult to achieve in the past. I don’t think we can expect voters to be any more supportive of reforms that could damage their short-term interests than they have been in the past. The best we can hope for is that when they see the writing on the wall, a sufficient proportion of voters in most countries will be supportive of political parties proposing economic reforms, rather than waiting until they are imposed by creditors (or institutions such as the ECB and IMF). In 2013 I wrote something here contrasting the responses of Sweden and Greece to fiscal crises, that illustrates the choices available.

The transition may be traumatic, but it seems likely that technological advances will provide options superior to government provision of many services in coming decades. What I have in mind particularly is the potential for blockchain to enhance opportunities to seek mutual benefit in voluntary cooperative enterprises, as previously discussed on this blog. That may create potential for functions to be transferred from the public sector to cooperative enterprises that can perform the functions more efficiently.

During the next few decades most of the western democracies seem likely to experience ongoing difficulty in coping with the additional government spending required to meet the health needs of the elderly.  The most likely outcome seems to me to be an increase in debt to GDP ratios that will result in more widespread debt servicing problems. It seems inevitable that debt servicing problems will lead to a lower rate of growth in government spending in many OECD countries, possibly accompanied by the transfer of some functions to voluntary cooperative enterprises.

That leaves the difficult question of identifying which of the western democracies are more likely to be able to implement those reforms through normal democratic processes in order to avoid having austerity imposed upon them by creditors and international agencies.

Tuesday, January 8, 2019

Will blockchain enhance our opportunities to seek mutual benefit in cooperative enterprises?



As noted in my review of The Community of Advantage, Robert Sugden suggests that it is appropriate for people to adopt the principle of mutual benfit in participating in voluntary interactions with others. The principle requires individuals to meet normal expectations concerning the consequences of the interaction of those with whom they are interacting, unless their behaviour indicates that they can’t be trusted. It may be seen as an alternative to seeking only personal benefit. It does not preclude seeking to benefit other people in some interactions.

Sugden suggests that the principle of mutual benefit is relevant to market exchange and many other forms of voluntary interaction. I want to focus here on the relevance of the principle to individuals participating in cooperatives and self-governing communities.

Governing the commons

Elinor Ostrom’s research on management of common pool resources illustrates how the principle of mutual benefit has been applied in some cooperative enterprises. In Governing the Commons: The Evolution of Institutions for Collective Action, which I have previously discussed in different contexts here and here, Ostrom suggests that individual participants have been willing to make a contingent self-commitment of the following type:

“I commit myself to follow the set of rules we have devised in all instances except dire emergencies if the rest of those affected make a similar commitment and act accordingly”.

In making such commitments people expect that governance rules will be effective in producing greater joint benefits, and that monitoring (including their own) will protect them against being suckered. Ostrom adds:

Once appropriators have made contingent self-commitments, they are then motivated to monitor other people’s behaviors, at least from time to time, in order to assure themselves that others are following the rules most of the time. Contingent self-commitments and mutual monitoring reinforce one another, especially when appropriators have devised rules that tend to reduce monitoring costs."

That contingent self-commitment strikes me as an adaptation of the principle of mutual benefit to a cooperative enterprise.

Self-governing communities

The principle of mutual benefit also has potential to play a role in democratic government. I am personally willing to commit to participating in the political process in ways that will promote mutual benefits for us all, and to refrain from using politics opportunistically to obtain benefits for myself and my family at the expense of others, provided the behaviour of most other people indicates that they have made a similar commitment.

However, from my observation of national and state politics, it is obvious that few other people behave as though they have made a such a commitment. So why would anyone? Norms of reciprocity have been lost to democracy at a national and state level. Most voters now seem to view the taxing and borrowing powers of government as a common pool resource to be used for their own personal benefit. Rather than improving the opportunities available to the ‘average citizen’, the outcomes of politics often diminish incentives for productive activity and constrain the opportunities available to all (except perhaps those most adept at rent seeking). 

We have learned from Elinor Ostrom that Garret Hardin’s “tragedy of the commons” story – impoverishment through over-use of common property resources – is fiction when boundaries are clearly defined, and participants voluntarily commit to follow appropriate norms of behaviour. Rather than a tragedy of the commons, wealthy societies are now experiencing a tragedy of democracy at a national and state level.

In his book, The Meaning of Democracy and the Vulnerability of Democracies, Vincent Ostrom set as an ideal the re-establishment of self-organizing and self-governing communities in which each person “is first his or her own governor and is then responsible for fashioning mutually productive relationships with others”. Such communities would be characterised by “mutual understandings grounded in common knowledge, agreeable patterns of accountability, and mutual trust”. As discussed in my review of his book, Vincent Ostrom wrote of re-establishment because American society in the 19th century was observed by Alexis de Tocqueville to have many of the characteristics of self-organizing and self-governing communities. They were the kinds of communities in which those seeking mutual benefit were more than likely to be rewarded personally and collectively.

Blockchain technology

Does blockchain technology offer potential for the principle of mutual benefit to be exercised to a greater extent in cooperative enterprises and local communities? A few months ago, while reading The Social Singularity, by Max Borders, I became enthusiastic about the potential for blockchain and smart contracts to enable people to act together to produce some public goods cooperatively without involving central government. Since then, I have learned a little more about blockchain and am still enthusiastic about the potential it offers.

There are good basic explanations of blockchain on sites such Upfolio. For present purposes, all you need to know is that blockchain technology is designed to let people safely undertake transactions without the need for trust, or middlemen to check transactions. It offers a new mechanism to manage opportunistic behaviour once property has been given a digital identity. Smart contracts are self-enforcing. They require no external authority for enforcement because all conditions of the contract are managed on-chain.

In a recent paper, Sinclair Davidson, Primavera De Filippi and Jason Potts make a strong case for blockchain to be viewed as a new form of economic institution. They define a Decentralized Collaborative Organization (DCO) thus:

A DCO is a self-governing organization with the coordination properties of a market, the governance properties of a commons, and the constitutional, legal, and monetary properties of a nation state. It is an organization, but it is not hierarchical. It has the coordination properties of a market through the token systems that coordinate distributed action, but it is not a market because the predominant activity is production, not exchange. And it has the unanimous constitutional properties of a rule-of-law governed nation state, by complicit agreement of all “citizens” who opt-in to such a Decentralized Collaborative Organization, and the automatic execution of the rules of that DCO through smart contract enforcement” (“Blockchains and the economic institutions of capitalism”).

Transactions are likely to occur in blockchains, rather than in firms or markets, when blockchains offer the prospect of reducing transactions costs, e.g. by reducing costs of monitoring managers to ensure that they are acting in the interests of owners. Blockchain organisations can be expected to be carved out of those parts of firms in which they lower transactions costs.

My understanding is that the transfer of transactions to blockchains has the potential to reduce transactions costs in all forms of enterprises – whether they are owned by investors, producers, consumers or governments.

As with markets and firms, blockchain systems offer people the opportunity of being able to get what they want by helping others to get what they want, even though the self-enforcing nature of the blockchain itself means that those who seek mutual benefit will gain no additional advantage by appearing to be trustworthy.

It is worth noting, however, that when using smart contracts to facilitate governance, trust is transferred to the code that defines them, and to those who write the code. That point has been made by David Rozas, Antonio Tenorio-Fornés, Silvia Díaz-Molin and Samer Hassan in a recent paper (“When Ostrom Meets Blockchain: Exploring the Potentials of Blockchain for Commons Governance”)

Who will you trust to write the code? I imagine that smart contracts would be no easier for a layperson to read and understand than the intellectual property agreements that we all have to claim to have read and understood before we can update our computer programs.

It seems to me that some of Henry Hansmann’s comments about the benefits of ownership of enterprises are relevant to the question of whose code is trustworthy. Even though the owners of an enterprise may have limited ability to reduce transactions costs by monitoring managers, ownership provides them with some assurance that managers are not serving interests that may be opposed to their interests (Henry Hansmann, The Ownership of Enterprise, 1996, p 48). Similarly, producers, consumers and investors could each be expected to place most trust in code written by technicians whom they perceive to be serving their respective interests. In many instances, distrust of code will be less of problem and transactions costs will be lower if multi-purpose DCO architecture can be purchased off-the shelf.

Backfeed, an experimental operating system for decentralized organizations, may well turn out to be a good example of blockchain technology which enhances opportunities for those seeking mutual benefit in cooperative endeavours. Its inventors claim that it enables “massive open-source collaboration without central coordination”. Backfeed’s governance system enables a decentralized network of peers to reach consensus about the perceived value of any contribution within the network, and reward it accordingly. Those participants who feel that their contributions are not adequately valued by their peers have an opportunity to fork-off into different communities that might be more appreciative.
Backfeed may or may not succeed but, one way or another, it does seem likely that blockchain will enhance our opportunities to seek mutual benefit in cooperative enterprises.

Tuesday, January 1, 2019

When can economists adopt a contractarian approach to provision of policy advice?


Cartoon by Peter Nicholson: from this site

Robert Sugden explains his use of the term ‘contractarian’ thus:

 “the most fundamental characteristic of this perspective is that a recommendation is addressed to a set of individuals, showing those individuals how they can coordinate their behaviour to achieve mutual benefit."

This post is prompted by my reading of his book, The Community of Advantage, reviewed on this blog a few weeks ago.  

Sugden’s adoption of a contractarian approach was inspired by the work of James Buchanan, in which social arrangements are assessed from the several viewpoints of individual members of society considered as potential parties to a social contract.

Contractarian reasoning implies a baseline of non-agreement from which benefit is measured. For agreement to occur, each party to a potential agreement must recognize that, for all the parties severally, agreement is more beneficial than the status quo.

Contractarian reasoning is readily applied in considering adoption of general rules. When individuals consider adoption of a general rule, a veil of uncertainty about future circumstances often makes it difficult for them to assess where their interests might lie. They become more likely to identify as an “average” citizen than a member of a narrow interest group.

Sugden contrasts the model of contractarian reasoning with two other approaches to normative economics, the model of the benevolent autocrat and the model of public reasoning. He suggests that each of these different approaches to provision of public policy advice, may be appropriate, depending on the circumstances.

When economists employ the benevolent autocrat model, they are providing executive decision-makers with their best judgements about what should be done. In stylized terms, Sugden suggests that they are implicitly saying: “If I were an impartially benevolent autocrat, this is what I would do”. In my experience, when economic advisors employed by governments are striving to be their best selves, they tailor their advice to the values and priorities of the governments they are serving. That doesn’t mean that bureaucrats should attempt to ‘second-guess’ political reactions in providing advice. As Roger Kerr pointed out, soon after leaving the New Zealand Treasury to become executive director of the New Zealand Business Roundtable, attempts to second-guess political reactions “can lead to a narrowing of policy options” and does less than justice to those politicians who are prepared “to tell the story like it is”. Roger explained:

“Economists of all people should be conscious that the performance of bureaucrats in trying to pick winners and losers in the policy-advice market is likely to be as unimpressive as in the industrial domain – and for much the same reasons, namely the lack of information and incentives. Perceived political constraints are not always immutable. They can be shifted by reasoned analysis and well-constructed strategies for policy change, developed by interaction between political managers and technical advisers” (Roger Kerr, ‘Ideas, interests, experience and the economic adviser’, World Economy, 10 (2) June 1987).

The model of public reasoning provides a stylized view of politics as an arena for debate about the public good, where the participants strive to deploy impartial and reasoned argument. By contrast, in the real world, many participants in public debate on economic policy strive to deploy arguments to advance their own interests. Members of the economics profession who participate in such debates have potential to play an important role in ensuring that the merits and demerits of the arguments advanced are subjected to appropriate public scrutiny. That role has been made part of the public policy advisory process in Australia by being embodied in the public inquiry system of the Productivity Commission and its predecessor organisations.

My mention of the ‘economics profession’ brings to mind some provocative comments of Ludwig von Mises, an eminent Austrian economist, about professional economists:

By virtue of their connection with definite parties and pressure groups, eager to acquire special privileges, they become one-sided. They shut their eyes to the remoter consequences of the policies they are advocating. With them nothing counts but the short-run concerns of the group they are serving. The ultimate aim of their efforts is to their clients prosper at the expense of other people. They are intent upon convincing themselves that the fate of mankind coincides with the short-run interests of their group. They try to sell this idea to the public …” (Human Action, fourth revised edition 1996, p 869).

I disagree with Mises description of such conduct as professional. It is unprofessional for economists to sell their souls to interest groups. It doesn’t matter how much knowledge of economics they might have, those who sell their souls are not behaving like members of an honourable profession.

Improving policy transparency

Some people with institutional expertise in public policy development have suggested that the advisory role of economists should be more akin to provision of information than normative advice. Bill Carmichael, a former chairman of the Industries Assistance Commission (a predecessor organisation to Australia’s Productivity Commission) argued for greater efforts to improve ‘policy transparency’ – to improve public understanding of the economic effects of policies that assist particular groups at the expense of the broader community. With reference to trade protection policies, he argued:

“Public availability of information about the effects, on national welfare, of responses which avert adjustment to economic change would improve domestic understanding and narrow the range of disagreement about what policy responses are appropriate. While it would not eliminate resistance to change by those who will be adversely affected, it would enable the grounds for such resistance to be weighed against the community-wide effects” (W B Carmichael, ‘National Interest and International Trade Negotiations’, The World Economy, 9 (4) December 1986).

Bill’s reference to ‘national welfare’ might raise tangential issues in the minds of some readers about the impossibility of aggregating, or averaging, the welfare of different individuals in a meaningful way, and the value judgements that are involved in using per capita GDP, or any other measure of income, as an indicator of welfare. In order to avoid getting bogged down in such issues, I interpret ‘national welfare’ as code for ‘the opportunities available, individually and collectively, to members of the community’.

When economists view their role as providing information publicly on the impact of policy change on opportunities available to various groups in a community, it seems to me that they are adopting something close to a contractarian approach to provision of policy advice. Such information enables the various groups affected to obtain a better understanding of how they are likely to be affected by policy change. Nevertheless, a public policy process of weighing the interests of those adversely affected by change against the interests of broader groups is likely to fall short of the ideal of a contractarian negotiation because the outcomes are unlikely to receive unanimous support. Unanimity is rarely possible since those adversely affected by change often have a strategic interest in withholding their support in the hope of obtaining a better outcome from the process. Perhaps the most that can be hoped for is that by the time policy decisions are made, the process will have persuaded those adversely affected by change that they are unlikely to benefit from lobbying to have the decisions reversed.

Compensation

Robert Sugden suggests that contractarian advisors have a better chance of achieving unanimous support for policy change if they give attention to compensation. When a policy proposal imposes significant harms on a group of individuals, the addition of compensation payments may have potential to make it mutually beneficial.  Unfortunately, Sugden doesn’t discuss the potential for those opposed to change to negotiate strategically in a context where policy outcomes are likely to be strongly influenced by the political muscle of narrow interest groups. When governments seek to negotiate compensation packages with powerful interest groups, they risk putting the rest of the community in a position somewhat akin to seeking to negotiate a settlement with an extortionist. The above cartoon relating to negotiations for deregulation of the Australian sugar industry illustrates the problem. After receiving substantial adjustment assistance to gain acceptance for deregulation about a decade ago, the industry has since been re-regulated.

Nevertheless, it is possible to cite instances where compensation payments do seem to have enabled better policy outcomes to be achieved in contractarian policy negotiations. In an article published a couple of years ago, reviewing literature on agricultural adjustment in Australia, Geoff Edwards, and I expressed the view that “economists advocating adjustment assistance during the 1970s helped shift the focus of agricultural policy in Australia away from price support and input subsidies, leading to greater acceptance of policies to facilitate adjustment rather than to impede it”.  We concluded that “adjustment assistance can sometimes enable less efficient and less equitable forms of assistance to be avoided” (Geoff Edwards and Winton Bates, ‘Antipodean agricultural and resource economics at 60: agricultural adjustment’, Australian Journal of Agricultural and Resource Economics, 60, pp 573-589).

Conclusions

So, when can economists adopt a contractarian approach to provision of public policy advice? My experience leads me to think that a contractarian approach has been used effectively in considering changes in the ‘rules of the game’ relating to economic policy in some countries. During the 1980s and 90’s, some economists in Australia and New Zealand adopted important elements of a contractarian approach in successfully proposing trade liberalisation, privatisation of public enterprises, regulatory reforms and government spending restraint. The focus of analysis was the potential for changes in the ‘rules of the game’ to improve the opportunities generally available to community members. Reports were published with a view to obtaining broad community support for changes in the rules. Many influential opinion leaders were receptive to the view that the rules of the game needed to be changed in order to avert looming economic disaster.

For reasons expressed elsewhere on this blog (for example here and here) I think the democratic political processes of western countries have been corrupted so much over the last few decades that in the event of a future economic crisis it is unlikely to be possible to implement reforms to prevent emergence of widespread economic misery. I doubt whether use of a contractarian approach to policy advice will help much in this context, but such an approach is still more likely to be successful than the alternatives available. The best contractarian advice I can offer to individuals is to reduce your dependence on government as far as possible, and to seek out opportunities for mutually beneficial interactions that do not involve governments.

Over the next few decades, I expect that economists adopting a contractarian approach will play an increasingly important role in helping people to use new technology to negotiate mutually beneficial agreements to obtain what they want without government involvement. I will write more about that later.