What is holding back the growth of economic opportunities in PNG?

 

Why should you care about the economic opportunities available to the people of Papua New Guinea?  Perhaps some readers didn’t even know the location of Papua New Guinea (PNG) before looking at the accompanying map.

There is a lot to be said for the view that the people of PNG should be left to solve their own problems for themselves. However, one of the problems the people of PNG need to solve is how to reduce their dependence on foreign aid. Another problem they need to solve is how to cope with living in a part of the world in which China and the United States are increasingly competing for influence.

Joe Biden, the president of the United States is to visit Port Moresby, the capital of PNG, on May 22 for discussions with Pacific Island Forum members, while on his way to Sydney for a Quad meeting.

My personal interest in the economic opportunities available to people in PNG stems from having worked there as a consultant on economic policy, having visited as a tourist on several occasions, and not least, from having relatives who live there. I maintain an interest in economic and social development in PNG and have written about it on this blog in the past (here, here, here, and here).

In this article I suggest that opportunities for human flourishing in PNG are less promising than recent macroeconomic indicators might suggest. After considering some macro-economic indicators, I briefly discuss population statistics, corruption and profligacy, the law and order problem, poor opportunities for young people, and lack of economic freedom.

Macro-economic indicators

The World Bank’s latest Economic Update paints a fairly rosy picture, with economic growth of 4.5 percent for 2022. Government revenue from mining and petroleum taxes surged (reflecting the impact of Russia’s invasion of Ukraine on natural gas prices). The increased revenue led to a reduction in the fiscal deficit. The magnitude of public debt remains a problem, with interest payments exceeding public spending on both health and education.

Inflation at around 6 percent per annum is not unduly high by comparison with other countries, but rising food prices have made life increasingly difficult for many people in urban areas. Foreign exchange rationing, associated with pegging of the Kina against the USD, has been a hindrance to business.

Population statistics

I mention population statistics mainly because questions that have recently been raised about the reliability of official estimates of the population illustrate the existence of deep-seated problems in public administration. The official estimate of population for 2022 is between 9 and 11 million. However, a leaked UN report has suggested that the population could be as high as 17 million. In this instance, the official estimate seems more likely to be correct. However, the last credible census took place 20 years ago, so no-one really knows the size of the PNG population.

It is widely accepted that the population of PNG has been growing rapidly and that the majority of people are relatively young, probably under 25 years old.

Corruption and profligacy

Corruption is still a major problem in PNG, although there seems to have been some reduction over the last decade. Of the 180 countries included in the Corruption Perceptions Index, only 50 were rated as more corrupt than PNG in 2022.

Profligacy in spending of public money by some government ministers is legendary. For example, in 2018, when PNG hosted the APEC summit, Justin Tkatchenko attracted controversy by purchasing 40 custom-made Maserati luxury cars. He claimed that they would sell like hot cakes after the event. Unfortunately, that didn’t happen. More recently, the same minister again attracted criticism for taking an overly large contingent of people with him, at public expense, to the coronation of King Charles III. It was his intemperate response, labelling critics as “primitive animals”, which eventually led to his resignation from the position of Foreign Minister.

The law-and-order problem

There has been a law-and-order problem is PNG for many years. In 2015 I wrote:

“It is unsafe for tourists to walk around most parts of Port Moresby alone except within the boundaries of major hotels, modern shopping malls and other locations where security is provided. The same applies to local residents. Tourists are more fortunate than most of the locals because they can afford to be transported safely from one secure area to another.”

It is particularly unsafe for women and girls to be in public places. A recent article on DEVPOLICYBLOG by Sharon Banuk, a university student, describes the nature of the problem that she has faced in staying safe.

PNG is ranked second, behind Venezuela, as the country with the highest number of reported crimes per 100,000 people. The ranking of PNG seems to have remained the same since 2017, having risen from 16^th place in 2015.

Poor economic opportunities for young people

The law-and-order problem has been linked to the increasing problem of youth unemployment in an article by Ms. Julian Melpa for the National Research Institute. A recent study found 68 per cent of people aged between 14 to 35 in Port Moresby were unemployed. Even people with tertiary qualifications often find it difficult to obtain employment.

The difficulty of finding employment is illustrated the accompanying photo of job seekers, published with a report in The National newspaper on Feb 6, 2023. The crowd were competing for a few advertised vacancies at a hotel in Port Moresby.

Lack of economic freedom

International agencies tend to label the main deficiencies in economic freedom in countries like PNG as governance problems. That labelling may make their advice more palatable to politicians who have ideological hangups about free markets but it obscures the adverse impact of lack of economic freedom on incentives to invest, innovate and create greater opportunities for human flourishing.

Only 36 of the 176 countries included in the Heritage Foundation’s index of economic freedom have a lower ranking than PNG. A similar picture emerges from the Fraser Institute’s economic freedom ratings. Only 43 of the 165 countries included in the Fraser index have a lower economic freedom rating than PNG.

PNG has particularly low ratings for rule of law (covering property rights, judicial effectiveness, and government integrity) business freedom, and investment freedom.

PNG governments have obviously been having major problems in performing the core functions of government in protecting natural rights of individuals to be safe and have opportunities to flourish. Governments face a formidable challenge in protecting economic freedom in PNG, with most of the population living in village communities and having little contact with the market economy.

However, similar challenges face governments in some other countries. Some African countries which face similar challenges now seem to be performing better than PNG in facilitating growth of economic opportunities.

Postscript

Readers who are interested in a more comprehensive picture of the well-being of people in PNG should visit the relevant country site of The Legatum Prosperity Index. For the purpose of the Legatum index, prosperity is defined broadly as occurring "when all people have the opportunity to thrive by fulfilling their unique potential and playing their part in strengthening their communities and nations".

My article mentions a visit to PNG by Joe Biden, which was scheduled for May 22. Unfortunately, this  visit will not occur as planned because he has given higher priority to political negotiations over the U.S. government debt ceiling.  

Does voting just encourage them?

 

A couple of weeks ago the thought struck me that it was about time I wrote something about the personal ethics of voting. That turned out to be more difficult than I had anticipated.

At first, I thought that I should argue that it is unethical to vote because politics is a dirty business. As a person who often espouses principles of libertarianism and decentralism (see the preceding post on this blog) I see voting as akin to online shopping with known fraudsters – you know that the package of goods they deliver will never be the same as the one you thought you were buying. You should avoid shopping with known fraudsters, and you should avoid voting because whoever you vote for a politician will be elected.

Then I thought of some problems with that analogy. What happens if you really need the goods that the politicians are advertising? Who will mend the potholes in your road if you don’t vote for a politician who promises to get it done? Perhaps you might tell me that you and your neighbours could organise a working bee and do it yourself. Good idea!

However, if you don’t vote, who will restrain government spending? I expect that the more cynical among you will respond that no-one will restrain government spending, irrespective of whether you vote, or who you vote for.

When my reasoning took me to that point, I couldn’t immediately think of an appropriate response. That was when I decided that to bring clarity to my mind I should read again the book, “Don’t Vote – It just encourages the bastards”, by the late, great P J O’Rourke.  My discussion of the book provides only a small sample of the humor and wisdom in it. Despite having been written over 12 years ago, the book contains insightful comments about people who are still on the political stage in America, including Donald Trump. However, that is somewhat tangential to the focus of this article.

You might think that this book would make a strong case against voting, but the old saying about not judging a book by its cover does seems to apply in this instance. O’Rourke suggests that voting does have a purpose: “We vote to throw the bastards out”.  The problem, as I see it, is that when enough voters manage to persuade each other to vote to throw politicians out of office, that doesn’t establish a regime of peaceful human flourishing without any interfering politicians. Voters throw out one lot of politicians by voting another lot into office.

One of the funniest parts of the book is a listing of the personality characteristics of people who are drawn to politics. The first item on the list is “A pervasive pattern of grandiosity”. After listing 9 other characteristics, O’Rourke acknowledges that he has just quoted from the American Psychiatric Association’s diagnostic criteria for narcissistic personality disorder.

Nevertheless, O’Rourke acknowledges that “individual politicians are, after all, individuals like the rest of us and should be judged individually”:

“It would be wrong—very tempting, but wrong—to think of them all as simply bastards”.

He elaborates:

“I’ve spent some time with politicians. I like politicians. I’m friends with politicians from both sides of the aisle. Politicians are fine until they stick their noses into things they don’t understand, such as most things. Then politicians turn into rachet-jawed purveyors of monkey doodle and baked wind.”

Unfortunately, I must agree. The politicians I have met personally have all been likeable. When you meet them, they seem to be pleasant people (perhaps in the same way that the scammers who seek my friendship on Facebook often seem pleasant). A few politicians I have met even had their hearts and heads in the right places. The one who comes to mind most readily is Bert Kelly, an Australian politician whom I have written about previously.

Sometimes when I see a politician performing on TV, I wonder how a nice person like her, or him, ended up like that – I mean, like a bad actor saying things they don't believe. The fact that their future political careers are at stake is no consolation.

Is there something inherently evil about politics? O’Rourke writes:

“Maybe politics is inherently evil. Maybe politics is so evil that anything we do for it, even attempting to supply it with morality, just feeds the beast. I trust this isn’t true but I can’t say the thought doesn’t trouble me.”

That thought troubles me, too.

In his discussion of morality in politics, O’Rourke introduces (on page 88) the Venn diagram, reproduced at the top of this article. He drew the two circles to intersect, implying that there can be such a thing as moral political behavior.

It seems to me to be appropriate to maintain some optimism about democratic political processes. They don’t do much to protect our liberty and pursuit of happiness, but not many of us would freely choose to live under any of the available alternative forms of government. Many people claimed that democracy could not exist as a permanent form of government because it would not take long for citizens to learn that they could vote themselves largesse out of the public treasury. Indeed, that is largely what democratic politics has been about for as long as it has existed. Yet democracy survives! Perhaps democracy’s secret of success has been the existence of sufficient voters and politicians who have been willing to stop playing politics when crises have become imminent.

I often wish that I could be apolitical, but O’Rourke has persuaded me that is not practicable:

“The democratic political process is like the process of our children going through adolescence. There’s not much we can do to improve it and there’s nothing we can do to stop it. We cannot, however, just declare ourselves to be apolitical any more than we can declare ourselves to be “aparental.” Here are the car keys, son. Dad’s stash is in the nightstand drawer. Why don’t you take my ATM card while you’re at it? See you when you’re thirty.”

It certainly appears that there is not much that we, as individuals, can do to change the outcomes of the political process. The chance that your vote will be decisive is miniscule. But people do talk about politics and influence one another about how they will cast their votes. Paradoxically, even those of us who would like to be apolitical can make a difference if we decide that we don’t like the direction that politics is taking and choose to vote.

Before concluding, I should offer a personal explanation about the relevance of the personal ethics of voting to me, as a person who lives in a country where voting is compulsory. It is possible to choose not to vote in Australia without displaying a great deal of courage. It is possible to attend a polling place, chat with your neighbours, eat a “democracy sausage”, exchange greetings with people offering “how to vote” literature, have your name ticked off on the voting roll, be handed voting papers, and still not cast a valid vote. In a secret ballot, no-one knows what you write on the voting papers before you put them into the ballot boxes.

Conclusion

When I began writing this article, I was not sure whether I would end up persuading myself to vote, or to have nothing to do with the political process. P J O’Rourke helped me to persuade myself that there is such a thing as moral political behavior.

Democratic politics is certainly a dirty business. It doesn’t do much to protect liberty or the pursuit of happiness, but most of us would choose to put up with democratic immorality rather than to live under any of the currently available alternative forms of governance. Paradoxically, the survival of democracies may be attributable to the willingness of sufficient numbers of voters and politicians to refrain from playing politics – to stop raiding the public treasury - when crises become imminent.

Although the chances of an individual vote being decisive are miniscule, individuals do influence one another in how they cast their votes. Individuals who don’t like the way politics is heading are more likely to improve outcomes if they choose to vote and encourage other like-minded people to do likewise, rather than choosing to refrain from having anything to do with the political process.

What is the best management metaphor?

 

Did you know that the word ‘metaphor’ is itself a metaphor? I just learnt that the word is a metaphor for carrying something beyond – it combines meta (beyond) and phoro (to carry).

Metaphors are ubiquitous.

The function of metaphors (together with similes and analogies) seems to be to assist conscious comprehension of the real world, and communication about it. It is possible to believe, as I do, that we need metaphors to consciously comprehend and communicate what we experience, while still maintaining that we have direct experience of the real world. In our attempt to understand this process of conscious comprehension and communication it is common to use the metaphor of a mind that creates maps or models of reality. However, if we are wise, we keep reminding ourselves that the map is not the territory, and the model is not reality.

I am focusing here on management metaphors because a few weeks ago I was struck by the thought that the potential for competition between use of sporting and musical metaphors in a workplace could be a source of humour. At the time I was trying to think of a topic for a humorous speech to present at Toastmasters. The speech turned out to be somewhat entertaining rather than uproariously funny, but the process of preparing it led me to think more deeply about management metaphors.

The story

The speech began with Sam Musico, who had just been recruited to the firm, being taken to meet the Boss in his office. As was his custom, the Boss asked him what sport he followed. Sam replied that he didn’t follow any sport, he was interested in music. The Boss then leaned on his bookcase, and looked Sam up and down, before saying:

“That’s OK, Sam. Just keep your eye on the ball. I hope to see you kick lots of goals!”

Asked later if he knew what the Boss was talking about, Sam said:

“I think he means to say that he wants me to stay in tune. And he hopes to see me become a virtuoso!”

Anyhow, to cut the story short, Sam did very well when working in our firm. After a few years, he left us and went off to play in the big league, and became a highly successful manager. One day, when we were discussing who to invite to speak to our annual management seminar, the Boss said: “Sam had become a management maestro. We should invite him.”

So, we asked Sam to talk on the topic: How to become a management maestro.

Sam began his speech by quoting a famous management guru who once wrote: 

A successful manager of a business is like “the conductor of a symphony orchestra, through whose effort, vision and leadership, individual instrumental parts that are so much noise by themselves, become the living whole of music.”

Then Sam told us he had a different view. He read us a poem he had written:

“An orchestra doesn’t need a maestro,

The gestures he makes are just for show.

The players focus on the composer’s score,

But your audience wants you to do much more.

Like a jazz band, the success of your enterprise,

Depends on players learning to improvise.

So, the metaphor I’m here to broach,

Is the ethos of a football coach”.

After the seminar was over, the Boss said: “You know, I think Sam might have learnt a thing or two about management while he worked here!”.

The message

The purpose of my speech was to entertain rather than to argue that the sports coach metaphor is the best management metaphor under all circumstances.

The management guru, whose words are quoted above, was Peter Drucker (The Practice of Management, 1954). I left his name out of the speech because the quote was selective. Drucker went on to say: “But the conductor has the composer’s score: he is only interpreter. The manager is both composer and conductor”.

The orchestra metaphor might be appropriate in some contexts. In proposing his orchestra metaphor, Drucker might have had manufacturing industry in mind. It could be argued that, from a management perspective, a manufacturing firm has more in common with a symphony orchestra than with a jazz band, or football team. This video of dancing robots assembling cars may help make the point.

The actual role of the maestro is another issue lurking in the background. The maestro’s responsibilities extend beyond waving his arms around during an orchestral performance. Henry Mintzberg explains that in his blog post, The maestro myth of managing, which provided some inspiration for Sam’s poem. In some respects, the maestro’s role is similar to that of a football coach.

My bottom line (if I may add a business metaphor to the mix) is that the sports coach metaphor is relevant to many aspects of management. However, to claim that the sports coach metaphor is always better than other management metaphors would be like claiming that a map of Australia is always better than other maps. Just as the best map to use depend on the territory that you are considering, the best management metaphor to use depends on the context that you are considering.

How should Bill Carmichael's transparency project be pursued now?

 

Unfortunately, few readers of this blog will know anything about Bill Carmichael or his transparency project. My main purpose here is therefore to explain who he was and why the question I have posed above is worth considering.

W.B. (Bill) Carmichael died recently at the age of 93. In his obituary,  Gary Banks, former chair of the Australian Productivity Commission, described Bill aptly as “an unsung hero” of the Australian Public Service (APS).

In my experience, most members of the APS who are working on economic policy like to claim that they are contributing to the well-being of the public at large. However, I find it difficult to accept such claims unless the people concerned can demonstrate that they are actively seeking to either undo mistakes that governments have made, or to discourage governments from making more mistakes.

Bill Carmichael made a huge contribution in helping to undo mistakes that Australian governments made over many decades in insulating much of the economy from international competition. His efforts in support of trade liberalization have helped Australians to enjoy greater benefits from trade and greater productivity growth than would otherwise have been possible.

Alf Rattigan’s right-hand man

Bill’s contribution to trade liberalization was largely behind the scenes, helping Alf Rattigan, the former chairman of the Tariff Board, to pursue his reform efforts. Rattigan argued successfully that tariff reform was required because industries that had been given high levels of government assistance to compete with imports were inherently less efficient users of resources than those requiring lower levels of assistance or none at all.

As Gary Banks’ obituary indicates, Bill played an important role in developing strategies, writing the key speeches that Alf Rattigan delivered, dealing with difficult bureaucrats, and engaging with economic journalists who were highly influential in informing politicians and the public about the costs of protection and the benefits of international competition. Bill’s contribution reached its pinnacle in the early 1970s when the Industries Assistance Commission (IAC) was established with an economy-wide mandate to ensure greater transparency to processes for provision of government assistance to all industries.

Bill eventually became chairman of the IAC. However, in my view, his most important contribution was made in helping to establish the organisation and ensure that it had access to the professional economic expertise it required to undertake research and produce quality reports.

Bill’s transparency project

Bill Carmichael’s interest in the transparency of trade policy did not end after he retired from the IAC in 1988. My reference to Bill’s transparency project relates specifically to the efforts he made during his retirement to bring greater transparency to trade negotiations. These efforts were made in collaboration with Greg Cutbush, Malcolm Bosworth, and other economists. The best way to describe that project is to quote some passages from an article in which Bill suggested that Australians are being misled about our trade negotiations and agreements. The article, entitled ‘Trade Policy Lessons from Australia’,  was published by East Asia Forum in 2016.

Bill wrote:

“The goal of trade policy is not limited to increasing export opportunities. Nor is it just about improving trade balances. Rather trade policy is about taking opportunities to improve the economy’s productive base. When assessing a nation’s experience with bilateral trade agreements, this is the test that should be applied.

In each bilateral agreement Australia has completed to date, projections of the potential gains for Australia, based on unimpeded access to all markets of the other country involved, were released prior to negotiations. These studies did not, and could not, project what was actually achieved in the ensuing negotiations. The quite modest outcomes for Australia from those negotiations meant the projected gains conveyed nothing about what was eventually achieved. Yet the projections were still quoted to support the agreements after they were signed, as though they reflected actual outcomes.

This approach to accounting for the outcome of trade agreements has meant that Australia has missed opportunities for productivity gains. So how, given Australia’s recent experiences, can trade policy and negotiations be better conducted in future?

Australia cannot change how it negotiated its agreements with the United States, Japan, South Korea and China. But policymakers can refine their approach to future negotiations. Australia’s trade policy should be guided by a model based on its conduct in the Uruguay Round of trade negotiations. The Uruguay Round confirmed that the domestic decisions needed to secure gains from unilateral liberalisation and those required to secure the full gains available from negotiations have converged.

The negotiations in the Uruguay Round took place at a time when former prime ministers Bob Hawke and Paul Keating were reducing Australia’s barriers to trade unilaterally. Their productivity-enhancing reforms were subsequently offered and accepted in the Uruguay negotiations as Australia’s contribution to global trade reform. Consequently, Australia secured all the gains available from trade negotiations: the major gains in productivity from reducing the barriers protecting less competitive industries, as well as securing greater access to external markets.

This was the kind of win–win outcome negotiators should seek from all trade agreements. It made a substantial contribution to the prosperity Australia has since enjoyed.  …

In future trade negotiations, the Productivity Commission — Australia’s independent policy review institution — could provide a basis for market-opening offers by conducting a public inquiry and reporting to government before negotiations get underway.”

In a subsequent paper, publicly endorsed by a group of trade economists, Bill argued:

“If we are to close the gap between trade diplomacy and economic reality, we need to respect three lessons from experience: first, a major part of our gains from trade agreements depends on what we take to the negotiating table, not what we hope to take away from it ; second, liberalising through trade negotiations cannot be pursued simply as an extension of foreign policy ; and third, … future bilateral agreements should be subject to cost-benefit analysis before ratification.”

How should Bill’s project be pursued?

I raise this question without much optimism that greater transparency of trade policy can be achieved in the short term. There is no more reason to be optimistic that the Department of Foreign Affairs and Trade will suddenly become receptive to ideas that challenge its claims about the benefits of trade agreements it has negotiated than there was to be optimistic that its predecessor, the Department of Trade and Industry, would be receptive in the 1960s to the ideas of Rattigan and Carmichael which challenged the protectionist orthodoxy of that department. Added to this, it is difficult to ignore signs that protectionist sentiment is on the rise again in Australia in the wake of the Covid 19 pandemic and fears that a further deterioration in international relations could lead to disruption of international shipping.

Nevertheless, as Bill might say, none of that should stop us from pursuing longer-term goals.  I hope that some people reading this will feel motivated to think constructively about how Bill Carmichael’s transparency project could be pursued as a longer-term exercise in institutional reform.

How should voluntary organisations make decisions?

 

Should voluntary organisations make decisions by seeking consensus or by majority rule?

In my experience, the usual practice is for members to seek consensus before putting issues to a vote. Formal meeting procedure is normally used to record decisions and meet legal requirements. The steam roller of majority decision-making is available where consensus is not possible but that way of making decisions is usually considered to be a last resort option.

Why is that so? Formal meeting procedure is part of our democratic heritage, so why should we reluctant to use it to make decisions in voluntary organisations? I see two reasons - potential divisiveness, and the potential for members to vote with their feet.

The potential for divisiveness is obvious to anyone who observes parliamentary debates. When people take sides on issues, they seek to demolish the views of their opponents and, in the process, implicitly (or explicitly) cast aspersions on their reasoning abilities. That is not conducive to the mutual respect among members that is required for voluntary organisations to function effectively.

The potential for members to vote with their feet is inherent in the nature of voluntary organisations. If individual members feel that insufficient efforts are being made to accommodate differing interests and views of members, they are free to leave.

These issues must be arising in many voluntary organisations all over the world as groups decide whether to conduct meetings online or in-person during the Omicron wave of COVID19.

Some groups are asking members whether they support a specific proposition (to meet online on in-person). That is equivalent to putting the matter to the vote straight away. People who have no strong preference will agree to either proposition, depending on which one is put to them. Those who have a strong preference opposed to the proposition that is put to members have a good reason to feel that they are being steamrolled.

The alternative I favour is to survey members to ask whether they are willing to attend meetings that are held online, in-person, or both forms of meeting. If a substantial proportion of the membership is willing to attend both forms of meeting, that opens up the possibility for compromises to be made to reach consensus. For example, one way forward would be for some meetings to be held online and some meetings to be held in-person.

How does skin in the game help solve the Black Swan problem?

As I was reading Skin in the Game, Nassim Taleb’s latest book, the thought crossed my mind that the author might classify me as an IYI (intellectual yet idiot). He puts economists in the IYI category along with psychologists.

Taleb writes: 

“Knowing ‘economics’ doesn’t mean knowing anything about economics in the sense of the real activity, rather than the theories … produced by economists”. 

I agree. Some economists know little about the real world.

Despite his low opinion of economists, the author acknowledges that some of the economists I admire, including Friedrich Hayek, Ronald Coase and Elinor Ostrom, had useful insights about the real world. He even suggests that Paul Samuelson made a useful contribution by pointing out that people reveal their preferences in their market behaviour rather than in what they say.

Rather than viewing Nassim Taleb’s offensive anti-intellectualism as evidence that he suffers from SFB, I think economists and psychologists should view it as a clever ploy to attract the attention of their students. I hope Taleb succeeds, and also hope that his book helps students to pose difficult questions for some of their professors.

There is some irony in the fact that Taleb has a low opinion of intellectuals, since Daniel Kahneman views Nassim Taleb as “one of the world’s top intellectuals”. Kahneman, a psychologist, won the Nobel prize for economics, largely for his research on asymmetry in the way people value potential gains and losses in making decisions. Taleb is critical of that research.

The question I raised at the outset was prompted by the following passage:

“Skin in the game helps to solve the Black Swan problem and other matters of uncertainty at the level of both the individual and the collective: what has survived has revealed its robustness to Black Swan events and removing skin in the game disrupts such selection mechanisms. Without skin in the game, we fail to get the Intelligence of Time".

It is worth trying to take that apart to understand the reasoning behind it.

Skin in the game is about more than just sharing in the benefits of an activity. It involves symmetry and reciprocity – paying a penalty if something goes wrong as well as sharing in the rewards for risk taking.

Most people who provide us with goods and services still pursue occupations where they have skin in the game. The problem is that many of the people who don’t have skin in the game - for example, politicians, bureaucrats, bankers and university professors - occupy positions where their mistakes can have far-reaching consequences.

The Black Swan problem arises when we ignore extreme events – potential disasters - that occur infrequently. Taleb’s main point is that there are some risks that we can’t afford to take even though there is a low probability that they will occur at any point in time. His book, The Black Swan, was published in 2007 and made him famous following the 2008 financial crisis. Taleb contends that banks and trading firms are vulnerable to hazardous Black Swan events. The bank blow-ups occurred in 2008 as a result of hidden and asymmetric risks in the financial system.

At the level of the individual, skin in the game helps to solve the Black Swan problem because it helps people to focus on their need to survive in order to succeed. Taleb argues for profiting from risk-taking that doesn’t threaten survival. He points out that Warren Buffet made his billions by picking opportunities that passed a high threshold, rather than by applying cost benefit analysis.

At the collective level, skin in the game helps to solve the Black Swan problem because it requires decentralization of decision-making. Under a decentralized system the costs of the mistakes made by individuals are borne by those individuals, without necessarily affecting other participants. Centralized systems are exposed to the Black Swan problem because they can only be run by people who are not directly exposed to the cost of errors.

What has survived has revealed its robustness to Black Swan events. That applies to ideas, institutions, technologies, political systems, procedures, intellectual productions, car models, scientific theories etc. The only effective judge of things is time, because time is equivalent to disorder. The longer things survive, the more likely it is that they will have survived Black Swan events.

Removal of skin in the game disrupts selection mechanisms. When people have skin in the game they are less likely to reject ideas that have withstood the test of time in favour of new ideas that that have been published in peer-reviewed journals. A lot of findings published in peer reviewed journals fail subsequent replication tests.  

Without skin in the game, we fail to get the Intelligence of Time. Time removes the fragile and keeps the robust. The life expectancy of the nonfragile lengthens with time. Taleb writes:

The only definition of rationality that I’ve found that is practically, empirically, and mathematically rigorous is the following: what is rational is that which allows for survival."

I think Nassim Taleb is correct in his view that skin in the game helps to solve the Black Swan problem. Unfortunately, however, when it is 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 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.

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.

How can we overcome confirmation bias?

This guest post by Leah Goldrick was originally published on her excellent blog, Common Sense Ethics. Leah acknowledges that confirmation bias is linked to pattern recognition, which serves a useful purpose. The confirmation bias problem arises when we seek out information to confirm what we believe and ignore everything else.

The documentary that Leah refers to in her first paragraph is worth watching. It illustrates how easy it was for a group of people who did not appear likely to be particularly gullible to acquire an unshakeable belief that the end of the world would occur on 21 May 2011.

Why is it so hard to for us the change our beliefs or to get other people to change their minds? A new documentary film Right Between Your Ears, examines the science and psychology of how people form convictions. According to producer Kris De Meyer, a neuroscientist, certain aspects of human psychology make it very hard for us to be objective or unbiased.

People usually form beliefs by accepting what they've been told by someone they trust: parents, teachers, media and so on. Our beliefs can change when we learn new things. But when we become convinced of something, it is similar to a religious belief in the way our brain operates. We may react with anger when challenged. This human tendency often leads us to seek out information which confirms what we already believe and ignore everything else - it's a cognitive bias actually - called confirmation bias.

It seems obvious why confirmation bias can be a problem - it can prevent us making good decisions. It makes us rigid thinkers. Someone can easily fool us by simply appealing to our established belief systems. The good news is that there are some practical strategies to overcome this natural human shortsightedness that I'll let you in on at the end of the post.
​

How We Form Beliefs

Let me back up for just a second. What led me to write this post (besides my abiding interest in critical thinking) was the Shakespeare authorship course I recently took online via the University of London. Along with being just about the most interesting topic ever, the instructor, Dr. Ros Barber, focused the first lesson on the science of how beliefs are formed, cognitive bias, and how belief systems can crystallize into orthodoxies which may not be questioned without ridicule.

Dr. Barber interviews ​Kris De Meyer, a neuroscientist and documentary film maker currently working at the Department of Neuroimaging at King's Institute for Psychiatry, Psychology and Neuroscience, about how we form our beliefs in the first place.

According to De Meyer, we form fairly rigid belief systems or perceptual frameworks out of necessity as we go through life in order to handle the information continually coming at us. Usually, our perceptual framework serves us quite well. But it can also be a major intellectual handicap when we are confronted with information which undercuts our established belief systems. De Meyer states:

"But beliefs become strongly held and particularly if we build our identity around them, they begin to act as perception filters. Indeed, it might be useful to think of a belief as a perceptual framework, something that helps us make sense of the world around us." 

Confirmation Bias

The problem with our perceptions being filtered through our belief structures is that it can create something called confirmation bias. We tend to interpret new information in a way that strengthens our preexisting beliefs. ​​When we are confronted with information which conflicts with our beliefs, we will often find ways to discard it. We also tend to search out information which confirms our beliefs rather than looking for more neutral or contradictory information.

For our general functioning in the world, we must keep our perceptual frameworks fairly rigid. So even when our brain finds data that is anomalous, confirmation bias can lead us to explain it away as an error. Experiments in the 1960s hinted that people are biased towards their beliefs. Later experiments focused on our natural tendency to test ideas in a one-sided way, focusing on one possibility and ignoring alternatives.

Anyone can suffer from confirmation bias: teachers, Shakespeare scholars, even scientists. In one study on confirmation bias involving scientists, over half of laboratory experimental results were inconsistent with the scientists' original hypotheses. In these cases, the scientists were reluctant to consider that data as valid. The anomalous finding was usually classified as a mistake. Even after scientists had produced an anomaly more than once, they would often choose not to follow up.

When we perceive, we construct systems of beliefs inside of our heads like a lawyer trying to prove a case. The more strongly we are engaged in a topic, the more likely we are to dismiss contradictory evidence. Basically on both sides of any debate, we have a system beliefs that tells us that we are right and the other side is wrong.

​According to Ros Barber, "[When any conflict happens] it's been described as "a dialog of the deaf" because people can't hear the other point of view. They just think it's totally invalid." 

Cognitive Dissonance

So why does confirmation bias happen? It might be because of wishful thinking, or because of our limited mental capacity to process information. It could also have to do with a failure to imagine alternate possibilities (more on this later). Another explanation for confirmation bias is that people are afraid of being wrong, and fail to ask the right probing questions about their beliefs, instead reasoning from their already held conclusions.

When we are confronted with contradictory evidence, it causes something called cognitive dissonance - mental distress caused by information that doesn't fit in with our current understanding of the world. Cognitive dissonance is uncomfortable and people will sometimes go to great lengths to avoid it.

​Cognitive dissonance was first theorized by psychologist Leon Festinger who argued that we have an inner drive to hold consistent beliefs. Holding inconsistent beliefs causes us to feel disharmonious. Festinger studied a cult whose members believed that the earth was going to be destroyed by a flood. He investigated what happened to the cult members, especially the committed ones who had given up their homes and jobs, after the flood did not happen on the proposed date.

The most committed cult members were more likely to rationalize their original beliefs (confirmation bias) even after experiencing cognitive dissonance in the face of the flood not happening. Loosely affiliated members were much more likely to admit that they had simply made a mistake and to move on. The more attached we are to a belief, the harder it is to change it. 
​

How To Think (and Debate) With Less Bias

​So what are the best strategies to overcome our natural human shortsightedness and bias? The first is to keep emotional distance in reasoning, and the second is to consider the other side (or sides) of any debate, a technique called the "consider the opposite," strategy.

1. Keep Emotional Distance When Reasoning

Given the natural human tendency towards confirmation bias, it is important to be at least somewhat dispassionate when reasoning and debating. I like to call this emotional distance. Emotional distance is just as much a character trait of a reasonable person as it is a strategy for handling cognitive biases.

Confirmation bias may in part stem from our desire not to be wrong, so by keeping emotional distance, you essentially are willing admit to yourself that you could have some things wrong. Don't be too attached to any particular piece of evidence. In any difficult debate we all may get certain parts of the puzzle incorrect.

Look out for signs of confirmation bias in yourself. ​ Remember that the more strongly held your beliefs are, the more likely you are to refuse to consider alternative evidence - like the cult members who invested everything in their belief in an impending flood.

Emotional distance also involves viewing debate as dialog rather than an angry fight. If your ego gets too caught up defending a certain belief, you are more likely to get angry when contradicted. Angry people usually double down and become more extreme on their point of view rather than considering someone else's. Keep in mind that politeness might actually be the secret weapon for getting someone to overcome their bias. Kris De Meyer suggests:

"When we do feel a pang of anger at being challenged, rather than responding very quickly we can step away from it for maybe a few hours or a day, think carefully about where that person is coming from, and then see if we can give them more constructive comments that then doesn't spark his or her angry response. Because it's those feelings of anger at being misunderstood and of being misrepresented that really are the ones that drive us towards more certainty. And if the conversation becomes amicable, it can be heated and passionate without being acrimonious and negative. The way to use [your knowledge of confirmation bias] is to question yourself and to reflect on your own assumptions and your own interactions with other people."

Maintaining emotional distance is powerful, but it may not be enough to overcome biases, which is why we should also use this second strategy:

2. Consider the Opposite

Confirmation bias may in part be the result of our limited mental capacity to imagine alternative scenarios. The consider the opposite strategy helps us to envision how else things might be. In a recent study, this technique was proven to work better than just attempting to remain objective.

Considering the opposite in everyday practice works like this: you take a look at a set of facts about something. Generally, you would try to discern whether the facts support your belief or not. If you are experiencing confirmation bias, you would probably imagine that the facts do actually support your belief. But when you force yourself to consider the opposite, you instead imagine that the facts point the opposite way, disproving your belief. This helps you to imagine alternatives to what you already believe.

The consider the opposite strategy works particularly well with diametrically opposed beliefs, but always bear in mind that there may be more than one alternate possibility. Be willing to entertain various possibilities rather than falling victim to false dichotomies. 

How can people become more open to critical evaluation of their own views?

It might not be obvious to everyone that it is desirable for people to be open to critical examination of their own views. The process of critical examination takes time and energy and can be unsettling. If it leads a person to change his or her view, relatives and friends might disapprove.

What is the problem with immunity to change? One problem is failure to actualize potential. In the first chapter of their book, Immunity to Change: How to overcome it and unlock the potential in yourself and your organisation, Robert Kegan and Lisa Laskow Lahey provide evidence suggesting that immunity to change of attitude tends to hinder mental development of adults. Survey data indicates that there is potential for mental development to continue throughout adulthood, at least until old age. Development tends to occur unevenly, with periods of change followed by periods of stability.

Researchers have identified three adult plateaus of development corresponding to different meaning systems that people use to make sense of the world and operate within it:

·         A socialized mind enables an individual to be a faithful follower and team player.

·         A self-authoring mind can generate an internal belief system/ ideology/ personal code and is self-directed. It places priority on receiving the information it has sought and creates a filter which determines what information it allows to come through.

·         A self-transforming mind can step back from and reflect on the limits of personal ideology and systems of self-organisation. Individuals at this level of mental development value the filter they have created to separate the wheat from the chaff, but they also value information that may alert them to limits of their filter.

Individuals at each successive level of mental development can perform the mental functions of the prior level as well as additional functions. A person who had attained the self-transforming stage of development can be self-authoring when required to develop and execute a plan of action, and can also be a team player when that is appropriate.

Studies involving several hundred participants suggest that most people (58% of respondents) have not attained a self-authoring level of development. Of the remainder, only a tiny percentage have self-transforming minds. The studies probably exaggerate the level of personal development of most of the population because they were skewed towards middle-class professionals.

This research seems highly relevant to questions considered recently on this blog about echo chambers in the social media and the reluctance of many people to listen to opposing viewpoints, as well as to consideration of the ingredients of good leadership. The vast majority of those who aspire to be able to reflect objectively on the limitations of their views of how the world works are likely to be biased against seeking information that might challenge those views.

As the title of the book suggests, Immunity to Change is about overcoming the psychological resistance that that prevent us from making the changes we want to make in our own lives and within organisations. The book is replete with examples, drawn from the extensive consulting experience of the authors, to illustrate how people can identify and deal with hidden fears that prevent them from making the changes they want to make. Most readers of this book are probably aspiring to leadership positions or attempting to change organisations, but much of the material in it is relevant to anyone who is attempting to make changes in their lives.

I will focus here on the approach to overcoming internal resistance that the book might suggest for a person who wants to become more open to critical evaluation of his or her own views on issues that have become highly politicized. I will provide my own responses to the series of questions suggested by the authors, rather than speculate about how others might respond. Hopefully my introspection will have some relevant to others.

1.       What is your improvement goal?

As already noted, I want to be more open to critical evaluation of my views on issues that have become politicised. My reason for doing this is that I suspect the opposing side on such issues might sometimes have genuine concerns that are worth considering.

2.       What are you doing/ not doing instead?

I rarely read opinion pieces by commentators whom I consider likely to be opposed to my views on controversial issues. I have sometimes expressed the view that I need to be paid to read such commentary.

When friends and relatives challenge my views on controversial issues, my response is often overly defensive. I begin such conversations with the intention of ensuring I understand the opposing point of view, but I am easily diverted to point scoring.

3.       What hidden competing commitments prevent achievement of your improvement goal?

When I imagine myself reading commentary that is opposed to my views I feel that I am likely to be bored by a recitation of views that I have previously rejected. It seems like a waste of time. However, I must also acknowledge fear that reading such commentary could be unsettling. The authors of these pieces often do their best to appeal to the emotions of their readers. I acknowledge some concern that I might need to modify my views if I start feeling sympathy for the plight of victims of policies that I support. The hidden commitments underlying those concerns are not feeling unsettled and not being swayed by appeals to emotion.

My defensiveness in conversations on controversial topics with people with opposing viewpoints seems to be related to the tendency for such conversations to degenerate into point-scoring exercises in which participants attempt to attach labels to each other. I am concerned that I might respond in kind if conversation partners disrespect me. The hidden commitments are to avoid being labelled and to avoid losing self-control.

4.       What are the big assumptions that underlie this immune system?

I accept that the hidden commitments identified above act as an immune system to prevent progress toward my improvement goal. I can see why I am unlikely to be able to make much progress merely by forcing myself to read commentary that is opposed to my views, or by telling myself not to become defensive when discussing controversial issues. The hidden commitments identified above have been acting as an anxiety reduction system.

 The authors of Immunity to Change explain the concept of “big assumption” as follows:

"We use the concept of big assumptions to signal that there are some ways we understand ourselves and the world (and the relationship between the world and ourselves) that we do not see as mental constructions. Rather, we see them as truths, incontrovertible facts, accurate representations of how we and the world are.

These constructions of reality are actually assumptions; they may well be true, but they also may not be. When we treat an assumption as if it is a truth, we have made it what we call a big assumption."

The big assumptions underlying the hidden commitments I have identified seem to be related to self-trust. There is an assumption that I can’t trust myself to feel sympathy for the plight of some unfortunate people without losing my mental faculties. There is also an assumption that I can’t trust myself not to lose control if I am disrespected.

Identifying those big assumptions was an “aha” moment for me. The absurdity of the assumptions seemed obvious as soon as they were identified.

However, Kegan and Lahey emphasize that the process of overcoming immunity to change does not end with identifying big assumptions. The next step is to design tests capable of disconfirming the big assumptions. The tests involve changes in usual conduct that generate information that we can reflect upon to challenge the big assumptions. The authors emphasize that the purpose of running the tests is not to see whether performance has improved, but to generate information to provide a learning experience.

This is where my story ends. In writing this article I have ‘tied myself to the mast’ with a public commitment to test my big assumptions. However, it could be counterproductive to disclose what tests I have in mind, and I’m certainly not going to promise to write a sequel to tell you what happens.

Even if it achieves nothing more, this exercise of identifying big assumptions has made me more appreciative that the difficulty other people have in being open to critical evaluation of their own views could well be attributable to deep-seated fears.

I recommend Immunity to Change to anyone struggling to understand why they are having difficulty in making the changes they want to make in their own behaviours.