In arguing that we are born to be good, psychologist Dacher Keltner has in mind a particular definition of what it means to be good. In his book “Born to be Good” he views goodness as synonymous with the Confucian concept of jen: a person of jen “brings the good things in others to completion and does not bring the bad things of others to completion” (p. 4).
The author’s aim is to enable the reader to see human behavior in a new light. He presents evidence supporting his view that we have been wired by seven million years of hominid evolution to practice emotions like compassion, gratitude, amusement and wonder that are associated with bringing the good in others to completion. “We have neuropeptides that enable trust and devotion, and a branch of nerves that connects the brain, the voice and the heart that enables caretaking. Our capacity for awe has given us art, a sense of the sacred. We have genes, neurotransmitters, and regions of the brain that serve these emotions as we serve others. These emotions are the substance of jen” (p 269).
Keltner does not deny that we are also wired to pursue self-interest. His claim is that this is “half the story” (p 11). His research suggests that rather than just one reward circuit in the brain that is activated in response to any kind of pleasure, different neural circuits are involved in different kinds of positive emotions such as sensory pleasure, pride, compassion and awe (pp 265-267). He suggests that in our search for happiness many of us have tended to focus excessively on sensory pleasure and to lose sight of the emotions associated with, for example, “subtle cues of embarrassment, playful vocalisations, the visceral feelings of compassion, the sense of gratitude in another’s touch to your shoulder” (p 15).
The main reservation I have about the book relates to the author’s tendency to equate self-interest solely with pursuit of sensory pleasure and to contrast this with the other positive emotions associated with bringing good things in others to completion. At one point he writes: “Ironically enough, compassion may be a prerequisite to the pursuit of self-interested happiness” (p 249). It seems to me that this is only ironical if one takes a very narrow view of self-interest – a much narrower view than that taken, for example, by neoclassical economists who incorporate the happiness of others in the utility functions they use in their theoretical work.
As discussed in an earlier post, it seems to me that there is a lot of good involved in self-actualization that does not necessarily involve bringing the good in others to completion. Being good also involves such things as the human capacity to distinguish between wanting and liking and to defer gratification that are also the result of evolution. In addition, Gregory Burns seems to me to make a strong case that evolution has also wired humans to meet personal challenges: “The sense of satisfaction after you’ve successfully handled unexpected tasks or sought out unfamiliar, physically and emotionally demanding activities is your brain’s signal that you’re doing what nature designed you to do” (“Satisfaction”, p xiv).
The book omits what seems to me to be the strongest argument that can be advanced in favour of the view that humans have evolved to be good, namely the evolution of the concept of self. As philosopher Daniel Dennett has pointed out, evolutionary processes have supported the evolution of minds powerful enough to capture the reasons for things and make them our reasons: “ We are not perfectly rational agents, but the social arena we live in sustains processes of dynamic interaction that both require and permit the renewal of our reasons, making us into agents that can take responsibility for our acts” (“Freedom Evolves”, p 287).
Despite these reservations and my critical comments in earlier posts about Dacher Keltner’s portrayal of Adam Smith’s views and his apparent attempt to argue that social cooperation cannot emerge from self-interest, I found this book to be highly informative. I am not competent to judge the quality of the author’s research findings, but he is obviously an authority in his field. The book makes a strong case that humans have been wired by evolution to experience positive emotions when they seek to bring the good in others to completion.
Tuesday, April 28, 2009
Saturday, April 25, 2009
Does tit-for-tat prioritize the gains of others over those of the self?
The essential feature of a tit-for-tat strategy is reciprocity – rewarding cooperation and punishing defection. In his book, “Born to be Good”, Dacher Keltner claims that “tit-for-tat instantiates the principle of cost-benefit reversal”. He argues that a set of mechanisms that reverse the cost-benefit analysis of giving is built into the human organism. He suggests: “These mechanisms might prioritize the gains of others over those of the self, and transform others’ gains into one’s own” (p. 71).
Keltner bases his claim that tit-for-tat involved cost-benefit reversal on three observations:
- When cooperation is the default setting, tit-for-tat favours mutually beneficial cooperation.
- Tit-for-tat is not envious – the strategy doesn’t change as a partner’s benefits mount.
- Tit-for-tat is a forgiving strategy – cooperation is resumed following the first cooperative action of a defector.
It seems to me, however, that none of these features of tit-for-tat necessarily involves prioritizing the gains of others over those of the self. It is possible for a tit-for-tat strategy to be adopted purely out of self interest. Robert Axelrod recognised this in “The Evolution of Cooperation” (p 173-4) , in his discussion of the experiments that Keltner uses as the basis for his discussion of tit-for-tat.
A tit-for-tat strategy based on self-interest provides a plausible explanation for the emergence of cooperation among strangers who have no reason to trust each other. For example, consider a situation where strangers are considering the initiation of trade in the absence of third party (e.g. government) protection against opportunistic use of force and fraud. From the perspective of each party the possible outcomes would be: a) a potential gain from trade; b) a potential loss resulting from opportunism by the other party – i.e. theft of the goods offered for trade; c) a potential gain from opportunism – theft of goods offered for trade by the other party; d) a stand-off.
If trade occurs in this situation, is it likely to be because one party places higher priority on the potential gains to the other party than on the potential gains to the self? I think it is more likely to occur because both parties consider that, in view of the likely responses of each other, they have more to gain from a series of mutually beneficial exchanges that they would gain from attempting to steal from each other.
If both parties adopt a consistent tit-for-tat strategy, then trade is likely to continue and they may come to trust each other. It is possible to envisage that the relationship could even develop to a point where they each gain some satisfaction from the benefit that they bestow upon each other through the exchange of goods. But this trust and affection is the outgrowth of mutually beneficial cooperation rather than a pre-condition for it.
I don’t understand why Dacher Keltner seeks to denigrate those who see self interest as a motivating force (see: How high was Adam Smith’s jen ratio?) and seeks to eliminate self-interest from the evolution of social cooperation. Perhaps he identifies the self-interest motive with opportunism, greed and selfishness to such an extent that he cannot see that it is good to desire to avoid being a burden on others, to help family members and other loved ones, and to accumulate the means to contribute generously to worthwhile causes. Perhaps he is uncomfortable with the idea that an invisible hand involved in voluntary exchange processes could enable people to benefit from cooperation with each other without actually intending to benefit each other.
Wednesday, April 15, 2009
How high was Adam Smith's jen ratio?
Jen is apparently the central idea in the teachings of Confucius. In his book, “Born to be Good”, Dacher Keltner tells us that the numerator in the jen ratio is actions that bring the good in others to completion and the denominator is actions that bring the bad in others to completion. For example, if a writer misrepresents the views of others he would tend to lower the jen ratio.
I have been looking forward to reading “Born to be Good”. I have previously considered on this blog the question of whether the inner nature of humans is good and I want to explore this topic further.
However, after reading a few pages I began to wonder whether reading this book will do much to improve my jen ratio. The problem is that it seems to me that Keltner’s discussion of the views of Adam Smith is uncharitable. Keltner claims that Smith portrayed Homo economicus as some kind of ideal of human evolution who was designed to maximize self-interest in the form of experienced pleasure and advances in advances in material wealth ( p 8).
Smith had a realistic view of human nature. I don’t think he saw humans as rational maximisers of anything, but it is true that he did make some famous observations about self interest as a motivating force. Smith stated: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” (“Wealth of Nations”, I.ii.2). It seems to me that this is an observation about the way the world works rather than a statement advocating selfishness.
I think the closest Smith got to advocating selfishness is his claim that by pursuing his own interests an individual frequently promotes that of society: “I have never known much good done by those who affected to trade for the publick good” (W.N., IV, ii, 9).
It is arguable that Smith was being too cynical at that point. It is possible to think of examples of a great deal of good being done by not-for-profit organisations e.g. in running schools and hospitals.
Anyone who had an interest in presenting a fair picture of Smith’s views of human nature, however, would also take account of the views he presented in “The Theory of Moral Sentiments”. For example: “The virtues of prudence, justice, and beneficence, have no tendency to produce any but the most agreeable effects. ... In our approbation of all these virtues , our sense of their agreeable effects , of their utility, either to the person who exercises them , or to some other persons, joins with our sense of their propriety, and constitutes always a considerable, frequently the greater part of that approbation” (TMS IV, iii, 59).
It is not fair to portray Adam Smith as promoting an “ideology about human nature ... with a jen ratio trending toward zero”.
I have been looking forward to reading “Born to be Good”. I have previously considered on this blog the question of whether the inner nature of humans is good and I want to explore this topic further.
However, after reading a few pages I began to wonder whether reading this book will do much to improve my jen ratio. The problem is that it seems to me that Keltner’s discussion of the views of Adam Smith is uncharitable. Keltner claims that Smith portrayed Homo economicus as some kind of ideal of human evolution who was designed to maximize self-interest in the form of experienced pleasure and advances in advances in material wealth ( p 8).
Smith had a realistic view of human nature. I don’t think he saw humans as rational maximisers of anything, but it is true that he did make some famous observations about self interest as a motivating force. Smith stated: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” (“Wealth of Nations”, I.ii.2). It seems to me that this is an observation about the way the world works rather than a statement advocating selfishness.
I think the closest Smith got to advocating selfishness is his claim that by pursuing his own interests an individual frequently promotes that of society: “I have never known much good done by those who affected to trade for the publick good” (W.N., IV, ii, 9).
It is arguable that Smith was being too cynical at that point. It is possible to think of examples of a great deal of good being done by not-for-profit organisations e.g. in running schools and hospitals.
Anyone who had an interest in presenting a fair picture of Smith’s views of human nature, however, would also take account of the views he presented in “The Theory of Moral Sentiments”. For example: “The virtues of prudence, justice, and beneficence, have no tendency to produce any but the most agreeable effects. ... In our approbation of all these virtues , our sense of their agreeable effects , of their utility, either to the person who exercises them , or to some other persons, joins with our sense of their propriety, and constitutes always a considerable, frequently the greater part of that approbation” (TMS IV, iii, 59).
It is not fair to portray Adam Smith as promoting an “ideology about human nature ... with a jen ratio trending toward zero”.
Monday, April 13, 2009
What is the role of animal spirits in the political sphere in producing economic crises?
“Conventional economic theories exclude the changing thought patterns and modes of doing business that bring on a crisis. They even exclude the loss of trust and confidence. They exclude the sense of fairness that inhibits the wage and price flexibility that could possibly stabilize an economy. They exclude the role of corruption and the sale of bad products in booms, and the role of their revelation when the bubbles burst. They also exclude the role of stories that interpret the economy. All of these exclusions from conventional explanations of how the economy behaves were responsible for the suspension of disbelief that led up to the current crisis” (George Akerlof and Robert Shiller, “Animal Spirits”, 2009, p 167).
I don’t have many problems with the argument of Akerlof and Shiller (A & S) that animal spirits play an important role in economic crises. I think they attempt to carry their argument too far; it seems to me that the economic system tends to be self-equilibrating despite notions of fairness and money illusion. But I accept that when there is high leverage in the system (i.e. high levels of debt relative to equity) it is a lot more vulnerable to economic crises than when there is low leverage. I also accept that changes in confidence help explain why leverage fluctuates. Stories that interpret the economy seem to have a big role in determining confidence. A few years ago it was common to hear the story that the risks involved in lending on housing were minimal – even “as safe as houses”. Now the story we hear is that investment in government-backed securities offers “a safe harbour”.
The main problem I have with this book is its failure to recognize that animal spirits also play a role in politics. In fact, as Arnold Kling and Clive Crook have pointed out, A & S fail to mention public choice theory. Instead, their model of government is what Kling describes as the “shockingly naive metaphor of a parent”. In their preface, A & S write:
“The proper role of the government, like the proper role of the advice-book parent, is to...give full rein to the creativity of capitalism. But it should also countervail the excesses that occur because of our animal spirits.”
Crook writes: “This is an unappealing analogy. I would sooner take up arms against a government that saw me as a child than vote for it.”
It seems to me that the most important animal spirit that Akerlof and Shiller fail to mention is the anti-market bias, stemming from an excessive desire for security and stability, which comes to the surface whenever a financial crisis threatens to occur. Rather than allowing the normal process of liquidation to occur when large financial institutions fail, the animal spirits that rule the political domain say that everything must be done to “keep the first domino from falling” (as A & S advocate on page 85).
When viewed in isolation, the bail-out of each institution seems like cheap insurance to government policy advisors. The problem is that a series of bail-outs tends to generate excessive confidence in central banks and governments. If you are lending money to a company that you expect to be backed by government, then you are not going to be too worried if the salary packages of the executives of that company give them incentives to take excessive risks. Creditors might not be surprised if the company gets into financial difficulty, but they will be shocked if it isn’t rescued by government.
From the A & S perspective the current crisis occurred not because parents encouraged the kids to act unwisely by incurring gambling debts , but because the parents decided to let one of their wayward children file for bankruptcy. That unsettled the creditors, so the parents lost their nerve and decided to pay all the kids’ debts. At this stage the lesson that the parents seem to have learned from this is that the kids need more parental supervision to make sure that their animal spirits don’t ever get out of control again. How will the kids respond? Will they leave home to get away from this parental supervision? Or will their animal spirits lead them to pretend to be good for a while in order to re-establish cosy relationships with their parents?
I don’t have many problems with the argument of Akerlof and Shiller (A & S) that animal spirits play an important role in economic crises. I think they attempt to carry their argument too far; it seems to me that the economic system tends to be self-equilibrating despite notions of fairness and money illusion. But I accept that when there is high leverage in the system (i.e. high levels of debt relative to equity) it is a lot more vulnerable to economic crises than when there is low leverage. I also accept that changes in confidence help explain why leverage fluctuates. Stories that interpret the economy seem to have a big role in determining confidence. A few years ago it was common to hear the story that the risks involved in lending on housing were minimal – even “as safe as houses”. Now the story we hear is that investment in government-backed securities offers “a safe harbour”.
The main problem I have with this book is its failure to recognize that animal spirits also play a role in politics. In fact, as Arnold Kling and Clive Crook have pointed out, A & S fail to mention public choice theory. Instead, their model of government is what Kling describes as the “shockingly naive metaphor of a parent”. In their preface, A & S write:
“The proper role of the government, like the proper role of the advice-book parent, is to...give full rein to the creativity of capitalism. But it should also countervail the excesses that occur because of our animal spirits.”
Crook writes: “This is an unappealing analogy. I would sooner take up arms against a government that saw me as a child than vote for it.”
It seems to me that the most important animal spirit that Akerlof and Shiller fail to mention is the anti-market bias, stemming from an excessive desire for security and stability, which comes to the surface whenever a financial crisis threatens to occur. Rather than allowing the normal process of liquidation to occur when large financial institutions fail, the animal spirits that rule the political domain say that everything must be done to “keep the first domino from falling” (as A & S advocate on page 85).
When viewed in isolation, the bail-out of each institution seems like cheap insurance to government policy advisors. The problem is that a series of bail-outs tends to generate excessive confidence in central banks and governments. If you are lending money to a company that you expect to be backed by government, then you are not going to be too worried if the salary packages of the executives of that company give them incentives to take excessive risks. Creditors might not be surprised if the company gets into financial difficulty, but they will be shocked if it isn’t rescued by government.
From the A & S perspective the current crisis occurred not because parents encouraged the kids to act unwisely by incurring gambling debts , but because the parents decided to let one of their wayward children file for bankruptcy. That unsettled the creditors, so the parents lost their nerve and decided to pay all the kids’ debts. At this stage the lesson that the parents seem to have learned from this is that the kids need more parental supervision to make sure that their animal spirits don’t ever get out of control again. How will the kids respond? Will they leave home to get away from this parental supervision? Or will their animal spirits lead them to pretend to be good for a while in order to re-establish cosy relationships with their parents?
Sunday, April 5, 2009
What is your inner economist?
As I was reading Tyler Cowen’s book “Discover Your Inner Economist” I wished that I had read it sooner.
The cover of the book and the table of contents did not give me good reasons to buy the book. The cover invites potential readers to use incentives to fall in love, survive their next meeting and motivate their dentist. The contents page suggests that the book is about things like how to control the world, possess all the great art ever made and practice the art of self-deception. Since I do not aspire to be a master of the universe I have given higher priority to reading other books, such as Tim Harford’s book about the economic logic of life and Dan Ariely’s book about hidden forces that can tend to make decisions predictably irrational (discussed here).
If I had read some reviews of Tyler’s book I would have discovered that it is really about how your inner economist can help you to live a good life. I would also have discovered that Tyler’s inner economist does not try to apply market place logic to all aspects of life. The book is full of parables drawn from every day life and suggestions about how to live well - including suggestions on how to make visits to art galleries and museums more rewarding and how to eat well on a limited budget.
If someone had asked me to describe my inner economist before I had read this book I would probably have said that it was the inner voice that kept telling me things like: incentives matter; resources are scarce; don’t forget about opportunity costs; sunk costs are irrelevant to current decisions; and human behavior is motivated by self interest. I would probably have mentioned that, like any other sensible human, any sensible economist also has other inner voices (e.g. the voices of ethicists, psychologists and sociologists) questioning whether the advice of the inner economist is appropriate to the circumstances. I might also have said that there is always potential for an inner voice of reason to preside over this inner babble and say things like “on the one hand ...” and “on the other hand ...” and for an inner executive to conclude “on balance, it seems to me ...”.
One obvious problem with my initial perception of the inner economist is that economists have a well deserved reputation for saying “on the one hand” and “on the other hand”. Good economics takes account of insights from other disciplines where they are relevant – it involves more than just an exploration of what might happen if people behave in the way economists have often assumed that they will behave in simple models of market behaviour.
Tyler sets up pattern recognition as the most important function of the inner economist: “Your Inner Economist sees patterns that you might not be seeing at first glance” (p 8). He argues against the view promoted by some economists that monetary incentives, markets and property rights should be applied to all aspects of life, including family life. “Our Inner Economist knows that money cannot buy love, respect or peace of mind” (p 3). But our inner economist can recognize the circumstances in which monetary incentives will work well (e.g. where performance is highly responsive to extra effort or where intrinsic motivation is weak).
Tyler identifies a major drawback of rewards and penalties as follows: “We use them to influence the behavior of other people. And this is precisely what makes those people feel a lack of control and a lack of freedom” (p 33).
If aspiring masters of the universe were the intended audience for this book, I hope a lot of them have bought it. However, I doubt whether many of them would have enjoyed reading it as much as I did.
The cover of the book and the table of contents did not give me good reasons to buy the book. The cover invites potential readers to use incentives to fall in love, survive their next meeting and motivate their dentist. The contents page suggests that the book is about things like how to control the world, possess all the great art ever made and practice the art of self-deception. Since I do not aspire to be a master of the universe I have given higher priority to reading other books, such as Tim Harford’s book about the economic logic of life and Dan Ariely’s book about hidden forces that can tend to make decisions predictably irrational (discussed here).
If I had read some reviews of Tyler’s book I would have discovered that it is really about how your inner economist can help you to live a good life. I would also have discovered that Tyler’s inner economist does not try to apply market place logic to all aspects of life. The book is full of parables drawn from every day life and suggestions about how to live well - including suggestions on how to make visits to art galleries and museums more rewarding and how to eat well on a limited budget.
If someone had asked me to describe my inner economist before I had read this book I would probably have said that it was the inner voice that kept telling me things like: incentives matter; resources are scarce; don’t forget about opportunity costs; sunk costs are irrelevant to current decisions; and human behavior is motivated by self interest. I would probably have mentioned that, like any other sensible human, any sensible economist also has other inner voices (e.g. the voices of ethicists, psychologists and sociologists) questioning whether the advice of the inner economist is appropriate to the circumstances. I might also have said that there is always potential for an inner voice of reason to preside over this inner babble and say things like “on the one hand ...” and “on the other hand ...” and for an inner executive to conclude “on balance, it seems to me ...”.
One obvious problem with my initial perception of the inner economist is that economists have a well deserved reputation for saying “on the one hand” and “on the other hand”. Good economics takes account of insights from other disciplines where they are relevant – it involves more than just an exploration of what might happen if people behave in the way economists have often assumed that they will behave in simple models of market behaviour.
Tyler sets up pattern recognition as the most important function of the inner economist: “Your Inner Economist sees patterns that you might not be seeing at first glance” (p 8). He argues against the view promoted by some economists that monetary incentives, markets and property rights should be applied to all aspects of life, including family life. “Our Inner Economist knows that money cannot buy love, respect or peace of mind” (p 3). But our inner economist can recognize the circumstances in which monetary incentives will work well (e.g. where performance is highly responsive to extra effort or where intrinsic motivation is weak).
Tyler identifies a major drawback of rewards and penalties as follows: “We use them to influence the behavior of other people. And this is precisely what makes those people feel a lack of control and a lack of freedom” (p 33).
If aspiring masters of the universe were the intended audience for this book, I hope a lot of them have bought it. However, I doubt whether many of them would have enjoyed reading it as much as I did.
Thursday, April 2, 2009
Are the economic rationalists in Canberra losing their marbles?
When Jim asked me whether I was an economic rationalist I thought he was just stirring. The term “economic rationalist” has been used mainly in Australia and doesn’t seem to be used much anywhere these days. I don’t think there were ever many people in Canberra who called themselves economic rationalists. Those of us advocating economically rational policies just thought of ourselves as economists doing what economists should be doing. We knew that when people referred to us as economic rationalists they were probably intending to be offensive, just as most of those who refer to classical liberals as neo-liberals are intending to be offensive. But I don’t think the label worried us much. When people referred to me as an economic rationalist I knew that I was among good company.
I admitted to Jim that people had sometimes referred to me as an economic rationalist. Jim then asked me if I thought John Smith (name changed to protect Jim) would be an economic rationalist. I don’t know that I have ever met Smith but he has the reputation of being a good economist, having held senior positions in the Treasury as well as other government departments at a time when major economic reforms were being undertaken. I told Jim that I thought that Smith could be relied on to provide good public policy advice.
Jim then seemed to change the topic of conversation. He asked: “Do you think economic considerations should be taken into account in quarantine policy?” I replied that economic considerations were obviously relevant. For example, it doesn’t make economic sense to implement policies that will raise consumer prices by a huge amount in order to protect a tiny domestic industry, even if scientific evidence suggests a high probability that diseased imports will damage this industry.
Jim said: “So, are you suggesting that quarantine decisions should all be subject to a full blown 100-page cost benefit analysis?” I acknowledged that a full-blown analysis would be too expensive to do every time and is not necessary in most cases because the answer that such a study would come up with was usually obvious. I suggested that the legislation should incorporate a national interest test and require that the economic advice used to apply that test should be made public when decisions are made.
Jim replied: “But wouldn’t that make it difficult for politicians to take account of things like impacts that are concentrated in particular electorates, their concerns that voters might attribute damage to industries from highly improbable events to their mismanagement - and other irrationality that people exhibit on risk.” I said: “So what! If you are designing public policy rules in the interests of the whole community then you want the rules to make life difficult for populist politicians who pander to such concerns”.
Jim said: “I thought you might say that. But John Smith tried to sell me a very different line when I spoke to him in Canberra recently. He said that it would be important for the analysis of quarantine matters by the advisory economist to place higher weights on extreme events and on things with concentrated impacts and to make other adjustments to account for the irrationality that people exhibit on risk.”
I was stunned. All I could say at the time was that I could now understand why Jim had asked me whether John Smith was an economic rationalist.
Jim’s story makes me wonder how many other Canberra people who once advocated economically rational policies have lost their marbles by getting too close to politicians.
Postscript:
A friend and former work colleague has responded by suggesting that it is normal for people providing economic advice within the bureaucracy to advise Ministers on the distributional effects of policy initiatives. I think my friend has missed the point.
As I understand it, John Smith is considering what rules should apply in assessing future quarantine cases. The issues involved take this outside of normal bureaucratic policy advice. There are interest groups who will see quarantine as a way to obtain protection from import competition by the back door i.e. through a non-transparent process. Ideally, the issues involved should be subject to some kind of public inquiry to assess national economic benefits and costs through a transparent process. The fact that this is not practicable in every case doesn't mean that we have to resort to normal processes for bureacratic advice to Ministers. As I understand it what is proposed is legislation that would require an assessment to be made of the relative economic costs and benefits of proposed quarantine action. John Smith seems to be proposing to muddy the waters.
I admitted to Jim that people had sometimes referred to me as an economic rationalist. Jim then asked me if I thought John Smith (name changed to protect Jim) would be an economic rationalist. I don’t know that I have ever met Smith but he has the reputation of being a good economist, having held senior positions in the Treasury as well as other government departments at a time when major economic reforms were being undertaken. I told Jim that I thought that Smith could be relied on to provide good public policy advice.
Jim then seemed to change the topic of conversation. He asked: “Do you think economic considerations should be taken into account in quarantine policy?” I replied that economic considerations were obviously relevant. For example, it doesn’t make economic sense to implement policies that will raise consumer prices by a huge amount in order to protect a tiny domestic industry, even if scientific evidence suggests a high probability that diseased imports will damage this industry.
Jim said: “So, are you suggesting that quarantine decisions should all be subject to a full blown 100-page cost benefit analysis?” I acknowledged that a full-blown analysis would be too expensive to do every time and is not necessary in most cases because the answer that such a study would come up with was usually obvious. I suggested that the legislation should incorporate a national interest test and require that the economic advice used to apply that test should be made public when decisions are made.
Jim replied: “But wouldn’t that make it difficult for politicians to take account of things like impacts that are concentrated in particular electorates, their concerns that voters might attribute damage to industries from highly improbable events to their mismanagement - and other irrationality that people exhibit on risk.” I said: “So what! If you are designing public policy rules in the interests of the whole community then you want the rules to make life difficult for populist politicians who pander to such concerns”.
Jim said: “I thought you might say that. But John Smith tried to sell me a very different line when I spoke to him in Canberra recently. He said that it would be important for the analysis of quarantine matters by the advisory economist to place higher weights on extreme events and on things with concentrated impacts and to make other adjustments to account for the irrationality that people exhibit on risk.”
I was stunned. All I could say at the time was that I could now understand why Jim had asked me whether John Smith was an economic rationalist.
Jim’s story makes me wonder how many other Canberra people who once advocated economically rational policies have lost their marbles by getting too close to politicians.
Postscript:
A friend and former work colleague has responded by suggesting that it is normal for people providing economic advice within the bureaucracy to advise Ministers on the distributional effects of policy initiatives. I think my friend has missed the point.
As I understand it, John Smith is considering what rules should apply in assessing future quarantine cases. The issues involved take this outside of normal bureaucratic policy advice. There are interest groups who will see quarantine as a way to obtain protection from import competition by the back door i.e. through a non-transparent process. Ideally, the issues involved should be subject to some kind of public inquiry to assess national economic benefits and costs through a transparent process. The fact that this is not practicable in every case doesn't mean that we have to resort to normal processes for bureacratic advice to Ministers. As I understand it what is proposed is legislation that would require an assessment to be made of the relative economic costs and benefits of proposed quarantine action. John Smith seems to be proposing to muddy the waters.
Thursday, March 26, 2009
What can the G20 do about protectionism?
“We have got to be absolutely clear that protectionism offers no solution. It’s the road to ruin. It protects no-one in the long run at all and we are for a free trade world where we remove barriers rather than create barriers, no matter what the temptation is at this particular point in time for individual countries.” Gordon Brown, U.K. Prime Minister, talking about his hopes for the G20 summit.
I have no doubt that the G20 will make a strong statement in opposition to protectionism. After the G20 leaders have agreed that protectionism is the road to ruin and have lined up for the group photo, they will then go home and continue to increase assistance to domestic industries at the expense of imports. The most we can hope for is that the threat of retaliation will prevent the most overt kinds of protectionism that could result in escalation of retaliatory protectionism. If we are lucky the world economy will begin to pick up before protectionism gets out of control.
Why am I pessimistic about the effectiveness of the anti-protectionist pronouncements that seem likely to come out of the G20? It is because decisions by governments about industry assistance are made primarily in response to domestic political pressures and because prevailing perceptions about domestic economic impacts will cause governments to take most notice of the narrow interests that stand to gain from protectionism.
The prevailing perceptions I am writing about include the belief that during a recession it is possible to protect jobs in one industry without any adverse effects elsewhere in the economy, unless there is foreign retaliation. It is easy to see why this is economic nonsense. Import restrictions cause consumers to buy higher-priced domestic production rather than imports – they work in the same way as a tax on consumption of a good that is used to finance a subsidy to producers. The result is that consumers have less income to spend on other goods. Jobs are saved in one industry at the expense of jobs elsewhere in the economy.
Some readers might be thinking that this reasoning doesn’t apply to industry assistance that is funded from government spending because the increased spending just goes to increase the fiscal deficit and government debt. Some government leaders who increase budgetary assistance to industry might even think they have reason to expect to be patted on the head by leaders of other governments for doing something to stimulate the world economy. The truth is, however, that such covert protectionism is unlikely to even stimulate the domestic economy since private investors are likely to be forced to pay higher interest rates in order to fund their investments, and domestic taxpayers are likely to increase precautionary savings in anticipation of having to pay higher taxes in the years ahead.
Is there anything that the G20 countries could do that would help governments to deal with the domestic political pressures that result in increased protection during recessions? The least they could do is to compare notes about how they cope with such pressures in their own countries. Australia’s prime minister, Kevin Rudd, is probably too modest to trumpet the success of the Hawke government in dealing with protectionism in the 1980s with the help of domestic transparency arrangements. It might be possible, however, for leaders of other governments who have an interest in this matter to prevail upon our Kevin to provide them with some helpful information on this topic.
Postscript:
Readers who wonder what I am talking about might be interested in this.
I have no doubt that the G20 will make a strong statement in opposition to protectionism. After the G20 leaders have agreed that protectionism is the road to ruin and have lined up for the group photo, they will then go home and continue to increase assistance to domestic industries at the expense of imports. The most we can hope for is that the threat of retaliation will prevent the most overt kinds of protectionism that could result in escalation of retaliatory protectionism. If we are lucky the world economy will begin to pick up before protectionism gets out of control.
Why am I pessimistic about the effectiveness of the anti-protectionist pronouncements that seem likely to come out of the G20? It is because decisions by governments about industry assistance are made primarily in response to domestic political pressures and because prevailing perceptions about domestic economic impacts will cause governments to take most notice of the narrow interests that stand to gain from protectionism.
The prevailing perceptions I am writing about include the belief that during a recession it is possible to protect jobs in one industry without any adverse effects elsewhere in the economy, unless there is foreign retaliation. It is easy to see why this is economic nonsense. Import restrictions cause consumers to buy higher-priced domestic production rather than imports – they work in the same way as a tax on consumption of a good that is used to finance a subsidy to producers. The result is that consumers have less income to spend on other goods. Jobs are saved in one industry at the expense of jobs elsewhere in the economy.
Some readers might be thinking that this reasoning doesn’t apply to industry assistance that is funded from government spending because the increased spending just goes to increase the fiscal deficit and government debt. Some government leaders who increase budgetary assistance to industry might even think they have reason to expect to be patted on the head by leaders of other governments for doing something to stimulate the world economy. The truth is, however, that such covert protectionism is unlikely to even stimulate the domestic economy since private investors are likely to be forced to pay higher interest rates in order to fund their investments, and domestic taxpayers are likely to increase precautionary savings in anticipation of having to pay higher taxes in the years ahead.
Is there anything that the G20 countries could do that would help governments to deal with the domestic political pressures that result in increased protection during recessions? The least they could do is to compare notes about how they cope with such pressures in their own countries. Australia’s prime minister, Kevin Rudd, is probably too modest to trumpet the success of the Hawke government in dealing with protectionism in the 1980s with the help of domestic transparency arrangements. It might be possible, however, for leaders of other governments who have an interest in this matter to prevail upon our Kevin to provide them with some helpful information on this topic.
Postscript:
Readers who wonder what I am talking about might be interested in this.
Friday, March 20, 2009
Does fractional reserve banking have to be a scam?
“To some extent, commercial bankers lend out their own capital and money acquired by CDs (certificates of deposit). But most commercial banking is "deposit banking" based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time. If Jim has a checking account of $1,000 at a local bank, Jim knows that this is a "demand deposit," that is, that the bank pledges to pay him $1,000 in cash, on demand, anytime he wishes to "get his money out." Naturally, the Jims of this world are convinced that their money is safely there, in the bank, for them to take out at any time.” Murray N Rothbard, ‘Fractional Reserve Banking’.
When my friend Jim asked my reaction to this quote, I said that I didn’t know that he knew Murray Rothbard. Jim replied: “I didn’t know that he knew me, but I think he is making a good point.”
I asked Jim whether he thought most people really believed that banks were like warehouses that kept the money deposited with them until people wanted to withdraw it. Jim said: “Most people know that banks lend the funds deposited with them to other people, but the point is that banks do promise to repay deposits on demand. They know that they can’t keep this promise if everyone wants their money back at the same time. Banks shouldn’t be allowed to make promises they can’t keep.”
I tried to argue that the financial system generally works well even though exceptional circumstances can arise where financial intermediaries make promises that they cannot keep. I suggested that it is very rare for situations to arise when a high proportion of borrowers do not meet their commitments and the value of the security held by banks falls below the value of loans outstanding.
Jim said: “Look, you can’t pretend that these situations where banks can’t keep their promises occur so infrequently that they should be ignored. Democratic governments don’t just look the other way when banks go bust. Do you think that the best solution for this problem is for governments to get involved by offering deposit insurance, guarantees that banks will not be allowed to fail and close supervision and regulation to ensure that such guarantee do not result in irresponsible behaviour? Don’t you see that this government intervention has arisen because banks are allowed to make promises that they can’t keep.”
I asked Jim whether he was suggesting that instead of promising to repay deposits on demand, banks should convert themselves into unit trusts. That would mean that the amount that investors could get back on demand would vary according to the market value of the financial institution’s loan portfolio.
Jim replied: “I don’t think many people would view that system as a good substitute for conventional bank deposits that are repayable on demand. What I have in mind is that a bank would specify in its agreement with depositors that in the event that it could not meet its promise to repay deposits in full within, say, a month of the request being made, then equity holdings in the bank would immediately be cancelled and re-issued to depositors in proportion to the nominal value of their deposits. The former depositors could decide whether they wanted to liquidate these equity holdings immediately by selling them on the stock market, or to hold on in the hope that the bank’s financial situation would improve.”
I have been thinking about Jim’s proposal. I do not imagine that the conversion of deposits in a troubled bank into equity holdings would be as quick and simple as Jim envisages. Nevertheless his proposal seems to me to be preferable to the current shambles that has arisen as government regulators have sought to substitute their assurances for dodgy promises that financial institutions are not able to keep.
When my friend Jim asked my reaction to this quote, I said that I didn’t know that he knew Murray Rothbard. Jim replied: “I didn’t know that he knew me, but I think he is making a good point.”
I asked Jim whether he thought most people really believed that banks were like warehouses that kept the money deposited with them until people wanted to withdraw it. Jim said: “Most people know that banks lend the funds deposited with them to other people, but the point is that banks do promise to repay deposits on demand. They know that they can’t keep this promise if everyone wants their money back at the same time. Banks shouldn’t be allowed to make promises they can’t keep.”
I tried to argue that the financial system generally works well even though exceptional circumstances can arise where financial intermediaries make promises that they cannot keep. I suggested that it is very rare for situations to arise when a high proportion of borrowers do not meet their commitments and the value of the security held by banks falls below the value of loans outstanding.
Jim said: “Look, you can’t pretend that these situations where banks can’t keep their promises occur so infrequently that they should be ignored. Democratic governments don’t just look the other way when banks go bust. Do you think that the best solution for this problem is for governments to get involved by offering deposit insurance, guarantees that banks will not be allowed to fail and close supervision and regulation to ensure that such guarantee do not result in irresponsible behaviour? Don’t you see that this government intervention has arisen because banks are allowed to make promises that they can’t keep.”
I asked Jim whether he was suggesting that instead of promising to repay deposits on demand, banks should convert themselves into unit trusts. That would mean that the amount that investors could get back on demand would vary according to the market value of the financial institution’s loan portfolio.
Jim replied: “I don’t think many people would view that system as a good substitute for conventional bank deposits that are repayable on demand. What I have in mind is that a bank would specify in its agreement with depositors that in the event that it could not meet its promise to repay deposits in full within, say, a month of the request being made, then equity holdings in the bank would immediately be cancelled and re-issued to depositors in proportion to the nominal value of their deposits. The former depositors could decide whether they wanted to liquidate these equity holdings immediately by selling them on the stock market, or to hold on in the hope that the bank’s financial situation would improve.”
I have been thinking about Jim’s proposal. I do not imagine that the conversion of deposits in a troubled bank into equity holdings would be as quick and simple as Jim envisages. Nevertheless his proposal seems to me to be preferable to the current shambles that has arisen as government regulators have sought to substitute their assurances for dodgy promises that financial institutions are not able to keep.
Thursday, March 12, 2009
What is the best analogy to help us understand the financial crisis?
In attempting to understand the current financial crisis I don’t have the benefit of a great deal of knowledge of macroeconomics. Nevertheless, I can understand only too well what many macroeconomists are saying about fiscal stimulus and multipliers because they are using Keynesian language that I learned in my first year at university 45 years ago.
During the 1970s nearly all macroeconomists seemed to abandon the crude Keynesianism that I learned about at university. Why have so many reverted to it at this time? The answer might have more to do with the desire for a comfort blanket in times of uncertainty than with the merits of Keynes’ approach. The Keynesian remedy does not seem to me to be much more relevant to the current situation than it was to the stagflation of the 1970s. It suggests that when you wake up with a debt-induced hangover, then you will soon feel better if you get the government to take on some more debt on your behalf. That doesn’t sound to me like a recipe for a more healthy world economy.
So I have been looking for articles which will help me to understand why the world is in recession and what can be done about it. The best aid to understanding that I have found so far is John Cochrane’s refinery analogy:
“Imagine by analogy that several major refineries had blown up. There would be tankers full of oil sitting in the harbor, and oil prices would be low, yet little gasoline would be available and gas prices would be high. Stimulating people to drive around would not revive gas sales. Borrowing gasoline and using it on infrastructure projects would be worse. The right policy action would obviously be to run whatever government or military refineries could be cobbled together on short notice at full speed, and focus on rebuilding the private ones.” John H Cochrane, ‘Fiscal Stimulus, Fiscal Inflation or Fiscal Fallacies’.
The “major refineries” correspond to the banks that have loaded themselves with toxic assets. The oil tankers sitting in the harbour correspond to the savings that are going to government securities paying low interest rates and the high gas prices correspond to the high price of credit to businesses and consumers (in many countries). The running of government and military refineries at full speed corresponds to the government raising funds by issuing debt and lending it to businesses and consumers.
Cochrane recognizes that this analogy does not give a complete picture of the current situation. He explains that if we just had a shock to the supply of credit (blown up refineries) we would expect to see stagflation – lower quantities of goods and services sold, but upward pressure on prices. Instead we are seeing lower quantities sold and lower inflation. So, we are also seeing a demand shock as a result of people becoming much more averse to holding risks. (The refinery analogy could possibly be stretched to accommodate this. If several major refineries were blown up then investors could be expected to seek to reduce the exposure of their portfolios to other firms that might also be at risk of “blowing up”.)
Would the situation be resolved if the central banks were to target a specific rate of growth in nominal GDP (as I discussed in an earlier post)? The answer might depend on what assets the central banks purchase from the public in pursuit of this objective. If they buy government bonds this will help satisfy the increased demand for money, but not address the supply shock in the credit market. It is possible that the market could take care of this problem e.g. major firms may be able to by-pass the damaged banks by raising funds directly from the public. However, when central banks buy newly-issued commercial paper and securitized debt they are acting directly in place of the injured banks.
As a stop-gap measure this kind of by-pass intervention has the important merit of being a lot easier to unwind than alternative approaches. If central banks confine their purchases to quality assets they will not have any difficulty selling them when inflation begins to rise and people get tired of holding so much money. The effects of fiscal stimulus involving cash splashes by governments are likely to be much more difficult to unwind without a decade or more of high-tax and low-growth stagflation.
It seems to me that current debates about the effectiveness of stimulus packages in lifting aggregate demand tend to miss a more important point about consequences beyond the immediate short term (i.e. long before Keynes’ long run when we will all be dead). John Cochrane makes the point as follows in relation to the U.S. economy:
“If the resources are not there to unwind our current operations, to quickly retire ... newly created debt, a large inflation will result as people dump government debt. If history is any guide, this outcome will unleash economic dislocations on a scale to make our current troubles look like a pleasant memory.”
During the 1970s nearly all macroeconomists seemed to abandon the crude Keynesianism that I learned about at university. Why have so many reverted to it at this time? The answer might have more to do with the desire for a comfort blanket in times of uncertainty than with the merits of Keynes’ approach. The Keynesian remedy does not seem to me to be much more relevant to the current situation than it was to the stagflation of the 1970s. It suggests that when you wake up with a debt-induced hangover, then you will soon feel better if you get the government to take on some more debt on your behalf. That doesn’t sound to me like a recipe for a more healthy world economy.
So I have been looking for articles which will help me to understand why the world is in recession and what can be done about it. The best aid to understanding that I have found so far is John Cochrane’s refinery analogy:
“Imagine by analogy that several major refineries had blown up. There would be tankers full of oil sitting in the harbor, and oil prices would be low, yet little gasoline would be available and gas prices would be high. Stimulating people to drive around would not revive gas sales. Borrowing gasoline and using it on infrastructure projects would be worse. The right policy action would obviously be to run whatever government or military refineries could be cobbled together on short notice at full speed, and focus on rebuilding the private ones.” John H Cochrane, ‘Fiscal Stimulus, Fiscal Inflation or Fiscal Fallacies’.
The “major refineries” correspond to the banks that have loaded themselves with toxic assets. The oil tankers sitting in the harbour correspond to the savings that are going to government securities paying low interest rates and the high gas prices correspond to the high price of credit to businesses and consumers (in many countries). The running of government and military refineries at full speed corresponds to the government raising funds by issuing debt and lending it to businesses and consumers.
Cochrane recognizes that this analogy does not give a complete picture of the current situation. He explains that if we just had a shock to the supply of credit (blown up refineries) we would expect to see stagflation – lower quantities of goods and services sold, but upward pressure on prices. Instead we are seeing lower quantities sold and lower inflation. So, we are also seeing a demand shock as a result of people becoming much more averse to holding risks. (The refinery analogy could possibly be stretched to accommodate this. If several major refineries were blown up then investors could be expected to seek to reduce the exposure of their portfolios to other firms that might also be at risk of “blowing up”.)
Would the situation be resolved if the central banks were to target a specific rate of growth in nominal GDP (as I discussed in an earlier post)? The answer might depend on what assets the central banks purchase from the public in pursuit of this objective. If they buy government bonds this will help satisfy the increased demand for money, but not address the supply shock in the credit market. It is possible that the market could take care of this problem e.g. major firms may be able to by-pass the damaged banks by raising funds directly from the public. However, when central banks buy newly-issued commercial paper and securitized debt they are acting directly in place of the injured banks.
As a stop-gap measure this kind of by-pass intervention has the important merit of being a lot easier to unwind than alternative approaches. If central banks confine their purchases to quality assets they will not have any difficulty selling them when inflation begins to rise and people get tired of holding so much money. The effects of fiscal stimulus involving cash splashes by governments are likely to be much more difficult to unwind without a decade or more of high-tax and low-growth stagflation.
It seems to me that current debates about the effectiveness of stimulus packages in lifting aggregate demand tend to miss a more important point about consequences beyond the immediate short term (i.e. long before Keynes’ long run when we will all be dead). John Cochrane makes the point as follows in relation to the U.S. economy:
“If the resources are not there to unwind our current operations, to quickly retire ... newly created debt, a large inflation will result as people dump government debt. If history is any guide, this outcome will unleash economic dislocations on a scale to make our current troubles look like a pleasant memory.”
Thursday, March 5, 2009
Can the perceptions of participants influence market fundamentals?
“Reflexivity can be interpreted as a circularity, or two way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them but on their perception or interpretation of that situation. Their decisions make an impact on the situation ... and changes in the situation are liable to change their perceptions ... . The two functions operate concurrently, not sequentially” (George Soros, “The New Paradigm for Financial Markets”, 2008, p 10).
“Many critics of reflexivity claimed that I was merely belabouring the obvious, namely that the participants’ biased expectations influence market prices. But the crux of the theory of reflexivity is not so obvious; it asserts that market prices can influence the fundamentals. The illusion that markets are always right is caused by their ability to affect the fundamentals that they are supposed to reflect. The change in the fundamentals may then reinforce the biased expectations in an initially self-reinforcing but eventually self-defeating process” (Soros, op cit, p 57-8).
Does George Soros know what he is talking about? The fact that he has operated successfully in financial markets for a long time suggests to me that he might have a few clues about how they work. But I struggle to understand him.
As is the case with many other problems of understanding, I think my problem in this instance relates to definition of terms. What does Soros mean by fundamentals? If a process is eventually self-defeating then it seems to me that this means that it is inconsistent with the fundamentals of the real world – i.e. it is inconsistent with what we know to be true about such things as resource availability, technology or human nature.
When Soros suggests that market prices can influence the fundamentals he may have something less fundamental in mind such as widely accepted perceptions of investors and credit providers about particular markets or the wider economic situation. It seems plausible that a widespread view that housing was a very safe investment, for example, could be reinforced if house prices began to increase more rapidly and if credit providers perceived that this made lending more secure. Under some circumstances that might, perhaps, result in a self-reinforcing process of increases in house prices that would eventually become self-defeating, for example because increasing numbers of people might decide that they would be better off renting rather than owning a house.
If this is what Soros means by reflexivity, does it help to explain the current financial turmoil? In explaining his super-bubble hypothesis Soros writes:
“The belief that markets tend toward equilibrium is directly responsible for the current turmoil; it encouraged the regulators to ... rely on the market mechanism to correct its own excesses. The idea that prices, although they may take random walks, tend to revert to the mean served as the guiding principle for the synthetic financial instruments and investment practices which are currently unravelling” (Soros, op cit, p 102).
It seems to me that the second part of that statement, relating to synthetic financial instruments, may help to explain the current financial turmoil. With the benefit of hindsight it is apparent that the world economy is suffering from, among other things, the development of a self-reinforcing belief system which led many financial firms to over-value synthetic financial instruments.
However, the first part of Soros’ statement doesn’t make sense. Regulators have not relied on the market mechanism to correct its own excesses. The current turmoil is partly a consequence of a history of financial firms being bailed out by regulators on the grounds that they were too big to be allowed to fail. George Soros is on much firmer ground when he recognises that most reflexive processes involve an interplay between market participants and regulators (p77).
Hopefully, the regulatory environment that emerges from the current turmoil will recognise that participants in financial markets are human. It should not surprise anyone that when financiers are given incentives to behave imprudently they tend to act accordingly.
“Many critics of reflexivity claimed that I was merely belabouring the obvious, namely that the participants’ biased expectations influence market prices. But the crux of the theory of reflexivity is not so obvious; it asserts that market prices can influence the fundamentals. The illusion that markets are always right is caused by their ability to affect the fundamentals that they are supposed to reflect. The change in the fundamentals may then reinforce the biased expectations in an initially self-reinforcing but eventually self-defeating process” (Soros, op cit, p 57-8).
Does George Soros know what he is talking about? The fact that he has operated successfully in financial markets for a long time suggests to me that he might have a few clues about how they work. But I struggle to understand him.
As is the case with many other problems of understanding, I think my problem in this instance relates to definition of terms. What does Soros mean by fundamentals? If a process is eventually self-defeating then it seems to me that this means that it is inconsistent with the fundamentals of the real world – i.e. it is inconsistent with what we know to be true about such things as resource availability, technology or human nature.
When Soros suggests that market prices can influence the fundamentals he may have something less fundamental in mind such as widely accepted perceptions of investors and credit providers about particular markets or the wider economic situation. It seems plausible that a widespread view that housing was a very safe investment, for example, could be reinforced if house prices began to increase more rapidly and if credit providers perceived that this made lending more secure. Under some circumstances that might, perhaps, result in a self-reinforcing process of increases in house prices that would eventually become self-defeating, for example because increasing numbers of people might decide that they would be better off renting rather than owning a house.
If this is what Soros means by reflexivity, does it help to explain the current financial turmoil? In explaining his super-bubble hypothesis Soros writes:
“The belief that markets tend toward equilibrium is directly responsible for the current turmoil; it encouraged the regulators to ... rely on the market mechanism to correct its own excesses. The idea that prices, although they may take random walks, tend to revert to the mean served as the guiding principle for the synthetic financial instruments and investment practices which are currently unravelling” (Soros, op cit, p 102).
It seems to me that the second part of that statement, relating to synthetic financial instruments, may help to explain the current financial turmoil. With the benefit of hindsight it is apparent that the world economy is suffering from, among other things, the development of a self-reinforcing belief system which led many financial firms to over-value synthetic financial instruments.
However, the first part of Soros’ statement doesn’t make sense. Regulators have not relied on the market mechanism to correct its own excesses. The current turmoil is partly a consequence of a history of financial firms being bailed out by regulators on the grounds that they were too big to be allowed to fail. George Soros is on much firmer ground when he recognises that most reflexive processes involve an interplay between market participants and regulators (p77).
Hopefully, the regulatory environment that emerges from the current turmoil will recognise that participants in financial markets are human. It should not surprise anyone that when financiers are given incentives to behave imprudently they tend to act accordingly.
Thursday, February 26, 2009
What will it take to get sustainable recovery?
As readers of this blog will know already, Jim often asks me questions that I can’t answer. This morning he asked me how long it will take for the Australian economy to get back on a sustainable growth path. I was not able to answer directly. I suggested that what happens to economic growth in Australia will depend on what happens in the rest of the world. I added that if the U.S. starts to grow again in 2010 then that will have a positive impact on growth prospects for Japan and China and for commodity exporters like Australia.
Jim asked: “How confident are you about the U.S. starting to grow in 2010?” I started making excuses about my lack of knowledge of the U.S. economy and my poor knowledge of short term macroeconomics. That was when Jim said: “You know that political leaders all over the world have been saying that they will do what it takes to restore confidence and get sustainable recovery.” I nodded as Jim went on: “What they seem to be implying is that they will just keep increasing government spending until people become more confident. Does that make you feel confident?”. I shook my head. Jim then asked: “So what will it take to restore investor and consumer confidence and get sustained recovery?”
I told Jim that was a very good question. That only bought me about a second to gather my thoughts. The only sensible answer that I could think of was that restoring confidence was a matter of establishing a general expectation in the U.S. (and other major economies) that GDP would grow at about the same rate as the trend rate of growth in their productive capacity.
Jim interrupted: “That means boosting aggregate demand. Isn’t that what governments are trying to do now?” My response was that our focus should be on establishing the expectation of sustainable growth in the monetary aggregates rather than just a short-term boost in aggregate demand, with the expectation of a subsequent contraction as soon as inflation raises its ugly head again.
Jim interrupted again: “Next you will be telling me that Milton Friedman was right and what we need is a rule requiring the monetary authority to maintain a specified rate of growth in the stock of money.” I admitted that I still thought Friedman was on the right track, but technical difficulties involved in targeting the money supply would make it more sensible to target growth in nominal GDP (i.e. PY rather than M).
Jim said: “So what you are saying is that if the U.S. central bank were to announce a target rate of growth of nominal GDP and start making appropriate adjustments in monetary policy to achieve that target, then this would restore confidence and promote a sustainable recovery.”
I wish I had sufficient confidence to tell Jim that he had hit the nail on the head. Instead I suggested that rather than trying to put words in my mouth he should take a look at Scott Sumner’s blog: TheMoneyIllusion.
Postscript:
I particularly liked the following posts on Sumner's blog: Why did monetary policy fail?; and The Economics Babel.
Jim asked: “How confident are you about the U.S. starting to grow in 2010?” I started making excuses about my lack of knowledge of the U.S. economy and my poor knowledge of short term macroeconomics. That was when Jim said: “You know that political leaders all over the world have been saying that they will do what it takes to restore confidence and get sustainable recovery.” I nodded as Jim went on: “What they seem to be implying is that they will just keep increasing government spending until people become more confident. Does that make you feel confident?”. I shook my head. Jim then asked: “So what will it take to restore investor and consumer confidence and get sustained recovery?”
I told Jim that was a very good question. That only bought me about a second to gather my thoughts. The only sensible answer that I could think of was that restoring confidence was a matter of establishing a general expectation in the U.S. (and other major economies) that GDP would grow at about the same rate as the trend rate of growth in their productive capacity.
Jim interrupted: “That means boosting aggregate demand. Isn’t that what governments are trying to do now?” My response was that our focus should be on establishing the expectation of sustainable growth in the monetary aggregates rather than just a short-term boost in aggregate demand, with the expectation of a subsequent contraction as soon as inflation raises its ugly head again.
Jim interrupted again: “Next you will be telling me that Milton Friedman was right and what we need is a rule requiring the monetary authority to maintain a specified rate of growth in the stock of money.” I admitted that I still thought Friedman was on the right track, but technical difficulties involved in targeting the money supply would make it more sensible to target growth in nominal GDP (i.e. PY rather than M).
Jim said: “So what you are saying is that if the U.S. central bank were to announce a target rate of growth of nominal GDP and start making appropriate adjustments in monetary policy to achieve that target, then this would restore confidence and promote a sustainable recovery.”
I wish I had sufficient confidence to tell Jim that he had hit the nail on the head. Instead I suggested that rather than trying to put words in my mouth he should take a look at Scott Sumner’s blog: TheMoneyIllusion.
Postscript:
I particularly liked the following posts on Sumner's blog: Why did monetary policy fail?; and The Economics Babel.
Thursday, February 19, 2009
What are the links between freedom and flourishing?
I think the best way to summarize the links between freedom and flourishing is by trying to answer the following questions.
1. What is the relationship between happiness, well-being and flourishing?
If happiness is viewed as a positive emotional state (involving, for example, peace of mind, optimism, uncompression, exuberance, flow, joy and cheerfulness) then well-being (utility) cannot be the same thing as happiness. (See: What is happiness? and Do good decisions always make us happy?) Well-being (utility) involves several other factors - including personal security and security of property, health and longevity, access to goods and services – as well as a positive emotional state.
Flourishing can be described as authentic well-being. I am attracted to the idea that flourishing involves self-fulfillment as well as to the idea that it involves a meaningful life and actualization of human potential. It seems to me that the highest level of reflection of a flourishing person would be in harmony with his or her emotional nature, and vice versa (but I don’t claim to know a great deal about this ideal frame of mind or meta-state).
2. What is the relationship between freedom, classical liberalism and rationalistic individualism?
Freedom (liberty) is the condition of society in which the coercion of some by others is reduced as much as possible. It seems to me that classical liberalism is essentially about the rule of law and the protection of freedom. It is the view that people can live together in peace and to their mutual advantage bound only by abstract rules of conduct that protect the life, liberty and property of each person.
It is important to distinguish between rationalistic individualism and classical liberalism. Whereas rationalistic individualism maintains that a person’s wellbeing always increases when he or she has more options to choose from (liberal optimism), classical liberals have a more sober view of human nature. For example, Adam Smith accepted human fallibility but believed that the desire that individuals to better their own condition would generally prevail over their tendency to be prodigal and imprudent. (See: Liberal sobriety plus contextualism equals classical liberalism? and Is freedom a necessary condition for human flourishing?)
Various attempts have been made to measure freedom. The most relevant for present purposes are economic freedom indexes that measure the extent to which economic policies support private property, personal choice, voluntary exchange, freedom to compete etc.
3. What is the relationship between freedom and happiness?
People generally have a passion for control of their own lives. (See: Does inner freedom link liberty with flourishing?) Most people enjoy exercising competence in the face of the challenges that freedom poses. Exercising such competence is no easy matter; people often become unhappy as a result of the poor choices they make. But people whose life stories that are full of challenges, setbacks and triumphs may be happier than those whose lives are uniformly secure, comfortable and tranquil. (See: Does a challenge make us happy?)
The exercise of freedom can result in economic developments that disrupt communities, cultures and lifestyles, and leave many people unhappy. Such problems can be minimized under appropriate constitutional arrangements that decentralize political decision-making (See: Do we have to choose between lifestyles and liberty?)
Inner freedom – the extent to which people feel in control of their own lives – seems to be closely related to the emotional states involved in happiness. The proportion of the population with high levels of inner freedom tends to be higher in countries with higher levels of economic freedom. (See: Is inner freedom related to economic freedom?)
4. What is the relationship between freedom and well-being?
Freedom (as defined above) is inextricably linked to security of persons and property.
The relationship between economic freedom and other aspects of well-being was discussed in my post: What do objective measures of freedom and flourishing tell us?.
1. What is the relationship between happiness, well-being and flourishing?
If happiness is viewed as a positive emotional state (involving, for example, peace of mind, optimism, uncompression, exuberance, flow, joy and cheerfulness) then well-being (utility) cannot be the same thing as happiness. (See: What is happiness? and Do good decisions always make us happy?) Well-being (utility) involves several other factors - including personal security and security of property, health and longevity, access to goods and services – as well as a positive emotional state.
Flourishing can be described as authentic well-being. I am attracted to the idea that flourishing involves self-fulfillment as well as to the idea that it involves a meaningful life and actualization of human potential. It seems to me that the highest level of reflection of a flourishing person would be in harmony with his or her emotional nature, and vice versa (but I don’t claim to know a great deal about this ideal frame of mind or meta-state).
2. What is the relationship between freedom, classical liberalism and rationalistic individualism?
Freedom (liberty) is the condition of society in which the coercion of some by others is reduced as much as possible. It seems to me that classical liberalism is essentially about the rule of law and the protection of freedom. It is the view that people can live together in peace and to their mutual advantage bound only by abstract rules of conduct that protect the life, liberty and property of each person.
It is important to distinguish between rationalistic individualism and classical liberalism. Whereas rationalistic individualism maintains that a person’s wellbeing always increases when he or she has more options to choose from (liberal optimism), classical liberals have a more sober view of human nature. For example, Adam Smith accepted human fallibility but believed that the desire that individuals to better their own condition would generally prevail over their tendency to be prodigal and imprudent. (See: Liberal sobriety plus contextualism equals classical liberalism? and Is freedom a necessary condition for human flourishing?)
Various attempts have been made to measure freedom. The most relevant for present purposes are economic freedom indexes that measure the extent to which economic policies support private property, personal choice, voluntary exchange, freedom to compete etc.
3. What is the relationship between freedom and happiness?
People generally have a passion for control of their own lives. (See: Does inner freedom link liberty with flourishing?) Most people enjoy exercising competence in the face of the challenges that freedom poses. Exercising such competence is no easy matter; people often become unhappy as a result of the poor choices they make. But people whose life stories that are full of challenges, setbacks and triumphs may be happier than those whose lives are uniformly secure, comfortable and tranquil. (See: Does a challenge make us happy?)
The exercise of freedom can result in economic developments that disrupt communities, cultures and lifestyles, and leave many people unhappy. Such problems can be minimized under appropriate constitutional arrangements that decentralize political decision-making (See: Do we have to choose between lifestyles and liberty?)
Inner freedom – the extent to which people feel in control of their own lives – seems to be closely related to the emotional states involved in happiness. The proportion of the population with high levels of inner freedom tends to be higher in countries with higher levels of economic freedom. (See: Is inner freedom related to economic freedom?)
4. What is the relationship between freedom and well-being?
Freedom (as defined above) is inextricably linked to security of persons and property.
The relationship between economic freedom and other aspects of well-being was discussed in my post: What do objective measures of freedom and flourishing tell us?.
Saturday, February 14, 2009
Do we have to choose between lifestyles and liberty?
As noted in my last post, Dan Haybron suggests that our prospects for flourishing may depend importantly on living in the right kind of setting, with the right sorts of people (“The Pursuit of Unhappiness”, p 267) . Haybron is concerned that liberal optimism (the presumption that well-being increases when people have more options to choose from) can result in damage to community attributes that are important to the happiness of many individuals.
One of the examples that Haybron gives has to do with a proposal for intervention in the education of Amish children to give them a wider range of options to choose from in their adult lives. Haybron makes the point that “the Amish are not crazy to fear that such a policy would threaten one of their most cherished values, that of community” (p 266). It seems to me that it would be possible for a classical liberal to take a position on either side of such an issue, depending on the facts of the situation e.g. whether a strong case can be made that the rights of the children are being breached and whether it is likely that government intervention on their behalf would actually improve their chances of having a happy life.
Haybron’s example of the possible harm that could be done to community well-being through economic development of an island is worth considering at greater length. The residents of the island are assumed initially to have relatively low incomes but to enjoy, on average, a high level of happiness, due to strong community bonds and a culture that emphasizes the enjoyment of life. It is possible for any one resident to obtain a substantial net benefit by selling land to developers who wish to develop the tourist potential of the island, since the incremental effect of any one sale on the community lifestyle is minimal. But, taken together, many such sales may have an overall negative effect on the average happiness of the island’s long term residents. Should the development be stopped?
A different example, concerning the views of Justus Moser about the impact of global commerce on local culture, might help to clarify the issues involved. Jerry Muller tells us that Moser was a leading citizen in Osnabruck, a self-governing region in western Germany, in the 18th century (“The Mind and the Market” pp 84-103). Moser, like some modern-day opponents of globalisation, was concerned about the effects of trade on local lifestyles and culture. He condemned the growing taste for new, imported commodities, such as coffee, tea and sugar, especially among the lower ranks. He viewed shopkeepers as the local agents of the new international economy who robbed artisans of their customers and their livelihood. He reserved his greatest condemnation, however, for foreign peddlers who were selling small quantities of imported goods to peasants who were largely outside the market economy. According to Moser, these activities were causing the rural population to be “stimulated, tempted, led astray and deceived”. He argued that the public needed to be protected from the temptation of buying products that they didn’t need like leather gloves, wool stockings, metal buttons, mirrors, cotton caps, knives and needles. Women also needed to be protected from local markets where they would chat and waste money on snacks and pleasantries, while ignoring their household duties. Should trade restrictions be imposed to protect local lifestyles and culture?
What is the main difference between these two examples? It seems to me that it is possible that there could be close to a unanimous view among the long-term residents of Haybron’s island in favour of restricting certain kinds of economic development, but it is unlikely that Justus Moser, and the modern day opponents of globalisation, could persuade many of their fellow citizens that they need to be protected from the temptations of international commerce.
Can the legitimate interests of communities in preserving lifestyles of their members be met without making unacceptable encroachments on liberty? Dan Haybron evidently does not think so. At the end of his book he seems to be suggesting that we have to choose between paternalistic interventions that might, or might not, promote happiness and the individual’s right to pursue unhappiness (like the Savage in Aldous Huxley’s “Brave New World”).
I think that view is too pessimistic. Robert Nozick’s concept of a framework for utopia (briefly discussed here) seems to me to provide a good way to begin thinking more optimistically about these issues. People who want the opportunities that economic growth provides should be able to choose to live in communities that provide those opportunities, while those who value a more simple lifestyle should be able to choose to live in communities in which economic development is restricted in various ways. Do you think that idea is too utopian?
Postscript:
I would like to draw attention to Dan Haybron's comment below.
One of the examples that Haybron gives has to do with a proposal for intervention in the education of Amish children to give them a wider range of options to choose from in their adult lives. Haybron makes the point that “the Amish are not crazy to fear that such a policy would threaten one of their most cherished values, that of community” (p 266). It seems to me that it would be possible for a classical liberal to take a position on either side of such an issue, depending on the facts of the situation e.g. whether a strong case can be made that the rights of the children are being breached and whether it is likely that government intervention on their behalf would actually improve their chances of having a happy life.
Haybron’s example of the possible harm that could be done to community well-being through economic development of an island is worth considering at greater length. The residents of the island are assumed initially to have relatively low incomes but to enjoy, on average, a high level of happiness, due to strong community bonds and a culture that emphasizes the enjoyment of life. It is possible for any one resident to obtain a substantial net benefit by selling land to developers who wish to develop the tourist potential of the island, since the incremental effect of any one sale on the community lifestyle is minimal. But, taken together, many such sales may have an overall negative effect on the average happiness of the island’s long term residents. Should the development be stopped?
A different example, concerning the views of Justus Moser about the impact of global commerce on local culture, might help to clarify the issues involved. Jerry Muller tells us that Moser was a leading citizen in Osnabruck, a self-governing region in western Germany, in the 18th century (“The Mind and the Market” pp 84-103). Moser, like some modern-day opponents of globalisation, was concerned about the effects of trade on local lifestyles and culture. He condemned the growing taste for new, imported commodities, such as coffee, tea and sugar, especially among the lower ranks. He viewed shopkeepers as the local agents of the new international economy who robbed artisans of their customers and their livelihood. He reserved his greatest condemnation, however, for foreign peddlers who were selling small quantities of imported goods to peasants who were largely outside the market economy. According to Moser, these activities were causing the rural population to be “stimulated, tempted, led astray and deceived”. He argued that the public needed to be protected from the temptation of buying products that they didn’t need like leather gloves, wool stockings, metal buttons, mirrors, cotton caps, knives and needles. Women also needed to be protected from local markets where they would chat and waste money on snacks and pleasantries, while ignoring their household duties. Should trade restrictions be imposed to protect local lifestyles and culture?
What is the main difference between these two examples? It seems to me that it is possible that there could be close to a unanimous view among the long-term residents of Haybron’s island in favour of restricting certain kinds of economic development, but it is unlikely that Justus Moser, and the modern day opponents of globalisation, could persuade many of their fellow citizens that they need to be protected from the temptations of international commerce.
Can the legitimate interests of communities in preserving lifestyles of their members be met without making unacceptable encroachments on liberty? Dan Haybron evidently does not think so. At the end of his book he seems to be suggesting that we have to choose between paternalistic interventions that might, or might not, promote happiness and the individual’s right to pursue unhappiness (like the Savage in Aldous Huxley’s “Brave New World”).
I think that view is too pessimistic. Robert Nozick’s concept of a framework for utopia (briefly discussed here) seems to me to provide a good way to begin thinking more optimistically about these issues. People who want the opportunities that economic growth provides should be able to choose to live in communities that provide those opportunities, while those who value a more simple lifestyle should be able to choose to live in communities in which economic development is restricted in various ways. Do you think that idea is too utopian?
Postscript:
I would like to draw attention to Dan Haybron's comment below.
Friday, February 13, 2009
Liberal sobriety plus contextualism equals classical liberalism?
I have now finished reading “The Pursuit of Unhappiness” by Dan Haybron and haven’t modified my view that it usually does people good to take responsibility for running their own lives. (See earlier posts relating to this book: here and here.)
What is more surprising, however, is that I find that the author’s position is in some respects fairly close to my own view. Why am I surprised? I think it is because I originally thought that Haybron’s foreshadowed attack on liberal optimism was shaping up to be an attack on classical liberalism. In the final chapter of the book, however, he defines liberal optimism more specifically as the presumption that a person’s well-being will increase if she/he has more options to choose from. (I think that is the essence of what he is getting at in his lengthy definition on pages 256-8.) In the end it turns out that Haybron’s main target is actually atomistic (or rationalistic) individualism rather than classical liberalism.
Haybron’s conclusion is that the balance of evidence may favour both “liberal sobriety” and “contextualism”. Liberal sobriety initially brought to my mind thoughts about the desirability of respecting the rights of others by being temperate in one’s consumption of alcohol - but it is actually the view that although people should not be presumed to fare better if they have more options to choose from, they usually do fare better under those circumstances (p 263). Contextualism is the view that well-being is better served when individuals’ lives are shaped by an obliging context, i.e. communities, cultures etc. conducive to human flourishing.
Haybron writes: “We should take neither liberal optimism nor individualism for granted. Indeed, perhaps the pursuit of happiness will prove to be mainly a societal matter: our prospects for flourishing may depend less on personal wisdom than on living in the right kind of setting, with the right sorts of people” (p 267). The main problem I see with that statement is that in the modern world a person usually needs considerable wisdom to choose to live in the right kind of setting with the right kind of people. (Haybron implies that there is also another problem, namely that people who consider that they are living in the right kind of community may not be able to prevent economic development that will damage the lifestyle that they value. I will discuss this in my next post.)
Dan Haybron’s position regarding liberal sobriety and contextualism seems close to that of Friedrich Hayek (and Adam Smith). This might deserve some explanation, since there has been a tendency - including by some politicians who should know better - to confuse Hayek’s views about individualism with those of Gordon Gekko.
Hayek supported the classical liberal view that humans are very irrational and fallible beings. In supporting the views of Adam Smith he wrote: “It would scarcely be too much to claim that the main merit of the individualism that he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system that does not depend for its functioning on our finding good men for running it, or on all men becoming better than they are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. Their aim was a system in which it should be possible to grant freedom to all ...”.
Hayek noted that the classical liberal view affirms the value of the family, community groups, voluntary associations and conventions that have evolved for the mutual benefit of community members. He argued that voluntary cooperation enables coercion to be kept to a minimum. He condemned “false individualism which wants to dissolve all these smaller groups into atoms which have no cohesion other than the coercive rules imposed by the state ...”. He even suggested: “It must remain an open question whether a free or individualistic society can be worked successfully if people are too ‘individualistic’ in the false sense, if they are too unwilling voluntarily to conform to traditions and conventions, and if they refuse to recognize anything which is not consciously designed or which cannot be demonstrated as rational to every individual”. (The quotes are from: ‘Individualism: True and False’, a paper written in the 1940s and published in various places including: C Nishiyama and K Leube (eds.), “The Essence of Hayek”, 1984.)
I’m not sure whether Dan Haybron would appreciate any further attempts on my part to associate his views with those of Friedrich Hayek. So, I will end this post with a quote from Haybron’s book:
“Accepting contextualism does not require us to follow communitarians in rejecting liberalism. Contextualists might insist that governments promote substantive goods only when doing so enjoys sufficient popular support, and that they not infringe on individual rights in doing so” (p 265-6).
What is more surprising, however, is that I find that the author’s position is in some respects fairly close to my own view. Why am I surprised? I think it is because I originally thought that Haybron’s foreshadowed attack on liberal optimism was shaping up to be an attack on classical liberalism. In the final chapter of the book, however, he defines liberal optimism more specifically as the presumption that a person’s well-being will increase if she/he has more options to choose from. (I think that is the essence of what he is getting at in his lengthy definition on pages 256-8.) In the end it turns out that Haybron’s main target is actually atomistic (or rationalistic) individualism rather than classical liberalism.
Haybron’s conclusion is that the balance of evidence may favour both “liberal sobriety” and “contextualism”. Liberal sobriety initially brought to my mind thoughts about the desirability of respecting the rights of others by being temperate in one’s consumption of alcohol - but it is actually the view that although people should not be presumed to fare better if they have more options to choose from, they usually do fare better under those circumstances (p 263). Contextualism is the view that well-being is better served when individuals’ lives are shaped by an obliging context, i.e. communities, cultures etc. conducive to human flourishing.
Haybron writes: “We should take neither liberal optimism nor individualism for granted. Indeed, perhaps the pursuit of happiness will prove to be mainly a societal matter: our prospects for flourishing may depend less on personal wisdom than on living in the right kind of setting, with the right sorts of people” (p 267). The main problem I see with that statement is that in the modern world a person usually needs considerable wisdom to choose to live in the right kind of setting with the right kind of people. (Haybron implies that there is also another problem, namely that people who consider that they are living in the right kind of community may not be able to prevent economic development that will damage the lifestyle that they value. I will discuss this in my next post.)
Dan Haybron’s position regarding liberal sobriety and contextualism seems close to that of Friedrich Hayek (and Adam Smith). This might deserve some explanation, since there has been a tendency - including by some politicians who should know better - to confuse Hayek’s views about individualism with those of Gordon Gekko.
Hayek supported the classical liberal view that humans are very irrational and fallible beings. In supporting the views of Adam Smith he wrote: “It would scarcely be too much to claim that the main merit of the individualism that he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system that does not depend for its functioning on our finding good men for running it, or on all men becoming better than they are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. Their aim was a system in which it should be possible to grant freedom to all ...”.
Hayek noted that the classical liberal view affirms the value of the family, community groups, voluntary associations and conventions that have evolved for the mutual benefit of community members. He argued that voluntary cooperation enables coercion to be kept to a minimum. He condemned “false individualism which wants to dissolve all these smaller groups into atoms which have no cohesion other than the coercive rules imposed by the state ...”. He even suggested: “It must remain an open question whether a free or individualistic society can be worked successfully if people are too ‘individualistic’ in the false sense, if they are too unwilling voluntarily to conform to traditions and conventions, and if they refuse to recognize anything which is not consciously designed or which cannot be demonstrated as rational to every individual”. (The quotes are from: ‘Individualism: True and False’, a paper written in the 1940s and published in various places including: C Nishiyama and K Leube (eds.), “The Essence of Hayek”, 1984.)
I’m not sure whether Dan Haybron would appreciate any further attempts on my part to associate his views with those of Friedrich Hayek. So, I will end this post with a quote from Haybron’s book:
“Accepting contextualism does not require us to follow communitarians in rejecting liberalism. Contextualists might insist that governments promote substantive goods only when doing so enjoys sufficient popular support, and that they not infringe on individual rights in doing so” (p 265-6).
Tuesday, February 10, 2009
How close is the relationship between life satisfaction and happiness?
This post is a continuation of discussion of issues raised in Dan Haybron’s book, “The Pursuit of Unhappiness”, and my last post, ‘What is happiness?’
I ended my last post suggesting that Dan Haybron overstates the difference between positive emotional states and being satisfied with one’s life.
My objection relates specifically to an example in which Haybron attempts to separate a person’s emotional condition from her dissatisfaction with her life in order to show that if you take away the former it is not clear that the latter involves unhappiness.
Haybron writes: “Consider a small-town resident, impressed by television depictions of city life, who believes her environs dull and unsophisticated. Dissatisfied with her life she wants to get out. Later, having done so, she realizes that her old life was actually rich and fulfilling with none of the anxiety and loneliness of urban life. She might conclude that, while she had indeed been dissatisfied in her former life, she was nonetheless happy” (p 150).
It seems to me that this attempt to separate the person’s dissatisfaction with life from her emotional state doesn’t work. It seems to me that she was clearly not happy in her former life because she thought she had the option of living a happier life in the city. Her problem was that the comparative judgement that led her to feel dissatisfied with small-town life was made on the basis of inadequate information. If she had followed Dan Gilbert’s advice (“Stumbling on Happiness”) and talked to some of her friends who had moved to the city, she would have been in a better position to know how she would feel after she moved. In possession of this better information it is reasonable to suppose that she would make a more favourable judgement about small-town life and feel happier.
Is it ever possible for individuals to make the judgement that they are satisfied or dissatisfied with life without referring to their emotional states? Perhaps it would be possible for some individuals to judge themselves to be satisfied with life from a purely intellectual point of view, without being happy. But would such people actually feel satisfied with life? I don’t think so.
This still leaves doubt about the relationship between life satisfaction judgements and happiness. Does it make sense to define happiness as “lasting and justified satisfaction with life as a whole”? (Charles Murray adopts this as his working definition of happiness in what I have previously described as the best book about pursuit of happiness and good government). It seems to me, however, that this definition encompasses factors that contribute to human well-being and flourishing that are additional to the positive emotional states involved in Haybron’s definition of happiness.
Perhaps “lasting and justified satisfaction with life as a whole” should be viewed as a definition of well-being rather than as a definition of happiness. Haybron might be right that life satisfaction is a dubious candidate for a major life goal because it is “too easy to come by” (p 99), but I think the requirement for justification meets this objection. The requirement for justification also has the virtue of recognising that human well-being requires the exercise of practical wisdom.
I ended my last post suggesting that Dan Haybron overstates the difference between positive emotional states and being satisfied with one’s life.
My objection relates specifically to an example in which Haybron attempts to separate a person’s emotional condition from her dissatisfaction with her life in order to show that if you take away the former it is not clear that the latter involves unhappiness.
Haybron writes: “Consider a small-town resident, impressed by television depictions of city life, who believes her environs dull and unsophisticated. Dissatisfied with her life she wants to get out. Later, having done so, she realizes that her old life was actually rich and fulfilling with none of the anxiety and loneliness of urban life. She might conclude that, while she had indeed been dissatisfied in her former life, she was nonetheless happy” (p 150).
It seems to me that this attempt to separate the person’s dissatisfaction with life from her emotional state doesn’t work. It seems to me that she was clearly not happy in her former life because she thought she had the option of living a happier life in the city. Her problem was that the comparative judgement that led her to feel dissatisfied with small-town life was made on the basis of inadequate information. If she had followed Dan Gilbert’s advice (“Stumbling on Happiness”) and talked to some of her friends who had moved to the city, she would have been in a better position to know how she would feel after she moved. In possession of this better information it is reasonable to suppose that she would make a more favourable judgement about small-town life and feel happier.
Is it ever possible for individuals to make the judgement that they are satisfied or dissatisfied with life without referring to their emotional states? Perhaps it would be possible for some individuals to judge themselves to be satisfied with life from a purely intellectual point of view, without being happy. But would such people actually feel satisfied with life? I don’t think so.
This still leaves doubt about the relationship between life satisfaction judgements and happiness. Does it make sense to define happiness as “lasting and justified satisfaction with life as a whole”? (Charles Murray adopts this as his working definition of happiness in what I have previously described as the best book about pursuit of happiness and good government). It seems to me, however, that this definition encompasses factors that contribute to human well-being and flourishing that are additional to the positive emotional states involved in Haybron’s definition of happiness.
Perhaps “lasting and justified satisfaction with life as a whole” should be viewed as a definition of well-being rather than as a definition of happiness. Haybron might be right that life satisfaction is a dubious candidate for a major life goal because it is “too easy to come by” (p 99), but I think the requirement for justification meets this objection. The requirement for justification also has the virtue of recognising that human well-being requires the exercise of practical wisdom.
What is happiness?
I am currently reading “The Pursuit of Unhappiness” by philosopher, Dan Haybron. My interest in the book was aroused by some quotes in a post on one of Henry Scouteguazza’s blogs, which suggested that Haybron’s book presented a challenge to classical liberal optimism, i.e. optimism about the capacity of individuals to achieve happiness if they have the liberty to pursue it. I had previously read articles by Haybron and was favourably impressed by them, so decided to read the book even though it might cause me to re-think my views yet again (and despite my aversion to the title).
A lot of the material that I have read and commented on in this blog seems to question the case for classical liberal optimism. I think that is because much of modern writing on this topic tends to view individual rationality in setting and pursuing goals as conventional wisdom that should be challenged. Since I began reading in this area I have become a lot more aware of the potential for individuals to fail to pursue happiness effectively. (For example, see posts discussing views of Dan Gilbert, Dan Ariely, Richard Thaler and Cass Sunstein, and Colin Camerer.) I still believe, nevertheless, that not only is it good to respect the liberty of others – to allow them to live as seems good to themselves - but it also usually does people good to take responsibility for the running of their own lives. It is possible that I might modify these views after I have finished reading “The Pursuit of Unhappiness”.
At this stage I have only read the first half of the book, discussing how happiness can most usefully be perceived. Very briefly, Haybron argues in favour of an emotional state view of happiness rather than either the hedonic view or the life satisfaction view. He rejects the hedonic view (that happiness is pleasure) largely on the grounds that pleasure is something that happens to a person (having pleasant experiences) whereas happiness is a deeper psychological condition. He rejects the view that happiness is life satisfaction for two main reasons. First, he argues that the attitudes that people have toward their lives tend to be unstable - influenced by whatever events come to mind. (I think he overstates this point because of evidence I have discussed in an earlier post that life satisfaction judgements can be fairly stable.) Second, he argues that life satisfaction judgements are inherently ethically loaded e.g. our judgement about our lives may be influenced by such factors as whether or not we think it is admirable to count our blessings.
Haybron argues that happiness consists of a person’s overall emotional condition. A happy person’s emotional condition is broadly positive – involving stances of attunement (peace of mind, confidence and inner freedom), engagement (vitality and flow) and endorsement (joy, cheerfulness).
My initial reaction is that Haybron has presented a persuasive argument that the happiness label belongs on the jar containing positive emotional states rather than on the jars containing pleasures or life satisfaction. This does not rule out the possibility that hedonic considerations and life satisfaction may still be important and closely related to happiness even though they are not the same thing as happiness.
However, I have two reservations. First, Haybron’s argument about the nature of happiness will not prevent the continued generic use of the term to cover a variety of influences on well-being as in the phrase “gross national happiness”. Some potential for semantic confusion will remain even if Haybron’s argument is widely accepted by happiness researchers.
My second reservation is that in the process of his labelling exercise I think the author overstates the difference between positive emotional states and life satisfaction. I will explain why in my next post.
A lot of the material that I have read and commented on in this blog seems to question the case for classical liberal optimism. I think that is because much of modern writing on this topic tends to view individual rationality in setting and pursuing goals as conventional wisdom that should be challenged. Since I began reading in this area I have become a lot more aware of the potential for individuals to fail to pursue happiness effectively. (For example, see posts discussing views of Dan Gilbert, Dan Ariely, Richard Thaler and Cass Sunstein, and Colin Camerer.) I still believe, nevertheless, that not only is it good to respect the liberty of others – to allow them to live as seems good to themselves - but it also usually does people good to take responsibility for the running of their own lives. It is possible that I might modify these views after I have finished reading “The Pursuit of Unhappiness”.
At this stage I have only read the first half of the book, discussing how happiness can most usefully be perceived. Very briefly, Haybron argues in favour of an emotional state view of happiness rather than either the hedonic view or the life satisfaction view. He rejects the hedonic view (that happiness is pleasure) largely on the grounds that pleasure is something that happens to a person (having pleasant experiences) whereas happiness is a deeper psychological condition. He rejects the view that happiness is life satisfaction for two main reasons. First, he argues that the attitudes that people have toward their lives tend to be unstable - influenced by whatever events come to mind. (I think he overstates this point because of evidence I have discussed in an earlier post that life satisfaction judgements can be fairly stable.) Second, he argues that life satisfaction judgements are inherently ethically loaded e.g. our judgement about our lives may be influenced by such factors as whether or not we think it is admirable to count our blessings.
Haybron argues that happiness consists of a person’s overall emotional condition. A happy person’s emotional condition is broadly positive – involving stances of attunement (peace of mind, confidence and inner freedom), engagement (vitality and flow) and endorsement (joy, cheerfulness).
My initial reaction is that Haybron has presented a persuasive argument that the happiness label belongs on the jar containing positive emotional states rather than on the jars containing pleasures or life satisfaction. This does not rule out the possibility that hedonic considerations and life satisfaction may still be important and closely related to happiness even though they are not the same thing as happiness.
However, I have two reservations. First, Haybron’s argument about the nature of happiness will not prevent the continued generic use of the term to cover a variety of influences on well-being as in the phrase “gross national happiness”. Some potential for semantic confusion will remain even if Haybron’s argument is widely accepted by happiness researchers.
My second reservation is that in the process of his labelling exercise I think the author overstates the difference between positive emotional states and life satisfaction. I will explain why in my next post.
Thursday, February 5, 2009
Why is Rudd's essay like toxic debt?
When Jim asked me what I thought of Kevin Rudd’s lengthy essay on the global financial crisis (published in the February 2009 issue of “The Monthly”) I said it was like a CDO. He said: “I agree. Its just a heap of garbage.”
I replied: “No, that’s not what I meant. What Rudd has done in writing this essay is like constructing a CDO. He has taken some reasonable stuff, combined it with some garbage and then dressed it up to look like gold. No-one knows what it is worth.”
Jim interrupted: “We have to pay $7.95 to get a copy. How is that for unrestrained capitalism? We actually have to pay to read the views of our prime minister.”
I ignored Jim’s comment. I continued: “The problem is that I can’t work out whether he is full of crap or just pretending. For example, if we can believe that his praise for the Hawke-Keating governments’ economic liberalisation is sincere, then we can be reasonably confident that his attack on what he describes as “the great neo-liberal experiment” is just a political labelling exercise designed to make Australia’s former government and current opposition look responsible for the world financial crisis. If we can believe that then we don’t have too much to worry about. But what if Janet Albrechtsen is right? What if Rudd’s claim to be a fiscal conservative before the last election was just a charade? What if his social democratic dream all along was to engage in an orgiastic spending spree on borrowed money?” (This is a reference to Janet Albrechtsen’s article ‘PM dumps facade for his ideological dream’, in “The Australian”, 4 February 2009.)
Jim looked puzzled. He said: “I thought the writing was on the wall before the 2007 election that Kevin’07 was no Paul Keating. Did you think his anti-market rhetoric at the time was just labelling? Can you imagine Rudd ever coming clean with the public, like Keating did before the recession in the early 1990s, and telling them that the Australian government can’t spend its way out of a world recession?”
I said: “I thought Rudd’s stuff before the election about not having to choose between Brezhnev and Hayek was just differentiating his product from John Howard’s. I didn’t like his misrepresentation of Hayek, but I thought Rudd was just a kinder and younger version of John Howard.”
Jim replied: “Well, the proof of the pudding is in the eating. What do you think of Rudd’s latest package of spending measures?”
I picked up my copy of this morning’s Financial Review and said: “I can’t say it any better than this.” I pointed to the following passage in an article by Mark Latham, former leader of the Labor Party:
“In an open economy, Keynesian pump-priming drives down national savings and increases reliance on costly forms of foreign debt. It is a Band-Aid policy that does nothing to enhance long-term demand conditions and productive capacity. Its lasting legacy for Australia will be a return to deficit budgeting, government indebtedness and tax increases to pay for the spending spree” (Australian Financial Review, 5 Feb. ‘09).
After he had finished reading Jim said: “Yeah, Latham had his problems, but if we had to have a Labor government – and couldn’t have Keating as leader – then I would feel a lot more confident about Australia’s economic future if we now had Latham at the helm instead of Rudd.”
I replied: “No, that’s not what I meant. What Rudd has done in writing this essay is like constructing a CDO. He has taken some reasonable stuff, combined it with some garbage and then dressed it up to look like gold. No-one knows what it is worth.”
Jim interrupted: “We have to pay $7.95 to get a copy. How is that for unrestrained capitalism? We actually have to pay to read the views of our prime minister.”
I ignored Jim’s comment. I continued: “The problem is that I can’t work out whether he is full of crap or just pretending. For example, if we can believe that his praise for the Hawke-Keating governments’ economic liberalisation is sincere, then we can be reasonably confident that his attack on what he describes as “the great neo-liberal experiment” is just a political labelling exercise designed to make Australia’s former government and current opposition look responsible for the world financial crisis. If we can believe that then we don’t have too much to worry about. But what if Janet Albrechtsen is right? What if Rudd’s claim to be a fiscal conservative before the last election was just a charade? What if his social democratic dream all along was to engage in an orgiastic spending spree on borrowed money?” (This is a reference to Janet Albrechtsen’s article ‘PM dumps facade for his ideological dream’, in “The Australian”, 4 February 2009.)
Jim looked puzzled. He said: “I thought the writing was on the wall before the 2007 election that Kevin’07 was no Paul Keating. Did you think his anti-market rhetoric at the time was just labelling? Can you imagine Rudd ever coming clean with the public, like Keating did before the recession in the early 1990s, and telling them that the Australian government can’t spend its way out of a world recession?”
I said: “I thought Rudd’s stuff before the election about not having to choose between Brezhnev and Hayek was just differentiating his product from John Howard’s. I didn’t like his misrepresentation of Hayek, but I thought Rudd was just a kinder and younger version of John Howard.”
Jim replied: “Well, the proof of the pudding is in the eating. What do you think of Rudd’s latest package of spending measures?”
I picked up my copy of this morning’s Financial Review and said: “I can’t say it any better than this.” I pointed to the following passage in an article by Mark Latham, former leader of the Labor Party:
“In an open economy, Keynesian pump-priming drives down national savings and increases reliance on costly forms of foreign debt. It is a Band-Aid policy that does nothing to enhance long-term demand conditions and productive capacity. Its lasting legacy for Australia will be a return to deficit budgeting, government indebtedness and tax increases to pay for the spending spree” (Australian Financial Review, 5 Feb. ‘09).
After he had finished reading Jim said: “Yeah, Latham had his problems, but if we had to have a Labor government – and couldn’t have Keating as leader – then I would feel a lot more confident about Australia’s economic future if we now had Latham at the helm instead of Rudd.”
Thursday, January 29, 2009
How can people know what they really want?
It was something I said that got Jim started on this topic. I was talking nostalgically about the lifestyle of the people in the farming community where I grew up. Most of these people knew what they wanted from life and they knew that they were well on the way toward getting it. A lot of the drudgery was disappearing from their lives with the introduction of electricity and the labour saving devices that we now take for granted. These people enjoyed the inner freedom of knowing that they were in control of their own lives. Most of them worked long hours, but they also volunteered a lot of time to work on community projects. Their social life was centred around fund-raising for the local school and charities. They liked their lifestyle and they wouldn’t think of swapping places with anyone living in a big city. They liked to go to “the big smoke” now and then, “just to see how the other half lived”, but they couldn’t understand how anyone would want to live there.
I can remember Jim saying: “You probably aren’t going to agree with this, but I think that these days a lot of people have a huge problem in knowing what they want from life. They have allowed themselves to become slaves to the things they think they have to do. Some are so stressed out that they are drowning in an ocean of ‘have to’.”
I was surprised to hear this argument from Jim. I had thought he would have been the kind of person who would say that if someone didn’t know what they wanted from life, then they should just “give themselves a wake-up call”. So I decided to find out where he was coming from. I asked: “What do you think is responsible for this problem?”
Jim said: “These days everyone in high-income countries has a huge amount of choice about what they do with their time. No-one has to work many hours a week to get the basic necessities of life. But a lot of people don’t feel the freedom that this gives them. They buy things they don’t really want and then they have to spend their lives paying for them. The farmers you were talking about earlier knew what they wanted and knew how to get it. These days a lot of people don’t know what they want because they have never learned how to deal effectively with Self 1’s interference.”
I knew that Self 1 was a concept that Jim had taken from Tim Gallwey’s “inner game” books about playing sport and work, but I wanted to see how he would explain it. So I just continued to show interest.
Jim explained: “Self 1 is your internal coach that has learned how to give advice from your parents and other external coaches. It is the inner voice that keeps warning you and instructing you how to do things and telling you to try harder whenever you make a mistake. Self 1’s reminders are intended to be helpful but they lead us to mistrust and over-control ourselves.
Self 2 is your natural self that embodies all the inherent potential you were born with.”
I didn’t have any problems with Jim’s explanation of Tim Gallwey’s concepts but I couldn’t see their relevance. I said: “Don’t people need this inner voice to warn them before they get out their credit cards and sign their lives away?”
Jim replied: “The problem is that when Self 1 has some good advice people tend to rebel against it because it isn’t their own authentic inner voice. People who grow up on farms have more opportunity to develop an authentic inner voice of their own. This is because they spend a lot of time working with their parents and arguing with them about just about everything.”
Jim’s theory seemed highly simplistic but I thought it might have some merit. As I thought about Jim’s theory I recalled Jonathan Haidt’s elephant and rider metaphor, and wondered whether growing up on a farm might also help some people to identify with the elephant as well as the rider. I remembered Haidt’s comment: “We sometimes fall into the view that we are fighting with our unconscious, our id, or our animal self. But really we are the whole thing. We are the rider and we are elephant. Both have their strengths and special skills” (“The Happiness Hypothesis”, 2006: 22).
Meanwhile, Jim began explaining how Self 1 interference can keep people from knowing what they really want. He said: “As soon as you start to think about what you want from life, Self 1 is likely to chime in with comments about what you should or should not want because of his or her hopes, expectations or fears. This advice is well-meaning, but it comes from someone else. It might even sound like the voice of someone else talking to you. Knowing what you really want is a matter of thinking in positive terms about your own desires - outcomes that are consistent with your own potential and your own values and preferences.”
I said: “So, what you are saying is that if a man wants to be happy then his goal should be to earn a higher income than his wife’s sister’s husband.”
Jim gave the hint of a smile before he replied: “What I’m actually saying is that if people learn to trust themselves they will know what they really want from life.”
I can remember Jim saying: “You probably aren’t going to agree with this, but I think that these days a lot of people have a huge problem in knowing what they want from life. They have allowed themselves to become slaves to the things they think they have to do. Some are so stressed out that they are drowning in an ocean of ‘have to’.”
I was surprised to hear this argument from Jim. I had thought he would have been the kind of person who would say that if someone didn’t know what they wanted from life, then they should just “give themselves a wake-up call”. So I decided to find out where he was coming from. I asked: “What do you think is responsible for this problem?”
Jim said: “These days everyone in high-income countries has a huge amount of choice about what they do with their time. No-one has to work many hours a week to get the basic necessities of life. But a lot of people don’t feel the freedom that this gives them. They buy things they don’t really want and then they have to spend their lives paying for them. The farmers you were talking about earlier knew what they wanted and knew how to get it. These days a lot of people don’t know what they want because they have never learned how to deal effectively with Self 1’s interference.”
I knew that Self 1 was a concept that Jim had taken from Tim Gallwey’s “inner game” books about playing sport and work, but I wanted to see how he would explain it. So I just continued to show interest.
Jim explained: “Self 1 is your internal coach that has learned how to give advice from your parents and other external coaches. It is the inner voice that keeps warning you and instructing you how to do things and telling you to try harder whenever you make a mistake. Self 1’s reminders are intended to be helpful but they lead us to mistrust and over-control ourselves.
Self 2 is your natural self that embodies all the inherent potential you were born with.”
I didn’t have any problems with Jim’s explanation of Tim Gallwey’s concepts but I couldn’t see their relevance. I said: “Don’t people need this inner voice to warn them before they get out their credit cards and sign their lives away?”
Jim replied: “The problem is that when Self 1 has some good advice people tend to rebel against it because it isn’t their own authentic inner voice. People who grow up on farms have more opportunity to develop an authentic inner voice of their own. This is because they spend a lot of time working with their parents and arguing with them about just about everything.”
Jim’s theory seemed highly simplistic but I thought it might have some merit. As I thought about Jim’s theory I recalled Jonathan Haidt’s elephant and rider metaphor, and wondered whether growing up on a farm might also help some people to identify with the elephant as well as the rider. I remembered Haidt’s comment: “We sometimes fall into the view that we are fighting with our unconscious, our id, or our animal self. But really we are the whole thing. We are the rider and we are elephant. Both have their strengths and special skills” (“The Happiness Hypothesis”, 2006: 22).
Meanwhile, Jim began explaining how Self 1 interference can keep people from knowing what they really want. He said: “As soon as you start to think about what you want from life, Self 1 is likely to chime in with comments about what you should or should not want because of his or her hopes, expectations or fears. This advice is well-meaning, but it comes from someone else. It might even sound like the voice of someone else talking to you. Knowing what you really want is a matter of thinking in positive terms about your own desires - outcomes that are consistent with your own potential and your own values and preferences.”
I said: “So, what you are saying is that if a man wants to be happy then his goal should be to earn a higher income than his wife’s sister’s husband.”
Jim gave the hint of a smile before he replied: “What I’m actually saying is that if people learn to trust themselves they will know what they really want from life.”
Saturday, January 24, 2009
Can ethics have the same objectivity as scientific research?
Jim has many annoying habits. One of his most annoying habits is to pick up books that he sees lying around my office and then to read passages at random. I wouldn’t mind if he just read to himself, but after he has been reading for a while he reads selected passages aloud and then asks me what they mean. It is as though he is testing whether I have actually read the book.
When Jim saw my copy of “Invariances”, by Robert Nozick he asked: “Have you read this book?” Without thinking I admitted that I had read it and immediately began to wonder whether it had been wise to claim to have read the book. I added: “But there is a difference between reading and understanding.”
I think Jim sniffed blood. He opened the book about a quarter of the way through and started reading, while I pretended to continue to read a different book. After a minute or two Jim asked: “What does Nozick mean when he states: ‘... we can hold that something about the world makes true statements true’.” (p 74). I suppose I could have admitted that I wasn’t sure what Nozick meant, but I tried to bluff my way through. I said: “I can’t explain it more simply than that.” Jim asked: “Is he saying that people who believe that all truth is relative are out of touch with reality?”
I thought of saying that such people must think they live in different worlds from the one we live in, but I decided the time had come to acknowledge the limitations of my understanding. I told Jim that I actually found the final chapter of “Invariances” a lot easier to understand than the first chapter. Jim flipped to a point about three-quarters of the way through the book and began reading. After a while he asked: “What did Nozick mean when he wrote: ‘an objective belief or judgement is one that arises through a process that does not tend to be directed away from the truth by the operation of biasing factors’.” (p 287) I explained that Nozick argued that it was possible for scientific research to be a reliable process for arriving at true beliefs. For example, while an individual scientist’s bias in favour of his pet theory might lead him astray, the scientific process can still be objective as long as other scientists are free to try to disprove his theory.
Jim read on for a while, and then asked: “Is Nozick actually saying here that ethical statements can be objective in the same way that scientific statements can be objective?” Fortunately, I was able to refer Jim to the following notes I had made when I read the book:
- Ethics evolved to enable us to co-ordinate our activities with others for mutual benefit.
- The ethics of respect is the first layer of ethics – mandating cooperation for mutual benefit e.g. respect for life and property, non-interference with others etc.
- Objectivity is required in ethical judgements to shield people from bias. Various devices have been proposed to promote objectivity e.g. Adam Smith’s ideal of an impartial observer and Rawls’ concept of a veil of ignorance.
- Objective ethical truths are held to have symmetry, or invariance, in their application e.g. the golden rule and Kant’s categorical imperative.
- The adoption of greater ethical symmetry (e.g. through rule of law) has extended the scope of impersonal dealings with non-relatives which in turn has enabled huge improvements in living standards in many countries.
After looking at my notes Jim flipped to the end of the book and began reading again. A little while later he made a loud noise. In fact, he uttered a profanity - one that some readers of this blog might find highly offensive. If Jim’s wife, Agnes, had been present she would have told Jim that what he said was “unnecessary”. Nevertheless, the profanity did serve to get my attention.
Jim said: “ Nozick was brilliant! Look, he makes the point here that the evolution of conscious self awareness – the attribute that marks us as human - was crucial to enable us to reflect on our own behaviour. And this reflection helps us to act in accordance with norms of cooperation for mutual benefit. Now listen to this.”
Jim then read aloud from one of the final paragraphs: “ ...if conscious self-awareness was selected for because it makes us capable of ethical behaviour, then ethics, even the very first layer of the ethics of respect, truly is what makes us human.” (p 300)
Jim added: “Don’t you wish you had written that?”
Monday, January 19, 2009
Do voters have a conservative bias rather than a pessimistic bias?
This post further considers the question of whether most people have a pessimistic bias, which was discussed in my last post.
Bryan Caplan defines “pessimistic bias” as “a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy” (“The Myth of the Rational Voter”, 2007: 44). On reflection, however, it seems to me that Caplan’s discussion relates to two separate questions: whether people are generally too pessimistic about economic performance in the recent past, the present and the near future; and whether people are unduly susceptible to arguments appealing to nostalgia, and to gloom and doom prognostications. I argue below that Caplan’s answer to the first question is probably wrong and that the second question has more to do with loss aversion than pessimism.
As discussed in my last post, Caplan’s argument that people are too pessimistic about economic performance rests mainly on a survey which showed that economists were more optimistic about short-term economic prospects than the general public. As subsequent events have shown, the economists were probably too optimistic. Moreover, the survey results do not seem to me to suggest that the American public were particularly pessimist about economic prospects at the time of the survey. In an earlier post, ‘Would a chain index provide a better guide to change in the quality of life’, I argued that surveys conducted by the Pew Research Center imply that over the last 30 years Americans have tended to perceive their quality of life to be rising more rapidly that per capita GDP. If anything, this would suggest an optimistic bias, rather than a pessimistic bias.
I therefore reject the view that people generally have a pessimistic bias in considering short-term economic performance. I think there is probably a pessimistic bias at present, but as a rule I expect that public opinion about economic prospects is as much prone to irrational exuberance as to irrational pessimism.
I think Caplan is probably on much firmer ground in relation to the second aspect of bias – susceptibility to arguments appealing to nostalgia, and to gloom and doom prognostications. It seems to me that the common element here is fear of change, or more precisely, loss aversion. Research by Daniel Kahneman and Amos Tversky has shown that most people will reject a gamble with even chances to win and lose, unless the possible win is at least twice the size of the possible loss (refer Kahneman’s Nobel Prize lecture p 461). It seems reasonable to speculate that such considerations impart a conservative bias to political choice.
Some of my “conservative” friends might think that a conservative bias among voters should be encouraged. I am not so sanguine because a conservative bias - a bias in favour of the status quo - tends to favour retention of government regulation that has outlived its usefulness (if indeed it was ever useful). A conservative bias may also tend to favour increased regulation to prevent changes that some groups fear – whether economic, social or environmental – irrespective of cost.
Postscript:
I have been reminded that Milton and Rose Friedman wrote a book entitled "The Tryanny of the Status Quo" in 1982. This "tyranny" was seen to be the result of the the actions of politicians, bureaucrats and special interest groups who advance their own interests at the expense of the public.
Bryan Caplan defines “pessimistic bias” as “a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy” (“The Myth of the Rational Voter”, 2007: 44). On reflection, however, it seems to me that Caplan’s discussion relates to two separate questions: whether people are generally too pessimistic about economic performance in the recent past, the present and the near future; and whether people are unduly susceptible to arguments appealing to nostalgia, and to gloom and doom prognostications. I argue below that Caplan’s answer to the first question is probably wrong and that the second question has more to do with loss aversion than pessimism.
As discussed in my last post, Caplan’s argument that people are too pessimistic about economic performance rests mainly on a survey which showed that economists were more optimistic about short-term economic prospects than the general public. As subsequent events have shown, the economists were probably too optimistic. Moreover, the survey results do not seem to me to suggest that the American public were particularly pessimist about economic prospects at the time of the survey. In an earlier post, ‘Would a chain index provide a better guide to change in the quality of life’, I argued that surveys conducted by the Pew Research Center imply that over the last 30 years Americans have tended to perceive their quality of life to be rising more rapidly that per capita GDP. If anything, this would suggest an optimistic bias, rather than a pessimistic bias.
I therefore reject the view that people generally have a pessimistic bias in considering short-term economic performance. I think there is probably a pessimistic bias at present, but as a rule I expect that public opinion about economic prospects is as much prone to irrational exuberance as to irrational pessimism.
I think Caplan is probably on much firmer ground in relation to the second aspect of bias – susceptibility to arguments appealing to nostalgia, and to gloom and doom prognostications. It seems to me that the common element here is fear of change, or more precisely, loss aversion. Research by Daniel Kahneman and Amos Tversky has shown that most people will reject a gamble with even chances to win and lose, unless the possible win is at least twice the size of the possible loss (refer Kahneman’s Nobel Prize lecture p 461). It seems reasonable to speculate that such considerations impart a conservative bias to political choice.
Some of my “conservative” friends might think that a conservative bias among voters should be encouraged. I am not so sanguine because a conservative bias - a bias in favour of the status quo - tends to favour retention of government regulation that has outlived its usefulness (if indeed it was ever useful). A conservative bias may also tend to favour increased regulation to prevent changes that some groups fear – whether economic, social or environmental – irrespective of cost.
Postscript:
I have been reminded that Milton and Rose Friedman wrote a book entitled "The Tryanny of the Status Quo" in 1982. This "tyranny" was seen to be the result of the the actions of politicians, bureaucrats and special interest groups who advance their own interests at the expense of the public.
Thursday, January 15, 2009
Do most people have a pessimistic bias?
I did not respond enthusiastically when Jim said that he wanted further discussion of Bryan Caplan’s book, “The Myth of the Rational Voter”. I told him that I was looking forward to talking about something else, like the recent research that suggests that happiness is contagious, but Jim was not to be distracted.
After referring to an earlier conversation (reported here) Jim said: “I accept Caplan’s view that most people have an anti-market bias, an anti-foreign bias and a make-work bias, but I’m not too sure what to make of his claim that most people have a pessimistic bias. How does he support that?”
I explained that the main support came from a survey of the attitudes of economists and the general public in America. Economists were much more optimistic than the public on questions such as whether you expect your children’s generation to enjoy a higher standard of living than your own and whether you expect the average American’s standard of living to rise or fall over the next five years.
I didn’t think what I had said was funny, but Jim burst out laughing. After he composed himself he asked: “What grounds did those economists have for being so optimistic?”
My response was that there has been a vast improvement in living standards in many countries over the last 200 years. Adam Smith was right when he said that efforts of everyone to better their own conditions is often powerful enough to maintain “the natural progress of things toward improvement” despite the failures of government. Over the years some very prominent economists have forecast the stagnation or secular decline of market economies, but subsequent events have always proved them to be wrong.
Jim then said: “I can see that optimism is justified if you take a long enough time frame and have faith that the average voter will not elect populist politicians who are likely to regulate economic incentives out of existence. But economists who share Bryan Caplan’s views about the irrationality of voters do not have grounds to be optimistic, do they?”
I don’t know whether or not that question was meant to be answered. I suggested that even now there are probably stronger grounds to be hopeful about the future than, say, 30 years ago. Markets are a lot more flexible now as a result of reforms introduced in the 1980s and 1990s. I added that all we need to get out of the bubble–bust cycle is for central banks to introduce monetary policy rules that will have a stabilising effect, rather than a destabilising effect.
Fortunately Jim didn’t ask what would be wrong with a monetary policy rule that interest rates should be determined by market forces in the same way that other prices are determined in a market economy. It would have been a good question for Jim to ask, but it is just as well he didn’t ask it because I don’t have an answer.
As usual, Jim had the last word. He said: “You know how every generation has a tendency to be pessimistic about the next generation.” I nodded and he continued: “From the beginning of history old people have always been talking about the good old days when young people used to have good manners and respect for their elders. Well, I actually don’t think that there is much wrong with the younger generation these days. If only they could learn to hold their liquor as well as we could when we were young, then they wouldn’t be too bad.”
Postscript: Jim has actually not had the last word this time. There is further discussion of this question in my next post.
After referring to an earlier conversation (reported here) Jim said: “I accept Caplan’s view that most people have an anti-market bias, an anti-foreign bias and a make-work bias, but I’m not too sure what to make of his claim that most people have a pessimistic bias. How does he support that?”
I explained that the main support came from a survey of the attitudes of economists and the general public in America. Economists were much more optimistic than the public on questions such as whether you expect your children’s generation to enjoy a higher standard of living than your own and whether you expect the average American’s standard of living to rise or fall over the next five years.
I didn’t think what I had said was funny, but Jim burst out laughing. After he composed himself he asked: “What grounds did those economists have for being so optimistic?”
My response was that there has been a vast improvement in living standards in many countries over the last 200 years. Adam Smith was right when he said that efforts of everyone to better their own conditions is often powerful enough to maintain “the natural progress of things toward improvement” despite the failures of government. Over the years some very prominent economists have forecast the stagnation or secular decline of market economies, but subsequent events have always proved them to be wrong.
Jim then said: “I can see that optimism is justified if you take a long enough time frame and have faith that the average voter will not elect populist politicians who are likely to regulate economic incentives out of existence. But economists who share Bryan Caplan’s views about the irrationality of voters do not have grounds to be optimistic, do they?”
I don’t know whether or not that question was meant to be answered. I suggested that even now there are probably stronger grounds to be hopeful about the future than, say, 30 years ago. Markets are a lot more flexible now as a result of reforms introduced in the 1980s and 1990s. I added that all we need to get out of the bubble–bust cycle is for central banks to introduce monetary policy rules that will have a stabilising effect, rather than a destabilising effect.
Fortunately Jim didn’t ask what would be wrong with a monetary policy rule that interest rates should be determined by market forces in the same way that other prices are determined in a market economy. It would have been a good question for Jim to ask, but it is just as well he didn’t ask it because I don’t have an answer.
As usual, Jim had the last word. He said: “You know how every generation has a tendency to be pessimistic about the next generation.” I nodded and he continued: “From the beginning of history old people have always been talking about the good old days when young people used to have good manners and respect for their elders. Well, I actually don’t think that there is much wrong with the younger generation these days. If only they could learn to hold their liquor as well as we could when we were young, then they wouldn’t be too bad.”
Postscript: Jim has actually not had the last word this time. There is further discussion of this question in my next post.
Sunday, January 11, 2009
What was Sandy Cuthbertson like?
Most people who knew Sandy would say that he was outgoing, witty and courageous. He was a good-humoured person. He had the knack of getting people to laugh along with him within moments of meeting them. Above all, he was a good family man, a wise economist and a loyal friend.
I expect that everyone who knew Sandy would have a slightly different view of what he was like. I first met him in 1963 when we were both studying agricultural economics at the University of New England (Armidale, NSW, Australia). Apart from our studies I don’t think we had a great deal in common at that time. I can remember him giving me some critical feedback – probably appropriate – about something I had written for the student newspaper. He wasn’t backward in saying what he thought even then, but he had a pleasant personality and a well-deserved reputation for his sense of humour.
After Sandy graduated from the UNE he went to the U.S. to do a Ph. D. in economics at North Carolina State University. I went to Canberra to work in the Bureau of Agricultural Economics (BAE) and then back to the UNE to do a masters degree. By the time I got back to the BAE, at the end of 1971, Sandy was also working there.
Sandy came back to Australia with a mission to over-turn the prevailing mind-set that the role of economists was to find market failures and to propose remedial government regulation. He presented the then innovative view that additional regulation often made matters worse. For example, the beneficiaries of regulation were often able to use political muscle to ensure that regulatory experiments were continued long after it was clear that the costs of regulation far exceeded the benefits.
Sandy would not have found the BAE to be a particularly fertile place to spread such wisdom. He soon moved to the Industries Assistance Commission (which later became the Industry Commission and then the Productivity Commission). I followed in 1975, joining a different research division of the Commission. There was a fair amount of creative tension – usually friendly – between the different divisions of the IAC, resulting from overlapping responsibilities. Sandy thrived in that environment and established a reputation for being a hard-working and innovative researcher, an entertaining writer and a talented team leader. He certainly brought out the best in the people in his team.
Sandy left the IAC in 1986 to become a founding director and managing director of the Centre for International Economics.
Sandy and I managed to collaborate successfully in 1983 on the one major project on which we worked closely together. We jointly led a project team to prepare a report on the structure of industry assistance in New Zealand for Syntec Economic Services and the NZ Treasury. We had no difficulty in agreeing at an early stage on membership of the project team, the analytical framework, the work plan and the report structure. We put a lot of effort into planning the project and didn’t leave a great deal to chance.
I had thought until very recently that the effort we put into planning that project was largely the result of my own insistance. But I now know that Sandy always put a lot of effort into planning of projects. An outside observer, who was not part of his team, might think the process was spontaneous - perhaps even chaotic - but Sandy always had a good idea where he was heading and how he would circumvent the obstacles in his path.
At a more personal level, I recall that Sandy asked me one day whether I had read John Irving’s novel, “The World According to Garp”. He recommended it highly and suggested that I make time to read some of it every day even though I was very busy. I enjoyed the book - and since then I have read just about every novel that John Irving has written. Looking back now, however, I suspect that what Sandy was really telling me was not so much that this was a great novel, but that I needed to get more humour into my life.
What more can I say? It was a privilege to have known Sandy Cuthbertson and to have enjoyed his friendship.
I expect that everyone who knew Sandy would have a slightly different view of what he was like. I first met him in 1963 when we were both studying agricultural economics at the University of New England (Armidale, NSW, Australia). Apart from our studies I don’t think we had a great deal in common at that time. I can remember him giving me some critical feedback – probably appropriate – about something I had written for the student newspaper. He wasn’t backward in saying what he thought even then, but he had a pleasant personality and a well-deserved reputation for his sense of humour.
After Sandy graduated from the UNE he went to the U.S. to do a Ph. D. in economics at North Carolina State University. I went to Canberra to work in the Bureau of Agricultural Economics (BAE) and then back to the UNE to do a masters degree. By the time I got back to the BAE, at the end of 1971, Sandy was also working there.
Sandy came back to Australia with a mission to over-turn the prevailing mind-set that the role of economists was to find market failures and to propose remedial government regulation. He presented the then innovative view that additional regulation often made matters worse. For example, the beneficiaries of regulation were often able to use political muscle to ensure that regulatory experiments were continued long after it was clear that the costs of regulation far exceeded the benefits.
Sandy would not have found the BAE to be a particularly fertile place to spread such wisdom. He soon moved to the Industries Assistance Commission (which later became the Industry Commission and then the Productivity Commission). I followed in 1975, joining a different research division of the Commission. There was a fair amount of creative tension – usually friendly – between the different divisions of the IAC, resulting from overlapping responsibilities. Sandy thrived in that environment and established a reputation for being a hard-working and innovative researcher, an entertaining writer and a talented team leader. He certainly brought out the best in the people in his team.
Sandy left the IAC in 1986 to become a founding director and managing director of the Centre for International Economics.
Sandy and I managed to collaborate successfully in 1983 on the one major project on which we worked closely together. We jointly led a project team to prepare a report on the structure of industry assistance in New Zealand for Syntec Economic Services and the NZ Treasury. We had no difficulty in agreeing at an early stage on membership of the project team, the analytical framework, the work plan and the report structure. We put a lot of effort into planning the project and didn’t leave a great deal to chance.
I had thought until very recently that the effort we put into planning that project was largely the result of my own insistance. But I now know that Sandy always put a lot of effort into planning of projects. An outside observer, who was not part of his team, might think the process was spontaneous - perhaps even chaotic - but Sandy always had a good idea where he was heading and how he would circumvent the obstacles in his path.
At a more personal level, I recall that Sandy asked me one day whether I had read John Irving’s novel, “The World According to Garp”. He recommended it highly and suggested that I make time to read some of it every day even though I was very busy. I enjoyed the book - and since then I have read just about every novel that John Irving has written. Looking back now, however, I suspect that what Sandy was really telling me was not so much that this was a great novel, but that I needed to get more humour into my life.
What more can I say? It was a privilege to have known Sandy Cuthbertson and to have enjoyed his friendship.
Tuesday, January 6, 2009
How can governments raise the quality of public debate in order to achieve worthwhile reforms?
Following from our recent discussions about Bryan Caplan’s book, “The Myth of the Rational Voter”, Jim said he wanted to ask me what I thought a reform-minded government could do to raise the quality of public debate in order to overcome problems posed by lack of public understanding of economic issues. I suggested that there were not many reform-minded governments around these days, but Jim made it obvious that he did not think that remark was worthy of a response. He said: “I have read a post on your blog about ‘institutionalised transparency’. After I managed to work out that the post had nothing to do with the number of windows in public institutions, I found it quite interesting. So I have got some questions I want to ask you.”
I thought that what Jim had in mind was a casual conversation, but he produced a piece of paper with three questions written on it. “I’m not interested in your top-of the-head comments”, he said, “I want you to give a thoughtful one-page response to these questions on your blog.” Anticipating that I might say that there are better things to do at the seaside on a summer’s day, he added: “Just remember that you used to tell people that you found your work so interesting that you would be willing to do it for nothing!”
Question 1: Why do you think a transparent public inquiry process would raise the quality of public debate, given that the vast amount of policy-related research that is already publicly available has not achieved this?
Answer: The public inquiry process ensures that the results of relevant research are brought to bear at the most appropriate time and in the most appropriate way. The advice resulting from the process is directly relevant to the government’s policy agenda because it is provided in response to questions posed by the government. It comes from an authoritative source - independent of government, political organisations, industry organisations and interest groups - that is required to consider the interests of the whole community, rather than the interests of particular industries or groups. It is produced by competent professionals who are capable of presenting their understanding of the issues involved in a way that can be readily understood by politicians, journalists and interested members of the general public.
Question 2: What are the critical requirements for such an organisation to be effective in raising the level of public debate?
The most critical requirement that has not already been mentioned is transparency. The whole advisory process is open to public scrutiny, not just the questions posed by government and the Commission’s final report. The Commission publishes its preliminary views on the scope of the inquiry, submissions by interested parties are made public, a draft of the Commission’s report is published and responses to the Commission’s report are also made public.
This transparency provides an incentive for all involved in the process to lift their game. When interest groups make submissions to politicians behind closed doors their most influential arguments often emphasise the likely effects of their policy proposals on gullible voters in marginal electorates. When policy issues are exposed to the transparent advisory process, however, interest groups have an incentive to consider whether the views they present are likely to be able to withstand public scrutiny by critical professionals who are interested in the economy-wide effects of policy proposals.
Question 3: Where is the evidence that Australia’s productivity commission has been effective in raising public understanding of economic issues?
The Commission answers this question in its annual reports ( see particularly, pages 43 – 48 of the 2007-08 annual report). The fact that media coverage of the Commission’s reports is fairly extensive (p 48) suggests that it capable of having a positive effect on public understanding of issues.
However, I must come back to the point I was alluding to when Jim raised this question. The Commission functions most effectively when we have a reform-minded government that is interested in raising the quality of public debate on complex issues.
I thought that what Jim had in mind was a casual conversation, but he produced a piece of paper with three questions written on it. “I’m not interested in your top-of the-head comments”, he said, “I want you to give a thoughtful one-page response to these questions on your blog.” Anticipating that I might say that there are better things to do at the seaside on a summer’s day, he added: “Just remember that you used to tell people that you found your work so interesting that you would be willing to do it for nothing!”
Question 1: Why do you think a transparent public inquiry process would raise the quality of public debate, given that the vast amount of policy-related research that is already publicly available has not achieved this?
Answer: The public inquiry process ensures that the results of relevant research are brought to bear at the most appropriate time and in the most appropriate way. The advice resulting from the process is directly relevant to the government’s policy agenda because it is provided in response to questions posed by the government. It comes from an authoritative source - independent of government, political organisations, industry organisations and interest groups - that is required to consider the interests of the whole community, rather than the interests of particular industries or groups. It is produced by competent professionals who are capable of presenting their understanding of the issues involved in a way that can be readily understood by politicians, journalists and interested members of the general public.
Question 2: What are the critical requirements for such an organisation to be effective in raising the level of public debate?
The most critical requirement that has not already been mentioned is transparency. The whole advisory process is open to public scrutiny, not just the questions posed by government and the Commission’s final report. The Commission publishes its preliminary views on the scope of the inquiry, submissions by interested parties are made public, a draft of the Commission’s report is published and responses to the Commission’s report are also made public.
This transparency provides an incentive for all involved in the process to lift their game. When interest groups make submissions to politicians behind closed doors their most influential arguments often emphasise the likely effects of their policy proposals on gullible voters in marginal electorates. When policy issues are exposed to the transparent advisory process, however, interest groups have an incentive to consider whether the views they present are likely to be able to withstand public scrutiny by critical professionals who are interested in the economy-wide effects of policy proposals.
Question 3: Where is the evidence that Australia’s productivity commission has been effective in raising public understanding of economic issues?
The Commission answers this question in its annual reports ( see particularly, pages 43 – 48 of the 2007-08 annual report). The fact that media coverage of the Commission’s reports is fairly extensive (p 48) suggests that it capable of having a positive effect on public understanding of issues.
However, I must come back to the point I was alluding to when Jim raised this question. The Commission functions most effectively when we have a reform-minded government that is interested in raising the quality of public debate on complex issues.
Thursday, January 1, 2009
What can be done to promote public understanding of complex issues?
Jim began our discussion by wishing me a happy new year and asking whether I had made any resolutions. I told him that I had not had much success in keeping new year’s resolutions, so there wasn’t much point in making them. Jim then offered to make some resolutions for me and to help me to keep them, but I declined. Undeterred, he said: “You should resolve to come to grips with some of the issues that you have been ducking in your blog, such as the question of whether you are in favour of free banking.” I replied that I knew very little about monetary policy and was quite content to leave that to the experts.
Jim replied: “So you think that the experts in control of monetary policy in the U.S. and other major economies have been doing a good job over the last few years do you? I suppose you think that the problems that voters have in coming to an understanding of complex issues can be resolved by just handing the problem over to the experts.” (Our previous discussions concerning the nature of this problem and Bryan Caplan book, “The Myth of the Rational Voter”, can be found here.)
I responded that I was certainly not in favour of leaving everything to experts, but I thought the world would be faced by even bigger financial problems if populist politicians were set loose to introduce ‘funny money’ policies. I put forward the view that as a general rule we get better outcomes when politicians focus on setting broad policy goals and put in place processes that ensure that expert opinion is brought to bear on how those goals should be achieved.
Jim was not as impressed as I thought he should have been. I suspect he might have been wondering how current monetary policies actually differ from the ‘funny money’ policies that might be introduced by populist politicians. He asked: “Doesn’t this Caplan fellow have any useful suggestions about how to improve public understanding of issues? What solutions does he offer?”
When I mentioned Caplan’s argument that more decisions should be left to the market rather than brought into the realm of political decision-making, Jim said: “That’s shutting the stable door after the horse has bolted”. I tried to explain that this comment was not entirely appropriate because there was an ongoing tendency for voters to say “the government should do something about it” every time a problem arose and for governments to respond by introducing more regulation.
Jim just asked what else Caplan had proposed. So, I mentioned that we had already discussed one of Caplan’s proposals, namely that economists should do more to combat economic sophistry espoused by politicians and voters.
“Is that all he suggests?”, Jim asked. Then, with some reluctance, I mentioned Caplan’s proposal to reduce efforts to increase voter turnout on the grounds that the additional people who are encouraged to vote are less likely to understand complex issues. Jim just said, “Harrumph!”.
One of the few things I have learned through life is that when someone makes unreasonable noises about another person’s ideas and you try to defend those ideas, you are likely to end up trying to defend the indefensible. So, I just remained silent.
Eventually, Jim said: “I have been reading some of the stuff on your blog about the role of transparency procedures in improving public understanding of issues. I would like to talk more about that later. Meanwhile, make sure you wish readers of your blog a happy new year”.
HAPPY NEW YEAR!
Jim replied: “So you think that the experts in control of monetary policy in the U.S. and other major economies have been doing a good job over the last few years do you? I suppose you think that the problems that voters have in coming to an understanding of complex issues can be resolved by just handing the problem over to the experts.” (Our previous discussions concerning the nature of this problem and Bryan Caplan book, “The Myth of the Rational Voter”, can be found here.)
I responded that I was certainly not in favour of leaving everything to experts, but I thought the world would be faced by even bigger financial problems if populist politicians were set loose to introduce ‘funny money’ policies. I put forward the view that as a general rule we get better outcomes when politicians focus on setting broad policy goals and put in place processes that ensure that expert opinion is brought to bear on how those goals should be achieved.
Jim was not as impressed as I thought he should have been. I suspect he might have been wondering how current monetary policies actually differ from the ‘funny money’ policies that might be introduced by populist politicians. He asked: “Doesn’t this Caplan fellow have any useful suggestions about how to improve public understanding of issues? What solutions does he offer?”
When I mentioned Caplan’s argument that more decisions should be left to the market rather than brought into the realm of political decision-making, Jim said: “That’s shutting the stable door after the horse has bolted”. I tried to explain that this comment was not entirely appropriate because there was an ongoing tendency for voters to say “the government should do something about it” every time a problem arose and for governments to respond by introducing more regulation.
Jim just asked what else Caplan had proposed. So, I mentioned that we had already discussed one of Caplan’s proposals, namely that economists should do more to combat economic sophistry espoused by politicians and voters.
“Is that all he suggests?”, Jim asked. Then, with some reluctance, I mentioned Caplan’s proposal to reduce efforts to increase voter turnout on the grounds that the additional people who are encouraged to vote are less likely to understand complex issues. Jim just said, “Harrumph!”.
One of the few things I have learned through life is that when someone makes unreasonable noises about another person’s ideas and you try to defend those ideas, you are likely to end up trying to defend the indefensible. So, I just remained silent.
Eventually, Jim said: “I have been reading some of the stuff on your blog about the role of transparency procedures in improving public understanding of issues. I would like to talk more about that later. Meanwhile, make sure you wish readers of your blog a happy new year”.
HAPPY NEW YEAR!
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