Wednesday, June 3, 2015

Unpuzzling the Politics of Growth and Redistribution: What hath growth wrought?

"If there is a future for cosmopolitanism in Europe, it needs a credible politics of growth and redistribution." -- Peter Dorman, "Europe, Where Two Rights Make a Wrong"
Sandwichman wonders how such a politics would differ from the "ostensible socialist" wing of the neoliberal coalition. First, it would help to have a credible definition of what it is that is supposed to be growing. "Growth" sounds good... as long as you don't have to pin it down. But what supposedly grows -- national income and product accounts -- is an incomplete, monetized aggregate of disparate things, some of which are double counted, and "more" of which could mean just about anything or nothing. 

It is wishful thinking to assume that more of "whatever" will inevitably be better than a well-specified less.

Barkley Rosser took Sandwichman to task for suggesting that the mix of empirical information, speculation and wishful thinking about the relationship between economic growth and income inequality has probably worsened since Simon Kuznets 1954 estimate of "5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking":
But the hard fact is that there is lots more data out there on many aspects of economics, including the precise issues that Kuznets was studying when he made his complaint about "speculation."
Barkley is right about there being more data and empirical work out there, although it is unnerving that the example he cited as a sign of the empirical work -- Thomas Piketty's work -- doesn't support the complacent conventional wisdom regarding the unquestionable beneficence of economic growth. I would like to add another source that supports Barkley's claim about empirical work but contradicts the dominant complacency about growth: François Bourguignon and Christian Morrisson's widely-cited "Inequality among World Citizens: 1820-1992":
To summarize, this analysis shows that world income inequality worsened dramatically over the past two centuries. ... Changes in inequality within countries were important in some periods, most notably the drop in inequality within European countries and their offshoots in America and in the Pacific during the first half of the 20th century. In the long run, however, the increase in inequality across countries was the leading factor in the evolution of the world distribution of income. ... World inequality seems to have fallen since 1950 as a result of the pronounced drop in international disparities in life expectancy. But now that disparities in life expectancy are back to the levels before the big divergence of the 19th century, this source of convergence has lost its influence.
Bourguignon and Morrisson's empirical analysis -- along with Piketty's -- controverts that initial, tentative summary of long-term trends that puzzled Simon Kuznets:
...a long-term constancy, let alone reduction, of inequality in the secular income structure is a puzzle. For there are at least two groups of forces in the long-term operation of developed countries that make for increasing inequality in the distribution of income before taxes and excluding contributions by governments. ... What is particularly important is that the inequality in distribution of savings is greater than that in the distribution of property incomes, and hence of assets. ... Other conditions being equal, the cumulative effect of such inequality in savings would be the concentration of an increasing proportion of income-yielding assets in the hands of the upper groups -- a basis for larger income shares of these groups and their descendants.
The puzzle is solved because there isn't "a long-term constancy, let alone reduction, of inequality in the secular income structure" after all. This is not to say that the relationship between economic growth and inequality is an uncomplicated one, wholly determined by the disproportion of savings between people in different income groups. But it does fundamentally undermine the conclusions of cross-country regressions, "on the basis of which," as Bourguignon put it, "it would be tempting to conclude that 'growth (of any nature) is good for the poor'."

But what about a politics of economic growth (of any nature?) and redistribution? It might work -- just as a politics of general copulation could reduce the birth rate if combined with effective measures of contraception. Long live the revolution, indeed!

On the other hand, why make redistribution conditional on achieving growth targets in the first place? In bargaining parlance, that is what's known as a fall-back position. You don't present your fall-back position in your opening proposal. That's called "giving away the farm."

A few days ago, Sandwichman promised to expound on why the perpetual fallacy mantra even matters. Here is why. Those FT monkeys (covered in banknotes) would simply prefer to rhetorically prohibit the only opening gambit that could force real concessions from the folks who have champagne and brandy on tap. That effective initial offer would be a demand that doesn't stupidly assume, but actively pursues a "fixed amount of work" with a more equitable distribution. The only "credible politics of growth and distribution" would put distribution first and leave it to the owners of a disproportionate share of income-yielding assets to offer a growth and redistribution compromise in their counter-proposal.

But, alas, those FT monkeys' strategy seems to be working. They think about nothing but screwing growing their income-yielding assets and we are the ones who get screwed yielded.


Artist Statement (from "The Interventions of Kathryn Walter" by Bill Jeffries, Contemporary Art Gallery, Vancouver, 1990):
"The strategy behind 'Unlimited Growth...' is direct. It is directed at those who operate our free-market economy in their own interests, while excluding those interests that would be 'responsive to the needs of the community'. The subtext to 'Unlimited Growth...' relates to several aspects of public art including the need to address the use of site-specific work as a way of intervening in local issues, and in this instance, acting as a marker of resistance by the economically marginalized, as represented by a parallel gallery and a hotel providing affordable housing. Walter raises questions related to the
systems underlying the transactions and power-plays that constitute normal business in the world of real estate development. In Walter's art the museum without walls is also a museum OF walls, walls new and old, as well as those walls that perpetuate economic class distinctions. Her text on the façade of the Del-Mar Hotel will stand as a witness to the various power-plays, including the threat to move B.C. Hydro's head office to the suburb of Burnaby, that led to the development surrounding 553-555 Hamilton Street." 

Sunday, May 31, 2015

FT monkeys' false fallacy eruption

The Sandwichman has been out of town since last Wednesday and the Financial Times (those FT monkeys) has seized the opportunity to publish not one but two articles foisting the farcical lump of labour fallacy fable on an unsuspecting public. This is evidence of a complete lack of journalistic ethics. A simple fact check would reveal that the fallacy claim is bogus.

Some time later this week I expounded on why this even matters.

Tuesday, May 26, 2015

Trade, Bribes and Yardsticks

In the conclusion to their 1941 article "Protection and Real Wages," Wolfgang Stolper and Paul Samuelson wrote: has been shown that the harm which free trade inflicts upon- one factor of production is necessarily less than the gain to the other. Hence, it is always possible to bribe the suffering factor by subsidy or other redistributive devices so as to leave all factors better off as a result of trade.
This is an instance of the infamous Kaldor-Hicks compensation criterion, which David Ellerman has shown to be a "same yardstick" fallacy. Ironically, Ellerman took the same yardstick analogy from another paper by Samuelson and elsewhere Samuelson is dismissive of the Kaldor-Hicks criterion.

Ian Little described the K-H criterion as unacceptable nonsense. But, hey, let's fast-track the TPP and maybe one of those winners will toss us a bribe!

Monday, May 25, 2015

Gnash Equilibrium

Philip Mirowski, Machine Dreams
The mathematical price of demonstrating that every game had a fixed value was the unloading of all analytical ambiguity onto the very definition of the game. Far from being daunted at a game without determinate bounds, Nash was already quite prepared to relinquish any fetters upon the a priori specification of the structure of the game, given that the entire action was already confined within the consciousness of the isolated strategic thinker. The game becomes whatever you think it is. He dispensed with dummies, exiled the automata, and rendered the opponent superfluous. This was solipsism with a vengeance.
Yanis Varoufakis, "The Dance of the Meta-Axioms":
In game theory itself, questions were raised about the plausibility of presuming that rational agents must always select behaviour consistent with Nash’s (1951) equilibrium. In the context of static games it became apparent that disequilibrium behaviour could be fully rationalised and rendered consistent with infinite order common knowledge rationality. Similarly, it transpired that out-of-equilibrium behaviour could be just as rational in finite dynamic games as the equilibrium path proposed by Nash and his disciples.  As for indefinite horizon games, the devastating force of indeterminacy was felt in the form of the so-called Folk Theorem which shows that, in interactions that last for an unspecified period, anything goes. And yet, all applications of game theory, from theories of Central Bank behaviour to industrial organisation, labour economics and voting models, ignore these challenges, assuming that behaviour will remain on the equilibrium path.

Saturday, May 23, 2015


"These and many other mathematical statements don't remotely correspond to observable reality, nor do they have any evidence in support of them." -- Noah Smith,  How 'Mathiness' Made Me Jaded About Economics
Will anything change in the wake of the big mathiness dustup of 2015? Of course not. This is, after all, only a "technical discussion on cavalry tactics at the Battle of Austerlitz" not a searching inquiry into the identity and fundamental commitments of the economics political economy.

In his 1872 review of Thomas Brassey's Work and Wages, Frederic Harrison denounced political economy as a "magazine of untruth," specifying, "Political economy professes to be a science based on observation. But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients."

Today's growth economics assumes the same facts and rounds off the same dogmas as did its magazine-of-untruth counterpart 143 years ago. Up until the 1870s, that dogma was called the wages-fund doctrine. Since the 1950s, it has borne the alias of economic growth. Same difference. The affiliated "fact" is that all blessings flow from the expansion of trade, therefore any impediment to that expansion is anathema.

The rest is rounding off.

Wednesday, May 20, 2015

Napoleon Solow and the Phantom Mechanism

I would like to say why I think that the Doomsday Models are bad science and therefore bad guides to public policy. ... The basic assumption is that stocks of things like the world’s natural resources and the waste-disposal capacity of the environment are finite, that the world economy tends to consume the stock at an increasing rate (through the mining of minerals and the production of goods), and that there are no built-in mechanisms by which approaching exhaustion tends to turn off consumption gradually and in advance. You hardly need a giant computer to tell you that a system with those behavior rules is going to bounce off its ceiling and collapse to a low level. -- Robert M. Solow, 1973
Sandwichman is agnostic on the built-in mechanism fable.

On the one hand, Solow's "built-in mechanism" is a metaphor -- a depiction -- and of course there is no "mechanism" strictly speaking, just as God is not an old man with a long, white beard. There are instead more or less spontaneous reflexes of economic actors that in the aggregate have observable effects. Such reflexes, however, are multitude. The probability of all these reflexes co-ordinating themselves spontaneously and independently -- without help from a Maxwellian demon, Walrasian auctioneer or Invisible Hand -- to produce a conjectured effect far in the future is infinitesimal.
Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion on cavalry tactics at the Battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon Bonaparte. -- Robert M. Solow
Aside from the multiplicity of so-called mechanisms, there is the slight inconvenience that a homeostatic regulator itself consumes energy to do its work (also known as 'transaction costs'). The more vast and complex the organism being regulated, the more energy the regulator will need to consume. When what is being regulated is the consumption of energy, a contradiction emerges: progressively more energy needs to be consumed to reduce the consumption of energy. There is thus a ceiling on vastness and complexity and a floor on reducing consumption.

It is not the finiteness of resource stocks, but the fragility of self organized natural cycles that we have to fear. Unfortunately, the services provided by these cycles are part of the global commons. They are priceless, yet ‘free’. Markets play no role in the allocation of these resources. There is no built-in mechanism to ensure that supply will grow to meet demand. Indeed, there is every chance that the supply of environmental services will dwindle in the coming decades as the demand, generated by population growth and economic growth, grows exponentially. -- Robert U. Ayres, 1998
Ayres highlighted another fly in the built-in mechanism ointment. To be fair, Solow did acknowledge the externality flaw in the price system. Fixing the flaw, he assured, would be simple and virtually painless:
The flaw can be corrected, either by the simple expedient of regulating the discharge of wastes to the environment by direct control or by the slightly more complicated device of charging special prices — user taxes — to those who dispose of wastes in air or water.  
What stands between us and a decent environment is not the curse of industrialization, not an unbearable burden of cost, but just the need to organize ourselves consciously to do some simple and knowable things.
Now that we know how that organizing ourselves consciously business has worked out, couldn't we please have a built-in mechanism to do that task too? What if there is a built-in mechanism in the price and profit system that militates against the social capacity "to organize ourselves consciously to do some simple and knowable things"?

Not all built-in mechanisms are equal

Finally, even if there was a built-in self-stabilizing market mechanism, it's interaction with natural systems may not lead to the gradual, advance adjustment that Solow conjectured:
We identify and prove that the interaction between a stable natural system and a self-stabilizing market mechanism can lead to cyclical or even chaotic behaviour. A built-in self-stabilizing market mechanism will not always serve the function of stabilization. Under certain conditions, it may increase the amplitude of fluctuations and have the effect of destabilization, as demonstrated in this paper. Therefore, by incorporating a self-stabilizing market mechanism, this model yields a result that contradicts Solow's (1973) conjecture that the market mechanism will have the effect of smoothing the time path of the world economy. -- Hans Gottinger, 1998

Tuesday, May 19, 2015

Mathiness, Growth and Increasing Returns

The following was originally posted on Ecological Headstand in October, 2012 under the title, Endogenous Growth Theory and Ecological Unequal Exchange: linkage, displacement and deflection of 'diminishing returns'. Paul Romer's rant on mathiness has provoked a response from Lars Syll regarding the issue of increasing returns to scale, which I discussed in this post.

What the late Stephen G. Bunker wrote bears repeating:
The crucial difference between production and extraction is that the dynamics of scale in extractive economies function inversely to the dynamics of scale in the productive economies to which world trade connects them.
Rather than repeat what Bunker wrote, though, I'm going to cite, later, a longer piece by Nicholas Kaldor from his 1985 Hicks Lecture that makes a somewhat similar point. But first, I want to present some background on an old debate and a 'new' theory.

In December 1926, The Economic Journal published an article by Piero Sraffa dealing with "that difficult branch of economic theory" -- the theory of increasing returns. Over the next five years it published responses from Cecil Pigou, G. F. Shove, Lionel Robbins and Allyn Young and, in March 1930, a symposium on the topic by D. H. Robertson, Sraffa and Shrove.

Almost exactly 60 years later, in October 1986, The Journal of Political Economy, published Paul D. Romer's "Increasing Returns and Long-Run Growth," an important contribution to so-called New Growth Theory. Romer took his cue explicitly from Young's 1928 paper, "Increasing Returns and Economic Progress" and although he mentioned the precedents of Adam Smith's pin factory and Alfred Marshall's distinction between internal and external economies, he skipped over the rest of the debate in which Young's contribution had appeared.

Critics have argued that Romer's usage of increasing returns and external economies is not faithful to Young's formulation, in that it "overlooked Young's emphasis on the reciprocal relations between the division of labor and the feed-back into aggregate demand as a requirement for growth," "neglected Young's categorical rejection of the usefulness of Walrasian general equilibrium models" and wrested "Marshall's microeconomic concepts of internal and external economies out of his theory of value and price to serve as a basis for amending constant return production functions to exhibit increasing returns for the macroeconomy" (Rima 2004, 181-182).

My concern here is with a more conspicuous omission in Romer's analysis -- the distinction between increasing returns as characteristic of manufacturing and diminishing returns as dominant in agriculture and extractive industries (Young 1928, 528-529). The words "agriculture," "land" and "rent" do not appear in Romer's 1986 article. When Romer mentions diminishing returns, it is only in the context of research activity or the limiting assumptions of classical conventional growth models. But diminishing returns is a specific limitation, not a generality that can be indiscriminately "offset" by increasing returns. In a lecture given at Harvard in 1974, "What is Wrong with Economic Theory," Kaldor explained that "it is the income of the agricultural sector, (given the "terms of trade") that really determines the level and the rate of growth of industrial production, according to the formula:"
Or, in prose, economic growth depends on either a relative reduction in the income of agriculture or increased demand from agriculture for industrial products. And, of course, increased demand from agriculture implies increased agricultural production, which at some point confronts the problem of diminishing returns. In his 1985 Hicks Lecture, Kaldor explained the inverse dynamics of scale between industrial and agricultural areas, parenthetically, in terms of the "differing manner of operation of perfect and imperfect competition":
The basic requirement of continued economic growth is that the various complementary sectors expand in due relationship with each other -- that is to say that general expansion is not held up by "bottlenecks" in key sectors. However, in the course of time, under the influence of technical progress, both of the natural-resource saving and labour-saving kind, the requirements of expansion may become considerably modified. In the manufacturing sector which becomes more important as real incomes rise, there are considerable economies of scale, as a result of which manufacturing activities are subject to a "polarization process" -- they are likely to develop in a few successful centres, and their success has an inhibiting effect on similar developments in other areas. The realisation of these economies of scale normally requires also that numerous processes of production which are related to each other are carried out in close geographical proximity.

As a result different regions experience unequal rates of growth of output and of population. The industrial areas experience a growing demand for labour which may involve immigration from other areas once their own surplus labour is exhausted. Technological development in primary production on the other hand, tends to be more labour-saving than land-saving, so that the growth of output may go hand in hand with a falling demand for labour; and though output per head may grow fast in real terms, the level of wages will tend to remain low (and may even be falling) as a result of a growing surplus population. Since labour cost per unit of output is the most important factor in determining selling prices (at any rate under competitive conditions) the low wages prevailing, in terms of industrial products, will mean that the terms of trade will move unfavourably to primary producers, which may be the main factor, along with the low coefficient of labour utilisation, for their state of "under-development" characterised by low standards of living. The important contrast -- which I regard as a major factor in the growing inequality of incomes between rich and poor countries -- resides in the fact that the benefit of labour saving technical progress in the primary sector tends to get passed on to the consumers in the secondary sector in lower prices, whereas in the industrial sector its benefits are retained within the sector through higher wages and profits. (The main reason for this difference lies in the differing manner of operation of perfect and imperfect competition.)
Kaldor's parenthetical explanation suggests more than it reveals. Sraffa's 1926 discussion is the key to unpacking why Kaldor specifies perfect competition as characteristic of primary production and associates imperfect competition with manufacturing industry. The key determinants, in that view, are the shapes of the firms' supply curves (increasing or diminishing returns) and the nature of external economies.

Externality and Ecological Overshoot

Marshall's notion of "external economies" has gone through a series of modifications to become today's "externalities." Pigou extended the concept beyond Marshall's industrial agglomerations and distinguished between “incidental uncharged disservices” and "incidental uncompensated services." The former became known as negative externalities and the latter as positive externalities, although typically it is the negative environmental externalities that are referred to simply as externalities. There is a seeming but misleading symmetry to the two terms and a similarly illusory quality of reciprocity within each of them. When a disservice is uncharged or a service is uncompensated there is a presumption that there might otherwise have been a "whom" to charge or to compensate and that the missing invoice could have been denominated in currency. In other words, the charging and compensating would appear to be a financial transaction between two parties, both of whom must be assumed to be legal persons. In reality, the services or disservices performed may (or may not!) be extremely indirect and the parties affected incredibly diffuse, both in space and time. Mundane examples of factory soot and laundry hanging out to dry may be more mystification than illumination.

In the case of the external economies of increasing returns and diminishing returns, respectively, although they function inversely to one another it is a double inversion that ultimately produces parallel incentives to firms in manufacturing and agricultural or extractive industries. In other words, while firms in the manufacturing center are routinely considered to be the beneficiaries of external economies that generate increasing returns in the sense that they receive uncompensated services, firms in the extractive periphery may also benefit from the externalization of diminishing returns in that they are able to avoid being charged for the environmental disservices they inflict. In effect, the cost of diminishing returns is first displaced to poor regions where it is then deflected onto society and the environment. Unequal exchange thus takes place, that is to say, in the global external economies, "behind the back", so to speak, of formal monetary transactions.

Monday, May 18, 2015

Denial, Then and Now: "Is the End of the World at Hand?" "Is the Economic System Self-Adjusting?"

"I would like to say why I think that the Doomsday Models are bad science and therefore bad guides to public policy," -- Robert M. Solow, 1973
1973 was 42 years ago and 42 just happens to be the answer "to Life, the Universe and Everything," according to Deep Thought in Douglas Adams's Hitchhiker's Guide to the Galaxy. When challenged, the computer replied that he had "checked it very thoroughly and that quite definitely is the answer. I think the problem, to be quite honest with you, is that you’ve never actually known what the question is."

John Peet used that Deep Thought dialogue to frame his contribution to a 1997 forum, "Georgescu-Roegen versus Solow/Stiglitz." In his 1973 article, "Is the End of the World at Hand?" Solow framed his response to what he called the Doomsday Models with two questions, "You can ask: Is growth desirable? Or you can ask: Is growth possible?" "But..." as the title to Peet's commentary asked, "what is the real question?"

How about just plain old "What is growth?"? In his 1975 article, "Energy and Economic Myths," Georgescu-Roegen recalled that:
One confusion against which Joseph Schumpeter insistently admonished economists, is that between growth and development. There is growth when only the production per capita of current types of commodities increases, which naturally implies a growing depletion of equally accessible resources.
That is to say, if we are talking about growth, strictly speaking, then the depletion of resources is inherent in the process by definition. Solow's exposition of why he thought  The Limits to Growth was bad science relied on blurring the distinction between qualitative development and quantitative growth and counting the former as an instance of the latter. This sort of legerdemain is, of course, standard in so-called growth economics.

Momentarily I will exhume and dissect the entrails of Solow's 1973 rebuttal to Limits but first a word from Geoff Tily, senior economist with the Trade Union Congress in the U.K. In a review of Diane Coyle's GDP: A Brief but Affectionate History, Tily argued that
...the development of national income accounting was as a means to an end, not as an end in its own right. The accounts were developed to support policy: to resolve the unemployment crisis of the Great Depression and to aid the deployment of national resources to their fullest possible extent for the conduct of the Second World War. The value of GDP, or rather at that stage ‘national income’, was of only slight interest.
Moreover, it is, I think, fundamental to recognise that these theoretical and practical initiatives were aimed at the level of activity – at the increased and then full employment of resources and the full extent of national production – rather than the growth of activity. At this stage there was no notion on the part of policymakers that the level of activity might be encouraged to grow in any systematic or uniform way from year to year; the intention was achieving one-off level shifts.
In summary, full employment and the effective deployment of national resources were the ends sought and national income accounting was seen as a means to those ends. "Growth" of national income had nothing to do with it. Eventually, growth became the goal -- even to the extent that full employment has come to be viewed as a dispensable side effect of growth that needs to be constrained to avoid accelerating inflation.

This targeting and exaltation of GDP growth was not something that Keynes had proposed. Pointing out that growth wasn't a "regular economic concept" before the war, Roy Harrod, one of the pioneers of growth theory, didn't "see how Keynes can have been expected to have systematic idea on growth; his systematic ideas related to full employment." (quoted by Tily)

So what is growth? Is it a means to the end of full employment? Is it a bait-and-switch surrogate policy objective in its own right? Is it a quantitative measurement of unmeasurable qualitative change? Those are not the questions Solow addressed in "Is the End of the World at Hand?"

The question Solow asked instead was whether the "basic assumption" made by Limits to Growth was any good. What was that basic assumption? According to Solow, the basic assumption of Limits to Growth was "that there are no built-in mechanisms by which approaching exhaustion tends to turn off consumption gradually and in advance." No built-in mechanisms.

Rephrased positively, Solow was arguing that there are built-in mechanisms that will turn off consumption gradually and in advance. There are built-in mechanisms. There are built-in mechanisms. That is the answer: 42.

Lord Keynes took a different view in the BBC radio address in which he asked (and answered) the question, "Is the Economic System Self-Adjusting?" Keynes's answer, in a word, was "No." Of course Keynes was talking about employment, not the consumption of natural resources.

But wait... so was Solow! The core of Solow's argument was an analogy between labor productivity and natural resource productivity:
It is a commonplace that if you calculate the annual output of any production process. large or small, and divide it by the annual employment of labor, you get a ratio that is called the productivity of labor. ...
Symmetrically, though the usage is less common, one could just as well calculate the GNP per unit of some particular natural resource and call that the productivity of coal, or GNP per pound of vanadium. ...
Why shouldn't the productivity of most natural resources rise more or less steadily through time, like the productivity of labor?
After a brief discussion of productivity gains for various minerals -- or non-gains, "GNP per barrel of oil was about the same in 1970 as in 1951" -- Solow concluded:
So there is no really no reason why we should not think of the productivity of natural resources as increasing more or less exponentially over time.
But then the overshoot and collapse are no longer the inevitable trajectory of the world system, and the typical assumption-conclusion of the Doomsday Model falls by the wayside.
But Solow was not the first to compare the productivity of labor to the productivity of coal. Stanley Jevons did it a century earlier: "It is wholly a confusion of ideas," wrote Jevons in The Coal Question, "to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth." He went on to explain:
As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.
So there you have it -- nothing to worry about, really. There is a built-in mechanism. The built-in mechanism will see to it that the economical use of natural resources will turn off consumption gradually and in advance lead to an increase in consumption. Well, er, pretend you didn't see that built-in mechanism...

Unpacking the tension between Solow, Keynes and Jevons, it would be safe to say that those "built-in mechanisms" don't always give exactly the results that would please us the most. There are feedback loops and then there are loops feeding back the feedback. The productivity of coal is connected to the productivity of labor in a way complementary to the way that full employment of labor is connected to the consumption of coal (or other natural resources). Either the built-in mechanism won't save us or, alternatively, there is no built-in mechanism. Select one from that menu.

To reprise Deep Thought's deep thought: "I think the problem, to be quite honest with you, is that you’ve never actually known what the question is."

Sunday, May 17, 2015

Mathiness is Next to Growthiness

What should worry economists is the pattern, not any one of these papers. And our response. Why do we seem resigned to tolerating papers like this? What cumulative harm are they doing? -- Paul Romer
It is bracing to see the intense (dare I call it petulant?) indignation expressed by Paul Romer toward papers by McGrattan and Prescott, Lucas and Moll, and Boldrin and Levine. He goes so far as to confess "embarrassment" that his suggestions as discussant were acknowledged by McGrattan and Prescott in an earlier version of their paper. He complains of "a lemons equilibrium in the market for mathematical theory" and laments "years of being bullied by bad theory."

Economists detained after theory rumble between "Freshwater" and "Saltwater" gangs
Superficially, Romer's diatribe against mathiness may recall Nicolas Georgescu-Roegen's principled objection to unhinged "arithmomorphism." But any perceived resemblance is purely coincidental.

Georgescu-Roegen was described in a critical note as "the methodological conscience of the profession for over a decade" whose mathematical renown rendered "his closely argued objections to the domination by mathematical methods... all the more welcome." In "Methods in Economic Science" (1979), Georgescu-Roegen wrote:
"According to the temper that has prevailed for some time now in the social sciences, but especially in economics, the contributions that deserve the highest praise are those using a heavy mathematical armamentarium; the heavier and the more esoteric, the more worthy of praise. Protests against this situation have not failed to be made sufficiently often to have deserved attention. What is more, protests of this kind were made not only by "verbal" economists, such as Thorstein Veblen and Frank H. Knight, but also by some who were well familiar with the mathematical tool, for example, Alfred Marshall, Knut Wicksell, and Lord Keynes. Knight lamented that there are many members of the economic profession who are "mathematicians first and economists afterwards." The situation since Knight’s time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists. How dangerous is the infatuation with pure mathematical symbolism is proved by the fact that voices from the circle of natural scientists have also often denounced it. ...
The fundamental reason why we cannot do without dialectical concepts is that actuality, at least as seen by the human mind, continuously changes qualitatively. … 
The most we can expect from an arithmomorphic model is to depict pure growth, or rather pure quantitative variations of qualitatively different but self-identical elements. 
In a 1981 commentary on Georgescu-Roegen's paper, Salim Rashid defended economists' persistence in undialectical methods as lying "not in their failure to appreciate the importance of dialectical logic, but in the institutional structure within which they live and work." To illustrate the utility of mathiness to career survival "at any reasonably good university," Rashid offered what he described as a "somewhat exaggerated" account of the "inimitable merits of mathematics" for facilitating "the process of grinding out articles." Furthermore, he maintained,
" is not the good mathematical economists or econometricians who insist upon the value of mathematical methods... The best users of mathematics can always move to a related field and do their research; it is the hordes of practitioners with lesser abilities who feel it essential to insist upon the value of mathematical methods."
By this account, then, the value of excessive mathiness was that it enabled mediocre junior faculty to survive and gain promotion in "any reasonably good university." In his reply to Rashid's commentary, Georgescu-Roegen asked, "Since publish or perish applies to all academe, why is it that economists alone can subsist by automatically grinding out empty exercises from the mathematical mechanism?" His answer was that "the American economics profession is dominated by a powerful and well-entrenched establishment determined to defend at all cost the type of economics by which virtually all its members climbed to the summit."

Romer lionizes Robert Solow and Gary Becker in contrast to Prescott, et al. In my opinion, Romer vastly overstates the cogency of Becker's contribution. As for Solow's growth theory, Georgescu-Roegen had a few things to say about that, too. In "Dynamic Models and Economic Growth" (1975), Georgescu-Roegen characterized Solow's model as one of "the most pertinent examples of the shortcomings of the mechanico-descriptive approach":
The economic literature of the last hundred years abounds in examples of this [mechanico-descriptive] category. The situation is the inevitable consequence of the mechanistic epistemology of our Neoclassical forefathers, who succeeded in convincing almost every subsequent economist that, if economics is to be a science at all, it must be set up as 'the mechanics of utility and self-interest'. We may mention, first of all, the picture of the economic process as  a self-sustained circular movement between production and consumption (indifferently, between consumption and production) which adorns the most respected manuals. Perfect reversibility is present everywhere. It constitutes the main pillar of the theory of market equilibrium. According to the ultra-familiar picture, if demand shifts from D to D ', the market moves from E to E'; and should, later, the factor responsible for the shift disappear, the market would return to E, in a manner perfectly similar to that of a mechanical pendulum which can swing back and forth with equal ease. True, no economist has even suggested that a process of production may be reversed so as to convert pieces of furniture back into trees. However, the classical theory of business cycles -- as this traditional name indicates -- rests on the idea that the entire economic process may come back to any previous position by following the same path in reverse. We should also note that the entire theory of production is still based on the simple formula known as the production function, which is not a satisfactory description even of the reproducible process of production, i.e., of the simplest possible arrangement. But the most pertinent examples of the shortcomings of the mechanico-descriptive approach are the standard dynamic models beginning with that of Harrod and Domar and ending with those of Solow and Leontief. ...
…no analysis which, instead of assuming away the qualitative change associated with an actual process, focuses on that very change can attain its aim through an arithmomorphic model alone. The reason is that there is an irreducible incompatibility between qualitative change, i.e., between essential novelty, and arithmomorphic structures. It is this last point that shatters the generally accepted validity of the standard dynamic models as adequate representations of actual processes.  
…mere growth -- i.e., change confined to quantity -- cannot exist in actuality continuously. The same is true even for the so-called stationary state.  Briefly, continuous existence in a finite environment necessarily requires qualitative change. And it is this qualitative change that accounts for the irreversibility of the economic process, of any actual process for that matter.   
Irreversibility and reversibility are the very properties that distinguish actual processes (which all are evolutionary in some sense or another) from those governed only by the laws of mechanics. We may therefore define a purely dynamic system as a system capable of returning to any of its previous positions. Certainly, all dynamic economic systems fulfil this condition: the fundamental notion behind dynamic economics is that investing and disinvesting, growth and contraction, are absolutely symmetrical operations.
Note that Georgescu-Roegen didn't exclude the "stationary state" from his critique. In a footnote, he singled out the fallacy of the Limits to Growth prescription: "Incidentally, this conclusion exposes the fallacy of those topical programmes which see the ecological salvation of mankind in a stationary state -- as the Club of Rome, for instance, does. See Donella Meadows et al." In "Energy and Economic Myths" (1975), however, Georgescu-Roegen noted the irony that Limits to Growth caused such consternation among economists -- "criticism of the report has come mainly from economists" (including Solow) -- apparently because it "employed analytical models of the kind used in econometrics and simulation works." What irked economists, in Georgescu-Roegen's view, was the intrusion on what they regarded as their turf:
Let us begin by recalling, first, that economists, especially during the last thirty years, have preached right and left that only mathematical models can serve the highest aims of their science. With the advent of the computer, the use of econometric models and simulation became a widespread routine. The fallacy of relying on arithmomorphic models to predict the march of history has been denounced occasionally with technical arguments. But all was in vain. Now, however, economists fault The Limits to Growth for that very sin and for seeking "an aura of scientific authority" through the use of the computer; some have gone so far as to impugn the use of mathematics. Let us observe, secondly, that aggregation has always been regarded as a mutilating yet inevitable procedure in macroeconomics, which thus greatly ignores structure. Nevertheless, economists now denounce the report for using an aggregative model. Thirdly, one common article of economic faith, known as the acceleration principle, is that output is proportional to capital stock. Yet some economists again have indicted the authors of The Limits for assuming (implicitly) that the same proportionality prevails for pollution — which is an output, too! Fourthly, the price complex has not prevented economists from developing and using models whose blueprints contain no prices explicitly — the static and dynamic Leontief models, the Harrod-Domar model, the Solow model, to cite some of the most famous ones. In spite of this, some critics (including Solow himself) have decried the value of The Limits on the sole ground that its model does not involve prices.  
The final and most important point concerns the indisputable fact that, except for some isolated voices in the last few years, economists have always suffered from growthmania. Economic systems as well as economic plans have always been evaluated only in relation to their ability to sustain a great rate of economic growth. Economic plans, without a single exception, have been aimed at the highest possible rate of economic growth. The very theory of economic development is anchored solidly in exponential growth models. But when the authors of The Limits also used the assumption of exponential growth, the chorus of economists cried "foul!" This is all the more curious since some of the same critics concomitantly maintained that technology grows exponentially. Some, while admitting at long last that economic growth cannot continue forever at the present rate, suggested, however, that it could go on at some lower rates.
As these observations from Georgescu-Roegen testify, mathiness has always been deeply implicated in growth theory from the earliest days. This analysis continues in the follow-up post, Denial, Then and Now: "Is the End of the World at Hand?" "Is the Economic System Self-Adjusting?"

Thursday, May 14, 2015

Exit, Voice and Misbehavior

Publication of Richard Thaler's Misbehaving has brought renewed attention to behavioral economics and to the "Libertarian Paternalism" advocated by Thaler and his co-author in their 2008 best-seller, NUDGE. In an earlier post, Libertarian Paternalism and the Pantomime of the Rational Actor, Sandwichman expressed deep reservations about the conceptual coherence of the LibPat argument. He compared the incongruous pastiche of rational choice and nudging to a parallel mash-up that occurred in Marxism, as criticized in the late 1940s by Harold Rosenberg.

My co-blogger, Barkley Rosser, claimed that my argument was "substantially the same" as the anti-paternalist libertarian case advanced by Mario Rizzo and Douglas Whitman. Having now read their "Little Brother Is Watching You: New Paternalism on the Slippery Slopes," I can affirm that I am "in league with" those authors' views when they write, "Our claim is not that slippery slopes are the only objection to the new paternalism." Beyond that, my main objections to LibPat are fundamentally different than Rizzo's and Whitman's. I part company with the latter authors at a point where they are still in consensus with Sunstein and Thaler.

Rizzo and Whitman state that their main problem with the libertarian paternalist framework is that "it defines freedom of choice (and libertarianism) in terms of costs of exit, without any attention to who imposes the costs and how [emphasis in original]." The go on to make it clear that they define choice as corresponding to property and personal rights and public policy as a coercive abridgement of those rights.

In other words, Rizzo and Whitman agree with Sunstein and Thaler's narrow framing of choice exclusively in terms of the cost of exit. This is essentially a marketplace definition of choice, as Albert Hirschman pointed out in Exit, Voice and Loyalty. Neither Sunstein and Thaler nor Rizzo and Whitman address the other element of choice: voice.

Turning to Hirschman's classic to borrow his definitions of exit and voice, I realized that Hirschman framed his discussion explicitly in terms of the misbehavior of economic agents. The following passage from the introduction to Exit, Voice and Loyalty proposes a much more satisfactory approach to the "misbehaving" of humans than does the technocratic framing fix of Nudge:
Under any economic, social, or political system, individuals, business firms, and organizations in general are subject to lapses from efficient, rational, law-abiding, virtuous, or otherwise functional behavior. No matter how well a society’s basic institutions are devised, failures of some actors to live up to the behavior which is expected of them are bound to occur, if only for all kinds of accidental reasons. Each society learns to live with a certain amount of such dysfunctional or misbehavior; but lest the misbehavior feed on itself and lead to general decay, society must be able to marshal from within itself forces which will make as many of the faltering actors as possible revert to the behavior required for its proper functioning. This book undertakes initially a reconnaissance of these forces as they operate in the economy; the concepts to be developed will, however, be found to be applicable not only to economic operators such as business firms, but to a wide variety of noneconomic organizations and situations. 
While moralists and political scientists have been much concerned with rescuing individuals from immoral behavior, societies from corruption, and governments from decay, economists have paid little attention to repairable lapses of economic actors. There are two reasons for this neglect. First, in economics one assumes either fully and undeviatingly rational behavior or, at the very least, an unchanging level of rationality on the part of the economic actors. Deterioration of a firm’s performance may result from an adverse shift in supply and demand conditions while the willingness and ability of the firm to maximize profits (or growth rate or whatever) are unimpaired; but it could also reflect some “loss of maximizing aptitude or energy” with supply and demand factors being unchanged. The latter interpretation would immediately raise the question how the firm’s maximizing energy can be brought back up to par. But the usual interpretation is the former one; and in that case, the reversibility of changes in objective supply and demand conditions is much more in doubt. In other words, economists have typically assumed that a firm that falls behind (or gets ahead) does so “for a good reason”; the concept — central to this book — of a random and more or less easily “repairable lapse” has been alien to their reasoning. 
The second cause of the economist’s unconcern about lapses is related to the first. In the traditional model of the competitive economy, recovery from any lapse is not really essential. As one firm loses out in the competitive struggle, its market share is taken up and its factors are hired by others, including newcomers; in the upshot, total resources may well be better allocated. With this picture in mind, the economist can afford to watch lapses of any one of his patients (such as business firms) with far greater equanimity than either the moralist who is convinced of the intrinsic worth of every one of his patients (individuals) or the political scientist whose patient (the state) is unique and irreplaceable. 
Having accounted for the economist’s unconcern we can immediately question its justification: for the image of the economy as a fully competitive system where changes in the fortunes of individual firms are exclusively caused by basic shifts of comparative advantage is surely a defective representation of the real world. In the first place, there are the well-known, large realms of monopoly, oligopoly, and monopolistic competition: deterioration in performance of firms operating in that part of the economy could result in more or less permanent pockets of inefficiency and neglect; it must obviously be viewed with an alarm approaching that of the political scientist who sees his polity’s integrity being threatened by strife, corruption, or boredom. But even where vigorous competition prevails, unconcern with the possibility of restoring temporarily laggard firms to vigor is hardly justified. Precisely in sectors where there are large numbers of firms competing with one another in similar conditions, declines in the fortunes of individual firms are just as likely to be due to random, subjective factors that are reversible or remediable as to permanent adverse shifts in cost and demand conditions. In these circumstances, mechanisms of recuperation would play a most useful role in avoiding social losses as well as human hardship. 
At this point, it will be interjected that such a mechanism of recuperation is readily available through competition itself. Is not competition supposed to keep a firm “on its toes”? And if the firm has already slipped, isn't it the experience of declining revenue and the threat of extinction through competition that will cause its managers to make a major effort to bring performance back up to where it should be? 
There can be no doubt that competition is one major mechanism of recuperation. It will here be argued, however (1) that the implications of this particular function of competition have not been adequately spelled out and (2) that a major alternative mechanism can come into play either when the competitive mechanism is unavailable or as a complement to it. 
Enter “Exit” and “Voice”

The argument to be presented starts with the firm producing saleable outputs for customers; but it will be found to be largely—and, at times, principally—applicable to organizations (such as voluntary associations, trade unions, or political parties) that provide services to their members without direct monetary counterpart. The performance of a firm or an organization is assumed to be subject to deterioration for unspecified, random causes which are neither so compelling nor so durable as to prevent a return to previous performance levels, provided managers direct their attention and energy to that task. The deterioration in performance is reflected most typically and generally, that is, for both firms and other organizations, in an absolute or comparative deterioration of the quality of the product or service provided. Management then finds out about its failings via two alternative routes: 
(1) Some customers stop buying the firm’s products or some members leave the organization: this is the exit option. As a result, revenues drop, membership declines, and management is impelled to search for ways and means to correct whatever faults have led to exit. 
(2) The firm’s customers or the organization’s members express their dissatisfaction directly to management or to some other authority to which management is sub ordinate or through general protest addressed to anyone who cares to listen: this is the voice option. As a result, management once again engages in a search for the causes and possible cures of customers’ and members’ dissatisfaction.  

Wednesday, May 13, 2015


There once was a very wealthy man whose children loved to play with toys. One day he came home only to see that his house was on fire.

"Fire! Fire!" the man shouted, as loud as he could. But the children didn't hear and went on playing with their toys.

"I have some wonderful new toys for you!" he called. And out of the house they ran and were saved.

Tuesday, May 12, 2015

The Power of Framing and the Framing of Power

In their review of framing analysis literature, Vliegenthart and van Zoonen pointed out that "'frames' are part of a collective struggle over meaning..." thus "an individualist approach to political sense-making does not do justice to the interactive and social nature of interpreting politics." That is to say, neither the construction nor the reception of frames takes place in a vacuum..

So called libertarian paternalism ("NUDGE-ing") is oblivious to this social context of power and collective struggle over meaning. It is all about molding individual choices and meanings to better align with presumed (by the noodges?) deliberative preferences.

There is a history of framing discourse that goes back -- explicitly using the word -- at least to Gregory Bateson's "A theory of play and fantasy" (1955) and Erving Goffman's Frame Analysis: An Essay of the Organization of Experience (1974). The concept of gestalt, articulated by Wertheim in 1912, has obvious salience too, as is acknowledged by Kahneman and Tversky. Amos Tversky was married to Barbara Tversky, a cognitive psychologist who specialized in visual perception, no stranger to gestalt theory.

In a 1993 article, which has subsequently become "the standard reference in frame research," Robert Entman defined framing in the following terms:
To frame is to select some aspects of a perceived reality and make them more salient in a communicating context, in such a way as to promote a particular problem definition, causal interpretation, moral evaluation and/or treatment recommendation Framing essentially involves selection and salience. To frame is to select some aspects of a perceived reality and make them more salient in a communicating text, in such a way as to promote a particular problem definition, causal interpretation, moral evaluation, and/or treatment recommendation for the item described.
Frames, then,
  • define problems -- determine what a causal agent is doing with what costs and benefits, usually measured in terms of common cultural values; 
  • diagnose causes -- identify the forces creating the problem; 
  • make moral judgments -- evaluate causal agents and their effects; and
  • suggest remedies -- offer and justify treatments for the problems and predict their likely effects.
Frames highlight some bits of information about an item that is the subject of a communication, thereby elevating them in salience. The word salience itself needs to be defined: It means making :i piece of information more noticeable, meaningful, or memorable to audiences.
Vliegenthart and van Zoonen fault Entman's definition for assuming an intentionality to the framing while at the same time ignoring the contingency of a frame's power. Earlier frame studies had emphasized that frames were "the result of interactions and conflicts between collective and individual social and media actors," Here, again, is an instance of "reification":
Reifications are simultaneously an accurate portrait of existing social reality and a false consciousness, serving the existing framework of values and interests. Psychological reifications clothe existing social arrangements in terms of basic and inevitable characteristics of individual psychological functioning; this inadvertently authenticates the status quo, but now in a disguised psychological costume. What has been mediated by a sociohistorical process — the forms and contents of human consciousness and of individual psychological experience — is treated as though it were an "in-itself," a reality independent of these very origins. 
Frames do indeed define problems, diagnose causes, make moral judgments and suggest remedies but they don't do so universally or at the discretion of the policy architect. The problem with libertarian paternalism is not that Sunstein and Thaler are evil-doers or that the nudge machinery might fall into the wrong hands. The problem is that the approach subsumes collective action problems under a illusory rubric of individual preferences mediated by a sort of deliberative Maxwell's demon -- a nudgineer of human choices. Social, political or economic power is nowhere to be seen in this rather flat drama. The nudgineer --or noodge -- is a benevolent technocrat, first cousin to the Walrasian auctioneer and most likely indistinguishable in countenance (or should I go with the spell checker's suggestion, incontinence?).

Guy Standing sees "social policy, which has become directive and moralistic... driven by libertarian paternalism, or behavioural economics" as a threat to freedom:
The drift to behavioural nudging gives discretionary and arbitrary power to bureaucrats, commercial surrogates and ‘experts’ lurking behind politicians. Social policy is becoming part panopticon, with dataveillance supplementing surveillance, and part therapy, manipulating people’s minds, with cognitive behavioural therapy a favoured tool of utilitarians. 
To arrest this drift to social engineering, the Voice of those subject to the steering should be inside the institutions responsible for social policy. This means more than putting token ‘community leaders’ on boards. It must be a collective democratic voice. At present, we see the opposite, with privatisation and commercialisation of social policy. We need social policy democracy, before it is too late.
One might again paraphrase Marx to observe that "framing is collective or it is nothing."

Sandwichman Denies Fraternizing with the Ghost of Joe McCarthy

premise 1: X criticizes Y
premise 2: Z criticizes Y
conclusion: X is "in league with" Z
Let's be more specific:

Sandwichman likes Harold Rosenberg's critique of party Marxism.
Joe McCarthy was also a critic of Marxism.
Therefore Sandwichman is "in league with" McCarthyism.

By the same token, of course, anyone who objected to Sandwichman's tacit alliance with McCarthy could be accused of being "in league with" that other Joe.

It's all so complex.

Monday, May 11, 2015

Libertarian Paternalism and the Pantomime of the Rational Actor

Harold Rosenberg prefaced his 1949 essay, "The Pathos of the Proletariat" with a quote from Marx, "the working class is either revolutionary or it is nothing." "The hero of history," Rosenberg explained, "was to be a social class, a special kind of collective person."

But this collective person, the Proletariat, is "without human motivation, whether individual or collective." In Rosenberg's view, Marx never explained how an inert personification was supposed to transform itself into the heroic subject of history. When volume III of Capital finally got around to addressing class, the mute reply to Marx's question, "What constitutes a class?" was the epitaph, HERE THE MANUSCRIPT ENDS.

Rosenberg described Marx's conception of revolutionary subjectivity as "un-Marxian" in that it derived neither from political economy nor materialism but from dramatic formulas and imaginative metaphors:
The self-consciousness that converts the class from economic personification into historical actor is not an intellectual comprehension of class interests and relations but is part of the revolutionary act itself. The class engages itself in the drama of history by its passionate and willful poetry of the event [italics in original].
But this modern poetry can have nothing to do with the ecstatic, hallucinatory poetry of the past. The bourgeois French revolutionaries recognized their identity through a re-enactment of ancient Rome. The working class does not have the luxury of such indulgences. They are scarcely motivated to act "until the situation has been created which makes all turning back impossible." That situation constitutes a "growing mass of misery" and worsening crisis. But even that is not enough.Such misery could as easily precipitate escape into fantasy.

To sustain the revolutionary struggle, the conditions themselves must be joined by a remarkable collective act of will, a "readiness to sacrifice itself for the moment alone":
The proletariat must be prepared to die in order to exist and for nothing else. Such appears to be the impasse of truly secular (without ideologies, as well as without myths) historical creation.
The trouble is, until the revolution happens it's all just a hypothesis. And the longer the absence of evidence supporting that hypothesis endures, the more likely it is to be read as evidence against. Here is where things get messy.
Marx... refuses to regard proletarian action as an ifof creative hazard. For him the revolution is an historical certainty. From this translation of the dramatic into the "scientific" arise the essential ambiguities of Marxism. ...though he thinks of the revolution as a tragedy, he does not behold its incidents as tragic, and his work lacks the pathetic tonality appropriate to its notion of the workers transforming themselves through constant risk of their lives. The rationalism of Marx's prose... wins against his beloved Shakespeare and Aeschylus. An optimism with respect to the historical drama as a whole subdues the anguish of the hero's striving against utter defeat through which the happy resolution is to be reached. Even in his description of the Commune and its executioners, the peak of his revolutionary eloquence, it is the foes of the revolution that he most vividly evokes.... For him the Commune is a single lost battle in a war that can have but one conclusion. Thus Marx himself prepares the shallow trust of Marxism in rationalistic formulas.
According to Rosenberg, the dilemma for Marxism is that it must either admit the radical contingency of a revolutionary class consciousness, "or it must reduce the situation to a given number of external elements, definable in advance, and thus become identical with what is known as 'vulgar materialism' or 'mechanical Marxism.'" There is no "happy medium" of a foreseeable autonomy."The failure of the situation to give rise to revolutionary consciousness leads Marx and Marxists to a second type of effort to guarantee the revolution: through politics and propaganda."

Politics and propaganda -- or to use more modern terminology, nudge the proletariat into actions aligned with its revealed revolutionary destiny. The comparison I am seeking to draw is with the segue from rational choice theory to behavioral economics. To paraphrase Marx, Homo economicus is either rational or it is nothing. The failure of humans to comply with the standards of rationality prescribed by rational choice theory informs policies "to motivate behaviour change among those who, on reflection, would have liked to have made different choices for themselves." 

From "Nudging, Shoving, and Budging: Behavioural Economic-Informed Policy," Adam Oliver, Public Administration, early view published online 2015:
Thaler and Sunstein use the term libertarian to modify the word paternalism in order to signify that their approach is liberty-preserving. In nudge policy, there should be no burden on those who choose their pre-existing behaviours rationally and thus wish to continue with those behaviours. Therefore, the approach does not allow regulation or bans. The approach is only paternalistic in the sense of wanting to motivate behaviour change among those who, on reflection, would have liked to have made different choices for themselves. That is, a nudge is meant to bring the instantaneous decisions of those who think that their non-reflective actions are irrational into better alignment with their deliberative preferences, and therefore relies on the assumption that deliberative preference is necessarily rational. Thus, the focus is on reducing negative internalities – the longer term harms that people impose on themselves through their own ill-considered automatic decisions.
Libertarian paternalism rules out using significant financial incentives or overt persuasion to change behaviour. The essence of the approach is that behavioural economic insights, such as those summarized above, can and should inform the design of what Thaler and Sunstein call the choice architecture, or in other words, the context or the environment, so that more people make automatic decisions that, on reflection, they would like to make and yet, due to bounds on their rationality and human error, ordinarily fail to do so. 
The concept of libertarian paternalism and its application in the form of nudges has attracted the attention of governments in a number of countries, but none more so than that of the United Kingdom, where a right-of-centre coalition government lauded the apparent promise of the approach to offer non-regulatory inexpensive demand-side solutions to some of the most profound problems in contemporary societies. ‘This new approach’, according to a 2010 government report, ‘represents an important part of the Coalition Government’s commitment to reducing regulatory burdens on business and society, and achieving its policy goals as cheaply and effectively as possible’, Soon after being appointed Prime Minister in 2010, David Cameron established the Behavioural Insights Team (BIT), colloquially known as the Nudge Unit. Whether or not this moniker is appropriate requires an assessment of whether the interventions that were advocated as nudges by the BIT comply with the original requirements of libertarian paternalism laid out by Thaler and Sunstein.
Oliver maintains the term "nudge" has become a popular generic label for "a whole spectrum of policies, some of which are informed by weak evidence bases and others of which are divorced from the original requirements of libertarian paternalism." Some of these approaches Oliver describes as "coercive paternalism" and "behavioral regulation." The parallel with Rosenberg's critique of Marxism suggests we have been here before. It wasn't pretty.
For Engels in 1893 the continuity of the revolutionary movement no longer depends upon the reflexes of a proletariat that has been forced into revolt; it is no longer subject to the intermittences of the heart and mind of the working class.
In order that the masses may understand what is to be done, long, persistent work is required, and it is just this work which we are now pursuing, and with a success which drives the enemy to despair. 
Instead of learning in action, the working class is put to school by the Party; it marches with its will in the secure custody of the leadership. Marching has indeed replaced revolutionary action, the movement which was to have been the source itself of the "alteration" of the workers.
Rosenberg referred to this substitution of party leadership for class spontaneity a "demonic displacement of the ego of the historical collectivity":
As a liberating program Marxism founders on the subjectivity of the proletariat. So soon as it declares itself, rather than their common situation, to be the inspiration of men's revolutionary unity and ardor - how else can it offer itself simultaneously to the French working class and to non-industrial French colonials? - Marxism becomes an ideology competing with others. When fascism asserted the revolutionary working class to be an invention of Marxism, it was but echoing the Marxist parties themselves. If the class as actor is a physical extension of the Party, fascism was justified in claiming that a magical contest in creating mass-egos could decide which collectivities are to exist and dominate history. Moreover, it proved that heroic pantomime, symbolism, ritual, bribes, appeals to the past, could overwhelm Marxist class consciousness. What choice was there for the workers between the fascist costume drama and a socialism that urged them to regard their own working clothes as a costume? In Germany and Italy the working class was driven off the stage of history by the defeat of the Party - in Russia it was driven off by its victory.
Similarly, as an exercise in "libertarian paternalism" behavioral economics founders on its takeover of rationality on behalf of the misbehaving humans. It reveals itself as yet another ideology competing with other ideologies. Instead of misbehaving, we will get marching in time to deliberative preferences. Instead of marching nudged by paternalistic libertarians, we will get marching led more forcefully by parties more aesthetically inclined to "heroic pantomime, symbolism, ritual, bribes, appeals to the past..."

Friday, May 8, 2015

FUDGE: False consciousness, rational choice, analytical Marxism and behavioral economics

One of the advantages of growing older is that you can remember intellectual fashions that have gone out of style but whose outlines are clearly discernible in the latest craze.

A long, long, long time ago -- the late 1970s and early 1980s -- critical theory, the Frankfurt School and Georg Lukacs was all the rage. An English translation of Lukacs's History and Class Consciousness was published in 1971 and reached the pinnacle of its celebrity by the end of the decade. Some people even read it (disclaimer: I did). The notion of false consciousness seemed to leftist university students to explain why The Proletariat hadn't brought about The Revolution.

I simplify, of course.

Then along came Analytical Marxism to bore and confound the academic left and Post-Modernism to entertain it (and bore and confound everyone else). Workers didn't suffer from false consciousness, after all. It was in their best interest to support capitalism and anyway they constructed a multitude of their own identities.
When workers pursue strategies that lead to a compromise, the state does what appears necessary to reproduce capitalism because this is the choice of the workers as well as the capitalists. The organization of the state as an institution and the policies pursued by this institution constitute an expression of a specific class compromise. ("The Structure of Class Conflict in Democratic Capitalist Societies," A. Przeworski and M. Wallerstein, 1982 [corrected reference])
Look, over there! It's Madonna, subverting the cultural codes!

Meanwhile, at around the same time false consciousness was been hounded out of respectable discourse, it was being revealed that "the most basic rules of the theory [of rational choice] are commonly violated by decision makers." Tversky and Kahneman argued that:
the deviations of actual behavior from the normative model are too widespread to be ignored, too systematic to be dismissed as random error, and too fundamental to be accommodated by relaxing the normative system.
So workers allegedly rationally calculate that capitalism is good for them even though they are probably incapable of consistently choosing between two identical pairs of options. How does this work, again?

I'm going to take a short cut here and quote extensively from a 1981 article, "Cognitive Psychology and Ideology," by Edward Sampson. In part, I'm doing this to save me the trouble of summarizing the argument. But also I want to emphasize the not inconsiderable detail that this argument was "already out there" and has been for 34 years.
It is clear from the treatment that Lukacs gives to reification, and from the subsequent critical analyses which Gergen and I have offered, that psychological reification tends to serve primarily ideological functions.Reifications are simultaneously an accurate portrait of existing social reality and a false consciousness, serving the existing framework of values and interests. Psychological reifications clothe existing social arrangements in terms of basic and inevitable characteristics of individual psychological functioning; this inadvertently authenticates the status quo, but now in a disguised psychological costume. What has been mediated by a sociohistorical process—the forms and contents of human consciousness and of individual psychological experience—is treated as though it were an "in-itself," a reality independent of these very origins. 
[Tversky and Kahneman] clearly adopt the forms of statistical and scientific analysis as the correct standard of judgment against which they measure the judgmental principles followed by lay people and even by professional clinicians and counselors. Tversky and Kahneman view most adults' intuitive predictions to be in error when compared with the true standard of excellence, statistical and scientific thought itself. They refer to these error-ridden everyday forms as "illusions" and express surprise that after a lifetime of experience most people still fail to "experience such fundamental statistical rules as regression toward the mean, or the effect of sample size on sampling variability," and so continue to make error-filled predictions.

Thursday, May 7, 2015

Ain't Misbehaving?: further thoughts on the Kahneman-Tversky experiments

I've been reading through some previous Sandwichman posts with the aim of extending the essay outlined in yesterday's Decisions... Decisions. When I was writing that, I resisted the temptation to call attention to the seemingly irrelevant detail that the hypothetical disease was described as "Asian." What is that about? Does originating in Asia give the disease some exotic elan? Or does the superfluous detail lend it an air of realism? Could this faux verisimilitude distract from the very unreal condition of having allegedly definitely-known probabilities of the results of various treatments?

I am wondering if perhaps many of the subjects in the experiment disregarded the literal but incongruous descriptions of the outcome probabilities and substituted more intuitive -- but also more ambiguous -- interpretations. Under these re-interpretations, the two sets of choices would not be equivalent. I am thinking here of the kind of "perceptual reorganization" investigated by Jerome Bruner and Leo Postman in their classic 1949 study, "On the perception of incongruity: a paradigm." Their assumption -- that "most people come to depend upon a certain constancy in their environment and, save under special conditions, attempt to ward off variations from this state of affairs" -- would seem to have salience in the Kahneman-Tversky experiments.

Is it not the case that the behavioral economists are looking at the case in terms of individuals failing to attain some presumed standard of rationality attributed to a so-called rational agent. This concedes too much "observation, fixed by reason" to so-called rational choice scheme. What if we view these anomalous outcomes from the perspective that the normative model is a magical pseudo-scientific one,"hedged round by observances, mysteries and taboos"?

Reprising material from an earlier post, rather than merely linking to it: In Magic, Science and Religion, anthropologist Bronisław Malinowski discussed the interplay between the systematic rational knowledge and the magical pseudo-science of the Trobriand Islanders, observing that "even with all their systematic knowledge, methodically applied, they are still at the mercy of powerful and incalculable tides, sudden gales during the monsoon season and unknown reefs."

It is in dealing with these formidable uncertainties that magic comes into play. "Science," Malinowski explained, "is founded on the conviction that experience, effort, and reason are valid; magic on the belief that hope cannot fail nor desire deceive." In contrast to the reliance of science on "observation, fixed by reason," the domain of magical pseudo-science is "hedged round by observances, mysteries and taboos."

The "mainstream/heterodox" distinction in economics is otiose (and odious). The demarcation that matters is between observation of economic regularities, which is limited, and the proliferation and persistence of economic pseudo-science in the face of "powerful and incalculable tides" and "sudden gales." "Theorists have a natural urge toward precise and determinate theorems or laws," John Maurice Clark wrote 65 years ago. "But..." he continued:
    "...the facts of economic life show little consideration for this urge, and remain, to a large extent, perversely and persistently indeterminate. This is the skeleton in the closet of economic theory. What is a proper attitude for a would-be science, forced to deal with such refractory material? One thing economists do is to construct hypothetical simplified 'models.' These can be used in two ways: as an approach to reality or as an escape from it. My problem is how to promote the first kind of use and set up safeguards against the second." 
    Would Clark's attitude toward this "skeleton in the closet of economic theory" make him "heterodox"? How has the bureaucratically-imposed conventional cost-benefit analysis and the Kaldor-Hicks criterion that justifies it achieved its canonical status? How about the notion of shirking in New Keynesian models of sticky wages? The ritual invocation of the lump-of-labor fallacy claim? Ceteris paribus? General equilibrium?

    The urge for formulas in economic analysis is strong, especially from official "deciders" who yearn for guidelines, criteria or rules-of-thumb that will immunize their decisions from criticism for favoritism, arbitrariness or bias (all the more convenient if favoritism and bias are non-transparently built-in to the formula!). In an article also published in 1950, Paul Samuelson wrote:
    "Improved measurement of national income has been one of the outstanding features of recent progress in economics. But the theoretical interpretation of such aggregate data has been sadly neglected, so that we hardly know how to define real income even in simple cases where statistical data are perfect and where problems of capital formation and government expenditure do not arise."
    In his article, Samuelson warned that "the last word on the subject will not be uttered for a long time." Not that anyone would still be listening when that proverbial "last word" (or even the next word) was uttered. Hedged in by observances of bureaucratic standards and procedures, mysteries of discounted net present value and taboos on interpersonal comparisons of utilities, the aggregate data of national income came to ritually stand in for its own interpretation.

    Usage and custom have shifted the burden of proof from the believers in economic magic to the skeptics. Disproving the magic is impossible. As Malinowski explained:
    First of all, magic is surrounded by strict conditions: exact remembrance of a spell, unimpeachable performance of the rite, unswerving adhesion to the taboos and observances which shackle the magician. If any one of these is neglected, failure of magic follows. And then, even if magic be done in the most perfect manner, its effects can be equally well undone: for against every magic there can be also counter-magic [ceteris paribus]. 

    Friday, May 1, 2015

    May Day! May Day! Arise, ye prisoners of starvation...

    "Ultimately, the trend toward widening inequality in America, as elsewhere, can be reversed only if the vast majority, whose incomes have stagnated and whose wealth has failed to increase, join together to demand fundamental change."  -- Bob Reich
    Workers of the world, unite. What kind of fundamental change does Bob Reich have in mind? Giving workers "the bargaining leverage they need to get a larger share of the gains from growth."

    Full employment was a substitute for collective action. Growth was a substitute for full employment. "We're all in this together" sacrifice (austerity) was a substitute for growth. Collective action to get a larger share of the gains from growth begins to sound like the conservative motto, "a fair day's wage for a fair day's work."
    “Workers ought not to be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the never ceasing encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto, ‘A fair day's wage for a fair day's work!’ they ought to inscribe on their banner the revolutionary watchword, ‘Abolition of the wages system!’”

    Full Employment, Growth and Immiseration

    Once upon a time there was full employment. Full employment after the war, to be exact.

    And then there was "growth." Not exactly the same idea as full employment but there was a compelling resemblance.

    At last we have arrived at "expansionary contraction" -- otherwise known as austerity (formerly referred to as immiseration). And they all lived happily ever after?

    Now, none of the things is "just like" the others. But we can talk about them as if they were "equal in exchange value.".

    Or we could mind the gaps.

    Thursday, April 30, 2015

    "They wonder why they are working longer hours for lower wages..."

    Should we tell them?

    Whether you work by the piece 
    Or work by the day 
    Decreasing the hours 
    Increases the pay.

    -- Mary Steward

    Wednesday, April 29, 2015

    Puzzling in America

    Technology and Jobs: Should Workers Worry?

    Barro: " could have a gradual decline in hours worked per week by a full-time employee and a gradual decline in the number of years that people participate in the labor force and that would do a lot on the labor supply side to deal with declines in labor demand..."
    Delong: "And in America it's puzzling we haven't... right? That we've been stuck at forty hours a week as full time or so since world war II even though there's been 75 years since then..."
    Writing in Fortune magazine 61 years ago, Daniel Seligman predicted achievement of the four-day week by 1980. He based that prediction on projection of historical trends. It didn't happen.
    The future of work has a chequered past.
    "And in America it's puzzling we haven't... right?"
    Wrong. It's only puzzling if you don't know anything about the role of American economists in opposing, castigating and ridiculing proposals for work time reduction ("economists call it the lump of labor fallacy -- the idea that there is only a fixed amount of work to be done").
    Larry Summers remembers: "when I was an undergraduate at MIT in the 1960s there was a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out, and if people got more productive they'd be richer and they'd spend and maybe we needed some transition assistance, but that it was all basically going to be okay. That was what I was taught."
    Puzzle solved!