I can’t shake a cold; I’m supposed to be going on vacation in two days and the British spring has lasted all of 2 days.
But this made me laugh a lot this morning. The comments are particularly amusing. (HT CT.
Summary – Economist who thinks he was defamed by Levitt & Dubner because they criticised his results in Freakonomics tries to sue but fails. As a result writes own copycat book dealing with issues of free markets and freedom.
A debate on Free exchange has centred around the use of Economics 101 models, and a related threads at Jane Galt and Ezra Klein centre around the use of anecdote versus data.
The two are clearly connected. If the point in question can be iluminated by a simple model. An anecdote can crystallize it further.
A case in point: Restrictions on firing people reduce the ability of employers to seek alternative labour; a minimum wage restricts the ability of potential works to offer their services at reduced rates; restrictions on working hours means harder working people cannot offer themselves as such. The simple model predicts bad outcomes for employers and potential employees; the only beneficiaries are incumbent employees, but even they lose out through higher taxes to pay for benefits and higher prices of goods.
And we know that the kind of people who are generally willing to work harder, for less, are immigrants.
A simple model, yes. But here’s the illuminating and very sad anecdote.
Although Hamid followed this advice and got a good economics degree he could not find work, not even as an unpaid intern….He eventually went to Sweden, got a grant to study for a masters degree in business administration …He then landed a well-paid job at telecommunications giant Ericsson…But his mother begged him to return to France…and after several weeks was offered one job as a travelling salesman….
But there is a happy ending.
At that point Hamid decided he had no future in France and moved to the UK where he worked for BP and Philip Morris before setting up his own consultancy firm
The BBC article linked to is a case in point when anecdote is useful or useless. Combined with the simple message of the econ 101 model, I think the anecdote is illuminating. The way the BBC tell the story – that Hamid is the victim of instituional racism – doesn’t make it clear whether this could be an isolated incident; a product of some character defect in Hamid or similar. The way the BBC use the anecdote, one would potentially arrive at the wrong policy – something like ‘trying to outlaw racism’ or having quotas or positive discrimination.
Tim Worstall is irate because the Government appears to be suggesting that chocolate is sold in smaller sizes to tackle the obesity ‘crisis’.
He said that surveys and food production statistics suggested that total calorie intakes had not increased.
So, err, if calorie intake has not increased, it isn’t increased calorie intake causing the problem. It’s reduced exercise causing it. So the solution is not reduced size choccie bars, it’s more exercise
You can’t determine cause and effect so simply here. Calorie intake has not increased in absolute terms, but relative to the amount of exercise we do, then surely it has. So calorie management, for a given (reduced) level of exercise could indeed be the problem. But Tim is right to stress exercise too.
Anyway, what I actually wanted to say that the Government’s suggestion is one that rational manufactuers should take up anyway (but obviously shouldn’t be forced too).
It’s well know that people have self-control problems but it’s less well appreciated that individuals sometimes manage the problem not by cutting out the product altogether, but by consuming it in smaller quantities at a higher price. Economically, this shifts their budget set it, restricting their future ability to buy said ‘sin’ good. Psychologically, the higher price, smaller and more appealing packaging makes the purchase appear as a gift, increasing utlity.
An opportunity for competitive paternalism, I think
Last night, Newsnight featured a story by Guido Fawkes on bloggers vs Establishment News and included an exchange with Paxo, Michael White of the Guardian, and Guido himself (in an rather hilarious attempt at ‘anonymity’) – update here is the interview.
Guido’s believes that major broadcasters pussy-foot around politicians, in order to retain access and exclusive coverage. The result is covered up stories and anodyne reporting from press releases.
I don’t find this convincing at all.
There is an analogy from the business world. Would a major manufacturer, hungry for market share, refuse to supply a retailer? In the uncontroversial case, manufacturers may refuse retailers who don’t give due prominence or support to their product. Parallel imports aside, this is why Armani are fully justified in not selling clothes to Primark. This is rarely a problem because you can get Armani clothes in plenty of other places, and there are plenty of clothes other than Armani at plenty of other shops.
The problem only arises where the manufacturer is dominant in the production of that good, for example if Armani was the main clothes producer, then it could foreclose the market to Gucci by forcing retailers to only stock its product,or insiting on minimum resale prices. The manufacturer tries to minimise interbrand competition and remain dominant.
The key difference of course is the presence of competition in the first case. And this is the case in politics – surely even more ruthless and competitive than the business world. For every Prescott that refuses to speak to the BBC, there are other power-hungry politicans who are only to grateful for obtain market share from their rivals. Similarly, for every poodling BBC that refuses to dish the dirt on overweight and incompetent Lotharios, there is advantage to be gained for broadcasters that aren’t so obsequious. In other words, you can refuse to supply, but you hand your competitors some advantage by doing so.
Of course, there may be a situation where there is an oleaginous equilibrium – a competitive retail and manufacturing market but one characterised by strict delination of products. In politics, the newspaper industry looks like this. But even here, for every Guardian editor that brushes aside interesting gossip on Labour, there’s a Torygraph waiting to publish. And for politicans seeking to gain market share, there is an advantage to speaking through non-favoured outles from time to time because the marginal voter is what matters.
So while there may be period in which some broadcasters toady up to some politicians, competition between politicans and broadcasters ensures the dirt gets dished eventually.
Or in even more simple terms, the politicans need the media more than the media needs them (plenty of sports and celebrity ‘news’ to take up airtime and column inches).
In the last part of his documentary, Adam Curtis completed his thesis illustrating how a particular idea of freedom (Berlin’s negative freedom) led to the pursuit of over-zealous policies in post-Communist Russia and Iraq.
The idea is fairly cogent; negative liberty, as pursued most vociferously by rigid libertarians, contends that ‘freedom from…’ is more important than ‘freedom to…’ and that the former can result in stable societies. Because of this, all the machines of state control were sold off or disbanded in Iraq.
Whether this is exactly how the US and UK thought I can’t comment on, but in any case the idea that only negative freedom is important is itself warped, especially in the context of promoting a market economy.
Consider that if the rights to transact freely, without interference from anyone (including the state) are to be protected then free markets are permissable. Free markets can then be defended not because of the welfare they generate, but because people should be free to transact. If this were really true, then we would have to justify markets not on grounds of Pareto efficiency, but on antecedent rights. Consequences would have no place in this analysis.
Judgng by the consequences in Iraq, perhaps that’s how the allies really thought, but even hardline liberatrians accept that positive freedom is important; consequences and outcomes matter for people. Thus one can have all the process demanded by negative liberty (and indeed one should), but such a society will rapidly become unstable unless people can actually achieve desired outcomes; there must be some substance to our freedom.
I think Curtis makes two mistakes. Firstly, he doesn’t acknowledge the fact that the mess in Iraq may be because individuals’ negative freedom is still being violated; the ethnic and religious violence perpetrated across the country hardly allows citizens to act without the encroachment of others. The Americans may have focused too much on the process of freedom but that the outcomes didn’t arise may simply be because one central tyrant has been displaced by several hundred more dispersed ones who do an equaly good job of restricting freedom and liberty.
The second point has been picked up by not saussure.
You cannot expect to have any sort of free society without the institutions to run it, and without people’s consent to those institutions — which will only come, if it comes at all, over time as people learn whether or not they can trust them.
That is, freedom does not, cannot possibly equate with the smallest government imagineable and an absence of buy-in. The reason why markets work well in Western Europe is because a legacy of freedom has created institutions and cultural practices that people believe in and that create trust. Trust engenders willing co-operation and that is surely the essence of a market economy.
What I started to wonder as the program ended is, was Curtis’ earlier documentary, The Power of Nightmares, as equally hashed? I found that work more compelling, but did it actually have similar gaps in analysis and reasoning? Would ‘normal’ people find The Trap a consistent and true story?
I’m not sure. TPON relied less on the dubious interpretion of scientific theory, and its equally dubious linkages to genetics and psychiatry. This is where I t hink the The Trap lost it. I think overall, the general idea that The US in particular has tended to promote one kind of freedom at the expense of anoher is probably true; I just don’t think Curtis presented the argument in the most compelling way.
Was there ever a more appropriate title for Adam Curtis’ slickly edited follow up to the Power of Nightmares?
His thesis, that the failure of political society and democracy is due to our enthusiastic embrace of free markets and the hyper-rational seflish individual model of human behaviour, is so broad that one can’t say it’s either true or false. What I can say with some conviction is that many of his supporting arguments are contradictory and plain wrong. Perhaps the biggest irony wasn’t intended by Curtis: if the politican’s failed in their attempts to make markets work their magic, it’s because they didn’t pay heed to the real message of Buchanan, Nash, Arrow et al, and instead relied on the kind of oversimplifiation presented in the documentary.
I won’t dwell on the rough treatment of economic theory already covered here, here and here. Not Sassure also provides an interesting take here). Few economists ever believed in homo economicus except as a simplifying assumption, and few also believe that the free market can work completely unaided but this isn’t the place for an elementary economics lesson. I won’t dwell either on his view that British society has become more unequal, except to say that this depends on whether one considers only outcomes or opportunities. The distribution of wealth may have become more unequal but it does not necessarily follow that our capability to leave fulfiling lives has become so.
There are three things I’d like to focus on.
Firstly, Curtis suggests that we have mistakenly applied the markets’ view of freedom to other areas of life, but this is the wrong way round. As Hicks said:
The liberal, or non-interference principle of the classical (Smithian or Ricardian) economists were not, in the first place, economic principles; they were an application to economics of principles that were thought to apply to a much wider field. The contention that economic freedom made for economic efficiency was no more than a secondary support
That is, ideas of freedom came first and the market followed. If, as Curtis proposes, we have less freedom today, it is not because market principles apply to many areas of life, but because politicians do not have a clear concept of freedom independent of the market.
Curtis points to the introduction of targets in the public services as a complete failure. Targets are meant to work as ‘shadow prices’ and thus provide incentives to staff who operate like selfish individuals. Curtis noted that policemen, for example, found ‘devious’ means to meet their targets (by reclassifying some crimes into other categories), thus proving that humans weren’t simplistically selfish after all. He also suggested that the financial frauds of the late 90s illustrated that the selfish model is a poor one.
Am I the only person for whom these anecdotes provided strong supporting evidence that humans are selfish rational maximisers? The broad economic take on human behaviour is that we maximise our utility, and this takes the form of maximising self-centred welfare. Buchanan, Niskanen and others argued that for public officials, welfare took the form of prestige, power, budgets, departmental size etc. But the introduction of target just replaced maximisation of these variables with maximisation of others. Similarly in the corporate world, the failure was probably the over-reliance on homo economicus which proved to be too true: use stock options to incentivise directors and, motivated by selfishness, they’ll do all they can to bump up the share price.
Whether this selfishness is the right form of behaviour to encourage in all contexts is another matter. Critical to this analysis is the design of institutions themselves. Curtis presented example after example of public services where market principles were harnessed but failed to deliver. But the overriding failure was the incomplete introduction of market principles; politicans put themselves between people and ‘market’ outcomes in the public services; they maintained political intereference, and did not really trust the market at all. Universities for example, are allowed to set prices, but they are capped, and they face intereference in terms of who they can accept. Is it really surprising that market principles don’t work when applied in this way?
If markets aren’t appropriate, e.g. defence, police, then the message is that half-hearted measures are likely to have unintended consequences. It may be better then to leave market theory out of it and let professionals manage the service as appropriate.
And did anyone really believe in this model of behaviour? Even Smith noted the limitations of selfishness as appropriate when considering mutual exchange, and argued that other moral sentiments may be as important for other human endeavours. Curtis tied his story to the emergence of the selfish gene theory. But as Dawkins’ book makes clear, humans possess a clear advantage over other animals: the ability to override blatant selfishness with genuine concerns for equity and justice for others. Dawkins’ own view was that unmitigated selfishness was a way of illuminating some aspects of our behaviour, but as a humanist, he would argue that concerns other than selfishness can and should be harnessed for their ability to promote growth and development. There is no contradiction here; ultimately, all our behaviour may be driven by selfish genes, but proximally, we can feel love and behave with altrusim. Even if our genes have ‘tricked’ us into these emotions, it doesn’t make them any less real or useful. The real lesson here is that behaviour is adaptive, not selfish; we will do what we have to do, given the incentives and institutions at our disposal.
The end of last night’s programme suggested that the work of behavioural economists proves that the notion of strict human rationality was wrong. Presumably Curtis will use this to argue that market intervention by Government is therefore right but even Richard Thaler would argue (and does so here) that this doesn’t follow. Assymetric patnernalism, which mantains freedom but encourages ‘right’ decisions (e.g. not smoking) from weak-willed individuals, is consistent with a competitive free market. The Government may be duty bound to intervene where it already sets a default, for example, the decision as to whether individuals opt-in or out of pension schemes. But that is no reason to give the Government carte blanche to interfere everywhere.
My own theory is that politicans of today will look at behavioural economic work in the same simplistic way that politicans of the 80s looked at competitive markets. The message they’ll take is that individuals are poor decision makers and conclude that they must help them. Don’t be surprised if we see more direct paternalism rather than incentivising individuals to obtain information and encouraging them.
A glance at the bookshelves reveals that baby-rearing theories change more often than the environment into which babies are born, and of course, far more frequently than humans evolve. Similarly there’s never a shortage of new investment guides from the latest tipsters. But just as bringing up a baby today should, fundamentally, be really no more different from bringing up a baby 1000 thousand years ago so the fundamentals of stock investing have barely changed. What explains the proliferation of advice?
Consider parenting first. Gina Ford divides parents violently but her books are unlikely to have any effect on a child’s behaviour’ active management of babies (or stocks) is of little value.
In Gina Ford’s case, the proof lies in the force of the disagreement between supporters and detractors – a disagreement that has seen parenting site mumsnet forced with closure – and also supports the view that parenting is largely a gene related. At this moment most parents are up in arms; how can a baby not be affected by how you treat it? Does that mean it’s OK to treat babies badly then? One encounters the same disbelief if you dare to suggest that active management is a waste of time.
Of course it’s not OK to treat a baby badly because it’s not OK to hurt others; love is not conditional on having the ability to change who you love. For the same reason, this doesn’t mean parents are redundant. We have a role in shaping the important effects that do have an impact on a child’s development, such as access to education, and especially the peer group. And loving is a selfish pleasure.
The proof that genes are more important is evident in the behaviour of parents themselves.
A lot of people try, but reject Gina Ford as not working. Other remain with it valiantly to produce ‘perfect’ babies. But this shows nothing. People who toil away with Ford’s methods obviously have a personal preference for those characteristics emphasised by her, such as strict routine. They may not necessarily enjoy fulfilling the routine, but they clearly have the (largely) inherited characteristics that favour routines over non-routines, otherwise the y would give up. Because they are inherited, their babies are likely to share the same preference. Parents (like me) who didn’t even consider Gina Ford are showing that their genetic endowment does not prefer routine to non-routine. My wife is similar so it’s unlikely that our baby has these genes.
The ultimate result then, is that parents with routine-preferring genes produce babies who prefer routines; the book has no effect except telling you, in case you didn’t know, whether your genes are fundamentally routine-preferring or not. Parents who fall away at Ford’s techniques because they don’t work, are simply proving that they (and their babies) don’t have strict routine-preferring genes. The damage to parents and babies is done if you’re not bringing up your child in a manner that is consistent with your own (and therefore your child’s) preferences.
But surely the book tells you what routine to use and how to implement it. Again not so. Many of the Gina babies I know of end up having meal and sleep times different to what the book suggests. That is, the babies follow a strict routine, but not really the one in the book.
As with investing, the theory will tell you that passive management in an index fund is the best strategy, yet most people clamber to make their infant portfolios outperform. Investors have faith in their advisors but fail to recognise that their advisors are either lucky, or just replicating a standar passive strategy dressed up as active.
The failure of parents and investors lies, I think, in over emphasis on short term volatility and the expense of long-term outcomes, and the consequent misplaced belief that active management can smooth the volatility over the long-term.
Parents stress over the day to day variable behaviour of their 3 month olds, especially when compared to other babies, but ignore the fact that all babies grow up to be remarkably similar children and adults. Active investors ignore the advice that stocks should be seen as a long-term investment that will almost certainly outperform other asset classes, and instead get all excited and disappointed by short term fluctuations such as we’ve seen last week. The excessive focus on the short term creates fear of an uncertain outcome and hence the demand for stability. In fact, as the economic psychology literature suggests, the myopia of investors may be responsible for the anomaly of the excessive risk premium (sub required) for stocks. Myopic parents may demand a similar premium to get a ‘better return’ from their infant holdings.
The lesson would be to throw away the books, go with the established theory and relax. It all turns out OK in the end.
The Times runs a story on the latest developments querying Burnham et al.
I’m one of the people that supported the study, not as a flawless piece of work, but as an important contribution to the study of mortality in post-invastion Iraq. The methodology – “proven” in epidemiological studies – was a useful one to adopt in this case. And I still think it’s appropriate to discuss statistical interpretation. The world may have focused on the 650,000 figure, but even the lower bound is a very high number.
But, I’m a Bayesian, or try to be, and it appears that cracks are appearing in the study. I’m willing to concede that these very well informed and expert critics may be right, in the sense that the implementation of the study may have been flawed. Indeed, in the worst case, there may have been fraud. But what is it likely to change, other than the job prospects for Dr. Richard Lambert, the Editor of the Lancet? True, there may be greater scrutiny of such politically-charged studies, which must be welcomed, but what of the war policy itself?
In fact, as with the situation when the study first came out, any sensible debate as to whether 650,000 deaths is a bad number is somehow meaningless unless compared to the benefits the Iraqi’s receive now or in the future. And of this there has been little mention other than ‘freedom’ which is questionable in itself; the freedom to vote masks the hugely inhibitions people place on simple freedoms like movement, work and dress. At best, for many of the population, there has been no change here. Indeed, which of ‘Life, Liberty and the pursuit of Happiness’ do current supporters of the war think has increased for the Iraqis?
If we are to do the rounds on this story again, perhaps we could focus on the benefit side, at least so we can make that cold calculation to estimate whether it really is worth it.
