Tuesday, July 29, 2014

Economic imperialism -- its pernicious effects in law



I've written before about the insidious stupidity of relying on simple minded economic cost-benefit calculations when thinking about complex issues such as climate change, trade policy and the like. The calculation gives the illusion of hard-headed quantitative analysis, unbiased by emotion, yet such calculations almost always make sweeping assumptions about what things get counted as costs or benefits and what things do not. There is often nothing scientific in the exercise at all.

I'm not alone in finding this troubling.

Economists in practice spend a lot of time thinking about market failures and how to prevent them, and they derive much of their policy advice from this recipe. Such analyses inevitably tap into the analytical machinery for welfare analysis (which, I admit, I find hard to take at all seriously, but that's another story) and consider how some policy intervention, by removing obstacles to possible exchanges in the market, can improve welfare and economic efficiency. The trouble is, as economists Daron Acemoglu and James Robinson pointed out  a while ago, is that the conceptual framework used in such analyses often simply dismisses as irrelevant other non-economic impacts of such policies, even though these may have huge societal ramifications. Here's how they described one example (I'm selecting some text here from an earlier post):


Faced with a trade union exercising monopoly power and raising the wages of its members, many economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and this is certainly the right policy in some circumstances. But unions do not just influence the way the labor market functions; they also have important implications for the political system. Historically, unions have played a key role in the creation of democracy in many parts of the world, particularly in western Europe; they have founded, funded, and supported political parties, such as the Labour Party in Britain or the Social Democratic parties of Scandinavia, which have had large effects on public policy and on the extent of taxation and income red istribution, often balancing the political power of established business interests and political elites. Because the higher wages that unions generate for their members are one of the main reasons why people join unions, reducing their market power is likely to foster de-unionization. But this may, by further strengthening groups and interests that were already dominant in society, also change the political equilibrium in a direction involving greater effifi ciency losses. This case illustrates a more general conclusion, which is the heart of our argument: even when it is possible, removing a market failure need not improve the allocation of resources because of its effect on future political equilibria. To understand whether it is likely to do so, one must look at the political consequences of a policy—it is not sufficient to just focus on the economic costs and benefits.

The paper goes on to analyze this problem in much greater generality, looking at the push to privatization in Russia, and the drive to deregulate financial markets over the past three decades in Western nations, and how both led to huge shifts in the wealth and political power of different social groups. In both cases, much of the intellectual groundwork for making these changes came from analyses that were ridiculously oversimplified and carried out with considerable disregard for the larger complexity of society.

On the same topic, here's a must read article at Salon.com by Ted Hamilton, a Harvard Law student, decrying the stultifying effects of the "law and economics" movement on the teaching of law. One of the most pervasive effects is the rise of the concept of economic "efficiency" in analyzing and judging the relative merits of different legal structures. The result, as Hamilton describes it, is the systematic narrowing of thinking and stamping out of any imaginative or creative analysis in law:

Since September, I’ve been encouraged to think about the law less as a journey toward justice and more as a means for distributing resources. In Civil Procedure, we examined the wisdom of allowing average people to bring lawsuits based on the overall court costs involved. And in Property, the problem of whether to permit the building of a cement plant in a residential neighborhood turned on the national industry’s need for cement. In nearly every discussion of a given law or a proposed policy, the first question was feasibility, and the second (or third) was justice. “Feasibility” means financial soundness. Financial soundness requires measurement. So in order to measure and mete out our resources, legal questions grasp for the harsh insights of computation.

According to this oddly constrained worldview, the legal system is just another (and comparatively imperfect) means for achieving “wealth maximization.” We want a “bigger pie,” so the incessantly repeated metaphor goes, and law is merely about deciding which yeast works best. The impassioned cris de coeurs of Blackstone, Cardozo or Sotomayor notwithstanding, “the life of the law” is not, to paraphrase another luminary, “experience” — it’s accounting. If only we would spend less time with the romantic and messy concepts that have beguiled the likes of Holmes and Brandeis for millennia, so the thinking goes, we might actually be able to make things work.

In the obvious — and obviously ideological — corollary to all this, law school has tried to convince me that it’s not lawyers or judges that should decide the hard questions of law: It’s economists. The white knights of the 21st century legal academy, economists are uniquely equipped, so they claim, to furnish us wishy-washy idealists with the quantitative rigor to perform the difficult, and consummately serious, analysis that policy and politics require.

In other words, society is a problem. And legal economics is here to solve it.

The law and economics movement, born at the University of Chicago in the 1970s, gave birth to this type of thinking and now enjoys unquestioned academic supremacy over the more prevaricating methods of legal realism, critical legal studies and legal formalism. Law and economics’ doyen Richard Posner, a professor at Chicago, Seventh Circuit judge and famous advocate of all things market-oriented, is the most cited legal academic of the 20th century. Ronald Coase’s “The Problem of Social Cost,” which reduces debate over legal rules to the calculation of transaction costs, is the most cited legal article. Passions have cooled somewhat since the raucous debate in the ’80s and ’90s over law and economics’ takeover of the legal academy — which was aided in no small part by generous donations from private, free market-promoting foundations — but that’s just because the movement’s methods have become part of the background. No other approach to adjudication dominates class discussion to such an extent, or shapes the way in which cases are selected and read.

The economic analysis of law, then, has become the standard against which other approaches are measured. And even if many professors still believe that cost-benefit analysis, with its incessant focus on data and calculation, brandishes empiricism the way Descartes brandished self-reflection (read: with excessive faith in a promising but limited approach), only a cantankerous cynic would argue that it’s all hogwash.

But that’s not to say there isn’t much to pause over.

Here’s a typical example: Legal economists generally assess the value of a resource — land, loans, even lives — by how much someone is willing to pay for it. This makes sense at a very basic level: The sandwich is worth $8 because you won’t pay $9 but you’ll pay more than $7. But how effectively can dollars capture worth when people have different abilities to pay? It seems a bit obtuse to claim that the owner “willing” to pay $200,000 for her home values it less than the developer  “willing” — read: able — to spend $1 million. And that’s just marketable assets. What about more elusive “resources”? How do we price, say, the happiness of children? (Don’t worry: economists have tried.)

Here’s another example: Economic analysis evaluates environmental regulations according to the net social value of restricting industrial activity versus the activity’s economic value absent regulation. Even beyond the difficulties of measuring such things, how do we decide where to draw the line between what “counts” as value in such a calculation and what doesn’t? When dealing with something as resistant to quantification as a wild stream, this puzzle has no end. Is the stream only valuable to those who live by it? To those who live in it? What about those who hear stories about it, or who would drink from it in 90 years, or the painters who might never see it? Does their value “count”?

... we need to consider economic thinking’s ideological and imaginative effects. ... Simply put, our social life is much more than a pie-eating contest. Our shared resources are meant to serve our shared ideals, not vice versa. Yes: a rising tide might sometimes lift all ships, and we need to enjoy our bread before we can enjoy our rights. But the two biggest specters on our communal horizon, climate change and inequality, demonstrate where a singleminded obsession with economic growth can lead us. Taking care of ourselves and our planet means much more than taking care of our wallets.

In an era crying out for radical thinking and radical solutions, we can ill afford the strictures of the cost-benefit mindset. The complete immersion of our legal class into this language of economics has a corrosive effect on its imaginations, leaving our lawyers unequipped to think outside the box. A singleminded pursuit of efficiency loses sight of the inherent messiness of society and the legal rules that grapple with it. By reducing everything to entries in a formula and by seeing human behavior as limited to “rational pursuit of maximum value,” law and economics conjures up a version of the self-interested and self-destructive world that we now inhabit.

After all, when we concede that our society’s legal life is essentially about growing the economy, it becomes very hard to argue against leaving the tough decisions of rule design and market legislation to the growth experts and wealth maximizers. Not surprisingly, those folks have lately turned out to be expert mostly at maximizing their own wealth and that of their friends, while minimizing the wealth, and the happiness, of everybody else — those less willing, because less able, to pay for their share of our resources.

Three years of law school spent evaluating society according to the metric of transaction costs will inevitably produce lawyers less attuned to the more ephemeral, and more essential, considerations — the kind that could actually inspire the reforms and revolutions we need. A law school acculturation process whereby the hard facts of economic analysis are constantly if implicitly vaunted over the less determinate methods of ethical reasoning necessarily generates attorneys more sympathetic to those who traffic in the material of such analysis — namely, bankers, hedge fund managers, and their similarly-educated regulators — and it’s just such economic essentialists who are overrepresented in the ranks of the enemies of social change.
 
Read the whole thing here (h/t Mitch Julis)

Gattopardo economics



Thomas Palley has written an interesting and provocative working paper on "Gattopardo economics" -- his phrase for recent efforts to paper over the fundamental failings of mainstream economic theory by making superficial changes, thereby leaving the main structures intact. Such efforts seek "change that keeps things the same... Gattopardo economics makes change more difficult because it deceives people into thinking change has taken place. By masquerading as change, it crowds-out space for real change."

The name comes from the novel Il Gattopardo (The Leopard) by Giuseppe Tomasi di Lampedusa, about class conflict in Sicily in the 1860s. In the novel, the aristocracy engineers change of a sort that deflects the real threat to their power and leaves them still in charge. 

I don't know if Palley's account of the causes of the financial crisis and subsequent stagnation is definitely correct, but it rings true to me. It was the end result of broad financial de-regulation, coupled with relentless downward pressure on ordinary wages over the past few decades driven by globalization. This set the stage for a three decade credit bubble which ultimately burst. The part I'm not sure about is his claim that stagnant growth now is due to a lack of aggregate demand linked to soaring wealth inequality. Sounds plausible. Anyway, here's his closing summary. The whole paper is worth a read:


The structural Keynesian account of the economic crisis makes clear the role of mainstream economists and the neoliberal paradigm in creating the crisis. Scratch any side of the neoliberal policy box and you quickly find the ideas of mainstream economists. Corporate globalization was justified by appeal to economists’ comparative
advantage theory of free trade. The labor market flexibility agenda was justified by economists’ claims that unions and the minimum wage cause unemployment. The retreat from full employment was justified by the Friedman’s theory of the natural rate of unemployment which implied central banks should focus on low inflation as they cannot permanently affect unemployment. The attack on government and regulation was supported by Chicago School claims that costs of market failure are small relative the costs of government failure and policy induced market distortions. Government was also charged with diminishing freedom and paving “the road to serfdom”, so that freedom was best served by a minimalist government or night watchman state. Financial deregulation was justified by claims it would produce a free lunch by increasing efficiency of resource allocation.

After the financial crisis of 2008 many Keynesian economists hoped there would be profound change of theory within the economics profession. The profession stood discredited owing to its complete failure to anticipate the crisis, whereas Keynesian economists had anticipated the crisis and also showed how neoliberal economics contributed to it. However, change has been minimal.

That should not surprise anyone. Neoliberal economics supports the economic and political interests of powerful elites, and those elites have reason to defend it and block change. Even if only sub-consciously, professional economists also have a private (utility maximizing) interest in maintaining neoliberal ideas to the extent that they are intellectually invested in those ideas and their careers have been built on them.

Society is now engaged in a war of ideas, the outcome of which will greatly influence the future. That is because how we explain the crisis will influence the direction of future economic policy. Gattopardo economics is one of the mechanisms for blocking intellectual change. It works by muddying the water and appearing to offer change when in fact it keeps everything the same. That is why it is so important to expose gattopardo economics.

Tuesday, July 22, 2014

A weed you can eat...




The thing you see above is a plant called Amaranth (this is Palmer Amaranth, one of many species). It's a superweed -- resistant to the ubiquitous and powerful herbicide Round Up -- and in many parts of the US an immense pain to farmers growing corn, soybean or cotton. They're spending millions to keep it from spreading in their fields, and not being too successful.

Now for the irony -- this plant is also completely edible and highly nutritious. It's been eaten for thousands of years around the world. Now farmers are trying to eradicate it in many cases so they can keep producing the cheap high-fructose corn syrup on which the soda and fast food and processed food industry depends. The very fuel of widespread obesity.

Talk about unintended consequences. You have to chuckle, really. More at Bloomberg.

Friday, July 11, 2014

How to cooperate with the future





Very interesting paper published yesterday in Nature. It's an experimental paper, reporting the results of a cooperation game in which people try (of course!) to cooperate, but also have incentives to cheat and take more for themselves. If each pursues his or her own ends without regard for others, there's a tragedy of the commons in which a common pool resource gets wiped out. It takes cooperation and control over selfish actions to avoid disaster for everyone. Lots of experiments have looked at such matters before, of course. This one adds a twist.

The twist is to make the experiment more relevant to some of the tricky issues we face today in thinking about climate change, how to preserve the environment, etc. Someone who is today 60 years old doesn't have the same personal stake in avoiding climate change as someone who is 10, because the older one is much more likely to be dead by the time serious effects kick in. The twist in the experiment is to include this cooperation between generations effect. In effect, the experiment probes our abilities to cooperate with the future -- with people we will never meet. Clever idea to try to do this in an experiment, and I think they've managed it quite well.

Oliver Hauser and colleagues placed volunteers into groups of five people, which they called "generations." In a typical run of the game, they would give the first generation a common pool of 100 units of wealth, with each of the five individuals in this generation able to "extract"  between 0 and 20 wealth units from this pool. Their choice entirely as individuals. The people know that the wealth pool will be passed on to future generations ONLY if the current generation extracts no more than half of it (50 units). Hence, individuals caring about the future generation could choose to extract, say, 10 or fewer units, while those not caring could just take 20.

The individuals were told that there actually would be a future generation with some probability p -- say, 0.8. Hence, there's a 20% chance that the game will just end, so no need to worry about future the generation, and 80% it won't, in which case the wealth resource will or will not be passed on depending how people act in this generation. This game repeats for a number of generations as determined by the random process (on average 5 for p = 0.8).

So, what happens? The research was designed to look at two different scenarios. First, where people just act as they want to without any further pressures on their behavior, and second, in the presence of various kinds of mechanisms designed to help them cooperate more effectively, preserving the resource through generations. The results are interesting:

1. Anything goes -- no institutions at all

In this case, everything goes to the dogs immediately. Interestingly, many people aren't wholly greedy and readily reduce the amount they extract so as to preserve the resource for the next generation of total strangers. The study found that over 20 separate trials, about 68% of the individuals extracted no more than 10 units. Even so, this wasn't enough the overcome the anti-social actions of a greedy minority which extracted so many units that the common pool vanished fairly quickly. In this set of experiments, there were second generations in 18 games, and only in 4 of them was the pool passed on intact through one generation. In the other 14 it was immediately wiped out by over-extraction.

Lesson: people aren't all bad, most have pretty good intentions, but the persistent efforts of a small minority of greedy cheaters is enough to mess everything up. In no single case did the common resource pool persist past 4 generations.

2. Anything doesn't go -- behaviour control by democracy

Maybe democracy can help? An alternative might be to have people in any generation hold a vote on how much of the resource should be passed on. Then, the result (taken as the median or more common choice among the voters) would determine the actual behavior of each and every individual. Freedom would reside in having a vote, not in just being able to extract what you like.

As the paper notes, there are some results in game theory that -- in the context of rational, self interested agents playing normal public goods games -- show that this kind of trick gives very good results. When selfish individuals can be strategic about getting something back from their cooperation, they can do so. However, this standard result does not apply in this generational game because no individual can gain anything by being cooperative. The first generation of rational greedy people would simply vote to each take 20 units and the resource would be gone. Who cares about those people in the future, anyway.

But of course, that's only if people really are rational and greedy. What about real people? Here the experiments suggest something encouraging. In another 20 trials, the researchers tested this protocol and found that now the resource pools never vanished even once, but were passed on and replenished by the unselfish voting of people for as long as the games persisted. The non-greedy norms of the majority, when linked to the coordinating mechanism of democratic voting, can overcome the greed of the uncaring minority -- in this very simple setting.

The message that the simple institution of democratic voting -- IF the outcome of the vote is then effectively enforced on the behavior of all individuals -- can be hugely beneficial for overcoming intergenerational tragedies of the commons. Secondarily, that analyses of what is possible in overcoming these kinds of problems is misleading and naive if conducted in the framework of strictly self-interested agents; pro-social norms in the behavior of real people are a resource for cooperation that we can put to good use. As the paper concludes:
   

We have shown that in the absence of regulation, a minority of selfish players consistently deplete available resources. By implementing median voting, however, this negative outcome can be prevented—but only if all players are bound by the outcome of the vote. Votes that are only partially binding, such as the international Kyoto protocol, have little power.
 
More generally, our results emphasize the importance of institutional designers moving away from the assumption of universal self-interest. We extend the ‘behavioural public choice theorem’ by demonstrating how voting can allow amajority of pro-social individuals to override a purely selfish minority, leading to costly group-level cooperation with future generations. Real-world data are consistent with this suggestion: countries that are more democratic also have more sustainable energy policies...  Policymakers can do much to promote the public good by using a behavioural approach that is informed by amore accurate understanding of human psychology. Many citizens are ready to sacrifice for the greater good. We just need institutions that help them do so.

This final comment reminds me of a European economist who I met several years ago at a European Commission meeting. Very polished, frightfully clever, Oxford and Cambridge, LSE and all that. In conversation, he made fun of all those silly people who recycle and try to take small steps to conserve energy, and had a really good laugh (all on his own) about their little minds and cute intentions to push our world in a better direction. All very silly, he said, because it will never amount to much. Nothing would really matter until it was determined what to do by people such as himself and then put into practice at an international level.

What seemed not to register in his brain at all was what all that small-sacrificing behavior actually reflects -- a desire to help, to make a difference, to change things, to care. Many people aren't only self-interested, and all their tiny efforts show it. They want to help solve the big problems. So that final sentence in the paper is exactly right: "We just need institutions that help them do so."






Saturday, June 28, 2014

The cost of fixed ideas



Books on economic policy aren't generally page turners. But a new book by economist David Colander and businessman Roland Kupers certainly is. It makes the argument that some of the assumptions economists made many decades ago -- especially about people having fixed preferences -- have effectively created a trap for policy analyses. We're stuck as a result with endless, useless arguments about markets versus government. Change those assumptions, and it's possible to imagine policies that don't have markets and government in opposition; it ought to be possible to have free markets and a useful and smaller government at the same time, and achieve not only material prosperity but a wide range of social goals too.

I wrote about the book in a Bloomberg column a few days ago. That column has garnered all of 4 comments so far, which I think also illustrates another problem we have. The column is all about how we might find a way around all of the sterile arguments of markets vs government, and not too many people seem to be interested in that.... or at least not motivated to comment. From past experience, I know that any column which seems to take a side in those arguments stirs up a lot of protest. 

Anyway, read Colander and Kupers' book. Here's the column:

From financial regulation to health care to climate change, we can't agree on what to do about anything. Free-market enthusiasts celebrate the creative power of markets and want smaller government; critics counter that we desperately need government intervention to solve problems that markets can't handle. Neither side can understand the other.

Is there any way out? Well, if you're discouraged, I suggest looking to an inspiring new book by an economist, David Colander, and a businessman, Roland Kupers, who believe the deadlock needn't be permanent. We can have better markets, they say, and more effective (and smaller) government too, if only we can muster a little more economic imagination.

The book is called ``Complexity and the Art of Public Policy,'' and its main point is that our policy debates have fallen into a trap that economists inadvertently created some 50 years ago. That's when they started building mathematical models of economic systems, and, to simplify things, made the assumption that people have fixed or unchanging preferences and desires. Sounds innocuous; it wasn't, and isn't.    Read more.

Friday, June 6, 2014

Medium Tedium

In comments on my last post, Gekko asks quite rightly why I've been doing this silly business of posting two paragraphs and then linking to "more at Medium." It's a good question, so let me explain what's going on. I know it's irritating, and I'd like not to do it, but ....

A while back, Medium asked me to write some things for them. They pay a few writers (a little, very little, in my case) and are in the stages of trying to get their project growing. What it will grow into remains unknown. I do like their layout, and would like to be involved in Medium if and when it turns into the next big thing, whatever that might be.... but I also don't want to just go over there and abandon my blog. First, Medium is just articles; you can't have any sidebars with links to other people's sites, and I think such links are valuable, so visiting there is very different. Two, I don't know if Medium won't just disappear two months from now.

So, I'm left with this very unsatisfying business of posting two paragraphs here, and then linking there. (By contract, I'm not supposed to post in both places, at least not before a significant delay.). I'm not sure what else to do. The dilemma has in fact hurt my blogging, as some days I've started writing about something, then fallen into internal debate about whether to post here, or over there, or what else I might do, and then.... just gave up after an hour and did something else, like clean the gutters or walk the dogs.

If anyone has any ideas, I'd love to hear them!

Wednesday, June 4, 2014

Defending economists -- from themselves


I am on occasion a fairly harsh critic of modern economics, for many reasons. I think economists use the concept of efficiency in a slapdash manner. I think they make a fetish of rigorous mathematics even when they gain no insight from it; it's too often imported as a tool to impress others, rather than as a legitimate means to understanding (see the absurd Appendices of this paper, for example, proving various irrelevant theorems about Markov processes). I think economists (most of them) don't make use of enough modern mathematics from dynamical systems theory.

I also think economists often infect their social analysis with their own subjective values, even while mistakenly and dangerously believing otherwise (as a result of their training). I think the modelling assumption of rational expectations, for agents dealing with anything but the simplest environments, is just a silly idea. I would go so far as to say that I think many economists don't appreciate basic elements of scientific method, preferring the logical beauty (?) of deductive theories to empirically relevant ones. Etc. Read almost anything I've written on this blog for similarly critical opinions.

But I do, just the same, also think there's lots of good and useful economics, some of it even beautiful. And I think economists themselves should do a better job standing up for it. Some very prominent and well known economists are giving the field a bad name. Let me explain.

Read the whole thing at Medium.