Friday, December 10, 2010

Good times for weird ideas

One strange side-effect of the economic crisis is that extreme critics of society are using the failure of mainstream economics as evidence to support their radical alternatives. All these extremists had been predicting failure, for completely different reasons, for years so now that it has finally happened they claim credit.

A few examples:

The Communist Part of Ireland, describe the crisis as a failure of the "monopoly capitalist system — imperialism".

Al Qaeda gloated that the recession was caused by expensive "crusades" in Iraq, Afghanistan and Pakistan, and also by the secular abandonment of Allah's laws forbidding the charging of interest on loans.

All the people who put Ayn Rand's Atlas Shrugged into the best-selling list again presumably thought that socialism and government interventionism caused the crisis.

This dude blames the cessation of economic protectionism for America's economic problems.

Rajan Zed, president of the Universal Society of Hinduism, blamed "excessive human greed" for the crisis...

...As did Pope Benedict...

...And the Dalai Lama.

And so on. Lots of people are saying they told us so, yet for contradictory reasons. They can't all be right.

In Ireland the crisis has caused a rush for scapegoats and explanations, and here too there were lots of fringe groups who had been predicting failure for years. Judging by comments on Twitter and Facebook, by the rising support for the Labour Party in polls and by the discussions on television, the new star of the crisis is the centre-left, those who explain the recession as a failure of "light touch regulation".

They blame Ireland's supposed shift to the economic right, its loose financial regulation, its prioritising welfare for banks and corporations over welfare for the poor, for the present crisis. There is a spectrum there between far-left and centrist, but they all benefit from a wider anger towards (and scapegoating of) bankers, politicians and developers.

For them the solution will involve a mucher bigger government: higher taxes on the rich and on corporations, higher social welfare, greater redistribution of wealth, and much tougher regulations. One recent focus of this centre-left anger is at the government's policy of reducing minimum wage by one euro per hour.

Not long ago I shared most of their views, I also thought we needed greater redistribution of wealth and top-down regulation of markets. I gradually changed my mind when I read things like this.

Are Regulators Rational? is a paper by Slavisa Tasic applying psychological research to regulators of economies and societies. Tasic argues that most psychological analysis of economics has tended to focus on the irrationality of markets and market participants, yet they apply as well to those trying to tame and control markets. Tasic lists a number of ways that regulators may mismanage economies.

1) Action bias
Following a crisis leaders and regulators feel pressure from the public to do something. Around the world this most recent economic crisis was met with gigantic government stimulus packets and bailouts. In Ireland the government was panicked into guaranteeing deposits in private banks, placing the entire state in danger. Regulators feel they must do something, yet doing nothing may be less harmful.

The Iraq War may be another example of action bias, with governments deciding that something had to be done, scared into aggressive action by the threat exposed by 9/11.

2) Motivated Reasoning
Regulators are as prone as the rest of us to subconsciously favour policies which bolster their own strength and influence. Other specialists behave in the same way: Tasic explains how economists may favour an economic system that involves lots of government intervention since that is going to create demand for well-educated economists to oversee it.

Regulators or economists who argue that there is no reason for regulation or controlled economies are putting themselves out of a job. It is in their interests to promote more regulation.

3) Focusing illusion
Economies are highly complex, but people tend to focus on, and overestimate the importance of, individual factors in the overall situation. The immediate benefits of a particular intervention are clear, but knock-on side-effects are not.

For example, when the state rescues a large business from collapse it saves lots of people from unemployment. However the money used to protect that company is taken from other tax-payers who suffer from the intervention. Also that large company's rivals, who are also employers, are now at a disadvantage.

Lobby groups focus on their particular area of interest, yet their desired regulation may have negative side-effects on the wider public.

4) Affect heuristic
This is the connection in human psychology between reason and emotion. In politics it is related to confusion between good intentions and good results. Tasic points out that modern society is mainly driven by self-interest, quoting Adam Smith in 1776:

it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Despite this, public discourse often focuses on good intentions instead of good results. Demands for greater foreign aid, welfare and regulation all come from positive desires to improve the world, but some may actually make it worse.

Tasic is off-hand about the minimum wage argument going on in Ireland today, insisting that it increases unemployment as "many of the workers that would otherwise work for a wage smaller than the new legal minimum now become or remain unemployed".

A final example is the well-intended Americans with Disabilities Act which, he says, increased the cost to employers of firing people with disabilities so they simply decided to avoid employing them in the first place, increasing unemployment for the group.

5) Illusions of competence
Seeing and understanding simple surface mechanisms in science or economics, people regularly feel wrongly confident that they actually understand the entire process. Overconfident regulators believe that they truly understand how the economy works, and that they are able to manipulate it.

Amusingly, Tasic points to studies connecting greater knowledge with greater humilty and an appreciation of the unknown. Physics novices are worse at assessing the difficulty of a physics problem than experienced physicists, he says. A truly knowledgeable person is one who understands better the limits of his or her knowledge.

As a consequence, those people who volunteer to control economies and societies, and claim to understand them, must be especially ignorant people, unaware of their own ignorance.

Today in Ireland we have people confidently demanding new regulations and expanded state interventions, unaware even of their own inability to regulate wisely. These, by Tasic's logic, are the last people we want in power.

Tasic's ideas are interesting but it is difficult to know what the implications are for a preferred system of government and regulation. I suggest three possibilities:

a) Libertarian/anarchistic
If we cannot understand the consequences of regulation then perhaps we should regulate as little as possible. One danger here, however, is that we also cannot predict the consequences of the massive deregulation needed to get there. So perhaps a better alternative is:

b) Conservatism
Things aren't so bad now, so perhaps we should simply keep things as they are. The global environment keeps changing, however, and that may make today's laws and regulations obsolete. From the 17th to 19th centuries Japan's Tokugawa government almost entirely sealed its borders from foreign trade, even executing fishermen who had been rescused by foreign ships and returned to Japan. This seclusion helped Japan develop economically and avoid war but left it highly vulnerable to the high-tech weaponry of the Western powers, and was abandoned utterly in the mid-19th century. So another alternative is:

c) Trial and error
A pragmatic approach, trying out new ideas and discarding them if they don't work. One problem is that interest groups may benefit from policies that harm the economy as a whole and lobby against their withdrawal. The fury in many European countries over austerity budgets that cut welfare spending shows how difficult it is to reverse regulations and interventions once passed.

There may be no simple solution. But I am certainly not charmed by the populist demands for drastically increased government regulation and spending. There may still be wisdom in Henry David Thoreau's observation in 1849:

"That government is best which governs least."

3 comments:

  1. Politicians who refuse to say "I'm not sure" or "I don't know" lose credibility in my eyes. These people are either dishonest or deeply ignorant of their own ignorance. An honest and knowledgeable person often admits ignorance.

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  2. On the other hand, simply saying "I don't know" is no indication of wisdom either. Take, for example, Glenn Beck's habit of insinuating terrible things by creating and immediately disavowing a piece of slander: "Now, I don't know, but isn't it almost as if Mr. B were a crypto-vampire pod person whose only goal on the surface of this Earth is to kick your cat?"

    Further, if a profession of lack-of-certainty became in any way a test of fitness for, for example, public office, we'd soon be inundated with people declaring ignorance in a wide range of topics, not because they truly understand their own limits, but because they had learned the currently rewarded stimulus-response patterns.

    Wouldn't it just be simpler to have policy decisions turned over to the relative academic fields? At least then you'd be relatively certain that whoever was making decisions would be the most-informed on the matter.

    Not that that doesn't raise an entirely new host of potential problems....

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  3. My point about "I don't know" is more about, say, an interview. The journalist asks the politician a question about some complex policy and the politician, clearly not having a clue, bluffs and blusters, trying to pretend he understands this perfectly! To me this is pathetic. Nobody can be expected to know everything about everything, so this refusal to admit ignorance is a sign either of dishonesty or even deeper ignorance.

    As for handing over policy to relevant academic fields, there is a problem there too that specialists may suffer from the "focusing illusion", believing their own fields to be more important than others, pushing for policies with direct benefits but possible unknown negative side-effects.

    If I remember correctly, Nicholas Taleb's The Black Swan mentions this problem of economists looking at their subject in isolation. When some unpredicted incident happens - a terrorist attack, spell of particularly good weather, natural disaster, cessation of war - all the economists' calculations are thrown into disarray. Economists may protest that their predictions WOULD have worked out, had it not been for that external factor.

    Yet these external incidents do happen!

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