JDN 2456594 PDT 15:55.

The blinders neoclassicists wear are large indeed. This book was written in 1971, and the neoclassical understanding of collective action has, as far as I can tell, not been substantially advanced since then—in over 40 years, the essential conclusions haven't changed.
This would not be a problem, of course, if those conclusions were correct; but they aren't. Indeed they are wrong at a fundamental level; they are almost literally reversed from the truth.

Here is the basic argument:
1. The interests of a group are not the same as the interests of its individual members. [This is true; moreover, I don't think it was recognized by most people before Olson. So that could be marked as the significant achievement.]
2. Individuals act in their own self-interest. [Fundamental neoclassical assumption; and herein lies the problem.]
3. Therefore, groups do not act in their own self-interest.

The logic—and the title did say "logic" after all—is absolutely valid. The problem is that the argument should actually run the other way:
~3. Groups act in their own self-interest.
1. The interests of a group are not the same as the interests of its individual members.
~2. Therefore, individuals do not act in their own self-interest.

That answer has been staring them in the face all along... and yet even now in 2013 most economists still fail to recognize it. Humans are neither selfish nor altruistic; we are tribal. We identify ourselves with a group, defining those inside as good and those outside as bad. The definition of the group can vary a great deal; it might be Americans, or White people, or Christians, or Red Sox fans, or economists, or University of Michigan alumni; and indeed most people will identify in varying degrees with many different groups at once—and much of the conflict in our lives comes from being torn between such identifications. (The rest probably comes from conflict between the groups we identify with and that one special group that contains only ourselves.)

Actually, even neoclassicists have been forced to accept the most extreme examples: They speak of "households" and "firms" as though they were indivisible entities, even though a household contains several individuals and a firm may literally contain millions. Why does this work? Because they are indivisible, at least in terms of their tendency to act in their own self-interest. A corporation is far more likely to act in its own self-interest than any individual human being would be. Households are also not strictly selfish, but they are at least close to it sometimes; whereas, anyone who would stop feeding their own child because they ceased to be amusing we would all immediately and rightfully recognize as a horrible and defective human being. (Yet this is how you would behave, if you actually acted in your own self-interest independent of that of your "household", that is, your family.) True, they might be punished for it; but then again they might not (most child neglect goes unreported), and in any case, this does not factor into a normal human being's decision process. We do not ask ourselves, "Would the police punish me if I stopped feeding my children?"; indeed, we do not even ask, "Should I feed my children?"; we simply feed our children, whenever it is possible, without hesitation. Indeed, we will go to great lengths to feed our children, even if it harms ourselves substantially.

That makes perfect sense in terms of evolutionary psychology—indeed, it would be completely baffling if it were not true, and might force us to radically redefine our understanding of evolution. But it is completely ignored when we assume that human beings are rational self-interested economic agents.

Olson even slips into arguing for group cooperation himself sometimes, apparently without realizing it: "[…] a more detailed analysis of the kind outlined above could help to explain the apparent tendency for large countries to bear disproportionate shares of the burdens of multinational organizations, like the United Nations and NATO,[...]" Once you start saying that The United States acts in its interests, you have already committed to an enormous scale of group cooperation. (Moreover, I also question whether he is even correct that this would be something to explain; it is not obvious to me that the disproportionately large amount of money the US gives to the UN offsets its disproportionately small amount of soldiers, for example. It could just be comparative advantage, or even the US bearing too little a share.)

Throughout the whole book, Olson seems completely unable to fathom why anyone would every do anything for anyone other than themselves.

He says things like "If the groups, or at least the economic groups, are often interested primarily in their own welfare, it could only be so because the individuals in these groups were primarily interested in their own welfare." Why? In fact, that is one thing we know doesn't work—as Olson himself goes on to say: "But if the individuals in any large group are interested in their own welfare, they will not voluntarily make any sacrifices to help their group attain its political (public or collective) objectives)." Olson goes to great lengths to prove that cooperation requires altruism, but simply dismisses the idea that altruism could actually exist.

He likewise dismisses the notion that people have an innate instinct for cooperation as "meaningless", when in fact it is the consensus conclusion of modern evolutionary theory. It's even formalizable; you can actually quantify the human instinct for altruism, and it's quite notable that the figure considerably exceeds the calculation we would get from simple kin selection, C < rB. If you're anything like me and most people, you've paid more than rB to give someone else B on many occasions in your life, and will probably continue to do so many times in the future. You probably haven't paid more than B, which would usually be bad—though some people do so, and it may not always be bad. You are probably even unlikely to pay exactly B, though at times you may. Instead, you pay pB,where p is a discount factor, functioning akin to r—but no longer equal to your genetic relatedness. Instead, it might be called your "cognitive relatedness", or to use a simpler and more evocative term, your solidarity. Usually p far exceeds r, though in some cases it might be less—e.g. if you have had a terrible falling-out with your sibling and now avoid all contact with them. I also suspect that for identical twins, even though r = 1, p < 1. Identical twins usually care about each other a great deal, but it seems unlikely that they value each other exactly equal to themselves. p = 0.99 seems like a reasonable guess.

The reason we call it an "instinct" is of course that it is, and this has a rather precise definition in evolutionary biology—a genetically encoded, evolutionarily selected behavior pattern that is triggered in response to certain environmental conditions. We have a moral instinct in exactly—exactly—the same sense in which we have a hunger instinct and a sexual instinct. One of the more important unsolved questions in modern evolutionary psychology (and moral science generally) is how much of human moral behavior is genetic and how much can be changed by environment; but there is no serious dispute about the fact that both are important—and that means that by definition we have a moral instinct.

Yet Olson doesn't seem to understand this instinct in the slightest, which makes him seem like he thinks all humans are psychopaths. And indeed, The Logic of Collective Action is a book about how people would behave if they were neoclassical rational agents, which is to say, omniscient psychopaths.

Don't get me wrong, there are some useful insights in this book. It's worth studying the ways that individual and collective decisions can be at cross-purposes. There are good reasons to have enforcement mechanisms in your system of policy, just in case people are tempted to act against the interests of your group in favor of themselves (or in favor of another group!). It's worth considering the fact that many forms of cooperation, from international treaties on down to class projects, are far below their optimal levels, and trying to find ways we might fix that.

His analysis of how the most stable groups provide both collective and non-collective goods simultaneously is also useful; it goes far to explain why churches hold bake sales and lobby politicians. His explanation of why the lobbying groups for oil companies and utility companies is so powerful is sound. His concept of "selective incentives" can be adapted, I think, to include our concepts of in-group and out-group and social belonging.

But if we were really atomistic individuals, acting always in our own self-interest, there would be virtually no cooperation at all; even enforcement mechanisms are costly, and if we were all the psychopaths we are imagined to be, we wouldn't even be willing to punish people who do bad things, because that takes effort and time (and in a modern economy, money). In reality, of course, we are very willing to punish people, even at rather substantial cost: Heinrich et. al. (2006) "Costly punishment across human societies." Science 312(5781): 1767-1770.

The few neoclassical economists who acknowledge this fact at all make ridiculous excuses for it, like "People enjoy punishing others for wrongdoing; they gain utility from a sense of righteousness." Okay, that may be true to some extent... I doubt it's the main motivation, but even if it is: Why is that true? Because we have a moral instinct. Yes, sometimes it feels good to do the right thing; but why does it feel good? Moral instinct. That is literally the only plausible explanation. Psychopathy is at a selective disadvantage.

(Given that this is the case, you may wonder how there are psychopaths at all. It's probably due to frequency-dependent selection: In a world of moral individuals, it can be adaptive to be a psychopath. But a population of psychopaths would rapidly self-destruct. Under frequency-dependent selection, the two traits converge to an equilibrium where they are equally adaptive.)

Only at the very end of the book does he acknowledge any motives other than self-interested calculation; and as neoclassicists are wont to do, he immediately declares them "irrational". I do appreciate that he at least mentions the possibility, because I've seen others who refuse to even do that.

There are of course limits to human altruism; and that is well worth studying. Many people are apathetic in large groups, and it's worthwhile to try to figure out why that is and what can be done about it. People are not always altruistic to everyone, and they do not always do their fair share. The tension between self-interest and group interest—and between different types and scales of group—is fundamental to economics, and indeed to human nature.

But you're never going to understand how that works if you pretend one side doesn't even exist.

JDN 2456589 PDT 15:46

A review of The Economic Consequences of the Peace by John Maynard Keynes.

The bad news: Most of the book is spectacularly boring to read, as Keynes deluges us with economic figures. I'm an aspiring economist, and even my eyes began to glaze over. Chapters IV, V, and VI can be safely skipped entirely.
One interesting thing about the figures is how small they seem; he recommends reparation funds of only $5 billion—and thinks even this may be too high—while the figures in the treaty he considers preposterous are on the order of $10 to $20 billion (actually he says "£200 milliard" etc., because he is an early-20th-century British gentleman, but I did the conversion for you). Germany's GDP is now $3.4 trillion, so how can $20 billion be such a burden? Well, there's been a lot of growth and a lot of inflation since 1920. Germany's GDP at that time was about $20 billion. (This is about the GDP of modern-day Zambia.) So Keynes's figures are absolutely correct. The actual reparations received were only about $3 billion, which is right about what he said would happen.

The good news: It really gets interesting when he starts making predictions. The predictions he makes are right, almost every last one of them—and they were made in an environment when everyone else was calling him mad. Reading the last few chapters, in which he predicts the dire outcomes of the Treaty of Versailles and the disasters it will lead to in the 20th century, you would think you were reading a history of the 20th century—except he is writing this history before it happened. I made a list of the events he clearly and specifically predicted:

1. Weimar hyperinflation: "A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter. If, however, a government refrains from regulation and allows matters to take their course, essential commodities soon attain a price level out of the reach of all but the rich, the worthlessness of money becomes apparent, and the fraud upon the public can be concealed no longer." "It is impossible at the present time to say what the mark will be work in terms of foreign currency three or six months or a year hence, and the exchange market can quote no reliable figure."
2. Balkanization: "Economic frontiers were tolerable so long as an immense territory was included in a few great Empires; but they will not be tolerable when the Empires of Germany, Austria-Hungary, Russia, and Turkey have been partitioned between some twenty different independent authorities."
3. Change of the League of Nations into a new body: "[...]that is no reason for any of us to decry the League, which the wisdom of the world may yet transform into a powerful instrument of peace, and which in Articles XI-XVII has already accomplished a great and beneficent achievement."
4. Obstruction due to international veto power: "Does not this provision reduce the League […] into a body merely for wasting time? If all the parties to the Treaty are unanimously of opinion [...] it does not need a League and a Covenant to put the business through."
5. The European Union: "A Free Trade Union, comprising the whole of Central, Easter, and South-Eastern Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt, and India, might do as much for the peace and prosperity of the world as the League of Nations itself."
6. World War 2: "If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can they delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilisation and the progress of our generation."

He didn't actually get everything right.
1. He overestimated the League of Nations: "These Articles, which provide safeguards against the outbreak of war between members of the League and also between members and non-members, are the solid achievement of the Covenant. These Articles make substantially less probable a war between organized Great Powers such as that of 1914. This alone should commend the League to all men."
2. He also failed to predict the rise of Stalinism: "As I write, the flames of Russian Bolshevism seem, for the moment at least, to have burnt themselves out, […]" "I see few signs of sudden or dramatic developments anywhere." But even then, he allows the possibility: "A victory for Spartacism [i.e., fascism] in Germany might well be the prelude to Revolution everywhere: it would renew the forces of Bolshevism in Russia, and precipitate the dreaded union of Germany and Russia;"
3. He predicted the collapse of the European food supply: "The danger confronting us, therefore, is the rapid depression of the standard of life of the European populations to a point which will mean actual starvation for some (a point already reached in Russia and approximately reached in Austria)." This absolutely would have happened if not for the invention of the Haber-Bosch process and the industrialization of food production. Indeed, he even allows for that result, but is too cautious to predict it: "I assume that there is no revolutionary change in the yield of Nature and material to man's labor. It is not impossible that the progress of science should bring within our reach methods and devices by which the whole standard of life would be raised immeasurably, and a given volume of products would represent but a portion of the human effort which it represents now." In a later work, Economic Possibilities for our Grandchildren, he actually expands upon this concept into a (highly, uncannily accurate) prediction of the 21st century economy.
4. He errs most when disagreeing with himself, saying: "Thus the extraordinary occurrences of the past two years in Russia, that vast upheaval of Society, which has overturned what seemed most stable—religion, the basis of property, the ownership of land, as well as forms of government and the hierarchy of classes—may owe more to the deep influences of expanding numbers than to Lenin or to Nicholas; and the disruptive powers of excessive national fecundity may have played a greater part in bursting the bonds of convention than either the power of ideas or the errors of autocracy." I am far more inclined to agree with a statement he made later in the General Theory: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. "

He has an extremely high view of America, at a level that I would find almost unseemly among an American citizen: "After the United States came into the war her financial assistance was lavish and unstinted, and without this assistance the Allies could never have won the war, quite apart from the decisive influence of the arrival of the American troops." "The ungrateful Governments of Europe owe much more to the statesmanship and insight of Mr. Hoover and his band of American workers than they have yet appreciated or will ever acknowledge." "If I had influence at the United States Treasury, I would not lend a penny to a single one of the present Governments of Europe. They re not to be trusted with resources which they would devote to the furtherance of policies in repugnance to which, in spite of the President's failure to assert either the might or the ideals of the people of the United States, the Republican and the Democratic parties are probably united. But if, as we must pray they will, the souls of the European peoples turn away this winter from the false idols […] and substitute in their hearts for the hatred and the nationalism […] thoughts and hopes of the happiness and solidarity of the European family,—then should natural piety and filial love impel the American people to put on one side all the smaller objections of private advantage and to complete the work, that they began in saving Europe from the tyranny of organised force, by saving her from herself."
Then again, this is... a basically accurate prediction. The Marshall Plan absolutely was a concerted effort by the United States to save Europe from itself, and it worked spectacularly well. Is America really that great? I think in practice we fail to live up to our ideals; but then, what other nation is founded upon such ideals at all? We are the first nation on Earth to actually be founded, not for the advantage of a king, not in the name of a race or a religion—but in the name of an ideal, a principle of democracy and liberty based directly on Enlightenment philosophy. Perhaps we really are so great, or could be, did we not so often stumble in our own hypocrisy.
In his most distasteful moments, he comes across as intensely elitist; he speaks often of the foolishness of peasants and the great achievements of entrepreneurs "These 'profiteers' are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot be get rich quick whether they wish it or desire it or not. If prices are continually rising, every trade who has purchased for stock or owns property and plant inevitably makes profits."
He does have great compassion for the people of Germany, however: "The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe."
He understands enlightened self-interest in a way that even modern game theorists don't: "If there is any force in this mode of thought, expediency and generosity agree together, and the policy which will bet promote immediate friendship between nations will not conflict with the permanent interests of the benefactor." "The more successful we are in snapping economic relations between Germany and Russia, the more we shall depress the level of our own economic standards and increase the gravity of our own domestic problems."

On the whole, Keynes is unmistakably brilliant, and his long-term predictions have a level of accuracy that is especially shocking in an age when modern neoclassicists could not see 2008 coming even in 2006. If nothing else, that alone should make us Keynesian.
Just skip Chapters IV-VI.

JDN 2456563 PDT 15:10.

A review of Animal Spirits by George A. Akerlof and Robert J. Shiller.

When I first came to CSULB about a month and a half ago, we had an orientation for graduate students. One of the faculty members there (Seiji Steimetz, for whom I am now a graduate assistant, and whom I have come to adore) asked us all a question: "What kind of research do you want to be involved in?" Most of the students didn't have an answer. I had an answer I didn't quite know how to explain, so I basically coined a new term: "Cognitive macroeconomics. Basically, what happens to our understanding of the macroeconomy when we stop assuming people are rational—because they're not?" He replied, "Like prospect theory to explain inflation?" That wasn't quite right, but it was a more accurate response than I'd expected. Actually that would count as cognitive macroeconomics I think; it's just not in particular what I had in mind. "Yeah, something like that," I said.
Animal Spirits is, in all but name, an introductory textbook on cognitive macroeconomics. It is written in a very readable style, and uses hardly any math; but it marks a paradigm shift in macroeconomic theory. Instead of assuming that workers and capitalists are rational, let's study how they actually think and behave.
Daniel Kahneman and Daniel Ariely (collectively I shall call them "the Dans") basically founded cognitive economics, but they are really cognitive microeconomists. They talk about issues at the level of individual firms and consumers. I find neoclassical microeconomics mind-numbingly boring; cognitive microeconomics is more interesting—and more valid—but it still lacks the glamor of large-scale impact that macroeconomics promises. If we want to live by Keynes's "the world is ruled by little else", it is in macroeconomics that we will do so.
Indeed, it could be argued that Keynes himself was a cognitive macroeconomist; after all, he was the one who coined the term "animal spirits" from which the book draws its title. But the paradigm shift didn't happen then, because Hicks distorted Keynes's vision into something quasi-neoclassical, making what could have been a fundamental advance into a incremental improvement. It is as if we shoehorned Newtonian physics onto Ptolemy's epicycles, or told Darwin that his theory was useful for other animals, but God still made human beings in his own image. (Come to think of it, a lot of people still think that, don't they?) I doubt Keynes would have recognized what we know call "Keynesian".
I actually know George Akerlof's older brother, Carl Akerlof; he's a physicist at Michigan (whom I interviewed for the Physics Historical Project). Hopefully someday I'll get to work with George as well; his work sounds like almost exactly what I want to be doing.
Part One explains the five "animal spirits" Akerlof and Stiller think are most important: Confidence, fairness, corruption, money illusion, and stories. The first three are relatively self-explanatory; the fourth is familiar to economists ever since (you guessed it) Keynes, though it has fallen out of favor.
The fifth I think is worth exploring further, since it may actually be the most important. Cognitive scientists have basically established that human short-term memory comes in two basic data formats, image and audio. The latter is literally audio, basically a two-second ring buffer: You can remember longer sentences if you say them faster. The former is not a bitmap image, but more like vector graphics; you can scale and stretch the image in your mind, but it has limited detail. To say that the human brain stores in SVG and WAV is only a slight exaggeration.
But long-term memory takes a fundamentally different format; I think the best way to describe it is to say that the native data format for long-term memory is narrative. We use stories to organize our own past, our culture, our ideas for the future—even our scientific theories. This is why epic poems were so successful in ancient times, and novels are so successful today; they link into this fundamental data format. (Epic also makes use our two-second audio buffer through techniques like rhyme and meter.)
The universe, by contrast, does not appear to be made of stories. Sometimes things happen randomly. Often the cause is unavailable to us. Most historical events are driven by slow pressure from millions of sources, with no clear "Great Man" to be the hero or the villain. Reality is unrealistic, and sadly, the good guys don't always win.
Animal Spirits uses this to explain the observation that Nassim Nicholas Taleb made in The Black Swan: Why do pundits always come up with a story to explain any random fluctuation? Because human beings like to organize their world in terms of stories.
The second part of the book tries to apply these "animal spirits" to real-world problems in macroeconomics; this is where the book comes up a little short. Akerlof and Shiller sketch out a plausible qualitative account of what happened in the 2008 crash and the Second Depression, and offer some basic suggestions on how we might fix the problem... but much of what they say is vague, and none of it offers sharp, quantitative predictions.
This is the one criticism neoclassicists make of cognitive economics that I do take seriously: It's easy to show flaws in the current models—but do you have a better one? Neoclassical economics succeeds as a science in one sense: It is wrong. It has gone beyond not even wrong and actually made it to wrong—it makes precise predictions that are incorrect. Cognitive economics isn't quite at that point yet; we have the potential to make predictions that are correct, which is of course the goal; but right now we aren't making a whole lot of predictions at all, and the ones we are making aren't very precise. Akerlof and Stiller think they can explain all the recessions of the past (or rather specifically the non-oil-related peacetime recessions) by their model; and that would be useful, to be sure. But can you predict or prevent the next recession? With enough free parameters you can fit an elephant; it's easy to make a model that fits the past. The trick is making a model that fits the future. (This is also why "maximum likelihood" is sort of a perversion of Bayesian methods. The maximum likelihood is basically just what you actually found. What you want is the maximum probability, and for that you need a prior distribution.)
They have precise models that give the wrong answer. We have imprecise models that give answers somewhere near the right answer. So we're not quite there yet. We need to make precise models that give the right answer.
That is why this is only the dawn.

JDN 24565554 PDT 20:54.

A review of The End of Poverty by Jeffrey Sachs

This should have been one of the greatest books ever written. It should have been the rallying cry for a radical new approach to global development, a seminal advance in what it means to do economics—it should have been quite literally a book to save a billion lives.
And make no mistake, Jeffrey Sachs has a project that really does have the potential to have that kind of impact. But The End of Poverty doesn't quite manage to sell that project, for reasons that are not all that easy to pin down.
I think part of the problem is that Sachs was trained as a neoclassical economist and hasn't quite managed to break free from this indoctrination. This makes Sachs, and thus The End of Poverty, of two minds: On the one hand he wants to say that the Washington Consensus has failed, capitalism is in crisis, and we are approaching a fundamental paradigm shift in development economics. On the other hand, he keeps talking about market incentives and rational expectations, and dismisses socialism as an obvious failure—even though many of the reforms he wants are in some sense socialist reforms. I couldn't find the passage when I looked back to quote it, but there's even a section where he talks about the shift from communism to capitalism and says "only then did unemployment emerge" and makes it sound like a good thing. It's really bizarre; rather than saying, "Yes, these workers had to bear the pain of unemployment, but in the long run the market reforms were necessary and made everyone better off," he actually speaks as though he thinks laying off all those state employees was intrinsically beneficial.
At the end of the book he calls upon us to see past narrow self-interest and work to create the world we want to live in. This is exactly right; and like him, I do believe it is possible. But in earlier pages he talks about how collective farms obviously fail because they don't have market incentives... and I find myself asking, "Well, why couldn't they see past narrow self-interest?"
Much of what Sachs says is not only right, it is desperately needed. His message sounds like a pipe dream—ending poverty in less than 20 years?—but his economic sophistication is undeniable. He not only shows how it can be done, he calculates how much it would cost and what would be the most efficient way to pay for it. The number he derives is now widely accepted by development economists, yet so few laypeople comprehend it: $100 billion per year. 0.7% of GDP. That's how much the United States would need to spend; the rest of the First World, mostly Europe and Japan, would add another $100 billion. And that's it. That's all it would take. For less than 1% of our total income, we could end extreme poverty forever.
Now, to be fair, this is extreme poverty—it's the kind of crushing poverty that leaves you starving in a rusting shack made of corrugated steel in a slum by the train tracks in Ghana. Sachs is not proposing to eliminate relative poverty—the dramatic difference between the richest and the poorest in the US—and it's not clear whether his plan would even fully eradicate absolute poverty—the state in which some people don't have enough to meet their basic needs. There are some things that might be considered "basic needs", especially in a First World society (like electricity, transportation, and dentistry) that might still remain out of reach for some of the world's poor. But Sachs' proposal really does have a serious chance of ensuring that everyone in the world has food to eat, water to drink, shelter to live in, and basic medical care. Sachs asks us to imagine a world without starvation or malaria, and then provides concrete steps we could take right now to get us closer to that world.
The problem is, Sachs appears torn between the neoclassical concept of selfishness and an idealistic concept of altruism. What he needs is a fundamentally new paradigm, something that is neither selfishness nor altruism—what he needs is what I call the tribal paradigm. Humans are not selfish individual utility maximizers; indeed, one would have to be a psychopath to act that way. But nor are we selfless altruists, giving everything we have to anyone who asks. The default setting for human moral intuition is tribalism—it is to think in terms of an "in group" that we are altruistic toward, and an "out group" that we are not. Put another way, our unit of rational action is the tribe, not the individual.
I'm actually working on how I might work this into an empirical paper or an econometric argument—perhaps my master's thesis will ultimately be titled, "The Tribal Paradigm"—but for now, let me offer some illustrative examples.
Are racists selfish? Is it acting in your self-interest to hate Black people? No, it isn't. Indeed, the reason neoclassicists have thus far utterly failed to explain or respond to racism is that it couldn't exist within their model of human behavior. There would always be a market incentive to not be racist, because whatever the color of their skin, the color of their money is the same. But does this mean racists are altruistic? It certainly seems odd to say so; if they're such altruists, shouldn't they be nicer to Black people? The answer is that they are tribalists—they are altruistic to their in-group (White people) and not to those outside it.
Here's another example, particularly relevant to economics: We often speak of "the firm" or "firms" as economic agents with well-defined interests and actions. Sometimes we speak of "the government" in a similar way. But for fundamental game-theory reasons, there's no reason to think that the interests of a firm are the same as the interests of any individual in that firm, or even necessarily an aggregate of all their interests put together. Yet we can with some accuracy predict the behavior of firms by assuming they are self-interested agents; how? Because sometimes people identify with the company as their tribe. And let's be honest: Who in the US government doesn't think of the US government, or the American people as a whole, as their tribe? You have to at least convincingly fake such tribalism to even be elected—we call this "patriotism".
I certainly hope Sachs succeeds. I just wish he were a little better at selling it.

A review of The Trouble with Diversity by Walter Benn Michaels

JDN 2456543 PDT 19:54.

Walter Benn Michaels is really not the best person to be addressing the philosophical, political, and economic issues involved in identity politics: After all, his PhD is in English and he's best known as a literary theorist. His writing style is competent, but sometimes a bit verbose and repetitive. He does not appear to have learned that brevity is the soul of wit(though to be fair, that is a lesson I've never learned very well myself). Worst of all, he acknowledges the support of Stanley Fish, who is insane.

Still, his basic message is sound, and much-needed: Identity politics is a dead end. Dividing people up into genders, sexual orientations, ages, and worst of all "races" and "cultures" (which, as he rightly points out, are scientifically nonsensical categories) does not advance the goal of social justice. It is at best orthogonal and at worst a dangerous distraction.

Indeed, Michaels writes as if he thinks that this might be intentional, some kind of right-wing conspiracy to make us all talk about diversity so that we ignore economic injustice. I find that unlikely; while certainly there are many people who don't want us talking about economic injustice, I don't think that they are the ones largely responsible for advocating diversity. No, I think diversity and identity politics were well-intentioned projects of social justice that took on a life of their own, accidentally triggering a deep human instinct for tribalism that overrode our (evolutionarily much more recent) rational principles of justice.

Michaels is apparently one of a select few, myself included, who realize just how divisive identity politics really is. Most LGBT people I've talked to strongly disagreed with what I said about Lavender Graduation, though disabled people I've talked were mixed on their responses to what I said about the disability community. Yet the more I think about it, the more I stand by what I said; the goal of equality is not to have me acknowledged as special for being bisexual, it's to be left alone because being bisexual doesn't matter. It's not to being respected for the diversity my migraines create; it's to cure my migraines.

And there is something I like about the style of the book; Michaels has a way of making the truth obvious, making it seem like we should have understood these things long ago. Examples follow.

If you, like me, have long felt that diversity is overrated or maybe even a totally wrong approach; if you have recognized how nonsensical the categories of "race" and "culture" are only to be rebuffed for being an anti-liberal bigot; if you have tried to find solutions to the global problems of poverty and inequality only to be told that feminist solidarity or "black power" is more important—this book is probably worth reading. And on the other hand, if you think we're all insane, and obviously diversity is wonderful, and we should respect and cherish "the black experience" and "Asian culture", this book is definitely worth reading. Some of the "differences" you are talking about aren't even real, and those that are real (like gender and sexual orientation) aren't particularly worth celebrating.

Page 15, on how the ultimate goal of social justice must be a world where differences simply don't matter: "An important issue of social justice hangs on not discriminating against people because of their hair color or their skin color or their sexuality. No issue of social justice hangs on appreciating hair color diversity; no issue of social justice hangs on appreciating racial or cultural diversity."

Page 43, on why the idea of "black culture" is nonsensical: "The problem is that
the minute we call black culture black, […] in order for a sentence like 'Some white people are really into black culture' to
make sense, we have to have a definition of white and black people that is completely independent of their culture."

Probably my favorite, on page 81: "Although no remark is more common in American public life than the observation that we don't like to talk about race, no remark—as our self-description and the very existence of these [diversity] rankings suggest—is more false. […] In fact, we love to talk about race." We clearly do, don't we?

This one on page 88 hit home because I am an upper-middle-class recipient of several merit scholarships, but I can't really disagree with it: "Another way you can put it is that where need-based scholarships give money to the poor, merit-based scholarships give money to the rich."

Page 122, in reference to companies apologizing for their past involvements in slavery and the Holocaust: "Apologizing for something you didn't do to people to whom you didn't do it (in fact, to whom it wasn't done) is something of a growth industry." We think of this as perfectly normal, yet Michaels is quite right that with a bit of thought it's baffling. "Chase" was supportive of the Nazis? But it has completely different staff and management now; what is this "Chase" of which you speak?

On page 126, Michaels points out how we have it exactly backward; we think apologies make sense and restitution doesn't, when quite the opposite is the case. "[…] the people who did the bad things can't be punished. But their descendants can give back the money they should never have had. Apologies are irrelevant, but restitution is not."

Page 136: "The majority of Americans, for instance, think there should be no inheritance tax, that is, they think that hard work and ability should make no difference whatsoever when it comes to distributing the billions of dollars that change hands from one generation to another."

On page 139, he captures something I've been trying to explain to economists for years; people aren't being irrational just because their being altruistic; indeed, it doesn't even follow that they are irrational just because their beliefs are wrong. "And there really isn't any contradiction in thinking that it is more important to stop abortion than it is to further your economic interests."

Page 140: "The real contradiction is between our support for equal opportunity and our support for all the things that make our opportunities unequal." (Or, I might add, opposition to things that would make opportunities more equal, like welfare, food stamps, basic income, and socialized medicine.)

This passage on page 144 reminded me most of all of Johnathan Haidt and why I hate him: "[…] they also prefer to understand our political differences as differences in identity rather than ideology, as differences in who we are rather than what we believe."

He makes a lot of really good points about how the "crisis" of disappearing languages and cultures is really not a serious problem; after all, people are giving up these languages and cultures voluntarily for the most part. Even when that isn't the case, the coercion is wrong, but why is it bad the "lose" the "culture"? And why are we focusing on these issues instead of the much larger problem of poverty and economic inequality? "[…] the disappearance of languages is a victimless crime. The disappearance of jobs isn't."

Michaels is hard to pin down as liberal or conservative; in some sense he's far left, but he often disagrees with standard liberal positions. He supports affirmative action only as a "better than nothing" system that should be replaced by income-based reforms, and I concur.

He also has some bad things to say about both liberals and conservatives, like on page 173: "And when people do want to have the debate (when they want to talk about inequality instead of identity) they are criticized by the right as too ideological and by the left as insufficiently sensitive to the importance of race, sex, gender, et cetera—that is, as too ideological."

He brilliantly takes down the sort of mealy-mouthed religious relativism that Dr. Hoffman spouted. On page 174: "Only someone who doesn't believe in any religion can take that view that all religions may be plausible considered equal and that their differences can be appreciated." On page 177: "And since politics to some degree involves your beliefs—you run for office in part by expressing and arguing for them; you govern more or less according to them—it can make no sense to say that religion should be kept out of the public square." I also made a similar point in "Is Secularism Sustainable?" Secularism effectively depends upon believing in atheism, but not being willing to make atheism your national policy.

This is my second-favorite, on page 189: "While the debate over whether America should be Christian is a step in the right direction, a debate over whether America should continue to worship at the altar of the free market would be better still."

JDN 2456534 PDT 15:58.

A review of Debunking Economics: The Naked Emperor Dethroned?
by Steve Keen.

The basic message Keen is trying to
send is a vitally important one: Neoclassical economics is failing.
Models based around rational agents and static equilibrium simply
fail to represent the real world, and and as a result give
policymakers a false sense of security against economic crisis.

The way Keen delivers this message is
by avalanche: Page after page, chapter after chapter, he tears apart
neoclassical economics piece by piece. His goal, indeed, is not to
show that the theory is wrong—refuting even a few assumptions
or equations would do that—but rather to show that it is rotten
to the core, that virtually every assumption and every equation is
defective.

And this, I think, is Keen's greatest
failing. Some of the walls he tries to tear down are stronger than he
imagines them to be, and this draws attention away from the very real
gaps in the walls of the citadel.

He also has this weird obsession with
"what they originally meant"; he clearly knows a great deal
about the history of economics and economists, and so I'm inclined to
think he's basically right about what Keynes, Marx, Von Neumann, etc.
originally meant; but so what? These men were brilliant, and many of
their insights are useful, but they were still wrong about a lot of
things. Even Darwin and Einstein made mistakes, and Marx was no
Darwin.

The first two chapters are
introductory material, in which he appeals to the reader (in a rather
melodramatic fashion) to be the change that economics needs.

In chapter 3, he examines the
theory of consumer behavior, and in particular focuses on several
mathematical results showing that preferences cannot be aggregated.
This is of course absolutely correct; the notion that we can get the
preferences of society by simply adding up the preferences of
individuals is profoundly naïve, and indeed the whole point of
Arrow's
Theorem is that you can't
do that. This certainly does damage neoclassical economics severely,
since the whole "New Keynesian synthesis" of modern
macroeconomics is based upon aggregated demand functions that are
simply the sum of individual demand functions.

The problem can actually be
avoided by accepting something classical economists did but
neoclassicists fear: cardinal
utility. If utility
isn't just an ordering, but actually a measurable value, then
aggregation becomes much easier. Indeed, as I often like to point
out, Arrow's "Impossibility" Theorem simply assumes a
priori that you're not allowed
to do range voting, even though range voting is in fact a real system
that real institutions (like Amazon.com and much psychology and
sociology research!) use with great success. Include range voting as
an option, and the "impossible" conditions Arrow presents
turn out to be actually quite easy to satisfy. They still don't
guarantee a negative-slope demand curve, but so much the worse for
negative-slope demand curves, because we know for a fact that some
goods increase in aggregate demand when their price rises. (Gold,
oil, diamonds...) Mathematically that system is unstable? Yes, yes it
is; and so are markets for these commodities. That's an
empirically valid prediction.

Now, the original reason
cardinal utility was abandoned was that it appears unmeasurable; what
are the units? How do you detect utility? Well... actually it's not
that hard. How many papercuts would you be willing to endure for a
delicious meal? How many electric shocks would you accept to get an
HDTV? If those examples sound silly, how about these: How many hours
would you be willing to work, in order to buy a nicer car? How long a
commute are you willing to bear to save $100 on monthly rent? These
are questions that we not only can answer, we do and
must answer in our
daily lives. If your answers
aren't precise, chalk that up to the inherent uncertainty in the
universe. At the very least you should be able to place some bounds
on your answer: The car is not worth less than 100 hours of work
(spread over a year), nor is it worth more than 100,000. I'd
definitely accept another 10 minutes to save $100, and I definitely
wouldn't accept another 2 hours.

Chapter 4 is the chapter Keen
says drew the most criticism in the first edition, and I can see why:
It's clearly wrong. He
tries to argue that there is no difference in pricing between
competitive markets and monopolies, based on the fact that the
aggregate total of firms would maximize their profits if they acted
like a monopoly.

Well, yeah, of course they
would; they'd be effectively a monopoly. The
whole point of perfect competition is that the firms can't collude
effectively, so they make their decisions independently. With that
assumption in mind, you can show mathematically that they'll charge a
much lower price than the monopoly would. In effect, they are trying
to exploit their competitors, and being exploited in return.

Keen does point out something
rather important: The slope of the marginal demand curve for a
competitive firm and the slope of the demand curve for a monopoly are
exactly the same. That
is indeed exactly right; since the firms act independently, producing
one more unit leads to an increase in the total production of, you
guessed it, one unit—and thus drives down the price at which
all units can be sold. The claim that the marginal demand curve is
"effectively horizontal" as many neoclassicists assert is
simply untrue; one more unit of production is one more unit of
production.

What Keen fails to realize is
that the assumption of "effectively horizontal" isn't
necessary to show that competition drives prices to equilibrium. I
actually worked out the full algebra for the price charged and
quantity produced by an n-oligopoly,
and sure enough, as n goes
to infinity, the price and quantity converge to the equilibrium.

Thus, Keen tried to argue that the
basic mathematics of neoclassical economics are wrong, and failed
miserably; the math works just fine, thank you. Where Keen should
have focused is on the absurdity of perfect competition as a
real-world phenomenon: It requires not only an infinite number of
consumers and firms (where at least we can get pretty good
approximations with millions of customers and thousands of firms),
but also perfect information, zero externalities, and perfect
neoclassical rationality—which is to say, the behavior of an
omniscient psychopath. Neoclassical economics does not model the
behavior of human beings; it models the behavior of amoral gods.

Similarly, Keen tries to make
the bizarre argument that profit is not maximized by setting marginal
revenue equal to marginal cost. That's not something neoclassicists
assumed; that's a calculus theorem. P
= R – C. max P → dP/dq = 0 = dR/dq – dC/dq →
dR/dq = dC/dq.

He claims that this disappears
if you include time as a variable; no, it does not. The math gets
more complicated (I probably already glazed some eyes with the
above), but when you solve that Lagrangian you still get marginal
revenue equal to marginal cost. If you can produce something for less
than you can sell it for, you do so; and you sell it, and you make
money. If it costs more to make than you could sell it for, you don't
make it. And the point where you change your mind (assuming things
are continuous, which is a pretty good approximation for large
corporations) is the point at which the price you sell it for is
exactly equal to what it cost you to make it! He babbles some
nonsense about how you want to maximize the rate of change
of profit, but that's simply not
true; you want the rate of change to be zero, because
that means you've hit a local maximum of the function.

Once again, Keen could simply
have pointed out that firms are not optimal
profit-maximizers, and it's not clear that it would be a good thing
if they were. Nor is it realistic to separate the market into
individual pieces and solve the "partial equilibrium", as
though raising wages for auto workers wouldn't affect the price of
real estate in Detroit, or an increase in the price of oil wouldn't
change the cost of shipping from China.

Chapter 5 is better. Keen rightly
points out that economies of scale are the norm, not the exception;
and the fact that neoclassical models can't handle them is so much
the worse for neoclassical economics. He compares the strange "short
run" in which firms somehow can change their labor usage without
changing their capital consumption with the empirical reality of
business, that buying more capital is often easier (and certainly not
systematically more difficult) than hiring new talent. Which takes
more effort and time, do you suppose: Buying a new copy machine, or
hiring a new secretary? Installing a new computer, or finding a new
programmer? Neoclassicists treat hiring as if it simply involved
pulling someone off the street, and capital purchase as if it
involved building a new factory from raw materials.

In chapter 6, the topic is labor
and how wages need not equal marginal productivity; he points out
that this result is derived from many unrealistic assumptions—most
of all that capitalists have no more market power than laborers, and
that people decide how much to work as a trade-off between money and
leisure. In fact, even with that
assumption, it's possible to derive the result that workers won't
vary their hours based on pay rates (a "vertical labor supply
curve")—and here's the best part: To get that result, all
you need to do is add the extra assumption of homothetic
preferences, which is
normally something neoclassicists assume all the time. It's a totally
unrealistic assumption of course; but isn't it interesting how they
suddenly abandon the assumption when it leads to a conclusion they
don't like?

On the other hand, Keen spends a
lot of time in this chapter criticizing the idea of a "social
welfare function"
that takes only GDP as input and outputs a utility score for the
whole society, and that really doesn't seem to belong in a chapter
about labor markets. He is of course absolutely right that this is
ludicrous; the distribution of that GDP is vital to deciding how just
and happy our society will be, and there are other factors as well.
But I don't see how it's necessary to assume a social welfare
function in order to argue that wages equal marginal productivity.

Chapter 7 is a mixed bag; some
of Keen's arguments are cogent, while others seem weak. He spends a
lot of time on Sraffa's esoteric argument that capital should be
priced as "dated labor" discounted at the average
risk-adjusted rate of profit. As far as I can tell no actual capital
is ever priced this way, certainly not consciously; nor is it clear
to me that this would be a normatively good way of pricing it. It
seems to me that capital should be priced at the point where marginal
value equals marginal cost, just like anything else; and no CEO is
concerned with the average risk-adjusted rate of profit for the
economy, but rather for the amount (not
rate, amount) of
profit he himself can make on any given activity. To see that it is a
question of amount and not rate, which would you rather do: A, buy
something for $0.01 you could sell for $1, or B, buy something for
$10,000 you could sell for $15,000? The former way you make a 9900%
profit... of $0.99. The latter way you make a 50% profit, but it's
$5,000. If you could repeat them both infinitely, you'd choose the
former; but you can't, so why does that matter? Given the choice
between A or B, done once, you choose B.

If you were trying to assess the
value of the capital
this way, that's wrong as well; its value is the amount of utility it
can provide by what it does, including the labor it saves, the
products it makes, and any joy it produces directly.

Fortunately, Keen is right in
his basic message of this chapter, which is that aggregating all
"capital" based on their price is basically nonsensical.
Except in a very narrow sense indeed, 10 books for $50 each and 2
computers for $1000 each is not $2500 of "stuff", and you
cannot calculate a rate of profit based on the value of the "stuff".
Prices vary as markets vary; you can't take the price as some kind of
absolute measure of the good's worth. Different capital goods are
used for different things, in different amounts, and depreciate at
different rates. The Cambridge
Capital Controversy
established all this... at which point neoclassicists simply ignored
this fact and went on aggregating capital in the same way.

Now, this might be an acceptable
simplification for some purposes; after all, there's no way we could
possibly include every single type of good in our model. But you
should keep that in mind when you speak of a nation's
"capital-to-labor ratio"; what does that mean exactly? If
it means anything at all, it's clearly not about
price. A post-scarcity society in which everyone has automated
systems that provide them with anything they need is one in which the
marginal cost—and hence price—of all capital goods is
effectively zero. The price of labor might also be zero, or rather
labor decisions are not made on a wage basis; so do we count the
number of people who work, or what they are paid (nothing)? By price,
the capital-to-labor ratio would be 0/0, undefined; yet in a real
sense, it's obvious that their capital-to-labor ratio is enormously
higher than ours. Conversely, if you are stranded in a desert and
someone offers to sell you a bottle of water for $1000 or a car for
$200,000, you're spending an awful lot on capital and nothing on
labor; but we would not say that your capital-to-labor ratio is high.

Chapter 8 is my favorite chapter of
the book. Indeed, it could have been the entire book; most of the
rest seems superfluous. Chapter 8 is about assumptions and their role
in scientific theory. Keen distinguishes between three different
types of assumptions: negligibility assumptions, which are
safe (e.g. ignoring friction in plotting the trajectory of
spacecraft); heuristic assumptions, which are undesirable but
sometimes necessary (e.g. special relativity ignoring acceleration);
and domain assumptions, which are dangerous (e.g. neoclassical
economics assuming that markets are efficient). He thoroughly
demolishes Milton Friedman's pseudoscientific argument that
"assumptions don't matter" and "the more significant
the theory, the more unrealistic the assumptions".

Yes, this is where neoclassical
economics fails: its ludicrous assumptions that humans are rational,
information is perfect, externalities don't exist, debt doesn't
matter, prices adjust instantaneously, preferences are homothetic,
production has constant returns to scale, expectations are
rational... none of these assumptions are even remotely true, they
fundamentally alter the character of economic models, and often they
don't even make the mathematics simpler. They merely serve to feed
the ideology that the free market is magic and government
intervention is evil.

Chapter 9 is about the difference
between statics and dynamics; it has always bothered me how
economists use "comparative statics" instead of actually
trying to work out dynamics. This is how you get things like "the
classical model" in which wages adjust to money supply changes
instantly and "the Keynesian model" in which they don't
adjust at all. Obviously, wages do adjust to money supply changes,
but equally obviously it doesn't happen immediately or all at once. A
dynamic model could very easily take this into account—dW/dt—but
comparative static models are forced to take an all-or-nothing
approach that produces ludicrous results either way.

Keen also uses this opportunity to
discuss complex systems and chaotic dynamics, which is also something
that is clearly desperately needed in economics. I think this is an
area I myself would do well to study more: I know very little about
the methods for solving complex nonlinear systems, and my first
thought would be to run huge computer simulations, which would
probably work but seems rather inelegant.

Chapter 10 is also a good one; it's
about the greatest singular failing in the history of economics,
which is the failure of neoclassical economics to predict, prevent,
or even significantly mitigate the Second Depression. True, it wasn't
as bad as the Great Depression, but back then economic science was
still quite new and computer simulations didn't even exist. To make
the same fundamental mistakes 80 years later is simply unforgivable.

But of course they didn't; the only
ones who got even close were the ones who are more sympathetic to
non-neoclassical theories, like Stiglitz and Krugman. Neoclassical
models predict smooth, efficient equilibrium; they simply can't cope
with the idea of a sudden crash. And so, blinded by their own
ideology, neoclassicists didn't believe a crash was possible even as
it had already begun. Honestly, the highest single priority of
macroeconomic theory should be to predict and prevent depressions,
shouldn't it? But that is one thing that neoclassical economics is
simply incapable of doing.

Chapter 11 isn't bad either; it's
about financial markets, and how a massive system of everyone
second-guessing everyone else can lead to chaos and absurdity with no
foundation in the real world. This honestly is obvious to anyone who
looks (and it was obvious to Keynes), but somehow there are still
economists—a lot of them—who believe in the "efficient
market hypothesis".

Personally, I'm not sure the financial
markets as we know them should exist. Yes, we need savings and
checking accounts. Yes, we need loans to finance investment (new
factories, student loans) and large consumer purchases (houses,
cars). And... that's about it, frankly. All these other layers of
finance really aren't necessary as far as I can tell, and right now
what they do is sap wealth from everything else and make the whole
system more unstable. I really don't see why we couldn't have a fully
nationalized banking system that would perform only these basic
functions and nothing else. Nevada effectively has a nationalized
banking system, and not only is Nevada doing rather well, it actually
fared better in the crisis than any other US state. The basic
arguments for why free markets work (which are already limited) break
down almost completely for financial markets; there's no comparative
advantage, no gains from trade, no mutual benefit; the whole system
is zero-sum and overwhelmed by asymmetric information. There are some
pretty good arguments for why auto manufacturing and computer
hardware are better off being privatized; but the fundamental basis
for those arguments breaks down completely when you try to apply it
to financial markets.

Alternatively, we could just regulate
much better, like in the Canadian system, which is almost universally
agreed to be the most stable and efficient banking system in the
world.

Chapter 12 is on the Great Depression.
Keen is absolutely right about two things: We need an empirically
validated theory of what causes depressions, and neoclassical
economics is not equipped to provide such a theory. Where he loses me
is on his particular Minsky-based theory of "debt deflation";
deflation was not a serious issue in 2009, and it is quite easy to
correct—raise minimum wage and print more money. Yes, the Great
Depression involved a lot of deflation, but that doesn't seem to be
what caused the worst problems.

Debt, on the other hand, obviously is
important—but exactly how it causes depressions remains
unclear. Keen's model proposes that aggregate demand is equal to GDP
plus the rate of change in debt; this doesn't make much sense, since
GDP includes all spending on final goods—if that debt is being
spent on goods, it will already be counted. (And if it isn't, what's
it for?)

Chapter 13 is on Keen's own
predictions of the Second Depression. I will give him credit where it
is due: He was one the first to predict the financial crisis, and did
so with precision and mathematical rigor. He didn't just say "A
depression is coming"; he pointed to specific problems in the
housing market and the financial system.

Chapter 14 is Keen's monetary model of
capitalism. Once again, Keen is absolutely right that we need
something like this—we need a comprehensive model of the
macroeconomy that includes monetary and financial systems. Our
current models are woefully inadequate—they massively
oversimplify money, and they typically don't include debt at all. But
once again, Keen's specific choice is less compelling; he bases it
around double-entry accounting with three sectors: Firms, consumers,
and bankers. It doesn't seem completely wrong, but it's also far from
complete. Still, it's better than nothing—which is basically
what we have right now.

Chapter 15 is on the instability and
inefficiency in the stock market. Here is where chaos theory really
shines; if we are ever going to understand the dynamics of such a
complex system of feedbacks, it's going to be using the tools of
chaos theory.

Right now, it's mostly a sketch; it's
certainly no comprehensive theory. But Keen freely admits this; he
more uses the chapter to express hopes for the future of chaos-based
economics, and also to demolish any vestiges of belief the reader
might have in the "efficient market hypothesis".

Chapter 16 is about mathematics, and
how it's still vitally important, but must be used correctly. I
couldn't agree more; one thing that never ceases to aggravate me is
people who try to argue that the basic methods of science, or math,
or even logic are flawed simply because they haven't solved
some particular problem. Even worse is when they simply won't accept
the solution—"Science has nothing to say about God!"
Yes, actually it does: It says he doesn't exist.

Chapter 17 is about Marxism and why it
fails, particularly how the labor theory of value collapses.
Obviously the labor theory of value is dumb; something does not
become valuable simply because people have worked on it, and
something doesn't stop being useful just because it was easy to make.

Yet Keen feels such a need to reject
neoclassical economics that he can't even accept the utility theory
of value, even though it is obviously correct. Instead he tries to
come up with some alternative theory based on the supposedly
fundamental difference between use-value and exchange-value—when
that distinction has already been captured in the standard
distinction between utility versus price.

He mocks the neoclassical
theory as the "subjective theory of value", which is at
best a misleading way of putting it; the subjectivity involved is the
kind of "subjectivity" involved in saying that pain hurts
and orgasms feel good. It is the "subjectivity" involved in
saying that chairs are for sitting on and apples are for eating. One
could perhaps imagine a lifeform that felt differently, but we are
not that lifeform.

This is also something that moral
scientists have trouble explaining to everyone else: Morality is only
"subjective" in the sense that it depends on the
experiences of sentient beings. That doesn't mean anything goes. It's
not "rape is wrong if you think it is"; it's "rape is
wrong because people don't like being raped". Likewise, it is
objectively the case that goods have subjective value to
people, and that's how our economy works.

Chapter 18 briefly summarizes some of
the alternative approaches: Austrian economics, evolutionary
economics, Post-Keynesian economics, Sraffian economics, and
econophysics. He rightly concludes that Austrian economics is a dead
end for the same reasons as neoclassical, and that Sraffian economics
doesn't go far enough; but he is oddly skeptical of evolutionary
economics and econophysics, and gives more credit to
Post-Keynesianism than I think it really deserves. (Especially since
"Post-Keynesian" is a lot like "post-modern"; it
doesn't describe what you're doing so much as what you're not doing
anymore.)

Oddly he does not include cognitive or
behavioral economics as one of the alternative approaches, even
though it plainly is. Indeed, he takes an oddly dismissive view of
cognitive economics, seeing us as apparently just working out a
series of ad hoc examples of minor irrationality that
ultimately will have no meaning for real-world economics.

And I suppose this is true, at least
of cognitive economics as currently practiced; but it is a field in
its infancy—it basically didn't exist until about 15 years ago.
Give us a few more years, and you will see that it is a radical
paradigm shift as significant as evolutionary economics or
econophysics, and clearly far more so than Post-Keynesian or
Sraffian.

All the way throughout the book, Keen
seems intent on showing that neoclassical economics is wrong, wrong,
wrong, about everything, in every possible way. But
this was not necessary; reversed
stupidity
is not intelligence. Neoclassical economics does not get
everything wrong; in fact, it probably gets more things right
than the general folk notions most people have about economics. I
doubt most people realize that sales taxes create deadweight loss,
for example, or that the money supply is largely created by bank
loans and isn't backed by any commodity; yet these are things that
neoclassicists definitely do understand quite well. Neoclassical
economics is wrong not at the core, but at the margins; but isn't it
neoclassicists most of all who taught us that margins are everything?

JDB 2456527 PDT 10:52.

 

A review of Listening to Prozac by Peter D. Kramer.

 

This was a book with great potential, but it failed to live up to most of that potential. The fundamental idea is a profound one that I wish more people would think about: What does cognitive science say about human nature?

The problem is that Kramer is not a cognitive scientist, he is a practicing psychiatrist. All of his understanding of the brain and mind is filtered through that lens; he spends most of the book explaining particular case studies in minute—sometimes excruciating—detail.

I had expected the title, Listening to Prozac, would be merely metonymous for psychopharmacology in general, or at least SSRI antidepressants in general; but in fact Kramer spends most of the book singing the praises of Prozac in particular, lending the entire book a strange parochial feeling—we are trying to assess the totality of human nature based on experiences with a single medication?

Kramer obviously struggles with the mind-body problem (as do we all I suppose); when he sees a drug affecting someone's behavior or personality, he suffers a kind of crisis of faith: If our minds can be affected by chemicals, how are they really minds? Are we just chemical automatons?

No, I say; that is what everyone gets wrong about cognitive science. The Basic Fact does not say that our minds are false; it does not say that our lives are meaningless; it does not say that we are automatons. The Basic Fact of Cognitive Science says that we are our brains, that everything we are—the things we really are, our thoughts, our feelings, our desires, our hopes, our fears—is made by our brains. The rainbow unweaved is still a rainbow.

Likewise, when he sees a homologue between humans and other animals, he fears that it reduces people to animals—instead of considering the possibility that it elevates animals to people. When he learns that rats and monkeys show the same behaviors and neurotransmitters we do under stress, depression, and loneliness, instead of realizing that this means they feel what we do, he instead tries to understand how it can be that human thoughts and feelings aren't real because they are made of animal parts.

That is the message that I get from listening to Prozac, and it is the message we should have gotten from Listening to Prozac. Altering the chemistry of our brains can alter our conscious experiences? Of course it can, for it is the chemistry of our brains that makes our conscious experiences! This fact should be no more surprising to us than the fact that running a magnet over your hard drive can erase your files, or the fact that smacking the side of an old UHF TV can sometimes clear the picture.

Indeed, the crudeness of medication shouldn't surprise us either; the numerous side effects, risks, and unpredictable results are exactly what you'd expect from running a magnet along a hard drive or smacking a UHF TV. You're trying to resolve a complex, subtle software problem with a brute-force hardware solution.

By comparison, the crudeness of psychotherapy is much more disappointing. It's obvious that it should be the right kind of solution—you fix software problems with software solutions—but we know so little about the underlying function of the human brain that we can't make it work. I guess we're better than cats walking across the keyboard, but we're something like EECS 101 students who keep forgetting to close their parentheses.

It's also possible that some more conventionally medical solution would be effective, but even then it won't be so "conventional"; we're talking about nanobots that deliver precision doses of serotonin reuptake inhibitor to particular nuclei in the amygdala. To use another machine analogy, filling your whole system with Prozac to treat depression is like fixing an oil leak by covering your car in oil.

Indeed, if there is anything surprising about our current psychiatric medicines, it is that they work at all; they are so hopelessly crude that the only way they could possibly be working is if the brain is already equipped with extremely powerful self-repair mechanisms that only need a nudge in the right direction. Further support for this view comes from the fact that electroconvulsive therapy sometimes works; it's the neurological equivalent of when a tech support intern tells you, "Have you tried turning it off and turning it back on?"
While the issues it raises are very compelling, I can't really recommend reading this book; Kramer's handling of these deep questions is just too haphazard.

JDN 2456514 EDT 21:08

 

A review of Confessions of an Economic Hit Man by John Perkins

 

The basic message of the book is a dire one, and not entirely inaccurate: For at least the latter half of the 20^th century, much of what the United States and its institutions did in the name of global development really served more to advance the interests of powerful individuals and corporations in the United States itself.

John Perkins himself participated directly in this process, particularly in his role as Chief Economist for MAIN (Main Street Capital Corporation). As such he sees many things from the inside that most of us would only discover from the news media, if at all. Yet from this position he seems to lack perspective; his overriding sense of guilt at times clouds his judgment as to the real costs and benefits involved.

That guilt infuses the entire book, and gives it an almost uncomfortable sincerity; in our culture we are not accustomed to such frank expressions of emotion, and we have become so accustomed to saccharine fakery of patriotism that when we encounter a real and deep patriotism we reflexively recoil. At times he sounds a lot like a politician, but then you realize that he really means it; and that these are things worth saying. It is only that we have heard them so many times from liars that we now find it difficult to accept them from an honest man.

I feel I have a great deal in common with Perkins; he is an author and economist, and I am an author and aspire to be an economist. Indeed, I suspect I'll be better at both than he, but only time will tell for sure. I may be faced with some of the same sorts of dilemmas he had to deal with, and I can only hope that I do better than he.

So what does an "economic hit man" do, you ask? Well, it's a very subtle sort of "hit man" indeed: Perkins primarily had the task of making economic forecasts for Third World development projects that would be used to guide decisions about international aid loans. He was pressured to make the forecasts unrealistically optimistic, so that they would justify larger loans and higher interest rates. Meanwhile, the contract would require the funds to be spent on US corporations, and then the huge debt incurred would provide the US government and corporations leverage to manipulate the governments they had lent to. It could be likened to a kind of loan sharking on an international scale.

Yet people voluntarily go to loan sharks, even knowing full well what they are getting into. Some of these Third World leaders may have been deceived; some may have been threatened or pressured; but others did the cost-benefit analysis and decided that they'd rather be in unbearable debt than let their people go without roads and electricity. It is exploitation, and it is wrong; but it is also beneficial to those who are exploited. If this seems paradoxical to you, you must immediately read "Wrongful Benificence" by Chris Meyers.

I propose an economic maxim: Focus on the real stuff. That is, keep your eye not on the money, the bonds, the derivatives, the stocks—these things are social constructions, and while they do matter, it is only insofar as they affect what really matters, real goods and services and their distribution. I wouldn't go so far as to say that these vast debts don't matter; but they matter only because of how they will influence future real economic activity. The roads and power lines are real right now, and they really do make people's lives better right now.

As such, I cannot really share Perkins' conclusion that this "new imperialism" is merely an extension of the old. The invasion of Iraq (and before it, the invasions of Panama and Grenada) feel like old-fashioned imperialism. But development aid debts, for all their despicable fine print and hidden costs, are not the same as mass murder. This new "imperialism" isn't just subtler; it's also clearly not as bad. We are not gunning down crowds. We are not unleashing the devastation of total war (if we had, our nuclear weapons would make short work of that). We are not rounding people up and carrying them in cargo holds to bring them home for lives of harsh and unpaid labor. Indeed, sweatshops pay higher wages than the local businesses around them. The injustice is that they could pay vastly more still, but don't.

And don't get me wrong: I'm not saying that this behavior is ethical. The World Bank, the IMF, the US government and others have much to answer for. The cost of ending world poverty is mind-bogglingly small; at a mere $100 billion, it is a check the US government could write tomorrow. The fact that we don't write this check is an appalling injustice. We are letting people die that we could easily have saved. But that is still a world apart from murdering them.

Indeed, most of the really awful things Perkins talks about occur in the 1970s and 1980s, where it must be remembered that the world was overshadowed by the very real threat of global thermonuclear war. Virtually anything would be justified if you could reasonably believe that it would significantly reduce the chances of such a global catastrophe. You would be absolutely right to commit murder, rape, environmental degradation, even genocide if it would reduce the chance of the total destruction of human civilization. A genocide of 40 million is justified if it is the only way to secure a 1% chance of preventing the deaths of 4 billion. That may even be conservative, once you consider that a world population of 5 billion could recover from 40 million deaths, but might not be able to recover from 4 billion. As paradoxical as it may seem, the overriding threat of nuclear devastation means that mass murder could be obligatory if it provided even non-negligible protection against apocalypse. Wars like Korea and Vietnam must be considered in this light, as many of the decision-makers involved do appear to have honestly believed that they were staving off the threat of nuclear war. Indeed, this can remain true even if they were honestly mistaken in that assessment; we cannot live in hindsight, but must act with the best knowledge we have at the time. If this seems cold to you, I must ask: How much colder would it be to let humanity die when we could have saved ourselves?

I do very much like the end of the book, where Perkins offers a much-needed message of hope and call to action: "In fact, those highly effective worldwide communications and distribution networks could be used to bring about positive and compassionate changes. Imagine if the Nike swoosh, McDonald's arches, and Coca-Cola logo became symbols of companies whose primary goals were to clothe and feed the world's poor in environmentally beneficial ways. This is no more unrealistic than putting a man on the moon, breaking up the Soviet Union, or creating the infrastructure that allows those companies to reach every corner of the planet. We need a revolution in our approach to education, to empower ourselves and our children to think, to question, and to dare to act. You can set an example. Be a teacher and a student; inspire everyone around you through your example."

JDN 2456497 EDT 08:55.

 

A review of Global Catastrophic Risks by Nick Bostrom and Milan M. Cirkovic

 

Light reading generally requires three things: Short, easy to read, and on a light-hearted subject. This book is none of those things: it consists of over 500 pages of scientific essays on the end of the world.

Setting the tone is the first chapter by astrophysicist Fred Adams about the inevitable death and decay of the universe. The basic message is that in 100 billion years, we will be dead, so get used to it.

The rest of the book is downhill from there; topics include supervolcanoes, gamma-ray bursts, climate change, pandemics, evil AI, physics experiments that destroy the Earth, nuclear war, nuclear terrorism, bioterrorism, self-replicating nanobots, and totalitarianism. Cheery stuff, basically. Climate change is actually considered a relatively minor problem; after all, it's "only" estimated to kill about 30 million people.

The best essays are actually in Part I, about general cognitive biases and approaches toward risk. James J. Hughes wrote an excellent essay on apocalyptic and millennial ideologies; Eliezer Yudkowsky's essay on cognitive biases affecting risk judgment is brilliant. Milan M. Cirkovic's essay on anthropic biases is particularly chilling: we may think that certain events are unlikely simply because, had they happened, we wouldn't be here. The only essays in Part I that aren't very interesting are Yacov Y. Haimes' essay on "systems-based risk analysis" (which is mostly obvious common sense restated in technical jargon, e.g. "The myriad economic, organizational, and institutional sectors, among others, that characterize countries in the developed world can be viewed as a complex large-scale system of systems."), and Peter Taylor's essay "catastrophes and insurance" (which basically just talks about how insurance only works if your economy hasn't collapsed).

The essays on specific threats honestly aren't that compelling; they don't present a unified narrative or give a good sense of what risks we should be most worried about or most focused on preventing. The net effect is sort of a list of ways we could die, without a clear sense of how we should be trying to protect ourselves. The book presents itself as trying to save humanity, but ends up feeling more like a pessimist's anxiety dreams.

JDN 2456484 EDT 09:35.

 

Most laypeople, if you asked them what economics is about, would probably answer with one word: "money".

This could hardly be more wrong; it's like saying that physics is about computer readouts and medicine is about needles on the dials of blood pressure cuffs. But I can forgive the mistake, because it is one that a large number of economists seem to make on a regular basis.

You'll actually hear economists say things like: "The tsunami killed 300,000 people, equaling an estimated cost of $30 billion." They literally try to assess the value of lives in terms of dollars. (And then wonder why people think they are cold-hearted psychopaths?) This is exactly backward; the value of dollars is and has always been what they can do for people's lives.

A lot of this glaring and disturbing error can be traced to one methodology in particular: "willingness to pay", or WTP. Economists are accustomed to valuing just about everything in terms of what someone would be willing to pay for it.

This seems relatively harmless for consumer goods; when asked, "What would you be willing to pay for a laptop?" or "What would you be willing to pay for a sandwich?" one can give a fairly consistent, precise, meaningful answer.

There are already problems with even this simple case, but most of them seem tractable, and neoclassical models do try to take some of them into account. It depends on your financial circumstances: Maybe you'd pay $5 for the sandwich and $500 for the laptop; or maybe you really like sandwiches and would pay $15; or maybe you need a very nice laptop and have enough extra money that you'd pay $2000. If your wage goes up, your willingness-to-pay for most things will rise. We also need to adjust for inflation; $500 isn't worth as much now as it was in 1950, so a WTP of $500 in 1950 isn't the same thing as a WTP of $500 today.

Also, the answer you'd state—or pay in real life—is actually anchored to current market prices and conditions; you say you'd be willing to pay $5 for that sandwich, but that's because you know you can buy a reasonably good sandwich for $5 at Subway or Jimmy John's. Now suppose you're stranded in a desert, starving, and someone is offering to sell you a sandwich; you'd be willing to pay quite a bit more, wouldn't you? $1,000? $10,000? Maybe even $100,000, if you could find some way to come up with it? But then, what is your true WTP? Is it $5, what you'd answer on a survey or pay at Subway? Or is it $100,000, the amount you'd pay if you were starving in a desert? In the sense economists really mean, the value of the sandwich to you, I think it's actually the latter. A sandwich is life or death. That means your consumer surplus upon buying a $5 sandwich is enormous; you gain $99,995 in consumer surplus when you buy that sandwich at Subway. But I think that's right; you really do gain something that could save your life for the cost of a few minutes of work at middle-class wage. That's how amazing our lives are in the modern world. Of course, standard WTP analysis ignores this entirely, using the price you'd pay in a real-world market. (On that measure, life seems quite bleak indeed: Something is only worth what you pay for it, so whenever you buy something you're really no better off. The game is zero-sum. Finance really is like this most of the time; but consumer goods most certainly are not.)

An even worse problem is one that only cognitive economists recognize this far; willingness to pay, WTP, and willingness to accept, WTA, are not the same. They should be, in an ideal efficient market; if something is really worth $500 to you, you should be willing to buy it for $500 or less and willing to sell it for $500 or more. If it's worth $600 to someone else, you should sell it to them, presumably for about $550; that way you gain $50 (you get paid $550 for something that was worth $500 to you) and they gain $50 (they get something that's worth $600 to them for a price of $550). That's how markets are supposed to allocate resources efficiently; goods go to those who value them the most. If WTP and WTA aren't equal, this system falls apart. If WTA is less than WTP, then you'll throw money away, buying something for $600 and then selling it for $500. Fortunately that rarely happens. But what does happen, indeed happens most of the time, is that WTA is more than WTP. It's called "endowment effect"; you value things more once you already have them. (Ironically, our aphorisms say otherwise: "The grass is always greener on the other side." No, actually, the grass usually seems greener on your own side.)

By the way, the "neoclassical explanation" on that Wikipedia page is utter nonsense. Your willingness to pay is not an abstract distance between indifference curves; it's a quantity of wealth. When asked your willingness to pay to go from X0 of the good and Y0 wealth to X1 amount of the good, that shifts you along the same indifference curve, to a point where you have X1 of the good and Y1 of wealth. The difference between Y0 and Y1 is your WTP. And when asked your WTA, you're contemplating going back to X0 and Y0, so indeed they should be the same, because, obviously, Y1-Y0 = -(Y0 – Y1).

Now, you might be thinking: "If it's mine, I can use it and customize it how I like." For instance, it makes sense that my computer is worth more to me now then it was when I bought it; I've customized it how I like, installed a bunch of programs, and most importantly, stored a great deal of files, which include things as important as my financial records, my resumes, and my writing (which is basically my livelihood). My financial records aren't worth much to other people, now are they? All this is true—and important; my laptop is worth far, far more than its replacement cost, especially if we include my backups—but it doesn't solve the problem. Endowment effect appears immediately, even before you've had time to make any changes to the product. Most people would be willing to pay $700 for the laptop when they buy it, and then if you offer to buy it back immediately, would expect $800.

You might think this wouldn't apply to sophisticated financiers, who surely know better; oh, but it does. Indeed, there's a well-known phenomenon in the stock market called the "bid-ask spread"; bid is the price people are willing to pay for a stock (that is, WTP), while ask is the price people are willing to accept to sell it (that is, WTA). In an ideal efficient market, those two would be equal. But in real-world markets, there's usually a small but significant gap, the aforementioned "spread"; and in market crises, the gap can widen to extreme levels, destroying liquidity in the market and often exacerbating the crisis. You might be thinking: If ask exceeds bid, how do stocks ever sell? Well, these are averages, so for small spreads, you can usually find someone whose ask is lower than your bid and vice versa (and one of the few real services brokerage firms provide is finding such matches). Also, many buyers and sellers place "market orders", which promise to pay or accept whatever the market price may be, with no limits placed (this is generally a bad idea, though oddly my online brokerage tries to encourage it, issuing warnings when your limit is above the current market price. Yes, you idiot, I was willing to pay that price. My limit is in case it gets bigger before my bid clears. Then again, market orders make the brokerage's job easier... so is this a conflict of interest?). But if the spread gets big enough and nobody places market orders, the distributions stop overlapping, and the market mechanism really does break down.

Endowment effect may also explain why people get the Monty Hall Problem wrong so often; even if they thought the odds were 50/50, they should still be willing to flip a coin to decide (and thus win, indeed, 50% of the time). That would be an especially good idea if you have any uncertainty about your probability estimate; flipping a coin is a robust strategy that will always win 50% of the time, whether the odds are really 50/50 or something else, even as extreme as 0/100. But in fact the majority stay with their first choice [link], which doesn't even make all that much sense if the odds are 50/50; it's as good as flipping a coin if you're exactly right, and not as robust if you're wrong. In fact, they aren't 50/50, they're 33/67, so you should switch, winning 67% of the time. Endowment effect would explain this: You over-value your current choice.

It also probably has something to do with another effect found in cognitive economics, loss aversion. You're willing to expend more effort and bear more risk to avoid a $100 loss than you would to get a $100 gain; indeed, a $100 loss and a $200 gain seem to be about equal for most people [link], which nicely explains how we came up with the aphorism "A bird in the hand is worth two in the bush." (This aphorism is an empirically valid statement in cognitive economics!) This also could explain why people won't switch: Suppose the prize is $100. Then you're comparing a 50% chance of losing $100 with a 50% chance of gaining $100, and the loss hurts more, so you don't take the chance.

Are loss aversion and endowment effect contrary explanations? No, I really think they're part of the same phenomenon. You over-value what you have, so you're afraid to lose it. They were discovered separately, but really they are part of the same cognitive process.

 

 

So, from the above, there are already a lot of problems with WTP even in the apparently sensible cases.

But now, let's consider the more extreme cases: What are you willing to pay for a liver transplant? (A lot, yes?) What would you be willing to accept to have your liver taken out right now? (Is there any amount you'd take!?)

What does willingness to pay even mean if the result of the transaction would be your death without heirs? Maybe then your WTA would be infinite? But surely there are things you'd be willing to do even if it meant dying without heirs—unless you're a complete psychopath, you'd rather die yourself than let everyone else in the world die but you. (Just how many it would take is a difficult question, to be sure: 2? 10? 50? Don't make it too low, for we all must make many choices every day that indirectly may cause or prevent deaths. Statistically, we are all heroes and murderers; and which we are on average, I honestly can't say. I hope heroes. I hope.)

What are you willing to pay to save a child from being tortured? What would you be willing to accept to have a child tortured? These kinds of questions are offensive to most people; they seem immoral to even ask. And most economists can't fathom why; they seem to think people are just being irrational and sentimental (which apparently they can only be when they take surveys, but not when they make market judgments? I still can't understand how any economist can believe that markets are rational; it's kind of like believing the sky is green.).

I, on the other hand, understand completely. This sort of question is morally backward; it values dollars instead of people, and completely ignores human dignity and agency. In what bizarre circumstances would I be paid to torture a child? Who is doing this payment, and why aren't we killing him and confiscating all his wealth? (He tortures children. If anything merits capital punishment, it's that.)

Moreover, saving a child from being tortured is very good; but it is in fact not as good as torturing that child would be bad. Hurting and letting be hurt,killing and letting die aren't the same; double effect is a moral principle that almost everyone believes in [link], and one of the best arguments against classical utilitarianism is that it doesn't allow for it. (More sophisticated rule utilitarianism does, and that is a big part of why I am a rule utilitarian.)

In these sorts of cases, WTP seems to break down entirely. That doesn't stop economists from trying to use it; indeed, even cognitive economists, for I worked on a research project a few years ago where surveys asked questions like "How much money would you be willing to accept in order to 1. strangle a puppy 2. rig an election 3. publicly deny your religious beliefs" (yes, really). They also measured eye movements of people taking the survey. I will say one thing in their favor: They did offer "no amount of money would be enough" as an option, which neoclassical economists would scoff at.

And then there's the fact that when economists try to estimate the WTP or WTA of human lives, the results they get vary absurdly depending on how they are measured.

If you determine how much we value life based on auto safety, consider that Americans own about 200 million cars, with an average value of about $10,000; that's $2 trillion. We probably spent 10% of that on safety features. The Institute of Highway Safety reports that auto safety features save about 100,000 lives per year. The average US car is 10 years old (yes, really!), so we're spending an average of $20 billion per year on safety features, to prevent 100,000 deaths. That's a price of $200,000 per life saved.

Now compare how much we spend on medical care; that's about $3 trillion. How many lives do we save that way? A lot, to be sure; but there are also a lot of people who just aren't sick. So let's say about 10 million lives per year, meaning our medical system extends average lifespan by about 30 years compared to what it would have been. That's $300,000 per life.

If you determine how much we value life based on what we spend fighting terrorism, you conclude that even assuming we prevented another 9/11 (which is dubious), we have net lost 1000 American lives—and young, healthy American lives, no less—by the wars in Iraq and Afghanistan, which cost us $1.4 trillion; so apparently we value American lives at a price of -$1.4 billion per person!? Even if you (insanely) discount the lost soldiers, that's only 3000 lives saved for $1.4 trillion, a whopping $466 million per life. Now do you see why I think we need to spend more on healthcare and less on war?

 

But it's one thing to say that WTP is flawed; it would be much more useful if I could actually propose a viable alternative.

Fortunately, I can: Quality-Adjusted Life Years (QALY).

QALY are already in fairly wide use in medicine. They don't need to be inflation-adjusted; a QALY in 1950 (or 50 BC!) is the same as a QALY in 2013.

The "life years" part is fairly straightforward; if an intervention saves lives, you can estimate how many people it saves, and how old they would be, and what their life expectancy now is. This is why we can use it easily in medicine; a lot of medical interventions straightforwardly save lives.

But what about the "quality-adjusted" part? That's obviously a lot more difficult. It requires you to ask questions like, "How many years of your life would you give up to get rid of your migraines?" and "How nice would a house have to be for it to be worth losing a year of your life?"

One might think that these questions are just as difficult—or just as absurd—as questions like "How much money would I have to pay you to torture a child?"; but there are some important differences that make QALY better than WTP.

First and foremost, QALY isn't immoral. It actually makes sense to weigh lives against other lives; ethical philosophy already does ask questions like "How many people would I have to save for it to be worth killing this person?" And when just assessing your own QALY, there's nothing obviously immoral or irrational about choosing to die a year sooner rather than suffer in chronic pain.

Secondly, there are already some obvious applications. Malaria treatment and prevention obviously has a higher QALY per dollar ratio than derivatives trading, so as a society it would be worthwhile to take some of the money from derivatives trading and put it into malaria prevention. We can compare the QALY losses due to marijuana use to the QALY losses due to imprisonment, and invariably find that prison is worse, not only for the users but also for the taxpayers. The latter would be hard to do with WTP, and the former would be utterly impossible; the WTP for derivatives is simply the price of the derivatives, and the WTP of malaria treatment would be very high except for the fact that most of the people dying of malaria have hardly any money.

Indeed, it is perhaps precisely because they use WTP that neoclassical economists can still convince themselves that markets are rational. If the price of everything is its value, then sure enough, everything is selling for its proper value! The First Rule of Tautology Club is...

Krugman calls this "ketchup economics", but that's not nearly harsh enough. A 40-ounce bottle of ketchup doesn't actually sell for twice as much as a 20-ounce bottle, and that makes sense because some people don't want a 40-ounce bottle of ketchup because they won't use it all before it spoils. And ketchup, actually, is worth some QALY. Not a lot, mind you; I love ketchup, and I'd give it up forever to get even 2 more years of life; so assuming I average 50 mL a day for my whole life, and live to be 80, that 1.46 cubic meters of ketchup (a lot of ketchup!) is worth only 2 QALY, meaning that the QALY value of ketchup is 1.37 QALY/m^3, or 1.37 milliQALY per liter. Since a liter of ketchup is about $3 (or $5 if you buy organic), I'm paying $2200 to $3700 per QALY, which is actually pretty good. I'm sure I've paid far more than that in ineffective migraine treatments—and possibly even in effective ones. In fact, I may even be getting a better deal than that, since the lycopene and vitamins may be extending my life. Then again, there's also the salt and sugar, and even for me ketchup is a small part of my diet, so the assumption that ketchup has net zero effect on lifespan seems pretty reasonable.

QALY can also explain very nicely why you shouldn't smoke; heavy smoking shortens your life by as much as 20 years, and a pack of cigarettes is about $5 and will last a heavy smoker about a day; so in your lifetime of 60 years (instead of 80), you'll have spent about $100,000 on cigarettes, which means you are purchasing QALY at a rate of negative $5500 per QALY—you are paying to kill yourself. Put another way, not smoking is like being paid to stay alive.

Of course, that ignores any potential benefits of smoking (it feels good?), so let's try factoring that in. How QALY-dense must smoking be in order to be worth it? Let's say we price each QALY at the same level as organic ketchup, $3700 per QALY. That means that from this lifetime of smoking you must gain 27 QALY, in addition to the 20 QALY you lose by killing yourself; so that means that those cigarettes have to produce 47 QALY of pleasure. That's 20,000 packs, so you're asserting 2.35 milliQALY per pack, meaning you get twice as much pleasure from a pack of cigarettes than I get from an entire liter of ketchup. Even eating it at every meal, I could probably spread that liter over a month, so now imagine spreading that pack of cigarettes over two months. You now have a cigarette once every five days, and you're telling me you get more happiness out of that than I would by having ketchup at every meal. I don't buy it.

But see, if we'd used WTP, you pay as much for the pack of cigarettes as I do for the liter of organic ketchup ($5), so it must be worth the same. Never mind that one product kills you while the other may extend your life; The Market Has Spoken.

Likewise, I had an economics textbook argue, yes, I kid you not, and I quote: "Based on market principles, a professional basketball player is worth more than a neurosurgeon." This is what happens if you conflate how much something costs with how much it is worth.

Indeed, on this sort of market-fundamentalist view, it becomes impossible to even assert that something is not worth what we're paying for it. What we're paying is what it's worth, by definition. This would make markets Pareto-efficient, as neoclassicists hope; it would also make them zero-sum. No matter what we do, we'll have the same outcome. A nuclear war is as good as a malaria vaccine. Surely that is not what you meant to say? (It shouldn't be hard to see that the QALY figures come out quite a bit different.)

 

I don't mean to suggest that QALY are perfect, or even that they're easy; they aren't, and in some ways they may even be harder to measure than WTP. But as in the Parable of the Lamppost, sometimes you want to look at what's actually important, instead of just what's easy to see.