On Evonomics, Spelling and Basic Economic Concepts

I am a big fan of exploring economic ideas into greater depth rather than remaining on the surface of knowledge that I accumulated through my studies. As such, I am always happy when I see people trying to promote “alternatives” within the field of economics (e.g. neuroeconomics, behavioral economics, economic history, evolutionary economics, feminist economics etc.). I do not always agree, but it is enjoyable to think about some of the core tenets of the field through the work of places like the Institute for New Economic Thinking. However, things like Evonomics do not qualify for this.

And this is in spite of the fact that the core motivation of the webzine is correct: there are problems with the way we do economics today (on average). However, discomfort towards the existing state of affairs is no excuse for shoddy work and holding up strawmen that can be burned at the stake followed by a vindictive celebratory dance. The most common feature of those who write for Evonomics is to hold such a strawman with regards to rationality. It presents a caricature where humans calculate everything with precision and argue that if, post-facto, all turns out well then it was a rational process. No one, I mean no one, believes that. The most succinct summary  of rationality according to economists is presented by Vernon Smith in his Rationality in Economics: Constructivist and Ecological Forms. 

Such practices have led me to discount much of what is said on Evonomics and it is close to the threshold where the time costs of sorting the wheat from the chaff outweighs the intellectual benefits.

This recent article on “Dierdre” McCloskey may have pushed it over that threshold. I say “Dierdre” because the author of the article could not even be bothered to write correctly the name of the person he is criticizing. Indeed, it is “Deirdre” McCloskey and not “Dierdre”. While, ethymologically, Dierdre is a variant of Deirdre from the Celtic legend that shares similarities to Tristan and Isolde, the latter form is more frequent. More importantly, Dierdre is name more familiar to players of Guild Wars. 

A minor irritant which, unfortunately, compounds my poor view of the webzine. But then, the author of the article in question goes into full strawman mode. He singles out a passage from McCloskey regarding the effects of redistributing income from the top to the bottom. In that passage, McCloskey merely points out that the effects of equalizing incomes would be minimal.  The author’s reply? Focus on wealth and accuse McCloskey of shoddy mathematics.

Now, this is just poor understanding of basic economic concepts and it matters to the author’s whole point. Income is a flux variable and wealth is a stock variable. The two things are thus dramatically different. True, the flux can help build up the stock, but the people with the top incomes (flux) are not necessarily those with the top wealths (stock). For example, most students have negative net worth (negative stock) when they graduate. However, thanks to their human capital (Bryan Caplan would say signal here), they have higher earnings. Thus, they’re closer to the top of the income distribution and closer to the very bottom of the wealth distribution.  My grandpa is the actual reverse. Before he passed away, my grandpa was probably at the top of the wealth distribution, but since he passed most of his time doing  no paid work whatsoever, he was at the bottom of the income distribution.

Nevermind that the author of the Evonomics article misses the basic point of McCloskey (which is that we should care more about the actual welfare of people rather than the egalitarian distribution), this basic flaw in understanding why the difference between a stock and flux leads him astray.

To be fair, I can see why some people disagree with McCloskey. However, if you can’t pass the basic ideological Turing test, you should not write in rebuttal.

Ricardo and Ringo for a free-trade Brexit

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My colleague, Shruti Rajagopalan, points out that today is the 200th Anniversary of the publication of David Ricardo’s  On the Principles of Political Economy and Taxation. It was here that the notion of comparative advantage began confounding protectionists and nativists. Shruti offers this famous example of it in practice:

Apparently, when asked if Ringo Starr is the best drummer in the world, John Lennon quipped, “Ringo isn’t the best drummer in the world. He isn’t even the best drummer in the Beatles.” And while Lennon may have fancied himself a better singer, guitarist, songwriter, and drummer, than Ringo, the Beatles are still better off with Ringo at the drums.

The essence of comparative advantage is that you don’t need to possess a great talent to benefit from trade within a group, whether we are talking about individual people or nations. So long as there exists some variation in relative talents, people will be able to benefit from specialization and trade.

This message is as relevant as ever. The British Parliament has just voted to hold fresh elections. This is supposedly to strengthen the Prime Minister’s hand when negotiating new terms of trade when Britain leaves the European Union. Politicians act as if trade is dangerous, always a threat to the national interest unless carefully constrained. They negotiate complex deals and regulation on market access, essentially holding their own consumers hostage, preventing them from buying foreign goods unless other countries agree to open their own markets. They fear that their domestic producers will be out-competed by superior, or cut-priced, businesses from abroad.

What comparative advantage shows is that even if that happened to be true for every single industry, domestic businesses could still specialize so as to be competitive on the world market, and improve domestic living standards at the same time. Britain could open its ports and wallets to foreign goods and services with no tariffs, even without any reciprocal deal from the EU, and yet still benefit from trade.

Why? Because it doesn’t matter if you have to be the drummer, just so long as you are in the band.

Would regulation stop the mistakes of rating agencies that contributed to the 2008 crisis?

I remember watching The Big Short and feeling great indignation at the S&P employee who told Steve Carell that rating agencies were pressured into issuing unreasonably high ratings because they were beholden to their customers. If true, this represented an unbelievable moral hazard, which is often cited as the reason for the failures of the ratings agencies–and as a reason for regulating these agencies.

However, more in-depth research and consideration reveals that this answer is incomplete and, in many ways, incorrect. Claire Hill, a law professor at the University of Minnesota Law School and director of the Institute for Law and Rationality, clearly and convincingly critiques this simplistic explanation by recognizing market influences and proposing alternate causes, which also means that if we are looking to avoid a future crisis, we need to look to alternative solutions to the regulatory measures that we currently employ. I don’t think it could be said better than she does in her abstract:

Why did rating agencies do such a bad job rating subprime securities? The conventional answer draws heavily on the fact that ratings are paid for by the issuers: Issuers could, and do, “buy” high ratings from willing sellers, the rating agencies.

The conventional answer cannot be wholly correct or even nearly so. Issuers also pay rating agencies to rate their corporate bond issues, yet very few corporate bond issues are rated AAA. If the rating agencies were selling high ratings, why weren’t high ratings sold for corporate bonds? Moreover, for some types of subprime securities, a particular rating agency’s rating was considered necessary. Where a Standard & Poor’s rating was deemed necessary by the market, why would Standard & Poor’s risk its reputation by giving a rating higher (indeed, much higher) than it knew was warranted?

Finally, and perhaps most importantly, giving AAA ratings to securities of much lower quality is something that can’t be done for long. A rating agency that becomes known for selling its high ratings will soon find that nobody will be paying anything for its ratings, high or low.

In my view, that issuers pay for ratings may have been necessary for the rating agencies to have done as bad a job as they did rating subprime securities, but it was not sufficient. Many other factors contributed, including, importantly, that rating agencies “drank the Kool-Aid.” They convinced themselves that the transaction structures could do what they were touted as being able to do: with only a thin cushion of support, produce a great quantity of high-quality securities. Rating agencies could take comfort, too, or so they thought, in the past – the successful, albeit short, recent history of subprime securitizations, and the longer history of successful mortgage securitizations.

“Issuer pays” did not so much make the rating agencies give higher ratings than they thought were warranted as it gave the agencies a “can do” mindset regarding the task at hand – to achieve the rating the issuers desired, working with them to modify the deal structures as needed. That the issuers were paying motivated the agencies to drink the Kool-Aid; having drunk the Kool-Aid, the agencies gave the ratings they did. My account casts doubt on the efficacy of many of the solutions presently being proposed and suggests some features that more efficacious solutions should have.

I very much recommend reading the full article, which gives more nuance and information about the weaknesses of proposed solutions for rating agency mistakes or malfeasance. This should also be food for thought concerning the general perspective we should have in examining “market failures,” as there are often market feedback systems that mitigate problems, and turning to regulation by reflex can cause unintended harm or even miss the mark entirely.


Reference: Hill, Claire. “Why Did Rating Agencies Do Such a Bad Job Rating Subprime Securities?” University of Pittsburgh Law Review (2010): 10-18. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1582539.

Where is the line between sympathy and paternalism?

In higher-ed news two types of terrifying stories come up pretty frequently: free speech stories, and Title IX stories. You’d think these stories would only be relevant to academics and students, but they’re not. These issues are certainly very important for those of us who hang out in ivory towers. But those towers shape the debate–and unquestioned assumptions–that determine real world policy in board rooms and capitols. This is especially true in a world where a bachelor’s degree is the new GED.

The free speech stories have gotten boring because they all take the following form: group A doesn’t want to let group B talk about opinion b so they act like a bunch of jackasses. Usually this takes place at a school for rich kids. Usually those kids are majoring in something that will give them no marketable skills.

The Title IX stories are Kafkaesque tales where a well-intentioned policy (create a system to protect people in colleges from sexism and sexual aggression) turns into a kangaroo court that allows terrible people to ruin other people’s lives. (I hasten to add, I’m sure Title IX offices do plenty of legitimately great work.)

A great article in the Chronicle gives an inside look at one of these tribunals. For the most part it’s chilling. Peter Ludlow had been accused of sexual assault, but the claims weren’t terribly credible. As far as I can tell (based only on this article) he did some things that should raise some eyebrows, but nothing genuinely against any rules. Nonetheless, the accusations were a potential PR and liability problem for the school so he had to go, regardless of justice.

The glimmer of hope comes with the testimony of Jessica Wilson. She managed to shake them out of their foregone conclusion and got them to consider that women above the age of consent can be active participants in their own lives instead of victims waiting to happen. Yes, bad things happen to women, but that’s not enough to jump to the conclusion that all women are victims and all men are aggressors.

The big question at the root of these types of stories is how much responsibility we ought to take for our lives.

Free speech: Should I be held responsible for saying insensitive (or unpatriotic) things? Who would enforce that obligations? Should I be held responsible for dealing with the insensitive things other people might say? Or should I even be allowed to hear what other people might say because I can’t take responsibility for evaluating it “critically” and coming to the right conclusion.

Title IX: Should women be responsible for their own protection, or is that akin to blaming the victim? We’ve gone from trying to create an environment where everyone can contribute to taking away agency. In doing so we’ve also created a powerful mechanism that can be abused. This is bad because of the harm it does to the falsely accused, but it also has the potential to delegitimize the claims of genuine victims and fractures society. But our forebears weren’t exactly saints when it came to treating each other justly.

Where is the line between helping a group and infantilizing them?

At either end of a spectrum I imagine caricature versions of a teenage libertarian (“your problems are your own, suck it up while I shout dumb things at you”) and a social justice warrior (“it’s everyone else’s fault! Let’s occupy!”). Let’s call those end points Atomistic Responsibility and Social Responsibility. More sarcastically, we could call them Robot and Common Pool Responsibility. Nobody is actually at these extreme ends (I hope), but some people get close.

Either one seems ridiculous to anyone who doesn’t already subscribe to that view, but both have a kernel of truth. Fair or not, you have to take responsibility for your life. But we’re all indelibly shaped by our environment.

Schools have historically adopted a policy towards the atomistic end, but have been trending in the other direction. I don’t think this is universally bad, but I think those values cannot properly coexist within a single organization.

We can imagine some hypothetical proper point on the Responsibility Spectrum, but without a way to objectively measure virtue, the position of that point–the line between sympathy and paternalism–its location is an open question. We need debate to better position and re-position that line. I would argue that Western societies have been doing a pretty good job of moving that line in the right direction over the last 100 years (although I disagree with many of the ways our predecessors have chosen to enforce that line).

But here’s the thing: we can’t move in the right direction without getting real-time feedback from our environments. Without variation in the data, we can’t draw any conclusions. What we need more than a proper split of responsibility, is a range of possibilities being constantly tinkered with and explored.

We need a diversity of approaches. This is why freedom of speech and freedom of association are so essential. In order to get this diversity, we need federalism and polycentricity–stop trying to impose order from the top down on a grand scale (“think globally, act locally“), and let order be created from the bottom up. Let our organizations–businesses, churches, civic associations, local governments and special districts–adapt to their circumstances and the wishes of their stakeholders.

Benefiting from this diversity requires open minds and epistemic humility. We stand on the shore of a vast mysterious ocean. We’ve waded a short distance into the water and learned a lot, but there’s infinitely more to learn!

(Sidenote: Looking for that Carl Sagan quote I came across this gem:

People are not stupid. They believe things for reasons. The last way for skeptics to get the attention of bright, curious, intelligent people is to belittle or condescend or to show arrogance toward their beliefs.

That about sums up my approach to discussing these sorts of issues. We’d all do better to occasionally give our opponents the benefit of the doubt and see what we can learn from them. Being a purist is a great way to structure your thought, but empathy for our opponents is how we make our theories strong.

Coup and Counter Coup VI: Presidential Authoritarianism in Turkey

(Previous posts here, here, here, here and here). The state of emergency proclaimed by President Erdoğan in Turkey on 20th July last year, in response to the coup attempt of five days before, is not a situation that will come to an end in a return to normality. It is the model for the presidential system that Erdoğan has been pushing for since 2007, when he was still admired by many liberal minded people inside Turkey (though not me) and abroad. One of the key provisions of the state of emergency is that the President can issue decrees with the force of law. There are doubts about the constitutionality of this form of ‘law making’ but two members of the Constitutional Court were arrested after the coup attempt and the chances of the court starting up to executive power are now extremely remote. Judges and prosecutors have been demoted and even arrested after making the ‘wrong’ decision during the state of emergency and I do not think Erdoğan and his associates would have any scruples at all about further arrests of judges in the Constitutional Court.

The Presidential system, or one person rule system, which Turks will vote on, will retain the decrees as law powers of the Presidency. There are some limits on the decrees issued, but as the President will control the appointment of most of the senior judiciary there are serious questions about whether the Constitutional Court will put any effective break on these powers to legislate through decree. There is no sign of the state of emergency ending, though at least now everyone can see the deception in the original decision to declare a state of emergency for three months only instead of the six months maximum allowed in the Constitution. The state of emergency is renewed every three months with no debate and no indication of when it will come to an end. Does Erdoğan have any intention of ending the state of emergency before he becomes a President elected with the new powers? In principle these powers should only be implemented after the next presidential election in 2019, coinciding with elections to the National Assembly. Erdoğan may wish to bring these elections forward, particularly for the National Assembly if he loses the referendum. While it may seem outrageous for the Council of Ministers to keep prolonging the state of emergency until 2019, the AKP government has been doing more and more previously outrageous and even unimaginable things now for some years, particularly since the Gezi protests of 2013.

What the state of emergency also means is that suspects can be held without charge and access to lawyers if charged with ‘terrorism’, which is defined in absurdly broad ways to cover any kind of contact with the Gülenists or sympathy for the Kurdish autonomy movement. Torture has been making a return in Turkey after becoming relatively unusual since the PKK terror campaign began again in 2015. The state of emergency conditions have now normalised it completely and though the government denies torture charges, in the normal manner of authoritarian regimes, claiming the charges are terrorist propaganda, you have to wonder how seriously they expect anyone to take the denials. Photographs of the alleged coup plotters immediately after the coup attempt showed they had been badly beaten, though of course this is explained away as the result of ‘resisting arrest’, another time-honoured evasion. Consistent reports suggest prisoners are denied food, placed in stress positions for long periods of time, beaten and sexually assaulted. In the more moderate cases, the prison officials merely restrict prisoners to a diet of bread and bad quality tap water in conditions of psychological abuse. There is amongst everything else in Turkey a growing problem of mental and emotion health problems amongst the survivors of these ordeals, which are of course excluded from the mainstream media.

The rhetoric and abuse used by police ‘special teams’ invading the media and political offices of ‘terrorist’, that is Kurdish autonomy and other leftist groups, involve extreme nationalism and Ottomanism. Kurds are insulted as covert Armenians. Actual Armenians are told that the Ottomans destroyed the Armenians and that Turks are the masters of Armenian. A particularly disgusting reference to the massacre of 1 500 000 Armenians during World War One. These are not aberrations, this behaviour reflects the deep ideology of the AKP, mixing extreme nationalism and Ottomanism, of course ignoring the tensions between these positions. The torture and abuse is legitimated in the minds of perpetrators by a political rhetoric and government measures which present opponents as terrorist and part of international conspiracies against the ‘innocent’ Turks who are so good they are naive. This I am afraid is no exaggeration of the political discourse of the moment.

There is no reason to think the abuse and political extremism will end, though of course we should hope it does. If all Gülenists – real and imagined – and all sympathisers with Kurdish autonomy or the far left are targeted, then there are essentially endless opportunities for authoritarianism, polarising dehumanising rhetoric and abuse. I can only presume the current atmosphere will last indefinitely, as Erdoğan has found it a successful strategy for staying in power and increasing his power.

It is of course not just a question of his own political power. There is the question of how his family occupy places of privilege in large Muslims NGOs (at the same time as non-AKP oriented NGOs come under increasing pressure) with huge budgets and sit on the boards of major companies in Turkey. Erdoğan does not envisage any situation in which these activities are placed under mainstream media examination, and even less legal investigation. The issue of legal immunity is a huge one in Turkish politics. The amended constitution would allow the President to appoint anyone to two vice presidential positions and to the cabinet. Like the President all these people would have lifetime immunity from prosecution for activities undertaken while in office. Though the National Assembly would have the power to send the President to the Constitutional Court, this requires a very high threshold, clearly designed to protect Erdoğan even if the AKP loses a large part of its support.

As mentioned above, there is an expectation that Erdoğan will call an early National Assembly election if he loses the referendum. It seems likely on current polling that two out of the three opposition parties currently in the National Assembly would fail to meet the electoral thresh hold of 10%. This means the National Action Party, which has split over the referendum, and the Kurdish radicals who have lost some of their more moderate support since the revival of PKK violence. In such a National Assembly, the AKP could certainly put any constitutional proposal to referendum and very possibly could have enough votes to amend the constitution without referendum. So even if Erdoğan loses the election, he could get the same measures, or close enough, through other means.

(Last post in the current series, though I will post an appendix on Ottomanist and Atatürkist legacies in Turkey, along with comments on related political thought.)

Coup and Counter Coup V: Jacobins and Grey Wolves in Turkey

Previous posts here, here, here and here. The post coup atmosphere created the impression of an invincible block of the AKP and the MHP, backed by some parts of Kemalist (Jacobinism alla turca) opinion, which would provide a massive majority for the Presidential republic desired by Erdoğan. The MHP did provide the votes in the National Assembly, for the super majority necessary to trigger a constitutional referendum. This was a complete turn about from the MHP’s previous position.

The background to this turn is partly in the state-PKK polarisation, but also in an internal female challenge to the MHP leader Devlet Bahçeli from Meral Aksaner. She is very popular with the Grey Wolf community and would have probably won a leadership election if a special party congress had been called. This became an issue in the courts, which did not in the end force the MHP leadership to act in accordance with an interpretation of laws on political parties (which are very prescriptive in Turkey), which in turn would require a congress. That Bahçeli was so resistant to calling a special congress tells its own story. He lost support within the MHP after their votes went down in the second general election of 2015, presumably also reflecting some previous accumulating weariness with his leadership. The whole story has raised suspicion of AKP supporting judges who twist the law in order to promote a MHP-AKP partnership, but there is no proof of this.

It can at least be said that Bahçeli hopes for some kind of deal in which the AKP-dominated media (that is a very large majority of the media, though not necessarily reflecting the inner views of journalists) treats the MHP gently, the AKP does not campaign against it, and the MHP can continue to get the minimum ten percent of votes necessary for a party list to have deputies in the National Assembly. He may also be hoping that in the Presidential system which Turks are voting on in the 16th April referendum, he or one of his surrogates will get one of the two vice-presidential positions and that the MHP has cabinet seats (which will all be appointed by the President, like the Vice-Presidential positions, with no parliamentary vote or scrutiny).

Meanwhile there is less of a story to tell about the Kemalists, who anyway do not have a clear leader or party. The CHP is their natural home but may be perceived as not pure enough. The bizarre character Doğu Perinçek provides a point of reference, but used to be pro-PKK and is generally just too strange and marginal. In any case, Perinçek has now recently and very publicly withdrawn his support from Erdoğan in reaction to Turkish support for the missile attack on a Syrian air force base. In general, the hardcore Kemalists have drifted back to opposing Erdoğan and supporting the CHP’s ‘No’ campaign. In at least some cases, there may have been second thoughts about how far exactly the government has gone in persecuting Gülenists, real and imagined, along with Kurdish movement politicians and activists; and a feeling that defending the Republic might also mean defending proper legal standards. Perinçek is at a vanguardist extreme where this is not an issue, but for those more influenced by foreign centre left parties and the wish for robust international standard rule of law, there has been a reaction, and a recollection of earlier objections to Erdoğan and his ambitions.

The Kurdish autonomy movement, the Grey Wolves, and the Kemalists will not disappear in Turkey. Positive developments in rule of law, constitutional democracy, individual liberties, and tolerant political culture require evolution in these movements. No government can come to power in Turkey which does not appeal to the concerns of at least one of these groups, and probably two. Erdoğan has never managed to completely absorb or eliminate any of them, though he has to some degree succeeded in keeping some appeal to both nationalist Turks and identity-oriented Kurds, particularly religious and socially conservative Kurds who may regard both CHP and HDP with suspicion. When the MHP and the Kemalist hardcore seemed to be behind Erdoğan after the coup, it seemed he might get more than 60% in the referendum. The MHP has now split in practice, and may well formally split after the referendum. Aksaner is the most popular MHP politician in Turkey and is campaigning for now. The CHP, and those most motivated by the CHP’s Kemalist roots, is solidly behind ‘No’. Right now, though ‘Yes’ may well win, it seems highly unlikely it will win with 60% plus and most expect a very tight vote. (to be continued)