Efficient markets as normative systems

Federico Sosa Valle Philosophy , , , , , ,

Recently, I came across this outstanding interview with Eugene Fama published by The Market / NZZ. Besides the main subject discussed -the inability of central banks to control inflation-, the interview is intertwined with gripping assertions about the limits of knowledge, such as the following ones:

Bubbles are things people see in hindsight. They don’t identify them in advance. Sure, you can look at the behavior of prices, and you may be able to identify cases where they are too high. But if you only look back and say: «Oh, stocks went down a lot, so that was a bubble», then that’s 20/20 hindsight. At the time, there was no evidence that there was a bubble.

I don’t say markets are completely efficient, but they’re efficient for most questions that I address. Models are never a 100 % true. If they were, we would call them reality, not models. But for almost all purposes, market efficiency is a very good approximation.

The real question is: How do you pick Warren Buffett? The way you pick him is after the fact, since he has done very well. Now, suppose I take 100,000 investors and say: Let’s let them run for 30 years and pick out the winner. Because you roll the dice so many times, even if none of them is a good or bad investor, many investors will do well and many will do poorly purely by chance. Statistically there is also going to be a big winner, but solely due to chance. In other words: There will be extremely good outcomes and extremely bad outcomes, but you just can’t tell who is successful because of luck and who because of skill.

This quotations resemble the distinction made by Friedrich Hayek between relative and absolute limits to explanation (The Sensory Order, 1952):

8.67. Apart from these practical limits to explanation, which we may hope continuously to push further back, there also exists, however, an absolute limit to what the human brain can ever accomplish by way of explanation -a limit which is determined by the nature of the instrument of explanation itself, and which is particularly relevant to any attempt  to explain particular mental processes.

8.68. If our account of the process of explanation is correct, it would appear that any apparatus or organism which is to perform such operations must possess certain properties determined by the properties of the events which it is to explain. If explanation involves that kind of joint classification of many elements which we have described as “model-building”, the relation between the explaining agent and the explained object must satisfy such formal relations as must exist between any apparatus of classification and the individual objects which it classifies (Cf. 5.77-5.91).

5.90. The model building by such an apparatus of classification simplifies the task and extends the scope of successful adaptation in two ways: it selects some elements from a complex environment as relevant for the prediction of events which are important for the persistence of the structure, and it treats them as instances of classes of events. But while in this way a model building apparatus  (and particularly one that can be constantly improved by learning) is of much greater efficiency than could be any more mechanical apparatus which contained, as it were, a few fixed models of typical situations, there will clearly still exist definite limits to the extent to which such a microcosm can contain an adequate reproduction of the significant factors of the macrocosm.

8.69. The proposition which we shall attempt to establish is that any apparatus of classification must possess a structure of a higher degree of complexity than is possessed by the objects which it classifies; and that, therefore, the capacity of any explaining agent must be limited to objects with a structure possessing a degree of complexity lower than its own. […]

Being confronted with an absolute limit to explanation does not mean that chaos lies outside those limits. Indeed, what we have beyond the scope of our models is a complex order -in this case, efficient markets. A kind of order whose “[…] existence need not manifest itself to our senses but may be based on purely abstract relations which we can only mentally reconstruct” (F. A. Hayek, “Law, Legislation, and Liberty”, Chapter II; 1973), and because of that its explanation finds not practical limits but absolute ones. For example, in this field, “passive investing” would be homologous to a law-abiding behaviour or to the moral saying “being honest is the best policy”. Of course, for such systems -economic, legal or moral- to evolve there have to be some “prices”, i.e.: people who trade in the short term or who perform innovative behaviours which establish a new legal precedent or a new habit.

But for this innovation to happen it is indispensable for the agents to count on a framework of stable regularities -usually called abstract or spontaneous orders- upon which they could draw their own “maps”, create new expectations, and coordinate their plans with other agents. That indicates that we have already spent enough ink writing about the economic way of looking at the law, and perhaps it is time to start pondering markets as complex normative systems.

Nightcap

Brandon Christensen Links , , ,
  1. The American Founders’ priceless legacy Myron Magnet, New Criterion
  2. The gonzo constitutionalism of the American Right Corey Robin, NYRB
  3. Britain at the end of history Robert Saunders, New Statesman
  4. Law’s disorder in Nigeria Marc-Antoine Pérouse de Montclos, LMD

Triple-blinded trials in political economy

Kevin Kallmes Economics, History, Law, Links, Politics , , , , , , ,

In medicine, randomized controlled trials are the most highly regarded type of primary study, as they separately track treatment and control groups to determine whether an observed effect is actually caused by the intervention.

Bias, the constant bane of statisticians, can be minimized further by completing a blinded trial. In a single-blinded trial, the patient population is not informed which group they are in, to prevent knowledge of therapy from impacting results. Placebos are powerful, so blinding has helped identify dozens of therapies that are no better than sugar pills!

However, knowledge can contaminate studies in another way–through the physicians administering the therapies. Bias can be further reduced by double blinding, in which the physicians are also kept in the dark about which therapy was administered, so that their knowledge does not contaminate their reporting of results. In a double-blind trial, only the study administrators know which therapy is applied to each patient, and sometimes an independent lab is tasked with analysis to further limit bias.

Overall, these blinding mechanisms are meant to make us more certain that the results of a study are reflective of an intervention’s actual efficacy. However, medicine is not the only field where the efficacy of many interventions is impactful, highly debated, and worthy of study. Why, then, do we not have blinded studies in political economy?

We all know that randomized controlled trials are pretty much impossible in political economy. North/South Korea and West/East Germany were amazing accidental trials, but we can still hope that politicians and economists make policies that can at least be tracked to determine their ‘change from baseline’ even if we have no control group. Because of how easy it is to harm socioeconomic systems and sweep the ruinous results under the rug, I personally consider it unethical to intervene in a complex system without careful prior consideration, and straight up evil to do so without plans to track the impact of that intervention. So, how can politicians take an ‘evidence-based approach’ to their interventions?

I think that, in recent years, politicians–especially in the US and especially liberals and COVID-reactionaries–have come up with an amazing new experimental method: the triple blinded study. Examples include the ACA, the ARRA, and the recent $3 trillion stimulus package. In a triple blinded study, politicians carefully draft bills so that they are (1) too long for anyone, especially the politicians themselves, to read; (2) filled with a mish-mash of dozens of strategies implemented simultaneously or that are delegated vaguely to administrative agencies; and (3) have no pre-specified metrics by which the policy will be judged, thus blinding everyone to any useful study of signal and response.

I am reminded of one of the most painful West Wing episodes ever made, in which “President Bartlett” is addressing an economic crisis, and is fielding dozens of suggestions from experts–without being able to choose among the candidate interventions. Donna, assistant to his Deputy Chief of Staff, tells a parable about how her grandmother would use ‘a little bit of this, a little bit of that’ to cure minor illnesses. Inspired, Bartlett adopts a policy of ALL suggested economic interventions, thus ensuring that we try everything–and learn nothing. I shudder to think that this strategy was ever broached publicly…and copied from fiction into reality.

In this way, politicians have cleverly enabled us to reduce the bias caused by any knowledge of the intervention or its impact. The patients (citizens), physicians (politicians), and study administrators (economists?) are all kept carefully in the dark so that none of them can know how a policy impacted the economy. Thus, anyone debating any of these topics is given the full freedom to invent whatever argument they want, cherry-pick any data they want, and continue peddling their politics without ever being called to task by the data.

Even more insanely, doctors are held not only to the standard of evidence-based medicine, but also to that of of the precautionary principle–where passivity is preferred to action and novel methods are treated with special scrutiny. “Evidence-based policy”, on the other hand, is a buzzword and not an actual practice to align with RCTs, and any politician who actually followed the precautionary principle would be considered ‘do-nothing’. Thus, we carefully keep both evidence and principles of ‘do no harm’ far from the realm of political action, and continue a general practice across politics of the blind making sure that they lead the blind.

In sum, political leaders, please ignore Donna. Stop intentionally blinding us to policy impacts. Stop doing triple-blinded studies with the future of our country. Sincerely, all data-hounds, ever.

Nightcap

Brandon Christensen Links , ,
  1. American elections: what’s at stake? Branko Milanovic, globalinequality
  2. Covid-19, risks, and rights violations Irfan Khawaja, Policy of Truth
  3. Reading 150 books on Donald Trump Alex Shephard, New Republic

Nightcap

Brandon Christensen Links , , ,
  1. Exercising religion and taming faction Lael Weinberger, LARB
  2. Out of a silent planet Nick Nielsen, Grand Strategy Annex
  3. The broken promises of mid-century liberalism Kim Phillips-Fein, Nation
  4. Grand plans and failed forests Kelvin Mulungu, Africa is a Country

Choosing inadequacy

Mary Lucia Darst Liberty

About a year ago, I had dinner with a friend who I have known more or less my entire life. We hadn’t seen each other in over ten years, though, not since she started college. During the interval, she became an inveterate social climber – at one point avowing completely seriously that she was open to marrying a rich man if it meant that she could have a flat in one of the world’s most expensive cities. She was also an expert at being woke. The contradiction in her thought processes – her craving for a life of riches and luxury and her woke “eat the rich” attitude – caused me to recognize the fuel behind the attraction redistributionist ideologies have for young Americans.

At some point in her trajectory, my friend had pitched on using the education system to climb the social ladder. In fairness to her, there is a pervasive idea that this is a valid approach; J.D. Vance mentioned it in the conclusion to Hillbilly Elegy. Choosing between the flagship state university and a small private liberal arts college, she picked the latter, which was a “social” school held in high esteem regionally and thought to be intellectually rigorous.

Upon graduating and moving two time zones away for graduate school, she made two unwelcome discoveries: 1) she was behind academically and intellectually, and 2) her college had scant brand-name value in the broader world. According to her, her graduate university’s student body was comprised of the children of America’s elite and “who didn’t get into Harvard.” She held a teaching assistantship for 101-level English literature classes and was discomfited to find that her freshmen students were better writers with a broader sense of literature and the humanities than she. She mentioned that she found out about entire chunks of the English literary canon from them, which is appalling given that she had majored in English at her liberal arts college.  

When Austrian novelist Stefan Zweig died, his executors found the manuscript for his novel Rausch der Verwandlung among his papers. The book’s title in English is The Post-Office Girl,[1] and it tells the story of a 1920s provincial girl who assumes a false identity to join the privileged world of her relatives. Everything works out – until it doesn’t:

Unwittingly Christine revealed the gaps in her worldliness. She didn’t know that polo was played on horseback, wasn’t familiar with common perfumes like Coty and Houbigant, didn’t have a grasp of the price range of cars; she’d never been to the races. Ten or twenty gaucheries like that and it was clear she was poorly versed in the lore of the chic. And compared to a chemistry student’s her schooling was nothing. No secondary school, no languages (she freely admitted she’d long since forgotten the scraps of English she’d learned in school). No, something was just not right about elegant Fräulein von Boolen, it was only a question of digging a little deeper […].

After Christine is unmasked, she returns to her previous life but this time she’s angry and bitter, aware now of the existence of another world, one lost through her own irresponsibility. Most of the book is about the girl’s mental unravelling. When I first read the book, I thought his ending of suicidal thoughts and participation in serious criminality to be melodrama for its own sake. Now, I think he was on to something.

In Zweig’s book, the root of the problem is the anti-heroine’s discovery that what is top-notch in her village isn’t held in the same esteem elsewhere: “[W]hat was the showpiece of her wardrobe [a green rayon blouse] yesterday in Klein-Reifling seems miserably flashy and common to her now.” My friend recounted a similar experience cast in academic terms. She slid through high school and college without any struggle. Upon starting her MA, she had difficulty keeping up with her cohort. Three years after starting a doctoral program, her dissertation proposal was rejected, with the evaluators citing lack of languages as one of the reasons. This last is interesting because it connects to Zweig’s list of faults that expose Christine’s real social standing. In the case of my friend, her background became equivalent to Christine’s blouse: haute couture in one locale and unsophisticated in another.

For both the Bright Young Things of Zweig’s world and my own generation more generally, there is a question over culpability. In the book, Christine’s aunt agonizes over the girl’s uncouth manners and dress, repeatedly reminding herself “how was she to know?” My friend and her parents assumed that “the system” would take care of her. Sure, the public school wasn’t great, but it also wasn’t too terrible and everyone else was going there. The college was the best and most expensive private college in the region, so surely the faculty and advisors there knew what they were doing.

This is not to say that there weren’t red flags if one knew where to look. For example, the college offered only two years of accredited foreign language training. My friend acknowledged this contributed to the problems with her first proposal. However, my friend also admitted that she hadn’t considered the curriculum when she picked the college. Her focus had been purely social. Consequently, the truth is that she chose her path at the moment she picked her values.  The fact that her measurement system didn’t hold up well to broader scrutiny is her fault.

Zweig’s anti-heroine contemplates suicide in response to her inadequacy; kangaroo courts, or cancel culture, are more my friend’s style. Not much has changed over the course of a century. In Zweig’s time, self-destruction was the default choice; in ours, destruction of others is the preferred MO. The source of the anger, though, is the same: envy stemming from inadequacy. Unlike the Bright Young Things, though, the modern generations chose their inadequacy.

[1] Much of the crucial action is set in a Swiss hotel, and Wes Anderson has said that the book was one of his inspirations for The Grand Budapest Hotel.

“The only time I’m not thinking about Palantir…”

Bill Rein Current Events , , , ,

If you’re not following Palantir, it’s on track to be one of the most important new American firms in geopolitics and security, and it just launched its IPO on September 30. (For what it’s worth, my buy stop is around $12 right now.)

Founded by real-life Ozymandias and California Ideology archon Peter Thiel, and governed by Freud Institute-bloodline parvenu Alex Karp, Thiel has said it will be every bit as important as Facebook is today.

Reading this profile of CEO Alex Karp, in which Karp laments his loss of anonymity and all its hedonistic red-light opportunities, while building a billion-dollar big data company to empower clients like the CIA, reminds me of a quote from Getting Straight.

Why haven’t you learned anything?

It’s all there, it’s all there in Toynbee and those books on the shelf!

Suppression breeds violence!

You’re going to raise the curfew an hour?

Will you look outside?

You see that kid?

Last week he just wanted to get laid.

Now he wants to kill somebody!

New Zealand’s elections and the geopolitics of the Pacific

Tridivesh Singh Maini Current Events , , , , , , , ,

Introduction 

The convincing victory of Jacinda Ardern is important for more than just one reason. First, the 40 year-old Ardern’s centre-Left Labour party has won convincingly — securing 49% of the vote, and securing 64 seats in the 120 seat assembly. Ardern has delivered the biggest election victory for her party in half a century. The victory gives Ardern and her party the opportunity to form a single party government.  

Second, while there is often talk of a right-wing political discourse being dominant globally, it is important that a center-left leader has won. Many commentators of course would argue that New Zealand is a small country, with a small population of less than 5 million – and that not much should be read into the electoral result.

Third, Ardern’s successful handling of the Covid19 pandemic, along with other women leaders – including German Chancellor Angela Merkel, Taiwanese President Tsai Ing Wen, Bangladeshi Prime Minister Sheikh Hasina, and Denmark’s Mette Frederiksen – has been acknowledged globally. A study published by the World Economic Forum and The Center for Economic and Policy Research makes this point and has cited some of the reasons for the success of the these leaders. The success has been attributed to the fact that all these leaders were quick to react to the crisis. 

Fourth, at a time when the world is becoming insular, the New Zealand PM has been firmly pitching for open immigration policies, has taken a strong stance vis-à-vis Islamophobia (something which leaders of other liberal democracies have failed to do), and repeatedly argued in favor of a more inclusive society. In March 2019, shootings at a Mosque in Christchurch by white supremacists had resulted in the killing of 50 people. Ardern, while expressing solidarity with members of the community, donned a head scarve, or hijab, and this gesture was appreciated. In her victory speech the New Zealand PM stated that the world is becoming increasingly more polarized and that “New Zealanders have shown that this is not who we are.” 

The New Zealand PM has her task cut out on issues related to the economy (the economy had shrunk by 12% in the second quarter thanks to the impact of the lockdown). Like other countries, there have been many job losses. Some of the sectors which have witnessed job losses, such as retail, hospitality, and tourism – employ women (according to some estimates a whopping 90% of people who have lost jobs are women). Some commentators also believe that the Labour government has not been able to deliver on key promises related to housing, child welfare, and the economy. There is also an argument that Ardern’s first tenure was not transformational, and after her win the expectations from her will be much higher.

Foreign Policy Challenges  

New Zealand, in spite of being a small country, is important in the context of foreign policy issues. There are two important dimensions: New Zealand’s ties with China, and as a part of the 11-member Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP).

As far as New Zealand’s ties with China are concerned, there are various layers to the bilateral relationship. Jacinda Ardern’s government has largely gone along with other 5 eye countries when it comes to the issue of allowing Huawei entry into New Zealand’s 5G network. On issues pertaining to Hong Kong, the Uygurs, and the South China Sea too, New Zealand has taken a firm stance vis-à-vis Beijing. After the imposition of the National Security Law in Hong Kong, New Zealand suspended its extradition treaty with Hong Kong, and it also made revisions with regard to its policy on military and dual-use goods and technology exports to Hong Kong, subjecting the city to the same as the People’s Republic of China (PRC). 

During her speech at the China-New Zealand Summit, Ardern said: 

As you know, this has come to the fore recently around developments like Hong Kong’s new security law, the situation of the Uyghur people in Xinjiang province, and Taiwan’s participation in the World Health Organisation.

Like its neighbour Australia, New Zealand has also been taking cognizance of increasing political interference in its domestic politics, via governments, political parties, and universities. There has been bipartisan support for taking measures to check the same. Some policies have been introduced with regard to political donations as well as Foreign Direct Investment. 

At the same time, New Zealand has a close economic relationship with China and this is strong reiterated by figures. In 2019, China accounted for a staggering 33% of New Zealand’s dairy exports, over 40% of meat experts and contributed to 58.3% of international education earnings (it is estimated that in 2019, 87% of New Zealand’s service export earnings from China came from education-related travel and personal tourism).

While there has been a shift in New Zealand’s approach vis-à-vis China, officials have also repeatedly made the point, that it will not blindly toe any other country’s stance vis-à-vis China. 

CPTPP

Another important foreign policy component of New Zealand is as member of the 11-member CPTPP. Along with other countries, New Zealand worked towards keeping supply chains going in the midst of the pandemic. For instance in April, New Zealand sent a first plane load of essential supplies to Singapore. (This included commodities like lamb and beef which were sent by a chartered plane.)

New Zealand and other CPTPP members have also been working to resume essential travel, while Singapore opened a travel bubble with New Zealand on September 1, 2020 (which means that quarantine-free travel will be allowed). 

New Zealand and its neighbour Australia, another member of CPTPP, have opened an air bubble too (though this is one-way as yet only passengers from New Zealand can travel to Australia). The bubble currently is applicable only to two Australian states New South Wales and the Northern Territory.

Conclusion  

In conclusion, the election result is important not just in the context of domestic politics, but in sending a message that there is space for centrist and inclusive politics and that it is not necessary to have a Strong Man image cultivated by many right-wing leaders. It is also important to bear in mind that liberal democracies, which respect diversity, are in a far better position to provide an alternative narrative to that of China. Apart from this, while the shortcomings of globalization do need to be acknowledged and addressed, inward looking economic and immigration policies need to be firmly rejected.

Nightcap

Brandon Christensen Links , , ,
  1. All ideologies eventually seem to fail Scott Sumner, EconLog
  2. State capacity libertarianism as a pipe dream Jason Brennan, 200-Proof Liberals
  3. China after Covid Wang Xiuying, London Review of Books
  4. Nationalism, Eastern European style James Felak, Law & Liberty

Nightcap

Brandon Christensen Links , , ,
  1. The political economy of U.S. Territories and Indian Country (pdf) Rachel Wellhausen, PS: Political Science & Politics
  2. The U.S. Empire, the Surveillance State, and the Imperial Boomerang Connor Woodman, Verso
  3. Unpacking the Sino-American relationship Paul Poast, War on the Rocks
  4. Worlds without nation-states: Five scenarios for the long term (pdf) Andreas Wimmer, Nations and Nationalism

Why snipers have spotters

Kevin Kallmes Liberty , , , , , ,

Imagine two highly skilled snipers choosing and eliminating targets in tandem. Now imagine I take away one of their rifles, but leave him his scope. How much do you expect their abilities to be decreased?

Surprisingly, there is a strong case that this will actually increase their combined sniping competence. As an economist would point out, this stems from specialization: the sniper sacrifices total situational awareness to improve accurate intervention, and the spotter sacrifices ability to intervene to improve awareness and planning. We can push out beyond the production possibilities curve.

It is also a result of communication. Two independent snipers pick their own shots, and may over-kill a target or miss a pressing threat. By explicitly designating roles, the sniper can depend on the spotter for guidance, and the two-person system means that both parties actually have more information than their cumulative, but separate knowledge without spotting.

There are also long-term positive impacts that likely escape an economist’s models from switching off in each role, or from an apprenticeship model. Eye fatigue that limits accuracy, and mental fatigue that may result from constant awareness, can be eliminated by taking turns. Also, if a skilled sniper has a novice spotter, the spotter observes the sniper’s tactics and can assimilate best practices–and the sniper, by previously working as a spotter, can be more productively empathetic. The system naturally encourages learning and improvement.

I love the sniper-spotter archetype, because it clarifies the advantages of:

  • Going from zero to one: Between two independent snipers, there zero effective lines of communication. Between a sniper and a spotter, there is one. This interaction unlocks potential held in both.
  • More from less: Many innovate by adding new things; however, anti-fragile innovations are more likely to come from removing unnecessary things than by adding new ones.
  • Not the number of people, the number of interactions: Interactions have advantages (specialization, coordination) and disadvantages (communication friction, lack of individual decision-making responsibilities). Scrutinize what interactions you want on your teams and which to avoid.
  • Isolation: Being connected to everyone promotes noise over signal. It also promotes focusing on competitors over opportunities and barriers over permissionless innovation.
  • Separate competencies, shared goals and results: To make working together worth it, define explicit roles that match each individual’s competencies. Then, so long as you have vision alignment, all team members know what they are seeking and how they will be depended upon to succeed.
  • Iterative learning and feedback: Systems that promote self-improvement of their parts outperform systems that do not. Also, at the end of the day, education comes from experimentation and observation of new phenomena, balance on the edge between known and unknown practices.
  • Establish ‘common knowledge’: Communication failures and frictions often occur because independent people assume others have the same assumed set of ‘common knowledge’. If you make communication the root of success, so long as the group is small enough to actual have–and know it has–the same set of ‘common knowledge’, they can act confidently on these shared assumptions.
  • Delegation as productivity: Recognize that doing more does not mean more gets done. Without encouraging slacking off, explicitly rewarding individuals for choosing the right things to delegate and executing effectively will get more from less.
  • Cheating Goodhart: Goodhart’s Law states that the metric of success becomes the goal. If you make the metric of success joint, rather than individual, and shape its incentives to match your vision, your metrics will create an atmosphere bent on achieving your actual goals.
  • Leadership is empowerment: Good leaders don’t tell people what to do, they inform, support, listen, and match people’s abilities and passions to larger purpose.
  • Smallness: Small is reactive, flexible, cohesive, connected, fast-moving, accurate, stealthy, experimental, permissionless, and, counterintuitively, scalable.

My most recent encounter with “sniper and spotter” is in my sister’s Montessori classroom (ages 3-6). She is an innovative educator who noticed that her public school position was rife with top-down management, politics, and perverse incentives, and was not finding systems to promote curiosity or engagement. She has applied the “sniper and the spotter” after noticing that children thrive best in either one-on-one, responsive guidance, where the instructor is totally dedicated to the student, or when left to their own devices in a materials-rich environment, engaging in discovery (or working with other children, or even teaching what they have already learned to newcomers). However, believe it or not, three-year-olds can often cause disruptions or even physical threats if left totally without supervision.

She therefore promotes a teaching model where there are two teachers, one who watches for children’s safety and minimizes disruptiveness. This frees the other teacher to rove student-to-student and give either individual or very-small-group attention. The two teachers communicate to plan next steps, and to ‘spot’ children who most need intervention. This renders ‘class size’ a stupid metric: what matters is how much one-on-one guidance plus permissionless discovery a child engages in. It is also a “barbell” strategy: instead of wallowing in the mediocrity of “group learning”, children get the most of the two extremes–total attention and just-enough-attention-to-remain-safe.

PS: On Smallness, Jeff Bezos has promised $1 billion to support education innovation. So far, despite starting before my sister, he has so far opened as many classrooms: one. As the innovator in the ‘two-pizza meeting’, I wish Bezos would start with many, small experiments in education rather than big public dedications, so he could nurture innovation and select strategies for success.

I would love to see more examples of “sniper and spotter” approaches in the comments…but no sniping please 🙂

Nightcap

Brandon Christensen Links , ,
  1. France’s African influence wanes, probably for good Ania Nussbaum, Bloomberg
  2. Why libertarians should vote for Biden Shikha Dalmia, the Week
  3. Mexico debates the role of Spaniards and Aztecs Jude Webber, Financial Times

Nightcap

Brandon Christensen Links , , ,
  1. Cosmos and Taxis (pdf) F.A. Hayek, L,L, & L
  2. How many times has Shanghai fallen? James Carter, Age of Revolutions
  3. Being a mom in a pandemic Goats and Soda
  4. Milton Friedman in Yugoslavia Branko Milanovic, globalinequality

Are we over profit maximization?

Rick Weber Economics, Law , , , ,

Friedman: A business is obligated to maximize shareholder value, nothing more.

Everyone else: That’s crazy! Profit maximizing businesses roll over all sorts of other stakeholders and fail to live up to basic ethical standards.

This relates to a complaint I’ve made before. Markets are good at generating prices that reflect aggregate views on the relative scarcity/importance of various goods. Markets aren’t good at charity. To roll other things in there means a good old fashioned price is now a price plus an obligation to do some moral calculus in how we each interact with the complex adaptive system that is the world economy. It’s a recipe for disaster.

So what do we do? We recognize the gap between a world where Friedman’s advice is reasonable and the world we live in, then we figure out how to close that gap. That Friedman’s doesn’t match our world says more about our world than it does about Friedman’s argument.

Rather than move Friedman’s starting point by trying to juggle competing demands of various stakeholders without markets, we should think about the legal framework these stakeholders are acting in.

If we refine our understanding of who has what rights to make what decisions we’ll see that the reason profit maximizers (and vote maximizers) sometimes do bad things is because it’s the best choice available to them. The answer isn’t to say “businesses lobby business therefore they shouldn’t respond to incentives!” it’s to say “therefore we should restrict opportunities to seek rents!”

Coase wasn’t trying to tell us that spillovers don’t matter. He was trying to tell us that transaction costs do matter and whenever they’re present, we need to be careful in allocating rights that have spillover effects. By the same token, we should think of Friedman’s advice as saying “in a perfect world, corporations should maximize profits, but the world needs work.”

Nightcap

Brandon Christensen Links , , ,
  1. Who gets the art? Dutch questions about plundered colonies Toby Sterling, Reuters
  2. Who was John Lothrop Motley? Wikipedia
  3. Children of the Holocaust Edward Packard, History Today
  4. Onchocerca volvulus and freedom of speech Natalie Solent, Samizdata