Nightcap

  1. The trend of economic thinking F.A. Hayek, Economica
  2. Against moderate politics Jason Sorens, Cato Unbound
  3. Socialist fantasies Sarah Skwire, EconLog
  4. “From the ashes, modernity arose, but at a cost” Thomas Lecaque, Age of Revolutions

Three Lessons on Institutions and Incentives (Part 7): Breaking the mold

This role of entrepreneurs also depends on an abstract characteristic of technological knowledge: it works in a manner contrary to that of most goods, since it is more productive to the extent that it is more widespread in the population. This characteristic of the abstract nature of technological knowledge is related to the phenomenon of the combination of skills (matching of skills): the negative side of creative destruction lies in substitution phenomena (a computer program of inventory management increases the productivity of work saving the salaries of the army of employees who used to carry them with pencil and paper), but the positive side comes from the phenomena of complementarity.

As William Easterly exemplifies, the cardiac surgeon will be more productive in a first world hospital, where he will have specialized nurses, other qualified doctors like him, a sophisticated system of hospital administration, and so on, being the only cardiac surgeon in a hospital. city ​​of the third world, where it does not have professionalized nurses, nor the help of other medical colleagues, working in a hospital in which he himself has to deal with administrative issues. If there were only substitution relations, it would be convenient for a doctor to practice his profession in the most remote place possible. However, as relations of complementarity of knowledge exponentially increase the productivity of the professionals involved, the doctor will find it more convenient to practice in a health center that has the largest number of doctors and paramedics possible.

The latter does lead to the phenomenon of “traps”: any rational agent, who maximizes the utility of their choices will be discouraged to deepen their studies if they perceive that they can not give any use to their education. There are the cases in which a person discovers that in his country there is no technology or the necessary number of professionals to develop a specific activity, or that, existing, you will find prohibited the exercise of their profession based on restrictions regarding their race, caste, social class, sex, etc. Since, rationally, a person who is included in a particular group under which he will be found forbidden or will be hindered the exercise of his profession, he will find as the most rational of their alternatives to abandon their studies, so that their chances of progress will no longer be limited only by legal or social barriers, but because of their lack of suitability for high-paying functions. Such are the so-called “poverty traps.”

There are also wealth traps. There are those cases in which the individual knows that he is within a favored group or in which he knows a large number of professionals and, therefore, invests time and money in his education because he knows that he has high chances of success, which will then be confirmed. Obviously, such phenomena of divergence generates another problem, addressed both by Easterly and by Daron Acemoglu & James Robinson, which is that of polarized societies.

Easterly affirms that it is the exchange of goods and services, through the mutual benefits that they report to the parties that participate in it, the main source of wealth generation. Where individuals are allowed to exchange, in a stable institutional framework with a stable currency, is where prosperity flourishes. However, Easterly recognizes that bad luck can devastate nations, as are the cases of geological and climatic phenomena such as earthquakes, tsunamis or mudslides, as well as recognizing that the situations of individuals involved in a poverty trap can only be resolved through an active public policy that not only provides education, but also establishes the conditions so that the recipients of that educational system can count on certain expectations that they will be able to apply that knowledge acquired through education and that, consequently, it is reasonable to study.

Just as the bad star can affect the economic performance of the countries, so can a favorable conjuncture, such as the case of a transitory improvement in terms of exchange of a given country. But this favorable circumstance can become a counter-march. Easterly explains that, for a simple statistical matter, it is very difficult for both a nation and an individual to always remain on the crest of the wave, over the years everything tends to return to the average. The problem occurs when a country -or a person, too- got used to a certain level of spending in the boom years and intends to maintain it through debt or emisionism. We come to the cases in which, according to Easterly, the government can “kill the growth.” Public debt and inflation generate capital consumption and, consequently, poverty.

Another way that governments have to discourage growth is through corruption. Not only because it means a transfer of resources from productive activities to unproductive activities, but because it also means a bad signal for citizens. However, in cases of corruption, as noted above, wealth at least changes hands. There is another case, even more pernicious, in which the government’s actions, whether motivated by corruption or inspired by good intentions, destroy wealth, without even redistributing it: this is the case of inconsistent public policies derived from highly polarized societies.

Public policies that aim to favor a given industry, but at the same time need to agree on measures with other sectors of the economy, whose purpose is to compensate for the losses generated by those policies, can lead to a tangle of inconsistent regulations that, instead of transfer riches from one sector to another, directly destroy them. For example: exchange controls harm the export sector, since they generate black markets. The exporters will have costs that will be partly quoted according to the black market prices (which are higher) and they will have to liquidate the value of their exports at the official exchange rate, which will be lower. Regulations of this kind may not involve acts of corruption, but they do destroy wealth, which there is no way to recover.

Easterly lists numerous examples of everything that needs to be done to destroy growth. However, there is something that deserves to be especially highlighted: the progress or stagnation of nations does not depend on educational, cultural or geographic factors, but rather on the incentive framework that predominates. This incentive framework will always be abstract, that is, it can be applied at any time and place.

[Editor’s note: Here is Part 6, and here is the entire, Longform Essay.]

In Defense of Not Having a Clue

Timely, both in our post-truth world and for my current thinking, Bobby Duffy of the British polling company IPSOS Mori recently released The Perils of Perception, stealing the subtitle I have (humbly enough) planned for years: Why We’re Wrong About Nearly Everything. Duffy and IPSOS’s Perils of Perception surveys are hardly unknown for an informed audience, but the book’s collection and succint summary of the psychological literature behind our astonishingly uninformed opinions, nevertheless provide much food for thought.

Producing reactions of chuckles, indignation, anger, and unseeming self-indulgent pride, Duffy takes me on a journey of the sometimes unbelievably large divergence between the state of the world and our polled beliefs about the world. And we’re not primarily talking about unobservable things like “values” here; we’re almost always talking about objective, uncontroversial measures of things we keep pretty good track of: wealth inequality, share of immigrants in society, medically defined obesity, number of Facebook accounts, murder and unemployment rates. On subject after subject, people guess the most outlandish things: almost 80% of Britons believed that the number of deaths from terrorist attacks between 2002 and 2016 were more or about the same as 1985-2000, when the actual number was a reduction of 81% (p. 131); Argentinians and Brazilians seem to believe that roughly a third and a quarter of their population, respectivelly, are foreign-born, when the actual numbers are low single-digits (p. 97); American and British men believe that American and British women aged 18-29 have had sex as many as 23 times in the last month, when the real (admittedly self-reported) number is something like 5 times (p. 57).

We can keep adding astonishing misperceptions all day: Americans believe that more than every third person aged 25-34 live with their parents (reality: 12%), but Britons are even worse, guessing almost half (43%) of this age bracket, when reality is something like 14%; Australians on average believe that 32% of their population has diabetes (reality more like 5%) and Germans (31% vs 7%), Italians (35% vs 5%), Indians (47% vs 9%) and Britons (27% vs 5%) are similarly mistaken.

The most fascinating cognitive misconception is Britain’s infected relationship with inequality. Admittedly a confusing topic, where even top-economists get their statistical analyses wrong, inequality makes more than just the British public go bananas. When asked how large a share of British household wealth is owned by the top-1% (p. 90), Britons on average answered 59% when the reality is 23% (with French and Australian respondents similarly deluded: 56% against 23% for France and 54% against 21% for Australia). The follow-up question is even more remarkable: asked what the distribution should be, the average response is in the low-20s, which, for most European countries, is where it actually is. In France, ironically enough given its current tax riots, the respondents’ reported ideal household wealth proportion owned by the top-1% is higher than it already is (27% vs 23%). Rather than favoring upward redistribution, Duffy draws the correct conclusion:

“we need to know what people think the current situation is before we ask them what they think it should be […] not knowing how wrong we are about realities can lead us to very wrong conclusions about what we should do.” (p. 93)

Another one of my favorite results is the guesses for how prevalent teen pregnancies are in various countries. All of the 37 listed countries (p. 60) report numbers around less than 3% (except South Africa and noticeable Latin American and South-East Asian outliers at 4-6%), but respondents on average quote absolutely insane numbers: Brazil (48%), South Africa (44%) Japan (27%), US (24%), UK (19%).

Note that there are many ways to trick people in surveys and report statistics unfaithfully and if you don’t believe my or Duffy’s account of the IPSOS data, go figure it out for yourself. Regardless, is the take-away lesson from the imagine presented really that people are monumentally stupid? Ignorant in the literal sense of the world (“uninstructed, untututored, untaught”), or even worse than ignorant, having systematically and unidirectionally mistaken ideas about the world?

Let me confess to one very ironic reaction while reading the book, before arguing that it’s really not the correct conclusion.

Throughout reading Duffy’s entertaining work, learning about one extraordinarily silly response after another, the purring of my self-indulgent pride and anger at others’ stupidity gradually increased. Glad that, if nothing else, that I’m not as stupid as these people (and I’m not: I consistently do fairly well on most questions – at least for the countries I have some insight into: Sweden, UK, USA, Australia) all I wanna do is slap them in the face with the truth, in a reaction not unlike the fact-checking initiatives and fact-providing journalists, editorial pages, magazines, and pundits after the Trump and Brexit votes. As intuitively seems the case when people neither grasp nor have access to basic information – objective, undeniable facts, if you wish – a solution might be to bash them in the head or shower them with avalanches of data. Mixed metaphors aside, couldn’t we simply provide what seems to be rather statistically challenged and uninformed people with some extra data, force them to read, watch, and learn – hoping that in the process they will update their beliefs?

Frustratingly enough, the very same research that indicate’s peoples inability to understand reality also suggests that attempts of presenting them with contrary evidence run into what psychologists have aptly named ‘The Backfire Effect’. Like all force-feeding, forcing facts down the throats of factually resistent ignoramuses makes them double down on their convictions. My desire to cure them of their systematic ignorance is more likely to see them enshrine their erroneous beliefs further.

Then I realize my mistake: this is my field. Or at least a core interest of the field that is my professional career. It would be strange if I didn’t have a fairly informed idea about what I spend most waking hours studying. But the people polled by IPSOS are not economists, statisticians or data-savvy political scientists – a tenth of them can’t even do elementary percent (p. 74) – they’re regular blokes and gals whose interest, knowledge and brainpower is focused on quite different things. If IPSOS had polled me on Premier League results, NBA records, chords or tunes in well-known music, chemical components of a regular pen or even how to effectively iron my shirt, my responses would be equally dumbfunded.

Now, here’s the difference and why it matters: the respondents of the above data are routinely required to have an opinion on things they evidently know less-than-nothing about. I’m not. They’re asked to vote for a government, assess its policies, form a political opinion based on what they (mis)perceive the world to be, make decisions on their pension plans or daily purchases. And, quite a lot of them are poorly equipped to do that.

Conversely, I’m poorly equipped to repair literally anything, work a machine, run a home or apply my clumsy hands to any kind of creative or artful endeavour. Luckily for me, the world rarely requires me to. Division of Labor works.

What’s so hard with accepting absence of knowledge? I literally know nothing about God’s plans, how my screen is lit up, my car propels me forward or where to get food at 2 a.m. in Shanghai. What’s so wrong with extending the respectable position of “I don’t have a clue” to areas where you’re habitually expected to have a clue (politics, philosophy, virtues of immigration, economics)?

Note that this is not a value judgment that the knowledge and understanding of some fields are more important than others, but a charge against the societal institutions that (unnaturally) forces us to. Why do I need a position on immigration? Why am I required (or “entitled”, if you believe it’s a useful duty) to select a government, passing laws and dealing with questions I’m thoroughly unequipped to answer? Why ought I have a halfway reasonable idea about what team is likely to win next year’s Superbowl, Eurovision, or Miss USA?

Books like Duffy’s (Or Rosling’s, or Norberg‘s or Pinkers) are important, educational and entertaining to-a-t for someone like me. But we should remember that the implicit premium they place on certain kinds of knowledge (statistics and numerical memory, economics, history) are useful in very selected areas of life – and rightly so. I have no knowledge of art, literature, construction, sports, chemistry or aptness to repair or make a single thing. Why should I have?

Similarly, there ought to be no reason for the Average Joe to know the extent of diabetes, immigration or wealth inequality in his country.

Nightcap

  1. Making sense of Japan’s new immigration policy Emese Schwarcz, Diplomat
  2. Deportations with benefits Irfan Khawaja, Policy of Truth
  3. Democracy as an information system Henry Farrell, Crooked Timber
  4. Against debate Chris Dillow, Stumbling & Mumbling

 

 

 

The Negative Capability of a Good Legislator

In a former post, we had explored the idea of considering the law as an abstract machine which provides its users with information about the correct expectancies about human conduct that, if fulfilled, would contribute to the social system inner stability (here). The specific characteristic of the law working as an abstract machine resides in its capability of dealing with an amount of information more complex than human minds. This thesis had been previously stated by Friedrich Hayek in his late work titled “Law, Legislation and Liberty”, aimed to provide the foundations to a proposal of an constitutional reform that would assure the separation of the law from politics -not in the sense of depriving politics from the rule of law, but to protect law from the interference of politics.

Paradoxically, the said opus had many unintended outcomes that surpassed the author’s foresight. One of them was the coinage of the notion of “Spontaneous Order”, which Hayek himself regretted about, because of the misleading sense of the word “spontaneous”. At the foreword of the third volume of the cited “Law, Legislation and Liberty”, he explained why he would prefer to use of the term of “Abstract Order”. Notwithstanding its creator’s allegations, the label of “Spontaneous Order” gained autonomy from him in the realm of the ideas (for example, here).

Why better “abstract order” than “spontaneous”? Because while no “concrete order” might be spontaneous, we could nevertheless find normative systems created by human decision, besides the spontaneous ones (see “Law, Legislation and Liberty”, Chapter V). Moreover, we do not see spontaneous orders whose rules fail to provide stability to the system, because of “evolutionary matters”: such orders could not endure the test of time. Nevertheless, for the same reason, we could imagine a spontaneous order whose rules of conduct became obsolete due to a change in the environment and, thus, fails to enable the social system with the needed stability.

Spontaneity is, thus, not the central characteristic of the law as a complex order. What delimits law from a “concrete order” is the level of abstraction. An alternative name given by Hayek to designate the concrete orders was the Greek term “taxis”, a disposition of soldiers for battle commanded by the single voice of the general. Concrete orders could be fully understood by the human mind and that is why they are regarded as “simple phenomena”: the whole outcome of their rules could be predicted by a system of equations simpler than the human mind.

Notwithstanding a single legislator could sanction a complete set of rules to be followed by the members of a given society, the inner system of decision making of those individuals are more abstract that the said set of rules and, thus, the human interactions will always result in some subset of unintended consequences.

These unintended consequences should not necessarily be regarded as deviations from the social order, but indeed as factors of stabilisation -and, thus, all abstract orders are, in some sense, still spontaneous. These characteristics of the law as a complex order concern on the information about the final configuration of a society given a certain institutional frame: we can establish the whole set of institutions but never fully predict its final outcome. At this stage, we reach what Hayek called in The Sensory Order “an absolute limit to knowledge”.

We now see that the legislator could sanction a complete system of rules -a system that provides solutions for every possible concrete controversy between at least two contenders-, but he is unable to be aware of the full set of consequences of that set of rules. We might ascertain, then, that being enabled with a “negative capability” to anticipate the outcome of the law as a complex phenomenon is a quality to be demanded to a good legislator.

By this “negative capability” we want to designate some understanding of the human nature that allows to anticipate the impact of a given norm among the human interactions. For example, simple statements about human nature such as “people respond to incentives”, or “all powers tend to be abusive”. These notions that are not theoretical but incompletely explained assumptions about human nature are well known in the arts and literature and constitute the undertow of the main narratives that remain mostly inarticulate.

Precisely, as Hayek stated, every abstract order rests upon a series of inarticulate rules, some of which might be discovered and  later articulated by the judges, while other rules would remain inarticulate despite being elements of the normative system.

However, we praise Negative Capability as a virtue to be cultivated by the legislator, not by the judge. The function of the judge is to decide about the actual content of the law when applied to a particular case. It is the legislator the one who should foresee the influence to be exerted by the law upon a general pattern of human behaviour.

Notwithstanding Negative Capability could be dismissed in order of not being a scientific concept, this negative attribute is one of its main virtues: it means lack of ideology, in the sense given to that term by Kenneth Minogue. While an ideological political discourse reassures itself in a notion of scientific truth, at least a legislator inspired by common and humble ideas about human nature would be free from that “pretence of knowledge”.

Legal Immigration Into the United States (Part 17): Merit-Based Immigration and Other Solutions

The long-established numerical prominence of immigration into the US via family relations makes it difficult to distinguish conceptually between legal immigration responding to matters of the heart and immigration that corresponds to hard economic, and possibly, demographic facts. The one motive has tainted the other and vice-versa. The current public discussions (2016-2018) suggest that many native-born Americans think of immigration as a matter of charity, or of solidarity with the poor of this world, as in the inscription at the foot of the Statue of Liberty: “Give me your tired, your poor, your huddled masses yearning to breathe free,….”  Many Americans accordingly perceive as hard-hearted those who wish to limit or reduce immigration. Inevitably, as whenever the subject of hard-heartedness emerges as a topic in politics, a Right/Left divide appears, always to the detriment of the former.

It seems to me that conservatives are not speaking clearly from the side of the divide where they are stuck. They have tacitly agreed to appear as a less generous version of liberals instead of  carriers of an altogether different social project. Whatever the case may be, the politically most urgent thing to do from a rational standpoint is to try and divide for good in public opinion, immigration for the heart and immigration for the head, immigration for the sake of generosity and immigration for the benefit of American society. Incidentally, and for the record, here is a digression: I repeat that I believe that American society has a big capacity to admit immigrants under the first guise without endangering itself. That can only happen once the vagueness about controlling our national boundaries has dissipated. Such a strategy requires that the Federal Government have the unambiguous power to select and vet refugees and to pace their admission to the country.

“Merit” Defined

In reaction to the reality and also, of to abuses associated with the current policy, a deliberate, and more realistic doctrine of immigration has emerged on the right of the political spectrum. It asks for admission based on merit, partly in imitation of Australia’s and Canada’s. Canada’s so-called “Express Entry System” is set to admit more than 300,000 immigrants on the basis of  formally scored merit in 2118. That’s for a population of only about 37 million. The central idea is to replace the current de facto policy favoring family relations as a ground for admission, resulting in seemingly endless “chain migration,” with something like a point system. The system would attempt scoring an immigrant’s potential usefulness to American society. In its simplest form, it would look something like this: high school graduate, 1 point; able to speak English, 1 point; literate in English, 1 more point; college graduate, 2 points (not cumulative with the single point for being a high school graduate); STEM major, 2 points; certified welder, 2 points; balalaika instructor, 2 points. Rocket scientist with positive record, 5 points.  Certified welder, 10 points.

The sum of points would determine the order of admission of candidates to immigration into the US for a set period, preferable a short period because America’s needs may change fast. With the instances I give, this would be a fair but harsh system: Most current immigrants would probably obtain a score near zero, relegating them to eternal wait for admission.

There are two major problems with this kind of policy. First, it would place the Federal Government perilously close to articulating a national industrial policy. Deciding to give several point to software designers and none to those with experience running neighborhood grocery stores, for example, is to make predictions about the American economy of tomorrow. From a conservative standpoint, it’s a slippery slope, from a libertarian standpoint, it’s a free fall. Of course, we know how well national industrial policies work in other countries, France for example. (For 25 years, as a French-speaking professor on the spot, visiting French delegations to my business school would take me aside; they would buy me an expensive lunch and demand that I give away the secret of Silicon Valley. First, create a first rate university, I would answer meanly…)

Second, the conceit that a merit-based system of admission, any merit-based system, is an automatic substitute for the family reunion-dominated current policy is on a loose footing. Suppose, a Chinese woman receives top points in the new system as a world-class nuclear scientist whose poetry was nominated for a Nobel in literature. She walks right to the head of the line, of course. But she is married and she and her husband have three children. Can we really expect her to move to the US and leave her family behind? Do we even want her to, if we expect her to remain? Does anyone? Then, the woman and her husband both turn out to be busy as bees and hard workers, major contributors to the US economy, and to American society in general. (They are both also engaged in lively volunteering.) So, they need help with child care. The husband’s old but still healthy mother is eager and willing to come to live with the couple. She is the best possible baby-sitter for the family. The problem is that the old lady will not leave her even older husband behind. (And, again, would we want her here if she were the kind to leave him?)

Here you go, making ordinary, humane, rational decisions, the merit-based admission of one turns into admission of seven! And, I forgot to tell you: Two of the kids become little hoodlums, as happens in the best families in the second generation. They require multiple interventions from social services. They will both cost society a great deal in the end. In this moderate scenario, the attempt to rationalize immigration into a more selfish policy benefiting Americans has resulted in a (limited) reconstitution of the despised chain immigration, with some of the usual pitfalls.

The arguments can nevertheless be made that in the scenario above, the new merit-based policy has resulted in the admission of upper-middle class individuals rather than in that of the rural, poorly educated immigrants that the old policy tended to select for. This can easily be counted as a benefit but the whole story is probably more complicated. In the exact case described above, the US did replace lower-class individuals with upper-middle class people but also with people possibly of more alien political culture, with consequences for their eventual assimilation. I mean that all Mexicans tend to be experts in Americana and that our political institutions are familiar to them because theirs are copy-cat copies of ours. I surmise further that Mexicans are unlikely from their experience to expect the government to be mostly benevolent. Moreover, it seems to me the children of semi-literate Mexicans whose native language is fairly well related to English and uses the same alphabet, are more likely to master English well than even accomplished Chinese. This is a guess but a well-educated teacher’s guess. (I don’t think this  holds true for the grand-children, incidentally.) Of course, if my argument is persuasive, there would be a temptation to down-score candidates just for being Chinese, pretty much the stuff for which Harvard University is on trial as I write (October 2018).

I described elsewhere how the fact of having relatives established in the country facilitates installation and economic integration, even as it may retard assimilation. Note that a point system does not have to forego the advantages associated with family relationships. Such a system can easily accommodate family and other relationships, like this: adult, self-sufficient offspring legally in the US: 3 points; any other relation in the US: 1 point; married to a US resident with a welder certification: 15 points, etc.

[Editor’s note: in case you missed it, here is Part 16]

Should you vote today? Only if you want to.

Today is election day in the United States and everywhere I turn I see “get out the vote” ads. Even on Facebook my feed is filled with people urging others to vote. I am fine with these nudges insofar that they are just that – nudges.

I am concerned when I see claims that voting is one’s duty. I am especially concerned when I see claims that, if you don’t vote, you are allowing the evil [socialists/white men/etc] to govern. These claims concern me because they respectively promote worship of the state and tribalism.

There is more to life than being a politico. If Americans at large sacrificed their other activities in order to become fully informed voter-activists, we would be a boring lot. If you enjoy politics, go vote, but you needn’t feel superior over someone who thinks their time would be better spent playing music or grabbing a beer with friends after work. Life is short and should be spent doing what one enjoys.

Likewise, it is perfectly okay to have an opinion on how government should be run. I, and I imagine most NoL readers, have strong policy preferences. It is however beyond arrogance to believe that an educated person can only believe X and only a mustached villain would believe Y. To be clear, I am not saying that truth is relative.

NIMBYist policies lead to housing shortages, that is a fact. I am in favor of revising zoning regulations and ending parking subsidies to mitigate the problem. I don’t think that the family that owns a detached unit in Santa Monica and opposes denser development is evil though. I understand their hesitance to see their neighborhood changed.

If you wish to vote today, please do so but please don’t act like a snob towards those who do not. Express your policy preferences, but leave your holier than thou attitude at home.

Tldr; play nice.