by Mike Brown, Stuart Kauffman, Zoe-Vonna Palmrose and Lee Smolin.
Having had the privilege to read a draft of this essay some weeks ago, I am thoroughly unsurprised to see my comments were completely ignored. To begin with, I must have repeated several times it is Jeffrey Sachs, Sachs, Sachs - not Sacks. Btw, his quotation used in section 4 you first read here. I doubt anybody else was stupid enough to rewind the recording two hundred times to do the transcript.
But that's what writing a blog is good for I guess, so I can now publish my comments here.
I largely agree with the overall scope of the essay, to the extend that my knowledge about economy is limited and some details escape me. The main statement however comes across very clearly: we need a scientific approach to modeling our economy, a necessity that have referred to as “Finishing the Scientific Revolution”. Given that our social, political, and economic systems affect the lives of billions of people this is in our responsibility as scientists. In their essay the authors make this point very aptly, pointing out especially the interdisciplinary nature of this endeavor:
“When physicists made the atomic bomb they realized what they had conceived and immediately felt a sober responsibility to help make the world safe from their invention. At this time there is a responsibility for those with the knowledge and skills to understand the financial instruments involved in this crisis to help first to resolve this crisis and to next turn their attention to the design and regulation of a stable market system. This will involve economists, mathematicians, physicists, biologists, computer scientists and others working together to make a more stable economic system.”
The authors first summarize common assumptions of neoclassical economics and then proceed “to ask if there are alternative ideas, principles and methods of modeling economic systems which might also provide the basis for wise advice and policy.” My social democratic heart was very pleased to see they explicitly acknowledge the necessity to regulate a system so it can properly fulfill its function, and especially that it can do so without running into instabilities:
“[E]conomies, financial institutions and markets cannot function without a context of rules and laws, which regulate them. In a market, each participant tries to do the best they can for themselves. In a properly architected and regulated market this contributes to the public good. There is simply no place for an ideological discussion about regulation. Stable systems in nature such as individual organisms and ecosystems are regulated. So must ours be. The only relevant question is do the regulations work or not, where work means that stable markets allow an orderly flow of capital to and from the goods and services economy and the people who comprise it.”
I previously wrote about the need to set up systems appropriately so they work towards their primary goal in my recent post The Best of All Possible Worlds.
Overall, the essay is for a bunch of Americans very well balanced and - in contrast to many other pamphlets on the topic that I have come across - notes that there is a plurality of what nations will consider optimal solutions depending on their citizens' preferences:
“An economy involves finding balance between long- and short-term objectives, acceptable distributions of wealth, and rewards for innovation and risk taking. Different governments may embrace different social philosophies and may seek to establish economic and financial regulations to obtain somewhat different desired results. The role of an independent, non-partisan scientific conceptualization of economics should be to provide these policy makers with a notion as to the likelihood that new economic and financial regulations they are considering will have the results they desire and that these will not involve unintended consequences to others.”
They finish with an appeal to scientists from different areas to join forces to increase our conceptual understanding of the systems that govern out lives with the aim to provide advice on their organization and regulation. Such an approach must be scientific, “should not be a matter of opinion or ideology” and “has to be carried out in an interdisciplinary and open spirit”. Or, as I put it in my post This is your Economy on Drugs
“[T]he central issue is trust in our ability to detect and correct shortcomings of the system. A detection that should not be hindered by faith-based argumentation, should not be tampered with by rhetoric, should not be driven by psychological effects. It requires a solid data base, shared knowledge, objective evaluation, and validation of models and predictions. In short, it requires a scientific method to reestablish trust in the working of our political and economical systems.
The Scientific Revolution, which has lead to a stunning progress in the natural sciences four centuries ago, has not yet been extended to the applications of social sciences. To a large extend, developments in these areas are still made in a process of trial and error, experiments with the well-being of billions of people. It is a slow learning process often plagued by a lacking ability to learn from past mistakes. Given that trial and error has worked for a long time, and that the computational prerequisits to deal with large amounts of data are only available since recently, it is not surprising this revolution did not take place earlier. But it is about time we upgrade to the 21st Century.”
Indeed, one should fund an institute to carry out such research to extend the scientific method to the applications of social science. Doesn't that sound like a great idea? It certainly does to me! Though I am not exclusively concerned with the economic system, the more general goal of combining insights from the social, the natural and the computer sciences to better understand and manage the complex systems that shape our living together on this planet is the idea behind The Lightcone Institute (see also this post). If you happen not to have lost all your billions of dollars in the last months, I would greatly appreciate some start-up support.
Okay, before you throw up because I'm praising this essay too much, let me mention what I think the authors did not sufficiently emphasize. Throughout, the economic system is treated as being coupled to the political system only in the sense that the latter acts as a provider of regulations. The idea seems to be that scientists will gather, analyze and model the economy, and provide some advice for proper regulations.
That is a well meant, but very short-sighted attempt and bound to fail. You can't understand and update the economic system and improve its functioning without simultaneously understand and update the political system that is supposed to balance and regulate it. The cause of the problems we have is a severe mismatch in timescales on which the global economic system evolves and reacts, and the timescales on which our global political system evolves and reacts - the latter is lagging severely behind. To fix that problem the political system too needs a scientific investigation and advise on how to set up flexible institutions that are able to learn in a timely manner - instead of reacting with panic meetings only when things have already gone disastrously wrong.
Besides this, it might seem like a redundant point to mention, but the essay completely fails to at least address the central question what it actually is our economic system is supposed to work towards and who decides that - again the connection to the political system is missing. The primary purposes they mention (provide capital, provide a stable repository for our collective savings, provide credit to individuals) sounds perfectly reasonably, but are actually what I referred to not as primary, but secondary goals. I have no reason to question their desirability, but they are only relevant because of the benefit they bring in increasing the well-being of the people. That really should be the primary goal. And yes, scientists can help in achieving it.
There's the old saying "buyer beware" which means many many transactions include some degree of fraud. "Sellers" don't tell everything they know. I just bought a 2006 car and the salesman actually did mention a problem with the air conditioner beforehand and said I can have it repaired under the warranty. What he didn't mention is that the part currently is not available from GM and they don't know when it will be. So much for my efficient transaction and many many are like mine, so many many political remedies aka laws are needed (wonder if there is one for mine?) Do you think the bottom 99% keep willingly with full information keep making transactions that make themselves have a lower and lower percentage of the wealth. The top 1% are great at using the buyer beware fraud.
ReplyDelete"The few who can understand the System (Cheque Money and Credits) will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class. While on the other hand, the great body of people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint and perhaps without even suspecting that the system is inimical* to their interests." - Extract from a letter written by Rothschild Bros of London to a New York firm of bankers on 25 June 1863
Course "buyers" can be fraudulent too (false resumes, false financial information, etc.) Another need for whatever you want to call it (regulations, unanimous consent laws, etc.)
By the way I think murderers might prevent murderer laws from being unanimous. Also not sure how lengthy murder trials can be considered economically efficient. Not always clear what exactly should be called murder (duals have sometimes been legal and sometimes not, and it is not always clear what justifies killing in self defense).
Protection of property rights was one of the very first casualties of capitalism.
At the very moment in history when some men's minds were turning to the potential for a better world, and others were turning to evil domination, the expropriation of land, through Enclosure, accelerated in England with arguments of this kind advanced to support the theft of land, "The use of common land by labourers operates upon the mind as a sort of independence ... when the commons are enclosed, the labourers will work every day in the year, their children will be put out to work early, and that subordination of the lower ranks, of society which in the present times is so much wanted, would be thereby considerably secured." More than half the cultivated land of England, before Enclosure, was farmed on the common-field system, and the landless farm labourer was hardly known in the villages of England.[6]
"About a fifth of the total acreage of England was enclosed between 1760 and 1840, and the old village community ... was broken up. Until that time, any man might hope, by his own labour, to acquire property and rise in his village. From that time, we inherit the most unhappy of beings, the landless farm labourer".[7] It is this landless labourer and his family, often then evicted as a further consequence of Enclosure, who became the factory workers of the Industrial Revolution, the men, women and children on whose immense suffering industrial capitalism was built.
Enclosure was justified as a means to improvement. The English countryside and the agriculture practiced on it was said to be in need of reform. The truth was that the expropriation of land from the ordinary people enabled a new form of industrialized agriculture to be practiced which greatly increased the profitability of farming and therefore the wealth of the ruling elite. The ordinary people were reduced to slaves on the land to which they held rights dating from the time of the Druids.
The subprime mortgages are just another buyer beware fraud by the elite to grab property rights and a bigger share of the wealth away from the common people.
I now return you to your regularly scheduled program (on channel Bee).
"The question on the table is whether science can be used to create regulations that make society better off by, for example, muting the business cycle."
ReplyDeleteOr perhaps science can educate lawmakers, "buyers" and "sellers" on how to get Rothschild-like buyer beware fraud out of the business cycle.
Hi Amos,
ReplyDeleteConsider you get everything you want, free market, no government whatsover, whatever you want. Now you claim that "science" tells you this is the "best" way to organize a society. Then go and ask people who live in this system whether they are happy with the state of affairs. There is very plausibly the possibility they will say "No".
The models of economics depend on the notion that resources are finite at any given moment in time (although they can expand over time). They cannot be applied to a universe of infinite, immediate, unlimited gratification. But this “assumption” matches reality, so I don’t see it as a problem.
That wasn't the point. My question is: consider you would have the power to organize the economic system exactly how you want it. It works as you claim is the "best" possible way. You go and ask people what they think and it turns out they don't like it and don't want it. What do you do? Tell them it is scientifically proven that this is supposed to be the "best" solution, no matter whether they are happy with it or not?
What I am saying is that you have no way of proving or knowing that your version of 'worse' or 'better' is complete and evidence tells it is not.
Actually, what I have proven is that my version of “worse” and “better” is complete to the limits of what is knowable, and I have also explained that the evidence is universally consistent that regulation does, in fact, make things “worse.”
Political opinions of people are also knowable, and you are ignoring them. Why do you think that in many cases (eg in Argentina and Chile) extreme deregulation and priviatization had to be pushed through by literally erasing the opposition, and in many, more moderate cases, unpopular free market measures were pushed through in packages with dirty deals? Because the majority of people in these countries did *not* think it was an improvement. The rich got richer, and the poor got poorer. Whether that is on the average "better" in your sense of definition, might just not be the deciding factor for many people if they are fighting for enough bread to eat. They are looking instead for a social, stable, sustainable development that does not come with recurring crisis that pushes a lot of them below poverty and literally struggling for their survival.
As I have said repeatedly, your notion of "better" might just not be considered "better" by many people, this is "knowable" - though in a sense you deny exists, since for you what exists is only people's ability to spend and invest money. This is a very convenient way to avoid having to think. In fact, I do think you are very well aware of what I am saying for you have above accused me of "Schadenfreude"
there is a group of people in society who would be made happier by the mere fact of other people having less. Schadenfruede, right? That's not really what you mean though, is it?
Your accusation is based on your sense that the outcome of a deregulated free market is "right". It is justice. Natural law. Every deviation from it is a "damage" to the "winners". Isn't that what you are really advocating here? Because that is the point on which we disagree. Your sense of what justice is isn't any better than what my sense is, or other people's sense it. And I do not consider the outcome of a free, unregulated, market to be just. And why should I? It is a manmade system to help us govern our lives, and there is no absolute notion of justice we can adopt. We have to find it ourselves. That too is what we need political systems for.
No, that isn’t right. We know (the Pareto logic) that a consensual transaction immediately (at T1) makes both sides better off than they were beforehand (at T0), and that regulation makes them worse off.
If Bill gives John a million dollars because he believes John is a great guy and will create a totally irresistible candy bar within three years and be able to pay back two millions then, Bill is not better off at T0. He is taking a risk, and he might be wrong. Same with political decisions. You are investing into macro-preferences that you think will make you better off in the future. You are taking a risk. It might not work out. If not, you learn and correct your behaviour.
It may well be the case that a transaction (or the consequence of a regulation) may evolve poorly at T2, but so what?
So what? That is the point we were talking about, remember? The tension of long-term preferences with short-term preferences? What I was saying, and you have again confirmed it, that you have in your economic system no way to "predict" the outcome at T2 either. And this was your alleged point of criticism.
Unless the government is better at predicting T2 than individuals (and there is every reason to think the opposite), the point is irrelevant—we have every reason to believe that regulation will make people worse off, and no way to determine if we’re wrong.
I have told you a dozen times it isn't about "predicting". The point I was apparently unsuccessfully trying to make is that it is equally hard if not impossible to make predictions in a free market. What you do is you give people an option to act, evaluate, and correct their behavior. That is what leads to optimization. You don't need to predict where the hilltop is, you just need to figure our whether you are going up or down.
But you already conceded that you cannot know from the political system whether any proposed regulation will actually make society (as a whole, not just the individuals who vote for it) better off.
Indeed, I have no clue which regulation will be good or bad. I never claimed I did. What I know or don't know isn't the issue. The issue is whether people's preferences are worked towards or aren't. You also can't know whether regulations will make people better or worse off if you include these preferences because you don't weight them in your model which you justify with the claim they are not 'knowable' (despite the fact that people express them very clearly in elections, and - if necessary - rebellions).
Okay, so then I recommend you better teach people what exactly they are supposed to do or not to do if they want their political system to run more stable, have a decent social security, minimum wages etc etc.
People already do a tremendously good job, on whole, of managing their lives. Of course some do worse than others, and some terribly, but on the whole, in the aggregate, letting people figure this out for themselves works just great.
This is a very cynical statement that you should maybe repeat to all those who have recently lost their jobs or their savings that were meant to get their children though college.
But besides this you didn't answer my question.
In a free market the way you envision it, the only thing people can do to influence the way things are is by investing and spending money. People who are on the edge of poverty have nothing to 'invest', they buy bread and a bus ticket, and they hardly have any choice with that. As I have told your deaf ears more than a dozen times already, a system in which opinions are weighted by money is not democratic. But you keep saying people can get whatever preferences they have in your system. So I repeat my question: how are people supposed to 'invest' their money if they want a more stable economy with less crisis that puts their savings into risk? What are they supposed to do if they want to decrease the gap between the rich and the poor? Which sort of bread is the right choice for that?
The question on the table is whether science can be used to create regulations that make society better off by, for example, muting the business cycle. (See your original blog post.)
Huh? I never said and never put forward the opinion that science should be used to "create regulations". What I have emphasized through +200 comments now is there is no scientific way to prove a certain state of the system will be considered "the best" because what is good or isn't good is subject to people's opinions. These might change over time, they might differ from country to country. You can't derive them. What I have been saying instead is that we need a system which allows these opinions to be incorporated more efficiently.
Best,
B.
That wasn't the point. My question is: consider you would have the power to organize the economic system exactly how you want it. It works as you claim is the "best" possible way. You go and ask people what they think and it turns out they don't like it and don't want it. What do you do? Tell them it is scientifically proven that this is supposed to be the "best" solution, no matter whether they are happy with it or not?
ReplyDeleteI am not a grant-architect-overlord of economic systems. Economic science tells us that people do better without such a person. Thus, the best answer I could give to this question is that I would tell them “do whatever you want, its up to you.”
As I have said repeatedly, your notion of "better" might just not be considered "better" by many people, this is "knowable"
What isn’t “knowable” is whether the degree of “not better” to those people exceeds the amount of “better” to others. That’s the point you’re missing. Perhaps “comparable,” or “measureable,” or “knowable in any useful way” would be better, but its really the same thing.
Your accusation is based on your sense that the outcome of a deregulated free market is "right". It is justice.
No, what I was trying to do in the quoted paragraph is get to what you mean by “macro-preference,” which is something you’ve kept changing positions on.
Every deviation from it is a "damage" to the "winners". Isn't that what you are really advocating here? Because that is the point on which we disagree.
No. I have no opinion on what is “economic justice.”
The teaching of ecnomics is that when you don’t regulate, you maximize the total “pie” of utility available to society as a whole, saying nothing about distribution.
It is empirically demonstrable that increasing the size of the “pie” is the only way to consistently increase well-being for those who are economically worse-off, but you can’t prove it from first principles (or at least I can’t).
If Bill gives John a million dollars because he believes John is a great guy and will create a totally irresistible candy bar within three years and be able to pay back two millions then, Bill is not better off at T0. He is taking a risk, and he might be wrong
Well, you’re at T1 (T0 is pre-transaction), but wrong anyway. Bill has purchased a risk in exchange for $2 million. Bill did that because he believes the risk is worth $2 million. At T1, with the risk in hand (out the $2 million), he is better off than he was before.
So what? That is the point we were talking about, remember? The tension of long-term preferences with short-term preferences?
No, it wasn’t. It was a point you have been arguing and I have been telling you is not coherent because there is no difference between a “short-term” and “long-term” preference that matters for the mathematics of economics we have been discussing. This is not that economics fails to take these things into account, but rather that it takes them into account transparently.
What I was saying, and you have again confirmed it, that you have in your economic system no way to "predict" the outcome at T2 either.
Actually, that’s not really right. If there is an efficient market (using “efficient” to mean that transaction costs are low) for a risk, then I can infer the quantification of the risk from the market price. This is not a logical “rule” of economics like we’ve been discussing; its true only to the extent people are smart. But it turns out to be empirically supported, for the most part.
Re-expressing the point in economic “rules,” “information” and “predictive analysis” are things that can be purchased and sold on a market like anything else. Allowing an efficient market for these things will mean that the market will create (to the extent doing so is possible, and at long-term equilibrium) mechanisms for predicting T2.
The point I was apparently unsuccessfully trying to make is that it is equally hard if not impossible to make predictions in a free market. What you do is you give people an option to act, evaluate, and correct their behavior. That is what leads to optimization.
That’s correct. Regulation, of course, necessarily impedes that process.
Indeed, I have no clue which regulation will be good or bad. I never claimed I did. What I know or don't know isn't the issue.
Sigh… But no-one knows, there’s no way to tell, which is the point you conceded. (I, obviously, didn’t mean “you” personally.)
People already do a tremendously good job, on whole, of managing their lives. Of course some do worse than others, and some terribly, but on the whole, in the aggregate, letting people figure this out for themselves works just great.
This is a very cynical statement that you should maybe repeat to all those who have recently lost their jobs or their savings that were meant to get their children though college.
And this is the point I made to you early on – economists rarely appear on TV to tell people the truth, because the truth is, in our culture, a rude thing to say.
People who are on the edge of poverty have nothing to 'invest', they buy bread and a bus ticket, and they hardly have any choice with that.
They have their time, the bread, the bus ticket, and the ability to make promises for the future.
Honestly, you can’t be serious. Go enough generations back, and everyone’s ancestors were beyond the “edge” of poverty, by today’s standard or any.
I repeat my question: how are people supposed to 'invest' their money if they want a more stable economy with less crisis that puts their savings into risk?
And I’ll repeat my answer: Invest in annuities, treasury bonds, insurance policies, and so forth.
Oh, but your question isn’t “how do I invest so I have a stable future,” it’s “how do I invest my money to affect other people’s futures as well.” The simple answer is, putting aside schadenfreude and other “I feel good when others feel __” stuff, that you should mind your own business. The first question matters and has an answer, the second question is gobbledygook.
What are they supposed to do if they want to decrease the gap between the rich and the poor?
Work very, very hard to make lots of money that they donate to the poor. Unless what they really want is to have other people donate money to the poor…
Huh? I never said and never put forward the opinion that science should be used to "create regulations". . . . What I have been saying instead is that we need a system which allows these opinions to be incorporated more efficiently.
Do you not see the disconnect between these two sentences in the context of this discussion?
By the way, you are still ignoring the bulk of my last three posts, which I repeat again for your convenience (because you can’t answer them consistent with your expressed views):
Here is what you are ignoring:
I have repeated numerous times that your notion of 'worse off' does not include how well people's preferences regarding macro-variables are fulfilled.
Sigh... I will try again...
We know (from the Pareto logic) that regulation will reduce utility in the people who would have transacted. We also know that we are reallocating resources to regulatory enforcement that would otherwise be used to expand the total "pie" -- new machines, new technologies, schools, etc. And we have no way at all of even beginning to try to measure the benefit sought by the regulation in a way that would allow it to be compared with those costs.
That is true even if the goal of the regulation is to alter an emergent property of the market, because the benefit is no more measurable than any other benefit. (If that is what you mean by "macro-preference," since the definition seems to change with each post.) It is true regardless of the goal.
What say you?
Now, I will make the point even stronger:
When you extend from individual transactions to the market as a whole, the costs described above magnify. Why? Because we are not just preventing people from trading apples and oranges, we are interfering in the mechanism by which resources are allocated to the production of new things. That process--economic growth--is an exponential one.
Allow me to demonstrate:
Let us say that we could measure the benefit of altering the emergent property, and it generates an aggregate 10 units of utility per year.
The annual cost of the regulation is 1 unit of utility devoted to regulatory enforcement, diverted from growth; plus 1 unit of lost transaction benefit; plus 1 unit of misdirected investment.
Now hypothesize that (a) each unit of utility directed to investment (growth) expands society's total utility pool by 0.06 of a unit annually, one half of which is reinvested in growth; and (b) when a unit of utility is misinvested, it expands the utility pool by only 0.04 units annually, one half of which is (mis)reinvested.
I leave an exercise to you, to figure out:
(a) How many years does it take before the aggregate cost exceeds the aggregate benefit?
and
(b) How many years is it before people say "wow, we really made a mistake with that one" because the annual lost utility exceeds the 10 units generated each year by altering the emergent property?
As a hint, I will answer for you (c), what is the total cost over time of the regulation? The answer is -- the cost is infinite, and even if you undo the regulation, the loss will always be there, accumulating for all eternity!
Sorry about the formatting.
ReplyDeleteHi Amos,
ReplyDeleteYour accusation is based on your sense that the outcome of a deregulated free market is "right". It is justice.
No, what I was trying to do in the quoted paragraph is get to what you mean by “macro-preference,” which is something you’ve kept changing positions on.
I haven't changed my position on what a macro-preference is. You have accused me of that now several times but that's not going to make it true. It isn't so hard to understand, so I will try it one more time (compare to what I wrote above to see it is the same).
Our societies are complex systems. They have emergent features, I call them macroscopic. These are properties that don't exist on the individual level like, for example, the stability of markets. People have preferences on the microscopic level (I like bananas better than apples). These are not the ones I am talking about, these are what the free market takes care of, that is great. What I am talking about is that people also have preferences about macro-variables (I don't want people to starve in my country thus everybody should have enough income to buy at least two apples a day). You need some way to take care of these as well. I don't care whether you call these issues 'moral questions' or whatever, we need a way to address them because it is important for people's happiness.
To come back to the reason if my question, you have circumvented to answer it. Why are you accusing me of 'Schadenfreude' when I say people care about relative wealth. Your answer to that was "Yes, there is a group of people in society who would be made happier by the mere fact of other people having less. Schadenfruede, right? That's not really what you mean though, is it?. That is what I mean, but your assertion strongly indicates you consider it 'unfair' in some sense to 'distort' the free market, whereas I don't. Therefore I assumed you have a different sense of justice and I was asking you why you think yours is more relevant than mine or other people's?
That wasn't the point. My question is: consider you would have the power to organize the economic system exactly how you want it. It works as you claim is the "best" possible way. You go and ask people what they think and it turns out they don't like it and don't want it. What do you do? Tell them it is scientifically proven that this is supposed to be the "best" solution, no matter whether they are happy with it or not?
I am not a grant-architect-overlord of economic systems. Economic science tells us that people do better without such a person. Thus, the best answer I could give to this question is that I would tell them “do whatever you want, its up to you.”
That doesn't answer my question. People have a preference for what they want (macroscopically) but they don't know how to turn this into reality through the options given in a free market economy. You can't answer that question as well. What people have done to address the problem is to install political systems to address these issues, however imperfectly. That's what leads to a mixed economy. Asserting that people do well if they just do what they want without trying to find out where it gets them isn't helpful in any regard. It also isn't true for there are many countries where a vast majority of people is stuck in poverty and given the limited possibilities these people have in doing what they 'want' that doesn't get them anywhere.
As I have said repeatedly, your notion of "better" might just not be considered "better" by many people, this is "knowable"
What isn’t “knowable” is whether the degree of “not better” to those people exceeds the amount of “better” to others. That’s the point you’re missing. Perhaps “comparable,” or “measureable,” or “knowable in any useful way” would be better, but its really the same thing.
I have not missed that point, I have replied to it several times above. What you don't seem to understand is that I don't want to compare people's happiness among each other. The only thing you need is their opinion on paying attention to which macro-preferences would improve their lives compared to a previous one, combined with the fact that one person has one voice. Such choices always have pros and cons, call them drawbacks or that the market might work less efficiently. And yes, I repeat this once again because it seems hard for you to understand: one person, one voice. It is not weighted by money. I have also told you several times above that I am far from saying the expression of these preferences presently works very well.
The teaching of ecnomics is that when you don’t regulate, you maximize the total “pie” of utility available to society as a whole, saying nothing about distribution.
That is really unfortunate given that research shows people care a lot about the distribution of wealth. It is definitely a factor relevant to their happiness (not to mention a factor that influences crimerates).
It is empirically demonstrable that increasing the size of the “pie” is the only way to consistently increase well-being for those who are economically worse-off, but you can’t prove it from first principles (or at least I can’t).
Could you please point me towards the empirical demonstration, because if I look towards South Africa, China, Russia, there seems to be an increase in pie by exploiting those who are economically 'worse-off'. You are not really advocating trickle-down works "automatically", do you?
If Bill gives John a million dollars because he believes John is a great guy and will create a totally irresistible candy bar within three years and be able to pay back two millions then, Bill is not better off at T0. He is taking a risk, and he might be wrong
Well, you’re at T1 (T0 is pre-transaction), but wrong anyway. Bill has purchased a risk in exchange for $2 million. Bill did that because he believes the risk is worth $2 million. At T1, with the risk in hand (out the $2 million), he is better off than he was before.
The only thing he has is a promise that makes him believe he is better off. This believe might be wrong. To come back to the reason of why we had this exchange, this is the same with political decisions. You vote for a program. You win. You have a promise and you believe that makes you better off. You might be wrong, future will tell. The point I was trying to make is it's the same in both situations, in contrast to what you were claiming.
So what? That is the point we were talking about, remember? The tension of long-term preferences with short-term preferences?
No, it wasn’t. It was a point you have been arguing and I have been telling you is not coherent because there is no difference between a “short-term” and “long-term” preference that matters for the mathematics of economics we have been discussing. This is not that economics fails to take these things into account, but rather that it takes them into account transparently.
That must be the reason why you said above you can't tell how they would be taken into account, you just have faith that if people do what they want, it will be the case?
What I was saying, and you have again confirmed it, that you have in your economic system no way to "predict" the outcome at T2 either.
Actually, that’s not really right. If there is an efficient market (using “efficient” to mean that transaction costs are low) for a risk, then I can infer the quantification of the risk from the market price. This is not a logical “rule” of economics like we’ve been discussing; its true only to the extent people are smart. But it turns out to be empirically supported, for the most part.
That's not a prediction. If you had one, there would be no risk.
The point I was apparently unsuccessfully trying to make is that it is equally hard if not impossible to make predictions in a free market. What you do is you give people an option to act, evaluate, and correct their behavior. That is what leads to optimization.
That’s correct. Regulation, of course, necessarily impedes that process.
Indeed, just that in an unregulated market optimization might not automatically work towards what people consider the 'best' solution since it doesn't address their macro-preferences. Regulations are necessary to align both with each other, making sure people following their micro-interests does result in a macro-behavior they prefer. Here is a nice capitalistic example of what happens when both don't match.
This is a very cynical statement that you should maybe repeat to all those who have recently lost their jobs or their savings that were meant to get their children though college.
And this is the point I made to you early on – economists rarely appear on TV to tell people the truth, because the truth is, in our culture, a rude thing to say.
The truth is, above everything else, a necessary thing to say. You should better go and tell people exactly what the side-effects are of the free market, so they can decide whether that's what they want. Side effects could be for example your savings vanish from one day to the next, your neighbors starve, and your friends will work their ass off so the rich get richer while to poor get poorer. But hey, on the average, wealth increases.
People who are on the edge of poverty have nothing to 'invest', they buy bread and a bus ticket, and they hardly have any choice with that.
They have their time, the bread, the bus ticket, and the ability to make promises for the future.
Honestly, you can’t be serious. Go enough generations back, and everyone’s ancestors were beyond the “edge” of poverty, by today’s standard or any.
Indeed, technological progress has brought us a long way, that's why I am so concerned about the raise of free market ideology. I don't want it to spoil this peaceful improvement of the circumstances of our lives.
I repeat my question: how are people supposed to 'invest' their money if they want a more stable economy with less crisis that puts their savings into risk?
And I’ll repeat my answer: Invest in annuities, treasury bonds, insurance policies, and so forth.
And I'll repeat again my answer that as long as you have a system where people's influence is weighted by income the opinions of those who have nothing to invest will not be heard.
Oh, but your question isn’t “how do I invest so I have a stable future,” it’s “how do I invest my money to affect other people’s futures as well.” The simple answer is, putting aside schadenfreude and other “I feel good when others feel __” stuff, that you should mind your own business. The first question matters and has an answer, the second question is gobbledygook.
I'll just leave that standing as it is, since it explains very nicely your point of view. I believe that solidarity is one of the most important ingredients to the quality of life in our societies. You don't have to share that point of view, but I don't see why your opinion is any more relevant than mine.
What are they supposed to do if they want to decrease the gap between the rich and the poor?
Work very, very hard to make lots of money that they donate to the poor. Unless what they really want is to have other people donate money to the poor…
If its a macro-preference its not about me or others, its about everybody for everybody. Which then brings us back to the collective action problem for which you need a political system to address, we've had that before and you didn't have anything enlightening to say except that you'll be hoping trickle-down will work by rich people donating to the poor.
Huh? I never said and never put forward the opinion that science should be used to "create regulations". . . . What I have been saying instead is that we need a system which allows these opinions to be incorporated more efficiently.
Do you not see the disconnect between these two sentences in the context of this discussion?
You are not understanding what the difference is between creating a specific regulation and creating a system that allows these regulations to be found and formulated. The latter can be addressed scientifically, the former is a question of decision-making and negotiation that can't be made scientifically.
By the way, you are still ignoring the bulk of my last three posts, which I repeat again for your convenience
Thanks, I can read. I have replied to this sufficiently often, and you didn't understand it, so it seems pointless to me. I have explained numerous times the point is not what your model does, but whether it is complete in addressing factors important for peoples well-being. The essence of what I am saying is it isn't. To complete it, we need a political system that allows in this context most importantly for people to express their opinion about the economic system to begin with. This is an option they don't have if you just impose on them a specific model. Best,
B.
Our societies are complex systems. They have emergent features, I call them macroscopic. These are properties that don't exist on the individual level like, for example, the stability of markets. People have preferences on the microscopic level (I like bananas better than apples). These are not the ones I am talking about, these are what the free market takes care of, that is great. What I am talking about is that people also have preferences about macro-variables (I don't want people to starve in my country thus everybody should have enough income to buy at least two apples a day).
ReplyDeleteThere are at least two or three different concepts wrapped up in that. (Maybe that is why it appears to me that you are switching your definition.)
One of those concepts of a “macro-preference” has to do with emergent properties of an economy such as the business cycle (“stability”), inflation, and so forth. That is not, however, distinct from the sort of preference the market can handle because, to the extent it is individualized (one’s care for one’s own stability), you can transact around it on the market (i.e., annuities, insurance, etc.).
There is a second concept, which has to do with the intangible benefit to one person of what happens to others. That you “feel better” knowing that other people are not starving and have not been harmed by a downshift in the business cycle.
The problem with this “preference” is that you’ve defined it in a way to create an artificial externality. If you redefine this preference as two separate preferences – (1) one’s concern over whether they themselves starve, and (2) one’s concern over whether others starve, then the artificial externality disappears from (1) and is isolated in (2). (2) happens to be precisely equivalent to the differential taxation problem we discussed earlier in the context of the relationship between money and utility. It isn’t a regulatory problem, it’s a distribution problem.
Let me engage this in more detail: Economics tells us absolutely nothing about how to achieve one distribution or another. What it does tell is that is interfering in distribution reduces the total “pie” of utility available for distribution to society as a whole, and that this reduction accelerates over time. Simple math tells us that this will inevitably be greater than the benefit obtained by satisfying the (2) preference above. What that leaves of (2) is whether a net social benefit can be obtained by redistributing from the better-off to the lesser-off, which is the differential taxation and marginal-declining-utility-of-money problem.
There is also a third concept mixed up here, which is a preference for one set-of-rules in place of another, which preference may include both tangibles and intangibles. But this concept does not work for you either, because the market handles it. A transaction does not have to include just two people. Many people can come together in a single transaction, contracting (promising each other in an enforceable way) to have their relationships governed by one set of rules or another. Examples of this abound, and I’ve given many (e.g., ISDA, condominiums, etc.).
A related problem occurs when you can’t transact, because some people say “no,” but because of externalities everyone has to abide by the same system to obtain the benefit. This is not a problem, however. So long as transaction costs are sufficiently low, people negotiate and eventually you get a system (perhaps with payments to some) that everyone has agreed to abide by. This circumstance is only “interesting” or a “problem” is when transaction costs are high, because so many people have to agree.
Now, have I summed it up? Is there anything here that I am missing in the “macro-preference” concept, and do you see why I don’t believe it is distinict from what you call a “micro-preference?”
Yes, there is a group of people in society who would be made happier by the mere fact of other people having less. Schadenfruede, right? That's not really what you mean though, is it?.
That is what I mean, but your assertion strongly indicates you consider it 'unfair' in some sense to 'distort' the free market, whereas I don't. Therefore I assumed you have a different sense of justice and I was asking you why you think yours is more relevant than mine or other people's?
Actually, in economics class, we sometimes refer to what you are presenting as the “German perspective,” and we’re taught it’s a unique cultural thing that started in Germany and spread to other parts of Western Europe post-war. We could have an interesting discussion about the political ideology that underlies this, where it comes from, and where social theory says it leads. But that isn’t this discussion.
Getting back to the point, I think you missed my point. My point is not that shadenfreude distorts the market. My point is that it isn’t really what you mean. I think what you’re really talking about is the harm to the starving person by starving, not the benefit obtained by the well-fed person from knowing that no-one else is starving. But you say that isn’t what you mean… Ok…
I guess, then, if you really don’t care about the harm to the starving person from starving, and you’re really talking about the other thing, the benefit to you from them starving (or not), then I don’t see why voluntary transactions don’t solve the problem.
Personally, I do care about the starving person, but not about the benefit to you (or me) derived from the fact the person is starving (or not).
What you don't seem to understand is that I don't want to compare people's happiness among each other.
Then does society determine whether a regulation is “good” or not? Whether it should be enacted?
The only thing you need is their opinion on paying attention to which macro-preferences would improve their lives compared to a previous one, combined with the fact that one person has one voice.
So we are enacting regulations based on a pure voting system now, regardless of whether the harm to the minority by virtue of the regulation exceeds the benefit to majority?
That’s a “yes” or “no,” and I think its high-time you answered it. (Of course, this is exactly where social theory says the “German perspective” leads.)
That is really unfortunate given that research shows people care a lot about the distribution of wealth. It is definitely a factor relevant to their happiness (not to mention a factor that influences crimerates).
Actually, I think most people really care about their own wealth more than about the wealth of others. Its true that human beings are capable of jealousy, and so forth. I guess I agree that jealousy is a motivating factor for many regulations that reduce the “total pie,” but I think this is a bad thing. Do you really disagree?
Again, “yes,” or “no”: Is it a good thing for society to impose a regulation that makes society as a whole worse off, reducing the size of the total “pie” available for distribution to society as a whole, in order to satisfy the jealousy or schadenfreude of some, even a majority?
Could you please point me towards the empirical demonstration, because if I look towards South Africa, China, Russia, there seems to be an increase in pie by exploiting those who are economically 'worse-off'. You are not really advocating trickle-down works "automatically", do you?
Growth correlates directly with economic freedom. “Exploitation” is a funny word here, although all the countries you mention seem to fall into that category fairly. I suppose its true that in the short-term places like China can demonstrate great growth through practices most would deem exploitive, but overall, in the long-run, the most growth happens in places like the United States and Western Europe, where the economy is more free. On the other hand, Western European growth has been stagnating for years, and now they have to import immigrants to exploit in order to avoid total collapse and sustain their social welfare systems…
Well, you’re at T1 (T0 is pre-transaction), but wrong anyway. Bill has purchased a risk in exchange for $2 million. Bill did that because he believes the risk is worth $2 million. At T1, with the risk in hand (out the $2 million), he is better off than he was before.
The only thing he has is a promise that makes him believe he is better off.
No, at T1 he really is better off, because he now owns the risk, whose value is at least $2 million (assuming liquidity). At T2 the value of the risk has decreased, so then he turns out to be worse-off. That’s the nature of risk… But at T1 he’s doing great.
If there is an efficient market (using “efficient” to mean that transaction costs are low) for a risk, then I can infer the quantification of the risk from the market price. This is not a logical “rule” of economics like we’ve been discussing; its true only to the extent people are smart. But it turns out to be empirically supported, for the most part.
That's not a prediction. If you had one, there would be no risk.
No… You can measure and predict risk. To make this simple, in economics, “risk” is a future contingency that is quantifiable, and “uncertainty” is a future contingency that is not. Risk can be purchased, sold, sliced, diced, divvied, and so forth.
Regulations are necessary to align both with each other, making sure people following their micro-interests does result in a macro-behavior they prefer. Here is a nice capitalistic example of what happens when both don't match.
Your example is of misconduct by a government official outside the market. There is no “market” there, just government. How this operates in favor of regulation escapes me…
You should better go and tell people exactly what the side-effects are of the free market, so they can decide whether that's what they want. Side effects could be for example your savings vanish from one day to the next, your neighbors starve, and your friends will work their ass off so the rich get richer while to poor get poorer. But hey, on the average, wealth increases.
In American political discourse, we have this debate continuously.
Indeed, technological progress has brought us a long way, that's why I am so concerned about the raise of free market ideology. I don't want it to spoil this peaceful improvement of the circumstances of our lives
Huh?
as long as you have a system where people's influence is weighted by income the opinions of those who have nothing to invest will not be heard.
Everyone has something to invest. Their time, their ability to make promises, etc.
I believe that solidarity is one of the most important ingredients to the quality of life in our societies. You don't have to share that point of view, but I don't see why your opinion is any more relevant than mine.
Ummm… Having raised the spectre of the German perspective already, and assuming that you are neither a Nazi nor a Communist, I will phrase my answer carefully.
I am vehemently opposed to the idea that “social solidarity” is a net-positive. I believe it is a net-negative, and I prefer diversity and individuality. As a scientist, I think it is fundamentally deistic and irrational. Moreover, as Jew, I believe I know where the game of “social solidarity” leads, and I will pick up arms to stop it. It is therefore my intention to vote against any law that has the goal of increasing “social solidarity,” and my preference is very strong, and very deep.
Now, I agree that my opinion is not “more relevant” than yours. So, I put the question back to you: When the Social Solidarity Act of 2009 is voted upon, how will you take into account the depth of each of our preferences?
You are not understanding what the difference is between creating a specific regulation and creating a system that allows these regulations to be found and formulated. The latter can be addressed scientifically,
The science says that that is an unwinnable game. It is always in the interests of people to band together to rally the government to take from others and give to them. That is true in an economic sense (“prevailing wage” laws, etc.). And it is also true when it comes to social solidarity (barring particular religious practices, and so forth).
The only way to win, is not to play.
By the way, you are still ignoring the bulk of my last three posts, which I repeat again for your convenience.
Thanks, I can read. I have replied to this sufficiently often, and you didn't understand it, so it seems pointless to me.
You’ve never addressed the point that, because growth is exponential, the “schadenfreude argument” you’ve made is always a net-negative in the long-run.
Hi Amos:
ReplyDeleteI believe that solidarity is one of the most important ingredients to the quality of life in our societies. You don't have to share that point of view, but I don't see why your opinion is any more relevant than mine.
Ummm… Having raised the spectre of the German perspective already, and assuming that you are neither a Nazi nor a Communist, I will phrase my answer carefully.
I am vehemently opposed to the idea that “social solidarity” is a net-positive. I believe it is a net-negative, and I prefer diversity and individuality. As a scientist, I think it is fundamentally deistic and irrational. Moreover, as Jew, I believe I know where the game of “social solidarity” leads, and I will pick up arms to stop it. It is therefore my intention to vote against any law that has the goal of increasing “social solidarity,” and my preference is very strong, and very deep.
Now, I agree that my opinion is not “more relevant” than yours.
Now the only thing that is left for you to realize is that A) people who share my opinion might not appreciate their lives being run on a system that pursues your goals. You thus need a system that is able to detect their opinion and implement them, and B) whether or not something is a "net-positive" or "net-negative" depends on people's attidute towards it.
Besides this, I think you also misunderstand what I am talking about in the first place because it has nothing to do neither with communism nor socialism (confusing social democracy with socialism is a common mistake Americans make). But if you want to put it that extreme, what would you tell people in a fictional country where they all want socialism? They have a right to make their decisions on their own, they have a right to realize whatever they believe makes them happy, even if you think it's stupid. This is the freedom you want to take from them.
Growth correlates directly with economic freedom. “Exploitation” is a funny word here, although all the countries you mention seem to fall into that category fairly. I suppose its true that in the short-term places like China can demonstrate great growth through practices most would deem exploitive, but overall, in the long-run, the most growth happens in places like the United States and Western Europe, where the economy is more free. On the other hand, Western European growth has been stagnating for years, and now they have to import immigrants to exploit in order to avoid total collapse and sustain their social welfare systems…
The reason Western Europe is importing immigrants has to do with its aging population and low birth rate. The number of Europeans is indeed dropping, and this causes substantial problems that have to be addressed no matter how 'free' the market is.
The point you still fail to see is that 'growth' per se is not the deciding factor for many nations, it is also the question what grows and how does it grow etc. See recent post for a summary what Europeans have chosen instead. Please not that it is a free choice of free people, it is this choice that you are denying they should have.
So, I put the question back to you: When the Social Solidarity Act of 2009 is voted upon, how will you take into account the depth of each of our preferences?
I have answered this question more than a dozen times. I will do it one more time, after which I have to conclude you are either not willing or indeed unable to understand the answer.
As you have pointed out, acts of solidarity or other decisions that work towards people's macro-preferences are a trade between individual satisfaction and the realization of goals for the society. They go on the expenses of the fulfillment of micro-preferences, otherwise you wouldn't need a political system to address them, the market would already do it.
There is a whole spectrum of how you can organize the system people live in. People need to express their opinions about what they want in terms of such organization (that's what they presently do if they vote, just very inaccurately). There is no mind-reading of any kind, just in case you still haven't understood that. To find out which organization is the optimal one for the society, you don't need to compare people's opinions to each other, you need to compare their overall satisfaction with the status to an earlier status (variation, evaluation, optimization). And yes, as I have said two dozen times before, it's one person one voice. That does not mean, as you repeatedly wrongly assert, despite my repeated explanations, that the majority opinion will necessarily be simply imposed on minorities since this is only one way to arrange things and most likely not the optimal one. If you'd for example find a way to simply not impose a regulation on the minority that would be a better solution and given the optimization process, that is the one that will be chosen.
The science says that that is an unwinnable game. It is always in the interests of people to band together to rally the government to take from others and give to them. That is true in an economic sense (“prevailing wage” laws, etc.). And it is also true when it comes to social solidarity (barring particular religious practices, and so forth).
So, you "know" what is in the interests of people, is that what you are saying? The interests you are taking about are btw once again the micro-interests. Since you have already acknowledged the existence of something called the “German perspective,” and "we’re taught it’s a unique cultural thing that started in Germany" maybe you should spend some time now trying to realize that cultural perspectives should be respected. You completely fail to see that respecting people's opinions matters a great deal for their happiness. And to repeat it once again, even if that means their economy does not on the average run as efficiently as it maximally could be. If that is what makes them happier, you have no right to deny them this choice.
(Will reply to the first part of your comment later, have to go now. It's pretty close.)
Best,
B.
I am vehemently opposed to the idea that “social solidarity” is a net-positive. I believe it is a net-negative, and I prefer diversity and individuality. As a scientist, I think it is fundamentally deistic and irrational. Moreover, as Jew, I believe I know where the game of “social solidarity” leads, and I will pick up arms to stop it. It is therefore my intention to vote against any law that has the goal of increasing “social solidarity,” and my preference is very strong, and very deep.
ReplyDeleteNow, I agree that my opinion is not “more relevant” than yours.
Now the only thing that is left for you to realize is that A) people who share my opinion might not appreciate their lives being run on a system that pursues your goals. You thus need a system that is able to detect their opinion and implement them, and B) whether or not something is a "net-positive" or "net-negative" depends on people's attidute towards it.
You’re ignoring the point. We both need to live in the same society. Your vote and mine will differ. My preference is very deep. No negotiation on this is possible. How does society decide which side wins?
Besides this, I think you also misunderstand what I am talking about in the first place because it has nothing to do neither with communism nor socialism
No, I’m not misunderstanding. In political economics, we view the concept you advanced – that “social solidarity” is a value of itself – as a communalist one, that necessarily leads (if permitted) to fascism, which we view as equivalent to socialism.
what would you tell people in a fictional country where they all want socialism
Then its easy, they can all adopt socialism by unanimous consent. As soon as dissent appears, however, you’re back in my world of Pareto-logic and the mind-reading problem.
They have a right to make their decisions on their own, they have a right to realize whatever they believe makes them happy, even if you think it's stupid. This is the freedom you want to take from them.
What about the dissenters? Note that their freedom and preferences are entirely disregarded in your view.
So, I put the question back to you: When the Social Solidarity Act of 2009 is voted upon, how will you take into account the depth of each of our preferences?
I have answered this question more than a dozen times. I will do it one more time, after which I have to conclude you are either not willing or indeed unable to understand the answer.
You’ve never answered it, and still haven’t. It’s a very simple question: How do you decide? What is the mechanism? Waxing generally about the virtues of democracy and negotiation, and “finding a way” does not answer the question.
At T1 the bill is up for a vote. Many people agree with my side with extraordinary depth of preference. Many others disagree, but who knows which side will win the vote? It is time to pick a mechanism for deciding. If the answer is pure majoritarianism, then depth of preference is entirely disregarded. So what is your mechanism?
That does not mean, as you repeatedly wrongly assert, despite my repeated explanations, that the majority opinion will necessarily be simply imposed on minorities since this is only one way to arrange things and most likely not the optimal one.
Ok, so what’s the way to arrange things? The regulation will either go into effect or not. There is no superposition possible. One side will win, and its will will be imposed by force on the other. How do you pick the winner? What is the mechanism, precisely?
The science says that that is an unwinnable game. It is always in the interests of people to band together to rally the government to take from others and give to them. That is true in an economic sense (“prevailing wage” laws, etc.). And it is also true when it comes to social solidarity (barring particular religious practices, and so forth).
So, you "know" what is in the interests of people, is that what you are saying?
LOL… no, I’m saying that people always try to act in their own best interest.
Since you have already acknowledged the existence of something called the “German perspective,” and "we’re taught it’s a unique cultural thing that started in Germany" maybe you should spend some time now trying to realize that cultural perspectives should be respected.
Should you take-up my suggestion of reading Hayek’s “The Road to Serfdom,” I will then be able to explain the relationship between cultural respect and economics.
In short form, it is the view of many economists that society’s system of laws for the protection of property rights, the enforcement of contracts, and so forth, should reflect the pre-existing cultural expectations and notions of “fairness” among the people. In doing so, transaction costs are minimized.
I appologize in advance for this, but: I think you may have missed the point of what I meant by the “German perspective,” but for the avoidance of any doubt, what I meant was a cultural view that, while not fascism or communism in and of itself, is the thing that fascism and communism grew out of: An essentially pre-modern, romantic affection for the people as a unit distinct from the sum of individuals.
In all events, I look forward to your response to the first-half of my comments.
Hi Amos:
ReplyDeleteWe both need to live in the same society. Your vote and mine will differ. My preference is very deep. No negotiation on this is possible. How does society decide which side wins?
In fact we don't, you vote and live in a country where I neither live nor vote.
To me it is a mystery why people in the USA like the system they live in. But after having lived there I figure it is because they regard 'social welfare' as a negative notion. I can't understand that, but it certainly seems to me it is a deeply felt conviction that their way of life is what they want. You couldn't run Germany that way, people are just different. Maybe it's about time you realize that there are no absolute, scientific notions of 'good' systems. The only thing that determines what is good or bad is what people consider it to be. It's not up to you to tell them under which circumstances they should be happy according to a calculation.
In political economics, we view the concept you advanced – that “social solidarity” is a value of itself – as a communalist one, that necessarily leads (if permitted) to fascism, which we view as equivalent to socialism.
Ah. So you are saying solidarity necessarily leads to fascism. That must be the reason then why Germany's political system was put into place after WW II - because it offered a possibility for people to express and implement solidarity that would lead to fascism? Well, I am glad you weren't around at that time to contribute to that decision with your enlightened insights.
I never said it is a 'value for itself,' I don't even know what that means. It certainly is a value that many people regard important and that shouldn't be dismissed.
The conclusion that it leads to fascism is false because you are mistakenly assuming it is a value that is imposed on a nation. The very contrary is the case. I am saying if people consider it important they should have a way to express that. It is a voluntary decision. In a democratic system, if people don't like it, they don't need to have it. I must have told you that three dozen times by now. In my version if people do want a free market, they can decide to have it. In your version, they don't have any choice with that. Imposing a free market on them is not any better than imposing on them any other system.
What you don't seem to understand is that I don't want to compare people's happiness among each other.
Then does society determine whether a regulation is “good” or not? Whether it should be enacted?
I had already answered this question in the next sentence:
The only thing you need is their opinion on paying attention to which macro-preferences would improve their lives compared to a previous one, combined with the fact that one person has one voice.
So we are enacting regulations based on a pure voting system now, regardless of whether the harm to the minority by virtue of the regulation exceeds the benefit to majority?
That’s a “yes” or “no,” and I think its high-time you answered it. (Of course, this is exactly where social theory says the “German perspective” leads.)
No.
You evidently indeed don't understand it. You don't compare one person's harm to somebody else's benefit. Not only are that micro-variables, it's also not something I'd know how to 'measure', isn't that what you have been incorrectly accusing me of? You don't compare one person's status with somebody elses. You compare their opinion about one macro-state to a that about a different macro-state. And yes, to repeat it even one more time though it might hurt: everybodies opinion has the same weight. That's what democracy is all about.
To come back to your question of course one does not disregard what the minority wants. As I have also told LoboGris above our political systems do protect minorities (in contrast to the economic system btw), just look at your constitution. I have told you so many times that the task is trying to find not one solution that you can push through but the best solution that it seems pointless to repeat it one more time.
That is really unfortunate given that research shows people care a lot about the distribution of wealth. It is definitely a factor relevant to their happiness (not to mention a factor that influences crimerates).
Actually, I think most people really care about their own wealth more than about the wealth of others. Its true that human beings are capable of jealousy, and so forth. I guess I agree that jealousy is a motivating factor for many regulations that reduce the “total pie,” but I think this is a bad thing. Do you really disagree?
Yes. You are attempting the same here as when you were talking about "Schadenfreude": You are using a moral loaden words to express your own notion of justice, evidently unable to see others don't share it.
The point is, Amos, that many people just don't consider the state a free market works towards 'just', and they prefer instead a redistribution of wealth that comes closer to their sense of justice. There is nothing better about their sense of justice than about yours.
If I think it is unfair that some people sit on billions of dollars and bath in champagne because they don't know what to do with all that money while a substantial fraction of people in their country has hardly enough to eat, I don't consider this fair. I don't want that, it is not a system that I want to live in, and as long as it is a democracy and I have a way to voice my opinion I will vote for a redistribution of wealth so everybody can live under human circumstances.
Again, “yes,” or “no”: Is it a good thing for society to impose a regulation that makes society as a whole worse off, reducing the size of the total “pie” available for distribution to society as a whole, in order to satisfy the jealousy or schadenfreude of some, even a majority?
There is no other way to find out what is a good or a bad thing other than to ask people. By accepting the politic system they live in we all accept that our individual preferences can not always be worked towards. If you are tremendously unhappy with that organization of things, vote with your feet. That by itself should convince you btw that the world needs different systems.
I have answered this question more than a dozen times. I will do it one more time, after which I have to conclude you are either not willing or indeed unable to understand the answer.
You’ve never answered it, and still haven’t. It’s a very simple question: How do you decide? What is the mechanism? Waxing generally about the virtues of democracy and negotiation, and “finding a way” does not answer the question.
Also that question I have answered more than two dozen times. I have already told you that I can't give you a mechanism that is any better than the one we currently have except for the points I have repeated endlessly: That it needs to be more flexible and evaluate and react to people's opinions more promptly. In fact, I had been hoping you could make some suggestion on that, but evidently you don't even understand why people want a politic system to begin with. I have also told you many times that your suggestion of just not having any such system isn't a solution either.
Occasionally you seem to be saying it isn't necessary because the market takes automatically care of everything, but when I ask you exactly what people should be doing to work towards their macro-preferences your answer is either impractical (too complicated, people would never do it) or unrealistic (ignoring the collective action problem, people would not individually do it).
In American political discourse, we have this debate continuously.
Yes! Of course you do! As I've been saying from the very beginning because people WANT to have that discussion and they WANT to have their opinions addressed - that's what we have a political system for.
Indeed, technological progress has brought us a long way, that's why I am so concerned about the raise of free market ideology. I don't want it to spoil this peaceful improvement of the circumstances of our lives
Huh?
Huh? Think about it one more time, you will get it. I don't want to live in a system that is based on your ideology. I think there are many people who share my opinion. In fact, given that we have no really free market anywhere in the world I think the vast majority of people share my opinion. The only way you can reach your goals is to force them to accept it (as has been the case eg in Bolivia, Poland, Iraq). I am very skeptic there is any other way than using force to get them to accept it, and I don't want that. That's what I am concerned about.
Oohm. I think now I have mixed up your previous two comments, sorry. Will try to reply to the rest later.
Best,
B.
Dear Bee,
ReplyDeleteOohm. I think now I have mixed up your previous two comments, sorry. Will try to reply to the rest later.
I really don't see why you waste your time with either a clever Turing robot or an amoral pervert. You have better things to do, I guess. With respect to
My preference is very deep. No negotiation on this is possible. How does society decide which side wins?
This has become quite clear by now. The obvious reasonable reaction towards fanatic ideologues: As long they do no harm, just let them babble and ignore them.
Cheers, Stefan
We both need to live in the same society. Your vote and mine will differ. My preference is very deep. No negotiation on this is possible. How does society decide which side wins?
ReplyDeleteIn fact we don't, you vote and live in a country where I neither live nor vote.
To me it is a mystery why people in the USA like the system they live in. But after having lived there I figure it is because they regard 'social welfare' as a negative notion. I can't understand that, but it certainly seems to me it is a deeply felt conviction that their way of life is what they want. You couldn't run Germany that way, people are just different. Maybe it's about time you realize that there are no absolute, scientific notions of 'good' systems. The only thing that determines what is good or bad is what people consider it to be. It's not up to you to tell them under which circumstances they should be happy according to a calculation.
But you’re still dodging the point. People’s preferences differ. In this case, those preferences are deeply held. Someone’s preferences will be subjugated by force. What is the mechanism for deciding who wins when that subject is put up for vote? How (if at all) does it take depth-of-preference into account?
In political economics, we view the concept you advanced – that “social solidarity” is a value of itself – as a communalist one, that necessarily leads (if permitted) to fascism, which we view as equivalent to socialism.
Ah. So you are saying solidarity necessarily leads to fascism.
Not quite, but close.
That “social solidarity” as a concept is linked to fascism, that fascism (or communism, which is the same thing) is the natural end-point.
That must be the reason then why Germany's political system was put into place after WW II - because it offered a possibility for people to express and implement solidarity that would lead to fascism? Well, I am glad you weren't around at that time to contribute to that decision with your enlightened insights.
What was the “volk” if not social solidarity? What about the "proletariat"?
The conclusion that it leads to fascism is false because you are mistakenly assuming it is a value that is imposed on a nation.
Whether or not solidarity is imposed as a value, some set of solidarity rules is inevitably imposed, over the objections of some group in society. If there was no such group, there would be no need to impose the rule. Imposition of the will of one group (sometimes a majority, sometimes not, e.g., South Africa under Apartheid) on another by force is the essence of the concept of social solidarity as a governmental objective.
In a democratic system, if people don't like it, they don't need to have it.
Laws are universally enforceable.
Imposing a free market on them is not any better than imposing on them any other system.
A free market cannot be imposed. It exists in the absence of imposition, logically and historically prior to government.
What you don't seem to understand is that I don't want to compare people's happiness among each other.
Then does society determine whether a regulation is “good” or not? Whether it should be enacted?
I had already answered this question in the next sentence:
The only thing you need is their opinion on paying attention to which macro-preferences would improve their lives compared to a previous one, combined with the fact that one person has one voice.
So we are enacting regulations based on a pure voting system now, regardless of whether the harm to the minority by virtue of the regulation exceeds the benefit to majority?
That’s a “yes” or “no,” and I think its high-time you answered it. (Of course, this is exactly where social theory says the “German perspective” leads.)
No.
You evidently indeed don't understand it.
Indeed.
You don't compare one person's status with somebody elses. You compare their opinion about one macro-state to a that about a different macro-state. And yes, to repeat it even one more time though it might hurt: everybodies opinion has the same weight. That's what democracy is all about.
If that’s the answer, then shouldn’t you have given a “yes” above? I really do not understand. It does not make sense to me. I do not get it.
In all events, do you concede that IF (a) you adopt a pure-voting, majoritarian system for regulations, THAT (b) regulations will then be enacted which are a net-negative for society, because sometimes the harm to the minority will exceed the benefit to the majority, because of depth-of-prefences?
Actually, I think most people really care about their own wealth more than about the wealth of others. Its true that human beings are capable of jealousy, and so forth. I guess I agree that jealousy is a motivating factor for many regulations that reduce the “total pie,” but I think this is a bad thing. Do you really disagree?
Yes. You are attempting the same here as when you were talking about "Schadenfreude": You are using a moral loaden words to express your own notion of justice, evidently unable to see others don't share it.
I’m slowing moving you into a smaller, and smaller, and less defensible, intellectual space, that is correct. You are now stuck arguing that the science of economics is inaccurate because it fails to take into account jealousy, and that this is an important value you believe society should advance at the expense of its total material wealth.
If I think it is unfair that some people sit on billions of dollars and bath in champagne because they don't know what to do with all that money while a substantial fraction of people in their country has hardly enough to eat, I don't consider this fair.
The economic question isn’t “is that fair,” but rather “can we do anything about it that won’t cause more harm than good?”
Again, “yes,” or “no”: Is it a good thing for society to impose a regulation that makes society as a whole worse off, reducing the size of the total “pie” available for distribution to society as a whole, in order to satisfy the jealousy or schadenfreude of some, even a majority?
There is no other way to find out what is a good or a bad thing other than to ask people.
No cheating! I’m asking you. It is currently the position on which you are resting your argument against the conclusions of economic science. Yet you are not willing to endorse it when it is presented to you explicitly, which speaks volumes.
I have answered this question more than a dozen times. I will do it one more time, after which I have to conclude you are either not willing or indeed unable to understand the answer.
You’ve never answered it, and still haven’t. It’s a very simple question: How do you decide? What is the mechanism? Waxing generally about the virtues of democracy and negotiation, and “finding a way” does not answer the question.
Also that question I have answered more than two dozen times. I have already told you that I can't give you a mechanism that is any better than the one we currently have
That is why you are stuck defending the position above which you are not willing to defend when it is expressed explicitly. Because there is no such mechanism.
Occasionally you seem to be saying it isn't necessary because the market takes automatically care of everything, but when I ask you exactly what people should be doing to work towards their macro-preferences your answer is either impractical (too complicated, people would never do it) or unrealistic (ignoring the collective action problem, people would not individually do it).
What I’ve been trying to say, in various ways, is that when you regulate, you will inevitably do worse in terms of total utility generation than if you had not regulated. Like thermodynamics, there is no way out of this problem, because there is no “mechanism” of the type we have been discussing, which is a consequence of the mind-reading problem. Without such a mechanism (which requires mind-reading), you cannot allocate society’s resources such that they generate the greatest possible utility.
Indeed, technological progress has brought us a long way, that's why I am so concerned about the raise of free market ideology. I don't want it to spoil this peaceful improvement of the circumstances of our lives
Huh?
Huh? Think about it one more time, you will get it. I don't want to live in a system that is based on your ideology. I think there are many people who share my opinion.
Perhaps, but the people who share mine invent and build more stuff, so the people who share yours inevitably want to move to where we live and adopt rules similar to ours over the long-term. But then people who share yours move to where we are, and you start regulating, and we go somewhere else, and so-on and so-forth.
The only way you can reach your goals is to force them to accept it (as has been the case eg in Bolivia, Poland, Iraq). I am very skeptic there is any other way than using force to get them to accept it, and I don't want that. That's what I am concerned about.
The only “goal” I’ve expressed is that I’m opposed to social solidarity. Otherwise, I am only representing the scientific conclusion of economics, which is that when you regulate you make society as a whole worse-off. If that is desirable to you because doing so satisfies the jealousy or schadenfreude of the majority, then so be it.
In all events, I cannot understand what “force” you are referring to. I rather thought Poland and the Eastern Block countries went to the free market by the removal of the forceful imposition of a system. It is a gross error to think that markets are “imposed by force.” The social theory argument in favor of markets is that they are the opposite of force.
Oohm. I think now I have mixed up your previous two comments, sorry. Will try to reply to the rest later.
Yes. But you still haven’t answered – now five or so posts in – the point that even if the “jealousy satisfaction” argument you’ve made is right, that its still inevitably a long-run net-negative because growth is exponential. This relates, by the way, to the question about the “pie” and jealousy that I asked above and you refused to “yes” or “no.” Actually, they are the same question.
(The other thing you’re ignoring is my analysis of the macro-preference concept, which you seem to be backing off from.)
Hi Amos,
ReplyDeleteJust to let you I’ve watched the debate between you and Bee flying back and forth. At times I’ve found it educational and revealing, other times amusing and yet for the most part I find it to be frustrating and mostly fruitless. I see you on one hand with your faith and trust in the adherence to having essentially Darwin’s 19th century version of evolution being strictly applied to economics, while on the other hand I see Bee trying to remind you it is not that simple, as it is compounded by the nature and level of sophistication of the creatures involved that institute to be the instigators, engines and benefactors of the process.
I could tell you for instance that evolution has turned out to be a little more complex then simply random mutation acting in the backdrop of an environment of constant change. That is since more recently it has been indicated that even the most simplest of creatures have a feed back mechanism that tends to have many of these changes to address their environment directly and thereby shortcutting the need to waste both time and resource in leaving it to reasonlessly explore all possibilities. So if an earth worm or an ameba has been discovered to have such a capacity, what do you imagine this could represent to be in ourselves? I tell you what I’m confident that part of this represents to be, for it is the mind.
If this then is taken as being true, it is then clear to me that this mind we’ve developed might then have a capacity for learning, reasoning and most importantly making decisions that go a great deal further then what you have been prepared to concede. What I can tell you if every person on this planet where given the right and resource to seek an education at the level that was afforded to Bee or even lesser so myself then I would think you might be surprised to find you have vastly underestimated this capacity. You may find more people discover individual and common interests have more to do with one another and that when forced to consider the larger picture that overall goals and expectations may also have commonalities that will be found and better shared. So I would challenge you to consider just one, alteration, concession and expansion to your simplistic model and extend only the right of access to a quality education as something that be considered a shared responsibility. Let that then incubate for a generation or two and I think thereafter that all the other concerns for the most part will look after themselves.
I will let you know that as strong as your conviction might be that you are firm in what and find reason to be true, that I am equally the same in what I see this as being. The one area I would agree with you however is that the changes that take place cannot be concocted by and instituted by a small group that consider themselves to know better yet only by in large by all that are involved by having been given the opportunity to learn for themselves that this be true.
Best,
Phil
Yes. But you still haven’t answered – now five or so posts in – the point that even if the “jealousy satisfaction” argument you’ve made is right, that its still inevitably a long-run net-negative because growth is exponential. This relates, by the way, to the question about the “pie” and jealousy that I asked above and you refused to “yes” or “no.” Actually, they are the same question.
ReplyDelete(The other thing you’re ignoring is my analysis of the macro-preference concept, which you seem to be backing off from.)
It's been two days; more than a week since the part you haven't responded to was first posted.
Tomorrow, I declare victory.
Phil:
ReplyDeleteI haven't said word one about evolution, and I have not advanced social darwinism.
A brief word on that: It is interesting to recall that social darwinism, at the time, the opposite choice to capital-R-racism, the belief that particular groups in society were culturally or biologically incapable of doing well and, in the "progressive" view of the time, best suited for eugenic elimination. Social darwinism was the opposition view, and held that, no, we should simply let people try to accomplish what they can in life and not have the government interfere by forcibly sterilizing the poor.
In all events, I really haven't said a word about justice, or fairness, but it is interesting that you and Bee think I have. I think this is because while you truly believe that economics is incomplete, deep down at your moral cores you acknowledge that if what I'm saying is true, your politics don't fit your goals.
This says nothing about my politics.
You can declare whatever you wish, but that is neither constructive nor meaningful.
ReplyDeleteI've been away for two weeks and obviously stuff is piling up on my desk now, sorry for the delay.
Hi Amos,
ReplyDelete“I haven't said word one about evolution, and I have not advanced social darwinism.”
I never said anything about social Darwinism, yet referred to your economic model as being economic Darwinism. I was just comparing the two to indicate that your version of the concept is outdated as serving as being explanatory of an evolutionary system.
To put it simply I would at least expect that if economics is going to use natural evolution as a blueprint, it should at least keep up to date in terms of the theory that inspired it. Further, there is no connection between a feed back mechanism in evolution and morality, simply it has evolution to be a more efficient system and therein more likely to make the most beneficial choices, with less waste of time and resource, where in the old model only random served as the mechanism of choice. I’m not so much suggesting the model should be discarded only it be brought up to date. Feed back systems in natural evolution lend the ability of the organism to access it environment and react in adapting to it.
Why then should we not use a model for economics that is at least this sophisticated? Bottom line is economics needs to get up to speed and refine their science to at least copy their models correctly if their not prepared to come up with their own.
Best,
Phil
Hi Amos:
ReplyDeleteSome remarks about your latest comments that I hope will clarify some things.
One thing I think we don't get over is that you consider a political system, even a democratic one, as something that imposes on people things they don't want. You have repeated that in various forms several times. What I have tried to say, maybe not explicitly enough, is that people living under a certain constitution have agreed, (ideally) voluntarily, that this way to organize their lives is one they do accept. They have entered a 'social contract', and thus have also agreed that they will accept decisions that do potentially not work out in their individual favor because they do believe that on the average the benefit they have from being part of that social contract exceeds the drawbacks.
Now, as I have also told LoboGris above, it is in practice not actually the case that people chose which nation (constitution) they want to belong to. That is unfortunate. If it was up to me, I'd let them chose. Most importantly, I would let people chose whether they want to be part of one at all. That then would solve your problem and also LoboGris' as people would have the possibility to opt out of being part of any social contract. If it was correct what you are saying, they should all opt out.
Does that help in some way? What I am trying to say is that people have decided that the system itself is something they do want, and that they will accept the resulting organizations of their lives, something that you prefer to call 'imposing'.
Ah. So you are saying solidarity necessarily leads to fascism.
Not quite, but close.
That “social solidarity” as a concept is linked to fascism, that fascism (or communism, which is the same thing) is the natural end-point.
Which is obviously nonsense. You seem to wrongly imply solidarity can not go along with a constitution that protects minorities or property rights.
What was the “volk” if not social solidarity? What about the "proletariat"?
I think you missed the point I was trying to make. The German constitution put into place after WW II is a mixed economy and what you would probably call a 'welfare state'. It thus has a place for solidarity - if that is what people wish, since it is a democracy. I am not sure what you are trying to say with the above. Both "Volk" as well as "Proletariat" refer to groups of people. Solidarity is, as you have previously correctly stated, a value, not a group. It is a value a group can adopt. It can be adopted as well by the Bourgeoisie, and in fact is adopted I'd say, they just don't call it that way. It is, as most values, one that can be abused by leaders if people are following blindly.
Imposition of the will of one group (sometimes a majority, sometimes not, e.g., South Africa under Apartheid) on another by force is the essence of the concept of social solidarity as a governmental objective ...
Laws are universally enforceable.
What you are saying is merely that if you want to organize the lives of many people so they get along with a minimum of friction you necessarily have to constrain some people's freedom in order to protect other people's rights. That means indeed you 'force' people to obey laws they might not voluntarily have obeyed. As I have repeated a great many times, the task is trying to find a solution in which you put as little constraints on people's lives as possible, but believing you can organize a society without the need to enforce laws (against some people's will obviously) is very naive.
So we are enacting regulations based on a pure voting system now, regardless of whether the harm to the minority by virtue of the regulation exceeds the benefit to majority?
That’s a “yes” or “no,” and I think its high-time you answered it. (Of course, this is exactly where social theory says the “German perspective” leads.)
No.
You evidently indeed don't understand it.
Indeed.
You don't compare one person's status with somebody elses. You compare their opinion about one macro-state to a that about a different macro-state. And yes, to repeat it even one more time though it might hurt: everybodies opinion has the same weight. That's what democracy is all about.
If that’s the answer, then shouldn’t you have given a “yes” above? I really do not understand. It does not make sense to me. I do not get it.
I really didn't think it would be so hard to understand for you. I answered "no" to your question because you assert "regardless of whether the harm to the minority by virtue of the regulation exceeds the benefit to majority". I must have told you two dozen times that A) you don't compare some people's harm with other people's benefit. You compare their liking of one organization (regulation, law) with their liking of a different one (a previous one or a suggested one). And B) the task is not to find SOME regulation that the majority can push through, but to find the regulation the most people consider the best. That means in particular if you have a solution for group X without making group Y unhappy, that's the thing to do. That means in particular whenever you can solve a problem without inducing constraints on anybody who doesn't want them, that's the thing to do. If that is always possible, that would be the outcome. I am just skeptic that always can be done.
You are attempting the same here as when you were talking about "Schadenfreude": You are using a moral loaden words to express your own notion of justice, evidently unable to see others don't share it.
I’m slowing moving you into a smaller, and smaller, and less defensible, intellectual space, that is correct. You are now stuck arguing that the science of economics is inaccurate because it fails to take into account jealousy, and that this is an important value you believe society should advance at the expense of its total material wealth.
Your argumentation is becoming very tiresome. You continue to retreat to moral loaden words like 'Schadenfreude' and 'jealousy' to express merely that you don't share my political opinion. You don't have to. But if you want to disagree on my political opinion, why don't you just say so instead of pretending that has something to do with science? What I might consider 'fair' you might consider 'unfair' and call it expression of some people's 'jealousy'. But your personal opinion is completely irrelevant, and I am actually not interested in discussing it. The point is that people disagree on the matter and there is no reason (as I said previously) that everybody has to agree with you on what should be disregarded because you consider it "Schadenfreude". Best,
B.
Hi Amos,
ReplyDeleteThere are at least two or three different concepts wrapped up in that. (Maybe that is why it appears to me that you are switching your definition.) [...]
Now, have I summed it up? Is there anything here that I am missing in the “macro-preference” concept, and do you see why I don’t believe it is distinict from what you call a “micro-preference?”
I am not sure, let me try. As to your first suggested concept:
a) I don't understand why you are restricting it to the economy.
b) Whether or not the market 'can' in principle handle it isn't the question, but weather it is in practice feasible to let the market handle it.
To understand b): All macro-features originate in micro-features. There is thus the possibility that people if they understand and study the market enough are indeed able to express their own macro-preferences in their individual actions. It is however doubtful they in practice manage to do that, and then also have the incentives to do that. Look at the current financial crisis. I am sure a large number of people doesn't like that and would want to know how to improve the situation. Yet (except for the advice to spend more money) they don't know what individual actions to take. So the issue is left over to governmental intervention. This is a grossly simplified expression of their macro-preferences, but at least it is one. (I have added this disclaimer three dozen times, but just to make sure: I am not saying this presently works very well, but just not having it is not a solution either. Instead the process should be improved.)
As to your second concept. I'd say a macro-preference is a preference about macro-variables that is expressed in macro-variables. That would roughly speaking be anything that can be put into a law. Something like: "I want Bill Gates to pay $100 Million to fix the potholes on American highways" is not a macro-preference. Neither is "I don't want to starve". "Nobody should starve" is a macro-preference (though it's too ambiguous to be useful, it's just an example). It is of course related to the individual experience, but the point is in its generalization, such that it becomes an ingredient of organization.
As to your third concept, a preference for one set of rules. That fits pretty well. You keep repeating the market handles this, yet when I keep asking you how so you fail to answer. The way I see how these preferences for rules are in fact handled is via our political system.
The only thing he has is a promise that makes him believe he is better off.
No, at T1 he really is better off, because he now owns the risk, whose value is at least $2 million (assuming liquidity). At T2 the value of the risk has decreased, so then he turns out to be worse-off. That’s the nature of risk… But at T1 he’s doing great.
What I was saying, and you have again confirmed it, that you have in your economic system no way to "predict" the outcome at T2 either.
Actually, that’s not really right. If there is an efficient market (using “efficient” to mean that transaction costs are low) for a risk, then I can infer the quantification of the risk from the market price. This is not a logical “rule” of economics like we’ve been discussing; its true only to the extent people are smart. But it turns out to be empirically supported, for the most part.
That's not a prediction. If you had one, there would be no risk.
No… You can measure and predict risk.
Predicting risk is not the same as predicting the outcome.
As I said, what he has is a promise for the future that he regards worth something, but it might turn out to be not worth anything. That's virtually the same thing as for political promises, to come back for the reason of this exchange. I don't see why you think that's any better for economic risk or promises than for political ones. In both cases predictions are almost impossible.
Everyone has something to invest. Their time, their ability to make promises, etc.
And some people are more equal than others.
To come back to the main point I was trying to make here: Markets are useful for people to express preferences that are mostly "here" and "now". I guess that theoretically, if the players in your market (consumers and producers) are intelligent enough (and rational enough) they can also decide what action to take arbitrarily long in the future to reach what they want. Just that in practise that isn't feasible due to the complexity of the system. What people do instead is that they formulate some rough, generalized goals for the future that express their overall preferences. Then they set the system up such that their individual "here and now" preferences work towards these macro-goals "automatically". This might not be a solution as "efficient" as letting the market "handle it", but the question is whether the scenario in which the market can and does handle it is build on a realistic expectations about what humans can know and decide on a day-to-day basis. The great success of the economic system lies in its simplicity. Even the dumbest of the dumb can learn that getting money is the thing to do. But the more your expectations on people's abilities to plan ahead and to express their preferences in micro-transactions increase, the less plausible is becomes this will work.
Best,
B.
One thing I think we don't get over is that you consider a political system, even a democratic one, as something that imposes on people things they don't want. . . . What I have tried to say, maybe not explicitly enough, is that people living under a certain constitution have agreed, (ideally) voluntarily, that this way to organize their lives is one they do accept. They have entered a 'social contract', and thus have also agreed that they will accept decisions that do potentially not work out in their individual favor because they do believe that on the average the benefit they have from being part of that social contract exceeds the drawbacks.
ReplyDeleteOf course. But so what?
Particular laws, even a democratic society, are necessarily (by definition) rules imposed on people by the government that force them to do things they otherwise would not, on threat of violence.
That “social solidarity” as a concept is linked to fascism, that fascism (or communism, which is the same thing) is the natural end-point.
Which is obviously nonsense. You seem to wrongly imply solidarity can not go along with a constitution that protects minorities or property rights.
By selecting what constitutes a protected minority, you are privileging some cleavages in society (race, gender, etc.) over others (e.g., wealth, religion). Obviously, you do not believe that (for example), “the wealthy” are the sort of minority that is entitled to constitutional protection.
The problem is, Bee, that every law creates a minority, even if that minority consists merely of those people who would benefit by the conduct proscribed by the law.
Once you start down the path of saying that it is ok to sacrifice the interests of a minority in society, because some extrinsic concept of “society” benefits by reducing the differences along an un-privileged cleavage, you are into communalism and the path to fascism is a short one. The fact that you believe that it is ok to protect some minority cleavages (race, etc.) but not others (wealth, etc.) is not a defense, but merely your own moral view. And history shows that whichever group you start with – the wealthy (burghers, etc.), homosexuals ("deviants"), etc. – it isn’t long before you get to the Jews.
We are out of economics here, Bee--although into another area which I’ve spent far longer thinking about than you and in which you are going to get schooled if we continue along this path. I suggest if you want to continue on this that we separate the discussion, maybe you put up another blog post and we do it in the comments there.
What was the “volk” if not social solidarity? What about the "proletariat"?
The German constitution put into place after WW II is a mixed economy and what you would probably call a 'welfare state'. It thus has a place for solidarity - if that is what people wish, since it is a democracy.
The “welfare state” and “solidarity” are not related concepts Bee. The welfare state is a post-war concept common to all contemporary democratic societies, and it is explainable in terms of the marginal declining utility of money and assymetric risk perceptions.
Social solidarity, on the other hand, is a 19th Century European (principally German, to a lesser extent French beginning in the 1890s) cultural concept. Its certainly true that contemporary German and French politicians use social solidarity to sell welfare programs to the populace, but that is just an appeal to a local prejudice.
Now, back to the main event…
So we are enacting regulations based on a pure voting system now, regardless of whether the harm to the minority by virtue of the regulation exceeds the benefit to majority? That’s a “yes” or “no,” and I think its high-time you answered it. (Of course, this is exactly where social theory says the “German perspective” leads.)No. You evidently indeed don't understand it. Indeed.You don't compare one person's status with somebody elses. You compare their opinion about one macro-state to a that about a different macro-state. And yes, to repeat it even one more time though it might hurt: everybodies opinion has the same weight. That's what democracy is all about.If that’s the answer, then shouldn’t you have given a “yes” above? I really do not understand. It does not make sense to me. I do not get it.
I really didn't think it would be so hard to understand for you. I answered "no" to your question because you assert "regardless of whether the harm to the minority by virtue of the regulation exceeds the benefit to majority". I must have told you two dozen times that A) you don't compare some people's harm with other people's benefit. You compare their liking of one organization (regulation, law) with their liking of a different one (a previous one or a suggested one). And B) the task is not to find SOME regulation that the majority can push through, but to find the regulation the most people consider the best. That means in particular if you have a solution for group X without making group Y unhappy, that's the thing to do. That means in particular whenever you can solve a problem without inducing constraints on anybody who doesn't want them, that's the thing to do. If that is always possible, that would be the outcome. I am just skeptic that always can be done.
I quote your response in full because I don’t understand a word of it. The proposition (which you accept) is that by voting you cannot tell (because of depth-of-preference) from how a vote comes out whether it will be a net-benefit or net-negative. You only know how many people think it’s a positive, and how many a negative, but not how strongly they feel about it. The question I asked you is: Whether this is what you propose, that we adopt regulations based on the outcome of simple votes, even recognizing that we will (in many cases) be adopting regulations that are a net-negative because the minority feels more strongly than the majority.
That is “yes” or “no.” “Lets try to find what most people consider best” is not an answer, and neither is “sometimes you can craft a regulation that nobody opposes.”
The point is that people disagree on the matter and there is no reason (as I said previously) that everybody has to agree with you on what should be disregarded because you consider it "Schadenfreude".
My point is not that someone’s opinion should be disregarded as schadenfreude. My point is that you are not willing to defend the position you set forth.
Onwards to macro-preferences…
a) I don't understand why you are restricting it to the economy.
Your argument is that “macro-preferences” are not taken into account by the science of economics. I am addressing each of your “macro-preferences” examples and arguments and explaining why your argument is mistaken.”
b) Whether or not the market 'can' in principle handle it isn't the question, but weather it is in practice feasible to let the market handle it.
Huh?
All macro-features originate in micro-features. There is thus the possibility that people if they understand and study the market enough are indeed able to express their own macro-preferences in their individual actions.
Huh? This is the problem with the “macro-preference” concept… you restate and alter it each time, as soon as I address each statement of it. This is why I do not think it is coherent. Maybe you should purt forth a formal definition.
I'd say a macro-preference is a preference about macro-variables that is expressed in macro-variables.
That’s tautological. What’s a macro-variable except something about which people have macro-preferences?
Something like: "I want Bill Gates to pay $100 Million to fix the potholes on American highways" is not a macro-preference. Neither is "I don't want to starve". "Nobody should starve" is a macro-preference (though it's too ambiguous to be useful, it's just an example). It is of course related to the individual experience, but the point is in its generalization, such that it becomes an ingredient of organization.
If this is your definition, then a “macro-preference” is a set of ordinary preferences cognizable by economics that are being lumped together linguistically in an effort to evade analysis. I referred in my post to how this kind of "macro-preference" can be broken into two (or more) easily analyzable ordinary preferences, and when these are analyzed the concept is shown to be pointless. Are you going to respond to that or not?
As to your third concept, a preference for one set of rules. That fits pretty well. You keep repeating the market handles this, yet when I keep asking you how so you fail to answer. The way I see how these preferences for rules are in fact handled is via our political system.
I will repeat it again: People do, in fact, come together to agree on sets of rules to abide by, and there are numerous examples of these consensual agreements in our society. The examples I’ve given are the ISDA and condominiums. Why aren’t those examples?
Two general comments on your response:
1) You have not engaged, or apparently attempted to engage, my attempt to classify aspects of the macro-preference concept that you set forth previously. Instead, you have attempted to restate it in a new form.
2) You have now fully walked away from your last rendition of macro-preference, which had to do with the amorphous benefit one obtains from knowing that other people are doing things to help a third group of people (jealousy/schadenfreude).
Back to the risk concept….
As I said, what he has is a promise for the future that he regards worth something, but it might turn out to be not worth anything.
If he can, at T1, sell it, then it is, in fact, worth something at T1. The fact that it may turn out poorly at T2 does not change things – at T1, it has value because people assign it value. As the simplest demonstration, if he can sell it, its value is (at a minimum) what he can sell it for.
I don't see why you think that's any better for economic risk or promises than for political ones. In both cases predictions are almost impossible.
Because the market is able to value (measure) risk. The value of a risk at T0 (or T1) is not equal to how it will ultimately turn out at T2. The value of a risk at T0 (or T1) is what the risk can be purchased or sold for.
The market for risks thus allows risks to be compared to each other, and accurate values (or at least the best possible approximation) obtained.
Now, of course it would be best if the value of a risk at T1 (transaction time) accurately reflected the probabilities of each possible outcome. Valuing a risk on the market creates a secondary market for tools for valuing risk. Over time, resources are allocated to the superior tools and away from inferior ones. Thus, over time, the market will, in fact, use valuations that more accurately reflect underlying probabilities, than if the government were to displace the risk-valuation market and attempt to value risk itself.
This, by the way, is an empirically demonstrated result.
I guess that theoretically, if the players in your market (consumers and producers) are intelligent enough (and rational enough) they can also decide what action to take arbitrarily long in the future to reach what they want. Just that in practise that isn't feasible due to the complexity of the system. What people do instead is that they formulate some rough, generalized goals for the future that express their overall preferences.
Or, put another way, people are rational value-maximizers, and they make value-maximizing decisions when they decide to spend how much of their time studying markets, investing for their own futures, or spending time with their loved ones and children etc.
What you have discovered is another way in which the market works.
Then they set the system up such that their individual "here and now" preferences work towards these macro-goals "automatically". This might not be a solution as "efficient" as letting the market "handle it", but the question is whether the scenario in which the market can and does handle it is build on a realistic expectations about what humans can know and decide on a day-to-day basis.
It’s just words strung together… no meaning arises from the text.
Hi Amos:
ReplyDeleteObviously, you do not believe that (for example), “the wealthy” are the sort of minority that is entitled to constitutional protection.
Obviously you still didn't understand what I mean, for of course "the wealthy" constitute a minority as any other. Whether or not their rights are currently well protected is a different question. Haven't I repeated sufficiently often now that I do acknowledge our political systems presently do not work very well? Can't you see that this is exactly the point I have been criticising about the essay (which was content of this post in case anybody remembers it). They are talking about regulations. But who decides what regulations are good?
Let me try once again to put it differently what I have been saying many times in the hope that you can maybe understand it. You like the way the economic system works towards an optimum because that optimum has the feature that there is no possibility to improve it. The point you are criticising about our political systems is that it is possible to push through *some* decision, as long as it has a majority, notwithstanding the question whether that is the best possible option. In fact I am afraid in almost all cases that is not the case. That is exactly the point I am saying must be improved. I don't see why you have a problem with that for it if was true what you say that a free market is the "best" possible solution, that is what the political system should also identify as best, since people have a free choice.
The problem is, Bee, that every law creates a minority, even if that minority consists merely of those people who would benefit by the conduct proscribed by the law.
Once you start down the path of saying that it is ok to sacrifice the interests of a minority in society, because some extrinsic concept of “society” benefits by reducing the differences along an un-privileged cleavage, you are into communalism and the path to fascism is a short one. The fact that you believe that it is ok to protect some minority cleavages (race, etc.) but not others (wealth, etc.) is not a defense, but merely your own moral view. And history shows that whichever group you start with – the wealthy (burghers, etc.), homosexuals ("deviants"), etc. – it isn’t long before you get to the Jews.
We are out of economics here, Bee--although into another area which I’ve spent far longer thinking about than you and in which you are going to get schooled if we continue along this path. I suggest if you want to continue on this that we separate the discussion, maybe you put up another blog post and we do it in the comments there.
Thanks, not interested. I've told you several times that I don't want to discuss your or mine political opinion. I don't care who you vote for.
I would greatly appreciate if you would stop assigning things to me I never said. The only result is that you undermine your own credibility. I have never said anything along the lines that sacrificing anybodies interests is okay. It is however trivially true that laws do always constrain the interests of some people, otherwise we wouldn't need them. Are you really trying to argue that therefore we shouldn't have any laws at all? Because you can only protect people's rights on the expenses of also constraining their freedom?
What I have been saying is people need a way to express what their preferences are, and the economic system does not provide a good way to express all preferences they do have. What I have been saying is the best thing you can do is to ask people for their opinion. That means they need to have a way to express them. That is what the political system is good for. Best,
B.
Hi Amos:
ReplyDeleteI quote your response in full because I don’t understand a word of it.
I am genuinely sorry about that. I think we are really talking past each other. Let me try this one more time. What I have been saying is democracy means everybody's opinion, or call it preference, is equally important. When I say I don't want to measure them, that's what I am saying. It's one person, one voice. I don't care about anybody's 'depth of feeling', I am not a psychologist and I don't believe trying to weight somebody's happiness by putting electrodes on their brain will get us anywhere anytime soon. Besides this, we are talking about a large sample of people and there is good reason to believe that on the average 'depth of feeling' is similarly distributed and uncorrelated with other statistical measures. There have occasionally been suggestions that people with underage children should be allowed to vote for their children and thus get a measure with higher importance. I am not in favor of that, but I am not sure whether that is relevant anyway.
Does that clarify it?
Now political decisions are supposed to address specific issues. There are many ways to deal with them. Each of them represents an option, which people can like, or don't like (Sum up all their preferences on that option, it adds to one. Yes, once again, it's one person, one voice.)
Now to your problem that political decisions try to minimize people's unhappiness, potentially by decreasing happiness for other people. That's the point you don't like, right? Well, what you like to forget is that everyone of these people has agreed to accept these solutions even if they themselves do not profit from one of them. That's the thing with making a contract. You make it because on the average you think you are better off. That doesn't guarantee only things can happen that will make you happier. People accept decisions even if they don't like them because at the very least they do have a way to express their preferences in a democracy, and they have a possibility to influence what's happening. As I have said above, I think if they don't like that altogether they should be allowed to leave the social contract. In practice, people move out of country. Eg to avoid taxation.
But to repeat what I have said earlier: if there exists a solution to a problem that does not require making anybody less happy, that is the solution that should emerge as the optimal one, and it should, if it is correct what you say, be the one you are advocating (ie leave it to the market). I just doubt this is indeed in practice always a solution that works.
My point is not that someone’s opinion should be disregarded as schadenfreude. My point is that you are not willing to defend the position you set forth.
I am not presently interested in discussing my personal political opinion. Evidently, it differs from yours. I am asking for a system that is able to address all people's opinions about political decisions and to implement them. I don't think the system we presently have works very well. From a pragmatic point of view, you should realize that this system isn't going to vanish any time soon anyway, so why don't you try to be constructive and help me with that? As I have said several times, if it was true what you say, that the free market is such a great thing, then people can simply decide that's what they want and not use their political system to influence it. This option thus includes yours, just not the other way round.
Best,
B.
The point you are criticising about our political systems is that it is possible to push through *some* decision, as long as it has a majority, notwithstanding the question whether that is the best possible option. In fact I am afraid in almost all cases that is not the case. That is exactly the point I am saying must be improved. I don't see why you have a problem with that for it if was true what you say that a free market is the "best" possible solution, that is what the political system should also identify as best, since people have a free choice.
ReplyDeleteMy point is actually different from that. My point is that it is impossible to design a political system that accurately distinguishes net-positive regulations from net-negatives, and the market takes care of this automatically. This is not a criticism of our political system, or any political system – it is a criticism of regulation as a general matter. The point is that it is an unsolveable problem.
I have never said anything along the lines that sacrificing anybodies interests is okay.
Actually, that’s exactly what you’ve been saying. At least, it’s the inevitable consequence of what you’ve been saying, and what I’ve been trying to do is get you to acknowledge that.
Are you really trying to argue that therefore we shouldn't have any laws at all? Because you can only protect people's rights on the expenses of also constraining their freedom?
No. What I said (that you are responding to) is that social solidarity cannot be a goal of society. Whether something is a net-positive or net-negative is nothing more the sums of its effect on individual preference satisfaction. Solidarity is not an end that justifies imposing a cost on anyone.
I quote your response in full because I don’t understand a word of it.
I am genuinely sorry about that. I think we are really talking past each other. Let me try this one more time. What I have been saying is democracy means everybody's opinion, or call it preference, is equally important. When I say I don't want to measure them, that's what I am saying. It's one person, one voice.
That’s fascinating, but it has nothing to do with the question you were responding to, which was whether you were willing to accept net-negative regulations that are supported by a majority of the people.
Besides this, we are talking about a large sample of people and there is good reason to believe that on the average 'depth of feeling' is similarly distributed and uncorrelated with other statistical measures.
That’s actually a responsive argument! It’s wrong, but at least its responsive.
It’s wrong because there is every a reason to believe that depth of feeling is differentially distributed in ways that matter for regulation. Let me take the non-regulatory example of progressive (redistributive) income taxation. There is every reason to believe that people who care more about money choose professions in which they work harder, spend more of their time at work, in order to make more money. For that reason, even though the marginal utility of money declines, it is not necessarily “fair” to tax at a greater rate the income of people who earn more so as to distribute that money to people who earn less.
Actually, this is almost always true, that the people who care most about a regulation are going to be the people who are harmed by it, who are not going to be able to execute transactions they otherwise would. Indeed
Depth-of-feeling does not just mean each individual’s capacity for happiness (although it certainly means that). It also means, “how much is the cost that this regulation will impose on each person? $1 or $10?”
I don't think the system we presently have works very well. From a pragmatic point of view, you should realize that this system isn't going to vanish any time soon anyway, so why don't you try to be constructive and help me with that?
The best bet is to limit government’s ability, constitutionally, to regulate. Other than that, its really a lost cause, can’t be done, won’t work, isn’t worth bothering.
Hi Amos,
ReplyDeleteGah, I wasn't even finished with your last comment. A quick reply to what you just wrote. Saying something is "inevitable" is very different from saying something is "okay".
My point is that it is impossible to design a political system that accurately distinguishes net-positive regulations from net-negatives, and the market takes care of this automatically.
Your idealized market in an ideal world with ideal people takes care of that. Maybe. But who cares. This world isn't ideal, you can only do as best as you can. That's what I'm trying, whereas you keep insisting on your idealized free-market utopia.
This is not a criticism of our political system, or any political system – it is a criticism of regulation as a general matter. The point is that it is an unsolveable problem.
Saying it's an "unsolveable problem" doesn't help anybody. As far as I am concerned, democracy is a pretty good idea compared to other forms of government. So we should use it as good as we can.
No. What I said (that you are responding to) is that social solidarity cannot be a goal of society. Whether something is a net-positive or net-negative is nothing more the sums of its effect on individual preference satisfaction. Solidarity is not an end that justifies imposing a cost on anyone.
Well, I never said it is or should be. I said people should have the possibility to decide for themselves.
That’s fascinating, but it has nothing to do with the question you were responding to, which was whether you were willing to accept net-negative regulations that are supported by a majority of the people.
Naively, I would say no. But I'm not sure what you mean exactly, can you define "net-negative"?
Actually, this is almost always true, that the people who care most about a regulation are going to be the people who are harmed by it, who are not going to be able to execute transactions they otherwise would [...]
Well, all they have to do is make their case understood. Unlike in your world, people's preferences about politcal decisions do depend on what others think about that. If some people think it's not fair because xyz, their task is to convince people of it. That's how the game works. You can also assert that people who care most about a regulation are the ones who are most likely to voice their opinion anyway, whereas the rest is more likely to remain indifferent. Best,
B.
Hi Bee,
ReplyDeletePerhaps science can help the sum of our economic woes yet first science itself must be saved. In his inaugural address Obama today at least has us believe he may support science being saved when he said:
“ We will restore science to its rightful place, and wield technology's wonders to raise health care's quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. All this we will do. “
Best,
Phil
Your idealized market in an ideal world with ideal people takes care of that. Maybe. But who cares. This world isn't ideal, you can only do as best as you can. That's what I'm trying, whereas you keep insisting on your idealized free-market utopia.
ReplyDeleteI never said its utopia. I said that as conclusion of economic science, you can't do better with regulation than the market will do. Perfect? No. Good? Maybe. But without question, there's no way to do any better.
Saying it's an "unsolveable problem" doesn't help anybody.
Well, there are things it tells us that are helpful. Like "don't regulate" and "focus on the transaction costs." But, yeah. Grim, isn't it?
democracy is a pretty good idea compared to other forms of government. So we should use it as good as we can.
And one of those ways is by not regulating.
That’s fascinating, but it has nothing to do with the question you were responding to, which was whether you were willing to accept net-negative regulations that are supported by a majority of the people.
Naively, I would say no. But I'm not sure what you mean exactly, can you define "net-negative"?
By net-negative, I mean that it results in an aggregate reduction in utility, taking into account its differential utility impact on each individual and summing.
Solidarity is not an end that justifies imposing a cost on anyone.
Well, I never said it is or should be. I said people should have the possibility to decide for themselves.
That doesn't work. Either it is permissible to pass laws for the purpose of advancing social solidarity -- which laws are by logical necessity going to impose a cost on some group of people in society -- or it is not permissible to do so. There's not third route.
Actually, this is almost always true, that the people who care most about a regulation are going to be the people who are harmed by it, who are not going to be able to execute transactions they otherwise would [...]
Well, all they have to do is make their case understood.
That's very naive Bee. Consider my favorite oppressed minority, the wealthy. Many of them strongly believe that it is unfair for them to shoulder more of the national tax burden than others. They have made this case clearly. And yet... (Which is not to say that they're right.)
If some people think it's not fair because xyz, their task is to convince people of it.
"Fair" and unfair depends on one's reference frame. I think it is unfair for one group, by lobbying for regulation, to impose on other groups the transaction cost of having to "convince" anyone that they should be allowed to keep doing what they've been doing.
Are you ready for transaction costs and externalities? You seem to have given up most of your positions regarding the completeness of the math.
Hi Amos:
ReplyDeleteYour argument is that “macro-preferences” are not taken into account by the science of economics.
What I am saying is that de facto people do not express many of their macro-preferences via their economic transactions, and I doubt that it is realistic to assume they will do it. I am thus saying the options are you either just ignore them, which means you are ignoring preferences people regard important for their happiness (that's what you are suggesting), or you offer them a different way to express these preferences (what I am suggestion), a version of which they already have, it's their political system. Just that the latter doesn't work as well as it could, unfortunately, thus I think people are not as happy as they could be.
I am addressing each of your “macro-preferences” examples and arguments and explaining why your argument is mistaken.”
What you are actually doing in your 'examples' is claiming people don't have these preferences, instead they have other preferences, namely these that nicely fit into your economic model. You also continue to ignore the point that even if people do indeed have a way in principle to express their macro-preferences in their economic transactions, they might not know how to.
b) Whether or not the market 'can' in principle handle it isn't the question, but weather it is in practice feasible to let the market handle it.
Huh?
I just looked up 'feasible' in a dictionary to make sure. The sentence says exactly what it was supposed to say. To repeat it once again, I am not asking what your market could do if all people can be brought to fulfill the assumptions that you need to arrive at the nice conclusions, but what it does do in practice. Real people, real world.
All macro-features originate in micro-features. There is thus the possibility that people if they understand and study the market enough are indeed able to express their own macro-preferences in their individual actions.
Huh? This is the problem with the “macro-preference” concept… you restate and alter it each time, as soon as I address each statement of it. This is why I do not think it is coherent. Maybe you should purt forth a formal definition.
Yes, maybe I should do that. I have played around with that for a while, but the terrain is somewhat fuzzy. Have you ever seen a strict formal definition for an 'emergent property' of a system? I haven't. Let me know if you find one, because it's really the same thing. Macro-variables (or emergent variables) are just variables that describe the system as a whole, and do not apply at the level of the single elements. For a physical system, the temperature or viscosity are examples. You could add to this extrinsic quantities, though you can apply them to subsystems as well, so you need a specifier. The total energy, the poverty rate, things like that.
I am not sure what about my above statement caused you to become confused again. I haven't changed anything, neither here nor earlier, about that concept. I have just added that, since I believe in reductionism, I think you could in principle derive all these macro-variables and their behavior from the micro-variables. Just that I doubt this is always practical. And then you still have the collective action problem.
I'd say a macro-preference is a preference about macro-variables that is expressed in macro-variables.
That’s tautological. What’s a macro-variable except something about which people have macro-preferences?
I have the strong impression you think it is tautological because you haven't considered the possibility that I am not just randomly typing on a keyboard.
I referred in my post to how this kind of "macro-preference" can be broken into two (or more) easily analyzable ordinary preferences, and when these are analyzed the concept is shown to be pointless. Are you going to respond to that or not?
I have replied to that already above. Probably several times. For one, you are always starting from the assumption that everything people care about is their own happiness which, if I understand that correctly, is encoded in their utility. It also seems to me these utilities are not only personal, but also independent of each other (right? wrong?). They optimize their utility because they have an opinion and a preference about all there is and all there can be and all they can possibly do (right? wrong?). What I am trying to say is that this doesn't sound like a description of reality to me. And second, even if people could break down their preferences in some way to express them by investing their money they might just not do that. Not to mention that this brings back the problem I have repeated three dozen times, that people's influence is then inevitably weighted by their wealth.
Then they set the system up such that their individual "here and now" preferences work towards these macro-goals "automatically". This might not be a solution as "efficient" as letting the market "handle it", but the question is whether the scenario in which the market can and does handle it is build on a realistic expectations about what humans can know and decide on a day-to-day basis.
It’s just words strung together… no meaning arises from the text.
It would be more helpful if you could ask questions that I can try to answer instead making silly remarks like this. This was just another try to say what I have been saying from the very beginning, I will try it again: The economic system is composed of many individual elements that act according to their micro-interests. From that, there arises a macro-behavior of the system that can be very complex. As time has shown, the behavior is overall desirable and works towards many of our goals, that's why we have come to the conclusion the free market is a good idea. The fact that the system does work towards goals we like is however not guaranteed. Thus, you need to monitor whether the micro-behavior of people does indeed work towards a macro-trend they also prefer. Defining it this way doesn't answer the question (though that is your answer). What I am telling you is simply: You have to find out what their macro-preferences are. And if they don't match with what the system works towards, you change the incentives such that their micro-behavior works towards their macro-preferences. Iterate that process, since people might change their mind. (Variation, evaluation, optimization). That is in a nutshell the interplay between our political and economic systems.
Best,
B.
«What I have been saying is people need a way to express what their preferences are, and the economic system does not provide a good way to express all preferences they do have.»
ReplyDeleteWhat you are not understanding is that either there are no regulations capable of attain those preferences or that no individuals which express those preferences are aware or can be aware or measure the total costs of such regulations.
If you are honest, you can't simply talk about preferences. You must talk about preferences and the costs that implies to attain them. Other way, you are talking about the need to satisfy some kind of preferences of the majority, at any cost (to minorities, or even to another majority, or even to themselves).
Which implies that you can't seriously speak about the need of a given way to express some kind of preference when you are not able to provide a way to evaluate its costs (and hence, its real benefits).
ReplyDeleteHi LoboGris,
ReplyDeleteyou are talking about the need to satisfy some kind of preferences of the majority, at any cost (to minorities, or even to another majority, or even to themselves).
Why don't you read what I have already told Amos more than two dozen times above, I am really tired of repeating myself. A) Of course there can be costs for working towards their macro-preferences. I have never denied that (just go an read it). That is why I am saying you need a system that is able to react to changes. Variation, evaluation, optimization. The cost is to high and people figure they don't want it? Then they'll change it. They can very possibly decide not to have any regulations if that's what they want. B) The assertion that any cost is okay is wrong, as I have said several times. The point is not to find *some* solution that you can push through at whatever cost, but to vary that solution until you find the best one. Again, if it is true that the pretty world you and Amos are envisioning can be realized indeed, then that would be what people would chose and that's what would come out of it. So what's your problem?
Best,
B.
"What you are not understanding is that either there are no regulations capable of attain those preferences or that no individuals which express those preferences are aware or can be aware or measure the total costs of such regulations."
ReplyDeleteWell that's kind of silly, we aren't even talking about anything specific. I ran small scale and/or short term tests at IBM to determine cost impacts. It would be like trying workfare instead of welfare at a single location to see the impact.
People used to say one of the key reasons for IBM's early success was that it put an unusually large amount of power in the hands of the lowest level manager. It was true, I could do virtually anything if I got any manager to give the go ahead. In practice, people begin to associate you with the power of that manager and you eventually don't even need to get a manager involved for that process.
Now also in practice there can be tyrants that you really want lots of good people to have more power than... like this guy:
“We are grateful to The Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subject to the bright lights of publicity during those years. But, the work is now much more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.” David Rockefeller, 1991 Trilateral Commission meeting speech
«The point is not to find *some* solution that you can push through at whatever cost, but to vary that solution until you find the best one.»
ReplyDeleteBut what if there is no way to evaluate? If so, you can never find a better solution. You are condemned to swing between different flavours of political systems, trying to find a solution but never attaining it. And this is actually which occurs in all democratic countries, which many times evolve even to authoritarian systems and even dictatorships (yes, by means of democracy)
«Again, if it is true that the pretty world you and Amos are envisioning can be realized indeed, then that would be what people would chose and that's what would come out of it. So what's your problem?»
The problem is that you are assuming that we can attain that pretty world by means of expression of preferences in a political system (democracy, by instance), when this is actually the failure of all your arguments.
The attainment of such a world is not possible by democratic choices, but by individual choices and free association, something that state and political system does not allow, because they prescribe rules for everyone, even if they don't want them.
And when i say these things, i'm not raising myself to the level of an envisioned which knows what people really need. From my perspective people can do whatever they want, except to impose to others their beliefs and the costs and errors of their beliefs. I don't matter what people want to do with their lifes. I'm worry about what people does to my life and the life of the people that has the same beliefs: they prohibit us to self-determinate in the way we think better for us.
And state and any political system consist in this fundamental prohibition. Even if it is called democracy.
Hi LoboGris,
ReplyDeleteBut what if there is no way to evaluate?
That's why I'm saying we need one.
If so, you can never find a better solution.
So we better make sure we have one.
You are condemned to swing between different flavours of political systems, trying to find a solution but never attaining it.
Generally, there can be different equlibria of a system, swinging between several that are equally good is not a prioi excluded but kind of unlikely since the system has a lot of friction. Either way, your observation is right, but the actual reason systems are fluctuating is that they have inaccurate memory and an insufficient learning curve. That is something that could be addressed with a more scientific approach.
And this is actually which occurs in all democratic countries, which many times evolve even to authoritarian systems and even dictatorships (yes, by means of democracy)
Which is an indication that, as I have said three dozen times, in practice democracy doesn't work as well as it should, and it isn't taken seriously enough in its function. It is in its functionality severely lagging behind the economic system, which is enourmously flexible and adaptive. That imbalance causes a lot of problems.
«Again, if it is true that the pretty world you and Amos are envisioning can be realized indeed, then that would be what people would chose and that's what would come out of it. So what's your problem?»
The problem is that you are assuming that we can attain that pretty world by means of expression of preferences in a political system (democracy, by instance), when this is actually the failure of all your arguments.
This is an empty claim. I have suggested an option of which the solution you are arguing is the best is part. People can chose it if they want. In contrast to you and Amos, I am trying to be realistic. We do have democracies. They work to some extend, though not as good as can be. People use them. They seem to be fairly happy with that, though I believe not as happy as could be. Democracies are not going to go away any time soon. If you believe not using a democractic system is the best option that there is, then the best way to get there is to make sure people can find that option. That means you need to make sure the optimization process in the system we presently have does work well. That's what I am saying. I don't know what the outcome will be. I do actually think that it might well be in some thousand years we indeed will not need any political systems anymore because people have figured out how to express their preferences without them. But we aren't there yet. Best,
B.
But what if there is no way to evaluate?
ReplyDelete«That's why I'm saying we need one.»
The fact that you need does not imply the possibility of evaluation. Indeed it is not possible. And YOU think we need one because you assume that a society can and must find a better solution by means of political system. Indeed, that is also false.
«Either way, your observation is right, but the actual reason systems are fluctuating is that they have inaccurate memory and an insufficient learning curve. That is something that could be addressed with a more scientific approach.»
Remember that in your proposal the people themselves are those who express preferences and so, they are the ones who must evaluate, and so, they are the ones that must have tools to evaluate. So, you are implying that all people must be scientific people. This seems not feasible (apart that, even if so, there is no means to evaluate)
«Which is an indication that, as I have said three dozen times, in practice democracy doesn't work as well as it should, and it isn't taken seriously enough in its function.»
You are denying a priori the alternative of the fact that democracy can't solve the problem, that the problem is not that democracy does not work as it should but instead, democracy is part of the problem.
«I have suggested an option of which the solution you are arguing is the best is part. »
I have demonstrated you that the solution i'm arguing is not included in the set of solutions you admit. I repeat what i said in my last comment (which seems to have been ignored by you):
The attainment of such a world is not possible by democratic choices, but by individual choices and free association, something that state and political system does not allow, because they prescribe rules for everyone, even if they don't want them.
And when i say these things, i'm not raising myself to the level of an envisioned which knows what people really need. From my perspective people can do whatever they want, except to impose to others their beliefs and the costs and errors of their beliefs. I don't matter what people want to do with their lifes. I'm worry about what people does to my life and the life of the people that has the same beliefs: they prohibit us to self-determinate in the way we think better for us.
And state and any political system consist in this fundamental prohibition. Even if it is called democracy.
Your argument is that “macro-preferences” are not taken into account by the science of economics.
ReplyDeleteWhat I am saying is that de facto people do not express many of their macro-preferences via their economic transactions, and I doubt that it is realistic to assume they will do it.
How do you know this and why do you think it? It is true that there are no market options for many things that people prefer. But this does not mean the market has failed to take those preferences into account. In fact, it implies the opposite.
Consider my “scuba equipment” example. The market has determined, contrary to my preference, that it would be a poor use of resources to allocate 10% of the national economy to the design and production scuba equipment. My “preference” is being expressed (see, I said it), but, balancing that preference against other people's, utility for society as a whole is greater if resources are allocated in a manner other than that which I would prefer.
Similarly, the fact that there is nothing on the market for some of the preferences you mention implies that, in fact, the preferences are not strong enough to justify the cost of satisfying those preferences. If the demand were really there, someone would develop and sell the supply.
I am addressing each of your “macro-preferences” examples and arguments and explaining why your argument is mistaken.”
What you are actually doing in your 'examples' is claiming people don't have these preferences, instead they have other preferences, namely these that nicely fit into your economic model. You also continue to ignore the point that even if people do indeed have a way in principle to express their macro-preferences in their economic transactions, they might not know how to.
Well, I suppose if you were studying electromagnetism, you could try to study it using the aether. You could have a lot of interesting conversations about aether, and maybe produce some nice math that worked sometimes.
But if you wanted to describe the world accurately, you’d talk about photons instead, and then all the math would work out.
Your macro-preferences are like the aether. A concept that, even if is linguistically coherent (which I don’t think it is), is better displaced by other concepts which more accurately describe the world and are cognizable by the science. What my “examples” demonstrate is that everything you have described as a macro-preference is cognizable by the "photons" of ordinary economics, which are individual utility functions.
Yes, maybe I should do that. I have played around with that for a while, but the terrain is somewhat fuzzy. Have you ever seen a strict formal definition for an 'emergent property' of a system?
No, but if you want to stick to that definition, it works fine for me since I know what an emergent property is. Of course, the argument still doesn’t work, but that’s a fine definition (if you’ll really stick with it).
I have the strong impression you think it is tautological because you haven't considered the possibility that I am not just randomly typing on a keyboard.
I don’t think that. But I don’t think you’ve tried to really formalize your thoughts about social matters in a consistent way.
For one, you are always starting from the assumption that everything people care about is their own happiness which, if I understand that correctly, is encoded in their utility. It also seems to me these utilities are not only personal, but also independent of each other (right? wrong?).
Doesn’t matter. But, to answer the question, each person’s utility function is there own, but other persons’ expressed satisfaction or feelings may be factors affecting one’s utility.
The economic system is composed of many individual elements that act according to their micro-interests. From that, there arises a macro-behavior of the system that can be very complex. As time has shown, the behavior is overall desirable and works towards many of our goals, that's why we have come to the conclusion the free market is a good idea.
With you so far, accepting “macro-behavior” to mean only “emergent property.”
The fact that the system does work towards goals we like is however not guaranteed.
This is where I’ve lost you. What’s guaranteed is that the market will allocate our finite resources toward greater total utility generation (the greatest good for the greatest number), in general and over time, than regulation, apart from exceptions which are both rare and impossible to identify.
Thus, you need to monitor whether the micro-behavior of people does indeed work towards a macro-trend they also prefer.
Even accepting your prior sentence as true (which it isn’t), this sentence doesn’t follow. There are several problems with it. First, you can’t “monitor” in this way. That’s the mind-reading problem. Its physically impossible. Second, and perhaps this is a threshold issue, who is “you” in the sentence? Third, you hit the mind-reading issue a second time when you want to evaluate preferences regarding the emergent properties. Fourth, even putting all of that aside, what you’d really care about is not whether people prefer the emergent property, but rather whether there is some alternative (with its own emergent properties) that they would prefer more. It is this which economics tells us doesn’t exist.
What I am telling you is simply: You have to find out what their macro-preferences are.
All we need to know is their preferences. If a “macro-preference” is an emergent property like, say, “market volatility” or “rate of poverty,” or “lack of health insurance,” these reduce to “people want more money and less risk of having less money, and also want to be able to buy stuff with their money.”
The question is then, how do you maximize people getting these things (or whatever else) they want? And economics tells us that we can’t beat the market with regulation.
(This, by the way, is why the “emergent property” definition of “macro-preference” doesn’t work for you. Your proposal that a macro-preference was a preference not about outcomes, but about the set of rules themselves got around this, but failed for different reasons. Your third proposal, that a macro-preference is a preference about whether other people’s preferences are being sacrificed with the intent of benefiting another group, also got around this, but bumped into the schadenfreude problem.)
In any event, you can’t find out people’s preferences in a way that would let you sum them through society, because preferences have different depths, without market transactions anyway.
And if they don't match with what the system works towards, you change the incentives such that their micro-behavior works towards their macro-preferences.
Putting all of the prior problems aside, and even if you could predict the “emergent properties” perfectly, before you “change the incentives,” you’d have know that the total benefit from the change (swapping emergent properties) will exceed the total loss caused (transactions foregone, transaction costs, misallocated resources, etc.). You can’t ever know this (the mind-reading problem), and in fact there’s every reason to believe, in every such case, that the change is more likely to be a net-negative than a net-positive (the problem that resource allocations compound over time).
Thank you for formalizing your definition and clarifying your prior argument. Do you see now why you’re wrong?
Hi LoboGris,
ReplyDeleteWhy don't you try to understand what I am saying before attacking it? None of your arguments even hits the target.
The fact that you need does not imply the possibility of evaluation. Indeed it is not possible. And YOU think we need one because you assume that a society can and must find a better solution by means of political system. Indeed, that is also false.
I didn't say they 'must' find better solutions by means of a political system. I am saying there is the possibility they can, and you should therefore try this option. Yes, I think we can, but I might be wrong with that. What I am saying, in contrast to you, is that I don't know what the "best" solution is and the only way to find out is to give people the possibility to freely search for it.
Remember that in your proposal the people themselves are those who express preferences and so, they are the ones who must evaluate, and so, they are the ones that must have tools to evaluate. So, you are implying that all people must be scientific people. This seems not feasible (apart that, even if so, there is no means to evaluate)
You don't need to be a 'scientific' person (whatever that means) to have preferences about your life.
You are denying a priori the alternative of the fact that democracy can't solve the problem, that the problem is not that democracy does not work as it should but instead, democracy is part of the problem.
No, I am not denying this possibility. In fact, I have said many times (you keep ignoring it), that if democracy is the problem - or more precisely I should say regulations and laws issued in this system - people would just decide not to use it, no laws, no regulations. That is an option they could chose. If it was true what you claim, and this is the best way to organize it, that's what the system should evolve to.
The one thing you are not allowed to do is to take away the option that people use the system if they think it necessary. The reason is simply that a power vacuum is unstable. Anarchy doesn't work. It would be replaced almost immediately by a tyranny executed by those who hold the weapons, and the whole story would tumble into a civil war until people settle on some form of government that can guarantee stability.
The attainment of such a world is not possible by democratic choices, but by individual choices and free association, something that state and political system does not allow, because they prescribe rules for everyone, even if they don't want them.
If you are part of a political system and you don't agree to the social contract, go leave it, and good luck. (You might find out btw, that that doesn't mean you can suddenly operate in a law-free space, whether or not you happen to "suffer" from a democracy or not.)
And when i say these things, i'm not raising myself to the level of an envisioned which knows what people really need. From my perspective people can do whatever they want, except to impose to others their beliefs and the costs and errors of their beliefs. I don't matter what people want to do with their lifes. I'm worry about what people does to my life and the life of the people that has the same beliefs: they prohibit us to self-determinate in the way we think better for us.
Well, LoboGris, as far as I am concerned a democracy is the tool to self-determinate your life as well as possible. It is what people want, that's why we have democracies. What you don't like is evidently that living together requires compromises, and you are not willing to accept these. You also believe that your idea how to organize people's lives is better. Moreover, you don't want people to have a choice to decide for themselves whether or not they want a social contract. You are the one who is trying to impose a notion of an 'ideal' system on others by constraining their freedom to organize their lives as they want to. Who are you to forbid people to have governments? Best,
B.
Hi, Bee, i encounter some inconsistencies in your comment.
ReplyDeleteYou say:
«You don't need to be a 'scientific' person (whatever that means) to have preferences about your life.»
But you said before:
«Either way, your observation is right, but the actual reason systems are fluctuating is that they have inaccurate memory and an insufficient learning curve. That is something that could be addressed with a more scientific approach.»
So, what? must people be scientific ones or not?
It is true, people don't have to be scientific to express preferences, but people also has to evaluate the results of expressing its preferences. And you have admited this need talking about evaluation.
So, how people can evaluate the result of expressing its macro preferences? One thing is to evaluate into themselves its individual preferences in the market, or other kind of individual to individual transaction. Its results are easily isolated and immediate. But, how common people can evaluate macro results, or even in themselves, isolating all the possible factors from each other without doing science, just guided by its "impressions"?
And, if that is possible, ¿why the need of gathering a study group of super minds to create a super new economic theory?
There is a big inconsistency here. If democracy is the solution, all people must be able to evaluate the results in macro and micro with a methodological approach that most people don't know or has not time or will to apply. If this is not possible, then democracy can't be the solution.
errata:
ReplyDeleteWhere i said:
Its results are easily isolated and immediate.
must said:
Its causes are easily isolated and its results are immediate.
Hi Lobogris:
ReplyDelete(If you're still around. Sorry for the delay). There is no inconsistency in what I wrote. When I said it should be addressed by a more scientific approach, I did not mean that everybody who wants to buy a good or vote should study several decades complex systems. In fact, this is exactly what I want to avoid. The neoclassical model builds upon the idea that every household is able to hold and evaluate preferences for all possible goods for all times in all states the world could be in. This is simply not feasible for the human brain has limited computing power, not to mention that few people would spend the time even if they could do these calculations.
What I said instead is that a scientific approach should be used to design the system in such a way that it is easy on the individual level to use it such that the system's dynamics works towards improvement as considered by the people themselves. And yes, that means exactly that scientists should examine the question what behavior a system like this would have under certain circumstances. Note that this is not the same as predicting what the system does, which I believe is pretty much impossible.
How can people evaluate the results? It doesn't matter how, as long as they do. I certainly think it would be better if they approached such questions scientifically, but the truth is many people don't and they make their judgements emotionally and irrationally. If that's how humans are, then that's how humans are. Neoclassical economics doesn't ask either how people decide to prefer one good over another, it just assumes they do.
Best,
B.
«How can people evaluate the results? It doesn't matter how, as long as they do.»
ReplyDeleteYes, it matters if you want to argument in favour of democracy. Because "how" is the difference between a good evaluation and a bad evaluation.
And this sort of evaluation involves many people who has to suffer the consequences of a bad evaluation even if their own evaluation is different.
That is one of the difference of evaluation between market and democracy. If you fail to evaluate when you choose a product, it affect you. If the majority fail to evaluate when choosing a government, it affects everybody, even the minority that made different evaluations.
¿why the minority has to pay for the errors of majority?
George Bush was reelected. People did a bad evaluation. There you have the consecuences. And that is democracy.
Also, you can't answer with "It doesn't matter how, as long as they do."
ReplyDeleteThat is not an answer. That does not solve anything. If your girlfriend say you "we need money to have our own house, how can we get it?", are you providing a solution by saying "it doesn't matter how, as long as we get"? That does not make money appear magically.
Your answer does not make an evaluation method to appear magically. The question is just which kind of evaluation will people rely on. If you say that people does not evaluate, but instead is irrational and emotive, then that is the contradiction i am saying.
how can be democracy a serious system if people does not seriously evaluate?
I am Philip Meguire, a professional economist who loves contemporary physics. One of my PhD fields was financial economics. I agree with the opinions Michael Shermer and Paul Romer expressed at the end of the article that is the subject of this thread. I am thrilled to discover that people of the calibre of Smolin and the gracious hostess of this blog are taking a serious interest in the world economic and financial crisis we've all witnessed over the past 24 months.
ReplyDeleteTo Turney and others: Experimental economics is up and running. Trouble is, the subjects are nearly always undergraduates. In my experience, quite a few people working in experimental economics are not well versed in the theory and practice of controlled experiments, or in the analysis of data produced by such experiments.
In another vein, I invite you all to peruse:
Epstein, Joshua, and Axtell, Robert (1996) Growing Artificial Societies. Brookings Institution.
My gossip network tells me that the "quants" were not to blame for this crisis, but the "suits" (MBAs and law school grads in executive positions) whose attitude seemed to have been "damn the torpedoes, full speed ahead!"
The cause of the current crisis is a good deal narrower than you physicists seem to understand. The problem does NOT lie with the overall economy, or the financial system, or the trading of financial derivatives. The problem is 2+ trillion dollars of mortgage loans that should never have been made. Lenders believed that by lending this money, they were advancing a cherished bipartisan goal of American public policy: raising homeownership. Many American elites fell in love with a "cargo cult" approach to dealing with the extensive American underclass: invite them to live in "owned" homes by dropping all common sense criteria for mortgage eligibility. Why this fetish for owned homes? Because homeowners are much less likely to inject drugs, be convicted felons, etc.! From this common sense correlation, causation was stupidly imputed. Hence "cargo cult."
The mortgage banking industry thought that the Federal government would somehow step in and prevent the pressure cooker from blowing up and wrecking the kitchen, because the bankers thought (self-serving of course!) that their frantic lending was doing good!
The loans should never have been made, so they went sour. When that happened, bank balance sheets began to implode. Bank accounting rules required that bank "capital" be reduced. Lower capital means that a bank has to contract the amount of loans it has made (this is a regulation adopted in the 1980s, called the Basel Accords).
Hence the credit crunch.
The way forward is to require buyers of real estate to pay at least 20% of the buying price in cash. This won't happen because voters dislike it. Requires a substantial downpayment it deemed cruel, heartless, reactionary, vindictive, Calvinist. It means that buying a first home will be a serious struggle for a lot of the young generation. It means that 30+% of households will never own a home. And we can't have that, can we?
More from Philip Meguire.
ReplyDeleteThe most ardent laissez-faire economist or political theorist in fact very much believes in a social practice that is a regulation in all but name: the law of private property and contract. So it is pointless to contrast real world economies with with a pristine unregulated ideal assumed by naive neoclassical theory of a half century ago. What has to be done is to sift through the pros and cons of differing "flavours" of regulation.
Financial derivatives are side bets. Derivatives do harm when the loser of the bet defaults on what he owes the winner. Futures and options exchanges are designed to make such defaults quite rare events, and the design nearly always works in practice. The derivative villain in the present crisis has been the "credit default swaps." These were not traded on formal exchanges, so that massive defaults (quaintly named "counterparty risk") have occurred.
Two first person narratives that alerted me to the macho dysfunctionality of contemporary Wall Street are Liar's Poker, by Michael Lewis, and the memoirs of Frank Partnoy. The current crisis could not have had a more appropriate set of villains.
I am very willing to share ideas with people who write on econophysics. And was thrilled to discover today that the arbitrary normalization that is the choice of a national currency unit, and the resulting irrelevance of absolute prices, can be seen as a manifestation of a gauge invariance!
Philip Meguire again.
ReplyDeleteThe crisis is not the result of our having been led astray by bad economic thinking. It resulted from a flagrant disregard for elementary economic and legal principles. The latter includes the hoary notion that lenders have a fiduciary duty to those who supply them with funds to lend.
The crisis is also grounded in two basic facts about economic transactions. These facts are paramount when one party can easily conceal facts about himself from the other party. Assume, as is the case, that legal and financial penalties for defaulting on debt are not too severe. If borrowers who are bad credit risks can conceal that fact from lenders, then you have "adverse selection." If borrowers tend to do things with borrowed money they would not do with money they "owned" free and clear, you have "moral hazard."
Moral hazard and adverse selection can culminate in systemic failure and explosive reactions akin to those that engineers and chemists have studied for generations in physical systems.
With all due respect to Taleb, the world economy was not blind-sided by a black swan. Instead, it was mugged by its own flagrant disregard for common sense in dealing with elementary human nature.
When you lend money to someone, they will rack their brains to find ways to rationalise not paying it back. It's that simple. I invite readers of this blog to propose physical analogies to this fact.