Monthly Archives: May 2016

Economists and morality

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This weekend I sat in the garden a lot, reading Sam Bowles’ excellent new book [amazon_link id=”0300163800″ target=”_blank” ]The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens[/amazon_link]. The book explores the incorrect standard (although shifting, I think) assumption in economics that incentives and morals do not affect each other – or in jargon, that they are additively separable. It describes research involving many, many experiments looking at how people behave in different contexts, cultures and communities in response to incentive changes.

The book begins with an explanation of the first theorem of welfare economics and underlines its power as a demonstration of the fact that in life, contracts are almost always incomplete, asymmetric information pervasive – and ever more so in modern economies – and externalities rife. Given the reality, Bowles writes: “Morals must sometimes do the work of prices, rather than the other way round.” His key argument is familiar in the post-public choice literature discussion targets and incentives in the public sector: that treating people as knaves (in Hume’s well-known formulation) makes them more likely to act knavishly. Introducing incentives – like the standard Pigouvian taxes or subsidies to correct externalities – can crowd-out intrinsic motivation, sometimes to the extent that the policy intervention backfires altogether.

[amazon_link asins=’0300163800′ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’39e6b984-7dee-11e7-b0d6-df43673ee614′]

Later chapters go on to consider the information conveyed by the standard incentives tool kit – the social information contained in a fine, for instance – and the importance of the social context in which policies are being implemented. For the experimental results show that behaviour in something like the Ultimatum game differs greatly between cultures. Paradoxically, there is far more pro-social or altruistic behaviour in advanced market economies than in those where the role of the market is limited. Bowles suggests it is because these long-standing capitalist societies have a liberal social order, meaning tolerance, respect for individual rights, relatively few barriers to social mobility. He quotes [amazon_link id=”2012183840″ target=”_blank” ]Voltaire[/amazon_link]’s astonishment on visiting the London Stock Exchange:

“The Jew, the Mohameddan, the Christian deal with one another as if they were of the same religion, and give the name infidel only to those who go bankrupt. … upon leaving this peaceful and free assembly some withdraw to the synagogue, others retire to their churches, some to have a drink … and everyone is happy.”

An apt quotation the week after the Mayoral election in London. The book suggests that there is a virtuous circle whereby “in more market-oriented societies … people learn from their market experiences that fair dealing with strangers is often profitable.” Equally, there can be a vicious circle of distrust outside the family or clan. The point is that preferences are endogenous, not fixed. But, “Where market failures arise because contracts are incomplete, socially valuable norms like trust and reciprocity may be important in attenuating these market failures.”

Finally, the book touches on mechanism design, and why it is not a solution for the policymaker who wants to stick with incentive-based responses to market failures, explaining the impossibility result in this literature: that if there is private information, no voluntary mechanism produces a Pareto efficient outcome. It would also be interesting to think about the role of Al Roth-style market design in using the informational power of markets to devise better policies even where the involvement of money would be ‘repugnant’.

The book does end with some rather general suggestions for ‘Aristotelian’ policymakers who understand the important role of virtue in underpinning efficient as well as fair outcomes. I concluded that in fact there is still a lot of work to be done to understand how incentives and intrinsic values interact. Early in the book, Sam talks about the well-known experiment in a nursery introducing fines for parents who were late to collect their children; the fines made parents feel they were paying for being late, so lateness rose rather than declining. But other examples go the other way: [amazon_link id=”0718193660″ target=”_blank” ]Duflo and Banerjee[/amazon_link] report on the use of mosquito nets rising when a small charge was introduced, rather than giving the nets away for free.

We don’t understand well enough when markets and price incentives are effective and when counter-productive, or the balance between the anonimity of market transactions, the role of reputation and trust in repeated transactions, and the power-laden character of both market and non-market transactions. There is a reason people flock away from their villages for the monetary relations of the big city. In an interesting section the book discusses the importance of identity for understanding these distinctions: people mind being manipulated through incentives by their boss – ‘he doesn’t trust me’ – but they don’t seem to mind the application of monetary incentives like fines so much when the authority is the collective decision of their peers.

It would be good to get to first base with policy makers, and have them appreciate the fact that policies change behaviour at all – there are still so many examples of the assumption that the economist or rule maker is ‘outside’ the economy. For this reason I find the fashion in policy circle for ‘nudging’ alarming as it is being done so much in the spirit of Madison Avenue. Having said this, the insights of [amazon_link id=”0300163800″ target=”_blank” ]The Moral Economy[/amazon_link] point to a potentially far more fruitful approach to policy than either of the current modes of the policy world, where it is either all about incentives or all about nudges. Fundamentally, designers of policies need to recognise that the people to whom they will apply have moral agency. So I applaud this book. And as it is non-technical and a terrific summary of the research on the relevant kinds of experiment concerning collective choice, I’ll be adding it as ‘further reading’ to my public policy course syllabus next semester.

 

Going beyond GDP: walking the talk

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Today I’m working on a talk for a conference organised by the Royal Economic Society, Royal Statistical Society and Institute for Fiscal Studies on the agenda for modernising economic statistics. The day’s programme covers a wide range of questions including regional statistics and measuring the digital. My contribution will be about ‘beyond GDP’. I was just reflecting that in the two years since my book, GDP: A Brief But Affectionate History was first published there have been enough other books on this issue to declare it a new genre.

Precursors were in 2009:

[amazon_link id=”B00E32LW1C” target=”_blank” ]Mismeasuring Our Lives[/amazon_link] by Sen, Stiglitz, Fitoussi (the report of the Commission set up by former President Sarkozy)

[amazon_image id=”B00E32LW1C” link=”true” target=”_blank” size=”medium” ]Mismeasuring Our Lives: Why GDP Doesn’t Add Up by Stiglitz, Joseph E., Sen, Amartya, Fitoussi, Jean-Paul published by New Press, The (2010)[/amazon_image]

and in 2013:

[amazon_link id=”019976719X” target=”_blank” ]Beyond GDP: Measuring Welfare and Assessing Sustainability [/amazon_link]by Marc Fleurbaey and Didier Blanchet

[amazon_image id=”019976719X” link=”true” target=”_blank” size=”medium” ]Beyond GDP: Measuring Welfare and Assessing Sustainability[/amazon_image]

Then:

[amazon_link id=”0691169853″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link] by Diane Coyle

[amazon_image id=”0691156794″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

[amazon_link id=”1780322720″ target=”_blank” ]Gross Domestic Problem[/amazon_link] by Lorenzo Fioramonti

[amazon_image id=”1780322720″ link=”true” target=”_blank” size=”medium” ]Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number (Economic Controversies)[/amazon_image]

[amazon_link id=”0801451639″ target=”_blank” ]Poor Numbers[/amazon_link] by Morten Jerven

[amazon_image id=”0801451639″ link=”true” target=”_blank” size=”medium” ]Poor Numbers: How We are Misled by African Development Statistics and What to Do About it (Cornell Studies in Political Economy)[/amazon_image]

Later:

[amazon_link id=”B015X37CI6″ target=”_blank” ]The Little Big Number[/amazon_link] by Dirk Philipsen

And new/forthcoming:

[amazon_link id=”1681771373″ target=”_blank” ]The Great Invention[/amazon_link] by Ehsan Masood

[amazon_image id=”1681771373″ link=”true” target=”_blank” size=”medium” ]The Great Invention: The Story of GDP and the Making (and Unmaking) of the Modern World[/amazon_image]

[amazon_link id=”B01EB74DFU” target=”_blank” ]The Power of A Single Number[/amazon_link] by Philipp Lepenies.

[amazon_image id=”0231175108″ link=”true” target=”_blank” size=”medium” ]The Power of a Single Number: A Political History of GDP[/amazon_image]

When this kind of thing happens, there is certainly change afoot.

A philosophical diversion

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It was a holiday weekend so I indulged myself in a little philosophy: Patrick Baert’s [amazon_link id=”0745685404″ target=”_blank” ]The Existentialist Moment: The Rise of Sartre as a Public Intellectual[/amazon_link]. Regular perusers of this blog will know I recently outed myself as a teenage existentialist, in reviewing Sarah Bakewell’s excellent new book [amazon_link id=”B017IGPTDQ” target=”_blank” ]At The Existentialist Cafe[/amazon_link]. Bakewell explains (and critiques) the philosophy, and sets it in the context of wider philosophical currents. Baert explores a few years in French history, those of the German occupation during World War 2 and the immediate post-war years, to explain why existentialism and why Sartre in particular struck a chord with the public and become so influential.

[amazon_image id=”0745685404″ link=”true” target=”_blank” size=”medium” ]The Existentialist Moment: The Rise of Sartre as a Public Intellectual[/amazon_image]

It is fascinating in its exploration of why writing came to be seen as so central to French national identity and why Sartre was particularly adept at using writing about politics to appeal to the French public at that time of national defeat and subsequent rebuilding. So, oddly, although Sartre and De Gaulle were poles apart politically, both played an important part in rebuilding the nation’s sense of cohesion and dignity.

Baert’s final chapter has some general reflections on the role of public intellectuals and writing as a performative political act. He argues that the generalist public intellectual of Sartre’s type cannot exist in modern social contexts, but have been replaced instead by public intellectuals with expert domain knowledge. Sartre wrote about social and economic issues with no knowledge of the facts or the social science, and nobody would get away with that now. I’m not sure I buy the argument about the perfomative character of people who pontificate about the economy, at least not in a straightforward way, but having said that, there’s some appeal (to a writer) in the idea that words are sufficiently powerful to shape social reality. Man the keyboards!

Poetry in statistics

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In a tremendous public service, Count Bayesie (Will Kurt) has put together a series of his blog posts that amount to a superbly clear and accessible guide to Bayesian statistics. Highly recommended, especially for doctors but also for economists – great teaching material here too.

Generously, the guide starts by recommending another book, Nate Silver’s excellent [amazon_link id=”0141975652″ target=”_blank” ]The Signal and the Noise[/amazon_link], something I would put on the reading list of all students, even those who only need to be minimally numerate to get their degree. (After all, how else can we grow them into intelligent voters?)

Encouragingly, Will Kurt himself started with an English degree before becoming a data scientist. Code is language too, and there is poetry in it. Even in probability and statistics.

[amazon_image id=”0141975652″ link=”true” target=”_blank” size=”medium” ]The Signal and the Noise: The Art and Science of Prediction[/amazon_image]

Upward bound?

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Lynsey Hanley is much younger than me. She cites often in her new book [amazon_link id=”1846142067″ target=”_blank” ]Respectable[/amazon_link] Richard Hoggart, and an intermediate generation of working class writers who made good via grammar school, who are much older than me. The continuity of experience, theirs and mine alike, is striking. The specifics have changed over the decades since Hoggart’s [amazon_link id=”0141191589″ target=”_blank” ]The Uses of Literacy[/amazon_link] was published in 1957, but Britain remains a firmly class-based society, with the (im)possibility of social mobility mediated through the education system. Having spent decent amounts of time in the US and France, I think they are equally class-bound, and maybe only Scandinavia is really different (although actually the OECD adds Canada and Australia to its list of socially mobile countries). However, the exact mechanics of keeping people in their place differs.

[amazon_image id=”1846142067″ link=”true” target=”_blank” size=”medium” ]Respectable: The Experience of Class[/amazon_image]

Hanley wrote an excellent book, [amazon_link id=”1847087027″ target=”_blank” ]Estates[/amazon_link], about growing up in a large council estate in outer Birmingham. [amazon_link id=”1846142067″ target=”_blank” ]Respectable[/amazon_link] takes up the story with her personal experiences of a working class education, and the lack of quality and lack of ambition for pupils in her first schools. I found the sections of the book where she describes her personal experiences the most interesting, partly because her reaction to her culture shock was so different from mine (my journey was a more ‘conventional’ social mobility story of 11 plus-grammar school-Oxbridge). I went from a northern working class household where we hardly ever had meals out, ate plain food at 5.30pm for our evening meal, had holidays in Blackpool B&Bs or Butlins holiday camps, had never been abroad to an Oxford college stuffed with southerners who had been to posh schools, listened to classical music, and knew how to tackle an artichoke. Although it was a shock, I relished it. Hanley is far more equivocal about her climb into the middle class, and seems to have felt the deracination as a far more painful process. She argues that upward social mobility leaves the individual permanently anxious in both kinds of context.

This contrast in our attitudes made the analytical parts of [amazon_link id=”B01AU5V9OA” target=”_blank” ]Respectable[/amazon_link] less compelling for me, but Hanley has many interesting observations about how monstrously hard it is for working class children to gain access to the privileges the middle classes take for granted. She is particularly astute about the lack of autonomy that goes with lack of confidence. And also on the fear – the fear of the ‘respectable’ working classes about falling downward which manifests itself as disdain for ‘chavviness’ or casual racism, and the fear of the middle classes about all of the lower orders. (This echoes the emphasis Julia Unwin places on the emotional role of fear in her excellent book [amazon_link id=”B00MX0ZW7Q” target=”_blank” ]Why Fight Poverty?[/amazon_link])

[amazon_link id=”B01AU5V9OA” target=”_blank” ]Respectable[/amazon_link] is also very strong on the ideological use of the idea that all an individual child needs to do is to work hard and behave well to get on, as if individual responsibility can by itself overcome embedded social structures. However, Hanley appears to argue against the idea of early intervention in some families, and free nursery care or extended hours at school, whereas I’m persuaded that, given the family context some children experience, this is absolutely the right thing to do – even if it would of course be great to be able to sort out the thicket of social, economic, health and crime problems experienced by poor families in poor areas. One point on which I wholly agree with her, though, is in marking the use of the phrase “these people” with a red flag. (“A characteristic feature of such pronouncements [about the fecklessness of the underclass] is the use of the phrase ‘these people’. ‘These people’, over there, are not and cannot ever be people like us.”)

Even if your own experience has been different – or especially if it has – [amazon_link id=”1846142067″ target=”_blank” ]Respectable[/amazon_link] is a terrific read. There are too few writers who can describe working class life with any authenticity, and this book gives real insight into why Britain is so socially stratified.