Why is Rudd's essay like toxic debt?

When Jim asked me what I thought of Kevin Rudd’s lengthy essay on the global financial crisis (published in the February 2009 issue of “The Monthly”) I said it was like a CDO. He said: “I agree. Its just a heap of garbage.”

I replied: “No, that’s not what I meant. What Rudd has done in writing this essay is like constructing a CDO. He has taken some reasonable stuff, combined it with some garbage and then dressed it up to look like gold. No-one knows what it is worth.”

Jim interrupted: “We have to pay $7.95 to get a copy. How is that for unrestrained capitalism? We actually have to pay to read the views of our prime minister.”

I ignored Jim’s comment. I continued: “The problem is that I can’t work out whether he is full of crap or just pretending. For example, if we can believe that his praise for the Hawke-Keating governments’ economic liberalisation is sincere, then we can be reasonably confident that his attack on what he describes as “the great neo-liberal experiment” is just a political labelling exercise designed to make Australia’s former government and current opposition look responsible for the world financial crisis. If we can believe that then we don’t have too much to worry about. But what if Janet Albrechtsen is right? What if Rudd’s claim to be a fiscal conservative before the last election was just a charade? What if his social democratic dream all along was to engage in an orgiastic spending spree on borrowed money?” (This is a reference to Janet Albrechtsen’s article ‘PM dumps facade for his ideological dream’, in “The Australian”, 4 February 2009.)

Jim looked puzzled. He said: “I thought the writing was on the wall before the 2007 election that Kevin’07 was no Paul Keating. Did you think his anti-market rhetoric at the time was just labelling? Can you imagine Rudd ever coming clean with the public, like Keating did before the recession in the early 1990s, and telling them that the Australian government can’t spend its way out of a world recession?”

I said: “I thought Rudd’s stuff before the election about not having to choose between Brezhnev and Hayek was just differentiating his product from John Howard’s. I didn’t like his misrepresentation of Hayek, but I thought Rudd was just a kinder and younger version of John Howard.”

Jim replied: “Well, the proof of the pudding is in the eating. What do you think of Rudd’s latest package of spending measures?”

I picked up my copy of this morning’s Financial Review and said: “I can’t say it any better than this.” I pointed to the following passage in an article by Mark Latham, former leader of the Labor Party:
“In an open economy, Keynesian pump-priming drives down national savings and increases reliance on costly forms of foreign debt. It is a Band-Aid policy that does nothing to enhance long-term demand conditions and productive capacity. Its lasting legacy for Australia will be a return to deficit budgeting, government indebtedness and tax increases to pay for the spending spree” (Australian Financial Review, 5 Feb. ‘09).


After he had finished reading Jim said: “Yeah, Latham had his problems, but if we had to have a Labor government – and couldn’t have Keating as leader – then I would feel a lot more confident about Australia’s economic future if we now had Latham at the helm instead of Rudd.”

How can people know what they really want?

It was something I said that got Jim started on this topic. I was talking nostalgically about the lifestyle of the people in the farming community where I grew up. Most of these people knew what they wanted from life and they knew that they were well on the way toward getting it. A lot of the drudgery was disappearing from their lives with the introduction of electricity and the labour saving devices that we now take for granted. These people enjoyed the inner freedom of knowing that they were in control of their own lives. Most of them worked long hours, but they also volunteered a lot of time to work on community projects. Their social life was centred around fund-raising for the local school and charities. They liked their lifestyle and they wouldn’t think of swapping places with anyone living in a big city. They liked to go to “the big smoke” now and then, “just to see how the other half lived”, but they couldn’t understand how anyone would want to live there.

I can remember Jim saying: “You probably aren’t going to agree with this, but I think that these days a lot of people have a huge problem in knowing what they want from life. They have allowed themselves to become slaves to the things they think they have to do. Some are so stressed out that they are drowning in an ocean of ‘have to’.”

I was surprised to hear this argument from Jim. I had thought he would have been the kind of person who would say that if someone didn’t know what they wanted from life, then they should just “give themselves a wake-up call”. So I decided to find out where he was coming from. I asked: “What do you think is responsible for this problem?”

Jim said: “These days everyone in high-income countries has a huge amount of choice about what they do with their time. No-one has to work many hours a week to get the basic necessities of life. But a lot of people don’t feel the freedom that this gives them. They buy things they don’t really want and then they have to spend their lives paying for them. The farmers you were talking about earlier knew what they wanted and knew how to get it. These days a lot of people don’t know what they want because they have never learned how to deal effectively with Self 1’s interference.”

I knew that Self 1 was a concept that Jim had taken from Tim Gallwey’s “inner game” books about playing sport and work, but I wanted to see how he would explain it. So I just continued to show interest.

Jim explained: “Self 1 is your internal coach that has learned how to give advice from your parents and other external coaches. It is the inner voice that keeps warning you and instructing you how to do things and telling you to try harder whenever you make a mistake. Self 1’s reminders are intended to be helpful but they lead us to mistrust and over-control ourselves.
Self 2 is your natural self that embodies all the inherent potential you were born with.”

I didn’t have any problems with Jim’s explanation of Tim Gallwey’s concepts but I couldn’t see their relevance. I said: “Don’t people need this inner voice to warn them before they get out their credit cards and sign their lives away?”

Jim replied: “The problem is that when Self 1 has some good advice people tend to rebel against it because it isn’t their own authentic inner voice. People who grow up on farms have more opportunity to develop an authentic inner voice of their own. This is because they spend a lot of time working with their parents and arguing with them about just about everything.”

Jim’s theory seemed highly simplistic but I thought it might have some merit. As I thought about Jim’s theory I recalled Jonathan Haidt’s elephant and rider metaphor, and wondered whether growing up on a farm might also help some people to identify with the elephant as well as the rider. I remembered Haidt’s comment: “We sometimes fall into the view that we are fighting with our unconscious, our id, or our animal self. But really we are the whole thing. We are the rider and we are elephant. Both have their strengths and special skills” (“The Happiness Hypothesis”, 2006: 22).

Meanwhile, Jim began explaining how Self 1 interference can keep people from knowing what they really want. He said: “As soon as you start to think about what you want from life, Self 1 is likely to chime in with comments about what you should or should not want because of his or her hopes, expectations or fears. This advice is well-meaning, but it comes from someone else. It might even sound like the voice of someone else talking to you. Knowing what you really want is a matter of thinking in positive terms about your own desires - outcomes that are consistent with your own potential and your own values and preferences.”

I said: “So, what you are saying is that if a man wants to be happy then his goal should be to earn a higher income than his wife’s sister’s husband.”

Jim gave the hint of a smile before he replied: “What I’m actually saying is that if people learn to trust themselves they will know what they really want from life.”

Can ethics have the same objectivity as scientific research?

Jim has many annoying habits. One of his most annoying habits is to pick up books that he sees lying around my office and then to read passages at random. I wouldn’t mind if he just read to himself, but after he has been reading for a while he reads selected passages aloud and then asks me what they mean. It is as though he is testing whether I have actually read the book.

When Jim saw my copy of “Invariances”, by Robert Nozick he asked: “Have you read this book?” Without thinking I admitted that I had read it and immediately began to wonder whether it had been wise to claim to have read the book. I added: “But there is a difference between reading and understanding.”

I think Jim sniffed blood. He opened the book about a quarter of the way through and started reading, while I pretended to continue to read a different book. After a minute or two Jim asked: “What does Nozick mean when he states: ‘... we can hold that something about the world makes true statements true’.” (p 74). I suppose I could have admitted that I wasn’t sure what Nozick meant, but I tried to bluff my way through. I said: “I can’t explain it more simply than that.” Jim asked: “Is he saying that people who believe that all truth is relative are out of touch with reality?”

I thought of saying that such people must think they live in different worlds from the one we live in, but I decided the time had come to acknowledge the limitations of my understanding. I told Jim that I actually found the final chapter of “Invariances” a lot easier to understand than the first chapter. Jim flipped to a point about three-quarters of the way through the book and began reading. After a while he asked: “What did Nozick mean when he wrote: ‘an objective belief or judgement is one that arises through a process that does not tend to be directed away from the truth by the operation of biasing factors’.” (p 287) I explained that Nozick argued that it was possible for scientific research to be a reliable process for arriving at true beliefs. For example, while an individual scientist’s bias in favour of his pet theory might lead him astray, the scientific process can still be objective as long as other scientists are free to try to disprove his theory.

Jim read on for a while, and then asked: “Is Nozick actually saying here that ethical statements can be objective in the same way that scientific statements can be objective?” Fortunately, I was able to refer Jim to the following notes I had made when I read the book:

• Ethics evolved to enable us to co-ordinate our activities with others for mutual benefit.
  
• The ethics of respect is the first layer of ethics – mandating cooperation for mutual benefit e.g. respect for life and property, non-interference with others etc.
  
  
• Objectivity is required in ethical judgements to shield people from bias. Various devices have been proposed to promote objectivity e.g. Adam Smith’s ideal of an impartial observer and Rawls’ concept of a veil of ignorance.
  
  
• Objective ethical truths are held to have symmetry, or invariance, in their application e.g. the golden rule and Kant’s categorical imperative.
  
• The adoption of greater ethical symmetry (e.g. through rule of law) has extended the scope of impersonal dealings with non-relatives which in turn has enabled huge improvements in living standards in many countries.
  

After looking at my notes Jim flipped to the end of the book and began reading again. A little while later he made a loud noise. In fact, he uttered a profanity - one that some readers of this blog might find highly offensive. If Jim’s wife, Agnes, had been present she would have told Jim that what he said was “unnecessary”. Nevertheless, the profanity did serve to get my attention.

Jim said: “ Nozick was brilliant! Look, he makes the point here that the evolution of conscious self awareness – the attribute that marks us as human - was crucial to enable us to reflect on our own behaviour. And this reflection helps us to act in accordance with norms of cooperation for mutual benefit. Now listen to this.”

Jim then read aloud from one of the final paragraphs: “ ...if conscious self-awareness was selected for because it makes us capable of ethical behaviour, then ethics, even the very first layer of the ethics of respect, truly is what makes us human.” (p 300)

Jim added: “Don’t you wish you had written that?”

Do voters have a conservative bias rather than a pessimistic bias?

This post further considers the question of whether most people have a pessimistic bias, which was discussed in my last post.

Bryan Caplan defines “pessimistic bias” as “a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy” (“The Myth of the Rational Voter”, 2007: 44). On reflection, however, it seems to me that Caplan’s discussion relates to two separate questions: whether people are generally too pessimistic about economic performance in the recent past, the present and the near future; and whether people are unduly susceptible to arguments appealing to nostalgia, and to gloom and doom prognostications. I argue below that Caplan’s answer to the first question is probably wrong and that the second question has more to do with loss aversion than pessimism.

As discussed in my last post, Caplan’s argument that people are too pessimistic about economic performance rests mainly on a survey which showed that economists were more optimistic about short-term economic prospects than the general public. As subsequent events have shown, the economists were probably too optimistic. Moreover, the survey results do not seem to me to suggest that the American public were particularly pessimist about economic prospects at the time of the survey. In an earlier post, ‘Would a chain index provide a better guide to change in the quality of life’, I argued that surveys conducted by the Pew Research Center imply that over the last 30 years Americans have tended to perceive their quality of life to be rising more rapidly that per capita GDP. If anything, this would suggest an optimistic bias, rather than a pessimistic bias.

I therefore reject the view that people generally have a pessimistic bias in considering short-term economic performance. I think there is probably a pessimistic bias at present, but as a rule I expect that public opinion about economic prospects is as much prone to irrational exuberance as to irrational pessimism.

I think Caplan is probably on much firmer ground in relation to the second aspect of bias – susceptibility to arguments appealing to nostalgia, and to gloom and doom prognostications. It seems to me that the common element here is fear of change, or more precisely, loss aversion. Research by Daniel Kahneman and Amos Tversky has shown that most people will reject a gamble with even chances to win and lose, unless the possible win is at least twice the size of the possible loss (refer Kahneman’s Nobel Prize lecture p 461). It seems reasonable to speculate that such considerations impart a conservative bias to political choice.

Some of my “conservative” friends might think that a conservative bias among voters should be encouraged. I am not so sanguine because a conservative bias - a bias in favour of the status quo - tends to favour retention of government regulation that has outlived its usefulness (if indeed it was ever useful). A conservative bias may also tend to favour increased regulation to prevent changes that some groups fear – whether economic, social or environmental – irrespective of cost.

Postscript:
I have been reminded that Milton and Rose Friedman wrote a book entitled "The Tryanny of the Status Quo" in 1982. This "tyranny" was seen to be the result of the the actions of politicians, bureaucrats and special interest groups who advance their own interests at the expense of the public.