Jen is apparently the central idea in the teachings of Confucius. In his book, “Born to be Good”, Dacher Keltner tells us that the numerator in the jen ratio is actions that bring the good in others to completion and the denominator is actions that bring the bad in others to completion. For example, if a writer misrepresents the views of others he would tend to lower the jen ratio.
I have been looking forward to reading “Born to be Good”. I have previously considered on this blog the question of whether the inner nature of humans is good and I want to explore this topic further.
However, after reading a few pages I began to wonder whether reading this book will do much to improve my jen ratio. The problem is that it seems to me that Keltner’s discussion of the views of Adam Smith is uncharitable. Keltner claims that Smith portrayed Homo economicus as some kind of ideal of human evolution who was designed to maximize self-interest in the form of experienced pleasure and advances in advances in material wealth ( p 8).
Smith had a realistic view of human nature. I don’t think he saw humans as rational maximisers of anything, but it is true that he did make some famous observations about self interest as a motivating force. Smith stated: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” (“Wealth of Nations”, I.ii.2). It seems to me that this is an observation about the way the world works rather than a statement advocating selfishness.
I think the closest Smith got to advocating selfishness is his claim that by pursuing his own interests an individual frequently promotes that of society: “I have never known much good done by those who affected to trade for the publick good” (W.N., IV, ii, 9).
It is arguable that Smith was being too cynical at that point. It is possible to think of examples of a great deal of good being done by not-for-profit organisations e.g. in running schools and hospitals.
Anyone who had an interest in presenting a fair picture of Smith’s views of human nature, however, would also take account of the views he presented in “The Theory of Moral Sentiments”. For example: “The virtues of prudence, justice, and beneficence, have no tendency to produce any but the most agreeable effects. ... In our approbation of all these virtues , our sense of their agreeable effects , of their utility, either to the person who exercises them , or to some other persons, joins with our sense of their propriety, and constitutes always a considerable, frequently the greater part of that approbation” (TMS IV, iii, 59).
It is not fair to portray Adam Smith as promoting an “ideology about human nature ... with a jen ratio trending toward zero”.
Wednesday, April 15, 2009
Monday, April 13, 2009
What is the role of animal spirits in the political sphere in producing economic crises?
“Conventional economic theories exclude the changing thought patterns and modes of doing business that bring on a crisis. They even exclude the loss of trust and confidence. They exclude the sense of fairness that inhibits the wage and price flexibility that could possibly stabilize an economy. They exclude the role of corruption and the sale of bad products in booms, and the role of their revelation when the bubbles burst. They also exclude the role of stories that interpret the economy. All of these exclusions from conventional explanations of how the economy behaves were responsible for the suspension of disbelief that led up to the current crisis” (George Akerlof and Robert Shiller, “Animal Spirits”, 2009, p 167).
I don’t have many problems with the argument of Akerlof and Shiller (A & S) that animal spirits play an important role in economic crises. I think they attempt to carry their argument too far; it seems to me that the economic system tends to be self-equilibrating despite notions of fairness and money illusion. But I accept that when there is high leverage in the system (i.e. high levels of debt relative to equity) it is a lot more vulnerable to economic crises than when there is low leverage. I also accept that changes in confidence help explain why leverage fluctuates. Stories that interpret the economy seem to have a big role in determining confidence. A few years ago it was common to hear the story that the risks involved in lending on housing were minimal – even “as safe as houses”. Now the story we hear is that investment in government-backed securities offers “a safe harbour”.
The main problem I have with this book is its failure to recognize that animal spirits also play a role in politics. In fact, as Arnold Kling and Clive Crook have pointed out, A & S fail to mention public choice theory. Instead, their model of government is what Kling describes as the “shockingly naive metaphor of a parent”. In their preface, A & S write:
“The proper role of the government, like the proper role of the advice-book parent, is to...give full rein to the creativity of capitalism. But it should also countervail the excesses that occur because of our animal spirits.”
Crook writes: “This is an unappealing analogy. I would sooner take up arms against a government that saw me as a child than vote for it.”
It seems to me that the most important animal spirit that Akerlof and Shiller fail to mention is the anti-market bias, stemming from an excessive desire for security and stability, which comes to the surface whenever a financial crisis threatens to occur. Rather than allowing the normal process of liquidation to occur when large financial institutions fail, the animal spirits that rule the political domain say that everything must be done to “keep the first domino from falling” (as A & S advocate on page 85).
When viewed in isolation, the bail-out of each institution seems like cheap insurance to government policy advisors. The problem is that a series of bail-outs tends to generate excessive confidence in central banks and governments. If you are lending money to a company that you expect to be backed by government, then you are not going to be too worried if the salary packages of the executives of that company give them incentives to take excessive risks. Creditors might not be surprised if the company gets into financial difficulty, but they will be shocked if it isn’t rescued by government.
From the A & S perspective the current crisis occurred not because parents encouraged the kids to act unwisely by incurring gambling debts , but because the parents decided to let one of their wayward children file for bankruptcy. That unsettled the creditors, so the parents lost their nerve and decided to pay all the kids’ debts. At this stage the lesson that the parents seem to have learned from this is that the kids need more parental supervision to make sure that their animal spirits don’t ever get out of control again. How will the kids respond? Will they leave home to get away from this parental supervision? Or will their animal spirits lead them to pretend to be good for a while in order to re-establish cosy relationships with their parents?
I don’t have many problems with the argument of Akerlof and Shiller (A & S) that animal spirits play an important role in economic crises. I think they attempt to carry their argument too far; it seems to me that the economic system tends to be self-equilibrating despite notions of fairness and money illusion. But I accept that when there is high leverage in the system (i.e. high levels of debt relative to equity) it is a lot more vulnerable to economic crises than when there is low leverage. I also accept that changes in confidence help explain why leverage fluctuates. Stories that interpret the economy seem to have a big role in determining confidence. A few years ago it was common to hear the story that the risks involved in lending on housing were minimal – even “as safe as houses”. Now the story we hear is that investment in government-backed securities offers “a safe harbour”.
The main problem I have with this book is its failure to recognize that animal spirits also play a role in politics. In fact, as Arnold Kling and Clive Crook have pointed out, A & S fail to mention public choice theory. Instead, their model of government is what Kling describes as the “shockingly naive metaphor of a parent”. In their preface, A & S write:
“The proper role of the government, like the proper role of the advice-book parent, is to...give full rein to the creativity of capitalism. But it should also countervail the excesses that occur because of our animal spirits.”
Crook writes: “This is an unappealing analogy. I would sooner take up arms against a government that saw me as a child than vote for it.”
It seems to me that the most important animal spirit that Akerlof and Shiller fail to mention is the anti-market bias, stemming from an excessive desire for security and stability, which comes to the surface whenever a financial crisis threatens to occur. Rather than allowing the normal process of liquidation to occur when large financial institutions fail, the animal spirits that rule the political domain say that everything must be done to “keep the first domino from falling” (as A & S advocate on page 85).
When viewed in isolation, the bail-out of each institution seems like cheap insurance to government policy advisors. The problem is that a series of bail-outs tends to generate excessive confidence in central banks and governments. If you are lending money to a company that you expect to be backed by government, then you are not going to be too worried if the salary packages of the executives of that company give them incentives to take excessive risks. Creditors might not be surprised if the company gets into financial difficulty, but they will be shocked if it isn’t rescued by government.
From the A & S perspective the current crisis occurred not because parents encouraged the kids to act unwisely by incurring gambling debts , but because the parents decided to let one of their wayward children file for bankruptcy. That unsettled the creditors, so the parents lost their nerve and decided to pay all the kids’ debts. At this stage the lesson that the parents seem to have learned from this is that the kids need more parental supervision to make sure that their animal spirits don’t ever get out of control again. How will the kids respond? Will they leave home to get away from this parental supervision? Or will their animal spirits lead them to pretend to be good for a while in order to re-establish cosy relationships with their parents?
Sunday, April 5, 2009
What is your inner economist?
As I was reading Tyler Cowen’s book “Discover Your Inner Economist” I wished that I had read it sooner.
The cover of the book and the table of contents did not give me good reasons to buy the book. The cover invites potential readers to use incentives to fall in love, survive their next meeting and motivate their dentist. The contents page suggests that the book is about things like how to control the world, possess all the great art ever made and practice the art of self-deception. Since I do not aspire to be a master of the universe I have given higher priority to reading other books, such as Tim Harford’s book about the economic logic of life and Dan Ariely’s book about hidden forces that can tend to make decisions predictably irrational (discussed here).
If I had read some reviews of Tyler’s book I would have discovered that it is really about how your inner economist can help you to live a good life. I would also have discovered that Tyler’s inner economist does not try to apply market place logic to all aspects of life. The book is full of parables drawn from every day life and suggestions about how to live well - including suggestions on how to make visits to art galleries and museums more rewarding and how to eat well on a limited budget.
If someone had asked me to describe my inner economist before I had read this book I would probably have said that it was the inner voice that kept telling me things like: incentives matter; resources are scarce; don’t forget about opportunity costs; sunk costs are irrelevant to current decisions; and human behavior is motivated by self interest. I would probably have mentioned that, like any other sensible human, any sensible economist also has other inner voices (e.g. the voices of ethicists, psychologists and sociologists) questioning whether the advice of the inner economist is appropriate to the circumstances. I might also have said that there is always potential for an inner voice of reason to preside over this inner babble and say things like “on the one hand ...” and “on the other hand ...” and for an inner executive to conclude “on balance, it seems to me ...”.
One obvious problem with my initial perception of the inner economist is that economists have a well deserved reputation for saying “on the one hand” and “on the other hand”. Good economics takes account of insights from other disciplines where they are relevant – it involves more than just an exploration of what might happen if people behave in the way economists have often assumed that they will behave in simple models of market behaviour.
Tyler sets up pattern recognition as the most important function of the inner economist: “Your Inner Economist sees patterns that you might not be seeing at first glance” (p 8). He argues against the view promoted by some economists that monetary incentives, markets and property rights should be applied to all aspects of life, including family life. “Our Inner Economist knows that money cannot buy love, respect or peace of mind” (p 3). But our inner economist can recognize the circumstances in which monetary incentives will work well (e.g. where performance is highly responsive to extra effort or where intrinsic motivation is weak).
Tyler identifies a major drawback of rewards and penalties as follows: “We use them to influence the behavior of other people. And this is precisely what makes those people feel a lack of control and a lack of freedom” (p 33).
If aspiring masters of the universe were the intended audience for this book, I hope a lot of them have bought it. However, I doubt whether many of them would have enjoyed reading it as much as I did.
The cover of the book and the table of contents did not give me good reasons to buy the book. The cover invites potential readers to use incentives to fall in love, survive their next meeting and motivate their dentist. The contents page suggests that the book is about things like how to control the world, possess all the great art ever made and practice the art of self-deception. Since I do not aspire to be a master of the universe I have given higher priority to reading other books, such as Tim Harford’s book about the economic logic of life and Dan Ariely’s book about hidden forces that can tend to make decisions predictably irrational (discussed here).
If I had read some reviews of Tyler’s book I would have discovered that it is really about how your inner economist can help you to live a good life. I would also have discovered that Tyler’s inner economist does not try to apply market place logic to all aspects of life. The book is full of parables drawn from every day life and suggestions about how to live well - including suggestions on how to make visits to art galleries and museums more rewarding and how to eat well on a limited budget.
If someone had asked me to describe my inner economist before I had read this book I would probably have said that it was the inner voice that kept telling me things like: incentives matter; resources are scarce; don’t forget about opportunity costs; sunk costs are irrelevant to current decisions; and human behavior is motivated by self interest. I would probably have mentioned that, like any other sensible human, any sensible economist also has other inner voices (e.g. the voices of ethicists, psychologists and sociologists) questioning whether the advice of the inner economist is appropriate to the circumstances. I might also have said that there is always potential for an inner voice of reason to preside over this inner babble and say things like “on the one hand ...” and “on the other hand ...” and for an inner executive to conclude “on balance, it seems to me ...”.
One obvious problem with my initial perception of the inner economist is that economists have a well deserved reputation for saying “on the one hand” and “on the other hand”. Good economics takes account of insights from other disciplines where they are relevant – it involves more than just an exploration of what might happen if people behave in the way economists have often assumed that they will behave in simple models of market behaviour.
Tyler sets up pattern recognition as the most important function of the inner economist: “Your Inner Economist sees patterns that you might not be seeing at first glance” (p 8). He argues against the view promoted by some economists that monetary incentives, markets and property rights should be applied to all aspects of life, including family life. “Our Inner Economist knows that money cannot buy love, respect or peace of mind” (p 3). But our inner economist can recognize the circumstances in which monetary incentives will work well (e.g. where performance is highly responsive to extra effort or where intrinsic motivation is weak).
Tyler identifies a major drawback of rewards and penalties as follows: “We use them to influence the behavior of other people. And this is precisely what makes those people feel a lack of control and a lack of freedom” (p 33).
If aspiring masters of the universe were the intended audience for this book, I hope a lot of them have bought it. However, I doubt whether many of them would have enjoyed reading it as much as I did.
Thursday, April 2, 2009
Are the economic rationalists in Canberra losing their marbles?
When Jim asked me whether I was an economic rationalist I thought he was just stirring. The term “economic rationalist” has been used mainly in Australia and doesn’t seem to be used much anywhere these days. I don’t think there were ever many people in Canberra who called themselves economic rationalists. Those of us advocating economically rational policies just thought of ourselves as economists doing what economists should be doing. We knew that when people referred to us as economic rationalists they were probably intending to be offensive, just as most of those who refer to classical liberals as neo-liberals are intending to be offensive. But I don’t think the label worried us much. When people referred to me as an economic rationalist I knew that I was among good company.
I admitted to Jim that people had sometimes referred to me as an economic rationalist. Jim then asked me if I thought John Smith (name changed to protect Jim) would be an economic rationalist. I don’t know that I have ever met Smith but he has the reputation of being a good economist, having held senior positions in the Treasury as well as other government departments at a time when major economic reforms were being undertaken. I told Jim that I thought that Smith could be relied on to provide good public policy advice.
Jim then seemed to change the topic of conversation. He asked: “Do you think economic considerations should be taken into account in quarantine policy?” I replied that economic considerations were obviously relevant. For example, it doesn’t make economic sense to implement policies that will raise consumer prices by a huge amount in order to protect a tiny domestic industry, even if scientific evidence suggests a high probability that diseased imports will damage this industry.
Jim said: “So, are you suggesting that quarantine decisions should all be subject to a full blown 100-page cost benefit analysis?” I acknowledged that a full-blown analysis would be too expensive to do every time and is not necessary in most cases because the answer that such a study would come up with was usually obvious. I suggested that the legislation should incorporate a national interest test and require that the economic advice used to apply that test should be made public when decisions are made.
Jim replied: “But wouldn’t that make it difficult for politicians to take account of things like impacts that are concentrated in particular electorates, their concerns that voters might attribute damage to industries from highly improbable events to their mismanagement - and other irrationality that people exhibit on risk.” I said: “So what! If you are designing public policy rules in the interests of the whole community then you want the rules to make life difficult for populist politicians who pander to such concerns”.
Jim said: “I thought you might say that. But John Smith tried to sell me a very different line when I spoke to him in Canberra recently. He said that it would be important for the analysis of quarantine matters by the advisory economist to place higher weights on extreme events and on things with concentrated impacts and to make other adjustments to account for the irrationality that people exhibit on risk.”
I was stunned. All I could say at the time was that I could now understand why Jim had asked me whether John Smith was an economic rationalist.
Jim’s story makes me wonder how many other Canberra people who once advocated economically rational policies have lost their marbles by getting too close to politicians.
Postscript:
A friend and former work colleague has responded by suggesting that it is normal for people providing economic advice within the bureaucracy to advise Ministers on the distributional effects of policy initiatives. I think my friend has missed the point.
As I understand it, John Smith is considering what rules should apply in assessing future quarantine cases. The issues involved take this outside of normal bureaucratic policy advice. There are interest groups who will see quarantine as a way to obtain protection from import competition by the back door i.e. through a non-transparent process. Ideally, the issues involved should be subject to some kind of public inquiry to assess national economic benefits and costs through a transparent process. The fact that this is not practicable in every case doesn't mean that we have to resort to normal processes for bureacratic advice to Ministers. As I understand it what is proposed is legislation that would require an assessment to be made of the relative economic costs and benefits of proposed quarantine action. John Smith seems to be proposing to muddy the waters.
I admitted to Jim that people had sometimes referred to me as an economic rationalist. Jim then asked me if I thought John Smith (name changed to protect Jim) would be an economic rationalist. I don’t know that I have ever met Smith but he has the reputation of being a good economist, having held senior positions in the Treasury as well as other government departments at a time when major economic reforms were being undertaken. I told Jim that I thought that Smith could be relied on to provide good public policy advice.
Jim then seemed to change the topic of conversation. He asked: “Do you think economic considerations should be taken into account in quarantine policy?” I replied that economic considerations were obviously relevant. For example, it doesn’t make economic sense to implement policies that will raise consumer prices by a huge amount in order to protect a tiny domestic industry, even if scientific evidence suggests a high probability that diseased imports will damage this industry.
Jim said: “So, are you suggesting that quarantine decisions should all be subject to a full blown 100-page cost benefit analysis?” I acknowledged that a full-blown analysis would be too expensive to do every time and is not necessary in most cases because the answer that such a study would come up with was usually obvious. I suggested that the legislation should incorporate a national interest test and require that the economic advice used to apply that test should be made public when decisions are made.
Jim replied: “But wouldn’t that make it difficult for politicians to take account of things like impacts that are concentrated in particular electorates, their concerns that voters might attribute damage to industries from highly improbable events to their mismanagement - and other irrationality that people exhibit on risk.” I said: “So what! If you are designing public policy rules in the interests of the whole community then you want the rules to make life difficult for populist politicians who pander to such concerns”.
Jim said: “I thought you might say that. But John Smith tried to sell me a very different line when I spoke to him in Canberra recently. He said that it would be important for the analysis of quarantine matters by the advisory economist to place higher weights on extreme events and on things with concentrated impacts and to make other adjustments to account for the irrationality that people exhibit on risk.”
I was stunned. All I could say at the time was that I could now understand why Jim had asked me whether John Smith was an economic rationalist.
Jim’s story makes me wonder how many other Canberra people who once advocated economically rational policies have lost their marbles by getting too close to politicians.
Postscript:
A friend and former work colleague has responded by suggesting that it is normal for people providing economic advice within the bureaucracy to advise Ministers on the distributional effects of policy initiatives. I think my friend has missed the point.
As I understand it, John Smith is considering what rules should apply in assessing future quarantine cases. The issues involved take this outside of normal bureaucratic policy advice. There are interest groups who will see quarantine as a way to obtain protection from import competition by the back door i.e. through a non-transparent process. Ideally, the issues involved should be subject to some kind of public inquiry to assess national economic benefits and costs through a transparent process. The fact that this is not practicable in every case doesn't mean that we have to resort to normal processes for bureacratic advice to Ministers. As I understand it what is proposed is legislation that would require an assessment to be made of the relative economic costs and benefits of proposed quarantine action. John Smith seems to be proposing to muddy the waters.
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