In the Australian federal budget delivered earlier this week, forward estimates of revenue and spending were based on Treasury projections of economic growth rates in excess of 4 percent coming out of the current recession. This projection has attracted attention because the projected growth rates are higher than those experienced in Australia during recent boom years.
It seems reasonable to me to suppose that growth rates might be somewhat above trend when an economy comes out of a recession. An economy that is not limited by capacity constraints obviously has potential to grow more rapidly than one approaching full employment.
However, the Treasury’s optimism about future economic growth prospects in Australia seems to me to sit oddly with their more guarded views about prospects for the world economy. In discussing the outlook for the world economy Treasury states: “Even when growth returns, the recession will leave a legacy of significant policy challenges across the world. The extraordinary measures being taken to combat the current crisis will have to be unwound carefully.” Governments will not find it easy to unwind these extraordinary measures. This means that commodity exporting countries like Australia should expect the world economy to give them a fairly bumpy ride in the years ahead.
Why is Treasury so optimistic about Australia’s growth prospects? The Treasury forecasters base their optimism on the growth rates experienced in Australia following recessions in the 1980s and 1990s. Their projected growth rate is about the same as that following the 1990s recession.
Even if it is reasonable to expect world economic growth in the 2010s to be as robust as in the 1990s, is it reasonable to expect that Australia’s productivity growth in the 2010s to be as high as in the 1990s? The 1990s was a period in which multifactor productivity growth in Australia was more than double the rate experienced in recent years. High rates of productivity growth in the 1990s stemmed to a large extent from productivity improvements in the services sector, which were associated with micro-economic reforms (neo-liberalism in the terminology favoured by Australia’s current Prime Minister).
Where will comparable productivity improvements come from during the 2010s? Perhaps the government has plans for extensive microeconomic reforms that it has yet to announce. But I wouldn’t bet on it!
Friday, May 15, 2009
Tuesday, May 12, 2009
How much prudential regulation do we need?
It was a few weeks since I had seen Jim, so I made the mistake of asking him what he had been doing. He replied that he had been thinking about bankruptcy.
I said that I didn’t know his financial situation was that bad. Jim replied that he wasn’t having too much trouble paying his own bills at this stage, but he had been thinking about bankruptcy as an institution and about the role of government in bankruptcy. While he was saying that I was thinking that Jim was not the kind of person who would ever have too much trouble paying his bills. I heard him ask: “What do you think about bankruptcy?”
I said that I thought modern bankruptcy laws that wiped the slate clean when debtors had no hope of meeting their obligations were a huge advance on traditional practices such as virtual enslavement or imprisonment of people who could not pay their debts. I added that in my view there had to be a role for government in this process because you can’t allow people to hire muscle to pressure people to pay their debts. Since we have to rely ultimately on the coercive power of government to enforce contracts then we have to rely on government to devise rules about the conditions under which contracts cannot be enforced.
Jim nodded. He then asked: “What do you think about limited liability?” I said that I thought the contribution of limited liability to economic growth was often overstated because liability insurance could have arisen to serve a similar purpose in enabling individual investors to limit their liability when in investing in companies. I added, however, that I couldn’t see a problem in the owners of a firm declaring that their liability was limited to the amounts they had invested. In my view transparency is the important issue: people who lend money to the firm or provide good on credit should be aware that if the firm goes bust the liability of the owners is limited.
Jim said: “Hmm, so you are saying that if I form a company to engage in speculation there should be no limit on the amount of debt that the company can incur? Are you saying that I should be allowed to gamble with other people’s money secure in the knowledge that if the gamble doesn’t pay off then my own liability is limited to the extent of my own investment in the company?” I insisted that transparency was the important issue. If people are prepared to take the risks involved in lending money to speculators, good luck to them.
Jim said: “People who take those risks need all the luck they can get. What about systemic risks? It is one thing to accept that a few people will lose their life savings whenever some highly leveraged property speculator goes bust, but isn’t it something quite different when confidence in the whole financial system is threatened because of excessive leverage in major financial institutions?” I did my best to put the argument that the current financial crisis arose at the end of last year because central banks in major economies hadn’t established a credible commitment to maintaining a stable rate of nominal GDP growth. I suggested that the best way to deal with the deleveraging and associated decline in the velocity of circulation would have been by maintaining a monetary policy that would promote expectations of a stable rate of growth in nominal GDP.
I could see Jim’s eyes glaze over as I spoke. He said: “If you were making government policy decisions in the aftermath of the current financial crisis wouldn’t you be looking to see what could be done to avoid re-emergence of systemic risk in major financial institutions? I had to admit that if I was making government policy decisions I would probably be looking for policy levers relating to capital adequacy and things like that.
Jim said: “Ah, you sound just like one of those neo-socialists who advocates more financial regulation in order to save the capitalist system. Rather than interfering in the financial management of healthy companies, wouldn’t it be better for governments to focus on improving laws to minimize the adverse effects on the wider economy that can occur when some companies become insolvent. For example, why can’t the ownership of insolvent companies be quickly transferred to creditors?”
Jim seems to like asking me questions that I can’t answer.
I said that I didn’t know his financial situation was that bad. Jim replied that he wasn’t having too much trouble paying his own bills at this stage, but he had been thinking about bankruptcy as an institution and about the role of government in bankruptcy. While he was saying that I was thinking that Jim was not the kind of person who would ever have too much trouble paying his bills. I heard him ask: “What do you think about bankruptcy?”
I said that I thought modern bankruptcy laws that wiped the slate clean when debtors had no hope of meeting their obligations were a huge advance on traditional practices such as virtual enslavement or imprisonment of people who could not pay their debts. I added that in my view there had to be a role for government in this process because you can’t allow people to hire muscle to pressure people to pay their debts. Since we have to rely ultimately on the coercive power of government to enforce contracts then we have to rely on government to devise rules about the conditions under which contracts cannot be enforced.
Jim nodded. He then asked: “What do you think about limited liability?” I said that I thought the contribution of limited liability to economic growth was often overstated because liability insurance could have arisen to serve a similar purpose in enabling individual investors to limit their liability when in investing in companies. I added, however, that I couldn’t see a problem in the owners of a firm declaring that their liability was limited to the amounts they had invested. In my view transparency is the important issue: people who lend money to the firm or provide good on credit should be aware that if the firm goes bust the liability of the owners is limited.
Jim said: “Hmm, so you are saying that if I form a company to engage in speculation there should be no limit on the amount of debt that the company can incur? Are you saying that I should be allowed to gamble with other people’s money secure in the knowledge that if the gamble doesn’t pay off then my own liability is limited to the extent of my own investment in the company?” I insisted that transparency was the important issue. If people are prepared to take the risks involved in lending money to speculators, good luck to them.
Jim said: “People who take those risks need all the luck they can get. What about systemic risks? It is one thing to accept that a few people will lose their life savings whenever some highly leveraged property speculator goes bust, but isn’t it something quite different when confidence in the whole financial system is threatened because of excessive leverage in major financial institutions?” I did my best to put the argument that the current financial crisis arose at the end of last year because central banks in major economies hadn’t established a credible commitment to maintaining a stable rate of nominal GDP growth. I suggested that the best way to deal with the deleveraging and associated decline in the velocity of circulation would have been by maintaining a monetary policy that would promote expectations of a stable rate of growth in nominal GDP.
I could see Jim’s eyes glaze over as I spoke. He said: “If you were making government policy decisions in the aftermath of the current financial crisis wouldn’t you be looking to see what could be done to avoid re-emergence of systemic risk in major financial institutions? I had to admit that if I was making government policy decisions I would probably be looking for policy levers relating to capital adequacy and things like that.
Jim said: “Ah, you sound just like one of those neo-socialists who advocates more financial regulation in order to save the capitalist system. Rather than interfering in the financial management of healthy companies, wouldn’t it be better for governments to focus on improving laws to minimize the adverse effects on the wider economy that can occur when some companies become insolvent. For example, why can’t the ownership of insolvent companies be quickly transferred to creditors?”
Jim seems to like asking me questions that I can’t answer.
Sunday, May 3, 2009
Is money a message as well as a medium?
Money is the medium of exchange as well as the unit of account and store of value. As the medium of exchange money makes life easy because we don’t have to spend a lot of time trying to find someone who is prepared to trade the goods we want to buy for the goods we want to sell. I have never been able to understand what Marshal McLuhan was talking about when he said “the medium is the message”, but the question I want to consider is whether we behave differently when we have money on our minds.
The idea that people may behave differently when they have money on their minds has a long history. Everyone has heard the biblical claim: “the love of money is the root of all evil”. What does this mean? This is not really an assertion that it is evil to collect coins, is it? It seems to me that the statement was not really about money at all but about the love of the worldly goods that money can buy.
The question of whether people behave differently when they have money on their minds also comes up in discussing when it is or is not appropriate to attempt to motivate other people using money. Tyler Cowen, for example, has used several parables to discuss this question, including the dirty dishes parable. Is paying one of your children a good way to ensure that the dishes are washed? Probably not. Children may feel less obligation to do their share of family chores if a voluntary exchange relationship is established in which the parent becomes an employer providing money in exchange for work, rather than a family leader “who is due some amount of obedience in his or her own right” (“Discover your Inner Economist”, p 14).
Is the payment of money intrinsic to this parable? I think that many economists would tend to say that the parable would apply in the same way if the child is paid in kind, e.g. in tickets to rock concerts, rather than in money. In the minds of many economists the issue would appear to be whether strict reciprocity is appropriate to the circumstances rather than about the method of payment that is used. Economists often say that money is a veil.
However, I am not sure that many parents would rule out all forms of bartering as being inappropriate as a means of motivating a child to do his or her share of family chores. It seems to me that bartering could be appropriate if it is about the things that parents do for their children that are beyond what might be generally considered to be the core responsibilities of a parent. For example, like many other parents, while my kids were in their teens I used a substantial part of my leisure time providing an unpaid taxi service to ferry them and their friends to and from various sporting and entertainment activities. Would it be inappropriate for a parent to suggest to a child that it would be unfair to expect provision of such services unless he or she does an appropriate share of family chores without having to be constantly reminded?
This raises the question of whether responses to provision of incentives have more to do with perceptions of the appropriateness of particular incentives than with concepts such as the strictness of reciprocity or the money value of the incentives provided. There is some evidence that actions that merely remind people of money can have a significant effect on behavior. For example, Kathleen Vohs, Nicole Meade and Miranda Goode report an experiment in which participants were primed by sitting at a desk facing posters showing various denominations of currency or posters showing either a seascape or a flower garden. The participants were then presented with a nine-item questionnaire in which each question asked them to choose between two leisure activities – an experience that only one person could enjoy and an experience that two or more people could enjoy together. Participants primed with the money poster tended to chose more individually focused experiences. The authors report similar results for eight other experiments (‘The psychological consequences of money’, Science, 318 (5802), 2006).
So what if responses to incentives are strongly influenced by perceptions of the form in which the incentive is provided and the language used when the offer is made? The most obvious implication is that a lot of care is required in selecting incentives that are perceived to be appropriate and in presenting them in an appropriate way to achieve the desired effect. There are quite different implications in relation to prevention of corruption. The ethics of accepting a bribe do not change merely because the incentive offered is more subtle than a bundle of notes in a brown paper bag.
The idea that people may behave differently when they have money on their minds has a long history. Everyone has heard the biblical claim: “the love of money is the root of all evil”. What does this mean? This is not really an assertion that it is evil to collect coins, is it? It seems to me that the statement was not really about money at all but about the love of the worldly goods that money can buy.
The question of whether people behave differently when they have money on their minds also comes up in discussing when it is or is not appropriate to attempt to motivate other people using money. Tyler Cowen, for example, has used several parables to discuss this question, including the dirty dishes parable. Is paying one of your children a good way to ensure that the dishes are washed? Probably not. Children may feel less obligation to do their share of family chores if a voluntary exchange relationship is established in which the parent becomes an employer providing money in exchange for work, rather than a family leader “who is due some amount of obedience in his or her own right” (“Discover your Inner Economist”, p 14).
Is the payment of money intrinsic to this parable? I think that many economists would tend to say that the parable would apply in the same way if the child is paid in kind, e.g. in tickets to rock concerts, rather than in money. In the minds of many economists the issue would appear to be whether strict reciprocity is appropriate to the circumstances rather than about the method of payment that is used. Economists often say that money is a veil.
However, I am not sure that many parents would rule out all forms of bartering as being inappropriate as a means of motivating a child to do his or her share of family chores. It seems to me that bartering could be appropriate if it is about the things that parents do for their children that are beyond what might be generally considered to be the core responsibilities of a parent. For example, like many other parents, while my kids were in their teens I used a substantial part of my leisure time providing an unpaid taxi service to ferry them and their friends to and from various sporting and entertainment activities. Would it be inappropriate for a parent to suggest to a child that it would be unfair to expect provision of such services unless he or she does an appropriate share of family chores without having to be constantly reminded?
This raises the question of whether responses to provision of incentives have more to do with perceptions of the appropriateness of particular incentives than with concepts such as the strictness of reciprocity or the money value of the incentives provided. There is some evidence that actions that merely remind people of money can have a significant effect on behavior. For example, Kathleen Vohs, Nicole Meade and Miranda Goode report an experiment in which participants were primed by sitting at a desk facing posters showing various denominations of currency or posters showing either a seascape or a flower garden. The participants were then presented with a nine-item questionnaire in which each question asked them to choose between two leisure activities – an experience that only one person could enjoy and an experience that two or more people could enjoy together. Participants primed with the money poster tended to chose more individually focused experiences. The authors report similar results for eight other experiments (‘The psychological consequences of money’, Science, 318 (5802), 2006).
So what if responses to incentives are strongly influenced by perceptions of the form in which the incentive is provided and the language used when the offer is made? The most obvious implication is that a lot of care is required in selecting incentives that are perceived to be appropriate and in presenting them in an appropriate way to achieve the desired effect. There are quite different implications in relation to prevention of corruption. The ethics of accepting a bribe do not change merely because the incentive offered is more subtle than a bundle of notes in a brown paper bag.
Tuesday, April 28, 2009
Are we born to be good?
In arguing that we are born to be good, psychologist Dacher Keltner has in mind a particular definition of what it means to be good. In his book “Born to be Good” he views goodness as synonymous with the Confucian concept of jen: a person of jen “brings the good things in others to completion and does not bring the bad things of others to completion” (p. 4).
The author’s aim is to enable the reader to see human behavior in a new light. He presents evidence supporting his view that we have been wired by seven million years of hominid evolution to practice emotions like compassion, gratitude, amusement and wonder that are associated with bringing the good in others to completion. “We have neuropeptides that enable trust and devotion, and a branch of nerves that connects the brain, the voice and the heart that enables caretaking. Our capacity for awe has given us art, a sense of the sacred. We have genes, neurotransmitters, and regions of the brain that serve these emotions as we serve others. These emotions are the substance of jen” (p 269).
Keltner does not deny that we are also wired to pursue self-interest. His claim is that this is “half the story” (p 11). His research suggests that rather than just one reward circuit in the brain that is activated in response to any kind of pleasure, different neural circuits are involved in different kinds of positive emotions such as sensory pleasure, pride, compassion and awe (pp 265-267). He suggests that in our search for happiness many of us have tended to focus excessively on sensory pleasure and to lose sight of the emotions associated with, for example, “subtle cues of embarrassment, playful vocalisations, the visceral feelings of compassion, the sense of gratitude in another’s touch to your shoulder” (p 15).
The main reservation I have about the book relates to the author’s tendency to equate self-interest solely with pursuit of sensory pleasure and to contrast this with the other positive emotions associated with bringing good things in others to completion. At one point he writes: “Ironically enough, compassion may be a prerequisite to the pursuit of self-interested happiness” (p 249). It seems to me that this is only ironical if one takes a very narrow view of self-interest – a much narrower view than that taken, for example, by neoclassical economists who incorporate the happiness of others in the utility functions they use in their theoretical work.
As discussed in an earlier post, it seems to me that there is a lot of good involved in self-actualization that does not necessarily involve bringing the good in others to completion. Being good also involves such things as the human capacity to distinguish between wanting and liking and to defer gratification that are also the result of evolution. In addition, Gregory Burns seems to me to make a strong case that evolution has also wired humans to meet personal challenges: “The sense of satisfaction after you’ve successfully handled unexpected tasks or sought out unfamiliar, physically and emotionally demanding activities is your brain’s signal that you’re doing what nature designed you to do” (“Satisfaction”, p xiv).
The book omits what seems to me to be the strongest argument that can be advanced in favour of the view that humans have evolved to be good, namely the evolution of the concept of self. As philosopher Daniel Dennett has pointed out, evolutionary processes have supported the evolution of minds powerful enough to capture the reasons for things and make them our reasons: “ We are not perfectly rational agents, but the social arena we live in sustains processes of dynamic interaction that both require and permit the renewal of our reasons, making us into agents that can take responsibility for our acts” (“Freedom Evolves”, p 287).
Despite these reservations and my critical comments in earlier posts about Dacher Keltner’s portrayal of Adam Smith’s views and his apparent attempt to argue that social cooperation cannot emerge from self-interest, I found this book to be highly informative. I am not competent to judge the quality of the author’s research findings, but he is obviously an authority in his field. The book makes a strong case that humans have been wired by evolution to experience positive emotions when they seek to bring the good in others to completion.
The author’s aim is to enable the reader to see human behavior in a new light. He presents evidence supporting his view that we have been wired by seven million years of hominid evolution to practice emotions like compassion, gratitude, amusement and wonder that are associated with bringing the good in others to completion. “We have neuropeptides that enable trust and devotion, and a branch of nerves that connects the brain, the voice and the heart that enables caretaking. Our capacity for awe has given us art, a sense of the sacred. We have genes, neurotransmitters, and regions of the brain that serve these emotions as we serve others. These emotions are the substance of jen” (p 269).
Keltner does not deny that we are also wired to pursue self-interest. His claim is that this is “half the story” (p 11). His research suggests that rather than just one reward circuit in the brain that is activated in response to any kind of pleasure, different neural circuits are involved in different kinds of positive emotions such as sensory pleasure, pride, compassion and awe (pp 265-267). He suggests that in our search for happiness many of us have tended to focus excessively on sensory pleasure and to lose sight of the emotions associated with, for example, “subtle cues of embarrassment, playful vocalisations, the visceral feelings of compassion, the sense of gratitude in another’s touch to your shoulder” (p 15).
The main reservation I have about the book relates to the author’s tendency to equate self-interest solely with pursuit of sensory pleasure and to contrast this with the other positive emotions associated with bringing good things in others to completion. At one point he writes: “Ironically enough, compassion may be a prerequisite to the pursuit of self-interested happiness” (p 249). It seems to me that this is only ironical if one takes a very narrow view of self-interest – a much narrower view than that taken, for example, by neoclassical economists who incorporate the happiness of others in the utility functions they use in their theoretical work.
As discussed in an earlier post, it seems to me that there is a lot of good involved in self-actualization that does not necessarily involve bringing the good in others to completion. Being good also involves such things as the human capacity to distinguish between wanting and liking and to defer gratification that are also the result of evolution. In addition, Gregory Burns seems to me to make a strong case that evolution has also wired humans to meet personal challenges: “The sense of satisfaction after you’ve successfully handled unexpected tasks or sought out unfamiliar, physically and emotionally demanding activities is your brain’s signal that you’re doing what nature designed you to do” (“Satisfaction”, p xiv).
The book omits what seems to me to be the strongest argument that can be advanced in favour of the view that humans have evolved to be good, namely the evolution of the concept of self. As philosopher Daniel Dennett has pointed out, evolutionary processes have supported the evolution of minds powerful enough to capture the reasons for things and make them our reasons: “ We are not perfectly rational agents, but the social arena we live in sustains processes of dynamic interaction that both require and permit the renewal of our reasons, making us into agents that can take responsibility for our acts” (“Freedom Evolves”, p 287).
Despite these reservations and my critical comments in earlier posts about Dacher Keltner’s portrayal of Adam Smith’s views and his apparent attempt to argue that social cooperation cannot emerge from self-interest, I found this book to be highly informative. I am not competent to judge the quality of the author’s research findings, but he is obviously an authority in his field. The book makes a strong case that humans have been wired by evolution to experience positive emotions when they seek to bring the good in others to completion.
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