When can economists adopt a contractarian approach to provision of policy advice?

Cartoon by Peter Nicholson: from this site

Robert Sugden explains his use of the term ‘contractarian’ thus:

 “the most fundamental characteristic of this perspective is that a recommendation is addressed to a set of individuals, showing those individuals how they can coordinate their behaviour to achieve mutual benefit."

This post is prompted by my reading of his book, The Community of Advantage, reviewed on this blog a few weeks ago.  

Sugden’s adoption of a contractarian approach was inspired by the work of James Buchanan, in which social arrangements are assessed from the several viewpoints of individual members of society considered as potential parties to a social contract.

Contractarian reasoning implies a baseline of non-agreement from which benefit is measured. For agreement to occur, each party to a potential agreement must recognize that, for all the parties severally, agreement is more beneficial than the status quo.

Contractarian reasoning is readily applied in considering adoption of general rules. When individuals consider adoption of a general rule, a veil of uncertainty about future circumstances often makes it difficult for them to assess where their interests might lie. They become more likely to identify as an “average” citizen than a member of a narrow interest group.

Sugden contrasts the model of contractarian reasoning with two other approaches to normative economics, the model of the benevolent autocrat and the model of public reasoning. He suggests that each of these different approaches to provision of public policy advice, may be appropriate, depending on the circumstances.

When economists employ the benevolent autocrat model, they are providing executive decision-makers with their best judgements about what should be done. In stylized terms, Sugden suggests that they are implicitly saying: “If I were an impartially benevolent autocrat, this is what I would do”. In my experience, when economic advisors employed by governments are striving to be their best selves, they tailor their advice to the values and priorities of the governments they are serving. That doesn’t mean that bureaucrats should attempt to ‘second-guess’ political reactions in providing advice. As Roger Kerr pointed out, soon after leaving the New Zealand Treasury to become executive director of the New Zealand Business Roundtable, attempts to second-guess political reactions “can lead to a narrowing of policy options” and does less than justice to those politicians who are prepared “to tell the story like it is”. Roger explained:

“Economists of all people should be conscious that the performance of bureaucrats in trying to pick winners and losers in the policy-advice market is likely to be as unimpressive as in the industrial domain – and for much the same reasons, namely the lack of information and incentives. Perceived political constraints are not always immutable. They can be shifted by reasoned analysis and well-constructed strategies for policy change, developed by interaction between political managers and technical advisers” (Roger Kerr, ‘Ideas, interests, experience and the economic adviser’, World Economy, 10 (2) June 1987).

The model of public reasoning provides a stylized view of politics as an arena for debate about the public good, where the participants strive to deploy impartial and reasoned argument. By contrast, in the real world, many participants in public debate on economic policy strive to deploy arguments to advance their own interests. Members of the economics profession who participate in such debates have potential to play an important role in ensuring that the merits and demerits of the arguments advanced are subjected to appropriate public scrutiny. That role has been made part of the public policy advisory process in Australia by being embodied in the public inquiry system of the Productivity Commission and its predecessor organisations.

My mention of the ‘economics profession’ brings to mind some provocative comments of Ludwig von Mises, an eminent Austrian economist, about professional economists:

“By virtue of their connection with definite parties and pressure groups, eager to acquire special privileges, they become one-sided. They shut their eyes to the remoter consequences of the policies they are advocating. With them nothing counts but the short-run concerns of the group they are serving. The ultimate aim of their efforts is to their clients prosper at the expense of other people. They are intent upon convincing themselves that the fate of mankind coincides with the short-run interests of their group. They try to sell this idea to the public …” (Human Action, fourth revised edition 1996, p 869).

I disagree with Mises description of such conduct as professional. It is unprofessional for economists to sell their souls to interest groups. It doesn’t matter how much knowledge of economics they might have, those who sell their souls are not behaving like members of an honourable profession.

Improving policy transparency

Some people with institutional expertise in public policy development have suggested that the advisory role of economists should be more akin to provision of information than normative advice. Bill Carmichael, a former chairman of the Industries Assistance Commission (a predecessor organisation to Australia’s Productivity Commission) argued for greater efforts to improve ‘policy transparency’ – to improve public understanding of the economic effects of policies that assist particular groups at the expense of the broader community. With reference to trade protection policies, he argued:

“Public availability of information about the effects, on national welfare, of responses which avert adjustment to economic change would improve domestic understanding and narrow the range of disagreement about what policy responses are appropriate. While it would not eliminate resistance to change by those who will be adversely affected, it would enable the grounds for such resistance to be weighed against the community-wide effects” (W B Carmichael, ‘National Interest and International Trade Negotiations’, The World Economy, 9 (4) December 1986).

Bill’s reference to ‘national welfare’ might raise tangential issues in the minds of some readers about the impossibility of aggregating, or averaging, the welfare of different individuals in a meaningful way, and the value judgements that are involved in using per capita GDP, or any other measure of income, as an indicator of welfare. In order to avoid getting bogged down in such issues, I interpret ‘national welfare’ as code for ‘the opportunities available, individually and collectively, to members of the community’.

When economists view their role as providing information publicly on the impact of policy change on opportunities available to various groups in a community, it seems to me that they are adopting something close to a contractarian approach to provision of policy advice. Such information enables the various groups affected to obtain a better understanding of how they are likely to be affected by policy change. Nevertheless, a public policy process of weighing the interests of those adversely affected by change against the interests of broader groups is likely to fall short of the ideal of a contractarian negotiation because the outcomes are unlikely to receive unanimous support. Unanimity is rarely possible since those adversely affected by change often have a strategic interest in withholding their support in the hope of obtaining a better outcome from the process. Perhaps the most that can be hoped for is that by the time policy decisions are made, the process will have persuaded those adversely affected by change that they are unlikely to benefit from lobbying to have the decisions reversed.

Compensation

Robert Sugden suggests that contractarian advisors have a better chance of achieving unanimous support for policy change if they give attention to compensation. When a policy proposal imposes significant harms on a group of individuals, the addition of compensation payments may have potential to make it mutually beneficial.  Unfortunately, Sugden doesn’t discuss the potential for those opposed to change to negotiate strategically in a context where policy outcomes are likely to be strongly influenced by the political muscle of narrow interest groups. When governments seek to negotiate compensation packages with powerful interest groups, they risk putting the rest of the community in a position somewhat akin to seeking to negotiate a settlement with an extortionist. The above cartoon relating to negotiations for deregulation of the Australian sugar industry illustrates the problem. After receiving substantial adjustment assistance to gain acceptance for deregulation about a decade ago, the industry has since been re-regulated.

Nevertheless, it is possible to cite instances where compensation payments do seem to have enabled better policy outcomes to be achieved in contractarian policy negotiations. In an article published a couple of years ago, reviewing literature on agricultural adjustment in Australia, Geoff Edwards, and I expressed the view that “economists advocating adjustment assistance during the 1970s helped shift the focus of agricultural policy in Australia away from price support and input subsidies, leading to greater acceptance of policies to facilitate adjustment rather than to impede it”.  We concluded that “adjustment assistance can sometimes enable less efficient and less equitable forms of assistance to be avoided” (Geoff Edwards and Winton Bates, ‘Antipodean agricultural and resource economics at 60: agricultural adjustment’, Australian Journal of Agricultural and Resource Economics, 60, pp 573-589).

Conclusions

So, when can economists adopt a contractarian approach to provision of public policy advice? My experience leads me to think that a contractarian approach has been used effectively in considering changes in the ‘rules of the game’ relating to economic policy in some countries. During the 1980s and 90’s, some economists in Australia and New Zealand adopted important elements of a contractarian approach in successfully proposing trade liberalisation, privatisation of public enterprises, regulatory reforms and government spending restraint. The focus of analysis was the potential for changes in the ‘rules of the game’ to improve the opportunities generally available to community members. Reports were published with a view to obtaining broad community support for changes in the rules. Many influential opinion leaders were receptive to the view that the rules of the game needed to be changed in order to avert looming economic disaster.

For reasons expressed elsewhere on this blog (for example here and here) I think the democratic political processes of western countries have been corrupted so much over the last few decades that in the event of a future economic crisis it is unlikely to be possible to implement reforms to prevent emergence of widespread economic misery. I doubt whether use of a contractarian approach to policy advice will help much in this context, but such an approach is still more likely to be successful than the alternatives available. The best contractarian advice I can offer to individuals is to reduce your dependence on government as far as possible, and to seek out opportunities for mutually beneficial interactions that do not involve governments.

Over the next few decades, I expect that economists adopting a contractarian approach will play an increasingly important role in helping people to use new technology to negotiate mutually beneficial agreements to obtain what they want without government involvement. I will write more about that later.

Do you acknowledge a personal responsiblity to seek mutual benefit?

In The Community of Advantage, which I reviewed in my last post, Robert Sugden observes that when individuals participate in market transactions it is possible for them to be motivated by mutual benefit, rather than personal benefit or even by the potential to use proceeds for altruistic purposes. They may see virtue in voluntary transactions that enable people to get what they want by benefiting others.

Sugden points out that being motivated by mutual benefit is consistent with Adam Smith’s famous observation that we do not rely on the benevolence of shopkeepers to provide us with the goods we need. The shop keepers don’t sacrifice their own interests to provide us with goods, but they may act with the intention of playing their part in mutually beneficial practices.

Sugden suggests that adoption of the principle of mutual benefit has implications for personal responsibility:

“According to that principle, each person should behave in such a way that other people’s opportunities to realize mutual benefit are sustained. But beyond that, no one is accountable to anyone else for his preferences, intentions, or decisions. Individuals relate to one another, not as one another’s benefactors, guardians, or moral judges, but as potential partners in the achievement of their common interests".

Individuals decide how to use the opportunities that are available to them, and accept sole responsibility for the consequences.

Sugden’s discussion of ethics includes responses to the virtue-ethical critique of the market of philosophers, such as Elizabeth Anderson and Michael Sandel, who argue for collective action by citizens to impose limits on the scope of markets - on the grounds that motivations of market participants are inherently non-virtuous and therefore liable to corrupt social interactions.

However, some virtue ethicists have adopted a much more market-friendly approach. I have in mind, particularly, the template of responsibility proposed by Douglas Den Uyl and Douglas Rasmussen in The Perfectionist Turn.

Den Uyl and Rasmussen suggest that “the fact that one must make a life for oneself is an existential condition”. To be a person is to have self-responsibility. Each person is primarily responsible for her or his own flourishing. Human flourishing involves “an actualization of potentialities that are specific to the kind of living thing a human being is and that are unique to each human being as an individual”.  Actualization “is dependent on the self-directed exercise of our rational capacities”. Flourishing amounts to the same thing as “the exercise of one’s own practical wisdom”.

As noted in an earlier article on this blog, an entrepreneurial analogy is used by Den Uyl and Rasmussen to describe what a flourishing life involves. Flourishing is activity rather than a passive state. It involves discovery of opportunities, and alertness to new opportunities amidst changing circumstances, rather than merely efficient use of the means at our disposal.

The authors suggest that if we accept that human flourishing is the goal of ethics, then we should learn from exemplars. People who have flourished in difficult circumstances may provide us with useful models of action. Of course, the idea that it can be helpful to personal development to identify and emulate the values that drive heroes has been around for a long time. It seems to work best for people who are sufficiently self-authoring to be able to recognise that famous people are not always good exemplars of human flourishing.

Den Uyl and Rasmussen argue that the ultimate value of the template of responsibility is integrity, which “signifies a coherent, integral whole of virtues and values, allowing for consistency between word and deed and for reliability in action”. They suggest that integrity expresses itself interpersonally in honour. Although acknowledging that honour may be “too old-fashioned a term for today’s usage”, they maintain that it does “capture the sense of what it means to greet the world with integrity”.

An alternative term, that captures some of that meaning, is trustworthiness. Den Uyl and Rasmussen briefly discuss the question of why they consider opportunistic participation in untrustworthy behaviour to be inconsistent with individual flourishing. They argue that such opportunism puts “the relationship we have with ourselves as a whole in disequilibrium by eroding what we ought to be in our relations with others generally”.

I have a vague idea of what that means. We can’t flourish if our behaviour is inconsistent with our values. Peoples’ consciences are often troubled when they engage in untrustworthy behaviour. When confronted with an opportunity to benefit unfairly at the expense of another person we sometimes hear people say, “I couldn’t live with myself if I behaved in that way”. I am not sure whether those sentiments are best explained in terms of evolved moral intuitions, internalisation of norms of reciprocity during the maturation process, a combination of both, or something else. Perhaps it doesn’t matter much how such sentiments are explained; the important point is to recognize that humans generally view untrustworthy behaviour to be inconsistent with their values.

Results of the trust game suggests that in a world we live in there seems to be a widespread expectation that even people we don’t know may be somewhat trustworthy. The trust game is a once-off game played between anonymous strangers (A and B). A is given $10. She can choose to keep it all or send some to B. B receives 3 times the amount sent by A. B can choose to keep all the money she has received, or send some back to A. In the results of games reported by Robert Sugden, A players sent on average $5.16 and received back $4.66, with B players keeping $10.82.

Sugden suggests that the willingness of A players to send any money to B players can explained in terms of their expectation that B players can be trusted to play their part in producing mutual benefits.  

In real world interactions, people have greater knowledge of the trustworthiness of others. Sugden points out that the principle of mutual benefit requires trustworthiness:  

"In an economy in which there is a general tendency for people to act on the Principle of Mutual Benefit, it is in each person’s interest that other people expect him to act on that principle”.

He explains:

“In choosing whether or not to enter a trust relationship, each individual is free to judge for herself whether or not that will be to her benefit, taking account of the possibility that other participants may be untrustworthy. To the extent that some person, say Joe, can be expected to act on the Principle of Mutual Benefit, he can be seen by others, and sought out by them, as a potential partner in mutually beneficial interactions that those others are free to enter or not enter, as they choose. Thus, Joe’s being seen in this way allows him to access opportunities for benefit that would be closed off if his potential partners expected him always to act on self-interest."

That reasoning might suggest to some readers that it is more important to establish a reputation for trustworthiness than to have an intention to be trustworthy. A lot of commercial advertising seems to make that presumption. Fortunately, there is some evidence that individuals’ dispositions toward trustworthiness are translucent. When people have face-to face interactions with others they are quite successful in predicting who will cooperate and who will defect. On that basis, Sugden suggests that having a disposition to act on the principle of mutual benefit makes it more likely that other people will expect you to act in this way.

Summing up, accepting responsibility for making something of one’s own life is an integral part of what it means to be a human, and seeking mutual benefit in interactions with others follows naturally from that. Integrity in our behaviour toward others is of central importance to flourishing because we cannot flourish if we don’t live according to our values, and because we cannot flourish unless other people trust us sufficiently to seek mutually beneficial interactions with us.

Isn't it good to be able to get what you want by helping others to get what they want?

When I was at university studying neoclassical welfare economics - about half a century ago - the standard discussion of the benefits and limitations of free markets began with a demonstration that, under certain assumptions, individuals with stable and internally consistent preferences could maximize their utility through voluntary transactions. As I write, I have a picture in my mind of neat sets of indifference curves in an Edgeworth Box, rather than the gains from trade diagram shown above.

Of course, in the 1960s and 70s a great deal of attention was given to market failure stemming from violation of competitive market assumptions and the existence of externalities. Since then, research by behavioural economists has provided evidence that individuals’ preferences tend to be context-dependent, rather than stable and internally consistent. For example, as we all know, what we choose to buy may be influenced by the placement of items on supermarket shelves.

Just as evidence of market failure led many economists to advocate remedial government interventions, evidence that individuals’ preferences tend to be context-dependent has been used by some behavioural economists to argue for paternalistic interventions to nudge people to make better choices. Wise economists urge that consideration should also be given to government failure - the tendency for government intervention to make matters worse even when politicians intend to produce better outcomes.

Robert Sugden has shone light through the smog caused by the standard neoclassical assumptions about individual preferences in his recently published book, The Community of Advantage. Sugden dispenses with assumptions about individual preferences by substituting the principle of individual opportunity – the idea that individuals will choose to have more opportunities rather than less.

Sugden’s book has been praised by some eminent scholars working at the interface between economics, psychology and ethics. It is pleasing that Cass Sunstein, whose advocacy of paternalistic nudges is challenged in the book, describes it as “one of the very few most important explorations of liberty in the last half-century.

Sugden makes the powerful point that there is no basis for behavioural economists to interpret contraventions of the standard neoclassical assumptions as necessarily attributable to cognitive error or self-control problems. There is no known psychological foundation for human decision-making to be modelled as “a neoclassically rational inner agent, trapped inside and constrained by an outer psychological shell”.

Nevertheless, humans obviously make cognitive errors and experience self-control problems. Should economists wash their hands of those problems and leave them for psychologists to deal with? Sugden suggests that economists may be able to help by adopting a contractarian approach – addressing their recommendations to individuals - usually by showing them how they can coordinate their behaviour to achieve mutual benefit - rather than addressing recommendations to paternalistic governments. It is consistent with a contractarian approach for economists to point out the mistakes that individuals are liable to make and to suggest types of choice architecture (e.g. nudges) that they could use, if they wanted, to avoid making those mistakes.

One of the highlights of the book is the perception it offers of the workings of “the invisible hand” of the market. The invisible hand is sometimes portrayed as something that has to be mysterious since it is able to convert self-interest into community benefits. Sugden suggests that the invisible hand is far from mysterious when perceived in terms of the activities of profit-seeking traders looking for arbitrage opportunities. If some individuals are willing to sell something at a lower price than other individuals are willing to pay to buy it, traders can take advantage of the profit opportunities of that situation. From the perspective of the buyers and sellers the transaction helps realize an opportunity for mutual benefit, whether traders are involved or not.

As I see it, from an individual’s perspective the market provides expanded opportunities along the lines suggested in the gains from trade diagram shown above. A person who subsists without trading with others has little leisure time left after eking out a living. By participating in trade - earning a market income in this example - her consumption possibilities are expanded. She is able to get more of what she wants – more leisure and/or more other goods - by helping others to get what they want.

Opportunities for mutual benefit are not limited to market exchange. Mutual benefit is possible in many different types of cooperative interaction. Sugden provides an insightful analysis of team reasoning, contrasting a contractarian approach in which individual team members seek to achieve mutual benefit with the alternative of perceiving the team as a single entity and seeking to maximize the overall good of the team, as judged from some neutral viewpoint.

The author’s analysis of adherence to voluntary practices is also insightful. He notes that individuals realize mutual benefits directly by conforming to voluntary practices, e.g. tipping conventions, because regularities of behaviour provide salient benchmarks for expectations about one another in specific interactions. By conforming to the practice, they also sustain the expectations upon which it depends and help to maintain it as an institution.

In my view, the most important contribution of the book is its discussion of the ethics of intending mutual benefit. A long-standing and recurring theme of criticism of market exchange is that it involves extrinsic motivations that are not virtuous. That line of thinking implies, implausibly, that the intrinsic satisfaction that I obtain from blogging might evaporate if I were to obtain monetary rewards for my efforts. Sugden observes that when people participate in markets they can act with the intention of achieving mutual benefit, rather than personal benefit. He urges readers to adopt the following principle of mutual benefit:

“When participating with others in a voluntary interaction, and for as long as others’ behaviour in that interaction is consistent with this very principle, behave in such a way that the other participants are able to satisfy normal expectations about the consequences of the interaction for them."

The author explains that one of the merits of the principle of mutual benefit is that what it requires of us individually is independent of the motivations of the people with whom we interact. It is in our interests to seek mutual benefit in interactions with as many other people as possible. The principle never requires us to make judgements about another person’s intentions.

The Community of Advantage is the best book I have read about the economics of human flourishing. This brief review has provided only a glimpse of what it is about. Hopefully, it has whetted your appetite to read the book.

The book has raised several issues that I hope to be able to explore further on this blog:

• Is the principle of mutual benefit consistent with the primacy of personal responsibility as discussed by Douglas Den Uyl and Douglas Rasmussen in The Perfectionist Turn?
• When is it possible for economists who are engaged in provision of public policy advice to adopt a contractarian approach?
• Does the principle of mutual benefit mesh well with the views of Elinor Ostrom on management of common property resources, the views of Vincent Ostrom on politics, and the views of Max Borders about the prospects of a Social Singularity?

Can the hope circuit help us to circumvent dysfunctional politics?

This question came to mind when I was reading the final chapter of Martin Seligman’s latest book, The Hope Circuit.

The book is an autobiography, but in discussing his own life the author provides readers who have little knowledge of psychology, people like me, with a painless way of informing themselves about some major developments in this field over the last century.

Marty Seligman played an important role - as a researcher, author of popular books, and transformational leader - in helping to bring about important changes in his profession. He made major contributions in encouraging the profession to study cognition, recognise evolution, embrace positive psychology, and give greater attention to prospection.

I will focus here on learned helplessness, learned optimism and the hope circuit. Marty, as he is accustomed to being called by just about everyone, made his name as a researcher in the 1960s for his work, with Steve Maier, on learned helplessness. Marty and Steve observed that when dogs were unable to avoid electric shocks by changing their behaviour, they subsequently tended to remain passive when they did have the opportunity to avoid shocks. The dogs appeared to have learned that nothing they did mattered.

Marty saw the potential implications of this research for understanding of mental illness among humans and developed the helplessness theory of depression on that basis. That theory was subsequently reformulated, with assistance from John Teasdale, to take account of the way people think about the causes of their feelings of helplessness. For example, those who see their current problems as likely to last forever and to undermine everything they do are likely to feel helpless long into the future. Pessimism leads to helplessness.

Marty’s popular book, Learned Optimism, published in 1990, integrated research findings on learned helplessness and explanatory style.  It advocated disputing pessimistic thoughts as the central skill of learned optimism.

Marty coined the term “hope circuit” in 2015 to describe the MPFC-DRN circuit of brain activity discovered by Steve Maier, who had retrained as a neuroscientist. Marty explains that Steve’s discoveries turned learned helplessness on its head:

“He showed that the arrow of causality that we had postulated was wrong and that it was not helplessness but control and mastery that were learned".

One of the implications of this research is that therapy that “creates end runs” around trauma and helps people to plan a better future is likely to be more helpful than therapy that tries to undo trauma by confronting the past.

What does all this have to do with dysfunctional politics? This passage got me wondering:

"Human history has, until recently, been a tale of woe: warfare, plague, famine, injustice, poverty, ignorance, and violent death. The last half century has witnessed, if not the eradication, a great reduction of these ills. When the world is a vale of tears, it is natural that politics, religion, science, medicine, and the arts should concern themselves with defense and damage. But what happens when the world is no longer a vale of tears?"

My initial reaction to that passage was the same as my reaction to Steven Pinker’s book, Enlightenment Now. I agree that massive progress has been made in human flourishing, but I see huge problems ahead for liberal democracy. We are confronted by widespread failure to adhere to the norms of self-reliance and reciprocity that underpin liberal democracy.

I became even more pessimistic when my thoughts turned to Jason Brennan’s book, Against Democracy. In my response to that book I mourned the declining power of the major political parties to shape political agendas in ways that moderate the ill-informed desires of electors. I raised the question of whether many voters would be likely to accept impartial advice on how to vote to achieve their objectives.

It is not obvious that there is anything that anyone can do now to save liberal democracy from political hooliganism.

So, why aren’t I feeling depressed and helpless?  The main reason is that a few months ago Max Borders’ book, The Social Singularity, gave me grounds to hope that technological advances will eventually enable citizens to circumvent dysfunctional politics. Rather than moaning endlessly about the decline of liberal democracy, we can look forward in the hope of a better future. There may even be practical things that we can do in cooperation with others to facilitate growth in opportunities for human flourishing.