The Polinomics Agenda

Neurath's Boat

2012-02-01T05:48:00.000-08:00

Neurath's boat metaphor for how we seek and apply knowledge seems popular among pragmatists, I've seen it feature quite prominently in recent defenses of pragmatism by Richard Rorty and Bryan Norton.

The basic metaphor is pretty simple (and no doubt they like being able to bring the positivists back into their camp), so there is intuitive appeal to it. We start out with the boat we have, rotting timber and all. And we don't have the luxury of replacing all the planks (which one would think of as propositions with relative degrees of truthfulness corresponding with how "sound" they are as planks), so we have to stand on other planks to replace those that are failing. As one is forced to stand on other planks, one can never start at the beginning, i.e. adopt a position of radical doubt. To not take a pragmatic stance, fix those planks most urgently need or repair while standing on those in ok, but perhaps not ideal condition, is to go into the drink. Given that the whole point of the knowledge boat in the first place is to avoid the drink, Descartes' project, er, founders.

My sympathies are with the pragmatists on this one, I mostly agree with Rorty's characterization of radical skeptics as "obsessive" is often apt. But it does seem pretty clear that the selection of the metaphor preselects the pragmatic conclusion. A boat is to keep you out of the water, that's what it's for. Of course it fails as a boat and you fail as a boat operator if you let it go down. Why are you voyaging might be a better question. Is it for pure knowledge and discovery, for conquest, to escape something, for profit, or to catch a tasty fish?

Having sailed a little, I also hate to let Neurath know, that most boats are made of fiberglass or steel these days, and if your boat is in trouble, you'll bring it into dock. The decision making will mostly involve which boat you decide to get on in the first place, not which non-existent planks you repair. So boat design actually is the pressing concern. What is it designed for, what tradeoffs has the designer opted for, how does it fit your purpose, how does it compare to othe boats designed for similar purposes.

I don't think that picking boats, instead of picking planks is at all problematic to the pragmatist project. How does one pick a boat, one finds a community of practitioners who generally shares the same purpose for boating, and looks at the types of boats they use. As one learns more about that specific area of boating, one may find one particular design suits oneself best, and will take a stance on various design choices. If one gets REALLY into boating, one can design and build a boat of one's own, and build it from the ground up. This might be an exercise in skepticism of current designs, and exercise in learning and understanding them, or simply a way to try one's hand at something new. At the end of the day the design will be judged by how well it performs in accordance to what it was designed for. So skepticism, even radical skepticism is permitted, but the proof is in a very pragmatic pudding.

The Neuroscientific Case for Heidegger

2011-07-27T05:40:00.000-07:00

I've been debating Prof. Massimo Pigliucci at Rationally Speaking over the usefulness and relevance of Heidegger's work. I am putting the below excerpt from Antonio Damasio's excellent Self Comes to Mind as an example of a situation and behavior I believe to be very difficult to explain without reference to Heidegger's work refuting the substance ontology.

Briefly stated, the substance ontology tells us objects exist because they have physical form and we observe that physical form. Intuitively, this is a pretty plausible explanation, which is why it is been more or less unquestioned since Plato. Up until Kant, this led to a problem, one could examine objects (the Empiricists) or one could examine the contents of the mind (the Rationalists) but the two could not be reconciled. Something existed because it was physically there, so it was silly to say it had any relation to the contents of the mind. And yet, the mind felt like the most real thing for the Rationalists, and so we have the axioms of Descartes and Spinoza that start with the mind and then try to make a proof of the external world without any empirical recourse to it.

Building on Kant, Husserl created phenomenology, the idea that we can have access to the objects we interact with as well as ourselves by reflecting on the situations in which we interact with the objects. But this was still something taking place in our own heads, we had free reign in our own heads under Husserl, but what relevance did this have to the cold material world outside our heads?

Heidegger tells us that phenomenology has relevance outside our heads by taking on the substance ontology. He demonstrates that (as beings that have a stance on our own being) the physical properties of objects are not the primary stuff that make up the world. (There is an important distinction between the World, which has people in it, and the Universe, the realm of science, where this does not apply.) We don't go out and find a hammer, nails, and wood, and discover they have the properties of building a place to live in a certain way. Rather, the place to live in a certain way, connected with our stance on being, preexists and coordinates the use of the hammer, nails, and wood. The hammer doesn't exist primarily as piece of wood with a blob of metal on top, rather it exists primarily as something to build with. And this something to build with is based on our stance on our own being. Without a self, the coordination of these physical objects breaks down. I'm challenging Prof. Pigliucci to come up with a better philosophical explanation for the condition described below. In this case the self is lost, but the mind is perfectly capable of acting in an intentional manner towards objects consistent with the substance ontology.

Removing the Self and Keeping the Mind

Perhaps the most convincing evidence for a dissociation between the wakefulness and mind, on the one hand, and self, on the other, comes from another neurological condition, epileptic seizures. In such situations, a patient’s behavior is suddenly interrupted for a brief period of time, during which the action freezes altogether; it is then followed by a period, generally brief as well, during which the patient returns to active behavior but gives no evidence of a normal conscious state. The silent patient may move about, but his actions, such as waving goodbye or leaving a room, reveal no overall purpose. The actions may exhibit a “minipurpose,” like picking up a glass of water and drinking from it, but no sign that the purpose is part of a larger context, The patient makes no attempt to communicate with the observer and no reply to the observer’s attempts.

If you visit a physician’s office, your behavior is part of a large context that has to do with the specific goals of the visit, your overall plan for the day, and the wider plans and intentions of your life, at varied time scales, relative to which your visit may be of some significance or not. Everything you do in the “scene” at the office is informed by these multiple contents [contexts?], even if you do not need to hold them all in mind in order to behave coherently. The same happens with the physician, relative to his role in the scene. In a state of diminished consciousness, however, all that background influence is reduced to little or nothing. The behavior is controlled by immediate cues, devoid of any insertion in the wider context. For example, picking up a glas and drinking from it makes sense if you are thirsty, and that action does not need to connect with the broader context.

I remember the very first patient I observed with this condition because the behavior was so new to me, so unexpected, and so disquieting. In the middle of our conversation, the patient stopped talking and in fact suspended moving altogether. His face lost expression, and his open eyes looked past me, at the wall behind. He remained motionless for several seconds. He did not fall out of his chair, or fall asleep, or convulse, or twitch. When I spoke his name, there was no reply. When he began to move again, ever so little, he smacked his lips. His eyes shifted about and seemed to focus momentarily on a coffee cup on the table between us. It was empty, but still he picked it up and attempted to drink from it. I spoke to him again and again, but he did not reply. I asked him what was going on , and he did not reply. His face still had no expression, and he didn not look at me. I called his name, and he did not reply. Finally he rose to his feet, turned around, and walked slowly to the door. I called him again. He stopped and looked at me, and a perplexed expression came to his face. I called him again, and he said, “What?”

The patient had suffered and absence seizure (a kind of epileptic seizure), followed by a period of automatism. He had been both there and not, awake and behaving, for sure, partly attentive, bodily present, but unaccounted for as a person. Many years later I described the patient as having been “absent without leave,” and that description remains apt.

Without questions this man was awake in the full sense of the term. His eyes were open, and his proper muscular tone enabled him to move about. He could unquestionably produce actions, but the actions did not suggest an organized plan. He had no overall purpose and made no acknowledgement of the conditions of the situation, no appropriateness, and his acts were only minimally coherent. Without question his brain was forming mental images, although we cannot vouch for their abundance or coherence. In order to reach for a cup, a pick it up, hold it to one’s lips, and put it back on the table, the brain must form images, quite a lot of them, at the very least visual, kinesthetic, and tactile; otherwise the person cannot execute the movements correctly. But while this speaks for the presence of mind, it gives no evidence of self. The man did not appear to be cognizant of who he was, where he was, who I was, or why he was in front of me.

In fact, not only was the evidence of such overt knowledge missing, but there was no indication of covert guidance of his behavior, the sort of nonconscious autopilot that allows us to walk home without consciously focusing on the route. Moreover, there was no sign of emotion in the man’s behavior, a telltale indication of seriously impaired consciousness (emphasis in original).

Such cases provide powerful evidence, perhaps the only definitive evidence yet, for a break between two functions that remain available, wakefulness and mind, and another function, self, which by any standard is not available. This man did not have a sense of his own existence and had a defective sense of his surroundings.

The Pitfalls of Objectivity in Policy Design

2011-07-19T12:26:00.000-07:00

We strive for objectivity in our work, as well we should. The less observations or conclusions are dependent on opinions, biases, or assumptions, the more replicable and generalizable results will be by others, and thus they will be more useful, and more convincing.

A prevailing view of objectivity derives from a conception of correctly representing phenomena in the natural sciences. In this view, there is an objective natural reality of objects "out there" and we, if we wish to be good scientists, seek to create representations that are objective to the extent that they replicate the objects in that reality. We must observe the objects to do this, with our sensory perceptions and with apparati, but we are more scientific if we can take the "we" out of the observation. If one wants to objectively characterize a rock "heavy" is a very useful subjective description, but a poor objective one. "25lbs" is a better objective one, but still tied to the context of the planet Earth. "11.33980925 kilograms" is the best objective measure, even if but it loses the subjective component. "Heavy" means the same thing here and on the moon in an experiential sense. 11.33980925 kilograms does not.

The reason we don't like "heavy" as a measurement, is it is very closely tied to the observer. A weightlifter and a four year old will have very different observations of what is heavy. The advantage of "heavy" as an observation, is if I do know the observer, I can abstract a lot of subjective information, and infer a lot of objective information from it. If I know you described the rock as heavy, I know that when you describe another item as heavy, you mean something in approximately the same range of mass. I can also know, when you have described a mass (that I also have made a subjective judgement about) as heavy, whether I think you are a weakling or not.

Let's call "heavy" and aspect of the rock, and "11.33980925 kilograms" a property of the rock. Both aspects and properties, have their uses. If you tell me someone was hit by a car on the freeway, you've conveyed a lot of information. I don't need the mass or velocity of the vehicle, or a detailed representation of the human body and the effects of force exerted on it, to know this is "bad" news for said individual. My intuitive understanding of human physiology, that cars are "heavy" and move "fast," especially on the freeway, is enough, and is in fact superior for rapidly and fully conveying what occurred, than a formally observed and modeled (attempts at repeated observations might run into some ethical issues) explanation of what happened.

That said, maybe there was construction on the freeway (or it just happened to be somewhere in the DC Metro area, or both) so the car was traveling two mph. The car was made up of balsa wood and rice paper and piloted by a midget and the person hit was a 400lb goliath in a suit of armor. Well, the formal representation route would have avoided this mistake, by refusing to take any information from the aspects of the situation and only using the properties, but once again would have been more costly than simply amending the initial statement with the above qualitative description and ensuing subjective judgments. On the other hand, if we wish to talk about general matters of car velocities and the ensuing dangers (though dangerous is an aspect, not a property) we may wish to take more formal routes.

Why do we throw out so much perfectly good information when conducting scientific inquiry? In fact we don't, interpretations of what situations are relevant to a theory or other human concern a situation are relevant and should be investigated, and interpretations of the aspects of those situations and the data they produce, are necessary for science to be an intelligible endeavor. This is why science is conducted by scientists, not computers. While computers can represent and analyze all kinds of data, we need a human being to interpret the data for it to be intelligible and intelligent. Even AI, just isn't that intelligent.

Indeed, all statistics must be interpreted. 90% of Pasteur's data on contagion theory is reported to have been ignored by him. We maintain the ideal of astronomy because it attractively avoids the slippery slope where the differences between interpretation, confirmation bias, and pure fabrication, are distinguished by the subjective intent of the individual researcher, and thus the research result, difficult to replicate under any circumstances, is very rarely objectively verifiable. Trusting the researcher and his or her reviewing peers is essential and necessary for much of the scientific endeavor.

Just trusting someone, a subjective stance (and as we know an often troubling one), is intuitively anathema to how we conceptualize science. Isn't the whole point of science that we can replicate results that are intuitively implausible of people that we don't trust? Isn't that what objectivity really is?

Can anyone beat Galileo's work as the style of investigation all scientific work should seek to imitate? Here we have someone take a theory, that is intuitively implausible based on our sense experiences, and confirm it with empirical observations. The theory and linked observations, are so strong, that it stands, despite all the organized political and spiritual powers that be, and despite that the man himself recanted it, as True, and replicable by anyone who wishes to verify it.

But there is a danger in idealizing this style of science, particularly when we get into the social sciences. The social sciences are often thought of as soft sciences, perhaps not really sciences at all. Their subjects of study are often so maddeningly hard to pin down, and likely to adapt to circumstances, that the development of formal representational models, that will have any empirical validity, predictive value, and societal relevance, is maddeningly elusive. This is the subject of much gnashing of teeth among social scientists. Who doesn't what to be a real scientist dealing with real hard Galilean Truths?

The social scientists that have best positioned themselves as being "real" scientists are economists. We have a lot of formal models based on assumptions that are more or less intuitively plausible, and more or less based on empirical observation. They do a lot of math, come up with a lot of counterintuitive conclusions. What economists have, are prices, employment figures, interest rates, and other such measurements, which mean they can get farther away from the world of subjective interpretation, (what does it mean that 54% of the population voted for this candidate, depends on why the population, who the candidate is, who the population thinks the candidate is, etc., etc.).

These numbers are more or less objective, one car argue about methodologies for measuring GDP, whether a black market exists, but at the end of the day, if an apple sold for $1, the apple sold for $1. The perception that economics deals with objective truths has given economists a great deal of power in the policy arena. Predicting the outcomes of various policies is undeniably complicated work so methodologies such as cost benefit analysis can help policymakers and the public get a rough idea of the policy's financial implications and thus whether it is "worth it."

The tricky thing, is that the apple's valuation at time of sale of $1 is a subjective valuation. I may not actually want the apple later when I initially planned to purchase it, and thus I may have wasted my money. This isn't a terrible problem, one buyer does not a market make (exception monopsony) provided that we trust the market is efficient and most buyers are rational. Similarly an unemployment rate doesn't just reflect the number of people out of work but looking for employment, but also the unemployed's subjective perceptions of whether it is worthwhile to keep looking, and employers' subjective judgements regarding where the economy will go. A full picture of unemployment must reference who the unemployed are, and why they're doing what they're doing, and who the employers are, and why there doing what they're doing. Suddenly we're stuck with subjective judgements in this most scientific of social sciences, no wonder macroeconomic arguments are often so heated. While we can formally represent the unemployment rate in a satisfactory manner, any formal representation of the employers or unemployed is going to be strongly contested.

Fortunately as a nation, we do not need to come up with agreed upon formal technical arguments for all political issues. While the American People employ technical experts to advise elected and appointed political representatives, ultimately the sovereign power of this nation resides in The People.

Just because the technical experts are let off the hook from finding technical and objective solutions to all of America’s problems does not mean that everything is hunky dory. The power Congress delegates to Executive Branch agencies may enshrine or foster over time a class of experts whose values differ markedly from that of The People. (We will leave who The People are aside for a moment, but needless to say, who they are, and what they want is naturally a contested political issue.) Thus we have practices such as cost benefit analysis that put a “weight” on an agency action that is readily understood by all.

How fully this weight describes the action can be complicated. Just as a rock can be described by its weight it will also have chemical and physical properties, texture and a geographical and perhaps even a cultural history. Its weight, just like the measure of economic efficiency that is cost benefit analysis, will capture some of these properties better than others. The numbers of a cost benefit analysis are a worse measure than the weight of the rock, because we aren’t able to weigh the economic efficiency of the action directly, rather we must derive it from technical assumptions that may only be understood by experts. Thus cost benefit analysis, may serve an anti-democratic and anti-transparent function by moving the realm of decision making to technical conflicts between experts inside and outside of government. The situation may be further worsened because decision makers and the public may have very little idea what a cost benefit analysis says and does not say. Just as the weight of a rock might not be its most interesting feature, so the economic efficiency of an agency action may not be what we care most about.

The solution is not to throw out cost benefit analysis, or even give up on “objectivity” as an important guidepost for decisionmaking. The key is too make sure that no one thinks they know everything about a rock because of its weight. Introducing more criteria to the analysis such as employment, distributional, indirect, and environmental justice impacts are all moves in this direction. Note that these more or less objective criteria do not bring us closer to an objective decision. A rule that would assign weights to them would be necessary to do that, and even if one were to come up with such an objective rule, it would be the equivalent to describing the rock by its weight again. These additional criteria allow and force the public and decision makers to think more critically about the issue at hand. Thus the veneer of objective decision making is lost, but more critical, engaged, informed, and transparent decision making is fostered.

In a future post (teaser!) I will discuss a different conceptions of objectivity and how analyses based on it incorporate many of the advantages (but also some pitfalls) of the intuitive understanding of the aspects of objects under investigation.

An Economic Critique of Pragmatism

2011-06-30T05:10:00.000-07:00

I've been doing a little reading in America's great philosophical tradition, pragmatism, and in general I like what I see. Get to the point people, tell me why it matters. "Monism" or "pluralism," why does it matter? Pretty soon you get to such abstract notions that no one but two old men care one iota. Coincidentally, one of those men suspects that the other intentionally spilled water on his tweed coat during a seminar 30 years ago, and the other that vociferiously denies the allegation, and is quite bitter about it. Angels on dancing on the head of a pin.

As an economist, however, I must advance a criticism of the following statement from William James:

The great English way of investigating a conception is to ask yourself right off, "What is it known as? In what facts does it result? What is the cash-value, in terms of particular experience? "And what special difference would come into the world according as it were true or false?" (Emphasis in original.)

What if I were to take a suitcase of $100 bills with me to visit one of those Amazonian tribes just coming in contact with the outside world? What would be the cash value of such a suitcase? It might be worth $1,000,000 when I get on the boat to go up the river, but what it is worth when I get there, is going to depend on whether I can convince the tribe that this paper will be accepted almost anywhere else in the world in exchange for goods and services, that its value will be maintained (hopefully these days!) because it is backed by a economic and military superpower, and that people everywhere basically trust this superpower to pay its obligations and thus maintain the currency. They may trust me, and thus take the cash and create their own dollarized economy, ensuring that I am very well taken care of with my now substantial wealth. They may read the newspaper I brought with me talking about the current debt ceiling negotiations, and put me on the next boat out of town.

The point is, cash value doesn't exist unless a standard by which values are measured is established. (One does not explicitly need cash to do this as in a barter economy, but one of the functions of currency is to act as a numeraire.) Biological value is not a bad place to start, I will immediately be concerned about how many dollars I can exchange for a tasty grilled sloth. But, as the massacres over seeminly petty doctrinal issues during the Reformation and Counter-Reformation indicate, our concerns in life are not merely biological. In fact, the current nastiness over the teaching of evolution is, at its core, a fight over whether the biological is primary or the spiritual is primary. Perhaps, if I had a religous restriction on eating grilled sloth, I would be truer to my values by starving instead of eating its devilishly tasty flesh?

Does this throw out pragmatism? No, not at all. Pragmatism is a very useful solvent to dissolve issues that are inherently silly because fighting over them obscures implicit agreement on a host of values that are far more consequential. It can help us move past the abstract to issues of significant political, social, and spiritual consequences, which may underlie the abstract debates. A small abstract detail can radically change the standard by which the world and objects and actions in it are valued. We should count ourselves lucky that those abstract details are carried out in irrelevant debates, rather than with tanks and jets.

A Brief Exercise in Subjectivity for Philosophy

2011-06-22T05:29:00.001-07:00

After my prior post on what I took to be John Searle's misreading of Antonio Damasio's new theory that the roots of consciouness are in the primordial mind, I went out and bought Damasio's book. It is, (in my subjective opinion), quite excellent. It lucidly ties together neuroscience, evolutionary biology, and philosophy for an intuitively very plausible (to me) framework for how consciousness arose and how it operates.

What makes Damasio's account powerful is that it is rooted in the scientific and objective. But how I ended up reading his account, is an exercise in the power of the subjective. And whether I reduced my search costs for this book enormously with clever shortcuts, or whether I simply found a way to confirm my own biases, is up to the reader to decide.

I found Searle's review of Damasio through a posting by blogger/philospher John Wilkins. I recognized Searle's name and found it interesting because Hubert Dreyfus had noted repeated squabbles with him. As I find Dreyfus to be very engaging and insightful, I have an interest in seeing what Searle has to say because Dreyfus is interested in what Searle has to say. (I also have a bit of a bias against Searle because of Dreyfus but you can judge how much that influences me based on my previous post.)

The little flag raised by Dreyfus' interest in Searle got me to go back to look for the post after I wasn't able to read it immediately. Three times. Twice on my workstation, where for some reason Twitter malfunctioned, and the post didn't show, and then a third time on my smartphone where I found it. That amount of effort says something, I'm not exactly hard up for information to consume. The little flag had a powerful effect.

But how did I even see the post in the first place? I didn't even know who John Wilkins was two weeks ago, and now I'm following him on Twitter, seeing stuff he writes a few times a day. Well, a few weeks ago, Andrew Sullivan, who I find takes novel and well thought out positions on politics and provides a nice mix of philosophy and religion thrown in, posted a link to Massimo Pigliucci's blog. The post was interesting, so I started following it and his Twitter account as I figured one post of interest might lead to more posts of interest. A few days later Massimo posted a link to Sean Carroll's article requiring a physically testable hypothesis for the soul. I think this is a silly position, and had some back and forth with Massimo who doesn't believe this is a silly position. At some point, John Wilkins, started following me in Twitter. So I looked his back and forth with Massimo, and his blog post on the subject which I found covered the limits of science in this case, to be technically well done (and I agreed with his conclusions). So I started following John Wilkins on Twitter, and later saw his post on Searle's article.

So how many degrees of subjectivity do we have here? I bought a book because Searle disagrees with the author and Hubert Dreyfus disagrees with Searle. I found out about the book because Sullivan found Massimo's post interesting, then I disagreed with Massimo on a subsequent point and John agreed with me. It ended in an objective act, a $25 purchase on Amazon. And I've got a book I'm happy with, that I wouldn't have found otherwise. Perhaps I'm confirming my biases, but without my biases, how would I have found the book?

John Searle's Illuminating Confusions

2011-06-02T06:33:00.000-07:00

John Searle concisely summarizes what appears to be a very complicated but interesting book, Self Comes to Mind: Constructing the Conscious Brain by Antonio Damasio, in the New York Review of Books. The first part of the review itself is worth reading for the significant progress Damasio appears to have made on the problem of where consciousness comes from, notably, by looking at lower level functions of the brain. But Searle brokers confusion and advances a subsequent critique which says more about the baggage that he, and many of the rest of us brought up in the analytic tradition, bring to such problems.

First, let us look at Demasio's conception of consciousness and Searle's problem with it.

Demasio:

The decisive step in the making of consciousness is not the making of images and creating the basics of the mind. The decisive step is making the images ours, making them belong to their rightful owners…. [Italics in original.]

Searle:

Consciousness. In actual practice I think his idea of consciousness is essentially the one stated above. Its essence is qualitative subjectivity. But when Damasio defines it explicitly it comes out a bit differently: it is “a state of mind in which there is knowledge of one’s own existence and of the existence of surroundings” (italics in original). I do not believe this definition is correct. My dog, Gilbert, is plainly conscious, but in what sense does he have knowledge of his own existence? He is certainly aware of his surroundings when he perceives anything. But it is hard to say that when he is dreaming he has knowledge of the existence of his surroundings. It is Damasio’s right to define a word any way he likes, but I think in practice he uses “consciousness,” as I do, to refer to ontologically subjective states such as pains, and does not use it just to describe epistemic states, such as my knowing that I am in Berkeley.

Searle's, problem and confusion, arises from a quirk in the English language. In English we ask, "Where am I?" and the answer, might be, "Here, in Berkeley." But a Japanese speaker, would see this question as nonsensical. You are always here, indeed, "Wherever you go, that's where you are." The question for a Japanese speaker, is "Where is here?" This conception mirrors Heidegger's Daseins, each of which is its own "here." This formulation of here one Gilbert, Searle's dog (who is "plainly conscious?"), could deal with. Gilbert knows where "he" is. "He" always where "he" is. "He" doesn't have a concept of a "he" that can be placed anywhere else. "He" may be interested in the properties of what currently surrounds him, however, and proceed to sniff about, see if "here" has other dogs about, and foul smelling but delicious items to consume. Where Searle gets himself in trouble is by assuming the statement "I am in Berkeley" is somehow a more objective statement than "My leg hurts." We can see a man in a location called Berkeley on a map, or we can see a bleeding leg, but both these are objective observations of the above statements are predicated on the existence of a John Searle, which is a subjective experience of said John Searle. If John Searle had recently returned to Berkeley from Venice, he could wistfully say "I'm still in Venice," and the statement would make sense. We would understand that John Searle was subjectively still in Venice even though objectively his physical form was in Berkeley. Gilbert the dog, as he has no knowledge of himself, would not be able to make such a statement.

The second issue that Searle has is the apparent "circularity" of Damasio's account of consciousness:

The problem can be stated succinctly by presenting his account with the following dilemma: Is the self, as he describes it, unconscious or conscious? If it is unconscious then he has nothing to say about how its encounter with a mind results in consciousness. But if you look at the text closely it seems pretty clear that there is no way to understand the sort of self that he describes without supposing that it is already conscious. He frequently uses words like “primordial feeling” and “emotion” to describe the self. It is hard to understand these in a way that does not imply consciousness. This account is therefore circular because we are assuming a conscious self in order to explain the conscious mind, but this uses consciousness to explain consciousness.

Searle's problem arises from two assumptions 1) he treats consciousness as an objective property and 2) he is trying to encompass completely that objective preexisting property in the individual. The former assumes that just because we are able to label a set of subjective experiences as "consciousness" that this label is sufficiently descriptive of these subjective experiences that it is a valid cognitive concept. The latter assumes, that this property can be fully attributed to the individual.

To address Searle's first assumption, let's look at a couple of examples of consciousness. When Jesus says: "Forgive them Father, they know not what they do," what is he saying? Clearly the Romans, the crowd, and Jesus have a fairly good understanding of the objective attributes of the situation. But Jesus and his followers have a very different understanding of the subjective aspects of the situation. Executing the Son of God versus executing a criminal and rabble rouser are subjectively very different things. Each of these things implies a very different concept of self. A self God died for to atone the sins of, a self that relates to the Roman Pantheon and keeps law and order, and a self as part of a people that has a Covenant with God and acts as part of that people by keeping that Covenant. Given that the self is part of Damasio's formulation of consciousness, we can expect these different formulations of self to be the explanation for different experiences of the same event. Thus, "They know not what they do," is fully consistent with Damasio's formulation of consciousness, Jesus is speaking of radically different subjective experiences.

Another example of an appeal to consciousness is Shylock's famous monologue:

He hath disgraced me, and hindered me half a million, laughed at my losses, mocked at my gains, scorned my nation, thwarted my bargains, cooled my friends, heated mine enemies; and what's his reason? I am a Jew. Hath not a Jew eyes? Hath not a Jew hands, organs, dimensions, senses, affections, passions? Fed with the same food, hurt with the same weapons, subject to the same means, warmed and cooled by the same winter and summer, as a Christian is? If you prick us, do we not bleed? If you tickle us, do we not laugh? If you poison us, do we not die? And if you wrong us, shall we not revenge?

If we are like you in the rest, we will resemble you in that. If a Jew wrong a Christian, what is his humility? Revenge. If a Christian wrong a Jew, what should his sufferance be by Christian example? Why, revenge. The villainy you teach me I will execute, and it shall go hard but I will better the instruction.

Here we see an appeal to a common human consciousness based on common experiences, across lines drawn by religion. It is a strong appeal for a new, humanistic consciousness. By my count, we have four different ways a self can be conceived above that each indicate radically different subjective experiences of the world. So while the term consciousness may encompass each of these, it tells us very little about them. By dealing with consciousness as a purely abstract concept, Searle has created a problem for himself.

Both of these examples also get to the second of Searle's assumptions, where how an individual becomes conscious. In a religious or other cultural tradition, consciousness is something that is received or cultivated. One's personal story becomes intertwined with that of the religion or tradition through ritual and simply because one's autobiography or self is immersed in the religion and tradition and thus picks up on narratives and habits of mind. It's no coincidence that we see language such as "awakening" and "enlightenment" in descriptions of religious experience. In a our society, our concepts of self are more likely to be tied to who we are as professionals, political actors, or consumers, but our concept of self is still tied to how we define ourselves and are ourselves defined culturally. A baby doesn't have a concept of self anymore than Searle's dog does.

The Achilles Heel of (Neoclassical) Economics

2011-04-16T09:53:00.000-07:00

Economic theory is counterintuitive for a lot of people. Many just don't like it and think it's a load of hooey. Not understanding something, or just not liking something is not an excuse for throwing out a set of methodologies, and a body of knowledge, that a lot of really smart people have put a lot of hard work into. Economic theory provides a lot of good insights because it's counterintuitive, and provides a good forum for honest discussion among opposing but honestly held views.

But that funny feeling of discomfort can be justifiable. And sometimes economics is the wrong forum for discussion. That won't sit well with anyone who subscribes to a worldview more or less made up of clearing markets, perfect information, and perfectly rational individuals. That's ok, there's no need to accept someone else's views when their ground in what Karl Popper (a neoclassical darling, and smart guy in his own right) would call metaphysics.. Metaphysics can pose as science, but actually isn't. Scientific propositions can be proven wrong, metaphysical ones, propositions in issues such as identity and moral values, cannot be.

Value theory is firmly in the metaphysical camp but it underlies many of the assumptions that allow us to practice economics as we currently do. Sadly, the profession has done little work the implications of these nonscientific assumptions underlying its work. This is partly because there isn't any way to scientifically resolve the issues broached by value theory. This is also because broaching the subject will lead to all types of heated discussion and undermine the scientific legitimacy of the profession in society at large. This is unfortunate, because the profession currently has little insight to offer us on our current "jobless" recovery. In fact, you can't actually understand what an economy is without some understanding of value theory. This article has a very good primer on the value theory of classical political economists such as Adam Smith in contrast with that of the current day orthodoxy from the "marginalist revolution." You can dig into Phil Mirowski's More Heat Than Light for a more (math!) rigorous exposition on the subject.

So if an economist seems like he's being a jerk, it may be because you don't understand what he's saying. Maybe you're the jerk. Or maybe he just is a jerk, and he doesn't understand what he's saying. But at any rate, it pays to know whether the issue at hand can be objectively resolved, or whether you should be discussing legitimate moral and ethical values that underly the disagreement.

Placeholder Post: The Role of Metaphysics in Organizing Knowledge

2011-04-13T05:03:00.000-07:00

The role of metaphysics in Popper's writing is that of a pseudoscience. But positive science science has not provided us clear guides to how to live our lives, or even how to interpret most knowledge in human terms. I will discuss role of humility, such as that of Orwell, in making metaphysical assertions that cannot be tied to objective truths.

Tension and Collapse

2011-04-07T09:49:00.001-07:00

Working on a post on why tensions, paradoxes, and ultimate irreducibility of a system makes for an ultimately stronger, more robust system.

Evaluating the Concept of Political Positions Through the Frame of Sports

2011-04-04T06:16:00.000-07:00

Sports and politics both use the term position quite a bit. In both it brings to mind a point in some frame of reference, in sports the field of play, in politics some sort of spectrum of ideas organized ideologically. In both, we get the picture of someone standing at some specific location or general area either on a field or in idealized political space. Stance and posture are also applicable, reflecting tendencies or dispositions of individuals or teams in the respective spheres.

In some ways, it’s incredibly odd that we apply physical analogies directly to politics. In the West, we don’t tend to seamlessly traffic between the physical and the ideal (and even if we do, there is no commonly accepted framework on how to do it). Yes, it’s intuitively a good way to convey information since we all have an understanding of position and stance are from our day to day lives. But it promotes sloppy thinking, partly because politics inhabits more dimensions than a sports field, and partly because our understanding of these physical analogies in sports is far superior to our understanding in politics, simply because the applications of physical analogies take place right before our eyes and are easy to communicate what happened in a specific case and thus build more sophisticated understandings of what the general physical analogies mean.

Political space at first seems very intuitive, a line running from left to right and various positions on issues marked on that line. But then we have to account for libertarians and more populist consevativism a la Huckabee and we now have two dimensions, socially liberal-socially conservative, fiscally liberal-fiscally conservative. We can put women’s rights in the socially liberal box, and restrictive positions on abortion in the socially conservative box. Animal rights and environmentalism in the socially liberal boxes (but maybe pull ‘em out of the fiscally conservative one) and gun rights over in the socially conservative. But how do you represent duck hunters, who are pro gun rights, but also want their hunting grounds protected. What local food movements and their general anti-regulatory/anti corporate postions? What about the migration of political positions such as those espoused by neo-conservatism from being generally left wing positions to being right wing ones? I’ve lost track of how many dimensions we have now. And even if we could sort them out, the political space and the positions issues occupy within the space are no longer intuitive.

Our political space is now volatized, and revealed for what it is. A quick way of lumping very complicated issues into simple categories. How we lump depends a lot more on the immediate political environment and our emotional and ideological prejudices, than any inherent content or interrelation of the issues or ideas themselves.

And even if we are able to find a way to adequately represent political space, knowing the position a person takes, tells us very little about the person, and may not tell us anything about their general political stance. Are they there because of how it relates to their core belief system? Is it a position they inherited uncritically from others? Are they there because they are seeking political gain and they think other people will like it? Are they there because they’re stupid and have no real clue how the world works and are ignoring all the evidence staring them in their face. Idiot.

Anyway, it’s very hard to know without a personal knowledge of the person and the process by which they came about that position. And since you tend to treat positions that you don’t agree with more critically, it’s not always easy to evaluate the validity of your own position on said issue. What you can evaluate, is consistency, which acts as a proxy for whether that position is connected to a coherent core belief system, i.e. they’re principled, or they’re stubborn or stupid, but at any rate you can’t rule out principled. If they seem to move around a lot, they may be confused, not really have thought things through, or be trying to maneuver to get themselves out of uncomfortable positions or just create conflict for no good reason. So we tend to associate consistency with being principled. Given the issues raised above, this is another short-cut, and given that political actors will try to appear consistent so they appear to be principled, another distortion and promoter of sloppy thinking, the old hobgoblin of small minds.

So let’s go back to sports. I play a fair amount of pick-up soccer, so I’m going to use it for my analogies out of familiarity. We have position used in terms of the general area on the field each player occupies. We also have position used in terms of where ball is on the field. The amount of time that the ball spends on one side of the field gives us a general, but not a definite metric, of which team is pushing more aggressively against the other. Of course, this doesn’t tell us definitively who is doing better, because the team with the ball on its side of the field the most may have a vicious counterattack and so may be up on the one metric that matters, how many times it positions the ball in the other team’s net. At any rate, we have a nice consistent two dimensional field to work with.

There are non-instrumental aspects of the game, just as there are non-instrumental aspects to politics. Who puts the ball in the goal matters, whether individual players or the coach get credit or blame for the win or loss matters, whether fair play was followed matters, and general style preferences and personal rivalries and egos also matter. But let’s set those aside and agree for now that, all things being equal, the team wants to put as many goals in the opponent’s goal as it can, while minimizing those scored on it.

So we have our players in their respective "fixed" positions, and generally, we want to recover the ball from the opponent and put it upfield and take a shot on the goal. For the team to be effective the forwards need to stay up, the defenders back, and the defenders will recover the ball from the opponent. If everyone is in their correct positions as organized at the beginning of the game we can get some quick passes up the field and take a shot on goal. Maybe it goes in, maybe it doesn’t, but the opponent then counterattacks, sending quick passes up the field to his players in their respective positions, takes a shot and misses or scores.

Well, this is kinda a silly game. And you feel like you can do better, so you let your players move around a little to block your opponent’s passing lanes. Your opponent adapts and does the same thing and now no one is getting really close to the goals. But by chance or astute observation you start notice, that your opponent’s defensive formations admit certain weaknesses against certain attacks. Maybe a chip over the defense by a midfielder to a sprinting forward creates an opening far up field in front to the goal. Maybe a give and go by the midfielder to the forward allows the midfielder a space he can run into to take a shot on goal.

Maybe the other team starts looking for the chip over the defenders? Well that might open up opportunities for the give and go and vice versa. A good dribble might open up a new line of attack as might a quick and accurate pass. The players positions become less defined, we start expecting them to display judgement, to make opportunities and be creative. The coach’s role becomes less to tell the players exactly what to do, but rather find ways to exploit and maximize their talents for the benefit of the team. What becomes more important are "relational" principles such maintaining good shape in regards to teammates and opponents, maintaining ball control, and creating space in the opponent’s position that can be exploited. The players gain a lot of flexibility in how they move around the field, and can create a lot of vulnerabilities in the opponent’s position, provide they can hue to these principles. But this flexibility is premised on players looking at their relations to other players, as opposed to their fixed position in regards to the field.

So a show boating but inpredictable player such as business might have a place on the team. Yeah, he may be erratic, and lose the ball trying to do what cannot be done, but the bursts of brilliance may rescue a lost game. An unflashy, slow, but predictable workhorse such as government may also have a place feeding balls to old business. Replication and predictability can pay big dividends in the midfield and backfield. But we’ve got to make sure they keep their egos out of it, ‘cause they’ve got very different styles.

This added flexibility may go wrong and lead to vulnerabilities. In trying to innovate players may leave their established positions, and if other players don’t or can’t cover for them, the team is very vulnerable. Under the old, fixed system, the responsibilities of the players were clear, stay in your positions. But with more flexibility, the problem may not be that the player left the position, but that no one else covered for him, or he didn’t get the pass he made the run for. At the same time, if he stays in his position, he may not be making the run, or covering for another player. So when someone is “out of position” in the old, inflexible system we know who bears the responsibility. In the new system, the fixed and the flexible are not necessarily distinguishable. The team bears responsibility for the success or failures on the field. Flexibility can lead to brilliance as it innovates on and even discovers new principles and fundamentals, or it can become a mess, a collapse into chaos as players each try out their own ideas with total lack of coordination.

Fundamentalisms (of which I hold Libertarianism to be one) are the ideologies and theologies of such a collapse. They grow out of a collapse in faith in the team in the above case or in our modern world, our political, economic, and ethical systems. They find what they take to be an absolute truth (“government is bad,” “abortion is murder”) that they believe can be fully extricated from the noise of the old, multidimensional order and try to build a new ethical and social order on it. This new order is pure and true because it is built on these absolute ethical precepts. We know the role of God, we know the role of men and women, we know the role of business, we know the role of government. Agency is only given to those worthy of it. For Christian fundamentalists, there is no positive agency that the individual can have, the individual can only be a moral agent as he does God’s work. For Libertarians, government can have no positive agency, anything the government does that is not narrowly prescribed is defined as necessarily bad by the ideology.

Whether fundamentalism is necessary depends on whether the systems of the current order are indeed headed towards collapse, a subject I will address in future posts. But make no mistake, by denying agency to many potential actors a fundamentalist system is far less adaptable and effective than a highly functioning flexible system. Fundamentalist systems are also uniquely unsuited to deal with other fundamentalist systems, though they can derive substantial strength and certainty from the conflict generated. We will see in the coming decades whether our institutions can deal with the fundamentalist challenge and address the systemic issues that gave rise to the challenge.

Methodological Individualism

2011-01-14T05:55:00.000-08:00

Sometimes I don't give Tyler Cowen enough credit, he clearly spends time thinking about the boundaries of economics.

Libertarianism as Liberal Fundamentalism

2010-12-30T12:04:00.000-08:00

This NY Magazine piece on the nature of libertarianism has been stirring up some commentary on the Internet and I couldn't help but be pulled in.

Overall, I found the article interesting and insightful and appreciated that it brought up that there is a lot of agreement between left and right wing libertarians on principles, if not always in politics. My take is that fundamentally both have a deep distrust of aggregate power, but vary on which aggregated power their are most concerned with be it government or business.

Something struck me wrong about this statement however:

Yet there’s no idea more fundamental to our country’s history. Every political group claims the Founders as its own, but libertarians have more purchase than most. The American Revolution was a libertarian movement, rejecting overweening government power. The Constitution was a libertarian document that limited the role of the state to society’s most basic needs, like a legislature to pass laws, a court system to interpret them, and a military to protect them. (Though some Founders, like John Adams and Alexander Hamilton, wanted to centralize power.) All the government-run trappings that came after—the Fed, highways, public schools, a $1.5 trillion-a-year entitlement system— were arguably departures from our country’s hard libertarian core.

A quick look at the Wikipedia entry for Liberalism demonstrates quite clearly that the American Revolution was the first Liberal revolution. Not Liberal in the sense that it is used in modern US politics, but in the Classical Liberal tradition of the Enlightenment and most notably Locke which is basically summed up as individual liberty and equal rights. It's exhilarating to skim the history of Liberalism from the English Civil War, to its explosion throughout Europe in the late 18th and 19th centuries, to its triumph in the Cold War. In mainstream modern American politics, there is virtually no one who does not operate within the Liberal tradition, it's more of a matter of how they deal with the tension between liberty and equal rights which determines whether they heave closer to Classical Liberalism (our Conservatives) or Welfare Liberalism (our Liberals).

But Libertarianism is from what I can tell a distinctly modern, and I will argue fundamentalist, movement and a break from the Liberal tradition. It chooses individual liberty over equal rights (or somehow conflates them) and thus relieves itself of the tension between the two. This gives it a consistency and an appeal the Liberal tradition with all its messy compromises and qualifiers cannot replicate, particularly in the modern media environment.

But why fundamentalist? I borrow from Karen Armstrong's understanding of fundamentalist religious movements as inherently modern. You can't be a fundamentalist in a traditional society because that society will encompass your entire world. Yes, you will have important practices and beliefs but these will be integrated into your day to day economic, social, political, and economic relationships so the idea of selecting which of them is fundamental is ridiculous. You won't have enough sustained contact with any other way of thinking or behaving to conceive of living differently. But in a modern, global economy, you may have to choose and if you're going to have to find a way to integrate your values with your changing world (but this may lead to dissipation or relativism) or preserving them by selecting and maintaining your fundamental practices and beliefs.

What is lost in this assertion of fundamentals are the tensions and paradoxes that were incorporated in the tradition. You avoid relativism and gain a powerful absolutist voice, but in exchange for certainty, you lose nuance and flexibility.

Now, I ask any of my libertarian friends who have read this far. Is this accurate? Is libertarianism in fact a break with Liberal tradition? If so, is such a break necessary? I by no means hold that assertive movements that break with current practice are always undesirable. Liberalism was a break too.

Economic Policy Institute's Health Plan

2008-06-03T15:49:00.000-07:00

Sometime during the Democratic Primary's Health Care Mandate food fight the Economic Policy Institute (EPI) released a health care plan authored by Jacob Hacker. So, as the Democratic primary winds to an end, let's spend a minute reviewing a little of the substantive policy we missed during the madness and compare it to the Wyden-Bennett/Committee for Economic Development plan that I have already written about fairly extensively.

The Health Care for America Plan is made up of three central elements:

1. An extension of Medicare to every legal U.S. resident who is not covered by their workplace.

2. All employers will be required to provide their workers with coverage equivalent or better than the Health Care for America plan or pay 6% of payroll to fund coverage for their employees.

3. A requirement (the good old mandate) that all Americans buy into Health Care for America Plan or purchase private coverage.

Of course, there is a lot more to it than that. But those are the basics and who has time for nuance anymore? So let's get into some analysis.

To begin, both plans have mandates. So, not much to compare here. If you still aren't sure what these are about and why there was such a food fight about them, feel free to leave a comment asking for a briefing and I will oblige. So both come down on the side of universality and guarantee (and require) that every American have a health plan.

The more interesting differences come in how each tries to cut costs. Both believe that there is substantial waste in the current system and tries to create incentives to reduce it. Wyden-Bennett does this through competition, requiring that insurance companies compete to offer a basic plan that is risk adjusted for the type of people who enter their plan. (I.e they get paid extra to cover people at higher risk of getting sick.) This will presumably reduce administrative costs of insurers as they compete to be leaner and hopefully make consumers price conscious as they will be able to select a plan to cover their specific medical needs. The hope will also be that insurers will form long term relationships with customers and so will be incentivized to provide preventative care.

EPI's plan uses the bargaining power of the government to negotiate for lower prices with drug companies and providers and the administrative efficiencies of having a single large insurer to further reduce costs. Furthermore, as the government will necessarily have a long term relationship with many of its customers, it will encourage preventative care to reduce its costs.

How will these different approaches to cost cutting succeed? It is impossible to say with an certainty, but I will point to the difficulties that each will face which hopefully will give the reader some guidance on which one he or she sees as more plausible.

Wyden-Bennett plan counts on the government being able to properly price the cost of various health risks in populations across the U.S. Given how many types of health conditions there are, and how much regional variation there is when it comes to intervention this is a very difficult problem. If you don't get it right, you will have insurers either making over-sized profits or going out of business at an alarming rate leading to substandard care. Either scenario could be very expensive. Yes the "Dutch" model that Wyden-Bennett has seen some success in the Netherlands, but we are dealing with a far more heterogeneous population here. I think the argument that would be advanced by the EPI folks would be that many of the insurers under this system would be too small to negotiated significant price concessions from drug companies and providers.

The big problem EPI's plan will face will be the rationing of health care through mechanisms other than prices. As has happened in single payer countries, consumers will not be price conscious and so will demand more of certain types of coverage than the government's reimbursement schedule will supply. So it is likely that health care will be rationed by systems such as wait lists, mechanisms that will increase the cost of overall care.

Which of these problems one finds the most intractable, will go a long way to deciding which health care plan one prefers.

Universal Health Care for Free!

2008-05-13T03:39:00.000-07:00

The Congressional Budget Office has scored the Healthy Americans Act as budget neutral. Politically speaking, this is a very exciting development and bound to get a lot of attention if publicized properly. No matter how much money we throw down the drain in the current system, it's very difficult to get Congress to invest in a policy with a large up front price tag no matter how much it saves in the long term. But who can turn down free universal coverage?

Unfortunately, this positive calculation comes partly because of a cap on government spending. After a certain year (2014 I believe) Federal spending will be capped at GDP growth. This cap may very well scare a number of groups that are concerned that a cap will lead to a decline in overall care or the particular disease or medical technique they advocate for. As I covered in a previous post that focuses mostly on a similar policy from the Committee for Economic Development, cost cutting should come from increased competition between insurance companies and preventative care. The Healthy Americans Act is similar enough to the Committee for Economic Development plan that the cap is probably unnecessary.

Still, I think this is an overall win for the Healthy Americans Act. From what I've seen Sen. Wyden is a savvy political player and probably knew what he was doing when he put in the cap on Federal expenditures. Without the cap, the CBO would not be able to issue an estimate so soon because of the complexities involved in seeing whether the incentives generated by the bill will create true cost cutting. This estimate generate a lot of publicity, and even if it gets people quibbling over details, at the very least they'll be talking about it as a new president enters the White House.

Prof. Larry Bartels on Unequal Democracy

2008-04-30T10:22:00.000-07:00

Larry Bartels of Princeton delivered a talk on his new book Unequal Democracy: The Political Economy of the New Gilded Age on Monday. The talk was interesting in that a respected academic came to a data driven but very partisan conclusion: if you're concerned about income inequality, elect Democrats.

You can see his most startling graph on the right. It clearly states that income growth is higher for all groups under Democratic presidencies than under Republican presidencies and that this growth is much more equal. A number of objections immediately jump to mind but from what I've seen so far this conclusion is robust, Prof. Bartels provides a response to some of the criticisms at Dani Rodrik's blog.

Why would voter's continue to vote for Republican presidents against their own economic interests? Prof. Bartels believes that they do vote with their economic interests, but only for the last year. The structure of Republican policies Bartels finds is that they lead to lower growth in earlier years of the presidency as spending and programs are cut. But this leads to higher growth towards the end of the term (and the upcoming election) as the economy rebounds from its bitter medicine. Democrats, however, unleash spending and new programs at the beginning of their term. By the time the end of their term has rolled around, the economy has begun to slow as the effects of the stimulus wear out and inflation kicks in.

Unfortunately for Democrats, according to Bartels (with support from Brookings' William Galston and Thomas Mann and over the objections of someone from Pew) voters only really remember the last year when assessing their economic fortunes. Thus, Democrats lose and Republicans win.

A couple of other interesting facts and figures:

1. Low income voters are more likely to support Democrats. It's high income voters in "red" states that swing them to Republicans.

2. Information matters: the more information self-identified liberal voters consume the more likely they are to correctly identify that it has increased in the United States.

3. Information distorts: the more information self-identified conservative voters consume the more likely they are to incorrectly deny that income inequality has increase in the United States.

4. Information doesn't matter: No matter ideological preference and amount of information consumed and preferences regarding income inequality, about 2/3rds of Americans oppose the inheritance tax.

Yet More Health Care Humor...

2008-04-17T14:22:00.000-07:00

An entertaining clip in support of the Health Americans Act:

"Predictably Irrational"

2008-04-10T11:54:00.000-07:00

I've been meaning to link to this review
of a couple of books on behavioral economics. "Predictably Irrational," a new book by Dan Ariely at MIT sounds like it has some particularly interesting experiments.

In one study, he asked students to look at the last two digits of their social security numbers and then bid on various items. Their social security numbers had marked effects on their bids.

The students whose Social Security number ended with the lowest figures—00 to 19—were the lowest bidders. For all the items combined, they were willing to offer, on average, sixty-seven dollars. The students in the second-lowest group—20 to 39—were somewhat more free-spending, offering, on average, a hundred and two dollars. The pattern continued up to the highest group—80 to 99—whose members were willing to spend an average of a hundred and ninety-eight dollars, or three times as much as those in the lowest group, for the same items.

This effect, which Ariely calls "anchoring," and which retailers such as Tiffany's have been acquainted with for decades (and probably longer) blows conventional economics out of the water. Clean downward sloping demand curves a la Econ. 101 assume rationality on the part of consumers, that they trade off the benefit of consuming the good against the benefit of the other goods they could consume for the same price. If they aren't cold calculators all the time, companies can rely on tricks such as putting other high numbers in the store to set the customer's "anchor" and engine of the free market economy is reduced to a sputter.

This is, however, more of a problem for a lot of academic economists than anyone else. The big money today isn't made on trying to produce commodities that consumers examine with steely eyes and then make a decision based on price. The game is to find a niche demographic and tailor your product to fit their needs. I didn't buy my Mac based on processing power, I bought it because my wife has one, sleek marketing, and because it doesn't feel (and perform) like a hunk of junk.

The key is differentiation, a good businessman doesn't just compete on price. That means that all those pretty supply and demand curves that we were all taught in Econ. 101 are virtually non-existent (they're also pretty damn hard to examine empirically too.) Perhaps this is why economists don't run the world but rather tell others how to?

Faith Based Economics

2008-03-26T06:57:00.000-07:00

From Dani Rodrik:

Kevin Hassett, economics advisor to John McCain, is quoted today as saying:

What really happens is that the economy grows more vigorously when you lower tax rates... It is beyond the reach of economic science to explain precisely why that happens, but it does.

Now you can be excused for thinking that the first of these statements is true, if you have an economically sound reason for it. But if you don't, you shouldn't.

Let's call it no longer supply-side economics. It is faith-based economics.

Health Care Humor

2008-03-11T06:53:00.000-07:00

The Committee for Economic Development (CED) held a briefing on the Hill yesterday to promote its healthcare plan. As I have written on the plan previously I will not rehash the details but rather share with you the comic stylings of Dr. Alain Enthoven.

For those of you unfamiliar with Dr. Enthoven, (I certainly was before I started tracking healthcare issues) he is a professor emeritus at Stanford and a very respected figure in health policy. He was integral in formulating CED's health plan and his support is equally integral to promoting it to a wide audience.

Dr. Enthoven got his start in public policy as the leader of Robert McNamara's "Whiz Kids," doing quantitative heavy lifting on nuclear proliferation and the war in
Vietnam. He spent a year pushing his conclusion, based on body counts, that the U.S.
could not win the war through attrition.

Despite his incredible stature (but reputation and physically too, he must be 6'3") he is incredible down to earth. Following the talk yesterday, he stuck around for a serious and engaged conversation with the youthful members of the CED, this blogger and the 23 year old American Prospect superstar Ezra Klein. Given this context, I would like to share a couple of his jokes dryly inserted into a very serious policy discussion. The humor of course, is bitter-sweet, given these problems have some very tragic consequences for the people dealing with them.

A Bad Pun:

Because people switch doctors so frequently because switching jobs means switching health plans and because medical information technology is nowhere where it should be, doctors often aren't aware of their patients' full medical history. This, Dr. Enthoven says with a straight face as his colleagues cringe, is "connectile disfunction." He uses this joke at every presentation and from what I hear, even in meetings with U.S. Senators.

Another Bad Pun:

Economists have a term "job lock" that refers to the case where people are prevented from leaving a position because of some sort of market failure. In the case of healthcare, because their plan isn't portable they are unable to be entrepreneurial
or take another job if the new employer doesn't offer the same plan. As many people get their health plan through their spouse's employer, there is another case to be considered. Dr. Enthoven spoke of a woman who was unable to leave her husband because she needed his healthcare insurance. "It brings new meaning to the term wedlock," he deadpanned.

Brick by Brick

2008-02-28T18:48:00.000-08:00

I saw an interesting documentary on the desegregation battle in Yonkers New York tonight. It's easy to get lulled into the sense that the battles for civil rights were something fought and won long ago. Brick by Brick is a fresh reminder that these fights go on to this very day.

This fight started in the 1980s and the city council is dragging its feet on a Supreme Court ordered housing desegregation plan and undermining school integration to this day. But the truly insane thing to watch is how rabidly the anti-integration forces fought. The yelling mobs, a city council willing to bankrupt the city by keeping it in contempt of court over 200 low-income townhomes in a city of 200,000.

Truly a spectacle to behold and a striking reminder that high-minded national policies are very difficult to put into practice without engaged local-level support.

Rise of the Lions

2008-02-14T17:53:00.000-08:00

I know I'm not the only one who finds the overwhelming majority of election analysis to be stultifyingly shallow. Beyond the polls, the deepest concept we deal with is "momentum," an amorphous concept that implies that a candidate will keep winning until he/she doesn't in which case the "momentum" has been lost. Basically, momentum can stand in for any number of other explanatory variables but it saves us all from the difficult task of defining them or being wrong when they fail to predict an election.

So, in honor of my first intellectual love (after a fling with psychology and a torrid affair with philosophy) I would like to recount a bit of political theory for my readers.

Vilfredo Pareto (for you economists, yes the efficient one), introduced a theory of political cycles in his 1901 work "An Application of Sociological Theory," which outlines a theory of the circulation of political elites. He sees the political elite as composed of a mix of two types of individuals, "lions" and "foxes."

The "lions" are strong-willed and rule in a forthright manner, relying on tradition and "group persistence." The "foxes" are devious and chip away at the "lions'" power through cunning and deceit. Eventually rule by the lions gives way to rule by the foxes who outmaneuver and undercut the traditions that gird the lions power. Eventually, however, the foxes in all their maneuvering end up in a position so far away from the underlying traditions, that they are exposed and upended by resurgent lions who bring the political culture back to its underpinning traditions in a direct manner.

The qualified application of this theory to this election would be this. The two "fox" candidates who maneuvered through positions, votes, and transactional politics to take their respective party nominations, Romney and Clinton, have fallen (or are falling) by the wayside. This is not because of their intrinsic failings, but rather after 15 years of Clinton I's triangulation followed by Tony Snow style press conferences, forthrightness is favored over political cunning.

The corollary to this, is that the "lions," Obama and McCain, have overcome a politically inevitable opponent and shown that predictions of their political death were "greatly exaggerated." Obama, a far-sighted cub, offers to renew the tradition of "communitarianism," while McCain, wizened member of the pride, offers us a return to pre-Conservative Republicanism.

Ironically, an election focused on change may really be about bringing us back to long-held traditions.

Rethinking Development Through Bashing Thomas Friedman

2008-02-13T17:23:00.000-08:00

There has a been a bit of buzz about a talk given by award winning Cambridge economist and CEPR fellow Ha-Joong Chong, at the New America Foundation on his new book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.

He begins with an example of a small cheap car introduced by Toyota to the U.S. in 1958, essentially an “ashtray on four wheels.” The car bombed and was pulled from the market as critics chided Toyota for trying to go against Japan’s comparative advantage. Japan had lots of labor and not much capital in 1958 so it should have stuck to producing silk. Toyota could not complain that it hadn't gotten help, it had already had 25 years of protection and government subsidies. But the subsidies and protection continued.

Toyota’s Lexus now has been made an icon of free market development by Thomas Friedman who argues that developing countries should put on neo-liberal (privatization, deregulation, reducing trade barriers) “golden straight-jacket,” in his view, the only model of development available. If they would only don the straightjacket they developing countries could produced similar products. (Mr. Friedman seems to find himself in the position of being a punching bag for many an academic.) Mr. Chang believes that using the Lexus as a model for development by free trade is “like writing book on self made man and having the first chapter on Henry Ford II.”

He goes on to point out that Alexander Hamilton applied the idea of protecting small economies before opening to free trade to the U.S. Hamilton was in direct opposition to Adam Smith who argued against the U.S. developing manufacturing in The Wealth of Nations.

By the 1830s U.S. was most protectionist economy in world, it heavily regulated foreign investment and had virtually no intellectual property protections. But the U.S. wasn’t the first to use this model, in fact, Hamilton got his model from Britain’s economic development during the 1700s. Chang believes this model this model has been pursued by all other developed countries with only Netherlands and Switzerland pursuing development through free trade.

This goes to the most fundamental disagreement between the economists of developing and developed countries. This debate raged over the drivers of East Asian growth and causes of the East Asian financial crises in the late 90s. Did East Asia grow because of its governments’ industrial policies or despite of them? And was the crisis cause by imbalances created by these policies or because of the ‘herd mentality’ of investors?

The truth is, macro-issues such as this are impossible to test in any kind of rigorous scientific manner. But Mr. Chang levels a very powerful charge at the supporters of the Washington Consensus and the structural adjustment (i.e. pro-liberalization) programs from the IMF, the charge of hypocrisy.

Internet Effect in '08?

2008-01-26T11:41:00.000-08:00

The internet was supposed to transform the political landscape in '04 after it propelled Howard Dean to the front of the Democratic Primary pack through small donations and passionately organized young people. As Dean imploded in Iowa and his volunteer army melted away or was absorbed by the Kerry campaign, the internet failed did not transform the general election. The most remarkable media event of the campaign was the Swift Boat Veterans for truth, which was more of a comment on campaign finance reform than changes in media.

According to MSNBC, of the top tier candidates McCain, Obama and Edwards are the biggest beneficiaries of donations under $200 with 31% of their total coming from the types of donors candidates most hope to reach online. Clinton, along with Romney and Giuliani has received less than 15% of her donations in amounts smaller than $200. That makes Obama the biggest winner in raw dollars, not even counting the alleged $500k he took in in one hour on the night of his SC win.

The most telling test of the internet's supposed transformative power may come in the next week. The big question, as put forward by a posting
on the Coldheartedtruth blog is will the Clintons' latest round of tactics pay off on Super-Duper Tuesday or are they playing with an outdated playbook which does not take into account a new demographic of high-information voters? That is, are we going go find out that the "Clintons still a step ahead, or have they fallen a step behind?"

Pew MediaSources has a very good study on the role of the internet in this election. 24% of Americans now say that the regularly learn something about the campaign from the internet, as compared to 13% in 2004. This growing participation is particularly significant when matched with Nielsen/Netratings data from the 2000 election which found that 86% of the online audience is registered to vote as compared to 70% of the U.S. population.

Perhaps unsurprisingly, young people are particularly active online with 42% of those 18-29 using the internet for campaign related information. The Obama campaign has shown eagerness to tap this demographic by setting up its own social networking software and given that almost 50% of 18-29 year olds voted for him in SC, his investment in this demographic is paying off.

But does it give him a chance at cracking new demographics given that internet usage is much lower among older demographics? Clearly, this is a problem particularly given that he trails significantly among both men and women over 65 (see below post.) A study from the University of Maryland tells us that women are also less likely to use the internet than men and usage declines with income which will make it particularly difficult to get to low income women where he trails significantly.

That said, there is room for expansion beyond his current base through the internet. While 18-24 year olds are very pro-Obama there is still significant support fo Clinton in the 25-29 demographic. Also according to the University of Maryland Latinos use the internet at a higher rate than all whites. Finally, women use the internet for communication (email) almost as much as men.

So despite some major blindspots (the over 65 set and low income women) the internet could offer a change of the rules that could eat into major Clinton constituencies. The next week may offer a test of whether they have taken it into their calculations.

Muddling the "Gender Gap"

2008-01-26T10:50:00.000-08:00

Margie Omero at pollster.com has interesting analysis on how the "gender gap" between Obama and Clinton is muddled by other demographic variables. Her analysis is based on a recent Pew poll that finds that Clinton leads among all voters over 50 (+26 among older women and +21 among older men) but the gender gap only really shows among younger voters where she leads by +17 among women and trails by -9 among younger men.

But the far more important predictors of support for Clinton are socioeconomic status and ideology. Men and women in households earning over $50,000 a year both favor Clinton to Obama by 41% to 36%. Clinton among all educated voters, by -3 among women and -9 among men.

Obama leads by +5 with liberal women but trails by -15 among liberal men. Clinton leads by +37 among non-liberal women but ties with Obama among non-liberal men.

So the picture is definitely too muddled to be simply summed up with "gender gap." But some of the sub-narratives do hold up. Hillary is strongest among women in households with less than $50,000 a year (+36) and is stronger among older voters. Meanwhile, youth, higher income, and higher education all play in Obama's favor. I can't say that I can make sense of the interaction between ideology and gender.

Wild and Woolly

2008-01-22T06:28:00.000-08:00

The $145 billion stimulus plan Bush announced on Friday has failed to impress says the Washington Post:

Most world markets were digesting for the first time the Bush administration's proposal to try to stimulate the U.S. economy with tax benefits. (It was announced Friday, after Asian and European markets had already closed.)

Traders around the world seemed to have little faith that the plan would arrest the slowdown in the U.S. economy, even if some version of it is passed by Congress.

"Foreign markets are doubtful about the ability of Congress to move quickly, and foreign markets have watched the Federal Reserve move slowly in August, September, October and November," Kotok said. "So the concern from abroad is that the U.S. has been too slow and done too little and is now playing catch-up."

We'll see if a rate cut of 75 basis by the Federal Reserve, the largest in 18 years, will help. At any rate, the Fed is taking this seriously now.

I'm not sure how fair it is to declare this yesterday's declines to be a referendum on Bush's stimulus plan (which I have yet to thoroughly review) given that investors seeing a lot of risk out there. With Bank of America and Wachovia reporting very large declines in fourth quarter profits, and the Bank of China reporting exposure to U.S. subprime mortgage loans, investors are going into full panic mode.

Bernanke on Board

2008-01-17T08:49:00.000-08:00

Bernanke is backing a fiscal stimulus plan and President Bush is as well. That's as green a light as we're going to get. Now let's see if everyone can agree on what the package is going to look like.

New Perspectives on the Fiscal Stimulus

2008-01-16T16:54:00.000-08:00

Everyone is getting in on the fiscal stimulus game. A brief survey...

The Congressional Budget Office (CBO) has weighed in with a well balanced and researched primer. Many of its conclusions are similar to the Brookings primer reviewed below so I will refrain from commenting further.

The Economic Policy Institute (EPI) provides an interesting reason to favor increased government spending over tax cuts in its plan. (Emphasis added)

Government spending is more effective than tax cuts in stimulating domestic demand for two reasons: a portion of the tax cut will be saved rather than spent immediately, and consumers are more likely than the government to spend on imports (rather than domestically produced goods). Approximately 10 cents per dollar of consumer expenditures will be spent abroad, while virtually every penny of investments in public infrastructure will be spent domestically.

The EPI also believes that this spending should satisfy unmet social needs. I think everyone agrees that this is a good principle but whether government or individuals best make this decision is a pretty fundamental ideological divide.

The Center on Budget and Policy Priorities (CBPP) subscribes to the timely, targeted and temporary goals for a stimulus pushed by Brookings. They do, however, cite work by Stiglitz and Orszag pointing to government spending being more effective than tax cuts, probably because the spending is direct as opposed to transfers to taxpayers who may end up saving.

Still, the CBPP points to broad-based tax cuts as an effective measure because they are easy and quick to implement. They also support state fiscal relief, strengthened unemployment insurance, and temporary increases in food stamp payments as effective measures.

In contrast to EPI, CBPP opposes new infrastructure investment as projects usually take months to get off the ground.

The Center for Economic and Policy Research (CEPR) is pushing a $600 tax cut for all taxpayers, $20 billion in tax credits for energy-conserving homes and businesses, $7 billion in public transit use subsidies, $3 billion in heating subsidies for low and moderate income families, and $25 billion in temporary relief for states and localities.

So that's quite a mix of options for you. Notably, with the exception of the EPI/CBPP differences on infrastructure spending, there appears to be pretty widespread agreement on what makes up an effective stimulus package.

Krugman and DeLong Enter the Ring

2008-01-15T14:13:00.000-08:00

Paul Krugman wrote a piece for yesterday's NYTimes praising the stimulus plans of Edwards and Clinton and criticizing Obama's plan. As Obama's plan contains no alternative energy plan and includes cross the board tax cuts, he sees it as further to the right than the plans proposed by the other candidates.

That may be the case, but considering that this is a fairly technical economic issue "further to the right" does not constitute legitimate criticism of the policy. As I said in an earlier post (Fiscal Stimulus Showdown) alternative energy programs, while laudable in their goals, have yet to be shown to be an effective stimulus tool, read, they're probably going to take a while to implement. Broad-based tax cuts, while not as targeted as one would like, get money into people's pockets much more quickly.

Delong takes the same tack in attacking Krugman's rather shallow analysis of the stimulus plans in his blog. To be fair, he uses the same Elmendorf and Furman briefing I used as a jumping off point so perhaps this fight is really Krugman versus Brookings.

Universal Health Care Mandates

2008-01-15T11:15:00.000-08:00

Theoretically speaking, the case for universal health care mandates is very strong. But as Robert Reich argues they are a silly thing to quibble over at this point in the campaign as the bickering takes the steam out of the common push for universal health care insurance. His most striking example is Massachusetts where 20% of the population is currently exempted from the mandate as the insurance is still too expensive for them.

Public's Agenda

2008-01-15T10:50:00.000-08:00

In a new Washington Post-ABC Newspoll respondents think the country is on the wrong track. The Post attributes this and the presidents low approval rating of 32% to the fact that only 28% of respondents approve of his handling of the economy.

Clinton versus Obama, Stimulus Package Showdown

2008-01-14T12:55:00.000-08:00

With the Democratic primary in full swing Senators Clinton and Obama have served up competing fiscal stimulus plans. Given my posting last week on fiscal stimuli, I thought a rough and ready analysis of their plans might be in order.

To begin, both their plans are roughly the same size, $70 billion and $75 billion for Clinton and Obama respectively. On the scale of things, $5 billion is not going to make a huge difference but it should be noted that they are both short of the $100 billion target proposed by Brookings panelist, on Wednesday (see below).

Round 1. Both the plans also contain $10 billion for an extension for unemployment insurance, an issue that the Brookings panelists were split on. Zandi of Moody's Economy.com advocated the extension as a way to put money in the pockets of the unemployed (and thus support consumer spending) and Feldstein of Harvard opposed it because most workers tend to get a job of some sort when their benefits are close to running out. The real issue is whether the extension goes into a recovering economy, thus disincentivizing the unemployed from looking for available jobs. So, a debatable policy, depending on where you think the economy is going, but since they both
support it let's call it a tie.

Round 2. Both also take aim at the housing crisis. Clinton with a $30 billion fund to forestall foreclosures and help states and cities with associated costs, and Obama with a $10 billion fund for foreclosures and $10 billion to offset revenue lost by cities and states. Both emphasize helping the "respectable" people facing foreclosure but in practice it will be difficult to find the respectable ones, particularly in a timely enough manner to forestall an impending recession. Basically you have to choose between a bailout that helps everyone, or help for the respectable which ends up being a lot less of a stimulus.

The money to cities and states does make sense in that it prevents them from cutting programs and resources during a recession. So my guess is that the foreclosure fund is mainly a political move to show concern for people in mortgage trouble in swing states, not a technical economic one. As Clinton seems to focus on the foreclosure side, while Obama only places $10 billion in this category, I believe that Obama wins round two of the fiscal stimulus showdown.

Round 3. Clinton provides $25 billion in heating assistance for use by needy families this winter. If implemented quickly this would fulfill the necessary conditions (see post below) of timely and targeted. These people will quickly spend the money they previously used on heating on other essentials, thus stimulating the economy.

She also proposes $5 billion for efficiency and alternative energy. While a good idea, this does stray from the focus of a stimulus. While retrofitting public schools with more insulation might be a good investment it is not nearly as timely or targeted as giving directly to needy people who will spend every penny they get.

Obama's alternative is a $250 immediate credit to all workers and through offsetting the payroll tax another $250 supplement to low to mid-income seniors on Social Security. These programs would cost $35 billion and $10 billion respectively. The tax credit would be very timely in that it would go immediately into workers pockets and very closely matches the program proposed by Jason Furman at Brookings. Where it varies is that it would go to all workers who pay payroll tax, making it less than perfectly targeted.

The $250 Social Security supplement would be a very good stimulus. Low income seniors are highly unlikely to save, so this money will go straight back into the economy almost immediately.

So I think Obama slighty edges Clinton in round 3 as well. Obama wins the stimulus showdown in three rounds by a split decision!

Change versus Experience

2008-01-14T10:49:00.000-08:00

I received my California absentee ballot and noticed that one of the myriad ballot initiatives would alter term limits. I would allow maximum of 12 total years in both chamber as opposed to the current limits of six years in the Assembly and eight in the Senate.

The whole point of term limits is to kick experienced people out, the underlying assumption being that long term exposure to power eventually corrupts. In California, term limits now mean that the Assembly acts as a training ground where legislators cut their teeth before going on to the Senate. But what is the right formula? Where do constituents get the most bang for buck with experience without being stuck with bad apples who have sold out to the status quo?

Obviously, California is still deciding, but I think this debate shines some light on the current change versus experience, Obama versus Clinton debate. We like our politicians to know what they're doing but when do they start to know too much? Do we need someone who knows the ways of Washington or someone who knows the ways of Washington must change?

An interesting experiment may be to look at the vote totals for each in term-limited states versus states without term-limits. Presumably the former will lean in favor of "citizen leaders" while the latter will lean in favor of "professional politicians."

A Stimulating Discussion, Fiscally Speaking

2008-01-11T14:04:00.000-08:00

In response to growing interest in a fiscal stimulus by both the President and Congress, this Wednesday the Hamilton Project released a paper framing the "If, When, How" of fiscal stimuli and organized a high-powered discussion panel. The panel, moderated by former Treasury Secretary Robert Rubin, included the very respected Prof. Martin Feldstein of Harvard, Hamilton Project Director Jason Furman, former Office of Management and Budget Director Alice Rivlin, and Moody's Economy.com Chief Economist Mark Zandi.

To get to the meat of the matter all of the panelists agreed that, if properly implemented, a stimulus in the range of $100 billion would be beneficial to the economy. (Furman would go a little lower than the others at $50-$75 billion, closer to Larry Summers' figures.) To justify this intervention, Feldstein and Rivlin pointed to falling home prices, rising foreclosures, the credit crunch, and financial institutions' general lack of confidence in current valuations because of their previous bad bets.

Zandi pointed to the fact that CA, AZ, FL, MI, and WI are already in recession and that these together make of 35% of U.S. GDP. Combine this with the fact that financial institutions have only written off one third of the $250 billion they are expected to lose and that rising gas taxes will effectively act as a $100 billion tax, and ouch!

While the loosening of monetary policy will be of assistance, Zandi contends that it will be less effective than usual as its primary conduit to the economy at large is through the currently turbulent housing market.

There was also agreement among the panelists over the rough outlines of how the stimulus should be delivered. The policy should be timely, targeted, and temporary. That is, implement it in time to forestall the depression, target those who will spend (generally the poor, but Feldstein contends that all Americans have such a marginal propensity to consume that it really doesn't matter who you give it to), and make sure that the stimulus doesn't become permanent policy. Feldstein and Furman agreed that a temporary growth in the food stamp program would give a quick and targeted kick to the economy (about 1% in annualized growth.)

So are we going to do this? Economists are always skeptical of the politics of fiscal stimuli since they are often implemented late and often hard to end. Well, Feldstein the economist was optimistic that a package could be arranged and Rubin the former political appointee was skeptical. I don't know the last time I saw an economist playing the optimist regarding a political situation. Can't say I know quite what to think.

Who decides? A view from the trenches.

2008-01-10T05:44:00.000-08:00

E.J. Dionne (pictured above with this blogger and his wife both of whom think he's wonderful) wonders whether the surprising Democratic primary results in NH where really so surprising.

Maybe the signs pointing to Hillary Clinton's victory in the New Hampshire primary were there all along, hidden in plain sight by the blur of Obamamania and a stack of flawed polls...

Just to be straight up about it, I have never been so certain and so wrong in many years of watching elections, anticipating as I did a solid Obama victory here. It's little comfort that the Clinton camp was surprised, too, as some in its ranks candidly acknowledged...

The campaigns -- and, yes, the media -- need to go back to the drawing board...

There are a lot of theories flying around about how Hillary pulled it off, but here's my take, built on rough theorizing among the foot soldiers of the ground campaign. It was not Hillary who pulled it off (otherwise wouldn't she have some explanation of what happened?) but rather New Hampshire voters who made a decision based on a number of complicated factors but most significantly the new polls. Some went over to vote for McCain, a lot of undecideds (of which there were loads) balked at deciding for the nation.

So it isn't back to the drawing board. Obama will keep with his message of unity that has finally paid off after six months of stagnation. Hillary will continue to try to cobble together ways to bank on her familiarity and technical knowledge of policies. And the press will continue to peddle silly theories. We've gone from the inevitable Clinton to the inevitable Obama to the comeback Clinton in a little over a month.

In the end, America is going to make a decision, and none of us, least of all this humble blogger, have any idea what it is going to be.

Behavioral Finance and Cultural Arbitrage

2008-01-01T00:27:00.000-08:00

I have been reviewing materials from a seminar attended by one of my colleagues in the finance industry. It begins with an attack on the rational investor and goes on to discuss how trends can be used to predict market behavior. Not the stuff of a conventional economics education.

It throws away the myth that investors have great predictive powers over financial markets. In fact, most investors make winning trades a little over half the time. If this isn't bad enough (seeing as these people manage the funds that you plan to retire with) they often tend to be profit adverse and risk seeking.

The explanations for investors running away from profits lie in human psychology. People are more than happy to take profits wherever they come. After all, "You can't lose money by taking profits, can you?" Well yes, you can. If you sell your investment after a 10% gain yes you make money. But if your investment goes up another 20% after you sell you are giving up that money.

The psychology of losing is more interesting. For various reasons, loss of self respect, status, or even your job, people just don't like to admit when they've made a mistake. So they compound it and stick with their losses, hoping to turn them around. In the process they end up losing a lot more money than if they sold early at a small loss. The moral of the story: pick a trading strategy (trend, mathematical, or discretionary), set targets before you trade, and stick with 'em.

A last note which may or may not be relevant for those of you concerned with profits more than overt wonkiness. This paper holds that high and low prices, resistance and support levels, are fixed in investors minds by past trading patterns. It takes a minimum of THREE troughs or peaks to set these prices. Why three!?!

Well as my former anthro professor, the late Alan Dundes, would hold, this is for the exact same reason that God has a tripartite nature, everyone makes three points in their speeches, and every joke has three guys walking into a bar. For us, three is a 'native category' a basic cultural reference point. It's unit of measure that we all have agreed can size up all manner of otherwise noisy information. Why did we pass a 'Three Strikes and You're Out' law in California? Because we've all agreed that that is enough chances.

But go to China and you'll find a native category of five. So five people in the jokes, etc. This would suggest that Chinese traders would require more troughs and peaks before support and resistance levels are set. This points to a possibility of potentially identifiable widespread trading biases.

A Different Time

2007-12-19T16:41:00.000-08:00

Sadly I am now working part-time which seriously impedes my ability to visit various interesting policy forums on the Hill. I am trying to compensate through heavy use of the iPod. Wonderful technology but I still haven't figured out how to take notes while jogging.

I recently listened to a talk on "Inequality and Institutions" in America at the New America Foundation. (Sadly Brookings and Center for American Progress only seem to have videos that don't work on my 2 year old iPod mini.) The talk was given in June of 2007 by Levy and Temin, a pair of MIT economists about a paper they were working on showing that the decoupling of productivity and wage growth was linked to the breakdown of the New Deal "Treaty of Detroit." In short, institutions such as unions matter in terms of economic distribution.

One anecdote particularly stuck with me, though unfortunately I don't know who to attribute it to as the speaker only identified himself as being, "one of the oldest people in the room." Anyway, this story is definitely out of a different world.

President Kennedy wanted to stimulate the economy but was worried about inflation. He had quite a bit of political capital with the head of the Steelworkers. Their contract was up and Kennedy was able to convince them to make significant wage concessions.

Shortly after, U.S. Steel raised prices by $6 per ton and was soon joined by other major steel manufacturers. In response, Kennedy called a press conference. He called the price rise a betrayal of the national interest and basically he said that he would use all tools at his disposal to punish the companies.

Can you imagine a president doing that today? Never! Any attempt to arbitrate a social contract would be an interference in the free market. Perhaps with work such as the study above and Krugman's recent book the country is slowly returning to the awareness that politics and institutions do change economic outcomes.

I've been wondering. Why is it that a politician that ignores the economists is labeled a populist while economists who ignore politics get tenure and win the Bank of Sweden prize in Honor of Alfred Nobel?

New Health Cost Projections from CBO

2007-11-26T17:59:00.000-08:00

CBO's Director, Peter Orszag gave an extremely interesting talk at the New America Foundation (NAF) a couple of weeks ago. After accepting seven Diet Cokes in honor of the late hours he and his staff have been working, he went on to present the following, very interesting conclusions.

The above graph was the crown jewel of his presentation and is so counter-intuitive to the prevailing wisdom that it currently graces the CBO's graphic sparse home-page. Most of the budget worries in the current discourse are over paying for the retirement and increasing health costs of the Baby Boomers. From this view, saving Social Security and Medicare are a matter of either depriving the Boomers of promised benefits, or squeezing more taxes from a shrinking working-age population.

But these new projections only attribute ten percent of health cost increases to the Boomers. Orszag posits that our biggest problem is that we spend too much on techniques with low rates of success. He believes that 30% of medical spending could be removed without adverse effects.

To support this conclusion he produced another two charts (of which I sadly do not have digital versions). The first showed how regionally, medical outcomes were not correlated with spending. The second showed how even at famous research hospitals such as UCLA and the Mayo Clinic (an admittedly small sample), spending was in no way correlated with outcomes. He attributed the difference to interventionist versus non-interventionist professional norms, which in the absence of solid evidence on best practices, play a very strong role in guiding doctors' decisions.

The simple solution would seem to make patients more accountable for health spending. That is, make sure they feel the financial bite of each extra dollar they want to spend on tests and treatments which they might otherwise forego. Unfortunately, a small portion of patients absorb the lion's share of health care spending and it is very hard to restrict care to these individuals. Doing so would mean doing away with catastrophic coverage which our nation is very unlikely to do.

So what are we left to work with? We need to do a lot of research. No one has good information on best practices and we have very few resources devoted to discovering or promoting them. Orszag believes that we should have started our research into best practices 15 to 30 years ago. Perhaps we can blame the Boomers for not starting earlier?

Economic Outlook

2007-11-08T12:44:00.000-08:00

I went to hear Bernanke speak to the Joint Economic Committee today. He's projecting moderate to low growth in the near future despite oil prices, the weak dollar, falling housing prices, and the credit crunch. I wouldn't say there were any startling revelations but it is quite a spectacle to watch Schumer question Bernanke and realize that neither of them quite knows where the economy is going. As Bernanke said, "economists are notoriously bad at predicting turning points."

A Breakthrough Policy on Healthcare?

2007-11-08T12:08:00.000-08:00

Yesterday the Committee for Economic Development (CED), a think tank composed of businesses and university presidents, had the East Coast launch of its healthcare reform policy. (Full disclosure I am married to the event organizer). The event was keynoted by Senators Bennett and Wyden, cosponsors of the closely related Healthy Americans Act. Congressman Jim Cooper and Dr. Alain Enthoven, a widely respected figure in the field of health policy, also spoke.

The CED's plan would seek to cut costs in the healthcare field and boost productivity by giving individuals discretion where they spend their healthcare dollars. The idea being that they will select more efficient providers and shun unnecessary tests if given the choice.

The federal government would create a series of regional exchanges in which every individual would be guaranteed the right to choose between multiple private insurance plans. Premiums would be flat in respect to age and preexisting conditions and "fine print" would be standardized. A "Health Fed" would be created to risk adjust the premium revenues to each insurer, that is compensate insurers for signing-up relatively more people who were likely to make claims.

This plan is significant in that the group five years ago called for an employer-centric solution to skyrocketing health costs. CED now believes government intervention is necessary to prod insurance markets and health providers into healthy competition.

This is only a tiny first step for this particular policy. The plan still has numerous details to be hammered out. For example, how the "Health Fed" will be organized and adjust for various conditions will be an incredibly contentious and complicated issue. (Holland, which has implemented a similar plan is having problems appropriately adjusting premiums for all pre-existing conditions.) Furthermore, as Rep. Cooper noted, there is $2.15 trillion in spending under the current system and there will be a lot of groups fighting to protect every penny they currently get.

Still, a policy that combines universality (for the Democrats) with cost-cutting (for the Republicans) might just stand a chance of success.

Subprime Fall Out Battle In Full Swing

2007-11-05T10:49:00.000-08:00

A bill that would provide greater bankruptcy protection for consumers facing foreclosure advanced yesterday despite protests by the Financial Services Roundtable, several large banks, and the White House. H.R. 3609, legislation co-sponsored by Reps. Brad Miller (D-N.C.) and Linda Sanchez (D-N.C.), was referred to the full Judiciary Committee today on a 5-4 vote. The legislation would, according to the WSJ, allow bankruptcy judges to adjust mortage interest rates and the length of mortgages to help borrowers avoid foreclosure. Judges could also possibly adjust the balance of the loan to reflect declining home values. For example, if $150,000 were owed on a house now worth $125,000, the judge could mark $25,000 to be "unsecured debt," making collection much more difficult.

This new law would naturally afford borrowers more protection than they enjoy under current law presumably at the expense of banks. Banks would have a more difficult time foreclosing on insolvent borrowers and would end up holding mortgages of lower value. David Kittle, the Chairman-Elect of the Mortgage Bankers Association (MBA) argued before the Subcommittee on Commercial and Administrative law that lenders would take into account this risk by increasing interest rates on mortgages by as much as 1.5-2%.

This legislation is interesting for two reasons. From an economic perspective, would it actually raise interest rates by 1.5-2%?Given that the source has an interest in killing this legislation, my guess would be no not now? But would this lead to some rise in the cost of obtaining a mortgage, either monetarily or administratively? It is definitely possible. Mr. Kittle is correct that risk should in theory be priced into the load. But considering that we have just come out of a period in which risk has been priced so badly, how much of this risk will be priced in for average buyers?

Much of the lending which fueled the bubble occured because risk was ignored. Mortgage originators did not end up holding risk at the end of the day so they originated as many loans as possible to maximize their fees. Meanwhile, borrowers and lenders alike anticipated (unrealistic in hindsight) ever-rising home prices so that borrowers could refinance. Now if this risk is better priced into the system (a good thing), we will expect interest rates to rise on their own. If interest rates are already rising will lenders be able to simply tack on another 1.5-2% when they are trying to bring borrowers back to the market?

From the political perspective, this legislation is interesting because a good deal of the subprime lending occured in Republican districts. This means it has potential of passing and could lead to some interesting defections.