The Achilles Heel of (Neoclassical) Economics

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

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

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

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

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

Libertarianism as Liberal Fundamentalism

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

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.