The paradox of trust

John Plender reviews favourably Trust: A History by Geoffrey Hosking. The review says: “He argues, convincingly, that there is a tendency to give too much attention to power and the law relative to trust. The workings of trust are nonetheless complex….In the complex modern world, what increases trust in one group can intensify distrust in another.”

This seems to me one of the most difficult questions in the trust/social capital literature: what is the scope of the relevant group for trust to be a positive rather than a negative influence on the economy? Criminal gangs can be high trust organisations yet decrease trust in the society of which they form a part, and so on. Divisions into inside and outsider groups rarely end well.

Last year I wrote a short essay for the OECD Forum on the economic cost of diminishing trust in many of the institutions in OECD societies, including trust in big business. It highlights the paradox that the complicated, interlinked modern economy could not work without high levels of trust and yet so many indicators show that trust in established institutions is declining. More questions than answers here too, I’m afraid. But one can’t help but feel that we’re in a very corrosive downward spiral in trust at present.

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It’s the housing market, stupid

Thanks to @PeterBoettke on Twitter, I found these articles by Vernon Smith (an economics Nobel winner) and Steven Gjerstad arguing that the housing market has had a central role in the 2000s bubble and subsequent crash, because of its importance to household and lenders’ balance sheets. The first article (of 3) suggests that the Taxpayer Relief Act of 1997, which exempted homes from the capital gains tax up to $500,000, might have helped to trigger the bubble in house prices that ran from then up to 2006. The authors suggest:

Proposition 1. Severe economic recessions have their origin in joint household and bank balance sheet crises.

Proposition 2. The Great Recession is an example of a housing boom-and-bust that devastated the economy – as is (Proposition 3) the 1930s Depression.

Proposition 4. Monetary policy is ineffective in a balance-sheet crisis and so is government deficit spending for the same reason (which is that both operate on income flows at a time when households are repairing balance sheets).

Part 3 is still to come, but the articles are based on a recent book (which I’ve not read), Rethinking Housing Bubbles: The Role of Household and Bank Balance Sheets in Modelling Economic Cycles.

This struck a chord for two reasons. One is that Kate Barker’s new book in the Perspectives series, Housing: Where’s The Plan, also emphasises the way the housing market drives the economic cycle, and has as one of its central recommendations capital gains tax on primary dwellings. She, of course, was a long-serving member of the Bank of England’s Monetary Policy Committee and also authored two landmark reports on planning and the housing market for the Treasury.

The other reason has been my growing conviction (over the last two books, The Economics of Enough and GDP) that economists and policymakers have paid far, far too little attention to assets in general. But perhaps people in general have become a bit less short-sighted? It would help explain the growing disillusion with politics by the next day’s or hour’s headlines.

Market failures and government failures

It’s lecture preparation time of week again, and the general theme for next week is the state as a producer: nationalisation and privatisation, PFIs and PPPs, contracting out and industrial policy.

This is one of those areas where there is a vast amount written, but much of it furiously ideological, or else at the wrong focal length for undergraduate students – far too specific or detailed. However, courtesy of Alex Marsh, I have found You Don’t Always Get What You Pay For: The Economics of Privatisation by Elliott Sclar.

This refers to privatisation in the US meaning of contracting out, rather than the UK sense of the sale of state assets. It starts by situating the debate in the context of the shifting tides of political beliefs over the 20th century, towards planning and the role of government as an agent of social change, and then back towards “free” markets and individual action. It then has a few chapters on the basics of markets versus administered or planned services and market failures, and also the basics of writing contracts and how hard or easy it is to specify the service and level of quality to be provided. This part has some very good and clear examples about how difficult it can be to get the incentives right in such contracts – indeed, how often there are perverse incentives due to contract structure.

The book goes on to market structures and competition, and organisational theory – the distinction between exchange in a market and a continuing relationship between individuals or organisations. The book ends with a plea for a less ideological debate about the issue, in favour of one more informed by economic and institutional analysis, by the realities of information asymmetries, moral hazard, principal-agent problems and the like. I wholly sympathise, for of course markets and governments fail in the same places for similar reasons – and this is why Elinor Ostrom‘s study of the idiosyncrasies of non-market, non-state collective institutions is so interesting. But am not optimistic about shedding the ideology.

There’s no doubt what Prof Sclar’s views about contracting out are, so this is in that sense a partisan book. However, it is carefully reasoned and the economic issues are set out clearly. The writing is lively with loads of examples (albeit all American), and the book is extremely clear – perhaps it helps that Prof Sclar is an urban planner rather than in an economics department!

It’s too long, and perhaps a bit too demanding, for 2nd year undergraduates though. (One of the things I’m learning in delivering my course is that my idea of a reading list is far longer than others like the look of.) If anybody knows of anything alternative (short-ish) readings that shed more light than heat, I’d be glad to know, especially UK-centric ones.

Women, computers – and economics

The latest issue of Fortune has an extract from a new book by Walter Isaacson, The Innovators, which is definitely on my to-read list. The extract is about the female pioneers of computing (and HT to @Dr_Black).

As it says, replugging the connections in the early computers was tedious:

“At first the programming seemed to be a routine, perhaps even menial task, which may have been why it was relegated to women, who back then were not encouraged to become engineers. But what the women of ENIAC soon showed, and the men later came to understand, was that the programming of a computer could be just as significant as the design of its hardware.”

Of course even before ENIAC, women had had the same job at Bletchley Park during the war. (And in the same way, in the Soviet Union women dominated the economics profession – making up more than two thirds -  because their job was the vast and tedious one of calculating prices and quantities for all the goods made in all the factories around the country. Needless to say, their pay and prestige was relatively low.)

As it happens, last week I was at Harvard and saw this Mark I on display in the Science Center. Grace Hopper was one of its key early programmers.

The Harvard Mark I

Unthinking computers and thinking rats

On the way back from a brief US trip I read a long review by John Searle in The New York Review of Books, What Your Computer, Can’t Know. In it he reviews The 4th Revolution: How the Infosphere is Reshaping Human Reality by Luciano Floridi and Superintelligence: Paths, Dangers, Strategies, by Nick Bostrom. You fear for the two books on reading, early in the review: “Neither book is modest.” The first claims that information forms the ultimate basis of reality. The second worries that there will soon be super-intelligent computers with malicious intent towards humans.

  

Now nothing by Searle is an easy read but his argument here – on his Mastermind special subject – is pretty clear. He argues that conscious thought is a real biological process like digestion or photosynthesis. Computers can simulate the digestive process. They can simulate thought too, but they are not conscious any more the they are breaking down dinner with enzymes. Computation by a computer depends on the interpretation of electrical processes by a human mind. Consciousness is a psychological process.

Searle writes: “The weird marriage of behaviourism – any system that behaves as if it has a mind really does have a mind – and dualism – the mind is not a ordinary part of the physical, biological world like digestion – has led to the confusions that badly need to be exposed.”

No no doubt cleverer people than me (ie those able to do philosophy rather than economics) could counter-argue; but I’m taken with the notion that rats, to pick a non-random biological example, are capable of consciousness but computers are not.