Ethics, culture and economics

It was thought-provoking reading Deirdre McCloskey’s Beyond Positivism, Behaviorism and Neoinstitutionalism in Economics right after Jamie Susskind’s Digital Republic. They’re about different subjects of course, but also have contrasting philosophies. The Susskind book points to more government action, much more, in shaping digital markets, and I agreed with some – althoug not all – of his suggestions. McCloskey is concerned to make the case against the frequently-heard kind of analysis that market failure X requires government action Y to fix it. And I sort of agree with her too. Am I just hopelessly inconsistent?

To take a step back, this book has three messages. One is that it’s incorrect and misleading of economists to claim – as so many of us always do – that the positive and the normative can be separated, and all we’re doing is the objective, evidence-based analysis. In this section the book targets a 2017 paper by Werner Erhard and Michael Jensen that I haven’t read but sounds philosophically naive. For a little reflection – really only a little – shows this to be false: if we’re recommending an action for its good outcomes, ‘good’ is an inherently normative, evaluative criterion. I wholeheartedly agree with McCloskey on this point and wish I’d been able to read this book before writing those sections of Cogs and Monsters.

McCloskey’s second point is to argue for a broader, multi-dimensional, humanities-inflected approach to economic analysis. She takes particular aim at ‘neoinstitutionalists’ from Douglass North to Daron Acemoglu for their reductionist view that economic institutions are wholly described by incentives and utility-maximising outcomes, arguing that standard economic models alone are insufficient for explaining modern economic growth. Her own view – set out in her major Bourgeois virtues trilogy – is that a change in culture toward liberal (in the old-fashioned sense) ideas are needed to explain the scale of change between 1800 and now. Changes in incentives bring small (Harberger-triangle sized) gains, not increases in incomes by many multiples. I’m on board with this too, while still thinking the economic max-U approach brings interesting and useful insights.

Her third aim, though, is to argue for a more libertarian public philosophy: governments mess up economies more than they fix problems, and policies had little to contribute to the massive growth of the past 200 years. Here is where I diverge. For sure there have been many government failures too. Indeed, markets and governments tend to fail in the same contexts and for the same reasons (natural monopoly, externalities, incomplete markets etc). But I disagree with her implied counterfactual that there would have been an even more massive improvement in living standards in the era of modern growth without government. Collective action problems need collective action even if the location of the need shifts over time with technology, or with the complexity of high fixed-cost markets characterised by technological or other uncertainties, or with social expectations. So yes, there are a lot of simple-minded government-can-fix-it proposals – on this point McCloskey takes aim at Mariana Mazzucato‘s claim that the government in effect brought us the smartphone, albeit caricaturing it somewhat. But I’d contend we’ve of late had too little market-shaping policy rather than too much – including in digital domains.

Some of the terrain will be familiar to McCloskey’s readers – the importance of ethics in economics, of culture in growth, the misleading cult of statistical significance. I enjoyed reading this book nevertheless – her style is a bit of an acquired taste and I like it although I know others don’t. And it’s a compact discussion of some crucial issues economists should be contermplating. Even where I disagreed, it made me think.

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An economist in the real world

I was a bit sceptical about John List’s The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale mainly because of its presentation as a how-to business book. This goes right through to the design, which would sit nicely in an airport bookstore (remember those?….) But my fears were groundless. It’s a terrific read, and despite the business gloss is full of good advice for all kinds of public and non-profit organisations too.

For those not familiar with his work, List runs field experiments and has done so across a huge range of organisations and contexts, testing behavioural hypotheses. He has also worked as chief economist for Uber and Lyft and so has hands-on experience of how businesses operate, a rare qualification among academic economists. The book clearly draws on this trove of experience, ranging from fishing villages in Brazil to primary schools in Chicago Heights to creating incentive programmes for Lyft drivers and riders. I don’t know Prof List but I admire any economist who has spent so much time out in the ‘real world’.

The book has two halves, the first covering five diagnostics to help assess whether an idea that works at small scale will scale up – whether that’s a policy to assist progress among toddlers in deprived areas to a new digital wellbeing app. The diagnostics boil down to some basic (but evidently challenging) statistical and economic analysis – for example, do you have a representative sample when you test an idea, can you identify false positive results, do you have economies of scale to capture or will costs go up with revenues? The second half is more general econ/business advice – sunk costs are sunk, risk compensation and other behavioural responses are a thing, focus on allocating marginal effort and identifying marginal revenues. I was particularly struck by the last point in the context of cost benefit analysis, List having also spent some time as an economist responsible for CBA in the George W Bush administration in 2002-3.

All in all, this doesn’t topple Shapiro and Varian’s Information Rules from my number 1 position as best ever business book (written by economists), or indeed Dixit and Nalebuff’s The Art of Strategy from number 2, but The Voltage Effect is definitely in the top handful and well worth a read by anbody who wants their organisation to succeed and grow.

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If/then

Earlier this year I read Jill Lepore’s These Truths, which made me eager to read her new book, If Then: How One Data Company Invented the Future, as soon as possible. It didn’t disappoint – although I had a couple of reservations about it. More on that later.

The book is the story of a company, Simulmatics, formed by a PR man, Ed Greenfield, and an MIT political scientists, Ithiel De Sola Pool. It aimed to apply computers to the prediction of human behaviour: feed the machine enough data and it would be possible to predict election outcomes, among other social phenomena, and more importantly manipulate them. The convergence of data, computational power and Mad Men behaviourist techniques seemed inevitable and unconquerable. The parallel with the same again this time round but more so is striking, and the book ends with the comparison.

Along the way, Lepore tells a rattling good story about American politics in the late 1950s through to the Vietnam War and Nixon, about the first application of computers to social issues (and Madison Avenue was onto the opportunities early), and also about gender politics. Right from the start, there was a culture of computer bros, hostile to women: “Women’s knowledge was not knowledge.” The cast of characters is fantastic. Many of them I’d never heard of – Eugene Burdick, the best-selling author of thrillers and leading political scientist, anyone? Lepore also writes like a novelist, and an excellent one at that.

That is in fact one of my reservations. Among the notes I was taking were notes on craft – this is genuinely a page turner. And yet ….. when the text gets into the interior lives of the wives of the men, I wonder how she knows? Are there really enough letters and diaries, or is this indeed embroidery?

The other is that I hungered for more context about the impact of behaviourism and of cybernetics, and the broader environment of computerised social engineering. For example, Stafford Beer had his own US consultancy applying cybernetics, going to Chile in the early 1970s to assist with Project Cybersyn (the subject of Eden Medina’s wonderful book Cybernetics Revolutionaries). If Then does acknowledge the early use of computers in advertising but Norbert Wiener gets but a passing reference. And even though Simulmatics failed – so many of its projects turning out disastrously – there is surprisingly little scepticism about whether computers can in fact predict and manipulate humans,  whether Simulmatics or their modern day equivalents in Facebook and Cambridge Analytica.

Having said that, If Then is a wonderful book, highly recommended. Lepore was interviewed by David Runciman in a great episode of Talking Politics for those who’d like another taster – it focuses mainly on those disturbing modern parallels.

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Economics for social animals

I’ve been reading the latest book by Robert Frank, Under the Influence: Putting Peer Pressure to Work. Although I greatly admire his work, and he has a knack for catching the moment – as with Luxury Fever or The Winner Take All Society –  I must confess I found this one a bit dull. This is nothing to do about disagreeing with the idea, which is to bring together thinking about social norms, altruism, positional goods and behavioural peer effects together to tease out policy implications, or rather policy approaches. This all seems blindingly obvious to me, and indeed one of ten lectures in my public policy economics course (one chapter in my Markets, State and People) covers exactly these social influences. I agree, too, that more economists ought to be more aware of social influence: we are not isolated individuals in making choices.

There are some deep questions for economists, once you accept the seemingly incontrovertible evidence that social norms can change, advertising works to persuade us to buy things, and positional arms races occur. What does it imply for a discipline whose models and welfare analysis are based on the concept of fixed preferences? For example, the way price indices are calculated – used to calculate in turn ‘real’ growth and productivity – assumes fixed preferences; but there are constant innovations and new goods, and there is no settled way of taking these into account in dividing pounds or euros spent into price and ‘real’ components.

Back to the book, though. Yes, of course to ensuring economics and policy advice are consistent with evidenced insights from social psychology or cognitive science or evolutionary theory. Yes, of course context affects how people make economic choices. But ….perhaps it was my frame of mind this week, but Under the Influence didn’t sing to me. It seems very long-winded. In fact, the prologue claims as a virtue the repetition in the book, arguing it will help get the message to stick. Students who are not familiar with the material might really enjoy this and find it sinking in. But not one for me.

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Top down *and* bottom up

Charles Stafford’s plea in Economic Life in the Real World: Logic, Emotion and Ethics, is for his fellow anthropologists to take more seriously the methodologies of two other disciplines, economics and psychology. I learned a lot about anthropology from this book, including how much anthropologists disdain economics (I fear we return indifference, on the whole).

Stafford’s argument, in a very interesting and readable book, is that the approaches are complementary: anthropologists focus on the most micro of details, while both economics and psychology are interested in generalisation about human behaviour. Intriguing to see these two bracketed together when psychology has – during the behavioural rvolution – been portrayed as a more realistic version of choice than that (assumed to be) assumed by economists – of course economists have always known that the rational choice version is not ‘realistic’.

He writes: “As a matter of routine, anthropologists accuse economists of being obsessed with ‘individual rational choosers’, but it is surely anthropolgists who are obsessed with detail.” There’s a bit of a paradox here: economics does apply methodological individualism on the whole, and easily overlooks social influences (though not entirely). Yet our concern is with outcomes at aggregate as well as individual levels. Economics is certainly universalist. It was interesting to see psychology being put in the same camp, as a universalist approach.

The plea is therefore for anthropologists to recognise that human psychology is at the heart of economic agency – it isn’t all about historical and cultural context. There is a nice chapter analysing the pros and cons of Robert Lucas’s approach to human capital and economic development, confrinted with the way people in a Taiwanese village think about the education of their children. The book ends too by pointing out that while anthropology resists quantification at all costs, the people whom the author had spent time with during his fieldwork considered numeracy and quantification to be important, not least for their economic lives.

There is surely an interaction between general human characteristics and cultural specificities. Both approaches are needed for a rounded understanding of society. I am particularly interested in the possibility for qualitative methods to inform causal inference, given that empirical identification of statistical relationships in complex systems of economic interactions is pretty much impossible. Identification needs to come from outside the model, rather than by torturing statistical correlations with dubious ‘instruments’.

Anyway, I enjoyed reading this book and welcome the anthropo-econo debate.

51Mcz+Z4MHL._SY344_BO1,204,203,200_I’ve also nearly finished Jeanette Winterson’s Frankisstein, which is terrific.

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