An Open Letter to the Left from the Confused British Public

Dear The Left,

Thank you for your policy suggestions, which have been passed to the relevant departments. We are very grateful for all your hard work, however it would be appreciated if you could clarify some points.

We have been listening to your theories on the deficit and we are certainly interested in your theories.

As a member of the British Public, to tell you the truth, I’ve always thought of a country’s budget like that of a household’s, but thinking about it I see you have a point and that things are more complicated than that.

A deficit is someone else’s surplus, that makes sense, and if I could take out a loan at 3.5% over 10 years like the Government can I might consider borrowing a little more too. In general it had started making sense.

Of course, at the moment I’m not working as much as I’d like to and you might be able to help out with that. My kids need childcare and it sounds like you can offer what the Tories can’t. Personally it had started making sense.

You had me interested, but then you changed and started confusing me.

You have stopped saying that the deficit was nothing to worry about at the moment and that eliminating it in 5 years was a bad almost dangerous thing. Now you have started arguing that it needs to be eliminated in a single year.

Apparently, an unprecedented tax aimed at the assets of the wealthiest 10% of the country could eliminate this year’s deficit. I thought that would be a bad thing, a fiscal contraction or something.

I have to admit, I was only just coming round to the idea that the deficit didn’t need eliminating over five years, and here you are saying we can close it in one! Now it kinda seems like you don’t know what you’re talking about.

I found it hard to trust you after that, so I looked at your new idea a little more. It turns out your plan doesn’t even make sense on its own terms. Look at this graph. [1]

If you concede that eliminating the deficit is important and that to tackle it you need to tax 10% of the population in a totally new way (not even the best totally new way), why do you do such a dreadful job of tackling the deficit?

Why are you promoting a one off tax to tackle the deficit? I mean why use a one off slice of the public’s stock of wealth to tackle a problem, as you seem to concede it is now a problem, like the deficit, which is a flow?

We British Public are getting a lot of mixed signals: Some of them are making you look untrustworthy and those that aren’t are making you look stupid.

Once again, please accept our thanks for your suggestions. If you don’t hear back from us within two weeks please accept this as confirmation that your policy recommendations have been rejected.

Yours sincerely,

A Confused British Public

______

[1] I found the original here and altered it in paint, hell, I’m not Beau Bo D’Or, I’m just a member of the General British Public.

Advertisements

“Russians calling for action on climate change after extreme heatwave & years of denialism”

As Sunny tweets, the Russians have been beaten into submission by the brute force experience of a 1 in 1000 year heat wave. Subsequently Dmitry Medvedev has called for more action on fighting global warming.

If you are having trouble visualising this then this is what a 12 degree temperature anomaly looks like.

https://i1.wp.com/media.economist.com/images/images-magazine/2010/33/eu/201033eum941.gif

Little need for a narrative on this one, mother nature’s “the world is warming and you’re gonna burn” shtick seems to be doing the trick.

Extreme weather events certainly focus the mind, but these events are of course weather not climate and it would be foolish to base our arguments on them.

When deniers used this winter’s snow as evidence that the world was not warming they were mocked as idiots, we would deserve the same were the tables turned.

However, extremes of temperatures have been changing, and that change closely tracks what models of climate change would predict.

Extremes of temperatures have been becoming more frequent and are going to continue to become more frequent as Climate Change advances.

However, I hope no more lethal heatwaves will be necessary to convince everyone of that and for action to be taken.

North, D.C, “Epilogue: Economic Performances Through Time” in Empirical Studies in Institutional Change edited by L. Alston, T. Eggerston and D. North, pp 342-356 (USA: University of Cambridge Press, 1996)

This is a crosspost from Global History @ LSE. All my posts leading up to the start of my course will be crossposted to Left Outside, but once my course starts you’ll have to visit Global History @ LSE if you want to keep up. These are my notes on North’s “Economic Performances Through Time” and is one of seven items of preliminary reading I have to cover before my course starts.

Taken from here. North is attempting to delineate what can and what cannot be learned about the way societies change over time. Section I is on the process of economic change, section II is on what questions we should ask and section III speculates on what questions can be answered and which cannot.

I

North explains that “a theory of economic performance through time would entail an integration of institutional change, demographic change and the change in the stock of knowledge.” In this essay he chooses to focus on the change of institutions because economics is the study of a process and processes are embodied in the institutions of a society.

Institutions are created by humans to structure human institutions in order to reduce uncertainty in pursuit of their goals (or those making the rules) in social, political and economic exchange.

Institutions are defined as the formal rules (constitutions, statute and common law, regulations etc.) , informal constraints (norms of behaviour, conventions, internally imposed codes of conduct etc.) and the enforcement characteristics of each.

Institutions are not Organisations. Think of Institutions as the rules of the game and Organisations as the players. “Organizations and their entrepreneurs are the actors; they will introduce new institutions or technology when they perceive that they can improve their competitive position by such innovation.”

North now goes into more detail on the processof institutional change.

The institutions of a period define what organisations will exist. Organisations exist under a condition of scarcity and therefore competition. The rate of innovation and change in the institutions which govern our organisations is governed by the incentive structure constructed by this competition.

This is not the competitive conditions of the economic theory of perfect competition but rather the institutional environment of the organizations–the framework of rules and norms–which determines the incentives for innovative activities. An improvement in an organisation is not necessarily an improvement in productivity but could be the creation of a monopoly or the redistribution of wealth in some advantageous way.

Sometimes the innovation involves a change in formal rules and structures [like the repeal of the corn laws] so a study of institutional change must take embody a theory of political change. Sometimes changes involve a gradual change in informal norms of exchange [like the end of religious prohibitions on usury].

Whether organisations change institutions in ways which boost productivity or by redistributing wealth depends on the incentive structure of currently existing institutions. If institutions and the way they evolve are the key to economic performance through time what determines the way they evolve?

The immediate answer is that individual entrepreneurs who are in the position of modifying the rules of the game in political or economic markets and have implicit or explicit theories about the consequences of policies act upon those theories to modify the rules to improve their competitive position; the perceptions of entrepreneurs shape their policies and over time it is the way these perceptions evolve that determines the way institutions evolve. There is no implication that results of the choices that are made will coincide with intentions; indeed more often than not the belief systems that underlie perceptions produce unintended and unanticipated results.

II

This approach to understanding economic performance through time is at odds with the mainstream literature.

Arnold Toynbee popularised the term “Industrial Revolution” in a series of lectures in 1880-81 and historians have ever since usually onsidered technological change to be the most important determinant for economic performance. For example “take off” theories of development. This is wrong, technologies give us our upper bound, but do not tell us about why this upper bound is so often missed. In contrast, Malthusian pressures have determined the gloomy lower bound.

The economic growth literature has seldom posed the questions which North wants answered. Growth accounting can explain the proportions with which human capital, physical capital, increasing returns, or technology contribute to economic growth but it cannot explain why poor countries don’t invest more in human or physical capital.

Studies of the Third World have often implicitly assumed incentives are aligned correctly, when they are almost always provide incentives for redistributive institutions are larger than those for productive activity. The failure of humans to organise themselves the provide the right incentives must be the centre of inquiry.

Too much study in economics looks at static equilibria, the study of economic performance through time needs a dynamic approach. Given the above, North now reveals his questions.

  1. Are institutions really the carriers of the process of economic change and if so what are institutions?
  2. If institutions play such a role how do they interact with the other key actors in the process of economic change, demographic change, and changes in the stock of knowledge?
  3. What are the sources of institutional change?
  4. What is the process of economic change? How useful are models drawn from evolutionary biology?
  5. How can we explain the diversity of economic performance through time?
  6. How far can we go in constructing a framework that can provide guidelines to improving the performance of third world and transition economies? Can we construct a dynamic theory of change?
  7. Where are we going?

III

In this section North  approaches each question in term.

Are institutions really the carriers of the process of economic change and if so what are institutions?

Mainstream economics neglects institutions. The evidence of the myriad levels of economic performance even amongst countries facing similar technological and demographic limits should illustrate how important institutions actually are.

However, while mainstream economics do not incorporate institutions into their theory, when they concern themselves with policy they do so in discussing changes in laws and regulations – formal institutions. But Informal institutions are also very important.

If institutions play such a role how do they interact with the other key actors in the process of economic change, demographic change, and changes in the stock of knowledge?

They interact in many ways, most of which we are yet to fully understand. Modern economic growth has its source in the stock of knowledge which is rooted in the scientific revolution of the sixteenth and seventeenth century, yet the roots of this revolution are far from clear.

The formal and informal institutions which led to this scientific revolution need to be understood to explain how it led to the massive changes in demographics and technology which followed.

What are the sources of institutional change?

The source of change reflects the perceptions of economic and political entrepreneurs who perceive ways in which they can improve their position.

In this context, actors do not act as neoclassical theory would suggest. This approach assumes pervasive scarcity and individuals making choices reflecting their preferences. The aggregate of this preference is then constructed  in the context of fixed resources, private goods and given technology. This model is good for illustration the benefits of a decentralised market system but is less useful in understanding institutional change.

When solving economic problems frictions arise [transaction costs] is the context of imperfect information and imperfect enforcement of agreements, and markets are the creatures of political forces. In the real world beliefs define the actions of actors.

We must model beliefs if we are to understand any social science.

Risk versus uncertainty comes into play when discussing someone’s beliefs. Risks can be described as a probability distribution and can be insured against. This is impossible for uncertainty and economics has not created a body of work on this subject. However, all human endeavour is conducted on the basis of some sort of uncertainty – religions, myths, taboos and half baked ideas all serve as the basis of (sometimes life and death) decision making.

The study of economic performance through time must entail the study of how humans learn and meld beliefs and preferences; why they develop these choices in the face of such uncertainty; and why some ideas die out and others prosper.

What is the process of economic change? How useful are models drawn from evolutionary biology?

There are parallels between Darwinian Evolution and the process of economic change. However, Institutional change is largely Lamarkian, change is intentional and is intended to improve the position of those making the changes.

Part of our the scaffolding on which society is built is genetic, part of being human, and part of it is cultural, also I guess part of being human, but in a different way.

Experimental Economists have found evidence which lends support to the position of evolutionary psychologist, human beings cooperate in small groups when transaction costs are small but noncooperative outcomes are favoured in large groups or under conditions of private information. Stephen J Gould and others have suggested that cultural evolution still has a large role to play in the architecture of how humans act. A look to the variety of human societies which share the same genetic material, suggests that cultural evolution play a large role.

Initially the architecture of the  structure is genetic, but interaction with the physical environment and those from the socio-cultural linguistic environment affect this. Categories of experiences are formed which become models on which we decide actions and predict outcomes, as we use these models we update them through confirmation and falsification.

No one individual can understand the whole world but each develops their own models. These models would diverge were it not for ongoing communications from those of a similar cultural background. The interaction of these models creates a culture, provides a method for intergenerational transfer, a means for internal communications, and a method to explain experiences outside the experience of our specific individual. This last function explains the helpes existence of irrational beliefs, some explanation is better than no explanation.

All this implies that individuals are constantly somewhat irrational, unknowledgeable and subject to experiences which may reinforce rather than dismiss incorrect beliefs. North proposes some more questions on what this means for the study of economic performance through time.

  1. What difference does it make that the agents fall far short of substantively rational behavior (full knowledge of all possible contingencies, exhaustive exploration of the decision tree, and a correct mapping between actions, events,and outcomes)?
  2. Is it possible that the agents simply get it wrong in terms of modeling the process of change or representations of the environment?
  3. It may be that the past experiences of the actors lock them in to a belief system and institutional framework that however well they have solved previous problems are strikingly bad at solving new problems.

How can we explain the diversity of economic performance through time?

History is a record of unanticipated consequences and outcomes of decisions made in the face of uncertainty. It could hardly be otherwise.

Economic History is the study of the huge increase in wealth and well-being of humanity, but is is also the study of actions which have produced death, war and famine on a colossal scale. Even what look today like the best laid plans (the US Constitutions) have in fact been aided hugely by chance.

One of the biggest challenges to economic growth for a society is the move from personal to impersonal exchange – a necessary component for greater specialisation and enlarged trade. For example, Genoese traders outperformed Islamic traders in the 11th and 12th century because the Islamic traders relied on in-group social communication networks to enforce collective action while the Genoese formed formal and legal enforcement mechanisms. Thus, due to path dependency, the Genoese could gain more from specialisation and enlarged trading networks.

Institutions change through time and impact one another in unpredictable ways. Because Islamic traders relied on personal exchange, they couldn’t specialise as much as the Genoese, which impaired change in the stock of knowledge which altered the path of demographic change which impacted the change of institutions etc.

How far can we go in constructing a framework that can provide guidelines to improving the performance of third world and transition economies? Can we construct a dynamic theory of change?

A theory of dynamic change is not possible in the same way that a theory of general equilibrium is. We make changes based on new information all the time. To predict those changes would require us to predict that future knowledge, at which point it ceases to be future knowledge and simply becomes knowledge and then becomes now. The past can inform the present and the future, but it cannot predict it.

We know something about the evolution of formal institutions but we know very little about how informal rules change, and these can be just as important.

We need to understand path dependency because it plays a major role in constraining change, if institutions exist which retard economic growth then we need to know hoe easy it is to change them.

Where are we going?

The foregoing discussion suggests that our potential foresight is relatively limited. Forecasting what humans will learn and how the human environmental landscape will change in consequence of that learning and non-human alterations is beyond our capacity and in consequence imposes severe temporal limits on our understanding of economic performance in the future.

The democratic repeal of Proposition 8

Last week Judge Walker struck down Proposition 8. This was passed by referendum in California in 2008 and would ban gay marriage in California.

On the left, Owen reflects the consensus in saying that this is the “judiciary overriding the democratically expressed will of the people” and calls the decision “unambiguously anti-democratic.” From the right, Gerald Warner of the Telegraph seems almost apoplectic with rage over undemocratic Judicial Activism.

However, I am unconvinced that the overturn of Prop8 is anathema to democracy. There are a number of ways of characterising democracy. Usually this is simply described as the will of the majority but I am not happy with this description.

Democracy can take many forms and each form can only exist within a given set of institutions. Many of these institutions are not compatible with simple majority rule, but as these institutions are foundational for Democracy it is not credible to call them undemocratic. [1]

On a practical level, the referendum which passed Prop 8 took place under the pre-existing rules of the Californian Constitution. In order to get Prop 8 onto to the ballot paper those backing it had to pay a $200 submission fee and collect signatures from 5% of the number of people who voted in the most recent election for governor.

Proposition 8 does not have weight as a Democratic decision because a majority support it, but because a majority supported it within the rules prescribed by the institutions of Californian democracy. Football is not just a game which involves men kicking a ball, there are rules. When a goal keeper picks up the ball we do not say that it is anti-football, it is part of the rules which people have agreed to abide by.

I am already on the record saying that for majority decisions to be democratic all those involved must be formally and informally, morally and legally, equal members of their polity. When citizens are discriminated against for who they are rather than what they have done, even if this is what the majority want, it is not democratic.

The reasoning behind Prop 8 was that Gay people were inherently worse than straight people and didn’t deserve equal rights. That is an undemocratic position because it vitiates a fundamental institution of Democracy. Timmy says that liberty should trump democracy, but it is equality which this judgement reinforces, not liberty, and without equality [2] there can be no Democracy.

In short, Prop 8 threatened the equal treatment of the citizens of California and its overturn has strengthened Democracy in that state.

There are many forms which democracy can take, and a simplistic formulae which labels any deviation from majority rule undemocratic does a disservice to democracy as an ideal or phenomenon.

_______

This became quite the sizeable aside, so I’ve committed it to a mere footnote, you should still read it though.

[1] First of all, I am annoyed that Democracy is so often solely associated with majority rule.Its amazing this is the common view of democracy since we live in a Representative Democracy, we vote people to make decisions for us, we don’t vote for policy. There are many, probably better, systems of Democracy.

For all its manifold deficiencies Athenian Democracy had many attractive qualities, lawmakers were often chosen by lot (and replaced at regular intervals) so that regular citizens rather than career politicians had the reins of power. Sortition is good enough for enforcing laws, it is a pity it is not used more often for making laws.

Moreover, at a fundamental level Democracy has never ever been about majority decisions. It has always been about a majority within a given polity, for example those from abroad are never included. Were a referendum to be held tomorrow, the world’s borders would melt away.

Of course then we come to economics. Democratic control of a citizen’s bedroom habits is often treated as a legitimate whereas democratic control of the means of production is given short shrift.

[2] Note please that I am not referring to material equality.