I say, again and again, that it is an embarrassing non-sequitur to argue that people are “irrational” and then leap to the conclusion that they need benevolent paternal guidance from the state. After all, if people are irrational then voters are irrational, politicians are irrational, bureaucrats are irrational, etc. To this, Ezra Klein responds:

I’m not sure what exactly it is that Will finds so inexplicable here. Behavioral research often finds that consumers act irrationally in certain situations. So given a specific set of constraints, they may underestimate future risk, prove oversensitive to loss, exhibit significant status quo bias, and so on and so forth. All problems.

Now, the government may be made up of people, but it is not made up of people carrying out transactions under these conditions.

Perhaps Ezra is right, but only because people acting inside government institutions are much less likely to themselves bear the cost of their mistakes, and will therefore likely make more of them. There is no way to wriggle out of the fact that people who win elections are just like the rest of us.

I really wish people would pay more attention to Vernon Smith, who invented experimental economics, won the Nobel Prize for it, and remains by far the most philosophically rigorous theorist of the relationship between individual rationality and institutional performance. (Ted Bergstrom’s paper here [pdf] is a good overview.) What Smith’s work shows is that, yes, individuals in isolation don’t act according to canonical postulates of rationality, but that well-structured market institutions will nevertheless tend to converge on the efficient outcome, as if the agents were behaving with full “rationality”, even though they are in fact limited, confused, and ignorant. The “rationality” of the outcome is more a function of the structure of the institution than of the “rationality” of those acting inside it.

Responsible social science therefore compares the way real people perform when embedded in different real-world institutional settings. What you surely don’t do is perform selective empirical work to discover an “anomaly” in decision making, and then deploy a priori high theory to infer that one set of institutions (markets) won’t work, because, in fact, the performance market institution might turn out to be indifferent to the anomaly or limitation. That’s what Smith has proved. If you’re going to be an empiricist, then be an empiricist, and actually test the effect of the anomaly in the performance of the relevant institutions. Until you do this, it’s either arbitrary, naive, or willfully ideological to posit another set of institutions (government) as a fix. Because there may be nothing to fix. And, even if there is, government may be the wrong kind of institution to fix it. You’ve got to run the experiment.

There is a great deal of carelessness in generalizing the results of anomaly-focused behavioral economics. As Steven Levitt and John List write in their short article on behavioral economics in Science ($$$) this month:

Perhaps the greatest challenge facing behavioral economics is demonstrating its applicability in the real world. In nearly every instance, the strongest empirical evidence in favor of behavioral anomalies emerges from the lab. Yet, there are many reasons to suspect that these laboratory findings might fail to generalize to real markets. We have recently discussed several factors, ranging from properties of the situation — such as the nature and extent of scrutiny — to individual expectations and the type of actor involved. For example, the competitive nature of markets encourages individualistic behavior and selects for participants with those tendencies. Compared to lab behavior, therefore, the combination of market forces and experience might lessen the importance of these qualities in everyday markets.

List has run a number of field experiments that show that this is the case. Smith has run a number of lab experiments that show that the frequency of a “mistake” goes down as the cost of making it goes up.

Ezra continues:

An easy example is the research on opt-out 401(k)s. We know, from the economists, that investing in 401(k)s is generally a wise idea. We know, from the statisticians, that far fewer people do it than should. We know, from the behavioralists, that far more people would do it if the default setting put you in the 401(k), rather than forced you to wander down to HR and specifically ask for it. And so folks in the government, acting with more information and in a different context than folks in an office, think up a policy to “recognize the power of inertia in human behavior and enlist it to promote, rather than hinder, saving.”

At exactly which point in this process does Will fear that the same irrationality that keeps someone from creating a retirement account will foul up a regulator’s efforts to ease their way into a retirement account?

As I said to Dan Ariely in our chat, I think behavioral work is really valuable, especially when it suggests to us how people might better structure their affairs to get more of what they want. I think the evidence shows that 401(k) opt-out defaults are often a good idea, and that businesses ought to make that part of their standard labor contract, if that is something that they think would be appealing to their prospective employees.

I also think that this minor fact about the general distaste for filling out complicated forms can hardly be used to justify further encroachments on the right of individuals to negotiate the terms of their contracts with employers. I think Ezra’s argument here is both strangely narrow and ungenerously extreme. I don’t doubt that non-terrible policies are sometimes successfully enacted. To doubt that would be a bit like a market skeptic doubting that anyone ever succeeds in buying a candy bar. That would be terrifically dense. What I doubt, very strongly, is that the discovery of “irrationalities” undermines the authority of market institutions more than it undermines the authority of government institutions. Are people more or likely to behave irrationally when voting for their congressman or when buying a sandwich? Do buyers for private organizations sign contracts for $76 screws? Etc.

So, no. I don’t fear the mandatory opt out 401(k) plans in particular will be a giant debacle. But I do fear that half-baked behavioral economics is being used to undermine support for market institutions in general, way ahead of the evidence. And I fear that a fundamentally confused assault on “rationality” is being used successfully to promote paternalistic control by elites and, necessarily, to encourage the docility of those who are to be controlled.

[Added: If you have not read Ed Glaeser's "Paternalism and Psychology" [pdf], then you probably should.]

All this collective action problem debate is delightful. Here are some not-very-structured musings….

The topic of my unwritten dissertation was how solutions to “the contractarian compliance problem” (the fact that an individual can often do better for herself by ignoring moral constraints on self-interest that, if generally heeded, more than compensate for the short-term sacrifices moral constraints require), and the boundary between ideal and non-ideal political theory, turn on assumptions about human motivation that are open to empirical investigation. My position was (and is) that both pure rational choice (as represented by James Buchanan) and modified rational choice (as represented by David Gauthier) are less satisfactory as a matter of empirical psychology than a more deeply-moralized conception of motivation (as represented by John Rawls), but that rationalist accounts of the “moral capacity” or “sense of justice,” like Rawls’s, are also inadequate (in part because of the failure of the Universal Grammar analogy and in part because of naivete about the power of the moral sense to regulate self-interest in many contexts, especially politics).

Anyway, the point is that I don’t accept strict rational choice reasoning about collective action problems. Indeed, I think the fact that we do successfully solve so many of them basically refutes strict rational choice assumptions. (Even if coercion needs to come in to solve a coordination problem, you’ve got to ask why the guys with the guns are doing what they are supposed to, and not just using their powers to plunder, etc.) But if we’re talking about whether or not a certain constraint on self-interest ought to be normatively binding, I think you have to ask: Why? Because I’m a soulless, reductive, naturalist, I think there’s a good answer to that: because heeding the constraint will tend to make the person who heeds it better off, conditional on others heeding it, too. This is where a lot of people will part ways from me. They feel uncomfortable seating normativity in individual flourishing. However, I find all the relevant alternatives to be basically religious.

I am entertained by the examples at hand — gifts to the U.S. Treasury, meat avoidance, and carbon minimization — largely because I see people fighting over whether or not to try to establish or reinforce a moral norm, and that is really interesting. I found Henry’s rational choice-style answer to the question of gifts to the government amusing, because it suggests that he is not interested in reinforcing a moral norm that would motivate us to give money voluntarily to the Treasury. But if he wants the government to have more money, why not? Perhaps such a norm of voluntary giving might undermine a sense of the necessity and/or moral legitimacy of coercive taxation, which he believes it is important to maintain. Perhaps he thinks that this is an area where we cannot realistically expect the moral sense to sufficiently regulate self-interest, and so appealing to morality to do a job only coercion can do will be self-defeating. A new set of moral norms might crowd out a more effective coercive solution.

Well, I can buy that as a real possibility. But then I become very interested in how to apply this kind of reasoning to other similar cases. A lot of people seem to want to pursue a joint moral-coercive strategy to carbon emissions. Might that be self-defeating? Or is it supposed that an optimal carbon tax is politically infeasible without some moral ground-softening? Ethical vegetarians can be very evangelical but don’t seem to be very interested in banning or taxing meat at all. Why not? Maybe all these subjects are more dissimilar than I’m assuming. Then how so?

My philosophy leaves me very skeptical that norms about any of these things (much less coercively-enforced rules) would have any justified normative force — would be rationally binding. I don’t think higher taxes in the U.S. will leave the average person better off over time, much less the person who pays them. I have no idea how to tote up the net externality of carbon emissions (I don’t even know if the sign is positive or negative) and neither does anybody else. And since I think morality is for enabling human flourishing, I care about animals only insofar as our attitudes toward them affect patterns of interaction that bear on human well-being.

“Culture wars” are largely ongoing fights about what the governing norms are going to be. Certain kinds of arguments are useful in discouraging people from adopting or internalizing a new norm. I think a lot of rational choice arguments are like that. Because I think a lot of fledgling moral norms are likely to be harmful if they go viral, I like to encourage people to think like an economist, both to help them understand why the norm may not do any good as a matter of fact, but also to promote a generally inhospitable psychological climate for faddish moral memes.

Did you really read this far?

Bryan and I ”diavlog” about his new book, The Myth of the Rational Voter, here.

Point of conceptual clarification. As far as I can tell, income mobility studies don’t actually study mobility in the sense of the ability to move. They study actual movement in incomes. Mobility is a dispositional term. If I have been immobilized, I am prevented from moving. If I am immobile, but not immobilized, then I could have moved, but didn’t. If I sit in my chair all day, my measured physical movement for the day will be low, but I may also be a spectacularly mobile person, able to run marathons, climb sheer rock faces, swim channels, etc. What we are interested in normatively from economic measures of mobility is whether there are structural barriers to upward movement, especially for the less wealthy, not the average deviation from parents’ earnings. Can people earn more if they try? Once the average income reaches a certain threshold of material comfort, we should expect people’s labor market choices to reflect preferences for many things other than income. So relatively low measured mobility (generation 2’s income highly correlated to generation 1’s) could indicate that people are fairly well satisfied with their parents’ level of income and are optimizing on other margins. The better off people become materially, the less you ought to expect actual measured intergenerational movement in average income to reliably indicate the opportunity to move. 

I have an extraordinarily interesting job that probably pays about 1/3 of what I could get on the labor market doing (for me) much more boring things, and so here I am happily foregoing twice what I actually make not to be bored. (So: what are my really real wages?) It turns out that this choice keeps my income in the neighborhood of my Dad’s at my age, I’m guessing. (I, however, don’t have a wife and three kids to support!) I am incredibly grateful to be at liberty, both economically and socio-culturally, to make this kind of tradeoff between income and satisfaction.  And I’m sure I’m not alone. 

The opportunity to make this kind of tradeoff in the labor market is largely a function of education. I think our current system of public schooling does create a structural barrier to upward movement for many of the least well-off, which is why we should scrap that system and replace it with a market in education as a matter of justice. But that’s a matter of particular barriers to upward movement, which are what we should focus on, not some meaningless-by-itself average.

Tyler Cowen shares his thoughts on the idea that it is important to try to preserve the average level of a society’s IQ, as though this is some kind of precious public good:

I don’t assign special status to The Conservation of IQ for two reasons.  The first is the Flynn effect, or the fact that measured IQs have been rising steadily over time.  This implies some combination of a) IQ gains come naturally under conditions of progress, and b) IQ statistics are to some extent phony and don’t measure real intelligence.  We can debate the mix, but either deflates fears that IQ is somehow especially scarce or endangered.  These data also suggest that IQ is an artifice to be unpacked rather than a primary category.

Second, defenders of the IQ view tend to read evolutionary biology and intelligence research.  My roots are in cultural history.  Clusters of amazing achievement come and go pretty quickly, usually through some mix of environmental effects and luck.  Look at Venetian painting.  It was much better centuries ago, but I doubt if Venetian IQs have been falling.  Once we see how such enormous differences can be explained by non-IQ factors, I again don’t obsess over the variable.

I find this pretty persuasive. The most stimulating thing I’ve read about IQ lately is the chapter on the topic in Francisco Gil-White’s webbed book on Resurrecting Racism: The modern attack on black people using phony science, which is mostly an attack on John Entine’s book Taboo: Why black athletes dominate sports and why we’re afraid to talk about it. I did not know, for example, that the IQ test was invented by Binet and Simon specifically as a test of the cognitive skills middle/upper-class French public schools were trying to develop in their students, and explicitly not as an assessment of raw, genetic, mental processing power. I also didn’t know that Sir Cyril Burt was a huge fraud. Gil-White’s theory an adapted cultural capacity that helps accounts for cultural and cognitive variation (a theory he shares with Boyd, Richerson, and Henrich, among others), seems to me to make good biological sense, to help make sense of the Flynn effect, and to pose a big problem for the Murray-Herrnstein Bell Curve thesis. Reading Gil-White changed my p on the existence of genetically inherited general intelligence from above .5 to below.  I get excited when that happens!

Brief aside on clusters of achievement: I want better explanations! What accounts for 4th c.  BCE Athens? Late 18th-early 19th c. Scotland? Early 20th c. Vienna?  Philosophy mostly just coasts along on these efflorescence’s of genius. What’s going on?  Why aren’t we having having one of these NOW, in the US? One idea is that our system of supporting our top intellectuals through the huge, geographically dispersed university system practically guarantees that no single place will develop enough of a critical mass of talent to create a world-historical outburst of brilliance. What if the world’s best economists, philosophers, psychologists, etc., were clustered in the same place in the same way the world’s best software engineers are clustered in Silicon Valley?   

Fun facts about Gil-White: (1)  he was canned from the Penn psychology department he says for his controversial views about recent history regarding several ethnic conflicts. I have developed no opinion on Gil-White’s opinions about these matters. I just know he’s a fascinating and intellectually solid theorist in biological anthropology.  (2) He is the son of Francisco Gil Diaz, who was Secretary of Finance for Mexico under Vincente Fox.

That’s the title of my new post at Overcoming Bias….

Lately I’ve been noticing a general phenomenon that strikes me as shady… comparing something unbounded against something bounded. The top quintile, decile, percentile, or whatever on, say, the income distribution is going to have no limit on the number. Which is why it is possible to have such a huge gap between the median and the mean when it comes to the top 1% in the income distribution, but unlikely at an n-tile beneath the top.

Or… The fact that happiness surveys lay a 1 to 4 or 1 to 10 scale on top of an in-principle unbounded income distribution, or in-priniciple unbounded growth in income over time, seems to me as a reason not to make a huge deal out of the fact that the average score on a bounded scale doesn’t necessarily rise with an essentially open-ended thing like economic growth. If growth is ongoing, and self-reported happiness rises with growth — even excruciatingly slowly — then it is just a logical necessity that there is some time in the future when everybody hits the ceiling of the scale. Even if income and happiness continues to grow, the scale will HAVE to report a flat average, and will HAVE to stop being fully informative. Now, if — as seems to be the case — people have a kind of aversion to putting themselves at or near the top of the scale (if I don’t know how happy I can get, I may not want to say that I’m already there, or even almost there), then you’ve got a case for totally banal scale re-norming that will also produce a flat trend over time, below the top of the scale — again, even if the effect of growth on happiness is ongoing. Perhaps someone can explain to me why this is not considered a huge problem.

I’ve been following Bryan Caplan’s posts on analytical egalitarianism with interest, and I agree with him: the point of a model is to track truth and enforcing moral and epistemic norms is the function of institutions and culture. I’d like to point out an additional worry I have about the same bits of Sandra Peart’s reply that Bryan excerpted:

Without AE, we wonder whether truth-seeking is incentive compatible…

[...]

Consider models with agents of different fixed types. Suppose a modeler proposes to pick who is in the “better” and who in the “worse” class. If the modeler can do this and policies follow from the exercise, the modeler may benefit. That’s one incentive issue. We consider rewards from both material sources and applause.

[...]

[O]nce we allow for difference to creep into the analysis, the incentives are asymmetric: the theorist gains more by showing difference than similarity.

Isn’t there a weird kind of question-begging going on here? The incentive-compatibility of truth-seeking depends on how you model it.  If the model recognizes the heterogeneity of motivation, then one can say that some people will opportunistically abuse the heterogeneity of models that allow it, but others won’t. Peart’s argument for AE turns on assuming it in her implicit model of motivation. If AE assumptions about motivation are false, the moral and/or epistemic argument for assuming them anyway falls apart. That said, even assuming rational choice homogeneity of motivation, institutions and the internalization of social norms can raise the price of defecting from truth-oriented epistemic norms making truth-seeking incentive compatible.

In one of their papers, Peart and Levy point out the anti-AE views of Edgeworth in Mathematical Psychics, which fascinated me, as it illustrates the fallacy of thinking utilitarianism is an egalitarian doctrine in which everyone is equal because everyone’s pains and pleasures count equally. What counts equally are equal units of pleasure and pain. If I remember from my later reading of Edgeworth, his fundamental unit of analysis is the smallest discenible duration of experience. Each such moment of experience will have an intensity on a pain/pleasure scale. Now, Edgeworth claimed that some races have a narrower range than others. This inequality in hedonic range can easily justify all kinds of odious injustice. As Edgeworth himself says, if you’ve got lamps that shine bright and lamps that shine dim, and a limited amount of energy, you’ll mazimize light by reserving it all for the bright.

Now, as I see it, the problem isn’t Edgeworth’s violation of AE, but his vulgar utilitarianism. It is an empirical matter whether inequality in hedonic capacity is true or not. It may be. But a satisfactory moral theory or theory of justice ought to be indifferent to this particular empirical contingency. That Edgeworth’s theory isn’t indifferent–indeed, that massive morally relevant consequences turn on it–refutes his normative theory. But if heterogenity of hedonic capacity is a fact, it’s a fact, and a good model of hedonic capacity will say so.

Don Boudreaux has been doing the Lord’s work by pointing out that economies are not bounded by political borders. I’ve made the point before that the better a state’s institutions are, the less the state level is the appropriate final unit of analysis. Good institutions within a state’s borders are precisely what enables the people under the jurisdiction of a state to create complex networks of economic, political, and moral cooperation with people outside that jurisdiction. Which is a way of saying the good institutions in here increase our interdependence with people and institutions out there.

Nothing has brought this point home to me more than the lovely, truthy, graphics accompanying Richard Florida’s Thomas Friedman takedown “The World is Spiky” [pdf] in the October 2005 Atlantic.

[click for full-size]

What is manifest in the pictures is that U.S. institutions, in addition to producing more wealth and using more energy, produce scientific discoveries at a rate far outpacing the rest of the world. Just glancing at picture, it appears that MIT and Cal Tech combined produce almost as much scientific discovery as all of of Europe, which in turn produces more science than the rest of the world. The market economies of the Pacific Rim produce a trickle of science, but produce on overwhelming proportion of the world’s tehnological innovation as measured by patents.

Here is one of these pictures’ 1000 stories. American institutions confer a fantastically huge positive externality, in terms of knowledge, to the rest of the world. Science is a root cause of economic growth. New knowledge enables new technologies, which enable increases in the productivity of capital, which enable growth. And good institutions are the root cause of science. If the U.S. produces most of the world’s knowledge and Asia produces most of the world’s technology, then the institutions that underpin epistemic and technical advance are chiefly responsible for growth in states that have different institutions, but which are able to import knowledge. Which is why it is nonsense to compare, say, American and French GDP growth, as if those growth rates were a function of American and French institutions in isolation from one another. Because institutions are not isolated. The interesting question is: what would French GDP growth have looked like if the U.S. had produced, say, only 10% of its actual scientific output? If the Japanese had made only a 10% of their technological advances? My sense is that French growth would not have looked good. (NB: I have picked the French because they are very good in science and tech, but even so, the point is, others are much better.)
And there’s the point. French institutions are good enough to take advantage of American science and Asian technology, and so can remain stable because they are plugged into others’ comparative advantages, and can power their system (literally: the French did not think up the nuclear reactor) on the uninternalizable positive externalities of other systems of institutions. The flip side, though, is that it would be a tragedy for the French, and the world, if American institutions produced less science. It is not just that the U.S. would be worse off if its institutions were more like France. France would be worse off if U.S. institutions were more like France.

While reading Randall Holcombe and Russ Sobel’s excellent paper “Consumption Externalities and Economic Welfare” (thanks to Michael Dennis, and about which more later), I ran across a cite to Rawls on interdependent preferences. It turns out that I’ve read this very important passage a bunch of times, but not since becoming obsessed with positional races, interdependent preferences, and suchlike. Here is what Rawls said:

[According to utilitarianism], [w]e arrange institutions so as to obtain the greatest sum of satisfactions; we ask no questions about their source or quality but only how their satisfaction would affect the total of well-being. Social welfare depends directly and solely upon the levels of satisfaction or dissatisfaction of individuals. Thus if men take a certain pleasure in discriminating against one another, in subjecting others to a lesser liberty as a means of enhancing their self-respect, then the satisfaction of these desires must be weighed in deliberations according to their intensity, or whatever, alnong with other desires. If society decides to deny them fulfillment, or to supress them, it is because they tend to be socially destructive and a greater welfare can be achieved in other ways.

In justice as fairness, on the other hand, persons accept in advance a principle of equal liberty and they do this without a knowledge of their more particular ends. They implicitly agree, therefore, to conform their conceptions of the good to what the principles of justice require, or at least not to press claims that directly violate them. An individual who finds that he enjoys seeing others in positions of lesser liberty understands that he has no claim whatever to this enjoyment. The pleasure he takes in others’ deprivations is wrong in itself: it is a satisfaction which requires the violation of a principles to which he would agree in the original position. The principles of right, and so of justice, put limits on which satisfactions have value; they impose restrictions on what are reasonable conceptions of one’s good. In drawing up plans and in deciding on aspirations men are to take these constraints into account. Hence in justice as fairness one does not take men’s propensities and inclinations as given, whatever they are, and then seek the best way to fulfill them . . . The priority of justice is accounted for, in part, by holding that the interests reqiring the violation of justice have no value. Having no merit in the first place, they cannot override its claims. [ToJ, 2nd ed., p. 28.]

Although I didn’t have this passage explicitly in mind, if you subscribe to Reason, you can see how deep in my system Rawls’s sensibility is in my review of Layard’s Happiness. There I said:

Layard’s account of economic success as “pollution” is a striking illustration of what philosopher John Rawls had in mind when he argued that utilitarianism fails to take seriously the separateness of persons. If it is legitimate to use the coercive arm of the state to discourage work simply because it makes other people feel bad, then our liberty to pursue our own ends, for our own reasons, is hostage to the way the brains of strangers happen to light up. The aims and beliefs that make us distinct persons are reduced to nothing, except as they count in the summing.

And my implied point is: if the happiness center of your envious brain happens to light up when I do less well, or the unhappiness center of your bigoted brain lights up when a minority family moves in next door, then, when deliberating about policy, we ought graciously to ignore your brain and its preferences in these matters.

There simply is no way to do policy analysis without making some normative ruling about permissible and impermissible preferences at the outset. The virtue of Rawls is that he tries to draw the distinction in a principled way, and at a high level of generality, without leaning too heavily on any one comprehensive conception of the good.

Glancing at the Gul & Pesendorfer paper, “The Case for Mindless Economics,” my first thought was that these guys good really use a good philosophy of science seminar. (Tyler discusses it, as does Bryan Caplan.) Now, I don’t really understand the drive to secure the autonomy of formal economics. Either economics seeks to decribe actual human behavior or it doesn’t. It is fine to create any kind of formal model you like, and to call predicates in your model anything you like. You can, say, create a model that speaks of ‘kittens’, ‘meowing’, and ‘estrus,’ and as long as your model hangs together in the way models should, then that’s nice. Maybe it will even be interesting. But if it has nothing much to do with actual purring furry pets, don’t get upset when a zoologist comes along says that you don’t really have a theory of cats at all, but a theory of ‘cats.’

My sense is that the formal neoclassical theory of economics is a theory of ‘behavior’ not behavior. Models don’t need to be models of the actual world in order to be worthwhile. But you just can’t get away with too much model/world three card monte, maintaining that your model both does apply to the behavior of real people, but cannot be touched by investigations into the sources of the behavior of real people.

Right on page 1, Gul and Pesendorfer say “Neuroscientific evidence cannot refute economic models because the latter make no assumptions and draw no conclusions about the physiology of the brain,” but this just has to be false if economic models are actually supposed to be models of human behavior. Because, see, human beings have brains. And brains are actual phsyical systems that have physical constraints that limit, say, the amount of information that can be processed within a period of time. If an economic model of the agent assumes instantaneous, zero-error updating, or the all-at-once representation of an ordering including the uncountably large number of options in the feasible set, or knowledge of the entire set of all other agents uncountably large preference orderings, then the model is in fact making a large number of assumptions about the information-processing capacities of agents. And if it turns out that human information processing capacities fall far short of these assumptions (and, oh, do they ever) then you have a choice when it comes to the economic model. You can either admit that it is not a model of actual human behavior, but just of some imaginary agent not subject to the laws of physics, such that they can complete all this computation before the heat death of the sun, or the implosion of the Universe. Or you can admit that it is bad model—false, due to non-correspondence—but, perhaps, of some heuristic value in hypothesis formation, or some such thing.

What you can’t do is say you’ve got a model of something that is in fact a biological system, and then argue that real information about the nature of the biological system is irrelevant to the truth of your model. I may be crazy, but that seems to me exactly what Gul and Pesendorfer are trying to argue. If it is, I am completely sure that it won’t work.

Please allow me to think aloud. Just don’t be disappointed if I don’t get anywhere . . .

A few posts ago I coined a term: Neutral Institutional Monism (NIM). NIM is the thesis that there are institutions and there are institutions. The primary explanatory distinction is not coercive vs. non-coercive, or state vs. market, but between stable patterns of mutually advantageous interdependent action vs. unstable or mutually harmful patterns. This cuts across the coercive/non-coervice distinction.

Undergirding NIM is what I’ve called the principle of behavioral uniformity, but which I’ll call instead the principle of uniform behavior (PUB), for the sake of a mnemonyic acronym, since PUB is the hard nugget of wisdom at the core of Public Choice theory. PUB says that there is human psychology and then there is human psychology. Whether a person is embedded in a market institution or a state institution will not affect how she will tend to represent her prospects, represent their relative costs, or act on these representations. Psychology is everywhere the same. When behavior differs, it is not due to underlying differences in cognitive or motivational structure, but due to the way alternatives and their prices are represented. People are smart and good when it pays to be smart and good. People are dumb and corrupt when it pays to be dumb and corrupt.

Now, whether “it pays” is a function and consequence of the structure of institutions. Not all institutions are formal. If your community has accepted a norm according to which women who show their ankles will be treated as if they are not there—will be denied any acknowledgement or human contact—then, other things equal, it will not pay for women to show their ankles. This norm is a kind of institution. If we want to go a level deeper, many norms lead to stable patterns of action because they have been fully “internalized,” leading people to impose negative sanctions upon themselves through shame and guilt, even when their norm violations are undetected. Norm enforcement is cheapest when people can’t help but punish themselves.*

Anyway, the point I want to get to from NIM and PUB concerns the justification of paternalistic intervention on the basis of the fact that actual human psychology diverges from some ideal or other of rationality. Many of these paternalist arguments suffer from violations of both NIM and PUB.

First, the Fallacy of Asymmetric Idealization. The cognitive paternalist (that’s what I call them) is very good about getting into the nitty gritty of actual cognition, its foibles and imperfections, and how the real deal differs from idealizations of rationality. Great! And, then they fail completely to get into the nitty gritty of actual political institutions, their foibles and imperfections, and how they differ from idealizations of collective action. In effect they say this:

In the real world, the mind works like this, and this can lead to all kinds of problems. And in an extremely unrealistic abstract model of government action, its agents can easily and objectively identify problems and act to effectively solve them. So, let’s have the ideal government solve the problems of nonideal cognition.

It sounds stupid when you put it that way, doesn’t it? The trick is figuring out how to work with real minds, using real governments!

NIM asks, so how are you going to do it? Most real government institutions are at least as kludgey and means-ends inconsistent as real minds are. “Silly, your sock won’t open that can of spinach! So try your pillow instead, because a model exists in which pillows are can-openers.”

The NIM “what is this wonderful institution of which you speak” question is heightened by PUB. Psychology is general. So if we’ve got nonideal psychology, then we’ve got nonideal psychology, including every single agent of the government. So the cognitive paternalist proposal really depends on a supressed premise that there is some possible institution of government that can solve problems of nonideal psychology, but which is itself unaffected (or only mildy affected) by problems of nonideal psychology.

NIM also suggests that we just slow the hell down before deciding we need a government institution to solve some kind of perceived problem. We might. But we might not. NIM asks us to compare all our possible institutional options.

Consider these combinations with nonideal cognition fixed:

(1) nonideal cognition + ideal markets = no paternalism

(2) nonideal cognition + nonideal markets + ideal goverment = paternalism

(3) nonideal cognition + nonideal markets + nonideal government = ???

Our world, the world of NIM, is (3). Whether nonideal cognition could justify paternalism depends on what our market and government institutions can in fact accomplish.

Let’s call an institution that corrects for some nonideal aspect of cognition an ameloriative institution. An ameliorative market is structured so as to raise the prices of nonideal cognition, resulting in less of it. An ameliorative policy is one the government implements to change the prices of nonideal cognition, through coercion, resulting in less of it.

OK. Suppose there is the possibility for an ameliorative market, but the market needs some changes in regulation, legal code, etc., in order to function, and this is something the government has to do. (For example, a Hanson-style futures market in ideas might be ameliorative in some ways, but it cannot exist the US’s present regulatory climate.) Now, if the government is of sufficient quality to implement an ameliorative market, then coercive ameliorative policies will be unecessary, or at least less necessary. But if the government is not of sufficient quality to implement ameliorative markets, then it is probably not in a position to apply effectively ameliorative coercion, either.

And . . . that’s all I’ve got for now.

I’ve always been a bit baffled by the common assumption in economic and social theory that the quantity of social status is fixed, such that games over the distribution of status are always zero-sum. The title of Frank’s Choosing the Right Pond seems to assume that it isn’t. Middling status in one pond can be high status in another. And how many ponds are there? But he almost always writes as if status is fixed. Becker and Murphy, in an exemplary discussion of status and inequality in Social Economics also assume a fixed amount of status. It’s obviously useful to model it this way for certain purposes. But I also think it fundamentally distorts the phenomenon of status and status seeking.

We all know what status is, but, then again, we don’t, really. Who has higher status: The Mayor of Des Moines or the quarterback for Notre Dame? The question has the sour flavor of a category mistake. As Frank’s title suggests, status can be pond-relative. But, at the same time, it can seem like we know that the Chief Justice of the Supreme Court has higher status than the quarterback for the Fightin’ Irish, although the incommensurability of domains creates some static in the judgment. It just might be that the CJ is higher status in his domain than # 12, Biff O’Malley is in his. So when we set the rankings by domain side by side, the right answer seems pretty obvious. One guy is at the top of his list, the other guy in the middle of his. So, easy!

But how about Peyton Manning vs. John Roberts. Here I don’t think we can say. We’d need to know which status domain has higher status. And that sort of sounds like a category mistake, too. Anyway, is it a bigger deal to be one of the world’s most gifted and celebrated athletes, idolized by children around the globe, watched by millions of fans each weak . . . or the head judge on the world’s most powerful and exclusive legal body? In any case, it seems pretty clear that if Peyton Manning and John Roberts are both somehow competing for status, they’re not competing with each other. When John Roberts was elevated, it might have stuck in the craw of some of his law school friends, or appeals court colleagues. But I don’t imagine Mr. Manning took much notice, or felt himself diminished in any way.

The obvious point to make about status, then, is that it is domain relative, and that the number of domains does not seem to be fixed. (My example may tempt you you to confuse status for fame. Don’t.) One of my favorite documentaries, Word Wars, goes inside the fascinating world of competitive Scrabble players. Naturally, this being a human endeavor, there is a ladder of status among Scrabble players, and for the people who devote their live and energy to the game, this is the kind of status that matters. Now, it may seem to you that Peyton Manning is a bigger deal than Joe Edley, but it doesn’t seem that way to Joe Edley.

Think about the fragmentation of music genres, and how each genre has its own scene. Before there was ska, say, there was no ska scene. But now, a position of status in the ska scene is a cherished part of someones life. But scenes break down by geography, too. Take the DC punk scene. Whatever he might say to the contrary, Ian McKaye takes his exalted status to heart. Now, suppose a new speed metal scene blossoms in Milwaukee. The advent of the scene implies the opening of some positions of status. Chances are that the don of the Milwaukee speed metal scene will find his status gratifying. But this is status created, not taken. Tony Hawk’s giant status in the relatively newly evolved skateboarding scene did not come out of Michael Jordan’s hide.

It is not even clear to me that status within a domain, scene, or group is fixed. Take a group of three friends, Cindy, Marcy, and Julie. Cindy is clearly the leader, and so has status. But Marcy is the brains of the operation, for which she is also accorded a certain status. Julie is seen as a dutiful follower, worth having along because she is pretty and laughs at everyone’s jokes. However, one day, Julie performs an act of amazing courage and fidelity, saving both Cindy and Marcy from grave danger. Julie gains new status for her mettle and faithfulness. But this is not status redistributed from Cindy and Marcy’s accounts, but is rather newly created out of Cindy and Marcy’s new and unanimous admiration.

People in a group of friends may compete for status as the funniest one, or the smartest one. But even then, status can get distributed pretty subtly, and what may seem like a single dimension of status may end up finely divided, one person generally admired for his mordant, cutting wit, another for her hilarious jocularity. Status-seeking, even at the micro-level, is not really zero-sum war of all against all. In my opinion, a really healthy group of friends is one which the dimensions of status are so many that everybody is high status on some dimension or other, and the calculation of absolute or total status across all the relevant dimensions is more or less impossible.

That said, other things equal, I think people prefer to have status in a broader or more general domain. And I think this is where things gets complicated, and where status and fame, which are quite different, are complexly intertwined. Generally, you get high status in some domain of wide interest. This brings you to the attention of the media, and therefore the public. If everyone is suitably impressed or interested, you capture a portion of the public’s attention, and become famous (at least somewhat). You then gain additional status simply in virtue of your fame. You become known for being known. (Kato Kaelin has a kind of status, just because lots of people know who he is, and not because he’s worth a damn in any noticaeble way.) But the amount of fame is limited by the amount of attention within a society. (Here’s where I find myself wishing I’d read Tyler’s book on the economics of fame.) And so fame-dependent status is also limited by attention. Therefore, those whose status is heavily fame-dependent will be jealous of attention. Glenn Reynolds does not directly compete for status with Tom Brokaw. However, he does compete for attention. If more people get their news from blogs, and less from Brokaw, then Brokaw gets less attention, and takes a sort of hit in fame, and therefore status.

Because status is not fixed, and new status domains or niches can be opened, there is a possibility for status entrepreneurs who seek to discover, expand, and occupy new status niches. Visionary artists, who become deeply involved with creating something totally new, might be good examples. Sometimes, when you insist on doing something no one understands, others will interpret it as a willful resistance to playing the status game. But perhaps a better interpretation is that it is an entrepreneurial gamble on opening a new status niche. If audio/olfactory immersive ambient concept assemblage really catches on, then the first-mover has a big advantage. When the Museum of Soulwarping Newness buys your great work, “The Elusive Fatuity of Near-Death in C Major, with Notes of Jasmine and Pork Rinds,” for seven figures, and you start getting invited to fancy parties, you’ll be, for a time, a status monopolist in your domain, and forever a pioneer.

Naturally, people who already occupy positions of wide status and semi-fame will attempt to denigrate the importance of new status domains in order to prevent a defection of attention. Indeed, the classic move is to try to characterize new domains of status as ipso facto low status. When some American Croesus slaps down 15 billion and opens Eisenhower University and buys up all the world’s greatest scholars, Harvard grads the world over will promptly thrust their noses skyward in disdain for all those brilliant kids at the tacky new school who are getting the best education money can buy under the guidance of professors the Ivy League used to have. But it won’t work.

So what to we do about the fact that people are status-seeking? What we do is encourage a decentralized entrepreneurial culture where status domains without number may bloom. Where the president of the Tuscon YMCA, the world’s Scrabble champion, Tony Hawk, the best fusion jazz guitarist in Miami, and the first and only audio/olfactory immersive ambient concept assemeblagist can sleep sweet dreams, secure in their well-deserved status.

Am I “hostile”? Megan McCardle writes:

Now, I am not as hostile to happiness research as, say, Will Wilkinson. I am willing to posit that status-seeking expenditure, on things like houses too big for a normal family to regularly use all the rooms, or expensive cars when the owners are not the kind of people who particularly care for driving or auto mechanics, does indeed strike me as a collective action problem. (A collective action problem is one where all the individuals in a group would be better off, say, striking to get more wages, but because they are only better off if everyone does it, they generally take another course of action acting alone.) Everyone buys expensive goods in order to signal their status to the community, but because status is a zero-sum game–one person must lose status in order for another to gain it–these are wasted activity from the point of view of the group; there is no net gain in happiness from all that expenditure.

I am also willing to posit that there are status races! I’m hostile to the misuse of happiness research. Here I was thinking that I’m doing my part in advancing a genuine understanding of human well-being and the way it relates to economic and political institutions by criticizing an under-theorized, methodologically shaky, but still useful, body of research, and I get called “hostile”! But I’m trying to help!

My hostility regarding the status question is to the ideas that (1) collective action problems generally imply the need for a government solution, and (2) that upward or downward moves in status are generally relevant to a sound standard of “social welfare.” Let’s talk about this. In a wholly inappropriate over-theoretical way.

(1) is perhaps the most notorious fallacy of social thought. Or, it ought to be. If it isn’t, I nominate it. The fallacy is transparent once you abandon the incoherently manichean market vs. state worldview. I think Doug North, more than anyone, has helped me toward what I’ll call neutral institutional monism (after Bertrand Russell’s idea—neutral monism—that the fundamental stuff is neither mind nor matter, but has tendencies toward both.) According to neutral institutional monism (NIM), there are stable structures of interdependent interaction, that is, institutions. Different institutions have different properties. It is crucial to recognize that these properties are not determined some kind of metric of resemblance to an ideal type, but by messy details about the real rules of the game, which are generally a melange of assurances and threats (some paradigmaticlly coercive, some reputational, some internally generated by conscience) impossible to locate in a simplistic taxonomy. Let’s see how quickly, and how far, we can travel from our original topic.

Economics textbooks provide a theory of ideal types. MARKETS are filled with strange omniscient creatures who have preferences over every conceivable combination of goods, who can trade instantaneously with zero transactions cost, etc. STATES are, more or less, that which can do anything MARKETS can’t—mainly, fix “suboptimal” patterns of interaction by changing relative prices by taxing, subsidising, regulating, credibly committing to punish defectors from contracts, and otherwise wielding coercive power with amazing laser precision.

Additionally, ADAMANTIUM is the hardest material in the world, which raises the profound question: Can Captain America’s shield shatter Wolverine’s bones?

However, once we step outside the Marvel Universe, the question is ill-formed, for ADAMANTIUM is, in fact, an empty category. Nothing fits the description. Likewise, once we step out of the enchanting Neo-classical Universe, it doesn’t even make sense to posit the STATE as the answer to MARKET failure, for STATE and MARKET, as laid out in the model, are empty categories.

NIM is interested in this market and this state. Don’t worry. We can draw lots of generalizations about institutions. For example! Markets need well-defined property rights, reliable mechanisms of enforcement, enough social trust, etc. In order for states to work, the state agents need a structure of incentives compatible with the goals of the paper, de jure, institution. Otherwise the effective, de facto, institutions will simply be something else. (”But it’s called the Ministry for Health and Welfare!”) There’s lots more we can say in general. But NIM demands that we resist thinking we’ve illuminated much of anything by tagging something a “state” or a “market.”

Now, sometimes states effectively fix a collective action problem. To learn something worth knowing we need to ask, “Why was there a collective action problem?” and “What was the state like such that it was able to fix it?” Suppose the collective action problem is that everyone is dumping their pisspots in the pond, because nobody owns the pond. Is this a problem of MARKET or STATE? Bleep! Ill-formed question!

The problem is that there are no well-defined property rights over the resource, so there is no “market” in which the price of dumping is non-zero. Could the local state step in and define property rights? Yes it could! But if there is no uptake by the folk, no compliance with the new paper institution, then we haven’t got anywhere. Or suppose the state doesn’t actually enforce the new rights. As soon as everyone knows it, the effective price of dumping reverts to zero. Could the folk have simply “evolved” a property norm over their common pool resource without any involvement from the state. They could have! But it looks like they didn’t. See how hard NIM is?

NIM shows us that even where there are coordination problems galore, some places have states so bad that they can do nothing but cause even bigger problems. So if we see a coordination problem, what should we do? It depends! It hurts to say it, but sometimes the correct answer is nothing. Sometimes the best thing to do is shake your fist at people and hope to change the informal norms. If the state is such that it can effectively do something about it, then we can start considering the pros and cons of the state stepping in to help out. But the cons may still win the day.

So, here we go, back to the status race. Megan mentions an important point: that if you think the state could do something about the status race by redistributing money, you’re wrong, because government checks don’t usually have enhanced status attached to them. (Note: Government checks aren’t usually NEA or NSF checks.) And there is the ever-present knowledge problem that haunt most statist proposals. Real state institutions can’t change relative prices with the laser precision necessary to fix things because they don’t, and usually can’t, know enough.

I think, however, that we must jump to hostility (2), above. The state just shouldn’t care about people’s status anxiety. It is impossible, I take it, to come up with a practicable standard for social welfare that doesn’t pick and choose among preferences. We’ve got to ignore meddlesome preferences, like the preferences of cranks who genuinely want everyone else to have frustrated wants. The preferences of slaveholders, child molestors, and insufferable prigs are properly left out of our assessment of what does and does not count as a social improvement. I posit that we ought to likewise ignore people who are upset about the fact that their neighbor has a wardrobe of Burberry and a plasma screen wide as a barn door. Status preferences are meddlesome, have little to do with how well-off people really are, and are at least vulgar, if not plain immoral.

Suppose your “collective action problem” is that everyone would like to slaughter the people in the next society over, and each would join up for the slaughtering squad if all did, but can’t get the necessary assurances to effectively coordinate. This is, in fact, a collective action problem. And we would have every reason to hope that it is never “solved.” And if people caught up in the status race are made miserable by it (there is, by the way, no evidence that people are made miserable by the status race—rich allegedly status crazed Americans are some of the happiest people in the world), then it’s really just their problem to work out for themselves. We might suggest that they get a grip and stop caring so much about what other people have. Keep a gratitude journal. Learn to eradicate the ego through meditation. If you’re really intent on the state doing something, then maybe vouchers for journaling and meditation classes? I do posit it that there is a collective action problem here in which people are involved in a zero-sum dumbness. And I posit that the state morally ought to officially ignore it.

The Aumann/Schelling Nobel has inspired much discussion over the intellectual usefulness of game theory. In response to Michael Mandel’s worry that game theory does us no good, Tyler offers a number of responses, and Mandel reiterates his concern. Over at Crooked Timber, John Quiggin discusses problems of indeterminacy in the absence of the common knowledge assumption. Drezner defends Schelling against Slate’s Fred Kaplan. Mark Kleiman notes that Todd Gitlin is a moron for claiming that Schelling doesn’t understand non-zero-sum games!

Unless we understand game theory to simply be the Aummann-ish formalism, with its ridiculous epistemic and behavioral assumptions, then it is probably not very useful. But it is better to see Aummann style game theory as a stylized limiting case of the logic of interdependent action, which is what game theory is the theory of. We can contrast between formal and substantive game theory, the latter being the very heart of social science and social and political philosophy. Thomas Schelling is the greatest living substantive game theorist, in the tradition of Hobbes and David Hume, but with the benefit of the discipline Nash, von Neumann, and Morgenstern (and others, including Aumann,) imposed upon game theory through formalization.

To move the subject toward my domain, let me assert that the reason contractarian political theories are superior to the alternatives is not due to the idea of a fictive contract, but because of the recognition of the centrality of patterns of interdependent action to social order. You can’t understand the good society until you understand society. And you can’t understand society without understanding interdependent behavior. But you can’t understand interdependent behavior unless you understand behavior. And to do that, you need to understand (1) how people represent their alternatives, and (2) how they order them, for which you need the cognitive sciences.

(Esoteric aside: Regarding Tyler’s five options for making game theory predictive, my sense is that (1) and (5) actually are one. The indeterminacy of the social world is a function of the indeterminacy of representation. Sooner or later the behavioralists will get around to discovering basic philosophy of language.  This also bears on Quiggin’s worries. For Kripkenstein reasons, previous behavior underdetermines the "rule" upon which one behaves, even if the rule is "maximize expected utility." If my strategy is a conditional rule sensitive to my representation of your strategy, which is a conditional rule sensitive to your representation of my strategy, etc., then an equilibrium, being a set of strategies, will be a slippery creature indeed. Thankfully, the in-principle indeterminacy of rules and representation need not worry us too much if there is stable regularity in the way we in fact tend to ascribe belief and motivation to others.)     

Let me quote my abandoned dissertation proposal by way of saying why I think substantive game theory is about the most important thing there is:

Central to the contractarian framework is a clear grasp of the interdependence of reasons for action in certain kinds of social settings. The idea of mutual advantage implies that we can often do better jointly than we can individually. There are gains to be had from cooperation.  However, as Hume put it, “the actions of each of us have a reference to those of the other, and are performed on the supposition that something is to be performed on the part of the other.”  It follows that the kinds of social cooperation we will be able to achieve and sustain depends on our expectations of the behavior of others. Our reasons to act to bring about the goods of cooperation, and to enter into agreements and comply with principles designed to facilitate them, therefore depend on the nature of the psychological capacities that enable agreement, assurance, and compliance. If we cannot sufficiently trust ourselves and others to keep agreements, or to adhere to conventions that are like agreements, or if we by nature severely discount future value, or are unwilling to tolerate more than a little risk, then we may find ourselves able to conceive of a social order that each of us would prefer, but which none of us may enjoy.