The Economist: “Sovereign in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.” This was Daniel McFadden’s memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFadden’s point. The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus “a rare species”. In his latest paper he outlines a “new science of pleasure”, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of behaviour that do not fit the standard models. Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity.
To take one example, the “people” in economic models have fixed preferences, which are taken as given. Yet a large body of research from cognitive psychology shows that preferences are in fact rather fluid. People value mundane things much more highly when they think of them as somehow “their own”: they insist on a much higher price for a coffee cup they think of as theirs, for instance, than for an identical one that isn’t. This “endowment effect” means that people hold on to shares well past the point where it makes sense to sell them. Cognitive scientists have also found that people dislike losing something much more than they like gaining the same amount. Such “loss aversion” can explain why people often pick insurance policies with lower deductible charges even when they are more expensive. At the moment of an accident a deductible feels like a loss, whereas all those premium payments are part of the status quo.
Another area where orthodox economics finds itself at sea is the role of memory and experience in determining choices. Recollection of a painful or pleasurable experience is dominated by how people felt at the peak and the end of the episode. In a 1996 experiment Donald Redelmeier and Daniel Kahneman, two psychologists, showed that deliberately adding a burst of pain at the end of a colonoscopy that was of lower intensity than the peak made patients think back on the experience more favourably. Unlike homo economicus, real people are strongly influenced by such things as the order in which they see options and what happened right before they made a choice. Incorporating these findings into models of consumer behaviour should improve their power to predict everything from which loans people choose to which colleges they apply for. [Continue reading...]
Eric Garland writes: People everywhere are fed up with the status quo of the economy. With the passion our official institutions show for this tepid “recovery,” many are concluding that progress will come not from the current system, which is after all what got us here in the first place, but from their own ingenuity and inventiveness. In pockets around the world, folks are declaring economic independence by starting small, local, but potentially revolutionary alternative currencies that could change not only how we buy goods and services — but how we relate to one other in society. If these micro-currencies catch on, we could be witnessing the replacement of our monocultural monetary system, which emphasizes a certain sort of free market capitalism above all else, with a variety of currencies that will represent more diverse sets of values belonging to the groups that hold them.
The next time you’re in the southside of London, you might find yourself standing next to a man purchasing his chicken tikka with pounds sterling that feature, rather than the Queen of England, David Bowie in his Ziggy Stardust era. The man isn’t a counterfeiter with a love of 70s glam rock, but a resident of Brixton proudly using the Brixton Pound, a “complementary currency” meant to revitalize the famously tough London borough by encouraging people to spend their money as close to home as possible. Started in September 2009, the Brixton pound can now be used at 200 local businesses, some of which offer special deals to those who use the currency instead of plain-old pounds sterling. Not that normal British currency is useless: the Brixton pound is pegged directly to its national cousin, and all the notes in circulation are backed by sterling located at a local bank. The scheme is small in scope and totally transparent. And while the paper money is gorgeous and meaningful, it will soon be expanded to allow people to spend their Brixton pounds by text message.
Brixton is one of four “Transition Towns” in the United Kingdom — the others are Totnes, Lewes, and Stroud — currently using local currencies. The effort to energize local merchants and inspire local consumers to incorporate their values into their commerce may also be inspiring others. [Continue reading...]
Jeff Madrick writes: On the last day of 2011, a headline in The Wall Street Journal read: “Spain Misses Deficit Target, Sets Cuts.” The cruel forces of poor economic logic were at work to welcome in the new year. The European Union has become a vicious circle of burgeoning debt leading to radical austerity measures, which in turn further weaken economic conditions and result in calls for still more damaging cuts in government spending and higher taxes. The European debt crisis began with Greece, and that nation remains the European Union’s most stricken economy. But it has spread inexorably to Ireland, Portugal, Italy, and Spain, and even threatens France and possibly the U.K. It need not have done so. Rarely do we get so stark an example of bad—arguably even perverse—economic thinking in action.
Over the past two years, the severe 2009 recession, which started in the U.S. but spread across Europe, have imperiled the finances of one European country after another. As a result, Portugal, Ireland, Spain and Italy are coming under pressure from the EU to cut government spending and raise taxes to reduce their deficits if they wanted to qualify for a bailout. All have done so. Ireland and Portugal sharply cut spending and still had to take tens of billions of euros to help meet financial obligations as of course did Greece. The European Central Bank bought the bonds of Italy and Spain. Britain’s Conservative government led the way in ruthless government cutbacks in 2010. France has adopted its own austerity package, and even Germany, the supposed economic leader of Europe, has planned to cut its deficit by a record 80 billion euros in 2014.
Proponents of austerity claim that as nations take control of their finances businesses become more convinced that interest rates will not rise and that growth will resume. Their reasoning has been abetted by the financial markets, which drove up rates on Greek debt and soon enough on the debt of nations like Portugal, Spain and Italy. Should these nations not be able to pay their debts, bond buyers wanted a high enough interest rate to compensate for the risk.
But this is pre-Great Depression economics. How could the EU so misread history and treat with contempt the teachings of John Maynard Keynes, who argued that during recessions governments must expand economies through spending and tax cuts, not the opposite? In practice, making large-scale budget cuts or raising taxes, as Keynes showed, will reduce demand for goods and services just when an increase is needed. Faltering sales will undermine the confidence of businesses far more than fiscal consolidation will embolden them. By ignoring this, European policy makers will deepen, not solve, the financial crisis and millions of people will suffer needlessly.
Kenneth Rogoff writes: Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy. That message is echoed in political debates, central-bank boardrooms and front-page headlines. But does it really make sense to take growth as the main social objective in perpetuity, as economics textbooks implicitly assume?
Certainly, many critiques of standard economic statistics have argued for broader measures of national welfare, such as life expectancy at birth, literacy, etc. Such appraisals include the United Nations Human Development Report, and, more recently, the French-sponsored Commission on the Measurement of Economic Performance and Social Progress, led by the economists Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi.
But there might be a problem even deeper than statistical narrowness: the failure of modern growth theory to emphasise adequately that people are fundamentally social creatures. They evaluate their welfare based on what they see around them, not just on some absolute standard.
Riz Khan – Europe’s Welfare State
The economist Richard Easterlin famously observed that surveys of “happiness” show surprisingly little evolution in the decades after World War II, despite significant trend income growth. Needless to say, Easterlin’s result seems less plausible for very poor countries, where rapidly rising incomes often allow societies to enjoy large life improvements, which presumably strongly correlate with any reasonable measure of overall well-being.
In advanced economies, however, benchmarking behaviour is almost surely an important factor in how people assess their own well-being. If so, generalised income growth might well raise such assessments at a much slower pace than one might expect from looking at how a rise in an individual’s income relative to others affects their welfare.
And, on a related note, benchmarking behaviour may well imply a different calculus of the tradeoffs between growth and other economic challenges, such as environmental degradation, than conventional growth models suggest.
Umair Haque suggests that to measure the welfare of America, it’s time to focus less on GDP — a measure of the national income — and consider instead an equation that says “real human welfare equals natural capital, plus financial capital, plus intellectual capital, plus human capital, plus social, emotional, and organizational capital.” If one was to assess these different kinds of capital:
You might see social capital — the wealth of relationships — crashing. According to Ohio State University’s Pamela Paxton, declines in trust among individuals of half a percent per year from 1975 to 1994. A life rich in relationships and connections seems to be a more and more elusive goal.
You might notice human capital — the wealth in people — splintering. Perhaps the most essential component of human capital is education. Yet, the Brookings Institution found that, for the first time, older generations have attained more higher education than younger ones. That points to an inflection point in human capital, marking a peak in American educational attainment.
Human capital is also composed of mental and physical health. Both mental illness and obesity rates have risen steadily for the last century in America. And rates of happiness in the United States, United Kingdom, and Japan have flatlined — and by some measures, fallen — over recent decades.
You might see intellectual capital — the wealth of ideas — struggling to develop. Intellectual capital is often assessed simply by looking at the sheer number of patents, but I’d choose a higher bar: the creation not merely of patents, but of new industries, sectors, and markets. Fewer industries were created in the noughties than in any decade since 1930: just two, by my count — search and nanotech. Though patent applications have skyrocketed, patent quality has dropped. They are now less expressions of true intellectual wealth than tools for strategic control.
You might see organizational capital — the wealth that harmonizes and synchronizes the other kinds of wealth — cratering. Organizational capital is the toughest kind of capital to measure and observe. I’d roughly gauge it by looking at the creation rate of new jobs, because new jobs often represent new roles, gains in the division of labor, the raw stuff of organizational capital. America is often said to be the most dynamic economy in the world, but the net creation rate of new jobs has dropped steadily since 1970. I’d also look at an alternative measure of organizational capital: political decision-making. Here, we find more “gridlock”: filibusters in the Senate have risen exponentially over the last three decades to an unprecedented high.
Here’s what the glimpse I’ve given suggests: the state of the Common Wealth is in crisis. In terms of an authentically good life, we’re going nowhere fast.
Robert Neuwirth writes: With only a mobile phone and a promise of money from his uncle, David Obi did something the Nigerian government has been trying to do for decades: He figured out how to bring electricity to the masses in Africa’s most populous country.
It wasn’t a matter of technology. David is not an inventor or an engineer, and his insights into his country’s electrical problems had nothing to do with fancy photovoltaics or turbines to harness the harmattan or any other alternative sources of energy. Instead, 7,000 miles from home, using a language he could hardly speak, he did what traders have always done: made a deal. He contracted with a Chinese firm near Guangzhou to produce small diesel-powered generators under his uncle’s brand name, Aakoo, and shipped them home to Nigeria, where power is often scarce. David’s deal, struck four years ago, was not massive — but it made a solid profit and put him on a strong footing for success as a transnational merchant. Like almost all the transactions between Nigerian traders and Chinese manufacturers, it was also sub rosa: under the radar, outside of the view or control of government, part of the unheralded alternative economic universe of System D.
You probably have never heard of System D. Neither had I until I started visiting street markets and unlicensed bazaars around the globe.
System D is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man is a débrouillard is to tell people how resourceful and ingenious he is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of “l’economie de la débrouillardise.” Or, sweetened for street use, “Systeme D.” This essentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy. A number of well-known chefs have also appropriated the term to describe the skill and sheer joy necessary to improvise a gourmet meal using only the mismatched ingredients that happen to be at hand in a kitchen.
I like the phrase. It has a carefree lilt and some friendly resonances. At the same time, it asserts an important truth: What happens in all the unregistered markets and roadside kiosks of the world is not simply haphazard. It is a product of intelligence, resilience, self-organization, and group solidarity, and it follows a number of well-worn though unwritten rules. It is, in that sense, a system.
Econ4 economists’ statement in support of Occupy Wall Street:
We are economists who oppose ideological cleansing in the economics profession. Equally we oppose political cleansing in the vital debate over the causes and consequences of our current economic crisis.
We support the efforts of the Occupy Wall Street movement across the country and across the globe to liberate the economy from the short-term greed of the rich and powerful one percent.
We oppose cynical and perverse attempts to misuse our police officers and public servants to expel advocates of the public good from our public spaces.
We extend our support to the vision of building an economy that works for the people, for the planet, and for the future, and we declare our solidarity with the Occupiers who are excercising our democratic right to demand economic and social justice.
(The economists who have signed this statement are listed here.)
New Scientist reports: As protests against financial power sweep the world this week, science may have confirmed the protesters’ worst fears. An analysis [PDF] of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.
The study’s assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.
The idea that a few bankers control a large chunk of the global economy might not seem like news to New York’s Occupy Wall Street movement and protesters elsewhere. But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world’s transnational corporations (TNCs).
“Reality is so complex, we must move away from dogma, whether it’s conspiracy theories or free-market,” says James Glattfelder. “Our analysis is reality-based.”
Previous studies have found that a few TNCs own large chunks of the world’s economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy – whether it made it more or less stable, for instance.
The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company’s operating revenues, to map the structure of economic power.
The work, to be published in PloS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What’s more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world’s large blue chip and manufacturing firms – the “real” economy – representing a further 60 per cent of global revenues.
When the team further untangled the web of ownership, it found much of it tracked back to a “super-entity” of 147 even more tightly knit companies – all of their ownership was held by other members of the super-entity – that controlled 40 per cent of the total wealth in the network. “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.
John Driffill of the University of London, a macroeconomics expert, says the value of the analysis is not just to see if a small number of people controls the global economy, but rather its insights into economic stability.
Concentration of power is not good or bad in itself, says the Zurich team, but the core’s tight interconnections could be. As the world learned in 2008, such networks are unstable. “If one [company] suffers distress,” says Glattfelder, “this propagates.”
“It’s disconcerting to see how connected things really are,” agrees George Sugihara of the Scripps Institution of Oceanography in La Jolla, California, a complex systems expert who has advised Deutsche Bank.
The top 25 of the 147 superconnected companies
1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
9. UBS AG
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
Maria Popova reviews Monoculture: How One Story Is Changing Everything:
“The universe is made of stories, not atoms,” poet Muriel Rukeyser famously proclaimed. The stories we tell ourselves and each other are how we make sense of the world and our place in it. Some stories become so sticky, so pervasive that we internalize them to a point where we no longer see their storiness — they become not one of many lenses on reality, but reality itself. And breaking through them becomes exponentially difficult because part of our shared human downfall is our ego’s blind conviction that we’re autonomous agents acting solely on our own volition, rolling our eyes at any insinuation we might be influenced by something external to our selves. Yet we are — we’re infinitely influenced by these stories we’ve come to internalize, stories we’ve heard and repeated so many times they’ve become the invisible underpinning of our entire lived experience.
That’s exactly what F. S. Michaels explores in Monoculture: How One Story Is Changing Everything — a provocative investigation of the dominant story of our time and how it’s shaping six key areas of our lives: our work, our relationships with others and the natural world, our education, our physical and mental health, our communities, and our creativity.
The governing pattern a culture obeys is a master story– one narrative in society that takes over the others, shrinking diversity and forming a monoculture. When you’re inside a master story at a particular time in history, you tend to accept its definition of reality. You unconsciously believe and act on certain things, and disbelieve and fail to act on other things. That’s the power of the monoculture; it’s able to direct us without us knowing too much about it.” ~ F. S. Michaels
During the Middle Ages, the dominant monoculture was one of religion and superstition. When Galileo challenged the Catholic Church’s geocentricity with his heliocentric model of the universe, he was accused of heresy and punished accordingly, but he did spark the drawn of the next monoculture, which reached a tipping point in the seventeenth century as humanity came to believe the world was fully knowable and discoverable through science, machines and mathematics — the scientific monoculture was born.
Ours, Micheals demonstrates, is a monoculture shaped by economic values and assumptions, and it shapes everything from the obvious things (our consumer habits, the music we listen to, the clothes we wear) to the less obvious and more uncomfortable to relinquish the belief of autonomy over (our relationships, our religion, our appreciation of art).
The failure of the Internet: Why efficiency promotes poverty unless ordinary people can own and sell information
“What you have now is a system in which the Internet user becomes the product that is being sold to others, and what the product is, is the ability to be manipulated.” Jaron Lanier