Bill's Notebook

As the first decade of the 21st Century ends, I hope that the economic events of the last thirty-five years finally loosen the hold that neoclassical economics has on public policy.  It is widely recognized that the accepted economic models that governments use to shape policy are just not empirically valid.  Today’s economies are vastly different from the industrial revolution economies that shaped neoclassical economic theory.  Yet, these theories are the basis for setting interest rates, regulating the stock market, determining the level of environmental protection, almost every aspect of government regulation (Smith 2010, p. 65).  It is time to modernize the economic theories that are used to guide government and economic policies.

The case against neoclassical economics has been growing in recent years.  As Yves Smith (2010) details in her book:
1)  Economics is not a real science because it is difficult to do the empirical evidence to validate the models economist develop from their assumptions (pp. 20-21).
2)  Many of the core assumptions of neoclassicism (people are totally rational, have complete information, only act to maximize utility, etc.) have been disproved by experiments in behavioral economics (pp. 94-97).
3)  Despite the fact that they are working with faulty assumptions, economists claim that the implications derived from the assumptions are still valid because they are good approximations of reality (p. 41 and pp. 47-48).
4)  Hard sciences also use simplified models to explain phenomena but the crucial difference is that economists add unrealistic properties to validate their models.  For example, economists add the property of perfect information to make supply and demand models work (pp. 48-49).

Some economists counter by admitting that neoclassical economics has these problems but the cure is to do more empirical research.  But with more empirical research, the neoclassical assumptions are giving way to a new economic theory – complexity economics.

Eric Beinhocker (2007) surveys the rise of complexity economics in which researchers apply complexity and network theory concepts to economic activities.  The main advantage of complexity economics is that its assumptions can be empirically validated and that its findings apply to modern economic phenomena.  Thus, this is a better basis upon which to base policy decisions.

Beinhocker’s  (2007) core argument is easy to understand.  Businesses use a mixture (business plan) of physical technologies and social technologies to compete with other businesses.  The businesses that have more fit business plans out-compete businesses with less-fit business plans.  Based on this model Beinhocker details several implications for policy makers:
1)  The role of markets is to process the immense amount of information from buyers and sellers into the most coordinated and effective manner while also determining how fit a business is.  Thus free and open markets must be maintained by regulations that do not impede the flow of information available to all parties (p. 423).
2)  Government’s role is to provide and preserve the vast array of social technologies that make it possible for businesses and markets to exist.  Social technologies such as contract law, antitrust enforcement, and securities regulation (p. 425).  Therefore, government plays an important role in shaping the fitness determination role of markets (pp. 426-427).
3)  Behavioral economics indicates what kind of social programs will be more readily accepted and politically-supported.  People will support aid programs that have strong reciprocity – programs designed to help people become functionally independent (pp. 418-421).
4)  Countries that score higher on measures of societal trust also have higher economic performance than countries with lower societal trust scores (pp. 432-433).  Thus, an important role for American government is to build up social capital in the U.S. (pp. 439-440).

As the above demonstrates, government has a vital role in preserving and strengthening the U.S. economy.  The argument of neoclassical economics that government should have little or no role in market economies is a false one and has led to extreme reactions from the Left and the Right.  With a clearer understanding of government’s actual role in the U.S. economy policy makers can craft effective policies that preserve the best features of the market system while building up the necessary social capital to strengthen the economy and serve the U.S. people.  We just need to move beyond the false answers given by neoclassical economics to the insights of complexity economics.

References:
Beinhocker, E.D. (2007). The origin of wealth: The radical remaking of economics and what it means for business and society. Boston, MA: Harvard Business Press.

Smith, Y. (2010). Econned: How unenlightened self interest undermined democracy and corrupted capitialism. New York: Palgrave MacMillan.

Further Reading:
Berreby, D. (2005). Us & Them: The science of identity. Chicago: The University of Chicago Press.

Cassidy, J. (2009). How markets fail: The logic of economic calamities. New York: Farrar, Straus, and Giroux.

Lehrer, J. (2009). How we decide. Boston: Houghton Mifflin Harcourt

Pfaff, D.W. (2007). The neuroscience of fair play: Why we usually follow the golden rule. New York: Dana Press.

Schelling, T.C. (2006). Micromotives and macrobehaviors. New York: W.W. Norton & Company.

Shermer, M. (2008). The mind of the market: Compassionate apes, competitive humans, and other tales from evolutionary economics. New York: Times Books.

Stiglitz, J.E. (2010). Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton & Company.

Thaler, R.H., & Sunstein, C.R. (2009). Nudge: Improving decisions about health, wealth, and happiness. New York: Penguin Books.

Ubel, P.A. (2009). Free-market madness: Why human nature is at odds with economics – and why it matters. Boston, MA: Harvard Business Press.

“Our youth now love luxury. They have bad manners, contempt for
authority; they show disrespect for their elders and love chatter in
place of exercise; they no longer rise when elders enter the room; they
contradict their parents, chatter before company; gobble up their food
and tyrannize their teachers.”

Socrates complained about the younger generation. St. Thomas Aquinas lamented that the world would be left to an ill-prepared and slovenly youth. A year after I was graduated from college, I read Steve Allen’s Dumbth which “humorously” recounted tales of how Generation X just didn’t know how to think.

Twenty years later it’s the Millennial Generation’s turn with The Dumbest Generation. “According to recent reports from government agencies, foundations, survey firms, and scholarly institutions, most young people in the United States neither read literature (or fully know how), work reliably (just ask employers), visit cultural institutions (of any sort), nor vote (most can’t even understand a simple ballot). They cannot explain basic scientific methods, recount foundations of American history, or name any of their local political representatives. What do they happen to excel at is – each other. They spend unbelievable amounts of time electronically passing stories, pictures, tunes, and texts back and forth, savoring the thrill of peer attention and dwelling in a world of puerile banter and coarse images.”

The crux of the “dumb generation” argument is that their generation just doesn’t have the knowledge that our generation has with the implication that our knowledge is inherently superior. It reminds me of summers that I spent at my grandparent’s farm where I was pitied because I didn’t know how to milk a cow, can vegetables, or could identify all the trees on the farm. “Didn’t I know anything?” they asked. Then we bought them a microwave oven, a VCR, and hooked their TV up to cable. Now I got to mutter under my breath, “didn’t my grandparents know anything?” As our workplaces become more multi-generational, I am sure there is a lot of muttering about the limitations of the different generations. And that is a misleading issue.

The real issue is how to transform our organizations into learning organizations so that we capture the knowledge we already have and determine the knowledge that we need. We produce new data and information at an astounding rate and it is growing faster every year. The challenge is to determine what knowledge we need to keep, what knowledge we need to discard, and how to find the new knowledge we need. Like the way I cling to 80s rock, knowledge we already have feels comforting and empowering but we need to have the courage to let some of that go and embrace the new knowledge that is being produced. Even so, we also need to recognize that not all old knowledge is useless and should be discarded.

Others on GovLoop have written that the best learning is in our workplaces and with conversations with our colleagues. We can learn a lot from each other and our organizations desperately need our efforts to keep the organizational memory growing and thriving. That means younger workers should not just immediately dismiss current practices and processes because that is how they used to do things. And older workers should not be defensive and dismissive when younger workers suggest new ways of doing the organization’s business.

Back when I worked at a state agency, I had a colleague who insisted on using Lotus 123 for his spreadsheets despite the fact that we had Microsoft Excel. He would complain bitterly when they tried to install Excel on his machine and we would have to support Lotus 123 even though it was getting harder to do so every year. I then hit upon a strategy of having him teach me his spreadsheets. I would go over to his cubicle and learn the macros that he created. I would recreate the macros in Excel and then show him how much more powerful they were and how the reports looked better with charting available to Excel. He was reluctant at first but I believe what sold him on upgrading is that he would not lose the original knowledge he had in his spreadsheets and macros but that they would be faster and more effective in a newer environment. A couple of years later, he relished his role as the “Excel Guru” who was the go-to guy about the intricacies of Excel spreadsheets.

So, maybe what is needed are less books about how stupid the other generations are and more books on how much we can learn from each other.

“Breitbart is, in short, expert in making the journalism industry his bitch. ‘The market has forced me to come up with techniques to be noticed,’ Breitbart says. ‘And now that I have them, I’m like, wow, this is actually great. This is fun.’”

How Andrew Breitbart Hacks the Media – Wired, April 2010.

By now, you have probably heard of how Shirley Sherrod, a former(?) Federal official, was forced to resign after a heavily-edited video of a recent speech she gave at an NAACP event was used as evidence of reverse-racism in Obama’s administration.  After the tape was released by Mr. Breitbart to FOX News, both the NAACP and White House called for Ms. Sherrod’s resignation.

Then, the unedited video was released (you can view it here).  Basically, the videotape shows that Ms. Sherrod’s statements were the exact opposite of what FOX News reported.  The NAACP apologized last night for being “snookered“  and called for her case to be reconsidered.  The farm family that Sherrod referred to even defended her while, just a few hours ago, the White House apologized.

Of course, all of this could have been avoided if the White House and the USDA remembered one basic fact – FOX News is not an actual news station.  Also, once they realized that Mr. Breitbart was behind the videotape, they should have remembered how an earlier, heavily-edited videotape falsely accused ACORN (and let to that organization’s demise).  At the very least, someone should have asked to see the complete unedited tape.  Even Mr. Breitbart admits that viewing the entire tape demonstrates that Ms. Sherrod is not a racist.

Mr. Breitbart and others like him are taking advantage of the decline of journalism.  Newsrooms are cutting back on staff and especially investigate reporters.  At the same time, they have to fill the 24-hour news hole and compete with other cable stations and local news.  Ratings are more essential now than ever.  Media manipulators know these weaknesses and use them to their partisan advantage.  As the Sherrod case shows, reputations can be damaged in just a few hours.  What is unusual about the Sherrod case is that the true picture came just as quickly.  In cases such as ACORN or Climategate, it was several months before the truth came out but was of little help in averting the damage.

It is imperative that the audience become more skeptical and reserve judgment before all of the facts are in.  More and more media manipulators are taking advantage of the decline of traditional journalism to spread their falsehoods.  Unfortunately, I don’t hold much hope as when obviously fictional news events (such as this from the Onion) are viewed as investigative journalism.

You have a strange idea of “fun,” Mr. Breitbart.

President Obama laid out an ambitious vision for American space exploration that included missions to an asteroid and to Mars while opening up routine launches to low-Earth orbit by private industries.  It is a great vision and I especially like the mission to an asteroid because of the vast mineral wealth from Near-Earth Objects and to develop an ability to protect against asteroid impacting on Earth.  It also appears that the plan has widespread support in the space community.

I do disagree with leaving out a mission to the Moon.  The Moon is a great base for launching missions to the asteroids and to Mars.  We know we can reach it within a few days, it has mineral resources, water, and an energy source for fusion.  The Moon’s gravity well is much smaller than the Earth’s gravity well and thus it easier to build bigger craft and launch them with less fuel.  Building a base on the Moon allows us to test out technologies and methods that can help us explore Mars.

This is not an argument for reestablishing the Constellation program.  Canceling Constellation was the right call as is the push to leave Low-Earth Orbit.  But skipping past such an obvious asset in our mission to Mars just doesn’t make sense.

Tis the night before Tax Day and I’m preparing my checks for the federal and state taxes.  A bit of bigger bite than expected but that is what happens when you have a day job and run your own business on the side.  I fully accept the rationale that taxes are the price we pay for civilization and I am glad to kick in my share.

But . . . it is grossly unfair that my one-man small business paid more in taxes than GE or Exxon Mobil.  My piddly profits would be considered a rounding error at GE or Exxon but at least I paid taxes on my earnings.  It’s part of being a good corporate citizen so why don’t some of these other megacorporations demonstrate their gratitude to the American public that buys the products?  Pay your fair share for the civilization that provides the free markets that you benefit (greatly!) from.

Well, Steve Jobs is a marketing genius first - the inner circle of journalists for Apple.  And before you order that iPad, consider your better alternatives.

The major intellectual influence in my life was Carl Sagan’s Cosmos.  I remember reading the preview for the series in Science Digest and seeing the very first episode.  I must have checked out the Cosmos book hundreds of times and I spent weekend afternoon devouring the science magazines down at the public library. I watched all the  NOVA programs and hung out with other kids in high school who were science and computer enthusiasts.  I was a geek and quite proud of it.

So it was with a bit of sadness when I read the following in Chris Mooney and Sheril Kirshenbaum’s Unscientific America:  How Scientific Illiteracy Threatens Our Future:

“Arguably, the most important news-oriented science communication today occurs via Comedy Central’s The Daily Show with Jon Stewart and The Colbert Report, popular public-affairs-slash-comedy programs that manage to integrate a surprising amount of scientific content and treat it very sympathetically overall – as long as the scientists who go on air can laugh at themselves, and their profession, a little.”

I like Jon Stewart and Stephen Colbert but a seven-minute science segment is no substitute for the effect Cosmos had on a generation.

The latest issue of Scientific American Mind has a good article disputing popular myths in pop psychology.  Myths like “we only use 10% of our minds” and the idea of learning styles.  I bring this up because the authors use the magic words – “evidence-based.”  I’m seeing more practioners in various fields advocate for a research-based reevaluation of the field’s core concepts.

The rise of evidence-based practice seems unnecessary because it seems that is plenty of research out there.  But, as the founders of evidence-based medicine found, the research seems to sit on the shelf while practitioners rely on rules of thumb and “professional folklore” to practice their arts.  There has always been a gap between the academic world and the practical world but it seems that the Internet has made that gap more apparent. 

For example, as patients began to use WebMD and similar sites to research their illnesses and treatments, many doctors were questioned on their ability to diagnose and successfully treat their patients.  The same started to happen in the legal community, investing, and so on.  The informed consumer is skeptical of the tactics that used to work for the professionals because this professional body of knowledge didn’t seem to have a basis in the latest research.

That is why the successful practitioners will be both scholarly and practical.  They should have the ability to understand the latest research and to critically appraise that research.  They should also have the ability to find the practical applications of the latest research findings and be able to communicate to their clients the implications of the research.  Selling the sizzle instead of the steak is not the way to consulting success in the 21st Century.

To paraphrase Homer Simpson’s observation about beer.  I read an interesting post about the seeming elitism of the TED Conferences and I somewhat agree with the author’s assertion:

“This is classic TED. Take an idea that has gained currency. Self-appoint some (non-genuine) champion of that idea. Change the idea subtly to align with the political preferences of the ‘elite’ audience. Then market the new version of the idea (and its new champions) as the original idea that has been and is widely accepted.”

It’s not just TED.  You see this all over the web.  A few consultants, speakers, writers, whatever get together and self-proclaim each other the elite of their field (an especially audacious example – The Digerati).  They build a website, hold online conferences, and video their talks so that the “masses” can bask in the assembled geniuses.

Sometimes, the stuff is good.  I especially enjoy the TED talks and some of the Digerati have interesting insights.  Other times, it is pure pretentious crap.  And woe be to any outsider who dares question the wisdom of this assembly of genius.

But, so what?  Before the Internet and Web 2.0, these mutual admiration societies could run a magazine or discussion salon that few others had the money or expertise to run.  Now, anyone with an online connection can become their own elite group.  Don’t like TED?  Then, build your own group of gurus.  Start a Facebook group, create a group blog, film some videos.  Gather around your friends, give each other titles, and publish your great works on Scribd.

Soon, you will be one of the elite and will have lots of fans.  And other people who can’t stand you and create their own group in response to your elitism.  Democratizing elitism through social networking.

Added some Berkshire Hathaway stock to my Sharebuilder account as the stock split now allows me to finally afford a few shares.  I’ve always admired Warren Buffet and his management/analysis skills.  And he is the cornerstone of my favorite piece of advice about advice.

When receiving advice (unsolicited or solicited), always consider two things.  First, does the person actually follow their own advice?  Second, how well did they do following their advice?  Given the choice between receiving advice from your average stockbroker or from Warren Buffet, who would you listen to?

Seems simplistic and rather obvious but I have been amazed at the number of people who turn down Warren Buffet when they don’t like the advice.  They would rather look for feel-good advice then the simple and effective advice such as eating healthy and exercising more.

But it’s this quest for the overnight, silver bullet piece of advice that drives much of the advice industry.