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October 26, 2009

Economist's View - 5 new articles

"Let A Hundred Theories Bloom"

Joseph Stiglitz says there's a diverse set of ideas within the economics profession, ideas that go beyond the "self-regulating, fully efficient markets that always remain at full employment" pushed by some economists. These ideas have had trouble finding their way into the mainstream, and that has limited our ability to move beyond the confines of standard approaches to macroeconomic modeling. But that may change (and hopefully will change) for the better since the crisis has "given new impetus to the exploration of alternative strands of thought that would provide better insights into how our complex economic system functions":

Let A Hundred Theories Bloom, by Joseph E. Stiglitz, Commentary, Project Syndicate: The economic and financial crisis has been a telling moment for the economics profession... If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.
But there is, in fact, a much greater diversity of ideas within the economics profession than is often realized. ... Economics has generated a wealth of ideas, many of which argue that markets are not necessarily either efficient or stable, or that the economy, and our society, is not well described by the standard models of competitive equilibrium used by a majority of economists.
Behavioral economics, for example, emphasizes that market participants often act in ways that cannot easily be reconciled with rationality. Similarly, modern information economics shows that even if markets are competitive, they are almost never efficient when information is imperfect or asymmetric... that is, always.
A long line of research has shown that even using the models of the so-called "rational expectations" school of economics, markets might not behave stably, and that there can be price bubbles. The crisis has, indeed, provided ample evidence that investors are far from rational; but the flaws in the rational expectations line of reasoning-hidden assumptions such as that all investors have the same information-had been exposed well before the crisis.
Just as the crisis has reinvigorated thinking about the need for regulation, so it has given new impetus to the exploration of alternative strands of thought that would provide better insights into how our complex economic system functions - and perhaps also to the search for policies that might avert a recurrence of the recent calamity.
Fortunately, while some economists were pushing the idea of self-regulating, fully efficient markets that always remain at full employment, other economists and social scientists have been exploring a variety of different approaches. These include agent-based models that emphasize the diversity of circumstances; network models, which focus on the complex interrelations among firms (such as those that enable bankruptcy cascades); a fresh look at the neglected work of Hyman Minsky on financial crises...; and innovation models, which attempt to explain the dynamics of growth.
Much of the most exciting work in economics now underway extends the boundary of economics to include work by psychologists, political scientists, and sociologists. We have much to learn, too, from economic history. For all the fanfare surrounding financial innovation, this crisis is remarkably similar to past financial crises...
Ideas matter, as much or perhaps even more than self-interest. Our regulators and elected officials were politically captured - special interests in the financial markets gained a great deal from rampant deregulation and the failure to adapt the regulatory structure to the new products. But our regulators and politicians also suffered from intellectual capture. They need a wider and more robust portfolio of ideas to draw upon.
That is why the recent announcement by George Soros ... of the creation of a well-funded Initiative for New Economic Thinking (INET) to help support these is so exciting. Research grants, symposia, conferences, and a new journal - all will help encourage new ideas and collaborative efforts to flourish.
INET has been given complete freedom - with respect to both content and strategy - and one hopes that it will draw further support from other sources. Its only commitment is to "new economic thinking," in the broadest sense. ...
For the past three decades, one strand within the economics profession was constructing models that assumed that markets worked perfectly. This assumption overshadowed a wide body of research that helped explain why markets often work imperfectly - why, indeed, there are widespread market failures.
The marketplace for ideas also often works in a way that is less than ideal. In a world of human fallibility and imperfect understanding of the complexity of the economy, INET holds out the promise of the pursuit of alternative strands of thought - and thereby at least ameliorating this costly market imperfection.

As I've noted before, I don't think it was the tools or the topics we study that was the problem, it was the questions the leaders in the profession emphasized (or ridiculed as the case may be). The emphasis on particular questions leads to a dominant presence of this line of work in journals, the source of advancement within the profession, and this crowds out alternative approaches. It will be interesting to see which of these ideas, if any, will now "find its time."

"Will the Super Rich Evolve Into a Separate Species?"

I can't say I stay awake at nights worrying about the super human part, but inequality in health care is an issue:

Will the Super Rich Evolve Into a Separate Species?, Discover Blog: As medicine becomes super advanced, and super expensive, the super rich may evolve into a completely different species from everyone else, according to American futurologist Paul Saffo. He thinks medical technology such as replacement organs, specially tailored drugs, and genetic research tools to alert the moneybags of any possible hereditary health dangers, could all lead to a new class of rich, elite, and longer-living humans.
Here are Saffo's thoughts on the advantages this would give the rich, as reported in the Guardian:
"I sometimes wonder if the very rich can live, on average, 20 years longer than the poor. That's 20 more years of earning and saving. Think about wealth and power and the advantages that you pass on to your children."
At the very least, they'll be able to afford health care—and keep opposing it for the rest of is.

"Egocentric Presentism"

I'm probably missing the finer philosophical points in this discussion of self-interest (e.g. the proposed solution to the logical inconsistency associated with the idea that a person's own well-being is especially significant, and whether a stable self exists at all), but it seems to me that philosophers are to a large extent rediscovering Adam Smith's Theory of Moral Sentiments (and if that is incorrect, I'd be curious to hear how this differs significantly from Smith's ideas):

You, yourself and you, MIT News Office: Caspar Hare would like you to try a thought experiment. Consider that 100,000 people around the world tomorrow will suffer epileptic seizures. "That probably doesn't trouble you tremendously," says Hare, an associate professor in MIT's Department of Linguistics and Philosophy.
Now imagine that one those 100,000 people will be you. "In that case you probably would be troubled," observes Hare, speaking in his office. If this is your reaction, he says, "You regard you own pleasures and pains as being especially significant." Which seems natural, Hare adds. "We have a tendency to think that what we care about is important in and of itself."
Yet this tendency creates an apparent inconsistency. You cannot claim your own well-being is uniquely meaningful, more important than the well-being of others, and expect anyone else to regard that notion as an objective fact, something that could be part of a universally acceptable morality.
How should we reconcile these differing perspectives? In recent decades, many philosophers have dismissed our self-interest as a kind of illusion. Indeed, a major current of contemporary thinking has questioned whether a stable "self" exists at all. "We are not what we believe," the British philosopher Derek Parfit has written. Rather, this view holds, we are nothing more than ever-shifting collections of mental and physiological states, lacking a definite, lasting identity.
The joy of solipsism
Hare has leaped into this philosophical fray with a distinctly different view, which he outlines in his new book, "On Myself, and Other, Less Important Subjects," published this fall by Princeton University Press. The fact that we care so much about ourselves, Hare thinks, tells us something deep about the world: It is correct after all, he believes, to regard our pleasures and pains as uniquely important among all pleasures and pains in the universe.
So if we think our self-interest is singularly significant, we are not being fooled. Instead, the fact that we know ourselves best reinforces our sense of individuality over time; we do have stable identities, and our minds are more than a shifting kaleidoscope of impressions. Our ability to make moral judgments flows from this fact.
On the other hand, Hare asserts, our minds are independent enough from the rest of the world that, when other people state their pleasures and pains are present, we should not regard their statements as true. Instead, Hare writes, we should regard those claims as "false, but rightly so."
In so arguing, Hare is reviving the philosophical concept of solipsism — the notion that one's own self has a special status in the world. More specifically, Hare claims in his book that we exist in a mildly solipsistic state he calls "egocentric presentism." To make sound moral judgments despite this condition, Hare asserts, just takes an act of imagination.
Thus Hare states that of course he would rather that he suffer a hangnail than that someone else's leg be crushed, even knowing the other person's pain would not be present. "For an egocentric presentist," writes Hare, "empathizing with an unfortunate [person] involves imagining that the unfortunate has present experiences."
Other philosophers note that Hare's ideas appear counterintuitive. "The argument seems controversial on the surface because it goes against common sense," says Berit Brogaard, an associate professor of philosophy at the Australian National University and the University of Missouri, St. Louis. "There is something eyebrow-raising about it," says Benj Hellie, an associate professor of philosophy at the University of Toronto.
Hare, however, does not think his own theory is radical. "One way to be a solipsist is to insist that other people don't have inner lives," explains Hare. "Another is that there are no other people. But I'm not saying either of these things. I'm not denying that other people exist, are fully conscious, and have brains and minds like my own."
Is universal morality possible?
For this reason, asserts Hare, solipsism need not lead us down a slippery slope into a world where, say, violence toward others could be tolerated. "Even if we give special significance to our own pleasures and pains," says Hare, "we don't go about ruthlessly trying to maximize our own pleasure and others' pain." He calls that "a crude caricature of human psychology," popularized by the 17th-century English philosopher Thomas Hobbes.
We may be self-centered, Hare argues, but not solely moved by self-interest: "It's certainly possible to think your self-interest is important without thinking it's the most important thing in the world." Still, Brogaard, for one, thinks Hare's ideas "are even more extreme" than Hare believes they are. By accepting that we are solipsistic, she believes, we may sacrifice the idea that there is an objective universal morality.
If so, the modestly solipsistic state Hare describes — in which we are still social and moral creatures — represents a trade-off. We may lose our ability to define an objective moral system. But we do have stable selves that can craft moral judgments. "My book is putting perspectival questions back into the ontology, into our picture of the way the world is," says Hare.
That still leaves the task of squaring our recurring self-interest with the common good, day after day. But that is at least a task for which we can each take responsibility, as distinct selves. "Caspar is pointing to a problem we have to come to terms with," says Hellie.

Paul Krugman: After Reform Passes

One health care reform passes, and it looks more and more like it will, is there any reason to be optimistic that the highly politically compromised reform bill will actually help people?:

After Reform Passes, by Paul Krugman, Commentary, NY Times: So, how well will health reform work after it passes? There's a part of me that can't believe I'm asking that question. After all, serious health reform has long seemed like an impossible dream. And it could yet go all wrong. But ... it looks highly likely that Congress will, indeed, send a health care bill to the president's desk. Then what?
Conservatives insist (and hope) that reform will fail, and that there will be a huge popular backlash. Some progressives worry that they might be right, that the imperfections... — what we're about to get will be far from ideal — will be so severe as to undermine public support. And many critics complain, with some justice, that the planned reform won't do much to contain rising costs.
But the experience in Massachusetts, which passed major health reform back in 2006, should dampen conservative hopes and soothe progressive fears. ... It ... has gone a long way toward achieving the goal of health insurance for all..., only 2.6 percent of residents remain uninsured.
This expansion of coverage has tremendous significance in human terms. The Kaiser Commission on Medicaid and the Uninsured recently ... reported that "Health reform enabled many ... individuals to take care of their medical needs, to start seeing a doctor, and in some cases to regain their health and control over their lives." Even those who probably would have been insured without reform felt "peace of mind knowing they could obtain health coverage if they lost access to their employer-sponsored coverage."
And reform remains popular...: an overwhelming 79 percent of the public think the reform should be continued, while only 11 percent think it should be repealed. Interestingly, another recent poll shows similar support among the state's physicians...
There are, of course, major problems remaining in Massachusetts. In particular, while employers are required to provide a minimum standard of coverage, in a number of cases this standard seems to be too low, with lower-income workers still unable to afford necessary care. And the Massachusetts plan hasn't yet done anything significant to contain costs.
But just as reform advocates predicted, the move to more or less universal care seems to have helped prepare the ground for further reform, with a special state commission recommending changes ... that could contain costs by reducing the incentives for excessive care. And it should be noted that Hawaii, which ...[has] a long-standing employer mandate, has been far more successful than the rest of the nation at cost control.
So what does this say about national health reform?
To be sure, Massachusetts isn't fully representative of America as a whole. Even before reform, it had relatively broad insurance coverage, in part because of a large union movement. And the state has a tradition of strong insurance regulation, which has probably made it easier to run a system that depends crucially on having regulators ride herd on insurers.
So national reform's chances will be better if it contains elements lacking in Massachusetts — in particular, a real public option to keep insurers honest (and fend off charges that the individual mandate is just an insurance-industry profit grab). We can only hope that reports that the Obama administration is trying to block a public option are overblown.
Still, if the Massachusetts experience is any guide, health care reform will have broad public support once it's in place and the scare stories are proved false. The new health care system will be criticized; people will demand changes and improvements; but only a small minority will want reform reversed.
This thing is going to work.

links for 2009-10-25

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