Self-Service and Self-Serving (24 March 2011)

Tyler Cowen linked to this paper (pdf) from the Information Technology & Innovation Foundation about the many blessings it claims that information technology bestows -- enhancing productivity, tempering the business cycle, making markets more efficient, improving the quality of goods, allowing us to defeat time and space and live forever, and so on. IT, it seems, enables employers to get more productive work per employee by eliminating the jobs of those whose work has been automated out of existence and by "letting" those who remain "do more things at the same time" -- that is, blurring the boundaries between work and nonwork, surreptitiously expanding the working day, and accelerating work processes through multitasking with little regard for the increased stress and irritability this imposes on workers.

What bothered me most is the paper's paean to technology-enabled self-service. Yes, I know, everyone loves checking themselves out at the grocery store and talking to robots on the phone instead of human customer service agents. We all recognize how companies have our best interests in mind when they get us consumers to do things they once had to pay an employee to do. Aware that some of us remain reluctant to rhapsodize over self-service, the paper explores the issue in a dedicated sidebar, which includes this tendentious passage:

Unfortunately, self-service sometimes gets a bad rap. The media routinely portrays the efforts of companies to implement self-service options as creating work for the consumer solely for the benefit of the company. In reality, most self-serve applications don’t cost the consumer more time, they just involve one person (the consumer) doing the work, not two (the consumer and the employee). Granted while some self-service applications (e.g., “press 2 if you are interested in opening an account”) can be maddening and cost consumers more time, overall self-service technologies usually cut overall labor time (for both the worker and consumer). And in some cases, they can save consumers time and add convenience. Even where personal service provides consumers with more value (a chauffeur-driven car is seen as a luxury), it usually costs more (which is why usually why only wealthy people have chauffeurs). Other kinds of personal service are the same. They cost more money to provide than does self-service. However, in the type of competitive markets more companies are facing, savings from self-service are passed back to consumers through lower prices, at least over the moderate to long term. As a result, standards of living go up.

Yes, while quality of living goes down. Notice how the concept of "prosumerism" -- where consumers get to be productive "co-creators" or "innovators" alongside their favorite brand buddies -- is here revealed in its true guise. The company just presumes that the consumer is already an employee, no different from the cashier or stocker. Post-Fordist, immaterial labor and consumption as production is not necessarily about getting to join in with creative-class while they shape social meanings and recast our shared material culture; it's about getting consumers to forgo some of the services they were once accustomed to assume are included and do those things themselves, which add value to the enterprise. When shopping becomes "productive," that means it has become a job you do for them, not yourself. Self-service means "serve the company."

To wash this down, consumers are sold on "convenience" or the ability to skirt human contact that might disrupt their solipsism -- indeed, the paper suggests the idea of personal service is a decadent luxury, not something the firm has implicitly promised in selling services to us ("Only wealthy people have a chauffeur) -- and we are promised that we'll ultimately save money, which after all is the only relevant value in a consumer society. "Standards of living" in this context means exclusively the ability to buy and have more stuff, not to have better experiences or enjoy humanized exchanges in an economy palpably made up of people doing things for one another. Instead we are encouraged to live in a fantasy world where everything is made for our money alone, and naturally we have no choice but to help ourselves to it.

The carefree society (14 Dec 2010)

I attended this lecture at the New School yesterday given by economist Nancy Folbre about how capitalism has transformed patriarchy and how this has helped bring on the employment crisis. It wasn't a discussion so much of the much-reported mancession of 2008-09 as it was a broader look at how the domestic and affective work long performed by women for nothing has increasingly become waged work, and also how such work continues to be performed by women who are also working other jobs. Women have gained "self-ownership" thanks in some part to the logic of capitalist individualism -- they have been granted the opportunity to sell their labor power and hold property. This increased agency threatens the way capitalist societies have relied on women to do the work of social reproduction outside of the markets that are assumed to be natural to and rule all other forms of production and exchange. As women gain self-ownership, their view of the domestic work they perform becomes more capitalistic -- they want to be paid for it, or rather pay other women to do it. The wages for such work is low, because the work itself is easily commodifiable and requires no formal education and can be performed by members of the underclasses.

In neoliberal ideology, it's regarded as better to privatize welfare than use the state to pool risks associated with social reproduction. American society in particular has fostered an every-family-for-itself environment that intensified risks for everyone -- if your parents lose the Alzheimer's lottery, and you have to put them in a home, well, tough break for you. Don't expect your neighbor's tax dollars to help you out. If your company pulls out of the U.S. and lays everyone off, don't expect anyone else to help put food in your kids' mouths until you can't find new work. Instead, you are presumably supposed to think about what gave you the right to have kids in the first place, if you couldn't guarantee you could afford them.

As capitalism internalizes or subsumes more and more of everyday experience -- as more and more of the traditionally unpaid work of social reproduction becomes reconceived as commodified, exploitable wage work -- there's less reason to want to do any of that for other ideological reasons (because it is fulfilling in one's social role; because it's morally satisfying; because it is pleases God; etc.). But someone's got to do it, or else the system as we know it will inevitably end. The key question is who does this work, and for what reasons, for what sort of recognition. Capitalism -- flying in the face of patriarchy, to some extent -- tells us that money is the only form of recognition that matters.

In the neoliberal world, where the costs of social reproduction are not defrayed by the state but instead show up as costs carried unequally by every family (unless they can outsource it to cheap workers), affective labor -- caring for children, the elderly, spouses, etc.; anyone other than yourself -- becomes a sucker's game unless you get some sort of payment for it. It represents an opportunity cost, especially since connectivity makes it so that we always can be working: domestic work is performed at the expense of the more lucrative work that is available to women with more-marketable skills. So the logic implies that the more mothering you do -- the more time you spend parenting instead of something else -- the poorer you will be. And birth rates drop. It's easy to extrapolate these trends to a global capitalist world in which no one wants to be a mother and we all become inadvertent Shakers.

Of course, we may also try to get by with as little of this caring work as possible -- to have a society where "caring" is automated in social networks as sharing self-broadcasts and pseudo-connection, but we spend as little time as possible actually caring for others in person. The friction of everyday life, ordinarily smoothed over by care work, could just ramp up and up, particularly if the online mediation of our productive lives sufficiently isolates us so that the friction doesn't impede productivity. That is to say, there is no absolute amount of caring required to make capitalist society; it can always be squeezed, reduced, rationed with the price mechanism. As more care work becomes paid work and becomes priced, the more incentive we all have to economize on it. If caring is work -- as capitalism's logic encourages us to see it -- then we have too much incentive to end it, and bring about a society in which no one cares about anything except themselves.

Price discrimination watch (10 Feb 2010)

In the world of economic abstraction, prices are believed to find their "true" level, a real-time approximation of a good's actual value (if there is such a thing), by balancing supply and demand. This process of price discovery is a central pillar of free-market ideology; drawing on Hayek, free marketeers read into prices the decentralized distribution of information vital to the development of the economy. Prices let the people on the ground, knowingly or not, translate local conditions into incentives that can be communicated far and wide.

But lots of things jam up the signal, as when prices are "sticky" and can't quickly adjust to shifts in the sovereign consumer's whims. Then, the discussion shifts to price elasticity of demand -- what sort of range of prices are possible for a good. Demand is "inelastic" if it's not much affected by price.

That brings us closer to what retailers' practical experience with prices seems to be: Their primary concern is to figure out how to charge as much as they can from a given customer for a given good. That is, they need to divide their customers into segments that see different menus of prices -- as when Americans in Prague get one menu from restaurateurs, Czechs another. Customers don't like this. It immediately seems unfair once we realize such discrimination is happening. Everybody wants to have the illusion that they are getting the best deal, or if not that, at least the same deal everyone else is getting.

Online retail -- as this CNN piece and this WashPost article by Joseph Turow, both from 2005, detail -- seems like it would be the perfect place to perfect techniques of price discrimination. We create a concrete demographic profile through our trackable online behavior (the sites we visit, the sort of goods we click through to have a closer look at, who we know on Facebook, that sort of thing), which can be used to make assumptions about the prices we can afford to pay. And in the absence of printed price tags or other customers at the scene of exchange (the point of sale), the discriminatory price can be generated on the spot. Think of it as automated haggling that has taken place without your having to go through all the awkward trouble and conflict. You are adequately sized up and the appropriate line in the sand (for retailers, at any rate) is drawn.

Amazon famously and clumsily tried this back in 2000, but users quickly discovered it and protested. Paul Krugman wondered if it might be illegal under the Robinson-Patman Act. Still, there was little reason to expect the issue to disappear. It's too potent a weapon in the retail arsenal, and it seems such a ideal application for all the data now being gathered in our new Web 2.0-powered knowledge economy.

But apparently there is some intramural strife among businesses: This recent NYT article looks at the battle between online retailers and manufacturers over who gets to set prices. The conflict, the article reports, stems from a 2007 Supreme Court ruling that gave manufacturers more power to dictate how prices can be advertised -- in sheer defiance of Hayek. Manufacturers want to stop online retailers from using their goods as loss leaders, tarnishing the brand with cheapness and presumably undermining their ability to price discriminate elsewhere.

[Manufacturers] say the competitiveness of the Internet has unlocked a race to the bottom -- with everyone from large corporations to garage-based sellers ravenously discounting products, and even selling them at a loss, in an effort to capture market share and attention from search engines and comparison shopping sites. They also worry that their largest retail partners may be unwilling to match the online price cuts and could stop carrying their products altogether.
“If there isn’t that back-and-forth between manufacturer and retailer, it’s just a natural tendency to drive the price down to nothing,” said Wes Shepherd, chief of Channel Velocity, which sells software that allows companies to scour the Web looking for violations of pricing agreements.

I've been thinking about that less quote all day, and I still can't make any sense of it. The online retailers don't exist to give products away to thwart manufacturers. What I am missing here?

The Ethics of Price Discrimination (5 Jan 2010)

Price discrimination is economics lingo for the retail practice charging customers different prices based on what they are willing to pay. Economists generally have no problems with this; that's just how fairness is defined in capitalist societies. Many consumers, I suspect, find the practice as unpleasant as I do, not merely because it can seem unfair to pay more than somebody else for the same good, but possibly because price discrimination undermines the cherished ideological tenet that there's a "true price" for goods, that useful goods are really worth something definite, and that fundamental use value is indexed to a good's cost. Instead, we learn that the price of many goods is indexed to our gullibility, to our negligence, or to retailers' ability to dupe us.

The price-discrimination game works best when pricing is not transparent -- visit a carpet warehouse, for instance, and try to find a price tag. Consumerism puts an end to the norm of haggling, however, since shopping in a consumer society must function as entertainment, and the shifty confrontations, the agonistic bartering with salespeople unnerves a lot of people. It makes us aware of all the asymmetries, makes us wary of bad deals, makes us aware that we must be willing to walk away with nothing oftentimes to not get ripped off. But consumerism requires a far more passive consumer who feels licensed to say yes to everything, to indulge in the pleasures of impulse purchasing, and take pleasure in the gratification of that impulse as mush as in the thing purchased, which more and more becomes a mere alibi for luxuriating in the retail world, where flattery and fantasy blend and become more salient to us. Shopping becomes an escape from conflict.

Hence, we have become more comfortable shopping with fixed prices, but retailers typically require prices to be less sticky in order to make a profit. They need to increase margins wherever and whenever they can. So there is constant tension between broadcasting a price to draw consumers in, and masking prices to charge consumers according to their class. Several strategies have evolved to address this: They can routinely reprice goods (easier now with automated systems), they can use various menu tricks to get consumers to choose more-expensive options (i.e., offering a ludicrously expensive option to make the second-most expensive option seem reasonable), they can offer loss leaders, they can bury additional fees in the fine print, they can sell the same crap with different labels to different customer classes, they can advertise a discount but not register it at checkout.

I encountered a blend of all this when I bought a TV this past weekend. I first went to P.C. Richard in College Point, in Eastern Queens, and tried to wrap my mind around the profusion of makes and models, all of which seemed largely the same, except for screen size and resolution. Various bells and whistles seemed tacked on to certain brands, but the flat-screen TV basically seems like a commodity to me -- any one would do, and I'd feel best about the one I selected once it was separated from all the others and began to become mine. Still I couldn't bring myself to simply buy the cheapest one on offer. The sale price for a particular model by a brand I have heard of was prominently displayed. I made a note of it, then went to Best Buy, where similar models were far more expensive (Best Buy is not always the best buy, apparently; they seemed to be banking on their mere reputation as a bargain retailer at this point.) So I went to the P.C. Richard in my neighborhood, and was baffled to find that the same sale model from the College Point store was priced $100 higher. I asked about it, and the salesman immediately matched the price I had seen at the other store. Then he tried to sell me a set of cables for $50. (It turned out I needed the cables to connect my laptop to the set, but you can get them on Amazon.com for under $20.) I was also buying a humidifier that was advertised on the showroom floor at $19, but when it was rung up, it defaulted to $25. I had to look over the salesman's shoulder at the register to notice this and have him correct it.

My point is that the TV purchasing process was riddled with opportunities for me to be lazy and get charged more as a result. My need for perpetual vigilance is no less than it would have been had I been required to haggle for it, only the illusion of stable prices was there to discourage me from worrying about anything. Should I yearn for a return to a haggling economy? Should I feel like I beat the system, or is that just more ideology reconciling me to the system? Should I point to the metaphoric scoreboard and celebrate the "bargain" I received at others' expense? Should I shop exclusively at flea markets and bazaars? Can any sort of regulatory intervention stop deceptive practices, or will retailers always find a new loophole or semi-deceitful practice to differentiate customers and dupe them according to their ignorance? Was it me? Was it you? Questions in a world of blue.

Corporations seem designed to maximize profit by exploiting every possible opportunity in a depersonalized economy. Any accommodation a big company happens to give a customer is the probably result of a probability calculation modeled on an analyst's spreadsheet. The message that corporations "care" about us is cooly manufactured in marketing departments as a sales tool and is blended with efforts to expedite price discrimination, to separate us into a million individuals cutting our own deals with that much less collective bargaining power.

If all competitors in an industry de facto collude to make customers miserable, so much the better -- just look at major U.S. airlines and cell-phone-service providers, or at the banks and credit-card companies. And look at health care, in which pricing transparency does little to contain costs. ("The evidence suggests the benefit of transparent pricing is limited, particularly when insurance companies are involved." Hmm -- I guess that's probably coincidental.)

Mike Konczal's recent post about businesses preying on the "cognitively weak" looks at some of the antisocial incentives of financial firms. Imagining himself an evil bank executive, he surmises he might be thinking along these lines, targeting old people whose brain function is fading:

Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source. Indeed, someone who forgets what they were doing between reading “Bullshit Surcharge: $40″ on their statement and calling the customer support number to complain is our ideal customer -- it’s the person who will be most profitable to us going forward.

To hard-liners free-marketeers, who tend to argue that companies are ethically bound to take advantage of their customers' foibles when they can get away with it, this is just price discrimination working its magic. The weak are punished, and the wise are thereby subsidized. It's financial innovation at its best. As Konczal explains, those who

are excited about how the current financial service industry excels because it punishes the ignorant and irresponsible: on what specific grounds could you not have to embrace, much less oppose, the Evil Rortybomb Plan above? I got a sense of proportionality in those arguments, that the most ignorant should have to pay the most. I don’t think anyone would argue against the idea that those suffering from dementia will be the most ignorant of their actual situations and most irresponsible in the sense that they aren’t capable of being responsible. The extra fees and traps they pay will in part also go to those enjoying extra bonuses and continued free financial services. It’s a win-win from this point of view, no? One must be consistent.

It doesn't take much for price discrimination to become plain old discrimination. Businesses want prices to differentiate the smart from the foolish to maximize the exploitative potential in society, whereas the rest of us want prices to indicate the social value of things so we can make more of what we need and stop making stuff we don't want. The result is a war over the meaning of prices, played out in the medium of information. Companies use disinformation and marketing to conceal beneficial or money-saving information from consumers, resulting in prices that can't be relied upon to mean much of anything.

Pleasure procrastination (31 Dec 2009)

The best defense for the advertising industry is that it licenses our pleasure. It gives us permission to relax and enjoy things. But that assumes that we need such permission, that our instincts lie elsewhere -- possibly with a different sort of pleasure that doesn't revolve around consumption, around possessions. It's not clear whether by pushing its peculiar form of desire, the ad industry isn't undermining other latent modes of pleasure, leading us to neglect them and let them atrophy. When I travel and escape from advertising, it never fails to startle me how much I miss it in subtle ways, how I need guidance about what I should be wanting. The absence of consumerist desire can seem to hurt. The pleasures of travel, such as they are, sometimes fail to compensate.

The difficulty of desire has long been a staple of French social theory. Virtually all of Lacan is about the subject. Baudrillard begins his essay "Concerning the Fulfillment of Desire in Exchange Value" with a memorable anecdote about the difficulty of ridding ourselves of what Bataille called the accursed share: "There was a raid on a U.S. department store several years ago. A group occupied and neutralized the store by surprise, and then invited the crowd by loudspeaker to help themselves. A symbolic action! And the result? Nobody could figure out what to take." The basic idea is that we are strangers in the world our economy has outfitted us with -- we must learn how to be subjects in it, and the adjustment is painful.

Baudrillard claims that "beyond the transparency of economics, where everything is clear because it suffices to 'want something for your money,' man apparently no longer knows what he wants." This is persuasive to me because I often need to see that something is on sale or is a "good deal" in order to permit myself to buy it. (This is why I generally shop at Savers and Goodwill.) I've argued before somewhere (can't find) that ads, as part of their function, promote the market mentality, the neoclassical economist's view of humans as efficient utility calculators for this reason, persuading us we should find pleasure in maximizing utility, in making good deals. In reality, no deals are required for pleasure. It's a free gift that comes with being alive.

The idea that we need external forces urging us to indulge fits well with the findings of market researchers Suzanne B. Shu and Ayelet Gneezy (pdf) about procrastinating pleasure, which John Tierney reports on in the NYT. The researchers claim in the abstract that "the tendency to procrastinate applies not only to aversive tasks but also to positive experiences with immediate benefits." We like deadlines, which make us decisive and prompt us to action. Advertising, marketing, sales -- all these seem to work best when they make it seem like we must "act now!" Maybe the details of the pitch and the dubious emotional associations they cultivate are ultimately irrelevant; maybe only the pressure they put on us forms the real substance of ads. The secret lurking in consumerism may be that we really don't want to spend our time liquidating gift cards and forcing ourselves to the mall -- that this isn't inherently fun, contrary to the pervasive ideology. Free of priming we may find it a hassle to have to want stuff. We postpone consumerist pleasures not out of protestant-ethic guilt but because they actually aren't all that compelling to us when isolated from their marketing.

The assumption that there is something inherently harmful in postponing consumerist pleasure seems a bit dubious to me. There's pleasure in restraint and indulgence both. Tierney sums up the researchers' apparent views this way: "Once you start procrastinating pleasure, it can become a self-perpetuating process if you fixate on some imagined nirvana. The longer you wait to open that prize bottle of wine, the more special the occasion has to be." But doesn't that work both ways -- the longer we wait, the more special the occasion will seem to be when we open it? (Tierney's conclusion sounds the same note.) We can only imagine the nirvana because we are building it around some delay in fulfillment, letting fantasies crystallize around some forestalled moment of truth. Immediate gratification isn't more pleasurable than the circuit of desire, the chase and the capture.

End of Utopias (13 Nov 2009)

Slavoj Žižek has a good essay in the LRB about the anniversary of the fall of the Berlin Wall. He looks at the idea that the end of the socialism brought in its wake a realistic mind-set grounded in the "truth" that markets and capitalism are the only basis for a social order that works. He basically argues that after the Wall fell, the same sort of people maintained political control. Neoliberalism has its power elite, just as Warsaw Pact countries had their Politburos. What's striking about the velvet revolutions, Žižek argues, is that after the fall of the Wall, these elites turned out to be the same people:

Indeed, one could argue that, when the Communist regimes collapsed, the disillusioned former Communists were better suited to run the new capitalist economy than the populist dissidents. While the heroes of the anti-Communist protests continued to indulge their dreams of a new society based on justice, honesty and solidarity, the ex-Communists were able without difficulty to accommodate themselves to the new capitalist rules. Paradoxically, in the new post-Communist condition, the anti-Communists stood for the utopian dream of a true democracy, while the ex-Communists stood for the cruel new world of market efficiency, with all its corruption and dirty tricks.

He sums up the ideological usefulness of this misrecognition: free marketeers can argue that their revolution was betrayed and demand more radical reforms.

In the 1990s, it was believed that humanity had finally found the formula for an optimal socio-economic order. The experience of the last few decades has clearly shown that the market is not a benign mechanism that works best when left alone. It requires violence to create the conditions necessary for it to function. The way market fundamentalists react to the turmoil that ensues when their ideas are implemented is typical of utopian ‘totalitarians’: they blame the failure on compromise – there is still too much state intervention – and demand an even more radical implementation of market doctrine.

Markets don't exist by virtue of natural law; impersonal exchange is hardly inscribed into human genetic code. Violence, or its implied threat, establishes the terms of exchange, or worse, the arbitrary neutrality of a society governed by unimpeded markets fosters an anything-goes climate where violence between competitors is tolerated, and is inevitable.

Rewarding complexity; or, information is not intelligence (14 Oct 2009)

I have a post up at Generation Bubble about embedded social relations, prompted by Oliver Williamson's winning the Nobel prize in economics. WIlliamson's main field is transaction-cost economics -- looking at frictions in economic exchanges that in his view shape the structure firms must assume to accomplish varying purposes. In the post I draw heavily on a paper by sociologist Mark Granovetter that emphasizes the dialectical nature of social relations -- they are always in process, thus they are difficult to pin down in the mathematical formulas preferred by neoclassical economists. I wanted to use that idea as a jumping off point for speculating about the ways neoclassical economics puts forward as an ideal the possibility of exchanges unhindered by social relations, depicting the absence of social ties as the essence of true freedom. This reverses the apparent human instinct for sociality, yet seems to have a tenacious hold on capitalist society, if you accept that the fetishization of convenience is a product of perfect-markets ideology.

In the process I threw out a stray thought about the necessity of regulation and the problem of finding trustworthy regulators (a primary concern of the other new Nobel laureate, Elinor Ostrom, who is known for her studies of "tragedy of the commons" problems and various self-regulating systems of resource management): Regulation is not a matter of preventing corruption but providing a conduit for predictable corruption at a socially tolerable level. Regulatory agencies serve as clustering points around which a density of social relations can build up, and through which power can be exerted to calibrate the level of exchanges that are seen as unjust.

Anyway, Felix Salmon's point in this post about smart bankers seemed apropos:

Banking isn’t for outright dummies — conscientious underwriting, for one, is a difficult and highly-skilled job which requires good, well-paid professionals. But far too many bankers thought of that kind of income as boring money, and were much more excited by the higher rewards and sophisticated risk management being shown them by the rocket scientists on the structured-products desk. Maybe in future they’ll be more suspicious of things they don’t really understand, but I’m not holding my breath. That’s what regulators are for.

Salmon's hope, it seems, is that future financial regulators will both understand thoroughly the complex structures banks invent often to shroud risk and at same time won't be seduced by their understanding to want to profit by it but will instead work to rein in and discipline the intelligent and ambitious people they must square off against. But financial complexity may work as a subtle form of regulatory capture; it supplies a rarefied meeting place where regulators and bankers can collude, with the hubris of wielding formulas and structures that few can understand working to override whatever generalized morality and adherence to duty that might have restrained them. (Arnold Kling suggests something similar -- a "Kool-aid factor" that has regulators buying into financial-engineer hype.)

In the banking world, we've learned in the past year, the mastery of complex ideas is regarded as an automatic justification for personal enrichment, regardless of whether that complexity served any useful social purpose, even when that complexity becomes an elaborate ruse to overcome investor wariness. Complexity, as Salmon's post details, ends up confusing everyone, and rather than match money with sound projects, bankers end up in a game of secrets and lies and off-balance-sheet shadiness.

So regulators overseeing complex entities may be more at risk to use their position to obfuscate rather than disseminate information. A point Steve Randy Waldman made in this post, however complicates that hypothesis a bit:

Information is a behavioral attribute, not an attribute of the external phenomena to which it may ostensibly refer. To say that an agent is informed means she behaves differently than an uninformed agent. Her behavior is less random, more predictable. To be informed does not imply one's information is accurate. (In general, accuracy is unknowable, both ex ante and ex post.) Information increases the volatility of outcomes, because it provokes larger and more concentrated bets than uncertain agents would take, creating large gains and losses depending on how adaptive the informed behavior turns out to be. It is often better, as a behavioral matter, to be uninformed than to be poorly informed.
But we do not always have the option of remaining uninformed. We cannot afford to hedge all of our bets. Whether via a great mis-recalculator in the sky or a political establishment largely captured by certain interests, new information will be manufactured.

Regulators obfuscate precisely by manufacturing information, by spreading unwarranted certainty. This may be precisely because they have been taken in by their own understanding, which gathers momentum. "Knowing" is ontological; it doesn't depend on what is supposed to be known. And in a state of "knowing," the objective reality of uncertainty is ignored. Being a "smart banker" is a dangerous state of mind, difficult to corral, impossible to regulat -- we can't force people to think they are ignorant; those who think they are smart also think they can figure out the loopholes.

UPDATE: Boing Boing linked to a writeup of a recent paper that argues complex securities are inherently impossible to regulate. Basically they argue that one can tell with structured securities whether the tranches are random or tampered with so that they are front-loaded with lemons.
UPDATE II: Free Exchange discusses the problem of too many smart people becoming bankers because it pays so disproportionately well, because it is dimly understood and poorly regulated. "To an increasing number of people, it looks as though the financial sector is recruiting the nation's best brains and putting them to work endangering the global economy." A paper (pdf) the blogger links to argues that "financial deregulation" is among the reasons jobs in the sector came to require more "skills" -- which could be translated into: deregulation brought smart people into finance because the field had been opened up to the devising of complex money-making schemes designed to enrich them far beyond what one could make in other more carefully scrutinized professions.

David Brooks's moral economy (1 Oct 2009)

A recent David Brooks column in the New York Times foments about the "erosion in economic values" that he expects to launch the "next culture war."

A crusade for economic self-restraint would have to rearrange the current alliances and embrace policies like energy taxes and spending cuts that are now deemed politically impossible. But this sort of moral revival is what the country actually needs.

If it sounds familar, it's because he wrote the same op-ed a year ago. There he wrote:

There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.

Basically, Brooks is unsatisfied with the much-heralded New Frugality, and he discounts the data that indicates the U.S. savings rate has surged in the past year.

Over the past few months, those debt levels have begun to come down. But that doesn’t mean we’ve re-established standards of personal restraint. We’ve simply shifted from private debt to public debt. By 2019, federal debt will amount to an amazing 83 percent of G.D.P. (before counting the costs of health reform and everything else). By that year, interest payments alone on the federal debt will cost $803 billion.

The logic here seems suspiciously nonsensical. Conflating public and private debt is a subterfuge if you want to rail about personal morality. If there is a connection, as Krugman notes, it's Reagan's fault. (He proved, after all, that "deficits don't matter," as Dick Cheney put it.) Kevin Drum, channelling Elizabeth Warren, notes that Americans stopped saving when their wages grew stagnant and their bills kept increasing, and banks were deregulated enough to lend recklessly to them.

And as Andrew Leonard argues at Salon, morality has little to do with our tendency to respond to economic incentives:

Americans ran up a lot of debt in the last few decades. There's no question about that. But one of the most striking developments of the last year has been how Americans have responded to the financial crisis at an individual level. We made a collective decision to start saving and stop spending. Is this because we woke up one morning last fall and suddenly became born-again Calvinists? No, it seems clear that we were responding rationally to economic incentives. The economy crashed, unemployment surged, home prices plummeted, and presto: We all started pinching pennies. Morality, insofar as expressed via our spending habits, is merely a reflection of the economy.

That's why I've generally been skeptical about the new frugality -- we've been trained by being raised in capitalism to respond to the economic drift and call that morality; the idea that we have a morality that supersedes what is happening in the economy is outdated, which is what I think Brooks is lamenting. He wants morality to drive the economy rather than vice versa, but for that to be the case you have to question the conservative tenet of trusting the market to arbitrate social conflicts. You would need to champion a resistance to economic incentives, a dismantling of the market-made consciousness, a rejection of the idea that there is justice in economic equilibria, of the idea that markets are fair. Religious conservatives can probably make that case and argue for a subjectivity grounded in religion, not the market. Brooks seems to want it both ways, though: He wants to condemn consumer desire as evil but champion the prerogatives of the businesses that have ushered in the consumerist era that have done so much to instigate that consumer desire.

When we respond to incentives, ideologically it seems as though we are being allowed to choose freely. If we are expected to adhere to some higher set of values, often these register as constraints, prohibitions and proscriptions -- curtailments of freedom. The problem is that "freedom" has come to be defined in terms of the breadth of consumer choice so that other sorts of inequalities (income inequalities in particular) could be allowed to persist. Not clear how a return to Calvinism can be sold as liberating.

Perfect markets as coercive ideology (9 Sept 2009)

In the past few posts I have been trying to get at ways in which the fantasy of perfect markets can be deployed ideologically, used normatively to shape people's thinking and aspirations, how we assess how reasonable our behavior is when we attempt to be "objective". Here are some more propositions:

1. If the laws assume a particular institution, subjects will conform their thinking to accommodate the institution in that mandated form.

2. If attempts to legislate a rational market into existence occurs, to simplify governing and entrench advantages already embedded in the status quo, then people must be forced to become homo economicus, must habitually restrict self-knowledge to cost-benefit analysis.

3. Perfect markets imply an ongoing process of equilibria being found. A chief way of trying to legislate perfect markets into existence is to try to force equilibrium, mandate it as a norm.

4. Market rationality is not merely the presumption of calm, omnipotent calculation in an instant. It also incorporates the assumption that we are always arbitraging as equilibrium are coalescing -- this activity is presumed to fashion the equilibrium, but only after certain already-favored parties have already taken advantage of the imbalance in the process. This exploitation can then be popularly conceived as justice, as inevitable, as harmful to impede.

5. In an economy with alleged, presumed or mandated perfect markets, timing is what is always at stake. We exploits the discrepencies on the way to equilibrium, and who suffers the equilibrium as fait accompli. This is matter of how information and the opportunity to act on it is distributed. The advantages of timing -- the arbitrage opportunity -- tends to disappear from the macro view, hiding any exploitation or injustice.

6. All of this is an elaboration of the observation that the useful fiction of efficient markets can be used as an ideological tool to browbeat people and curtail freedoms, and also to hide actual imperfections pertaining to timing. It's an ex post facto alibi for unfair outcomes.

Right to rampant risk-taking (7 Sept 2009)

Yesterday I was wondering about whether it makes since to curtail individual freedom in order to achieve a larger efficiency that no one individual will experience as directly beneficial. In particular, it's possible that we like to think we can outwit everyone else when we can't, but that fantasy is more beneficial to us than a smoother-running system.

Steenbarger, a guest poster at Barry Ritholtz's Big Picture blog, calls attention to the research that suggests that certain traders are addicted to playing the market recklessly.

It turns out that a large body of psychological research finds that people who are sensation seekers tend to also be risk takers. Indeed, many hapless traders are attracted to markets precisely because of the stimulation of risk and reward. At the extreme, this makes trading an addiction, not a disciplined quest to exploit market inefficiencies.

Obviously this means market players are not all contributing useful information, and markets themselves are not automatically efficient in that sense. It may instead provide opportunities to express irrationality, to defy reason and take defiant chances. Markets are just another social medium in which individuals can try to leave their distinctive mark, even if it requires acting insanely. And markets may then conduct misleading information to other participants, compounding the confusion and generating unexpected or suboptimal outcomes.

Does that mean such individuals' participation in markets should be curtailed in the name of perfecting markets? Of course we shouldn't, but I wonder though if all the talk about the unfortunate reality of inefficient markets will at some point lead to attempts to perfect them by force and prohibition. A perfect market, as Albert Hirschman pointed out in his "Rival Interpretations of Market Society," requires that participants not be connected by any ties other than commercial ones, ties that might affect their economic-rational judgment: "Involving large numbers of price-taking anonymous buyers and sellers supplied with perfect information, such markets function without any prolonged human or social contact among or between the parties." Perhaps the isolating aspects of capitalist society are self-reinforcing, or at least are reinforced by economistic technocrats who wish to conjure their perfect market, which would reinforce the plausibility of their predictions and enhance their credibility and power. The more that traditional ties are broken, denied, or prevented from forming, the more "perfect" markets can be become; efforts to promote "rational thinking" over emotional or altruistic thinking may work to further our way toward such perfection, until we are all perfectly anonymous in our solipsistic individuality.

Private knowledge's value (6 Sept 2009)

Krugman's NYT Magazine article, which looks at shortcomings of economics as a discipline, reminded me of a question I have been mulling over. Does macroeconomics, in aggregating and potentially canceling out more localized movements in opposite directions within the data, gloss over the questions that are significant to individuals, which are typically a matter of where they stand in relation to other individuals? Macro data flattens out much of the relative differences in between individuals, but such differences are what register to those individuals and determine to large degree their sense of how the economy is faring and what their prospects are. So when economists and econojournalists begin prognosticating based on the macro data, they create a picture of reality that excludes everyday experience and alienates those whose relative story doesn't fit the general trends. Or what individuals experience as lost opportunities or jobs or wages may show up in aggregate data as something more hopeful about society generally. This means a disconnect between what passes for the truth about society and what people experience in everyday life can grow and deepen, intensifying the perceived antagonism between the two.

To make this less abstract: I couldn't accept the premise reported on in this Christian Science Monitor story that reducing the number of roads for drivers might cut traffic delays.

It all hinges on something called Braess’s Paradox, which states that adding capacity to a network in which all the moving entities rationally seek the most efficient route can sometimes reduce the network’s overall efficiency.... The price of anarchy drops if you close a few roads, because individual drivers are less able to selfishly optimize their routes. In their analysis, the authors identified six streets in Boston and Cambridge: By closing those streets, they say, the optimal collective travel time would decrease between the two points.

Granted, but we as individuals don't care about the overall efficiency of the system; freedom, from our limited point of view, is being able to use our wits (and alternate routes) to beat the system, or at least believe we are. When roads are closed, even if it helps the overall efficiency, it may appear to us as an arbitrary nuisance thwarting our creativity and improvisational skills. We may think, relative to other drivers, we know more and can get through a busy traffic network more quickly. If the state intervenes and negates the value of that knowledge, we are likely to feel unnecessarily frustrated, thwarted in our personal potential.

The stock market, and the efficient markets hypothesis (which Krugman covers, and is discussed at length in Justin Fox's The Myth of the Rational Market), is somewhat analogous -- individuals participate in the market because they believe they can beat it, even though financial theory (in its most dogmatic form) holds that any advantageous information is already priced in. Imagine if the state stepped in and forced investors to accept that they couldn't beat the market, on the idea that it would be more efficient socially to have a few large institutions allocate a country's collective capital. Would all that knowledge that those individual investors believe that they have be wasted -- or are they all deluded in their belief in that knowledge and would thereby be prevented from harming society by acting on it? And would the theoretical gains in efficiency outweigh the enforced impotence that individuals would experience?

Clinging to our idiosyncrasy (15 July 2009)

Chris Dillow makes a good point about the similarities between Marxian and neoclassical assumptions about human behavior:

The basic premise of neoclassical economics, that people respond to incentives, echoes the Marxian notion that individuals are bearers of social relations. Both stress that an individual’s behaviour arises from the position he finds himself in - which influences the costs and benefits he perceives - more than from his character. Of course, both views can be pushed too far. But both remind us not to see human action as rising from mere idiosyncratic disposition.

Of course, the idea that our own action stems from our own uniquely idiosyncratic disposition is something we probably all have a tendency to assume. That seems to me the core of capitalist ideology, that we as individuals are essentially responsible for not only our actions but also for the surrounding circumstances that determine the possible range of actions. Dillow points out how this converges with behavior economists' findings:

there’s an important convergence between Marx and behavioural economics. Marxists believe that false consciousness can bamboozle workers into accepting capitalism. If we want to know how this happens, the cognitive biases and heuristics programme helps us. For example, the fundamental attribution error leads us over-estimate the extent to which the poor are to blame for their poverty, and to under-rate the importance of environmental or societal forces. The availability heuristic leads workers to blame immigrants for unemployment rather than less obvious forces. The just world phenomenon and system justification cause us to believe that capitalism must be fair. The status quo bias causes us to accept existing evils rather than risk new ones. And adaptive preferences cause the poor to resign themselves to their fates and want less, with the result that capitalist democracy sustains inequality.

If one's condition can be read as a statement of what is deserved, our empathetic instincts can be tempered if not squelched altogether. With empathy out of the way, the exchange process becomes more unfettered, and can grow to become the basis for more and more of social life, governing more of our interpersonal interactions. Our emotional responsiveness starts to register in our consciousness as irrational miscalculations of our interest, as maladaptive tendencies. In the name of preserving our individuality -- of hewing to the assumption that our idiosyncratic disposition determines our behavior -- we end up even more alienated, with a far more mechanistic view of our own behavior. The stubborn belief in our own special uniqueness is harnessed to a view of human behavior that allows for virtually no spontaneity whatsoever, that presumes our best self always acts out of the calculation of costs and benefits and explains away sacrifice or altruism as covertly self-serving.

Anyway, I know I have a tendency to cling to my sense of my own idiosyncrasy and take a peculiar pleasure in what I think it might prove about me, about my nonconformity, about my ability to resist manipulation, about my ability to transcend social norms and expectations and realize some higher originality. I'm into obscure music; I have a taste for difficult books; I don't watch popular TV shows. I won't go see the Transformers sequel. But I think that my presumptions of uniqueness are probably what guarantee my overall insignificance -- it keeps me motivated to remain deliberately apart, internally praising myself to the extent that other people don't get me, thereby guaranteeing that I will only be happy with myself to the degree that I influence no one. I wonder if this attitude truly is personal idiosyncrasy or the product of late capitalist ideology. Isolating individuals in their presumed specialness is an effective way of rendering them vulnerable to marketing appeals, to consumerism generally.

Why did people think house prices can't fall? (7 July 2009)

When I was looking to find a new apartment, I was in the office of a parasitic bloodsucker -- whoops, I'm sorry, a real estate broker -- in my neighborhood (brokers have locked down the apartment market in my corner of New York pretty tightly, largely because of immigrant and absentee landlords). This particular broker also showed houses for sale, and his office was decorated with a cartoon that depicted a broken-down old couple hobbling along in the street, above a caption that mocked them: "They are waiting for home prices to drop." I thought of that cartoon while reading this Mark Thoma post about what caused the housing bubble, which takes as its jumping-off point this post at the NYT economics blog by Ed Glaeser. Glaeser admits that "The housing price volatility of the last six years has been so extreme that it confounds conventional economic explanations," and agrees with housing economists Case and Shiller that "housing bubbles were fueled by irrationally optimistic beliefs about future housing price appreciation." He uses the Las Vegas bubble as his example:

I once thought that the Las Vegas housing market was so straightforward (vast amounts of land, no significant regulation) that no one could be deluded into thinking that prices could long diverge from construction costs, but I was wrong. I underestimated the human capacity to think rosy thoughts about the value of a house.

My father lived in Las Vegas in the mid 1990s, and when I would visit, I would be astounded by the exponential growth along the I-215 corridor. It seemed utterly senseless -- shopping centers that hadn't existed on my previous visit would be filled to capacity with virtually full parking lots (I'm thinking of the Eastern Ave. exit circa 1998), while the centers a few exits back toward downtown would be nearly empty. The fetishization of the new shopping centers was indicative of the insanity that was free-floating through the region then. The new housing developments would already be started before the road grid even reached them. Planners had a difficult time coming up with all the new names for all the new cul-de-sacs being created. And the new homes were presumably being purchased by the new arrivals to the area, who by and large were construction workers in the home building business. It didn't take a genius to figure out that pattern was unsustainable.

The key question, that Glaeser declines to try to answer here, is why did people think such "rosy thoughts"? Thoma quotes Shiller, who argues that housing bubbles have happened because "people believed that both land and building materials were becoming relatively more scarce over time," which is plainly false. Still, how come people in Las Vegas and Henderson believed houses would continue to go up, against the obvious evidence in front of their face of the utter lack of land and materials scarcity? Thoma suggests people assume a long-term premium on their "investment" in a home, because they make a semi-conscious connection between buy-and-hold investing in the stock market (presumed to bring surefire 8 percent returns over the long haul) and home ownership. But buying a home is a consumption purchase, not an investment.

The question then is why people were so quick to view housing as a great investment and all those renters out there as "suckers" who were "just throwing their money away." The answer, I think, is straight-up propaganda. Consider how often the NAR economist is cited in the press as an objective expert on the meaning of housing data. Consider how much blather we hear from politicians about the ownership society and the sanctity of home owning. Think of the tax breaks and subsidies that homeowners get and seem to believe they deserve. Think of the whole parasitical class of real estate agents and the relentless advertising on their behalf and on the behalf of the mortgage lenders and banks.

In the U.S. an ideology about homeownership has become entrenched that seems guaranteed to produce irrational (by economists' standards) views about home owning. So it's hardly surprising that this ideology yielded a housing market full of deluded buyers and sellers who had little understanding of the true value of what they were bargaining over. Sadly, very little has been done, even now, to dismantle this erroneous view of housing. Perhaps because of the vested interests -- I doubt my neighborhood broker has taken down his cartoon.

Blaming everyone and no one (9 June 2009)

Feeling a bit sorry for the bankers, historian Harold James in this Project Syndicate op-ed attempts to shift some of the blame for the economic crisis on, of all things, postmodernism.

Other academic disciplines have looked rather smugly at the public humiliation of their colleagues in economics. The non-mathematical appear to have their revenge, as the perils of over-reliance on complex symbolic notation and arcane formulae are relentlessly exposed.
In fact, developments or fashions in other academic disciplines and also in the general culture contributed at least as much to a willingness to engage in absurd risks and to provide and accept valuations of complex and inherently unfathomable securities. The general cultural developments are sometimes termed post-modernism, which involves the replacement of reason by intuition, feeling, and allusion.

Sure. That seems fair enough. It is easy to picture the trading floor at Goldman Sachs littered with Lyotard, easy to imagine risk management falling through the cracks because all the continental philosophy bankers customarily read persuaded them they should believe in nothing and that so-called "risk" was just a signifier with no fixed transcendental relevance. When they were through decentering their subjectivity, the minions at credit-rating agencies went ahead and gave structured securities whatever the hell rating was requested; after all, any evaluative criteria will be compromised by the tautological assumptions that are always already tacitly accepted.

As far as I can tell, James is not joking. He wants readers to believe that postmodernism is responsible for a climate of irresponsibility among bankers on Wall Street -- and not something more immediately salient and obvious like, say, greed. This is an actual, undoctored quote from James's essay: "At the era's height, major financial players built vastly expensive collections of highly abstract modern art. A post-modern neglect or disdain for reality generated the sense that the whole world was constantly shifting and malleable, and might be as transient and meaningless as stock quotations." It seems a pretty postmodern way to argue, actually; just present a few incoherent juxtapositions of vaguely associated notions and demand that readers tease out and decide what it might mean (or better yet, have them settle on undecidability itself). James argues that financial innovation, political cowardice, and postmodernism all worked together so that "every sort of value - including financial values - came to be seen as arbitrary and fundamentally absurd." But just because philosophers may have been exploring the possibility that there was no "there" there with regard to Western values doesn't mean they advocated the idea that fictitious values should be actively created to artificially inflate asset values, or that derivatives whose notional value far exceeded the assets from which they were derived should be written. Just because both critical theory and quantitative finance are hard for laypeople to comprehend does not make them morally equivalent. And the fact that a postmodern analysis could be used to elucidate the techniques of finance (the building something out nothing aspects of it anyway) revealed how awry finance had become; it didn't supply a justification for it. Greed did that. The spirit motivating philosophers ( a concern for ways in which ideology distorts what passes for truth) is fundamentally different than the one that spurred financial innovators; to elide them is to discredit the whole notion of responsibility, which seems to be James's aim. In his final paragraph, he laments the possibility that society might regress to a "medieval" witch-hunt mentality by playing blame games. Better by far to suggest that everyone is responsible in some small way and preserve the existing social order.

A non-risible critique about the role of ideas in the crisis from Neil Sinhababu can be found here, and it demonstrates how a postmodernish style of inquiry can actually help unmask problems rather than contribute to them:

economists have managed to convince people of indefensible views on normative topics such as what it's rational for individuals to do, what's an appropriate object of moral criticism, and what would be a good distribution of resources. I don't know how many of them would, when pressed, defend these sorts of claims -- their discipline isn't supposed to be one that makes normative claims.
Saying you're not making any normative claims is, of course, a good way of getting people to accept the normative claims you make. A lot more in this sort of thing depends on the sorts of emotions that get communicated as people talk about stuff and the loaded words you use. Pareto optimality, for example, has 'optimality' built into it, and who doesn't like optimality? Of course, as Rawls tells us, a distribution where one person owns all tradable goods and services while nobody else has anything is Pareto optimal.
In any event, this is the kind of thing we ought to be concerned about, both as citizens and as philosophers. While ideas from other parts of academia can't get out to the public, economists are convincing people of ridiculous theses in moral and political philosophy that their research doesn't even support. (It probably helps that widespread social acceptance of these theses is favorable to the interests of very wealthy people.)

Leave deciders alone (7 June 2009)

Economics blogger Matthew Rognile pinpoints what is bothersome about Dan Ariely's Predictably Irrational and the extrapolations he makes from the slew of ingenious studies he details in the book.

The more general philosophical issue here is the tradeoff between internal and external validity. If you're concerned about internal validity, Ariely's work is great. Small sample size notwithstanding, I have very little doubt that if I set up an identical experiment measuring the effects of bonuses on laboratory tasks in India, my results will be similar to Ariely's, and that if prodding lab subjects to perform contrived tasks ever becomes a critical policy goal, this knowledge will prove predictive and invaluable. In this limited sense, I have far more confidence in randomized economic experiments than I do in, say, the correctness of a particular regression specification.

Unfortunately, we are also concerned about external validity—whether our results extend to a more realistic setting—and here we are forced to indulge massive leaps in analysis.

This seems such an obvious problem -- that people act differently in lab studies than in the course of their ordinary lives -- but it also seems that the sorts of clever and pleasing conclusions Ariely typically draws are hard to resist and function well as story or conversation hooks. I'm wary of elevating the idea of revealed preference to the end-all and be-all of studies of decisionmaking; there are too many variables in play to read to much into a fait accopmli decision. But isolating the decision-making process artificially and attempting to control the variables would seem to yield equally limited results. I have the same skepticism about the neurological-scan based studies that Jonah Lehrer details in How We Decide.

Maybe I'm just creeped out more and more by the attempt to reduce decisionmaking to an object of exact science, so that human responses can be better predicted, and inevitably, better programmed in advance.

Undoing ideology with policy (24 April 2009)

When an industry gains disproportionate social power, as the finance and real-estate industries had in the pat decade, there must be an associated ideology that legitimates that ascendancy. It surprises me that this notion sometimes seems a shocking discovery to those who cover business, as though it never occurred to them that they were dealing in ideology in their coverage of CEOs and on earnings calls and in shareholders letters and the rest of the official communications from corporate America, not to mention the efforts of their lobbying arms to plant their preferred soundbites into the speeches of politicians. Of course, those in the business press often function as ideologists themselves, suffering from the "cognitive regulatory capture" that Willem Buiter claimed happened to the Federal Reserve under Greenspan. Business journalists often seem more enamored than critical of the titans of industry who deign to speak to them, and they typically accept in its entirely ethics derived from a faith in deregulated markets. Workers are depersonalized into "labor" or "wages" -- an unfortunate cost of doing business and an obstacle that the heroes of capitalism must overcome.

They are used to economists playing by the same rules, so they seem a bit flummoxed when someone like MIT economist Simon Johnson (interviewed here by Salon) rises to prominence by declaring the obvious point that the finance industry exercised political power for its own good and not the good of the country. But that is how the system plainly works; I don't think one is being unduly cynical to recognize that in the US, money is openly and obviously used to gain political power (via campaign contributions and marketing efforts), which is then used to further an industry's agenda. The "good of the country" is an afterthought, a premise cooked up in the ex post facto spin.

In the interview Johnson suggests that economic realities will be sufficient to dispel the effects of that spin. In response to whether greater regulation and a mandated bank breakup would end the oligarchy, he replies:

The breaking of the belief system is an outcome of the crash. The belief system is kind of a perpetuating mechanism but when the economic realities change, people stop believing the same things. I think one advantage of a society like the United States, a democracy, is that we can change our minds pretty quickly on some things, even some firmly held beliefs. I am not saying throw capitalism out with the bath water. I'm saying big finance has just become too powerful and it needs to be reined in. There are some relatively straightforward technocratic steps that can be taken that will move us in the right direction. But I'm not a starry-eyed idealist -- I don't think this is going to change massively overnight.

Throughout the interview he is at great pains to avoid being marginalized as a "radical," to shift the sense of the center toward his position through a kind of rhetorical calm. That's certainly a prudent course, though the country may be more in the mood for scapegoats and show trials than incremental change. The banking business would like us to believe that it was just a few bad apples who can be tossed out while keeping the ideology in tact, whereas the rabble-rousing, tea-bagging set seems to want vengeance. The danger is that the fervor for scapegoats could prove a distraction, leaving the underlying system unaffected. In this you can see how the right-wing may hope to steer the populist uproar.

Addendum: Matt Yglesias makes a related point here, where he wonders why Americans seem to think CEOs have more credible opinions on policy than other citizens.

Zack McMillan of the Memphis Commercial Appeal recounts for us a great moment in ideology in America, as FedEx CEO Fred Smith deigns to speak to the Memphis City Council. Note that the very premise of the event, that a wealthy CEO should be considered a source of public policy insights, is, though very common in today’s America, a highly ideological notion. Relative to a person selected at random, Smith is no more likely to have substantive insights into the issues facing the Memphis City Council, but much more likely to be deliberately lying in order to personally enrich himself.

But in the United States, when a wealthy and powerful person wants to opine on public affairs, this is viewed not with suspicion (”what’s this rich guy trying to pull?”) but with delight. The mere fact that someone is rich is held to demonstrate that he’s entitled to massively disproportionate political influence even beyond what he’s able to directly purchase.

Needless to say, Smith's ideas were entirely self-serving.

Consumer confidence and optimism (13 Nov 2008)

This is the last paragraph from David Leonhardt's article yesterday about consumer confidence (I would have made it the lead):

It would be silly to insist that a few terrible months meant the end of American consumer culture. But it would be equally silly to assume that culture could never change. It might be changing right now.

Data and anecdotes support the notion that consumers are currently spending less and mean to cut back even more -- Best Buy's CEO declared that "rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." The FT's Lex column today wondered whether "conspicuous aceticism" might become the "new ostentation," producing "structually lower levels of demand across all areas of discretionary spending." I'm still pessimistic, though, that this amounts to a rupture with the culture that is all any of us born after World War II have known.

Nevertheless, I don't think that means Americans are incurably optimistic. One of the strangest things about the business press, and I'm still not used to it, is how optimistic is usually a complimentary term, a boon and a benefit. Where I come from intellectually, it tends to mean you are a useful idiot or a rube. That seems especially true when applied to consumers.

Andrew Kohut, president of the Pew Research Center, noted that his recent polls showed a sharp rise in the number of people planning to cut back on spending — but also a clear increase in the number who expected the economy to be in better shape next year. “What the American economy has going for it is the innate optimism of the public,” he said. “Americans get optimistic at the drop of a hat.”

We don't need a reason to expect the best; we're just dog-like in that way. Our masters are going to put something good in the bowl; we just know it.

Also, is shopping rather than saving really an expression of optimism? "I am feeling very positive. I'm going to go buy a TV set." Seems like it is a preference for living for today instead of having faith or concern with tomorrow. I guess the idea is that confidence in our future earning capabilities makes us more likely to spend now, but I always (wrongly) interpret consumer confidence as meaning "confidence in the consumer way of life." When it is high, it suggests to me a vote of no confidence in the possibility of meaningful work, of finding purpose, confidence, hope, etc. in making and doing rather than spending and getting. It's as though consumers are surrendering by being confident in the pleasures of consuming, and that when consumer confidence falls, people are indicating that they suddenly enjoy consumption less. Falling consumer confidence seems like it should mean rising personal confidence. But that of course isn't the case. They just aren't confident enough about having a healthy flow of cash to support all the spending they wish to perform.

Still, the term consumer confidence seems to relegate people to their passive roles, whereas these same people also are part of the production process. But we are accustomed to thinking that the only role we take pride and pleasure in is our role as consumer; it's through that process that we make ourselves with as much autonomy as we like -- not the working world. What's hard to take is how often disappointment in American consumers is expressed, for letting the economy down, for their thinking of other ways to make it through their days without ceaseless spending on consumer goods. How dare they? Have they lost their minds? Why can't they be more optimistic and compliant?

Greenspan's principal-agent problem (24 Oct 2008)

Former Fed chairman Alan Greenspan testified in Congress yesterday on his contributions to the current financial crisis. To the surprise of virtually everyone, he admitted fault. House Oversight Committee chairman Henry Waxman basically told him that he was making decisions ideologically and that his ideology was inadequate; Greenspan admitted it was true.

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said. Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.” Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said. “Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

This is flabbergasting, most of all Greenspan's claim that he believed that the "self-interest of organizations" would protect shareholders. It's almost as if he'd never heard of the principal-agent problem. Bankers make big bonuses when they take big risks and increase revenue; those risks are in the interests of their bonuses, not in the shareholders' long-term interests. And what's more, shareholders had even less idea of what was happening on trading floors with respect to derivatives and securitizations and the whole alphabet soup of financial arcana. Management was making bets with shareholder's equity. Incentives were misaligned. It was only a matter of time before the whole system melted down. But this isn't the failure of the "free market," at least how your average free-market ideologue would understand it. Dean Baker explains how Greenspan's testimony makes him a faux Randian. Ayn Rand would say be as greedy as possible and let shareholders look out for themselves, if they can. And the fee market ideologue would say those who fail, fail; they don't get bailed out. But that is not what was happening on Wall Street, which is not the "free market". It's not free because the government and taxpayers were tacitly paying for it all along:

The banks were able to get access to vast amounts of capital because everyone had faith in the "too big to fail" doctrine. In other words, all the people who lent Bear Stearns, Lehman, AIG, Goldman and the rest money felt secure because they thought the government would come to the rescue at the end of the day if the hotshots messed up big time.
With the exception of Lehman Brothers, these folks were right. The Wall Street hotshots were gambling not only with their shareholders' money, but they could also count on the security blanket of a government bailout if they really got into trouble. In other words, they were gambling with the taxpayers' money also.
This is important because the Wall Street hotshots didn't have and don't want a free market. They want to be able to take big risks with other people's money, both their shareholders and the taxpayers.

The point, as always, is that talk of "free markets" is a disguise for trying to slant the markets in your favor. The same goes for "spreading the wealth," as Will Wilkinosn explains: "democratic politics just is a wealth-spreading exercise, and there’s no avoiding it. If you’re gonna pick sides, you’re just picking your favorite redistributive poison."

Judging by what has happened to income distributions over the past eight years, Republicans want to spread it up, concentrate it in the hands of the established and already well-connected. Democrats -- I hope -- intend to spread it around.

Hyperopia hype (16 July 2008)

A few days ago Will Wilkinson linked to this brief piece in the Harvard Business Review by professors Anat Keinan and Ran Kivetz, summarizing their research into consumer regret.

Our research shows that forgoing indulgences today can feed strong regrets later, and that near-term regrets about self-indulgence dramatically fade with time. These responses are so strong that we were able to influence people’s buying behavior simply by asking them to anticipate their long-term regrets.

The gist of this is that they are conducting research to support the contention that people are not indulgent enough in their consumer behavior, and they need to be persuaded to indulge themselves more. All work and no play, and all that.

People who unduly resist self-indulgence suffer from an excessive farsightedness, or hyperopia—the reverse of typical self-control problems. Rather than yielding to temptation, they focus on acquiring necessities and acting responsibly and they see indulgence as wasteful, irresponsible, and even immoral. As a result, these consumers avoid precisely the products and experiences that they most enjoy. Their hyperopia can inhibit consumption in ways that are bad both for their own well-being and for marketers’ bottom lines. We don’t advocate trying to motivate consumers to make ill-considered purchases, of course, but marketers can help customers make appropriately indulgent choices that they’ll appreciate over the long term.

The "of course, but" in that last sentence seems very telling. These are marketing professors after all. It seems to me that they are trying to motivate consumers to rethink their resistance to consumerism and are trying to encourage marketers to remind them of a future self that will nostalgically look back on that consumerism as a life well lived.

Our findings suggest that marketers of luxury products and leisure services could benefit from prompting consumers to predict their feelings in the future if they forgo the indulgent choice. For instance, a travel company might ask customers to consider how they’ll feel about having passed up a family vacation package once the nest is empty.
Consumers, too, can benefit from such prompts. In the words of the late Massachusetts senator Paul Tsongas, “Nobody on his deathbed ever said, ‘I wish I had spent more time at the office.’”

This rationale is often used in defense of advertising -- it helps consumers find their wants, and get more out of the concept of desiring itself by stimulating it. It unleashes our impulsivity, which is freedom in action, right? I'm sure all those people who thought long-term about the houses they were buying in 2006 feel great about their purchases now and are so pleased that they didn't stop themselves from indulging.

If desiring things is in itself pleasurable -- and it clearly is -- then advertising does us the great service of stoking it. But desire is not an unalloyed good; it's a cognitively draining state of contradiction -- mixed in with the excitement and fantasies of possession and the motivation to achieve that it brings, it also yields envy and disappointment and dissatisfaction at the same time. The point of criticizing consumerist desire is not that it's inherently bad or unpleasurable, but that it restricts us to certain definitions of what is pleasurable, and casts our dreams and regrets (as the researchers discovered) into a specific mold. Clearly we should take more action in the present moment, but that need not take the form of making purchases, as this marketing research seems to imply. Seems like similar studies could be contrived to suit this unconsumption motto: Work less, buy less, do more.

A Minsky moment (8 July 2008)

That we measure consumer confidence and sentiment and report the figures with great portentousness has always troubled me. It's not just the unsettling implication that the intention to consume more is inherently good, and a positive sign for all of us -- though that has certainly contributed to the wasteful, throwaway economy we currently enjoy, in which sensibly reusing goods registers as damage to the economic picture. But is there really something all that relevant in how people feel about spending their money? Shouldn't we stick to the data about what they are actually doing? Surveys seem an especially dubious way to get at the truth, given that people routinely exaggerate or misrepresent their behavior when they are put in the spotlight and are taken seriously for once. But the scrutiny to which economists and policymakers subject these figures is enough to lead one to suspect that the economy runs on nothing but optimism -- that what is produced and sold is in a way secondary or even beside the point. What's scary is that this might be true.

Yesterday in the FT Wolfgang Münchau mentioned (and dismissed) the possibility that the world economy has reached what is known as a Minsky moment.

Hyman Minsky, the 20th century US economist, formulated the long forgotten, and recently rediscovered, financial instability hypothesis, according to which capitalist economies, after a long period of prosperity, end up in a vicious circle of financial speculation. The Minsky moment is the point when what economists call this “Ponzi game” collapses.

The WSJ's Justin Lahart offered this more specific explanation last year:

At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote. When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash [that can force central bankers to lend a hand]. At that point, the Minsky moment has arrived.

In other words, risky assets are sold along a chain of investors, with each investor confident they will be able to sell the asset along to a bigger sucker and take profits in the process. Eventually, though, investors run out of suckers, the accumulated debt engenders fire sales and spiraling depreciation, and central banks are forced to become suckers of last resort. Vox EU's compendium of analyses of the subprime crisis offers this description the logic leading to a Minsky moment: it "starts with unrealistically high asset prices and buildups of leverage based on momentum effects, myopic expectations and widespread overleveraging of consumers and firms." Myopic expectations seems a good way to describe what surveys about consumer sentiment and confidence are likely to record, no matter how far in the future the time period is that the people surveyed are supposed to prognosticate about. It seems possible that such surveys have the effect of fostering myopic expectations, generating a seemingly statistical and sound basis for such optimistic feelings (that is, while the Minsky moment is building). The consumer opinion measures are trailing indicators that often are passed off as leading indicators, so they incubate optimism even when people are starting to wonder where the next sucker is. Such surveys are not passive gauges but are actively constructing the sort of sentiment it seeks to measure by the momentum of its own periodicity and the assumptions built into the questions, that consumerism is rational and reflective rather than impulsive with motives poorly understood even by those caught up in them.

What precipitates a Minsky moment is some vague awareness that things can't go on forever, but it's not clear what triggers it. John Cassidy notes in this New Yorker essay about Minsky moments that "the onset of panic is usually heralded by a dramatic effect," but that is to say it's only apparent after the fact. The inevitable end seems a problem for game theory: Tyler Cowen linked yesterday to an excerpt from Richard Tuck's new book, Free Riding, which aims to make the case that individual action is meaningful even when the difference it makes seems indiscernible. In the excerpt, he looks at the prisoner's dilemma and notes that cooperation among participants can develop as long as no one believes the end of the game is near:

There is now a large literature examining the possible strategies which can arise in repeated games of this sort. An obvious one, which is the subject of a whole book by Robert Axelrod, is ‘tit for tat’: if you defect from our common enterprise and make me suffer, next time round I will defect and make you suffer, and so on until we end up co-operating. This is also in effect what has been suggested by modern economists as the correct strategy for firms under oligopolistic conditions. Of course, if we know the games are going to end at a determinate point, tit for tat ceases to make sense as a strategy as the last round approaches, though precisely where it ceases has been a matter for debate. Strictly speaking, prior knowledge of where the sequence of games will end ought to dictate non-co-operation in every round.

If the consumer-driven economy is one big prisoner's dilemma -- one in which it makes sense to extend credit only if you suspend what seems to be your dominant strategy -- then it's imperative that the end of the game never seems near and that continuing the game almost becomes more important than winning it. Only the players are playing to win, not merely to play -- though merely playing may be analogous with the inherent benefits of living in a prosperous society. (In other words, there aren't consumer-confidence surveys in Zimbabwe.) But the cooperation in this case becomes a kind of momentum-driven speculative mania, with each tit-for-tat raising the overall stakes and leaving a residual of mounting risk. Eventually this risk appears to outweigh the gains of cooperation -- even the circumscribed ones presumed by accepting implicit cooperation as a strategy. "At some point," Tuck writes, "the players will decide that the end is close enough to abandon this strategy and move to full non-cooperation." This is the point at which they no longer fear reprisals from the other participants, where they see trust as a scam, possibly because they see their own trustworthiness as dubious.

Consider this story from today's FT, which begins:

Credit rating agencies failed to properly manage conflicts of interest in assigning top ratings to bonds backed by subprime mortgages and other assets, the Securities and Exchange Commission has concluded.

And this story, in which Gillian Tett notes, "Few bankers want to hear dissent about the models when they are enjoying a profit bonanza. Greed is what drives much of the modern financial world -- combined with fear of getting sacked." Greed and fear, however, seem to be motives pulling the economy in opposite directions; their tension supplies the dialectic that may have the economy careening from bubble to bubble, from Minsky moment to Minsky moment. Or it might allow, in Münchau's phrase, for "Minsky’s moment to become an eternity."