Digressions&Impressions

Chicago Economics, Simons, American Irresponsibility, and World System

If multiple collectivism or large-scale nationalisms promise everything bad, no mongrel system is likely to give us much peace. Peace is the limiting case at both extremes. Rejecting more government and more power concentration as the cure for our ills, we must move far toward the other extreme to find security. However, an extreme application of traditional liber­alism, if hard to attain, is not politically impossible. It involves the kind of order in which the democracies can most easily assume their places. It affords the only kind of world system congenial to democracies, and the only kind they can hope continuously to operate and to control. While its establishment does not permit gradualist measures or diffident procedure, it requires initially the close adherence of only a few democratic nations. A democratic, free-trade block comprising the United States, Great Britain and the Dominions, the Low Countries, Norway, and Sweden would represent a magnificent and ade­quate beginning. Adhering to the rule of equal or nondis­criminatory treatment and inviting the widest national par­ticipation, it need not and should not induce other nations to form rival and hostile blocks. Moreover, other nations need only be asked, in return for free access, to maintain equal ac­cess and to avoid gross discrimination. Along these lines may be established an economic and political integration of nations which, resting on dispersion of power and responsibility, is indefinitely extensible and capable of enlisting all nations, either as full partners or as increasingly responsible par­ticipants.
The essence of this postwar program, in its crucial economic aspect, is free trade among nations. On the political side, inci­dentally, a major purpose should be that of preserving and protecting small autonomous nations. The Low Countries and Norway and Sweden rather than great national states are the ideal elements or nucleus for world organization. It is our great good fortune that such nations will now demand and attain an important role in postwar reconstruction. In them democratic institutions have their deepest roots and free-trade tradition remains relatively uncorrupted.

The important specific features of a liberal world program are fairly obvious and familiar. Four requirements may be noted as fundamental and minimal: 

1. Dismantling of tariff barriers by all the democracies, and elimination of quota restrictions, import preferences or discrimination, export subsidies, and bilateral or barter trading.
2. Organization for co-operative or united action in matters of monetary and fiscal policy.
3. Preparation and execution, by parallel and united national measures, of effective antimonopoly policies, involving systematic industrial decon­centration, dissolution of giant corporations and cartels, and effective prohibition of private monopolistic restraint of enterprise and trade.
4. Establishment of inclusive, supranational government, limited in its sphere of action but strong within that sphere, and designed specially and primarily (a) to prevent military aggression or resort to force in connec­tion with international disputes and (b) to promote parallel action and to implement united action in the three areas of policy listed above.----Henry C. Simons (1943) "Postwar Economic Policy" originally published in the American Economic Review, Supplement reprinted in Economic Policy for a free Society (Chicago 1948), pp. 242-244.

Ever since Adam Smith proposed (recall) an Atlantic parliament unite and equalize the United Kingdom, Ireland, and the American colonies, and to prevent war with the colonies, and, I suspect inspired by Smith, Kant (recall) proposed regional federations of free trading, liberal democracies (he called them republican), a strain of liberal thought (recall also Mazzini) has embraced interstate federation as either a means to peace, or presupposing peace.* After the failure of the Wilsonian League of Nations, I had assumed that liberal hopes in the 1930s had retreated toward plans for (partial) European federations (recall this post on Mises; this one on Hayek; and, looking ahead in time, Buchanan). There were ambitious, cosmopolitan plans for world federations in the 1930s and 40s [proposed, for example by Lionel Curtis and Clarence Streit--then both quite famous], but these tend to assume Angl0-Saxon exceptionalism and superiority.**   

These days "world system" connotes neo-Marxist ideas associated with (the recently deceased) Immanuel Wallerstein underdevelopment, and exploitation of the periphery by the so-called core. In the 1930s and early 1940s, the term was not common. And while there are Marxist usages of the phrase in the period, "world system," also often involves (non-Marxist) discussion of trade economics (see here for a very interesting and pertinent one by K.W. Rotschildt), or balance of power politics, or the failure of WWI settlement. 

Simons, who helps (recall for the complexity of this claim) originate the Chicago school of economics, was clearly not immune from reflections on world system. (The term is not indexed, although it's used again in the chapter.) The particular proposal is notable because it is explicitly designed to preserve and protect "small autonomous nations." This fits with Simons' broader understanding of liberalism, which is oriented toward devolution to the lowest political unit (preferably the provincial or local  units (see "A Political Credo" in Economic Policy for a free Society, pp. 12-13)). Unlike some other liberals of the day, there seems to be no racial motive for this (but see below).

Simons does not argue from a right or fact of national self-determination. Rather, his motive is political; he thinks the moral consensus required to facilitate collective action is more like at the smaller (more homogeneous) political level (p. 12). He also conjoins to this commitment (a) historical and normative claim(s): "

Democratic process is an invention of local bodies. It has been extended upward and may be extended gradually toward world organization. In any case, modern democracy rests upon free, responsible local government and will never be stronger than this foundation. Free, responsible local bodies correspond, in the political system, to free, responsible individuals or families and voluntary associations in the good society. A people wisely conserving its liberties will seek ever to enlarge the range and degree of local freedom and responsibility. In so doing, it may sacrifice possible proximate achievements. (13)

Simons thinks about local democracy as a kind of Lockean voluntary association of individuals or families (he routinely freely moves back and forth between family and individual without commenting on the waffle). This means there is a right to exit. But he does not emphasize this.+ He is explicit that where there is a trade-off between local democracy and, say, (supra)-national efficiency, the collective action should strengthen local democracy. Not unlike other liberals of the 1930s, Simons is quite worried about the capture of the national and supra-national institutions by economic, special interests (he calls them "articulate minorities), he is firmly committed to democracy. In this he sounds a bit like Lippmann, except (recall) that Lippmann is more enamored of large national government with its system of checks and balances (and here).

Simons is self-consciously foreseeing that American might will "determine" (258) the post-war "world system." The problem he faces squarely is that "America, save in gravest crisis, is irresponsible." (259) For, he thinks that the US was very much responsible for the economic and political collapse of the 1930s. Now, like other neo-liberals of the day, he hopes that supranational institutions will help constrain national practices (he offers anti-trust and patent law as examples). But he does not rely on this.

Rather, he wants the US and the UK to federate with the Low Countries and Norway and Sweden in particular because "democratic institutions have their deepest roots and free-trade tradition remains relatively uncorrupted." That is to say, he hopes that in virtue of collaborating with the smaller states, the US and UK will become better players on 'team democracy.' So, somewhat unusually, and not together plausibly, Simons hopes that economic and political exchange will allow the weaker and smaller states to moralize the more powerful ones. It is notable that unlike Hayek's celebration of British common law, Simons does not flatter his audience here. 

I close with two observations. First, Simons  is ignoring that Holland and Belgium ran rather large colonial empires in the 1930s. Interestingly enough, if we look again at the list of countries included in his democratic free trade block, we note that "Great Britain and the Dominions,"(in 1943) de facto includes, "Canada, Australia, New Zealand, Newfoundland, South Africa, and the Irish Free State," but not other (less Anglo-Saxon) parts of the British empire. So, while Simons' argument is different from the ones articulated by Curtis and Streit, it is not wholly dissimilar in outcome. 

Second, Chicago did not create the post-WWII settlement. But if we look at Bretton Woods, then we may say that its failures and demise in the early 1970s are, in large part, due to the fact of allowing the United States with unique ability and flexibility to wage war and to undermine common monetary and fiscal policy. Here Simons seems prescient. With the United States returning to illiberal policies, we can expect the world system to unravel; collapse may come suddenly. 

 

on Glory Liu on Milton Friedman (and George Stigler) and the Invisible Hand.

Though they were both students of Knight and Viner, Milton Friedman (1912-2006) and George Stigler (1911-1991) had very different views about the nature and purpose of economics — and hence, of Smith — from their predecessors. For Friedman and Stigler, economics’ scientific power came from its ability to predict outcomes based on two central insights, both of which could be found in “The Wealth of Nations.” The first was self-interest, or what Stigler called the “crown jewel” of “The Wealth of Nations.” According to Stigler, Smith’s idea of self-interest was so powerful that it was “Newtonian in its universality” and had unlimited explanatory power.

The second was, of course, the invisible hand. According to Friedman, Smith’s master metaphor represented “the way in which voluntary acts of millions of individuals each pursuing his own objectives could be coordinated, without central direction, through a price system.” Taken together, self-interest and the invisible hand represented the core axioms of scientific economics. The political implications were clear. Once individual behavior was reduced to utility-maximizing self-interest, promoting Smith’s invisible hand of the market — and restraining the heavy hand of government — was the ultimate goal. Few economists were as successful as Friedman in spreading this interpretation of Smith’s ideas to the public. In numerous op-eds in major news outlets, speeches and public television (where he sometimes sported an Adam Smith tie), Friedman popularized this interpretation of Smith’s invisible hand for an overtly conservative political agenda.--Glory Liu, "How the Chicago School changed the meaning of Adam Smith’s ‘invisible hand," The Monkey Cage, Washington Post

The quoted passage is by the exciting young scholar, Glory Liu, who published an important scholarly paper on the reception of Adam Smith in the Chicago school (see here). Liu's WP editorial is a nice introduction to the more complicated larger argument. And I agree with her conclusion that "Smith’s relevance has always been political" (although I would add not only political). Her editorial nicely introduces a larger public to the complex intellectual evolution of the Chicago school, drawing an important (and scholarly well grounded) generational contrast between Viner and Knight (who didn't agree about everything important) and two of Chicago's Nobel laureates, Friedman and Stigler (who also didn't agree about everything important). It's a clever idea to use their treatment of Smith to reveal the contrast.* 

Here I want to focus on Liu's treatment of Friedman in her editorial and her piece. For, while Liu is primarily interested in the reception of Smith (and the political ways in which the Chicago schools used him), she does take a stance on Smith's position. I quote the relevant paragraph (from the editorial):

At the same time, political theorists and historians like me have argued that the Scottish moral philosopher didn’t just stand for free markets and that, in fact, [A] Smith’s invisible hand wasn’t a warning about state intervention but state capture. Rather unlike the caricature of Smith who espouses unchecked economic growth, they’ve also argued that [B] Smith was deeply worried about the moral consequences of growing inequality.

The first reference [A] is to a 2018 Aeon piece by another rising scholar, Paul Sagar. The second is [B] to an essay by a leading (more senior) scholar, Dennis Rasmussen writing in the Atlantic in 2016. (That second piece was, in turn, anticipated by Deborah Boucoyannis in her LSE blog, which introduced the findings of her important 2013 paper, and several papers by Lisa Herzog (see, for example here and here).) It's notable how much public attention Smith is getting! As it happens I agree with [B] and so I leave that aside here.  But the story about [A] is more complicated. Let me first quote Sagar before I respond to him and Liu:

Indeed, Smith’s single most famous idea – that of ‘the invisible hand’ as a metaphor for uncoordinated market allocation – was invoked in precisely the context of his blistering attack on the merchant elites. It is certainly true that Smith was skeptical of politicians’ attempts to interfere with, or bypass, basic market processes, in the vain hope of trying to do a better job of allocating resources than was achievable through allowing the market to do its work. But in the passage of The Wealth of Nations where he invoked the idea of the invisible hand, the immediate context was not simply that of state intervention in general, but of state intervention undertaken at the behest of merchant elites who were furthering their own interests at the expense of the public.

So, first, I agree with Sagar and Liu that Smith cared deeply about state capture by mercantile interests. But it is worth noting Milton Friedman also agreed about this. In the very (1977) essay that Liu quotes, Friedman writes:

There is a great misunderstanding about Adam Smith, a serious misconception of his role. Because he is known as the father of laissez-faire, because of his emphasis on the “invisible hand,” and because he explained the virtues of the price system, Smith is ordinarily regarded as if he were a defender of the status quo, a representative of the existing institutions, part of the establishment. He was anything but that. Smith was a revolutionary, one of a small minority who attacked the existing order of things. At the time he wrote in the late eighteenth century, Britain was a mercantilist state, in which the government was exercising almost as great a control over economic affairs as the United States government does now. It was a state of affairs in which there were restrictions on imports and exports, there were remnants of the guild system of the middle ages, and so on down the line. Adam Smith attacked this system. His book was a tract for reform, calling for a revolution in the way in which economic affairs were conducted.--Milton Friedman (1977) "The Invisible Hand"

What Friedman writes here is all correct (except, perhaps, the claim that in 1776 "the government was exercising almost as great a control over economic affairs as the United States government does"in 1977). In fact, as I have noted before (recall here and here) it is a key theme of Chicago economists to worry about state capture. These days regulatory capture is entrenched within the critique of neo Liberalism. But the idea of regulatory capture was developed by the Chicago economist, George Stigler [recall this post, too], and is also strongly associated with the so-called public choice literature associated with the Virginia school of (other Chicago trained economists) Buchanan and Tullock and law economics (see this classic article by Coase). That is to say, the intellectual framework of regulatory capture was developed to help understand and criticize the effects of the New Deal and became influential in the aftermath of understanding the successes and limitations of the Great Society by market-friendly economists.

As it happens, in his 1962 presidential address to the AEA, Stigler credits the idea of state capture to Adam Smith! However, he does so, in part, to complain that Smith fails to "demonstrate" empirically "that the state is normally the captive of "partial interests." (3; Liu does not mention the piece in her more scholarly article.) So, Stigler and Friedman agree with (and anticipate) Liu and Sagar that Smith was interested in and worried about state capture and rent-seeking. 

Second, Sagar and Liu are correct that the invisible hand (in the version presented in the Wealth of Nations) is offered in the context of Smith's criticism of state capture by mercantile interests. I agree with them that Stigler and Friedman tend to ignore this when they write about the invisible hand.

Third, while it is true that Friedman and Stigler both thought that assuming self-interested agents could be predictive,+ I doubt, as Liu suggests (this is not in Sagar), they thought that positing the invisible hand helped them make "predictions." Since this claim is not (defended) in Liu's original essay in Modern Intellectual History, I am inclined to chalk this error up to the difficulties of condensing a major scholarly achievement into a popular presentation.

Fourth, I disagree with Sagar and Liu that in the Wealth of Nations, the invisible hand is itself a warning about state capture. Rather as I argue in my recent book, the phrase 'invisible hand' captures circumstances when (i) an agent produces unintended consequences that (ii) are unknown to him or her; but, (iii) the consequences are, in principle, knowable to the right kind of observer (theoretically informed)** at the time, and (iv) in fact, the agent should have known better. (As an aside, invisible hand processes tend to be short term in Smith and to be contrasted with the more typical unintended consequence explanation/process given by Smith.) In fact, one of the the key underling points is that (mercantile) ideology masquerades as science and, thereby, confuses even those who benefit from the ideology.++

Now, I agree with Liu that Friedman's interpretation of the invisible hand -- Adam Smith was all the rage in 1976-7 due to bicentenary of Wealth of Nations --  as a master metaphor representing the way in which voluntary acts of millions of individuals each pursuing his own objectives could be coordinated, without central direction, through a price system is incorrect. But as an interpretation of Smith, even the passage in which the invisible hand as a phrase occurs, it's not wholly false either: the subsequent passage (the very next paragraph in Wealth of Nations) does claim that government should not direct industry or mercantile agents (as Sagar also notes):

"What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."

This gets me to the final point. Liu notes in her conclusion that, 

What makes the Smith of Milton Friedman and George Stigler so interesting — some people might say problematic — is not that they aligned Smith with a particular political agenda. It’s that they “economized” Smith in a way that obscured if not precluded the relevance of his moral philosophy and political theory. Stigler once famously quipped that “the correct way to read Adam Smith is the correct way to read the forthcoming issues of a professional journal.” In other words, Stigler believed that you had to read Smith as if he were a modern, 20th-century economist, not (as Smith originally was) an 18th-century moral and political thinker. What’s more, the power of Friedman’s version of the invisible hand derived from the seemingly objective scientific authority of its author, the “father of economics,” Adam Smith. It’s clear, however, that impulse to portray economics — even Smith’s version of economics — as an objective science is deeply embedded in the history and politics of the discipline.

Much of this is right. But there are two potentially misleading and connected features to this quote. First, Stigler's famous quip is offered in the context of an extended argument about the purpose of history of economics (it is a passage that long ago caught my eye): "The purpose in seeking to understand the man’s theoretical system is not to be generous or malicious toward him, but to maximize the probability that his work will contribute to scientific progress. Only if the analytical system is well defined and cleansed of irrelevant digression and inessential error may we determine whether it is a worthy addition to the corpus of the science, or at least a line of investigation that ought to be expslored further." (Stigler "Does Economics Have a Useful Past?" 1969: 221) Now, one may think there are other ways to make the past usable to scientific progress or, perhaps, other purposes for the past. (I think that's compatible with Stigler's position here, but this post is too long already.) Stigler's position does not entail that one need to efface the relevance of Smith's moral and political theory. For Stigler thinks that in addition to the corpus of (progressing) economic science, there are two different projects -- which both he and Friedman call 'normative' economics and the 'art' of economics. From the start of his professional career, Stigler takes these other two projects very seriously so much so that he famously, perhaps infamously, contested welfare economics's claim to being an objective science from his earliest publications onward (recall here; here, here, and here).  

And, in fact, Stigler (not Friedman) shared with Smith the idea -- now unfashionable -- that the knowledge that economics produced was knowledge of comparative institutional development and analysis. As Stigler puts it in his AEA address: the "competence" of economists "consists in understanding how an economic system works under alternative institutional frameworks." (2)*** This has many pertinent implications for normative projects associated with political theory, including the possibility and appropriateness to act as an adviser to government. Stigler's immediate example is, of course, Adam Smith, but he criticizes Smith for insufficient evidence for his claims.+++ 

The reason for Stigler's dismissive attitude is not hard to find. Stigler (1971) thinks that "Smith’s attitude toward political behavior was not dissimilar to that of a parent toward a child: the child was often mistaken and sometimes perverse, but normally it would improve in conduct if properly instructed." ("Smith's Travels on the Ship," 273) The problem is not Smith's tone, but rather, according to Stigler, the giving of policy advice "without taking account of the political forces which confine and direct policy. In the absence of knowledge of these political forces, the advice must often be bad and usually be unpersuasive." What this reveals is that according to Stigler, Smith was a normative, political theorist. ("Political science had been a normative literature for 2300 years before Smith wrote and has continued to remain normative to the present day.") It's just that according to Stigler a different kind of policy relevant political theory is required; Stigler thinks that the art associated with turning empirical economics into normative economics involves taking into account the political forces which confine and direct policy. He claims Smith failed to do so, so qua political theorist, Smith is not an exemplar worth taking seriously according to Stigler.*****

On the Crisis of Liberalism (II)

Regular readers know (recall) that I believe the second wave of liberalism+ has ended and that it may not survive the present darkness. (In brief: first long wave: 1776-1914; second wave: 1945-2009. Some readers will say, good riddance, and to you I say, I hope you do better.) The present crisis is much visible in our daily politics (and headlines), shifting public norms, and the rising confidence of regimes and thinkers who, again, openly espouse hierarchical, ethnic, zero-sum, eugenic, and violent solutions to present conflicts.* While there is much urgent, practical work to be done to salvage institutions that may be at the core of a renewal, some reflection away from daily politics is also required. This also requires attention not just because we need polities that make minimal decency possible,** but also because we need (or so I assume today) properly functioning liberal institutions to meet humanity's great challenges -- environmental disaster, genetic engineering, ethnic conflict, -- ahead.  To reflect on our shortcomings is a means of being liberal as well as a path toward its possible renewal. This is the second post (recall) in an open-ended series (see also here, here, and here).

What follows, then is the start of an attempt to display the existential challenges to liberalism that arise from within. I do not offer solutions to these challenges and so invite readers to chime in. In earlier posts, I discussed self-inflicted wounds such as (i) For profit media; and (ii) the financialization of the economy.

Today i focus on (iii) the Embrace of Revealed Preferences/The Rejection of a Philosophy of Life. One striking feature of the second half of the second wave of liberalism is that its most prominent advocates were economists and ('ethics first') political philosophers (or both). Jointly, their prominence conveyed the message that the point of a liberal project is protecting rights in order to make and re-distribute money. Of course, making money is not the end of the story, it is taken to be an instrument for the pursuit of one's private welfare and the embrace of (what a Rawlsian may call) private, nonpublic values and individual life-plans. Liberalism was seen as an important political and economic doctrine, not a philosophy of life.+ This has two important consequences, first, liberals embrace state-neutrality with respect to fundamental values/goods; and, second, we have a tendency to promote the idea that public speech and justification must be articulated in terms of public reason (with respect for fairness, principles of freedom, equality, and justice, etc.). 

By contrast, critics of liberalism appeal to shared, action-guiding projects: the health of the nation, submission to the divine plan, a green future, a post-revolutionary communist/socialist paradise, social harmony, traditional values, etc. Obviously, these projects are often incompatible with each other. And liberals are often tempted to argue from the pluralist reality of conflicting values in societies with advanced division of labor (and so conflicting interests) and a variety of ethnic and religious backgrounds to the prudential idea that state neutrality is required. We may even add that conflicting values are epistemically fruitful in preventing the dogmatic and premature embrace of any ideology.

But this stance generates a tactical and a philosophical challenge.  The tactical challenge is that critics of liberalism are left to articulate profound shared action-guiding projects, while liberals are left to point to statistics of rising GDP. Now, one may argue that the rejection of shared projects is a feature of liberal political ideology not a bug. And one may claim that rising GDP is often a sign of the removal of famines, the reduction of poverty, increased life expectancy, lower crime, etc. So, it's not as if the liberal's pointing to such statistics is morally worthless. But tactically, the liberal is left with uninspiring politic projects, especially in a context where by historical standards modern societies are already fairly wealthy and not very likely to suffer famine or violent crimes. (Yeah, go read your Pinker!)

The philosophical challenge is the articulation of a liberalism worth having that is both a shared, action-guiding project and does not violate core liberal commitments (the harm principle, the avoidance of cruelty, individual autonomy, non-dogmatism, freedom, justice, etc.). For, shared visionary projects are action-guiding (recall this post critical of Jacob Levy). The articulation of such shared projects, means rejecting a relatively recent, second-wave liberal dogma, nicely articulated by Shklar, "liberalism does not have any particular positive doctrines about how people are to conduct their lives or what personal choices they are to make." (Again, I pick Shklar because in many ways she is least like the problematic version of liberalism I am rejecting.) I think this claim is a mistake, even if I grant Shklar and her followers that creating political conditions and institutions in which cruelty is avoided a crucial and difficult enough task as it is.

The first sentence of Adam Smith's The Theory of Moral Sentiments, asserts, as an axiom, that flourishing of others is necessary to us.** He goes on to describe how such flourishing is possible and what objective conditions for it are. In particular, he draws a sharp contrast between what people imagine is worth attaining and what are true means toward flourishing. The liberal enterprise is, thus, from the beginning concerned with articulating shared projects, the institutions that may facilitate them, and an embrace of ideas that imply that people's flourishing is an objective state of affairs.++  

Now, one may worry -- as Shklar evidently did -- that if one asserts that joint flourishing is an objective state of affairs worth promoting that one then may provide "public authorities the unconditional right to impose beliefs and even a vocabulary as they may see fit upon the citizenry." This is a reasonable fear and most of the critics of liberalism who promote a shared project do so to some degree (even if some will abhor an unconditional right). But Shklar and modern liberals ignore, that there is a half-way station between imposing approved beliefs/vocabulary and being neutral.+++  

What matters is that (again echoing Smith) individuals have the security, capabilities, dispositions, and options to make meaningful choices of the sort that will allow them to flourish jointly. Today, in the context of this post, I do not offer a substantive program (which would have to draw on more recent social science and moral psychology). (Such flourishing will probably involve good health, mutual recognition, lack of fear, the opportunity for love, capabilities for meaningful choices, cultural development, etc.)  Rather, all I point out here is that within constraints, the state can promote indirect incentives conducive to joint flourishing and virtue, while generating strong, indirect disincentives that prevent mutual misery while not encroaching on people's individual freedoms.*** What such a liberalism worth having is, is something that, for now, I must leave -- and this is a political invitation, my dear reader -- to your imagination.

 

 

 

On the Crisis of Liberalism (I)

Regular readers know (recall) that I believe the second wave of liberalism+ has ended and that it may not survive the present darkness. (In brief: first long wave: 1776-1914; second wave: 1945-2009. Some readers will say, good riddance, and to you I say, I hope you do better.) The present crisis is much visible in our daily politics (and headlines), shifting public norms, and the rising confidence of regimes and thinkers who, again, openly espouse hierarchical, ethnic, zero-sum, eugenic, and violent solutions to present conflicts.* While there is much urgent, practical work to be done to salvage institutions that may be at the core of a renewal, some reflection away from daily politics is also required. Perhaps, a way forward can be found if we articulate and invite reflection on unresolved short-comings of the liberal tradition today. I think this is urgent not just because we need polities that make minimal decency possible,** but also because we need (or so I assume today) liberal institutions to meet humanity's great challenges -- environmental disaster, genetic engineering, drone warfare -- ahead. 

Before I do so I mention two qualifications: first, even though there is no shortage of criticism, much of it has been calling attention to features not bugs of liberalism: that it is disruptive of tradition, that it embraces markets, that it is cosmopolitan, that it prefers muddling through and compromise over decisive action, that it requires living with uncertainty, and that it effaces any distinction between higher and lower pleasures and goods. The critics who complain about these features can show us what is found unattractive in liberalism, and surely teach us much about the costs of embracing liberalism, but they cannot point the way to a better, revived form of liberalism. 

A second is offered by two kinds of self-described friends of liberalism; some claim ignorant voters are the problems (for a series of posts see here). This is peculiar because liberalism is, in fact, the response to that very same diagnosis--liberalism learned from the failures of direct democracy and elected kingship. Representative democracy (an elected aristocracy), judicial review, separation of powers, and technocratic control over major policy areas are, in fact, the status quo not some distant ideal. Of course, it's possible that voter ignorance is fatal to liberalism, but that's just to say it will end in this crisis.

Others claim that the state needs to do a better job educating its citizens into democratic values.*** This is especially notable in Europe with rising panic over the presence of an Islamic population. That this is a panic is betrayed by the eagerness by which the state is marshaled to undermine once cherished, individual freedoms (of religion, association, asylum, etc.); the panic betrays a complete lack of confidence in the vitality of liberal ideas, that if children are left free to discover their own way in the world they will fail to find a liberal way of life attractive. Instead, conformism to a narrow way of life is promoted even coerced in the curriculum (or as a requirement on full citizenship). What's missed by such false friends is that the liberal experiment consists precisely in the ever-present-possibility that our children will reject our ways, and that in their vital conflicts over ends, they will discover new paths. 

What follows, then is the start of an attempt to display the existential challenges to liberalism that arise from within. I do not offer solutions to these challenges and so invite readers to chime in.

For profit media. Liberals value a free press and commerce. It's not obvious the combination is fruitful when the press is subsumed under a business model that consists in attracting eye balls by way of outrage and in order to outrage. Cycles of outrage undermine even minimal mutual trust (recall) and the possibility of keeping even a stuttering conversation going. Outrage displaces and distorts hope, which is the central emotion of liberalism. As Mill already noticed with admirable frankness, even despair, outrage (because founded in the sense of justice) is an important political weapon against the powerful, but manufactured and facilitated outrage can be a dangerous conformist and oppressive tool when wielded against minorities. There is no reason to assume that competition among media companies with such a profit model will produce good outcomes and every reason to expect it to cheer us into mutual hatred or civil war. (Mill himself did not share in the providential optimism often attributed to him.) I don't know of a good response given well-founded liberal suspicion of state oversight of the press. 

The free press was once sustained by a political economy which was completely upended by the internet (which changed viewing habits and undermined the subsidy of [classified] advertising to the press). But the more fundamental problem is the inability of a set of values (focused on objectivity, reporting news, exposing malfeasance, etc.) to sustain itself (such that the life-styles of the rich and famous passes for shaping public opinion).  And that's because of the following challenge.

Financialization of the economy. When this started the greatest danger of such financialization was already perceived by Hume, Smith, and Kant: it made open-ended warfare possible (because cheap) and it would distribute the costs of war away from those that benefit. In recent decades we have also seen that because of rent-seeking and the intellectual power of financial interests, the financial sector continues to socialize risk for relatively narrow private gain. This means that in many economies in good times the increase in general welfare primarily accrues to those with assets, and in bad times social services and public goods are cut (in order to pay for bail-outs). This state of affairs offends a sense of fair play and almost certainly is a contributing cause in stagnating productivity. When fair play seems naive, people embrace zero-sum frameworks. 

It's clear that existence of central banks, lenders of last resort, facilitates this state of affairs. Liberal alternatives, such as free banking or the Chicago plan (100% reserves on demand deposits), have serious drawbacks. Advocates of crypto-currencies have not yet offered a truly workable alternative that will address the problems mentioned here. 

Ideally, there would be competing interests that can systematically resist financialization. But most of the institutions and great intermediary social orders that may be once thought so capable -- military, law, health, education, research, clergy, press, etc.++-- are all embracing or have already been embraced by financialization. I think that's not just due to self-interest or capture by extrinsic interests who disrespect experts. For reasons that are worth exploring some other time, financialization often enters a social order under the guise of meritocracy (recall my reflections). This suggests that prior to financialization, hierarchy and status within such orders must have come to be felt unearned or inadequately rewarded (or both). Critics of neo-liberalism are surely right, then, that the public sphere and the great intermediary social orders have been undermined by financialization. But they have misdiagnosed the problem; these great intermediary social orders lacked the self-confidence and we may say (ahh) spiritual will-power to resist encroachment. This matters for those orders themselves, but also undermines the pluralism and moderation that is constitutive of a liberal political order. 

That's to say, and to get to a preliminary and my first conclusion -- this digression has been too long anyway -- that one of the roots of the crisis of liberalism is a spiritual or, if one dislikes such elevated language, a value crisis. So before one can articulate an institutional response or a political program, this crisis must be better diagnozed. To be continued... 

 

On Universities Investing in Springer via Offshore Networks (corrected)

College and university endowment earnings are usually tax-exempt. But as endowments have sought greater investment returns in recent years, they have shifted more of their money out of traditional holdings like United States equities to alternative, potentially more lucrative investments. These include private equity and hedge funds that frequently borrow money, opening them up to tax consequences.

When schools earn income from enterprises unrelated to their core educational missions, they can be required to pay a tax that was intended to prevent nonprofits from competing unfairly with for-profit businesses.

Establishing another corporate layer between private equity funds and endowments effectively blocks any taxable income from flowing to the endowments, the reason they are called blocker corporations. The tax is instead owed by the corporations, which are established in no-tax or low-tax jurisdictions like the Cayman Islands or the British Virgin Islands....

The use of blocker corporations has raised concerns among policymakers in recent years. That’s partly because they cost the United States Treasury millions of dollars, but also because they legitimize an opaque offshore network sometimes used for nefarious purposes.

...

Perhaps illustrating the sensitivity of the topic, officials at most of the college and university endowments that use blocker corporations, including Colgate, Dartmouth, Duke and Stanford, declined to comment specifically, citing longstanding policies against discussing their investments...

References to such corporations in the Appleby files, shared with The New York Times by the International Consortium of Investigative Journalists, which obtained them from the German newspaper Süddeutsche Zeitung, date back at least to 2003. At that time, five elite schools — Columbia University, Dartmouth College, the University of Southern California, Stanford University and Johns Hopkins University — became partners in a Bermuda-based group called H&F Investors Blocker.

H&F Investors Blocker was formed to invest with one of the largest private equity firms, Hellman & Friedman, in shares of Axel Springer, a German publisher of newspapers and magazines.--Stephanie Saul, New York Times, 8 November 2017. [HT Stephen Turner]

[UPDATE: an earlier version of this piece conflated Axel Springer with Springer Science+Business Media.+  thank Trevor Pearce for catching my error. I apologize to my readers for causing confusion. I have substantially rewritten this piece.]

It is peculiar to see universities try to minimize their tax bill so aggressively. It's not obvious that this is really compatible with their corporate  missions, which in addition to their research and teaching commitments tends to include something about the promotion of -- to quote Stanford's general mission statement, "the public welfare." While there is plenty of daylight between the state's tax coffers and the public welfare, it is hard to see how (let's stipulate, legal) off-shore tax evasion really contributes to any sense of a shared public.

It is especially notable that these universities have "longstanding policies against discussing their investments." If they do not think their investment decisions can survive public discussion, then, perhaps, they really should not be investing in these particular investments.

In fact, such tax evasion and unwillingness to talk contribute to the increasing, illiberal, zero-sum public mores, in which one person's gain is another's loss, that are undermining all talk of a public good. Before long these wealthy universities will be seen legitimately as parasitic on the society that hosts them, rather than one of the great engines that nourish such a society. Before long the idea that these institutions are hedge-funds with some property on which universities can be found stops being treated as a (truthful) joke. This matters a lot in a political context in which politicians compete with each other for being anti-intellectual and in which academics are treated as no better than a special interest.

Even if one were willing to grant, for the sake of argument Milton Friedman's idea that the only social responsibility of for-profit corporations is to maximize shareholder-income, there is really no reason why not-for-profit institutions should be maximizing endowment income at the expense of other social obligations. I have argued that universities are rightfully, self-governing associations in which organized, structured, teaching about, and research in the whole aggregate of things (events, being(s), etc.) is the main aim (recall).

That's been surprisingly durable enterprise throughout the last half millenium. Universities routinely outlast the political entities that originally house them. Such durability is not the product of mindless idealism or self-abnegation; like any great corporation it houses opportunism and fatal moral compromises with unprincipled, brutal regimes (sometimes even bringing light and shelter into darkness). But universities depend for their continued existence as somewhat independent institutions, even mediating institutions, on the the good will of the society that houses them; that is, they should not forget the fate of the wealthy, great monasteries in Tudor England or Revolutionary France. Once state and society understand universities as parasitic islands, as tax-shelters for the relatively well-connected, and as narrowly self-interest corporations, there will be little to prevent a swift and merciless confiscation of their property and endowments other than political timidity.

 

 

On David Graeber Against Adam Smith

[1] Adam Smith…was determined to overturn the conventional wisdom of his day. Above all, [2] he objected to the notion that money was a creation of government. [3] In this, Smith was the intellectual heir of the Liberal tradition of philosophers like John Locke, who had argued that government begins in the need to protect private property and operated best when it tried to limit itself to that function. Smith expanded on the argument, insisting that [4] property, money and markets not only existed before political institutions but [4*] were the very foundation of human society. [5] It followed that insofar as government should play any role in monetary affairs, it should limit itself to guaranteeing the soundness of the currency. [6] It was only by making such an argument that he could insist that economics is itself a field of human inquiry with its own principles and laws-that is, as distinct from, say ethics or politics. Smith's argument is worth laying out in detail because it is, as I say, [7] the great founding myth of the discipline of economics.—David Graeber Debt: The first 5000 Years, 24-25 [numbers added for ease of discussion--ES]

Regular readers know I am an admirer of Graeber's Debt (recall here, here, and here). The book offers a bold vision in which geographically and temporally distant evidence is brought to bear on central issues in political economy. In addition, it alerted me to the significance of the revival of interest among anthropologists in what we may call culturally embedded and shaped human universals, and a willingness to avoid the easy relativism characteristic of much ethnography (and history). Today's post is a bit more nit-picky than my previous ones on Graeber and focuses on a subsidiary issue in the work. It's not an irrelevant issue, however, because Graeber's criticism of Smith frame the work.+ Okay, with that out of the way, let me get started.

The core of Graeber’s argument turns on an extended fictional description, we may call it a thought experiment, of the origin of currency out of the inconveniences of barter. The description of a tribe of “hunters or shepherds” (WN 1.2.3) is introduced at the start of the Wealth of Nations, by Smith to explain the origin and benefits of the division of labor. Graeber has good fun showing that this “faraway fantasy” seems “to be an amalgam of North American Indians and Central Asian pastoral nomads;” (25) the example exhibits “a tendency to slip from imaginary savages to small-town shopkeepers.” (26) As Graeber correctly notes, according the thought experiment, “everyone will inevitably start stockpiling something they figure that everyone else is likely to want. This has a paradoxical effect, because at a certain point, rather than making that commodity less valuable (since everyone already has some) it becomes more valuable (because it becomes, effectively, currency).” (26) After quoting Smith extensively, Graeber helpfully summarizes the upshot of  Smith’s narrative, “Using irregular metal ingots is easier than barter, but wouldn't standardizing the units-say, stamping pieces of metal with uniform designations guaranteeing weight and fineness, in different denominations-make things easier still? Clearly it would, and so was coinage born.” (27) Before we accuse Graeber of being unfair to Smith, he explicitly recognizes that Smith quickly turns to how standardized coinage into an instance of abuses of state power, which with its control over  the mind can defraud other creditors easily. So, there is ample evidence for Graeber’s claims [1-7] in Smith’s text.*

Now, an alert reader may well be suspicious of the fact that I am calling Smith’s treatment of the origin of money a “thought experiment.” My point in doing so is, indeed, to discount Smith’s commitment to the “faraway fantasy” as articulating the (hypothetical) origin of money and property. There are three mutually supporting reasons for this that draw on significant commitments of Smith articulated later in Wealth of Nations.

First, the whole set up of the thought experiment contradicts Smith’s four-stage stadial theory of the development of civilizations. In it, there is a natural progression from (i) a savage stage  of hunter-gathering-fishing; (ii) shepherding by nomadic tribes; (iii) sedentary agriculture; to (iv) commercial society characterized by trading. (WN 5.1.a.3–8) These stages are akin to Weberian ideal types in which the whole order and practices of a society are characterized by its predominant economic organization. To be sure, the four stages do not necessarily follow each other and they can succeed each other out of sequence. Smith also allows that in the territory of a large state the stages coincide. As Graeber notes, it is a very peculiar that Smith seems to mix many different kinds of societies in his example.  And a critic of Smith may see in the contradiction outlined in this paragraph as a problem for Smith; my talk of 'a thought experiment' may seem overly charitable using later passages of Wealth of Nations to interpret earlier ones. But it is worth nothing that Smith had already called attention to his embrace of something like a stadial theory in the Introduction of his work (where he draws a prominent contrast between the misery of "savage nations" of fishers and hunters and the "abundance" of commercial society) and (less prominently) in chapter 1 ("progress of society.")

Now Smith does claim that some medium of exchange is adopted by "every prudent man in every period of society, after the first establishment of the division of labor." (WN. 1.4.2) Of course, not  everybody is prudent, but even so Smith is here committed to the claim that some medium(s) of exchange is likely to exist in every society. This matters because Smith can be read as claiming that government originates in the (second) shepherding stage where the rich cattle/herd owners institute government in order to defend themselves against the poor as a kind of a protection racket. (WN 5.1.a.15) ISo, that Smith would agree with Locke that there is property and money prior to the formation of government. While Smith is not a contractarian, in this sense he is a Lockean (as I have also argued). And Graeber is surely right in thinking that for much of human history government is really an instrument of the rich and powerful to subjugate the poor and powerless.

Second, however, when Smith address the question of the origin of government and property, Smith does not claim that money and property must proceed government. Rather he claims that "Among nations of hunters," [the first stage], "as there is scarce any property, or at least none that exceeds the value of two or three days’ labour, so there is seldom any established magistrate or any regular administration of justice." (WN 5.1.b.2) So, while Smith thinks it is likely that property will precede the existence of government, he does not think property must precede government. Rather, he thinks that most of the time people in the hunting stage are so poor and relatively equal, there is little reason to expect the rise of a regular government in it. (That is, he allows the existence of some authority and hierarchy, but not full blooded government.) He makes the exact same point at the end of the very long paragraph (which articulates his narrative of the origins of government): "The acquisition of valuable and extensive property [in a shepherding stage], therefore, necessarily requires the establishment of civil government. Where there is no property, or at least none that exceeds the value of two or three days labour, civil government is not so necessary."

So, Smith's position is that in the conditions akin to the Lockean state of nature, government is possible. But this means that for Smith it is explicitly and entirely possible that government can precede the existence of property and the development of a medium of exchange. Rather than seeing a contradiction in two strands of Wealth of Nations, it makes a lot more sense to see that by Smith's lights, the thought experiment does not entail anything about the origin of the institution of adopting a medium of exchange and (later) an official government approved currency. Rather the thought experiment is meant to illustrate  why such institutions (medium of exchange/currency, etc.) would be (to speak informally) more welfare enhancing (Graeber uses 'efficient' in his summary of Smith--that's fine, too, if one recognizes it is an informal notion). This is why it shows up in all societies. Of course, Graeber may legitimately claim that Smith's stadial theory is out of date. But that does not touch upon their present debate.

I promised three reasons. For the third, we need to move back to the very first chapter of Wealth of Nations, which precedes the thought example that Graeber criticizes and may, thus, be naively presupposed in its  interpretation. I have in mind this famous passage:

Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow citizens. (WN 1.2.2)

Now, the main point here is that trade presupposes mutual interest. And nothing I'll say will undercut that. In addition, as Sam Fleischacker has emphasized, Smith is emphasizing here the significance  of mutual persuasion in any trade. It is worth asking what happens to Smith's framework when markets become anonymous, but that's for another time.** However, for present purposes the key point is the final claim--that exchange and begging take place among citizens and so within a political framework. The significance of Smith's point may be missed if one forgets that in the eighteenth century there was an extremely limited (male) franchise based on wealth. So, while Smith does not reduce market and begging relations to their political context, he does not ignore these either.

Let me sum up because I have gone on long enough. Where does this leave Graeber's seven theses? Leaving aside [1], which is irrelevant for present purposes, we have undermined [1],[4] and [6]. I think Graeber is right about [2]; it's clear Smith thinks that money need not be the creation of government. But I don't think Graeber can show that Smith thinks money is never the creation of government.

With regard to [3], I have shown that Graeber is right that government generally (! begins in the need to protect private property (and in this sense is a Lockean). But it does not follow that Smith thinks government should limit itself to this task. As the one-time Chicago economists, Jacob Viner and George Stigler already showed, Smith's task for government are rather expansive, including  (inter alia) the maintenance of a standing arm and the martial spirit of nation (WN 5.1.f.60) the seting up of roads, tolls, canals (WN 5.1.d.5) primarily to be paid for by progressive taxes on wealthy; the maintenance of public health (WN 5.1.f.60); provide for public education for the poor (WN 5.1.f.55); and even imposition of prudential building codes to prevent spread of fire (WN 2.2.94, while defending his financial regulation).

With regard to [5], it is possible that Graeber is right that for Smith "government should play any role in monetary affairs, it should limit itself to guaranteeing the soundness of the currency." I don't think this is right. If anything, much of Book 2 of Wealth of Nations is a critical treatment of the financial sector--Smith thought it should be regulated carefully including the details of money creation by banks (but about that see my book). It is also possible, of course, that Graeber is right about [7]; that regardless of Smith's own views, Smith is the source of a myth that became constitutive of the way economics ended up understanding itself and its object of study and the nature of its knowledge. I leave  that question for another day.++

 

Should Policy Relevant Researchers Stay Out of Politics?

To lock yourself up in an ivory tower is impossible and undesirable. To yield subjectively, not merely to a party machine, but even to a group ideology, is to destroy yourself as a writer. We feel this dilemma to be a painful one, because we see the need of engaging in politics while also seeing what a dirty, degrading business it is.--Orwell (1948) "Writers and Leviathan."

Liam Kofi Bright ignited discussion on Facebook of a (fairly) recent paper by (BHLer) Bas van der Vossen. This paper argues for a normative conception of the division of labor, between "consumers," that is, "activists," and producers, that is, political philosophers (19), of political philosophy such that pure specialization between them should be maintained:

for precisely those academics that work on politically relevant topics, most prominently among them political philosophers. For them, the university should become more like an Ivory Tower, not less.... the problem with these [political] activities is that they encourage us to think about ourselves in partisan terms. And this is incompatible with our academic professional responsibilities.--Bas van der Vossen (2015) "In Defense of the Ivory Tower: Why Philosophers Should Stay Out of Politics" (1-2)

Before I get to his main argument, I want to note, first, that throughout his paper Van der Vossen equivocates among (i) 'working on politically relevant topics' and (ii) "those who are serious about thinking through political issues" and (iii) being "paid to think about politics." (On (iii) he notes that political philosophers do not have a monopoly and he also lists "sociology, political science,  economics, gender studies, psychology." (2)) By this I do not mean that (i-iii) are not synonymous in the strict sense (they are not). Rather, there are quite a few sciences (genetics, climate-science, epidemiology, civil engineering, IT, etc.) that are politically extremely relevant, but that are not, in the first instance, about thinking about political issues (although, interestingly enough, it does happen).  Because Van der Vossen ignores those latter sciences he can escape having to think about difficult, hybrid contexts where the distinction between consumer/producer is not so easy to draw. In what follows, where necessary, I distinguish between policy relevant research and research about politics and political issues.

Second, Van der Vossen's paper presupposes non-trivial commitments about the good life: "Many people stay out of political activism and they do just fine. Activism is not a necessary ingredient of a good life." (18) One need not be an elitist, a Republican-thinker, or a follower of Hannah Arendt to see that appealing to what "many people" do and that they are doing fine is an odd standard. The paper is also oddly complacent about the status quo (b) "many people in even the healthiest democracies around the world are not politically active and, in the grand scheme of things, these democracies seem to do just fine." (19) Even if this were true (when the paper was published in 2015 [i would reject this]) a cosmopolitan, political philosopher may take an interest in the health of transnational political subjects and promote these via transnational activism.

Third, and this is more important, Van der Vossen takes for granted that the bridge between consumers and producers of political philosophy can be bridged without the producers being politically active. His is a magical theory of dissemination; if you produce it, it will be  consumed. This may be true for (lots of) highways, but it is rarely true otherwise. While there are many different ways in which the gap can be bridged between policy relevant research and politics, a key way is by way of what Merel Lefevere and I call aggregators. Aggregators are distinguished researchers, whose professional function is, in part, to act as an interface between research and policy. There are many different kinds of aggregators (journal editors, science policy-advisors, science-journalists, etc.) and not all of them maintain active research profile or need to do so. But because cutting edge research is often extremely complex/subtle it is important that some of the  best researchers are also aggregators. In practice, these researchers-aggregators often have high prestige within the field (think of Singer, Pogge [sic], Nussbaum, Baroness O'Neill of Bengarve, Norman Daniels, etc.). (This is not the place to explore all the tricky issues pertaining to this class of researcher-aggregator, especially if they deviate from professional consensus and advocate their own views, but recall this post.) In some grant-driven environments, researchers are, in fact, expected by the grant agency to play some role as an aggregator or actively disseminate their research.

That he misses the very issue becomes clear when we turn to his argument (which he has helpfully summarized):

(1) People who take up a certain role or profession thereby acquire a prima facie moral duty to  make a reasonable effort to avoid those things that predictably make them worse at their tasks

(2) The task of political philosophers is to seek the truth about political issues

(3) Therefore, political philosophers have a prima facie moral duty to make a reasonable effort to avoid those things that predictably make them worse at seeking the truth about political  issues

(4) Being politically active predictably makes us worse at seeking the truth about political issues

(5) Therefore, political philosophers have a prima facie moral duty to avoid being politically active (17-18)

Aggregators clearly violate the  conclusion of the argument, But one could accept all the premises of the argument, even its conclusions, and still see a need for aggregators in practice. That is, (5) is at best a defeasible duty. It becomes defeasible for two interesting, interdependent reasons: (a) research is esoteric, and so requires expertise to navigate; (b) political activists lack time to explore and master an esoteric realm.

In addition, it is, of course, also an empirical question if aggregators really become worse at their research. (This is not to deny that Van der Vossen draws on rich empirical research on the effects of partisanship and also about motivated reasoning and rationalization--including work by Dan Sperber that I happen to be reading this week, too.) I bet the most admired 20th century professional economists -- by other economists -- were Samuelson, Arrow, Friedman, and Keynes.* While the first two cultivated a decidedly technocratic image, it's hard to say they stayed out of politics--they certainly functioned as aggregators in the sense I use the word. Would they have been better at their craft if they stayed clear of policy relevance? That's hard to imagine. Their biases animate their research. Would they have been even better researchers if they stayed clear of policy and the role of aggregator? That's a tricky counterfactual. I am not confident it can be answered.

So, far I have pretended to accept  all his premises. Regular readers, who may discern a skeptical strain in these Digressions, may suspect that I would hesitate at (2). But, for the sake of argument, I accept it. As it happens, I think there are also aesthetic goals of research that are not properly captured by 'truth.' (Not unlike Marcus Arvan I think there are also excellent reasons to think that there are other very respectable, epistemic and moral goals of research that may have  to be balanced.)

But I close with a final objection that is directed at the way Van der Vossen cashes out premises (3-4). For, he thinks that biased research is incompatible with the pursued of truth. That is, he conflates unbiased (and partisan) research with truth-apt research.**  As the previous paragraphs make clear individual researchers are part of a larger epistemic process in which motivated reasoning may well have some use. In fact, this theme is a feature, not a bug, of the law, which is an adversarial process in which the conflict between motivated reasoning, advocacy, helps uncover the truth. Obviously, academic research is not fully analogous with that (and being lawyer-ly is, in an important sense, inimical to a proper, collaborative research ethos). But if we think of research as a community-activity, then we can immediate see that's compatible with individual bias--as long as these individual biases contribute to a social, epistemic process that is truth-conducive. (Regular readers will recognize in the previous sentence my interest in combating biases -- purportedly truth-apt status quo and hierarchy biases -- with other biases in research.) That is, the process requires mechanisms and filters that help to transform the biases in truth-conducive activity. There is a nice formal (see here for useful discussion) and empirical literature on the role of diversity in  research, when it is or is not apt. [So, I am certainly not saying that all individual biases are good!] So, for (4) needs to be rewritten as follows:

(4+)Being politically active predictably makes us worse at seeking the truth about political issues unless the research institutions in which we operate are designed to prevent our biases from undermining the epistemic process.

 

I started this post with a quote from Orwell. Throughout his writings, Orwell discusses the problems of partisanship and its relationship to (artistic) integrity (recall, for example, this post; and here). And he discerned that we should not conflate partisanship and group-think with all political activism. That is to say, he recognizes that party-politics and group-enforced ideology do corrupt (he was primarily interested in writing, but his arguments carry over easily to research). But the answer to this need not be political quietism or withdrawal into the ivory tower. The problem is party-politics and ideologies.

For, there are lots of ways one can be politically active in which one's research (artistic vision) need not be undermined at all. Sometimes this is due to functional role (e.g., recall the stuff above aggregators above). But sometimes is due to the fact that corrupting elements can be avoided. This is most clear in advocacy work on single issues (death penalty, abortion, same-sex marriage, euthanasia, basic income, human rights, racism, etc.). The researcher can be uncompromising in her single-issue advocacy and maintain her integrity. (Grant me the distinction between single-issue and systemic ideology.) Often this generates a kind of lack of moderation, even fanaticism in the name of truth. While there are problems with that, these are political problems not research problems.

 

 

What Could Possibly Go Wrong? Singer on Working for Trump

[T]here’s little to be gained from boycotting Trump if you think there’s a chance you can shape policy in a positive direction. He says the same logic should apply to working at a corporation with a poor environmental track record, like Monsanto or ExxonMobil: It’s ethical to work there if you think you can help bend the organization to do the right thing. But you must also be prepared to quit if you realize you can’t.

The calculus might be different if you have a high public profile. In that case, a decision not to join the administration would be public enough that in and of itself it could help influence policy and public opinion, Singer says. But he draws a distinction between joining a Trump White House and working with an illegitimate regime, such as Americans like Milton Friedman, who gave credibility to Augusto Pinochet after he took power in a coup d’etat in Chile.

“I’m not really sure if that is the case with Trump at this stage,” Singer said. “After all, he has been elected, and as Hillary Clinton said, and as Obama said, we have to respect this situation.”

Trump’s unique candidacy presents another reason to work for him, Singer said. Since so many of his positions are poorly defined, anyone who ends up in the administration could have more influence on Trump’s policy than you might expect.--Quartz. [HT DailyNous]

Let's stipulate, for the sake of argument, that [A] before you join the Trump administration to work in some policy-relevant area, you have solid reasons to be optimistic that you can make a difference for the better.* For example, you will be hired to help craft a generous-by-US-Standards maternity leave (six weeks paid). But let's also assume -- again for the sake of argument -- that [B] you think it is very likely that overall the Trump administration will be bad for some cherished moral ends (rights of immigrants and minorities, sexism, workplace harassment, the environment, rule of law, etc.). I happen to think both stipulations are realistic (even if you, say a Trump supporter, will reject some of these cherished moral ends or reinterpret them very differently.) In what follows, I ignore the question of legitimacy.

Should you follow Singer's advice? One non-trivial concern with the advice is that if you stay in, you end up facilitating the smooth running of the Administration and even allow it to claim genuine policy success. It seems one could, thereby, become complicit in its bad behavior in areas that you cherish morally (and one ought to cherish). It strikes me that at some point of badness (i) one's participation in a bad administration really becomes a form of more general complicity; (ii) more prudentially one gets tainted generally.

Now, one might think that especially in bad circumstances ameliorating some bad is especially needed. In civil wars, physicians and nurses, say, can still do important work (even in regimes that Singer would call illegitimate). Caring for the sick and infirm is still a duty. It seems Singer has something like this ameliorative stance in mind. Singer's position is at least partially plausible for professions that understand themselves to have some such ameliorative duty (that is, medicine) It's not entirely obvious such a duty exists in engineering, economics, and law. As is well known, some of these fields think they are very akin to medicine, and so that their advice can be given to even pretty bad regimes (I have tackled that issue elsewhere, recall; and with regard to Milton Friedman in scholarly fashion here).

I note two reservations one might have about Singer's stance (and, perhaps, the problem of Dirty Hands more generally within utilitarianism). First, it clearly does not fly with folk who resist for strategic political or deeply held moral reasons any attempts to normalize a Trump Presidency.+ One can offer moral-consequentialist justifications to maintain such resistance to normalize. Even if one's would-be-participation does not offer any enhanced credibility, one's lack of participation may still reduce capacity of functioning. It's only if one assumes that qualified folk will be found anyway, that one simply dismiss the resist normalization strategy. But in some policy areas that is not evident.

Second, Singer assumes that quitting is feasible. By this is not obvious for two reasons: (i) there is lock-in financially and psychologically [as David Luban notes,* Hannah Arendt pointed out this out a while ago]. One will get on board with the project and aims one has been recruited for and one will start to make financial and personal plans alongside it. So one almost certainly will quit too late. {Not to mention that if joining means overcoming disapproval from peers and family, one's unwillingness to admit error will only  grow.} (ii) Singer assumes that defections from the Administration will not be prevented psychologically and financially by the Administration. But, again, that's not obvious. There may be all kinds of carrots and sticks (non-disclosure agreements, prohibition on working in private sector, etc.) that can prevent exit. 

But I am curious what readers think, including readers who reject my stipulative assumptions [A-B] for whatever reason.

 

When 'Theologians' Criticize 'Mathematical Economists'

Economists who rationalise their discipline’s value can be convincing, especially with prestige and mathiness on their side. But there’s no reason to keep believing them. The pejorative verb ‘rationalise’ itself warns of mathiness, reminding us that we often deceive each other by making prior convictions, biases and ideological positions look ‘rational’, a word that confuses truth with mathematical reasoning. To be rational is, simply, to think in ratios, like the ratios that govern the geometry of the stars. Yet when mathematical theory is the ultimate arbiter of truth, it becomes difficult to see the difference between science and pseudoscience. The result is people like the judge in Evangeline Adams’s trial, or the Son of Heaven in ancient China, who trust the mathematical exactitude of theories without considering their performance – that is, who confuse math with science, rationality with reality.

There is no longer any excuse for making the same mistake with economic theory. For more than a century, the public has been warned, and the way forward is clear. It’s time to stop wasting our money and recognise the high priests for what they really are: gifted social scientists who excel at producing mathematical explanations of economies, but who fail, like astrologers before them, at prophecy.--by Alan Jay Levinovitz  "The New Astrology" @Aeon.

Levinovitz has a PhD from the Divinity school at Chicago. This is why I'll call him a 'theologian' in what follows. (In the piece he calls himself "a scholar of Chinese religion.") That will help distinguish what he does from what 'philosophers of economics' do, and also call attention to the significance of labels and labeling. In his Aeon piece, Levinovitz refers smoothly to 'economists' without distinguishing the many varieties of economists and economics; he talks of 'mathematical theory,' 'mathiness,' and 'mathematical reasoning' without distinguishing the many different kinds of mathematical theories and uses of mathematics in the varieties of economists and economics; and he talks of 'performance' without bothering to explore the particular ends that different kinds of economists set for their particular theories and models. And he conflates different kinds of non-performance: for example, within a single paragraph, he moves from (a) failed predictions of interest rate movements, (b) to failures to foresee economic crises, to (c) a purported failure of not succeeding at -- pace the confident claim of "the Nobel Laureate Robert E Lucas Jr" -- 'depression prevention.' What's especially odd about this list is that a depression was prevented (Stateside!) by the actions of former Fed Reserve Ben Bernanke (who was the leading expert on the great depression and who followed to a considerable degree the policy relevant morals of pre-existing research.) I return to the failures of (a-b) shortly--these are both failures of "prophecy," they need not involve failures of explanation or understanding (or abuses of mathematics).

Without mentioning it nor irony (nor historical self-consciousness), Levinovitz re-activates a familiar Meme: the hyper-mathematization of economics (recall this piece in the New York Times by Tyler Curtain and Alex Rosenberg; also recall my response). The modern version of the Meme goes back to Boulding's response to Samuelson Foundations [recall my treatment]--the book that self-consciously tried to generate a mathematical revolution in economics in the 1940s. (No, I am not claiming Samuelson invented mathematical economics as such, but he did develop the modern edifice and the disciplinary self-understanding that accompanied it.) I mention this, rather, to point out that when earlier generations of economists debated the question in public they were, in fact, very interesting on the issue. But by now the Meme gets recycled without distinctions that may make the conversation illuminating.

Much of the piece is about the abuse(s) of financial economics. But we get no analysis of the different uses and kinds of mathematics in it: there is a huge difference among (d) so-called, ‘Technical analysts at big banks...trying to find patterns," in stock-market movements, which is thoroughly discredited by professional economics (already since the 1960s), and, say, (e) portfolio allocation models, (f) rational pricing techniques (like Black-Scholes), and (g) bankers' risk-models (even though some of the same underlying principles are used in e-g). The character of the mathematics and the models used in (e-g) is, in turn, very different from the models and theories used in (a-b). And the reasons for their failure are different in kind from the failure of risk-models.

For example, I have studied the failure to forecast the economic crisis of 2009 by the Dutch planning agency. And the explanation for it is fairly simple: they did not (and perhaps could not) foresee the collapse in world trade (as a consequence of a liquidity crisis post Lehman)-that's no trivial matter in an economy in which the variance in growth is extremely dependent on trade volumes. It took the planning agency six months to catch up with reality. To solve this problem, they do not need to abolish the use of mathematics, but they need to get much more creative in having access to  relevant trade-data in real time. (I am not suggesting there will not be other problems--I am a big defender of the significance of uncertainty, after all.)

This is not say that Levinovitz's piece is all rubbish. We learn quite a bit about the "the enchanting force of mathematics," especially, its role in facilitating the huge social investment in "li production in ancient China" that is, "the science of calendrics" (or astrology/astronomy). But Levinovitz's underlying point that 'mathematics' is excessive status enhancing is a familiar one. For, as I have noted, Mandeville already made the point about the social, non-epistemic role of mathematics in eighteenth century medicine (Mandeville was an insider, a trained and practicing physician): "The reason, therefore, why the mathematics are so highly recommended to all young students in general, is not so much the utility they are of in their studies, and to understand the business they are to follow, as that they are a modish science, the knowledge of which thought to be a fine accomplishment." In particular, "to ingratiate themselves with the Publick; and that they hope from it to be sooner trusted with sick People, than they would be, if it was known that thy had never applied themselves to that science." That is, the utility of math in eighteenth century medicine is a signaling device that makes mathematical medical doctors more attractive in the market place. (There are some fantastic observations about this in Mandeville's piece.) Levinovitz's piece is, in fact, framed with a series of complaints  ("wasting our money") about the high value(s)/incomes of economists in various market places. (Again, he conflates these.)

Mandeville also anticipates Levinovitz's point that the use of mathematics (now quoting Levinovitz) "creates a high barrier to entry for those who want to participate in the professional dialogue." More recently, Sandra Peart and David Levy, two creative economists that often fuel my ideas about these matters, have investigated the ways in which economics and finance are represented as alchemy and subtly rely on selling themselves as alchemy (see here, and pay attention to the cartoons).

But it is by no means obvious why the use of mathematics "makes checking someone’s work excessively laborious." The problem here is the economists' history of lack of norms on sharing data (and other forms of transparency) and, more general, lack of incentives to check each other's results and publish dis-confirmations (this may be changing).  It is certainly not obvious why the use of mathematics (an abstract, non empirical tool) would imbue "economic theory with unearned empirical authority." (I leave aside that at one point in the piece the evils of measurement and mathematics are conflated.)

In conclusion, one may be tempted to say that I have missed Levinovitz's point. He claims that that economists have become modern high priests, which because they do so bad at predicting future events,"fail at prophecy." Surely, I cannot object to his position? But I do because it also misunderstands the nature of prophecy. Prophecy is not prediction (recall this post). Here's an argument from authority: as Hobbes notes, the Hebrew Bible recognizes false prophets are also capable of accurate prediction--Balaam is the exemplar in this category. The previous sentence is a partial joke, of  course. The more important point is that social prophecy is only tangentially related to prediction. The sooner we understand this, the more sophisticated our conversation about the possible roles of reflexive social science in our societies can be. 

 

On Unlimited Liability

Shadow banks under LPB [Limited purpose banking] will be those without limited liability. They will be permitted to leverage. But the risk of owners' loss will greatly limit their desire to take on leverage as illustrated by the behavior of the unlimited liability banks in Switzerland. Nonfinancial corporations that wish to engage in financial intermediation must operate these businesses as LPB mutual funds.--Christophe Chamley, Laurence J. Kotlikoff and Herakles Polemarchakis (2012) "Limited-Purpose Banking—Moving from "Trust Me" to "Show Me" Banking" The American Economic Review.

One persistent myth about Chicago economics is that it is always in favor of free markets. While this is true, in general, historically the school is very suspicious of free markets in finance. At the height of the depression, the intellectual Godfathers of the school, Frank Knight (a regular in my blogging) and Henry Simons (the smartest Bleeding Heart Libertarian you probably have never heard of) tried to convince the Roosevelt administration to embrace 100% reserve banking (the so-called Chicago plan); this would prevent banks from creating money and, instead, would give the government (or the central bank) full control over money creation (and much else in the financial industry). This is quite radical because in modern credit based, capitalist economies the financial industry is responsible for much of the money creation. (This has not been true in the age of quantitative easing, of course.) In fact, as they developed the plan, they contemplated putting drastic constraints on the whole financial industry. The Chicago plan is not an artifact merely of 'old Chicago'--Milton Friedman defended a version of the plan throughout his life (see here for useful treatment). This is not to deny that other members of the Chicago school, including students of Friedman, also became cheerleaders of the financial industry (e.g., Fama, Miller, Scholes, Merton, Markowitz, etc.).* But versions of the Chicago plan are still being defended in the Chicago school (see here).

Unsurprisingly, features of the Chicago plan were rediscovered and modernized since the events of 2008. The best known is an is an IMF report from 2012 by Jaromir Benes and Michael Kumhof (see here), which is, incidentally, my source for the claim that the financial industry is responsible for much of money creation (not central banks as is commonly believed). But at the top of this post (Chamley et al.), I quote from a quirky (and much shorter) variant on the plan; the paper is worth reading because it pulls no punches and is very funny. Here I want to call attention to a feature of their proposal which deserves wider consideration (even if the Chicago plan never gets implemented). The rule is simple: if you want to take on leverage, then you must have unlimited liability (as Lloyds of London had, and some partnerships still do):

"[W]here owners share joint and several responsibility for the entire amount of debt and other liabilities amassed by the business. Unlimited liability is not capped at a maximum amount and exists regardless of the amount of investment each owner has personally made. If the business is unable to meet any financial obligations or settle any outstanding liabilities, the owner's personal assets can be seized to satisfy the debts."

Unlimited liability greatly reduces the incentive within the the financial industry to make one-way bets in which insiders get all the gains and socialize the losses; it will create serious incentives to improve underwriting standards, do due diligence, and monitor risk. (Obviously, I am not claiming that limited liability is the sole reason leverage can get out of hand; governments everywhere subsidize debt in the financial sector rather than equity.)** This is not just a matter of prudence, it's also a matter of morality (or social justice); in his recent book, Alexander Douglas has nicely argued the moral significance of proper underwriting standards. Reducing moral hazard is one important benefit from reducing leverage; the other is reducing systemic risk--all other things being equal, less leveraged banks means a less fragile system. It's also an easier policy to implement than macro-prudential regulation (which requires skills and information/knowledge that we simply do not possess yet, and probably will never obtain).

Unlimited liability in leveraged finance is also a matter of fairness. In many places the law is very much stacked against debtors (especially in Europe), who can enter bankruptcy if they are unable to pay back a loan. Unlimited liability in the financial industry, say among corporate officers and underwriters, evens the scales again; it ensures that financial creditors, too, run genuine risks. In fact, it treats creditors' losses as ordinary business debts (which they are). It also ends the ugly spectacle in which governments become collection agencies for banks when they have been reckless (or worse).

Somebody may argue that unlimited liability is rather drastic. For it makes one very vulnerable to the effects of fraud or disastrous bad luck. This is why I propose allowing some exceptions to the liability of the (modest) sort allowed to debtors (e.g., modest allowances (see here for an example).) This is also a matter of fairness.

Note that unlimited liability for leveraged financial services companies (banks, insurance companies, investment banks, shadow banks, etc.) can be decoupled from the Chicago plan. While it undoubtedly would reduce leverage in an economy, it is by no means obvious it would reduce the availability of credit in the long run. (I am ignoring here transition period issues.) For, the government has many ways to supply credit to the economy--leveraged banks are just one such mechanism.

Finally, a believer in the efficient market for ideas may ask, if unlimited liability for leveraged financial intermediaries is so prudent, then why is it not widely adopted? The answer is obvious (if one reflects briefly on public choice theory): there is a rich and powerful group of people who have every reason to spend a good chunk of their shareholders' money (it's legal, and it's called 'lobbying') to prevent it from being imposed on themselves. If even Chicago is not fond of leveraged finance, neither should our legal code be.