Digressions&Impressions

Economists's Policy Advice Still based on Dubious Models

More than half a decade has passed since the start of the financial crisis. So it is worth investigating if the elite policy economists that advise governments and that dominate policy discussions rely on more robust models of reality than the generation that dominated discussion prior to the crisis (allowing that some of the same faces keep recurring, phoenix-like, from the firestorms they helped generate). In order to explore this question, I look at an influential document whose conclusions I largely endorse—so that I can focus purely on the arguments, assumptions, and evidential practices. I have picked Anat Admati and her collaborators’ “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation,” because Admati and Hellwig (one of the co-authors) are the authors of the widely read (2013) The Bankers’ New Clothes.  The paper (“Fallacies, Irrelevant,” etc.) beautifully exposes a lot of special pleading by bankers and their advocates and offers sensible policy advice (to simplify: banks need a lot more true equity) based on the straightforward insight (again to simplify) that bankers’ costs are not necessarily social cost. (It does so in the kind of language any regular reader of a newspaper can understand.) Better capitalized bank should, all things being equal, reduce “systemic risks.” Along the way it correctly criticizes one of the most important and simultaneously regressive policy scandals of our time:  government subsidies on bank debt which encourage excessive risk-taking and basically make poor people subsidize the life-styles of relatively wealthy folk for little, if any, social benefit. In addition, Admati et al. correctly criticize the bank rules (associated with the more recent, so-called Basle agreements) that allow banks to rely on (i) their internal evaluation of their risks by way of (ii) “risk weighted assets”—a metric primarily designed to encourage banks to buy government bonds and keep creating mortgages on real estate.  It turns out, however, as we will see below that they are more critical of (ii) than (i). [In fact, their criticism of (ii) echoes The Bankers’ New Clothes.]

Okay, let me get to my criticism(s): when it suits them in their piece, Admati et al. assume without argument that (a) capital markets function properly (despite providing evidence to the contrary) and (b) that banks actually know how to estimate the risks of their loan-book just fine.  So, for example, when responding to the concern that economic growth/activity may be harmed (at least in the short-run, transition period) by the demand for higher equity – the easiest way to get there is to deleverage, that is to reduce the loan book --, they argue that “as long as the bank is currently solvent…the bank should be able to raise the desired capital quickly and efficiently through, for example, a rights offerings. Indeed, the inability to raise the capital needed…provides definitive evidence of the bank’s solvency,” (emphasis in original).

Now, the quoted claim in the previous paragraph is undoubtedly true in theory, but in practice it is by no means obvious for (1) there is considerable uncertainty about bank balance sheets – nobody really believes the accountants [recall]; some banks are so complex that it is doubtful anybody understands the underlying health of the bank at any given time-and nobody has access to relevant data to price accurately systemic risk. So, (1) can create conditions in which it very hard for otherwise solvent banks to raise equity. The converse is possible, too: (2) as long as governments maintain a fairly implicit guaranty for those banks that are purportedly too big to fail, their equity can be priced attractively enough to short term speculators. The upshot of (1-2) is that there is no reason to believe that equity markets will either provide the right signal about bank solvency or supply banks with the relevant equity. (It does not follow, of course, that equity markets won’t supply the needed equity. It’s just that no compelling argument has been given.)

There is a related problem: throughout the piece, (c) they assume that shareholders “will require a lower expected return to be willing to invest in a better capitalized bank.” That is, they assume that markets accurately understand/price risks and, thereby, adjust expected returns adequately (e.g. “in a market in which risk is priced correctly, and increase in the amount of equity financing lowers the required return on equity in a way that, absent subsidies to bank debt and other frictions, would leave the total funding costs of the bank the same.”) Now, let’s stipulate that when stated as a coarse-grained fact of the market’s ability to evaluate relative riskiness of stocks and bonds (etc.) this is undeniable true. But what we have learned during the last decade is that markets are quite capable of exhibiting lack of fine-grained discrimination among assets—this happens during a bubble as much as it happens during a crash. It’s quite possible this is due to misaligned incentives (taxes, subsidies, guarantees, bad compensation plans, etc.) and failed regulation, but it is downright silly to rely on models that do not just assume these sources of friction away in the context of policy, but also are too fine-grained (they have high degree of exactitude, but no reason to believe they are accurate).

At one point in their paper, they recognize the severity of the issue:

Finally, the assumptions underlying the Modigliani-Miller analysis are the very same assumptions that underlie the quantitative models that bank use to manage their risks, in particular, the risks in their trading books. Anyone who questions the empirical validity and relevance of an analysis that is based on these assumptions is implicitly questioning the reliability of these quantitative models and their adequacy for the uses to which they are put – including that of determining required capital under the model-based approach for market risks. If we cannot count on markets to correctly price risk and adjust for even the most basic consequences of changes in leverage, then the discussion of capital regulation should be far more encompassing than the current debate.

To be clear, I love Modigliani-Miller—it is elegant, and a very useful model to help one think about balance sheets and taxation; it originates in the golden age of mathematical economics. But it does not follow that the underlying assumptions (no arbitrage, efficient markets, and – worst of all – the treatment of uncertainty as randomness) are robust in the real world (multiple Nobel prizes to the contrary). As I have repeatedly argued, these assumptions encourage market participants to take controlled bets on outcomes rather than recognizing that they have no firm grip on underlying distributions (and, thus, modalities).

Oddly, the whole quoted paragraph is intended as a rhetorical flourish; they do not propose a more encompassing approach to capital regulation. This is really astounding: one would think that after the collapse of LTCM, Bear Stearns, Lehman, ING, RBS, ABN Amro, the whole Irish banking industry, and a long list of other banks (including mortgage banks), some humility about the banks’  ability to “manage” their risks would be in order.

To wrap up: my criticism does not target the policies advocated by Admati. I have no expertise to offer better proposals. Moreover, her piece is required reading for anybody that wants to learn how different governmental policies (taxes, regulations, accounting standards, subsidies, etc.) impact different stake-holders in banks and, thereby, different political agents in society. It really exposes lots of myths, and its underlying moral stance – dismay at liberal democracies’ persistence at encouraging socially wasteful efforts in finance – is admirable. But let’s hope that somewhere there are freshly minted PhDs in economics that will provide a path to more robust models; it’s been enough time since the crash for young minds to start afresh.

On Stockmarket and Airplane Crashes

It may fall to the political scientists rather than the economists to give us a complete story of what happened" [during the financial crisis].

To make this contrast more stark, compare the authoritative and conclusive accident reports of the National Transportation Safety Board (NTSB)—which investigates and documents the who–what–when–where–and–why of every single plane crash—with the twenty-one separate and sometimes inconsistent accounts of the financial crisis we’ve just reviewed (and more books are surely forthcoming). Why is there such a difference? The answer is simple: complexity and human behavior.
While airplanes often crash because of human behavior or “pilot error,” the causes of such accidents can usually be accurately and definitively determined with sufficient investigatory resources. Typically there are a small number of human actors involved—the pilots, an air traffic controller, and perhaps some maintenance crew. Also, the nature of accidents in this domain is fairly tightly constrained: an airplane loses aerodynamic lift and falls to the ground. While there may be many underlying reasons for such an outcome, investigators often have a pretty clear idea of where to look. In other words, we have sufficiently precise models for how airplanes fly so that we can almost always determine the specific causal factors for their failure through relatively linear chains of physical investigation and logical deduction. Human behavior is just one part of that chain, and thanks to flight data recorders and the relatively narrow set of operations that piloting an aircraft involves—for example, the pilot must lower the landing gear before the plane can land, and there’s only one way to lower it—the complexity of the human/machine interface isn’t beyond the collective intellectual horsepower of the NTSB’s teams of expert investigators.
Now compare this highly structured context with piloting an investment bank, where the “instrument panel” is the steady stream of news reports, market data, internal memos, emails, text messages, and vague impressions that a CEO is bombarded with almost 24/7, not all of which is true; where the “flight controls” are often human subordinates, not mechanical devices or electronic switches; and where there is no single “flight data recorder,” but rather hundreds of distinct narratives from various stakeholders with different motivations and intentions, generating both fact and fantasy. If we want to determine whether or not the failure of Lehman Brothers was due to “pilot error,” like the NTSB, we need to reconstruct the exact state of Lehman prior to the accident, deduce the state of mind of all the executives involved at the time, determine which errors of commission and omission they made, and rule out all but one of the many possible explanations of the realized course of events.
Given that we can’t even agree on a set of facts surrounding the financial crisis, nor do we fully understand what the “correct” operation of a financial institution ought to be in every circumstance, the challenges facing economists are far greater than those faced by the NTSB. However, the stakes are also far higher, as we’ve witnessed over the past four years. There is a great deal to be learned from the NTSB’s methods and enviable track record, as Fielding, Lo, and Yang (2011) illustrate in their case study of this remarkable organization. And one of the most basic elements of their success is starting with a single set of incontrovertible facts. In other words, we need the equivalent of the “black box” flight data recorder for the financial industry, otherwise we may never get to the bottom of any serious financial accident.--Andrew W. Lo (2012) Journal Economic Literature.

The passages quoted above come from a widely read, wonderful, extended survey of books by economists and journals on the financial crisis. Andrew Lo (MIT) is co-author of one of the most important and influential papers in the history of analysis of stock-markets (which denies that markets behave as a random walk--a key feature of the efficient market hypothesis [recall and here]). It has over 7000 citations. Oddly enough, his most important paper, "The National Transportation Safety Board: A Model for Systemic Risk Management" has only 17 citations. (This tells us the market for ideas in financial economics is not efficient.) Odder yet, when he draws on his own research in the passage quoted from his 2012 review article, he draws extremely incomplete lessons from his very own research. Let me explain.

I first encountered the idea of a financial cockpit when I met Jean-Pierre Fouque in Santa Barbara (whose office was right down the hall when I was visiting the philosophy department). The idea is deceptively simple: make sure that key policy-makers (at central banks and other oversight agencies) have real-time access to relevant data to monitor systemic risk in the market. As Lo notes (note 23 attached to the quoted passage) something like this was "behind the Dodd Frank Act's creation of the Office of Financial Research." (See also David Warsh's account of Lo's 2008 testimony to Congress). The guidelines of the (more international) Financial Stability Board, also tacitly rely on bank regulators having access to relevant data in real time so that they can regulate and monitor, say, shadow banking entities.

A moment's reflection makes clear that even in airplanes nobody (inside or outside a cockpit) has access to the relevant data before or during a crash. A further moment's reflection reminds us that lots of participants in markets have incentives to (a) hide their data, or (b) generate dummy data to gain a competitive advantage (and they would surely not trust the probity of the regulators to never abuse the data for public or private gain). Moreover, and this is a point that Lo and his co-authors make in his overlooked piece on the NTSB, there is (with exception of outside lawyers) nobody that benefits from airplane crashes, whereas in trades gone sour there may well be counterparts that gain (and there are examples of folk who made a killing during the crash). Not to mention the fact, that nobody really knows what data should or should not be included in that financial cockpit; as Lo's review reminds us, we simply don't understand what happened yet, and so don't have reliable models to tell us what data is salient. As we know from nuclear power station disasters [many of which involve mistakes in reading the data in the control room], and other complex systems failures, including airplanes (recall), a complex system in which monitoring of the health of the system is not part of the normal functioning of the most important (and well trained, if not drilled) actors within the system, is fundamentally unstable.

So, even if we do figure out what happened during 2007-9, odds are that during the next crisis systemic risk will be generated, in part, by products that are not invented yet by people who do not feel it's their job to care for the system. There is an important policy lesson here: all approaches that count on regulators of complex systems (as the financial market) to have access to and know how to act on data during a crisis, are not robust. To be sure, regulators don't fly entirely in the dark and don't only make bad decisions: the Treasury Department's guarantee of money market funds almost certainly prevented a total meltdown of the financial system in 2008 (recall).

This is not to deny the significance of having high quality data which may be useful to reconstruct what happened (as Lo suggests, and this may have been all he intended to suggest) after the fact. But such a post-facto perspective misses some of the key features of air-travel success: (i) the ongoing drilling and training of pilots, air-controllers, and others that are part of the system; (ii) the extensive and expensive stress testing of planes and components before commercial flight--in the JEL article, Lo misleadingly suggests that we really know how planes fly; as I learned from George Smith (a failure expert) that's true at a high level of generality, but despite cheap and massive computer power, in practice we are constantly dealing with extremely subtle approximations;* (iii) the ongoing feedback loop between design, practice (including minor failures), investigation, and regulation. Moreover (and now drawing on Lo's research on NTSB): (iv) at NTSB the separation of the regulation and investigation functions -- this is a key feature identified by Lo and his colleagues. That is, the "paradox of less regulatory authority yielding greater influence is one of the most striking characteristics of the NTSB;" (v) at NTSB there is a culture of open-ness and "inclusive atmosphere for all stakeholders involved" (again quoting Lo et al). Most astonishingly of all, (vi) "Each of the [NTSB's] board members and employees undergoes a rigorous ethical review process and is subject to ongoing restrictions such as not having any financial interests in transportation-related companies so as to minimize actual and potential conflicts." (Section 2.3 makes for interesting reading for those of us who note that economists and financial regulators routinely act as if financial incentives do not apply to them!) And, not trivially, (vii) work at NTSB is a capstone not a steppingstone to future careers which contrasts between the revolving door we encounter between Wall Street, Central Banks, Academia, and Politics. It is disconcerting that when Lo writes for a wide audience of fellow economists in JEL,** he does not challenge them to reflect on his best insights.

 

 

Plato's Political Science of decline in an Age of Progress and Ecological Disaster

I have long been fascinated by Socrates's account of the fall of the luxurious city (developed between 372e-451b). About that soon. It is introduced with two laws: one is law in political science, the other is a law in metaphysics (although I note a complication below). First, Socrates notes:

luxurious city

[T]he simple and unvarying rule, that in every form of government revolution takes its start from the ruling class itself, when dissension arises in that, but so long as it is at one with itself, however small it be, innovation is impossible--Plato, Republic, 545d.

This law states, that all other things being equal, the power that allows an elite (of whatever kind) to rule at T1 is sufficient to allow it to rule at T1+n. So, that when elite unity is maintained, elite rule is maintained. (That is just to say, that elite rule is sufficient for bare political unity.) Obviously, other  things are not always equal: sometimes a city is conquered or undermined from abroad. This would not refute the law. But sometimes the internal balance of power of a state also shifts and that may be thought, in contradistinction to the law, to generate the causes that allow for constitutional innovation or revolution. But I take Socrates's point to be that a unified and determined elite keeps a careful watch out against such shifts of power and decisively (appealing, say, to precautionary principles) acts against them in an anticipatory fashion.

I am not sure what the exact empirical status of Socrates's claim is, but history provides plenty of examples in which political revolutions are at least facilitated by elite defections. Of course, such elite disunity may may not so be the cause of decline in power as a symptom of it (as Socrates's subsequent examples also suggest).

The second law is a law of metaphysics:

Since for everything that has come into being destruction is appointed, not even such a fabric as this will abide for all time, but it shall surely be dissolved,--Plato, Republic, 546a.

We may say that this is the law of natural necessity (of the sort that all men are mortal, which is an instantiation of the law of metaphysics). The law covers the sensible world of matter in which, as the PSR teaches, everything has a cause, but in which everything has to perish, too.* That's to say, according to Socrates no principle of unity of a created thing is eternal. If we put the two laws together, we get (if we leave aside a complication I'll explain below) the following ruling principle of Socratic political metaphysics:

• As long as a political principle of a state's unity (that is the elite) remains unified a state's unity (and, thereby, its political order) persists, but no such principle of unity is eternal and, therefore, no state is eternal.

The complication is that the second law above is articulated by Socrates in his imitation of Homeric poetry (545d). Whatever else this shows, it proves that according to Socrates, poets can be made to sound like metaphysicians (recall José A. Benardete on Quine and the quarrel between philosophy and poetry).+ But here I'll pretend the complication does not undermine the status of the second law as well as the ruling principle.

Despite it relying on natural necessity, the ruling principle of Socratic political metaphysics is by no means obvious (despite it being an extremely solid empirical generalization). By this I do not just mean that both Aristotle, who seemed to think that a good mixture would really endure (see Politics 5), as well as Spinoza, who (in E3p6) articulated his Conatus doctrine against it (viz. "everything, in so far as it is in itself, endeavours to persist in its own being,"), reject it. Rather, I mean to call attention to the fact that the modern doctrine of open-ended progress, which may well owe something to this mixture of Aristotle and Spinoza, leaves little room for our demise. Even known civil war within liberal democracies (UK 1688; US 1861-5; Paris 1871; Spain 1936-9) are turned into glitches on the path toward true progress. [We might say that whenever the march of progress produces (a Vico or) a Spengler, a Toynbee and an Adorno await to rekindle faith in progress.]

Our current science teaches that one day our Sun will die and that one day in a remoter future the universe will be inhospitable to life as we know it. So, it is unlikely that open-ended progress is really true. The previous sentence used to be 'merely academic.' But with increasing odds of the reality of anthropic-induced ecological disaster, the continuing vitality of the ruling principle of Socratic political metaphysics is to be tested afresh in the next century or two.

 

Bad News for some Libertarians and Conservatives on Precautionary Principles

[T]he acknowledgment of uncertainty and unknowability does not lead to a political-philosophical recognition of the fragility of modern life. On the contrary, this uncertainty itself becomes a ground for security action and intervention on the basis of speculation and imagination. As Francois Ewald put it...The precautionary principle invites one to anticipate what one does not yet know, to take into account doubtful hypotheses and simple suspicions. It invites on to take the most far-fetched forecasts seriously."--Marieke de Goede (2012) Speculative Security: The Politics of Pursuing Terrorist Monies, 50

The precautionary principle can be understood as follows: "if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific consensus that the action or policy is not harmful, the burden of proof that it is not harmful falls on those taking an action." Prior to reading De Goede's book I had two general reflections on the nature of precautionary principles (PP); first, the application of a PP is a means of pausing action, that is, as a moral tool that (a) could be used by Libertarians and Conservatives to slow down the machinery of government decision-making and (b) could be used by Progressives and Environmentalists to call attention to harmful, social consequences of policies on folk (or non-folk) that lack lobbying power. For, the precautionary principle is a natural accompaniment of uncertainty: if you don't know the wide consequences of an action on bystanders, you should be careful about advocating/pursuing it. It is a way to shift the burden of proof.

And, second, I worried that once Kuhnian ideas of science -- which treat science and consensus as strongly correlated -- are integrated into science's self-understanding, a (manufactured) scientific consensus itself could mask either considerable underlying uncertainty or facilitate further harms (see my piece with Lefevere for more reflections on the moral significance of such consensus). In practice, there are (i) complex judgments about whose risks and harms are counted in the context of justifying a course of action (or inaction) in light of PP (for an excellent example, see Kukla and Wayne's analysis here) and (ii) complex judgments about what possible futures one wants to allow (Arrow and Fisher (1974) showed that even without risk aversion "that the expected benefits of an irreversible decision should be adjusted to reflect the loss of options it entails.")**

Of course, logically the principle also facilitates government action because (and again quoting Wikipedia): PP "is used by policy makers to justify discretionary decisions in situations where there is the possibility of harm...The principle implies that there is a social responsibility to protect the public from exposure to harm, when scientific investigation has found a plausible risk" (emphasis added). That is, a precautionary principle can also function as a call to action. But because PP is a burden shifting demand, I had always viewed it as a means for slower, more responsible action that I associated with a generally conservative political outlook. (Given that I tend to view environmentalism as a species of conservatism, this fit my priors nicely.)

De Goede's book, which creatively uses Foucault-ian ideas, disabused me of the ideas in the previous paragraph. Rather she shows that precautionary principles are used to justify preemption; they are invoked in the "war on terror in the face of risks that are thought to be at once uncertain or unknowable and catastrophic to the extent that they require immediate action." (De Goede, xxviii)* The most chilling moments in the book are quotes from legal decisions that use the language of "temporary precautionary measure" (167) to deny those suspected of terrorist sympathies normal legal standards of evidence even in the absence of any criminal action (or evidence of intent). To what extent such precaution still falls under the classical precautionary principle (with its emphasis on scientific consensus) is, of course, also tricky; are the security and legal experts as well as the data-miners really representing a genuine scientific consensus?

Now, one might claim that given the-call-to-action-feature of a precautionary principle, we should not be surprised by such abuses; all principles are liable to abuse, after all. It is an open empirical (and contextually subtle) question if the abuses generated by applying precautionary principles are worse than their absence. It is familiar paradox, after all, that where such principles are needed most, they are most likely to be abused.

But rather than debating the merits of the precautionary principle, here I call attention to the key point in De Goede's book: in (urgent) contexts that focus on precaution (e.g., security), "the appeal to uncertainty replaces the demonstration of evidence as grounds for taking action" (174; see also p. 199). If this merely upends familiar habits of thought (and threatens cherished conservative principles), this would not be very disconcerting. But as De Goede notes, once such ideas get widespread bureaucratic uptake (not just in context of terrorism), a state of emergency is normalized and legally recognized. That's not just bad news for Libertarians and Conservatives.

 

On Knowing We are Doomed, and Not Being Able to Act on It (social ἀκρασία)

The thesis that luxury had destroyed ancient European civilization actually originated from the ancients themselves, who were capable of formulating the best theoretical accounts of their own demise. This was not an explanation after the event, it was a prediction that had come out true. Whatever the problem with ancient societies, it was not their lack of theoretical understanding. Their problem was not actually with theory but with practice...Ultimately they went down altogether, while still remaining fully aware of their mistake...According to Rousseau...[t]he ancient failure was not because the theory was false but because the ancients did not follow their theory in practice. Istvan Hont Politics in a Commercial Society, 89-90. [In context, Hont is describing Rousseau's response to the so-called 'luxury debate' (recall yesterday's post.)]

According to Hont's analysis, Rousseau is not describing a self-fulfilling prophecy, which is, according to Merton, "in the beginning, a false definition of the situation evoking a new behavior which makes the original false conception come true. This specious validity of the self-fulfilling prophecy perpetuates a reign of error." (Only if Rousseau's social theory were false, then it could be possible that the ancients suffered the consequences from a self-fulling prophecy.) I mention a self-fulfilling prophecy because it can generate a species of practical impotence; if one does not stop the effects/impacts of a self-fulfilling prophecy early enough (i.e., when it's description is still false-ish), then it becomes nearly impossible (i.e., once its description is true).

Rousseau is also not describing a species of fatalism, that is, "the view that we are powerless to do anything other than what we actually do." By Rousseau's lights (a) the ancients could have done otherwise [in some sense], and (b) they believed they could do otherwise. (Again, this is not to rule out the possibility that Rousseau is wrong about (a) or (b).) According to Omri Boehm's reception of Spinozistic fatalism (recall), fatalism naturally slides into nihilism (which is indeed a plausible disposition accompany a species of practical impotence.) On (b): the ancients articulated their theoretical knowledge in order to change a foreseeable, but not inevitable outcome. On (a): reflection on Rousseau's recipe for change (build new institutions and habits in which a society can act on knowledge) in light of ancient experience (and his social theory), suggests that the nature of 'this could have done otherwise' is a bit tricky given their institutions and practices. 

So, Rousseau is describing a kind of social akrasia (from the Greek ἀκρασία), that is, the possibility of a society acting against its better judgment and, thereby, demising. (A mortal collective action problem, as it were.) Of course, -- unless one is an economist who thinks all revealed behavior just is optimal, that is, with a tacit belief in theodicy -- non-lethal forms of social akrasia are not un-common (which is why I specified the 'demise' part)--fill in your favorite examples (American sugar subsidies, Dutch housing policy, etc.). To be clear, not all societies always value (earthly) survival; so if people are knowingly willing to die for a way of life (a God, a culture, philosophy, etc.) then, even if outsiders find their behavior delusional or akratic, it does not count as social akrasia. Obviously, there are complex cases where societies are in denial about the truth (or their good) -- say, during war fever, or bubble economies -- which may count as akratic, despite, perhaps, not meeting the standards of the definition. 

Now it's easy to take for granted that the presence of certain institutions will prevent (excessive)  social akrasia: modern (and independent) science, free speech/press, accountable and replaceable government, educated elites, and, even, knowledge about how to tackle collective action problems. But what makes the case(s) contemplated by Rousseau so interesting, is that he is describing (oligarchic) societies where the political, economic, and intellectual elites overlap greatly. So, where social akrasia is not caused by a kind of disunity among rulers, but rather by mistaken, downright foolish behavior.*

Only a fool will assume that purportedly advanced or developed (or civilized) societies cannot act foolishly.

 

On Not being a Pundit or Activist (On Harman on Truth In Politics)

But my lack of interest in this new orientation [Accelerationism--ES] stems primarily from the authors’ excessive certitude about contemporary politics. They write more like activists than philosophers, and unfortunately we are starting to forget the important difference between these two professions— one person might do both, such as Sartre or Foucault, but they are two very different hats. The authors seem confident in what the problems are with ‘neo-liberalism’, ‘capitalism’, ‘climate’, and so forth, and they also speak in terms of ‘cataclysms’ and ‘annihilations’. The philosophical element missing from this picture is any sense of Socratic ignorance... politics is not primarily about truth and not primarily about power, but about uncertainty. By contrast, the Accelerationists continue in the basically idealist line of the modern Left start out by assuming that the political truth is basically known and it’s time to strategize about how to implement it in some suitably radical way. The general assumption on the Left is that there are certain corrupt, greedy, ignorant, alienated, or evil interest groups that are preventing an already known ideal political order from being implemented, and hence there is no time to waste on piddling, fruitless, navel-gazing speculation. There are crisis moments when this attitude makes sense, and perhaps we’re in one now. Yet this is still the attitude of the activist, not of the philosopher, who deals with much longer stretches of time than the modern period of philosophical idealism in which the Left was born and raised. Another way of saying it is that the Left misreads politics as being primarily about the implementation of justice, when politics is really about the conflict over what justice is. This is not simply a class struggle or any kind of power struggle (though it’s partly that) because humans are genuinely mystified about what truth and justice are. You can’t make a science out of these; rationalism is even more dead as a political doctrine than it is as an ontological one. Politics is neither primarily about truth and justice (Rousseau, Marx) nor primarily about conflict and victory (Hobbes, Schmitt). ...As philosophers, we're not supposed to be swept along with the Zeitgeist, we’re supposed to be resisting it. Even if ‘neoliberalism’ has the political Zeitgeist in Western countries since Thatcher and Reagan, the Zeitgeist among intellectuals has been something quite different, and that’s a bigger danger for us.--Graham Harman [discussing his book Bruno Latour: Reassembling the Political] [HT Cogburn]

I agree with Graham Harman that even the public philosopher should, qua philosopher,* try to restrain herself from being a pundit or a citizen-activist. The technical reason for this is that modern philosophers are (in the scheme of things) rather narrow specialists, whose methods teach them (a) to abstract away from lots of messy and irrelevant details; we are taught (b) to be suspicious of polysemy and vagueness, and (c) we have little tolerance of conflicting (partial) lexical orderings. Because politics requires different attitudes than those exhibited in (a-c), when we speak in public we tend to come across as partisans or casuistrists joining sides in the great (and a few petty) debates of the day (recall this post on Gaza; this is controversial, see more below). From the trial of Socrates we learn that this can harm the institution of philosophy, especially if others think we're on the side of immorality (or exhibit lack of patriotism, etc.); the name Heidegger is a salutary reminder of what is at stake in these matters (recall and here, here, etc.). Even in lower stakes circumstances, philosophical skills are not innocent; Anil Gomes (Oxford) recently revived [HT Dailynous & Leiterreports] Aristophanes' charge against philosophy, viz., that the capacity to make careful distinctions does not ensure that they will be put to good uses.

Of course, sometimes the times demand, that some of us embrace our fate as philosophically trained activists. The pundit and the activist can legitimately avail themselves of philosophical arguments and other insights, while even the purest philosophers avail themselves of philosophical politics within the profession (recall this post on David Lewis). It is, of course, not always easy to figure out where one activity (philosophy) slides into another (activism). Harman suggests one useful heuristic echoing Seneca: the philosopher focuses on the long term, by influencing (through books, lectures, TED-talks, etc.) the minds and habits of a 'public,' while the activist tries to influence immediate public, political decisions. (This presupposes there are no philosopher-kings.) Of course, the activist would like thereby to secure long-term aims, so the distinction is not a neat one. (And, obviously in a 24hrs news-cycle, next month may seem long away!) That's okay because there are going to be lots of trading-zones where philosophers and activists meet and overlap. 

To accept the distinction between philosophy and activism entails a certain kind of self-command and judgment on behalf of the philosopher. (Undoubtedly some non-philosophers might think good riddance, too.) But the position does not entail being silent in public. Conceiving the long-term is compatible with putting issues on the agenda and calling attention to long-term trade-offs or dilemma's as a public philosopher. (Harman calls attention to the dangerous political situation over Nile water-rights/treaties.)  

Some impatient readers will reject a more fundamental (as opposed to technical) assumption I share with Harman: that politics is not wholly aimed at either pre-existing truth or the battle over power. This assumption entails that one ought to be very careful switching from philosophy to activism even with fully worked out philosophical theories. Harman captures the insight by insisting that public politics is about uncertainty (he attributes it to late-ish Latour; I would mention Knight or Keynes here). [A note on terminology: I think politics is present in philosophy and in public life, so this is why I sometimes use 'public politics' to refer to familiar political activity (by presidents, activists, lobbyists, parliamentarians, voters, etc.)]. That is, it is a site where justice and power are, in part, constituted (through discussion, negotiation, legislation, bargaining, bribing, voting, public opinion, etc.) and, in part, discovered. This means they (justice/power) lack a certain permanence (recall this post on the Conservative's dilemma). 

This lack of permanence is also true (grin) to some extent for truth, although obviously the story is not exactly the same.  When Senators vote to deny the existence of man-made climate change they just look ridiculous. But it is also a fact that political legislation has some influence on non-trivial social truths that will occur, say, in the future.

Harman recommends a certain kind of public caution that he (mistakenly, I think) associates with Socratic ignorance. Now, such caution can quickly sound conservative and generate a status quo bias. To be clear: it is important to distinguish such caution with a kind of reliance on precautionary principles, which have become a justification for quite a bit of government action (and overreach)--these days anti-terrorism practices rely on precautionary principles in order to justify preemptive practices that do away with long standing legal procedures (see this excellent book by my new colleague Marieke de Goede). But embracing such philosophical caution for oneself does not prevent activism by others.

Even so, I was struck by Harman's claim that the greater danger comes from groupthink among philosophers rather than from bad politics. This is not an evident position. I have to admit that I had his attitude during Bush vs Gore, but the Bush administration set in motion a set of responses to 9/11 that have (and continue to have) far-reaching consequences some of which may, in fact, delimit the space of future philosophy Stateside and in the Middle East. So, I worry that there is a tendency to underestimate the significance of public politics. Even so, in an other context he puts his point as follows (and more instructively):

There is a lazy tendency in our era to moralize every political issue, as if politics were merely the implementation of an already understood justice, rather than –as Latour holds– the place where the nature of justice is determined. Someone is always held to be morally at fault whenever a political situation goes wrong; politics becomes an actual knowledge of the morally right, whose truth is opposed only by those corrupted through inferior character or vested interests.....’--Graham Harman.

Contemorary philosophers (influenced by Rawls) prioritize the right over other values. But the tendency is not only exhibited on the Left, but also on the (Libertarian and Conservative) Right where a fondness for epistemocracy, lotteries, and betting markets is rising (often also in the service of some right). By treating politics as a site where morality is implemented, we philosophers treat politicians as technicians rather than as crafty agents that need to weave together (and sometimes trade-off) different values and interests into compelling narratives that allow us to cope without violence.   

 

Wisdom in economics...Keynes, Savage, and Friedman

The maximization of such an expected value may also be regarded as a maxim for behavior. As such, it promises to have important implications for statistical theory. Cf. L. J. Savage, "The Theory of Statistical Decision," Journal of the American Statistical Association, XLVI (March, 1951), 55-67. Success of the maxim in this domain, as in any other area of decisions involving uncertainty, depends, not on its empirical verification for the economic behavior of men at large, but on its acceptability, to individuals who are particularly concerned with such decisions, as a rule guiding "wise" behavior in the face of uncertainty.--Milton Friedman & L. J. Savage (1952) The Expected-Utility Hypothesis and the Measurability of Utility (463).

Yesterday, at a workshop I co-hosted with Rogier de Langhe in Ghent, David Teira called attention to the quoted passage in a  paper (co-authored with Rasmus Winther) he presented. The passage occurs in the first substantial footnote of the Friedman/Savage paper (which by building on work by Von Neaumann & Morgernstern, together with their earlier 1948 paper, generated the canonical treatment of the axioms of expected utility theory).* Hereafter I will call their joint 1952 paper: 'F&S1952.' Teira astutely noted that the quote puts a normative ("wise") interpretation on expected utility theory. This is surprising because standard historiography suggests that the normative interpretation was a much later consequence, the result of criticism (see, for example, this fine paper by Hands.) In fact, the standard story can base itself on F&S1952:

Two quite different classes of objections are made to this particular convention for assigning a "measure" to utility:... (2) that any convention that would treat utility as measurable is undesirable or unnecessary... The second objection, on the other hand, cannot be accepted. It would deny economics a mode of speaking and expressing theories that has been found useful if not indispensable in other sciences. It expresses a viewpoint that its proponents would find impossible to apply consistently; they would have to deny themselves the privilege of speaking of money income, or stock of money, or size of population as measurable. If this viewpoint seems persuasive for utility, it is, we think, partly because some hypotheses that would, if verified, have implied convenient measures of utility were actually flagrantly contradicted by experience, and partly because of a widespread confusion between positive economics and normative economics, a widespread tendency to use the same word---utility- to stand for two quite different things: on the one hand, a quantity that it is useful to regard an individual as maximizing in interpreting his behavior and predicting his reactions to changed circumstances, and, on the other hand, a quantity that he "should" maximize or that society "should" maximize or help him maximize. The identification of these two conceptually different magnitudes is a maxim for wise behavior or an ethical precept, not a scientific proposition, and is in no way required by the adoption of a particular convention for "measuring" utility. (474)

This is the closing paragraph of F&S1952. Here wise behavior is in the domain of normative not positive (or empirical/scientific) economics. As is well known, for Friedman the distinction between normative and positive economics is central to his methodology of economics (which he was working on at the time and which he published in 1953). And, his ''as if" methodoloy is fully present in the first sentence of F&S1952: "individuals choose in such circumstances as if they were seeking to maximize the expected value of some quantity." Now, Teira offered an interesting explanation for the presence of a normative conception in F&S1952, and here I don't want to steal his thunder.

Before I get to what I take to be the significance of the footnote, I should note that, I think the footnote reflects the influence of Savage. For three reasons: (i) it fits uneasily with Friedman's larger methodology at the time; (ii) in the note they explicitly appeal to Savage's work, and (iii) Savage thought that one could treat uncertainty as a species of risk: one treated the probabilities as subjective (see his Foundations of Satistics), although Savage was quick to note that “we must be prepared to find reasoning inadequate to bring about complete agreement.” (1954 [1972]:7; see also 3, 67ff.) So, Savage did not endorse the ideal that there could be full consensus about wisdom. By claiming that this line of thought reflects Savage's influence, I do not mean to deny the significance of it to Friedman's thinking.

For, the idea that wisdom in the face of genuine uncertainty could still be a species of (mathematical) rule-following is an important rupture with earlier modes of thought which understood wisdom in terms of judgment. For example, at the hight of the financial crisis, Keynes had argued, reflecting widely held belief, that in the face of genuine (computational) complexity, that is uncertainty, central bankers should be given considerable "discretionary power" (to manage its reserves): he denied that “the rules of wise behavior by a central bank could be conveniently laid down -- having regard to the immense complexity of its problems and their varying character and varying circumstances." (Quoted from Bibow.) Of course, Keynes insisted that the discretionary power should not be absolute; as Bibow notes, Keynes thought that the economic and moral aims of the central bankers should be set by government.

Friedman, by contrast, in reflecting on the experience of monetary policy during the financial crisis in his great work with Anna Schwartz came to think that much of monetary policy ought to be rule-based (see, for example, here, and here). Whether we think of these rules as robust heuristics (to be ignored in some future emergencies) or as a species of optimizing rationality is a further question that lay in the future. Sadly, whether it's wise to think of wise behavior in conditions of uncertainty as an instance of utility maximization was not debated in full when introduced into the literature, perhaps because it was treated as pertaining to 'individuals' (who are free to do what they wish) rather than social institutions; or, perhaps because sometimes footnotes fly under the radar screen.

 

The Technocratic Conception of Politics (The Economists and Rawls redux)

By a 'technocratic conception of politics,' (recall) I mean to capture the following three features of an enduring image of politics present in (social) science: first, it is characterized by the ideal that with social knowledge and its progress, substantial political disagreement can be eliminated. Here is a very striking instance of the claim from Milton Friedman's (1976) Nobel lecture: "Many countries around the world are today experiencing socially destructive inflation, abnormally high unemployment, misuse of economic resources, and, in some cases, the suppression of human freedom not because evil men deliberately sought to achieve these results, nor because of differences in values among their citizens, but because of erroneous judgments about the consequences of government measures: errors that at least in principle are capable of being corrected by the progress of positive economic science." The context of the passage is the furor surrounding his association with the so-called 'Chicago Boys' in Chile and the assassination of his Chilean critic Orlando Letelier (recall).

In particular, second, this ideal of conflict-free politics presupposes (as is clear from the quoted passage in Friedman's Nobel lecture) considerable value-unanimity in society. So, for example, in a famous article, the Chicago-school economists, Stigler and Becker write, "one may usefully treat tastes as stable over time and similar among people;" establishing this point "is the central task of this essay." When value-unanimity is granted then ordinary welfare economics is possible as a kind of (social) engineering science (recall).

Third, the conception requires an image of science in which one of the central aims of policy scientists is to achieve consensus (or lack of disagreement). In modern economics this idea goes back at least to Sidgwick's (1887) Principles of Political Economy (recall; for some prehistory on Hume). It was a central feature of Lionel Robbins's influential methodological restatement (1932) of what economics is: "Surely, for the sake of securing what agreement we can in a world in which avoidable differences of opinion are all too common, it is worth while carefully delimiting those fields of enquiry where this kind of settlement is possible from those where it is not to be hoped for —it is worth while delimiting the neutral area of science from the more disputable area of moral and political philosophy." This image of science was made widely popular by Thomas Kuhn in Structure (1960), but via Talcott Parsons's Weberianism and others it was already well known in mid-twentieth century social science.

It is worth emphasizing that the expectation of consensus was by no means universal. Friedman's sometime co-author, Savage, insists in The Foundations of Statistics, that "we must be prepared to find reasoning inadequate to bring about complete agreement." (1954 [1972]:7; see also 3, 67ff.) But this view became a minority position (cf. Aumann).

Stoner and Augustus On Love and Freedom (and Parenting)

There is a variety of love more powerful and lasting than that union with the other which beguiles us with its sensual pleasure, and more powerful and lasting than that platonic variety in which we contemplate the mystery of the other and thus become ourselves; mistresses grow old or pass beyond us; the flesh weakens; friends die, and the children fulfill, and thus betray, that potentiality in which we first beheld them. It is a variety of low in which you…have found yourself for much of your life, and it is one in which our poets were happiest; it is the love of the scholar for his text, the philosopher for his idea, the poet for his word. Thus Ovid is not alone in his northern exile at Tomis, nor are you alone in your far Damascus, where you have chosen to devote your remaining years to your books. No living object is necessary for such pure love; and thus it is universally agreed that this is the highest form of love, since it is for an object that approaches the absolute.

And yet in some ways it may be the basest form of love. For if we strip away the high rhetoric that so often surround this notion, it is revealed simply as a love of power…It is the power that the philosopher has over the disembodied mind of his reader, the power that the poet has over the living mind and heart of his listener. And if the minds and hearts and spirits of those who under the spell of that appointed power are lifted, that is an accident which is not essential to the love, or even its purpose.

I have begun to see that it is this kind of love that has impelled me through the years, thought it has been necessary for me to conceal the fact from myself as well as from others. "Augustus to Nicolaus of Damascus"--John Williams Augustus: A Novel (306)

In the face of death and delirium (when one can be "more reasonable than most men"), there are, we are told, three kinds of love:

1. One consequent the pleasure of, let's say, body-coupling. (This is fleeting.)
2. One (Platonic) consequent our intellectual awareness of our lack of knowledge about our intimates—a form of unstable, self-knowledge that is revealed to be an imprisonment.
3. An enduring love that the scholar-craftsman feels for one's necessary creations, which – upon further reflection – is revealed as love of power.* 

It is no surprise that an emperor would identify his own ruling passion with a love of power; nor surprising that a novelist would have him say so. It is a bit more surprising that at the end of this novel about the art of ruling, which is simultaneously about the art of parenting, the novelist would allow his reader to entertain the thought that her immersion in the written text is a form of subjugation to the author's craft.

So, we are back in familiar terrain of the modern novel: the novelist as prosecutor of his own craft. We might say that the main defense of the novelist is that he acts from "necessity" ((305) or "destiny" (295)). While the propagandist's utility for the novel can be aimed at directly (recall), if there is genuine utility to the novel – elevating minds toward greatness (recall this post on Grunberg/Coetzee) – it is an unintentional byproduct of the love of power. (This is the secondary defense.) Williams lets us enjoy the irony that the emperor is wiser on the novel's possibility, and takes it more seriously, than his poet-propagandist (recall Maecenas here and here). But this very possibility is also destabilizing psychologically and politically; for the novel leaves no doubt about the dissatisfaction that follows from wise rule. Our excellence is revealed under duress (privation), not in prosperity.

This writer's necessity is not opposed to freedom (although there seems little room for the readers's/subjects' freedom--John Williams's sudden popularity offers a window on our limited aspirations). On the contrary, Augustus is recorded as claiming:

On Carnap, Luck and Necessity in Samuelson's *Foundations* of Economics

By 1983 we were all, so to speak, mathematical economists...This is as it should be. Soft and hard sciences are cumulative disciplines. We each bring our contributions of "value added" to the pot of progress. In Max Planck's much-quoted words: Science progresses funeral by funeral. Inside tomorrow's physics treatise will be the lasting truths of Isaac Newton and also of the professor who works down the hall from you. Something of the same goes for economics, where often the dance must proceed Two Steps Forward and One Step Back.--Paul A. Samuelson 1998 (1378-9)

Had I remained on the Chicago Midway, I might well have missed out on the three revolutions that remade mainstream economics: the Keynesian Revolution, the Imperfect-Competition Revolution, and the Mathematical-Economics Revolution. Instead I had a front-row seat.--Paul A. Samuelson (1379)

Had I been a strict constitutionalist, I might well have stopped there. The result would have been a shorter 200-page book with one fully integrated theme.--Paul A. Samuelson (1384)

Reading widely, I was a child of my time, but it was the internal logic of the economic puzzles that guided Foundations' growth.--Paul A. Samuelson (1375 [emphasis in original])

The historian of economics, Roger Backhouse, has long been prodding me to pay closer attention to Paul Samuelson, who was the economist's economist for much of the second half of the twentieth century. In particular, in commenting on my work on the pre-history of Kuhnian ideas within Chicago economics, he insisted that I should not underestimate the significance of Samuelson (the very anthithesis of a Chicago economist, despite having done a BA there). And, indeed, in reading Samuelson's reflections on his own achievement on his seminal Foundations of Economic Analysis a half century later, I was struck by the Kuhnian imagery, including his self-presentation as a would-be-revolutionary (rather than "strict constitutionalist") and the focus on how puzzle-solving  (rather than external influences) led to the breakthroughs. 

But I wondered to what degree the evidence from 1998 wasn't itself a consequence of Kuhn's influence. Nudged by Backhouse I was directed to the following passage in Samuelson's Foundations:

[A]t a time when pure economic theory has undergone a revolution of thought—from statical to dynamical modes. While many earlier foreshadowings can be found in the literature, we may date this upheaval from the publication of Ragnar Frisch’s Cassel Volume essay [1933--ES] of only a decade ago. The resulting change in outlook can be compared to that of the transition from classical to quantum mechanics. And just as in the field of physics it was well that the relationship between the old and the new theories could be in part clarified, so in our field a similar investigation seems in order. (Samuelson 1947, p. 284)

So, Samuelson was very explicit about that fact that he was participating in a scientific revolution that was initiated before him. In an "age of specialization," Samuelson thought of himself as the 'last generalist' because after his framework setting work, the end of "upheaval," there would only be a need for esoteric specialist work. In Samuelson's hands the revolution has an air of inevitability.