Amos Tversky: In Memoriam, Part 2

Neo-classical (mainstream) economic theory operates under the assumption that human beings are rationally self-interested optimizers. Rational here, in its most modest form, denotes that people consistently apply an appropriate (i.e., reasonably well-suited) set of means toward the achievement of their goals. Self-interested here, in its most charitable form, denotes that individuals adopt goals according to their own interests, which are taken as given and idiosyncratic. Optimizers here denotes that, all else equal, people tend to prefer more (of something they like) to less, and at the least cost. There is a long standing debate within economics as to whether these assumptions are descriptively accurate depictions of human motivation. Some argue that descriptive accuracy does not matter; what counts is that these simplifying assumptions reduce the infinite complexity of human motivation to a manageable degree. When all the noise is cleared away, what remains is a distillation of human motivation—a model—which can be represented mathematically and yield testable predictions of the outcomes of human interactions across a range of settings.

Many of the social science scholars Danielle and I are highlighting in our “In Memoriam” series have played a pivotal role in the debates described above and have extended our collective understanding of economics and institutions in various ways. One such scholar is Amos Tversky:

Tversky Young and Old

Amos Tversky and Daniel Kahneman pioneered work in cognitive psychology which explored the limits of human cognition and caused social scientists to question the applicability of the rationality assumption. Using experiments, Tversky and Kahneman demonstrated that human beings lack the cognitive resources to be fully rational. Rather, humans tend to rely upon mental shortcuts, or heuristics, “which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations.” These heuristics allow us to approximate rational judgments and they serve us well in most contexts, but are also susceptible to many types of error which can lead to systematic biases. In their seminal co-authored paper, “Judgment Under Uncertainty: Heuristics and Biases” (1974), Tversky and Kahneman catalogue some of the most common errors individuals make. They later gathered their research into a book by the same name (1982):

Tversky and Kahneman Book

The video below discusses two such errors, representativeness and availability:

These findings have greatly influenced the way social scientists now think about human cognition, as well as the extent and conditions under which the rationality assumption applies. In fact, these insights are fundamental to the subsequent development of Behavioral Economics and Behavioral Law & Economics, both very fruitful areas of contemporary research.

The Nobel Prize

Many of the scholars Danielle and I are highlighting in this series are Nobel laureates. Daniel Kahneman won the Nobel prize in Economics in 2002 for his pioneering research, but Tversky had already passed away in 1996. James Ryerson wrote the following in the Boston Globe:

 JUST AS BEATLES fans couldn’t fully appreciate the 1997 knighting of Sir Paul McCartney in the absence of the late John Lennon, so the announcement of this year’s Nobel Memorial Prize in Economic Science felt incomplete. At a news conference at Princeton University on Oct. 9, the psychologist Daniel Kahneman, who won the Nobel this year along with the economist Vernon L. Smith, expressed regret that his longtime collaborator Amos Tversky wasn’t able to share the distinction with him. Tversky died in 1996, and while he did receive a citation from the prize committee, he couldn’t receive the prize itself: Nobels are not awarded posthumously.

Tversky and Kahneman are nearly always mentioned in the same breath. In the 1970s, the two Israeli-born psychologists devised a series of ingenious experiments to expose the illogical ways in which people make decisions that involve probability – everything from playing roulette to guessing what someone does for a living. But Tversky also had a successful career in his own right. At 19, before he became a worldwide expert on risk assessment, he earned Israel’s highest military decoration by saving the life of a fellow soldier who had frozen in panic after placing an explosive charge. Tversky daringly intervened and was wounded by the explosion. After receiving his doctorate at the University of Michigan, he taught at Hebrew University, later moving to Stanford University, where he worked for many years until his death.

Well, hat’s off to you, Amos Tversky!

A.K.

Review: Place Matters: Metropolitics for the Twenty-First Century

Place Matters

In Place Matters: Metropolitics for the Twenty-first Century (2004), Dreier, Mollenkopf, and Swanstrom argue that economic segregation in America’s metropolitan areas exacerbates the effects of economic inequality and diminishes the quality of life for poor inner city residents. In the long-run, they argue, such trends harm wealthier residents who occupy the concentric rings around the urban core, and threatens to undermine social cohesion as well as political equality. The book’s argument is articulated across eight chapters which I briefly summarize before offering some critical remarks.

The first chapter lays out the basic premise of the book. America’s growing inequality is bad enough in itself but compounded by the extent to which America’s economic classes are moving away from each other geographically—the wealthy flee to suburban enclaves on the city’s periphery, leaving lower income households to languish in the increasingly impoverished core. “Politically,” say the authors, “the problem is not so much the existence of poverty but the gap between the rich and the poor. This gap enables the rich to dominate the poor” (26). One look at the flood of money into recent elections demonstrates that “rising inequality makes a mockery of the democratic principle of one person, one vote” (id.). Geographic divergence not only means that the rich and the poor will have divergent interests and political priorities for the metro areas, but revenues needed to sustain city services which uplift the poor are increasingly concentrated in a multiplicity of smaller jurisdictions, leaving the central city in fiscal distress and social decay.

In the remainder of the book, the authors present evidence for the existence of economic segregation, argue about the costs thereof, and propose a way forward. A look at income shows that “per capita income in a sample of eighty-five cities actually exceeded that of their suburbs by 5 percent in 1960…central cities fell relative to their suburbs, reaching 84 percent in 1990” (46). Here, the authors suggest that the way to reverse trends of city decline is more regional land-use planning and cooperation and nationalization of public services as in Europe (63). Essentially, they present a compelling case for the proposition that many of the trends associated with urban decay should not be written off as the effects of inexorable economic forces. These trends reflect policy decisions and can be ameliorated by a recognition that how we define local communities matters. Simply, the drawing of local jurisdictional lines has consequences for the allocation of resources, the plight of economically vulnerable residents, and the health of the nation’s cities.

It is in chapter three that the authors attempt to spell out the costs of economic segregation by examining the effects on “jobs and income, health, access to private goods and services, and crime” (66), and it is here that I focus my remarks. While the goals are laudatory and the assembled data is impressive, several of the arguments border on the bizarre. For example, “black men in Harlem have a lower chance of reaching sixty-five than do men in Bangladesh, even though the average income is many times higher in Harlem” (76). “By far the most powerful explanation” the authors explain, “is that economic inequality cancels out improvements from rising GNP” (76-77). So here income inequality—the extent to which others in the society are richer—is the cause of shorter life expectancy of black men in Harlem compared to Bangladesh even if Harlem residents enjoy a higher quality of life in absolute terms. Despite the counter-intuitive nature of this claim, and the many possibly relevant differences between the two groups compared, the authors put forth little that would necessitate their conclusion. Bizarre. While inequality undoubtedly has its consequences, are readers simply to accept that inequality causes Harlem men to die earlier than Bangladeshi men with no further inquiry into other factors which may distinguish the two demographics?

Another example from chapter three involves the higher propensity of persons in concentrated poverty areas to engage in risky behavior. “Tobacco and alcohol companies target their advertising on central-city minority neighborhoods, influencing the likelihood in such areas of smoking, consuming alcohol, eating fat, and failing to use seatbelts” (80). This is an interesting and highly attenuated causal chain extending from tobacco advertisements all the way to seatbelt use. The link between cigarette ads and seatbelt use stretch credulity beyond the breaking point. As deplorable as it might seem, cigarette marketing may be targeting people more likely to be interested in their products, and (forgive me) given the evidence of the health effects from smoking, less educated persons may disproportionately fall into this target group. Low levels of education and low level of income are highly correlated, so it is easy to see how such a phenomenon might play out: it is possible to suppose that residents of low income areas are less rational and hence more prone to see and be influenced by advertisements contrary to their interests. However, this possibility is foreclosed by the authors’ assumption that such residents are hyper-rational, employing risk analysis based on overall life expectancy: “People who do not expect to live very long discount the costs of risky behaviors and engage in them more frequently” (81). This logic is circular: Poor people engage in behavior likely to shorten their own lives because they expect their lives to be foreshortened. Moreover, if we accept the conclusion, it is perfectly rational, morally unobjectionable, and legally uncircumscribable for a vendor of a legal product to market that product to a demographic with a higher likelihood of consumption.

Yet another oddity of chapter three involves banking. The authors note with disapproval that “it is perfectly legal for banks to discriminate against low-income neighborhoods if they have good business reasons not to lend” (89). This is another bizarre statement. Should a bank’s refusal to lend on the basis of “good business reasons” ever be illegal? Would it be helpful to extend credit to a low-income urban resident against sound business judgment? If good business reasons exist not to lend, does not the true problem lay deeper? Such statements betray a bias that unfortunately pervades the work: All market mechanisms are to be judged by their effect on the urban poor even where it is difficult to find fault with the mechanisms themselves.[1] This type of analysis does little to advance the literature on urban development or the effects of inequality. Rather, it muddies the waters.

The above stated bias has another implication: we must be willing to discuss issues of urban decay without reference to any agency in urban dwellers themselves—urban residents come across as flat characters in a narrative that only contemplates victims and villains. The authors are dismissive of arguments or evidence that counterproductive norms and dysfunctional behavior within inner city communities contributes to the environment. They make clear that their focus is on opportunity structures and not behaviors (66). Examining structural causes is needful; declining to give way to condescending moralizing is admirable. But the authors err on the opposite extreme by romanticizing urban dwellers and leaving no room for individual agency in the account of their lives. Hence, high rates of obesity are attributed to parents being afraid to let their children play outside in dangerous areas and the lack of healthy food options in inner city food deserts. Observe that one of the reasons inner city residents engage in more risky behavior, they argue, is because residents are desensitized to danger by their dangerous environments. Yet the authors argue concurrently that the same residents suffer high rates of stress and obesity due to paralyzing fear of danger. One wonders what the authors do with studies in the food insecurity literature which suggest that unhealthy eating habits persist even when more nutritious foods are available[2] and even when such foods are subsidized.[3]

The tendency of the authors to deny agency can be seen in their marketing-based explanation for theft. Crime is higher in low-income communities because “Advertisers promote extravagant consumption patterns that only the middle and upper-middle classes can afford,” driving the neighborhood youth to steal—not for sustenance but for status, an apparently unassailable motivation (93). Of course, the entire elite-driven model of inner city conditions denies individual agency and betrays a lack of familiarity with inner city culture that engenders the romanticizing tendency (For what its worth, I grew up in the inner city beneath the poverty line and presently live in an economically depressed inner suburb–albeit slightly above the poverty line). Though such a tendency seems charitable, it drips with its own brand of condescension and is ultimately dehumanizing. No community can be reduced to the sum total of opportunity structures provided by elites, whether they are wealthier suburban residents, local business leaders, national-level dispensers of public services, or regional land-use planning commissions. Nor is such an exogenously-driven perspective of inner city ills necessary to motivate policy measures that might prove beneficial. Indeed, more even-handed diagnoses might elicit broader cooperation across the ideological spectrum.

One final note before concluding. The authors cultivate a practice throughout their work of lumping individuals into groups according to the authors’ own taxonomic criteria in ways that can be insulting. This practice is fundamental to the premise of their book, e.g., “the rich dominate the poor” (26). However, they make simplifying categories on the basis of race as well. In one passage from chapter five where they examine black political representation (which apparently is synonymous with the number of officeholders who are black), the authors state with a sense of irony that “class difference within black suburbs sometimes undermine blacks’ ability to act cohesively, even where they are a majority” (210, italics original). This passage speaks of blacks as an otherwise undifferentiated mass who sadly allow differences in income—of paramount concern elsewhere in the book—to undermine their natural unity and uniformity of interest. Such lumping is common to group theories of behavior but are no less insulting to members of putative groups, who may not recognize the demarcations which place them in one “imagined community” and alienates them from all others[4]. Such groupings always raise the question of whether it is the individual who cognizes his own interests and demonstrates them through his actions or whether some well-meaning observer may simply impute interests according to his or her own criteria.

Overall, this work by Dreier, Mollenkopf and Swanstrom is well-researched and informative. The authors provide detailed historical and statistical data that can aid policy makers and members of the reading public to think more critically about the political economy of metropolitan life. Their recommendations about rethinking local jurisdictional boundaries shows promise. Where the authors are weakest is in the unnecessarily biased narrative they construct from the data they collect. A just-the-facts approach would have been equally helpful, more concise, and perhaps even more broadly read. What makes this book a worthwhile read despite its limitations is that it challenges the reader to see that the lines we draw around communities are not to be taken for granted; these are policy decisions with consequences for local residents, especially those least able to “vote with their feet.”

[1] For example, the authors note that over a period of economic expansion, the nation’s poverty rate dropped from 14.8 percent to 11.3 percent, and median household income rose substantially across all groups. They follow this paragraph with: “Some trends, however, were less upbeat. Despite falling poverty and increased incomes for low-skilled workers, the gap between rich and poor continued to widen” (142).

[2] See http://www.npr.org/blogs/thesalt/2012/05/09/151707985/what-will-make-the-food-desert-bloom: “A few years ago, Popkin chaired a meeting of experts on the health effects of food deserts. The farmers markets didn’t seem to have a measurable effect on the health of people in that neighborhood. Nor did bringing in a supermarket.”

[3]  See http://www.ers.usda.gov/media/448664/eib29-4_1_.pdf: “If an income increase of approximately $400 per month is associated with an additional $4 in spending on fruits and vegetables at the grocery store, providing these households with an extra $100 in monthly income (or potentially, in food stamps benefits) may spur fruit and vegetable purchases by $1 per month for the entire household, or roughly one extra apple or banana every week for the entire household.”

[4] Benedict Anderson refers to the nation-state as an “imagined community.” See a quotation from his seminal work here.

Another Obamacare Challenge

So Obamacare is on the ropes again. There is currently a split in the circuit courts of appeals over whether the ACA permits health care exchanges established by the federal government to provide the subsidies that make the coverage affordable in those states which have declined to establish their own exchanges. As Tom Goldstein over at SCOTUSblog succinctly explains:

Here is the legal dispute.  The law establishes a formula for determining the tax credits.  It applies to insurance that is purchased through an exchange “established by the State.”  It does not mention the federal exchange.  The challengers argue that this language is clear:  the tax credits are available only for purchases through the state exchanges.

Courts are required to apply the laws that Congress enacts and to strike down rules that violate clear statutes.  On the other hand, Congress passes a lot of laws that aren’t clear.  In those cases, courts are required to uphold rules that reasonably resolve ambiguities in the statutes.

One court of appeals (the D.C. Circuit) ruled in a split decision that the ACA clearly prohibits the subsidy for purchases from the federal exchange.  Another court of appeals (the Fourth Circuit, based in Richmond, Virginia) held unanimously that, because the law is unclear, the subsidies can be provided to everyone.  Two other challenges to the rule are still waiting for decisions from the lower courts.

Goldstein’s full text can be found here. For really good background, see here and here.

(The success of the challenge thus far is quite ironic given the trend toward the federal exchange.)

Of course, the functionality of the law turns in large part on whether the subsidies are available in the 36 states with federally-run or partially-run exchanges. In part for that reason, I seriously doubt the challenge will ultimately succeed. I may say more on this when I get a chance…

 

A.K.

Economics of Sex and Marriage

I came across an interesting video today from an organization I have not encountered before. The Austin Institute, whose stated mission is “to be a leading resource for tested, rigorous academic research on questions of family, sexuality, social structures and human relationships,” produced the following video on the economics of sex that is worth a watch:

The video applies basic principles of supply and demand to the “market for sex” and views the advent of birth control as a technological innovation that acts as a supply-side shock which shifts the equilibrium price and quantity of pre-marital sex by dramatically reducing the cost of sex for producers (women). This new technology, by allowing copious quantities of sex without the risk of accidental families, bifurcates the “mating market”–allowing individuals whose preferences are primarily sex-oriented (predominantly men) and individuals whose preferences are primarily commitment-oriented (predominately women) to sort themselves into different mating pools. The result is more premarital sex, deferred marriage, and fewer overall marriages. The implicit premise, given the organization’s emphasis on “those practices, habits, and structures that make for greater sources of family stability,” is that deferred and fewer marriages are undesirable social outcomes.

I am always uncomfortable commodifying the uncommodifiable, which is required if we are to talk about sex as fundamentally an economic exchange. In an infamous and cringe-worthy passage from Judge Richard Posner‘s text Economic Analysis and the Law, Posner describes rape as a “coercive transfer” of property. He then proceeds to analyze the merits of permitting such a coercive transfer. Among the several reasons he gives for proscribing such conduct is that “Allowing rape would lead to heavy expenditures on protecting women, as well as expenditures on overcoming those protections. The expenditures would be largely offsetting, and to that extent socially wasted” (1986, 202). Although I take his point, I find it hard to conceive of the crime in question as anything other than an act of grievous violence. Many social relations can be described as markets only by analogy, and some analogies are more attenuated than others.

On the other hand, applying economic analysis to the “mating market” elicits less cringing than the example from Posner, and I think the points are well made. Nonetheless, some responses to the video so far have been (predictably) non sequiturs.

Update: The Business Insider has a slightly more responsive critique here.

 

A.K.

F.A. Hayek: In Memoriam, Part 1

A.K. and I are very excited to start a 10 part series of Great Social Scientists that have died in the last 25 years. There are so many great social scientists that have passed away, but few have impacted the profession as much as the top 10 most influential or important social scientists we have chosen. Each Tuesday, a new edition will debut. We won’t give away the top 10 just yet, but, as a major hint, we are going in chronological order of who passed away first. You may even get a sneak preview of which notable social scientist will be highlighted next week.

Each week we will give a brief summary, one longer quote, young and old pictures, two major contributions to social science (although most have many more) and a short video. This week’s edition summarizes a very important social scientist to me, Friedrich A. Hayek, who commonly signed as F.A. Hayek. Hayek wrote a seminal piece called, “The Use of Knowledge in Society”, that spoke volumes to me when I read it 6 years ago. This piece encouraged me to study economics. I am not sure one journal article has ever had such a profound impact on me… or ever will. His work is far too great to be summarized in one short post, but here is my best attempt at briefly summarizing and remembering the great F.A. Hayek.

Summary

Friedrich August Hayek was born in 1899 in Austria. He earned his doctorate in law and political science at the University of Vienna in 1921 and 1923.  Beyond Vienna, only Cambridge and Stockholm were other notable economic schools of the time. He was known as the one of the founders of “Austrian economics” which is a branch of economics that arose in 1871 by those working and studying at the Austrian School of Economics.  Austrian economists believe that  all costs and benefits to an individual are subjective and therefore, not measurable. One of the main differences of this school of thought is that Austrian economists believe that the complex reality of human action cannot be captured in a mathematical theory or analysis.

Hayek researched on law, labor unions, the welfare state, business cycles, capital theory and monetary theory. His first book, Monetary Theory and the Trade Cycle was published in 1929 . During the same time period, John Maynard Keynes was writing his famous book: General Theory of Employment, Interest and Money. Hayek frequently disagreed with Keynes’ work because he believed Keynesian policies to combat unemployment would cause inflation.  Hayek  stated that low-interest rates caused artificially high investment which will turn the boom (referencing more investment and growth) into a bust.   This view is what is accepted by mainstream economists today. Hayek also wrote The Pure Theory of Capital in 1941 related to monetary aggregates.

The famous Boom and Bust video, was posted in an earlier blog entry. It is a modern “rap” by actors impersonating Keynes and Hayek. It explains two of the greatest economic thinkers very well in such a short parody.

After studying Germany during World War II very closely, Hayek wrote The Road to Serfdom, 1944, which is regarded as one of his most famous books. The Reader’s Digest version condensed the book for the masses. For the first and only time, Reader’s Digest put the condensed book at the front of the magazine where no one would miss it. Originally only hundreds were printed, but eventually they were in the hundreds of thousands. This book explained the rise of Nazism as a cause of socialist practices. In the Foreword of the Reader’s Digest version, by Walter Williams, Williams sums up Hayek’s main point:

“Collectivism, whether is in Germany, the former Soviet Union, Britain or the USA, makes personal liberty its victim.”

 

Another great book was the Constitution of Liberty (1960) which talked about freedom and law. In the book’s post script, “Why I am Not a Conservative”, Hayek distinguished his classical liberalism from conservatism.  He states,

“One of the fundamental traits of the conservative attitude is a fear of change, a timid distrust of the new as such”(p. 522)…”like the socialist, he is less concerned with how the powers of the government should be limited than with that of who wields them; and, like the socialist, he regards himself as entitled to force the value he holds on other people” (p.523).

One of his last pieces of work was The Fatal Conceit (1988) which showed how intellectuals’ are attracted to socialism. In this book, Hayek says that property, honesty, and laws of contracts work because they allow a free society. It is conceit to suppose we can replace universal values with a council of wise men who will tell us how to act and direct us individually for the achievement of some social or economic plan. Socialist ideals appeal to our instincts, in our hunting and tribal past, but cannot work in large societies today.  Hayek is what is most commonly known as today as a classical liberal scholar.

Road_to_Serfdomconstitution of libety

Main contributions as a social scientist

Hayek was unique in that he was not only a trained economist, but also in law. The style in which he wrote often erred toward philosophical and he wrote on many subjects such as taxes, Social Security, American Constitutionalism, education, and agriculture amongst the topics mentioned above. Two of his many impacts as a social scientist were:

  1. Spontaneous order/ rules of order—This is the idea that the general benefit in a social system is the spontaneous ordering and forces that are beyond the control of men. Structures of social life evolve not because they are consciously chosen, but due to recognized benefits which they would bring.  Examples Hayek uses are language, walking in someone’s foot tracks in sand and bees. Taking the footpath example, the creation of the footpath in the sand was nobody’s intention, but the fortunate result of their private ambitions to take the easiest route. While these structures are undoubtedly patterns of human behavior, they are not the consequence of human design or planning.

The task of social and political studies, then, is to discover what sorts of action at the individual level will in fact bring about a smoothly functioning social order. But for an overall social pattern to emerge and survive through evolution does not necessarily require that the individuals themselves all act in precisely the same way or have a common purpose. Even a very limited similarity of action may be sufficient: for example, rules against injuring others, or theft of property, or breaking promises, may well make co–operation and social life possible but leave each individual a great deal of scope for free action. The regularity of individual behavior will produce an overall order.

  1. Defense of individual liberty/defining role of government–Individual freedom is needed to develop society and any attempt to inhibit freedom will rob the social order of its unique ability to allocate resources efficiently and to overcome new challenges and problems.  Freedom allows people to conduct experiments and try new ideas. We are not wise enough to know what will work in the future, so we trust the independent and competitive efforts of people to induce new ideas. The best ideas will prove useful and will encourage growth.

There is no central planner who is better equipped to come up with new ideas. A free society, however, does not come without rules, but is limited to predictable rules. If we know what actions are expected of us, in terms of things we must not do and things we must do, and know the rules which bind the government in its use of force, then we are spared the arbitrary nature of many governments.

There are many important contributions from Hayek and the simplicity of his points alludes to how intelligent and well written F.A. Hayek truly was. A more complete and thorough understanding of all of Hayek’s contributions can be found: here

 

Picture of F.A. Hayek

Here is a picture of F.A. Hayek in his younger years vs. towards the end of his life:

hayek_0Friedrich_Von_Hayek

 

Selected Quote

One of Hayek’s most well-known short pieces, “The Use of Knowledge in Society”, published in the American Economic Review in 1945 expanded on Adam Smith’s belief of the invisible hand. Hayek explains how knowledge works in society without the use of a central all-knowing entity.

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. (emphasis, his own)

Brief Video

Here is one video in which F.A. Hayek attempts to answer why Intellectuals Drift Toward Socialism:

“Part of the government ideas which govern thinking since the 18th century, is the idea that we can make everything to our pleasure, that we can design social institutions in their working. Now, that is basically mistaken, social institutions have never been designed.” (0:34)

F.A. Hayek died on March 23, 1992, but his legacy and will forever live on. Next week, A.K. will be posting on Amos Tversky in Part 2 of In Memoriam.

Additional References:

  1. Hayek, Friedrich A. The Road to Serfdom with the Intellectuals and Socialism. London: Readers Digest, 2001. Print.
  2. Hayek, F.A. The Constitution of Liberty. London: The University of Chicago Press, 2011. Print.

Insights on Ideology, Institutions, and the Limits of Human Judgment

Three insightful quotations from three works which inform the New Institutionalism:

People in all human societies create mental models of reality. These models attribute causality to various factors—oftentimes invisible ones—and their function is to make the world more legible, predictable and easy to manipulate….The sharing of belief and culture improves cooperation by providing common goals and facilitating the cooperative solution of shared problems.

Francis Fukuyama, The Origins of Political Order (2011, 442)

 

[I]nstitutions create elements of order and predictability. They fashion, enable and constrain political actors as they act within a logic of appropriate action. Institutions are carriers of identities and roles and they are markers of a polity’s character, history and visions. They provide bonds that tie citizens together in spite of the many things that divide them…

Most contemporary theories assume that the mix of rules, routines, norms, and identities that describe institutions change over time in response to historical experience. The changes are neither instantaneous nor reliably desirable in the sense of moving the system closer to some optimum. As a result, assumptions of historical efficiency cannot be sustained.  By “historical efficiency” we mean the idea that institutions become in some sense “better” adapted to their environments and quickly achieve a uniquely optimum solution to the problem of surviving and thriving.  The matching of institutions, behaviors and contexts takes time and have multiple, path- dependent equilibria. Adaptation is less automatic, less continuous, and less precise than assumed by standard equilibrium models and it does not necessarily improve efficiency and survival.

March & Olsen, “Elaborating the ‘New Institutionalism’” 2005

 

[P]eople rely on a limited number of heuristic principles which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations. In general, these heuristics are quite useful but sometimes they lead to severe and systematic error.

Tversky & Kahneman “Judgment Under Uncertainty: Heuristics and Biases” 1974

 

A.K.

People Talk With Their Feet, Why Not Listen?

One of my colleagues just posted yesterday about federal subsidies for cities that are failing. He questions why the federal government props up cities that have been in a population decline and lists which cities made the “Most populated cities” list in 1950 and then again in 2013. Detroit, Cleveland and Washington D.C. among others no longer make the top 15. He studies cities and, in particular, the changing demographics of cities over time, so his work on this subject is very interesting.

 

In particular, he makes a great point about cities not having a right to be large and prosperous:

 “Cities like Cleveland and St. Louis used to be relatively large and well off while cities like Columbus, OH and Austin, TX were small and relatively poorer. Today that is flipped, but that does not mean that the federal government should attempt to put things back the way they were; no city has a right to be large and prosperous.”

 

This sounds correct, but in reality I am not so sure that cities, or the people who live in them, believe they have a right to grow and create wealth. As mentioned in his blog, cities rise and fall for numerous reasons such as businesses leave for a cheaper location, better parks and recreation, better hospitals, tax structures of local governments and zoning policies. So, is it not that cities lobby for federal financial assistance to overhaul tax structures, fix ill-maintained parks and create better hospitals and then are awarded federal dollars? Or is it that they are envious of prosperous cities like New York and they feel like they have a right to be like NYC without actually moving its entire population to New York?  I would think that it would be the former, although, additional dollars for failing cities rarely helps fix tax structures, bad government or parks. An alternative option would be that the government is worried about socio-economic implications with a declining population since the rich are more mobile, while poorer members of society do not have the means to relocate to find a better job, better neighborhood or school for their kids. However, if the government set up performance-based federal money, I think the decision to give more federal dollars to some cities would change.

The federal government has been handing money to one declining city, Detroit, since the 1960s by means of more subsidies and propping up their large automobile industry. Forty years later, Detroit still has issues, while they continue to receive government money.  If the federal government believed that population trends are any indication for future growth there should be no reason for an increase in federal dollars. People talk by ways of their feet and the government should listen.