Friday, July 11, 2014

How to cooperate with the future

Very interesting paper published yesterday in Nature. It's an experimental paper, reporting the results of a cooperation game in which people try (of course!) to cooperate, but also have incentives to cheat and take more for themselves. If each pursues his or her own ends without regard for others, there's a tragedy of the commons in which a common pool resource gets wiped out. It takes cooperation and control over selfish actions to avoid disaster for everyone. Lots of experiments have looked at such matters before, of course. This one adds a twist.

The twist is to make the experiment more relevant to some of the tricky issues we face today in thinking about climate change, how to preserve the environment, etc. Someone who is today 60 years old doesn't have the same personal stake in avoiding climate change as someone who is 10, because the older one is much more likely to be dead by the time serious effects kick in. The twist in the experiment is to include this cooperation between generations effect. In effect, the experiment probes our abilities to cooperate with the future -- with people we will never meet. Clever idea to try to do this in an experiment, and I think they've managed it quite well.

Oliver Hauser and colleagues placed volunteers into groups of five people, which they called "generations." In a typical run of the game, they would give the first generation a common pool of 100 units of wealth, with each of the five individuals in this generation able to "extract"  between 0 and 20 wealth units from this pool. Their choice entirely as individuals. The people know that the wealth pool will be passed on to future generations ONLY if the current generation extracts no more than half of it (50 units). Hence, individuals caring about the future generation could choose to extract, say, 10 or fewer units, while those not caring could just take 20.

The individuals were told that there actually would be a future generation with some probability p -- say, 0.8. Hence, there's a 20% chance that the game will just end, so no need to worry about future the generation, and 80% it won't, in which case the wealth resource will or will not be passed on depending how people act in this generation. This game repeats for a number of generations as determined by the random process (on average 5 for p = 0.8).

So, what happens? The research was designed to look at two different scenarios. First, where people just act as they want to without any further pressures on their behavior, and second, in the presence of various kinds of mechanisms designed to help them cooperate more effectively, preserving the resource through generations. The results are interesting:

1. Anything goes -- no institutions at all

In this case, everything goes to the dogs immediately. Interestingly, many people aren't wholly greedy and readily reduce the amount they extract so as to preserve the resource for the next generation of total strangers. The study found that over 20 separate trials, about 68% of the individuals extracted no more than 10 units. Even so, this wasn't enough the overcome the anti-social actions of a greedy minority which extracted so many units that the common pool vanished fairly quickly. In this set of experiments, there were second generations in 18 games, and only in 4 of them was the pool passed on intact through one generation. In the other 14 it was immediately wiped out by over-extraction.

Lesson: people aren't all bad, most have pretty good intentions, but the persistent efforts of a small minority of greedy cheaters is enough to mess everything up. In no single case did the common resource pool persist past 4 generations.

2. Anything doesn't go -- behaviour control by democracy

Maybe democracy can help? An alternative might be to have people in any generation hold a vote on how much of the resource should be passed on. Then, the result (taken as the median or more common choice among the voters) would determine the actual behavior of each and every individual. Freedom would reside in having a vote, not in just being able to extract what you like.

As the paper notes, there are some results in game theory that -- in the context of rational, self interested agents playing normal public goods games -- show that this kind of trick gives very good results. When selfish individuals can be strategic about getting something back from their cooperation, they can do so. However, this standard result does not apply in this generational game because no individual can gain anything by being cooperative. The first generation of rational greedy people would simply vote to each take 20 units and the resource would be gone. Who cares about those people in the future, anyway.

But of course, that's only if people really are rational and greedy. What about real people? Here the experiments suggest something encouraging. In another 20 trials, the researchers tested this protocol and found that now the resource pools never vanished even once, but were passed on and replenished by the unselfish voting of people for as long as the games persisted. The non-greedy norms of the majority, when linked to the coordinating mechanism of democratic voting, can overcome the greed of the uncaring minority -- in this very simple setting.

The message that the simple institution of democratic voting -- IF the outcome of the vote is then effectively enforced on the behavior of all individuals -- can be hugely beneficial for overcoming intergenerational tragedies of the commons. Secondarily, that analyses of what is possible in overcoming these kinds of problems is misleading and naive if conducted in the framework of strictly self-interested agents; pro-social norms in the behavior of real people are a resource for cooperation that we can put to good use. As the paper concludes:

We have shown that in the absence of regulation, a minority of selfish players consistently deplete available resources. By implementing median voting, however, this negative outcome can be prevented—but only if all players are bound by the outcome of the vote. Votes that are only partially binding, such as the international Kyoto protocol, have little power.
More generally, our results emphasize the importance of institutional designers moving away from the assumption of universal self-interest. We extend the ‘behavioural public choice theorem’ by demonstrating how voting can allow amajority of pro-social individuals to override a purely selfish minority, leading to costly group-level cooperation with future generations. Real-world data are consistent with this suggestion: countries that are more democratic also have more sustainable energy policies...  Policymakers can do much to promote the public good by using a behavioural approach that is informed by amore accurate understanding of human psychology. Many citizens are ready to sacrifice for the greater good. We just need institutions that help them do so.

This final comment reminds me of a European economist who I met several years ago at a European Commission meeting. Very polished, frightfully clever, Oxford and Cambridge, LSE and all that. In conversation, he made fun of all those silly people who recycle and try to take small steps to conserve energy, and had a really good laugh (all on his own) about their little minds and cute intentions to push our world in a better direction. All very silly, he said, because it will never amount to much. Nothing would really matter until it was determined what to do by people such as himself and then put into practice at an international level.

What seemed not to register in his brain at all was what all that small-sacrificing behavior actually reflects -- a desire to help, to make a difference, to change things, to care. Many people aren't only self-interested, and all their tiny efforts show it. They want to help solve the big problems. So that final sentence in the paper is exactly right: "We just need institutions that help them do so."

Saturday, June 28, 2014

The cost of fixed ideas

Books on economic policy aren't generally page turners. But a new book by economist David Colander and businessman Roland Kupers certainly is. It makes the argument that some of the assumptions economists made many decades ago -- especially about people having fixed preferences -- have effectively created a trap for policy analyses. We're stuck as a result with endless, useless arguments about markets versus government. Change those assumptions, and it's possible to imagine policies that don't have markets and government in opposition; it ought to be possible to have free markets and a useful and smaller government at the same time, and achieve not only material prosperity but a wide range of social goals too.

I wrote about the book in a Bloomberg column a few days ago. That column has garnered all of 4 comments so far, which I think also illustrates another problem we have. The column is all about how we might find a way around all of the sterile arguments of markets vs government, and not too many people seem to be interested in that.... or at least not motivated to comment. From past experience, I know that any column which seems to take a side in those arguments stirs up a lot of protest. 

Anyway, read Colander and Kupers' book. Here's the column:

From financial regulation to health care to climate change, we can't agree on what to do about anything. Free-market enthusiasts celebrate the creative power of markets and want smaller government; critics counter that we desperately need government intervention to solve problems that markets can't handle. Neither side can understand the other.

Is there any way out? Well, if you're discouraged, I suggest looking to an inspiring new book by an economist, David Colander, and a businessman, Roland Kupers, who believe the deadlock needn't be permanent. We can have better markets, they say, and more effective (and smaller) government too, if only we can muster a little more economic imagination.

The book is called ``Complexity and the Art of Public Policy,'' and its main point is that our policy debates have fallen into a trap that economists inadvertently created some 50 years ago. That's when they started building mathematical models of economic systems, and, to simplify things, made the assumption that people have fixed or unchanging preferences and desires. Sounds innocuous; it wasn't, and isn't.    Read more.

Friday, June 6, 2014

Medium Tedium

In comments on my last post, Gekko asks quite rightly why I've been doing this silly business of posting two paragraphs and then linking to "more at Medium." It's a good question, so let me explain what's going on. I know it's irritating, and I'd like not to do it, but ....

A while back, Medium asked me to write some things for them. They pay a few writers (a little, very little, in my case) and are in the stages of trying to get their project growing. What it will grow into remains unknown. I do like their layout, and would like to be involved in Medium if and when it turns into the next big thing, whatever that might be.... but I also don't want to just go over there and abandon my blog. First, Medium is just articles; you can't have any sidebars with links to other people's sites, and I think such links are valuable, so visiting there is very different. Two, I don't know if Medium won't just disappear two months from now.

So, I'm left with this very unsatisfying business of posting two paragraphs here, and then linking there. (By contract, I'm not supposed to post in both places, at least not before a significant delay.). I'm not sure what else to do. The dilemma has in fact hurt my blogging, as some days I've started writing about something, then fallen into internal debate about whether to post here, or over there, or what else I might do, and then.... just gave up after an hour and did something else, like clean the gutters or walk the dogs.

If anyone has any ideas, I'd love to hear them!

Wednesday, June 4, 2014

Defending economists -- from themselves

I am on occasion a fairly harsh critic of modern economics, for many reasons. I think economists use the concept of efficiency in a slapdash manner. I think they make a fetish of rigorous mathematics even when they gain no insight from it; it's too often imported as a tool to impress others, rather than as a legitimate means to understanding (see the absurd Appendices of this paper, for example, proving various irrelevant theorems about Markov processes). I think economists (most of them) don't make use of enough modern mathematics from dynamical systems theory.

I also think economists often infect their social analysis with their own subjective values, even while mistakenly and dangerously believing otherwise (as a result of their training). I think the modelling assumption of rational expectations, for agents dealing with anything but the simplest environments, is just a silly idea. I would go so far as to say that I think many economists don't appreciate basic elements of scientific method, preferring the logical beauty (?) of deductive theories to empirically relevant ones. Etc. Read almost anything I've written on this blog for similarly critical opinions.

But I do, just the same, also think there's lots of good and useful economics, some of it even beautiful. And I think economists themselves should do a better job standing up for it. Some very prominent and well known economists are giving the field a bad name. Let me explain.

Read the whole thing at Medium.

Friday, May 23, 2014

A thought on Steven Levitt...

Professors of economics at the University of Chicago like being provocative. Following the tradition of Milton Friedman, they enjoy causing a stir by making crazy, freaky claims in public. So it is really no surprise to hear economist Steven Levitt of Freakonomics fame make the claim that “it doesn’t take a whole lot of smarts or a whole lot of blind faith in markets to recognize that when you don’t charge people for things (including health care), they will consume too much of it.” This is why, he suggests, a country such as the UK would benefit by replacing their silly publicly funded healthcare system with a truly free market where people would have to pay for everything — the market could then through the price mechanism work its miracles and produce a vastly superior outcome, without anyone being tempted to over-consume.

I suspect that Levitt cannot possibly believe this — at least I hope not. If he does, then he has an embarrassingly woeful knowledge of the literature in his own field, as it doesn’t take a lot of smarts to realize that this statement ought to come with about 10 pages of qualifications and conditions. For a dose of reasoned good sense on the topic, see commentary by Noah Smith, and also this excellent insight from Cameron Murray. Makes you wonder by how many decades the Freakonomics series has actually set back the public understanding of economics.

But in the spirit of “Thinking like a Freak” — a new book pushing bold thoughts of this kind by Levitt and co-author Stephen Dubner — I thought I’d try to see if Levitt’s idea, taken seriously, might lead to something interesting. I think it does. Perhaps Levitt really is on to something freaky big and astonishingly brilliant, if we’re only brave enough to follow the logic through to its end without fear or trembling. Let’s suppose Levitt is right that “when you don’t charge people for things… they will consume too much of it,” and let’s think about the causes of climate change, as well as possible remedies.   Read more at Medium.

Tuesday, May 6, 2014

Conservative economists assume what they want to prove, claim victory!

I have a new column out in Bloomberg looking at some arguments by conservative economists against Thomas Piketty's work on inequality. I stumbled last week across this post by Tyler Cowen, which Barkley Rosser helpfully put into context. Cowen claimed that we don't really need Piketty because several earlier studies "already give an explanation" for the observed wealth inequality. Really? It turns out, he suggested, that you don't need any stories about returns to investment growing faster than wages. Standard economic models have already shown that inequality may just be the consequence of simple things like differences in personal patience (rich having more, of course, and the poor less), or in the effects of random shocks to peoples' ability to earn over their lifetimes.


Having looked into it, I now think this is a perfect example of Chameleon Economics, as recently described so brilliantly by Paul Pfleiderer. You tuck some preposterous assumptions A into a model, derive some apparently interesting result X, and then hope that people will soon forget about A so you can go around saying "we've shown that X" holds. The preposterous assumptions A might even include an assumption that is essentially equivalent to X, so you've assumed the result you want to prove. This trick is the real basis of the papers that Cowen pointed to, but jeez -- the authors did such a good job of plastering their arguments over with 50 odd pages of technical mumbo jumbo that it took quite a lot of effort to see what they were up to. In the paper by Krusell and Smith, for example, you can read on and on in utter semi-conscious misery before you begin to find the real secret of what the authors have done, as they finally admit:

When the representative-agent model is altered only by adding idiosyncratic, uninsurable risk, the resulting stationary wealth distribution is quite unrealistic: there are too few very poor agents, and much too little concentration of wealth among the very richest. For this reason, we consider a version of the model with preference heterogeneity: agents have random discount factors, whose values have a symmetric distribution with a small variance and whose transition probabilities are such that the average duration, or life length, of a discount factor equals that of a generation. In this fashion, we incorporate genetic differences in the population that are passed on imperfectly from parents to children. We show that this model does succeed quite well in matching the key features of the wealth distribution.

In other words, they start out seeking an explanation for the unequal distribution of wealth -- why do some people have so much more than others? Ultimately, they find that this result tumbles directly out of their economic model, IF they make the assumption that some people in the model are more patient than others, and are therefore better at saving and accumulating wealth than others. There you go -- the whole result from that one assumption (plus some others)! Science advances! 

I'm reminded of the famous claim of the doctor in Moliere, explaining how opium induces sleep? "By virtue of a faculty," the virtus dormitiva, he said, "the nature of which is to put the senses to sleep." Fortunately, Moliere was writing comedy, not pretending to do science.

Anyway, how about the following for a funny coincidence. Courtesy of a kind invitation from Ole Peters, I'm spending May at the London Mathematical Laboratory, a small mathematics center in Central London. Last week we were discussing Piketty's book, which Alex Adamou, one of the researchers here, has been diligently working his way through. Ole boldly suggested that maybe we should try to get Piketty to come here and give a talk on the book, whereupon we all chuckled at the very idea, thinking it preposterous given the outrageous current demands on his time. Piketty seems to be on a worldwide tour of epic proportions.

Yet this afternoon we learned that, at the very moment of our discussion, Piketty was actually in the very same building, one floor above our heads, giving a talk to a public policy think tank! Had we been speaking a bit louder, he might have heard us!

Tuesday, April 22, 2014

DSGE: the sinking Titanic of economic methodology

What's the future of macroeconomics? Does it lie in further development of the old-style models of rational optimizers and equilibrium, the dynamic stochastic general equilbrium (DSGE) models? Or will it instead be a new breed of agent-based computational economics (ABM), i.e. in computational simulations which don't restrict themselves to rational optimizing behavior, or to equilibrium?

From what I see, the DSGE people -- the old guard, if you will, as this IS the current mainstream approach -- don't take the opponent very seriously. They seem to sneer and chuckle at ABM for its lack of mathematical rigor; they don't even prove theorems! BUT, I suspect, this is only because the DSGE people secretly know very little at all about ABM, about its potential, its power and flexibility, and especially, about how far it has been developed already, for exploring banking stability,  monetary policy and so on. DSGE, as I see it, is doomed for sure. It's not going to be a fair fight.

DSGE is the Titanic of economic methodology, already taking on water, its bow looming high in the air. Message to young economists: Don’t let your career go down with it! Read more at Medium.