Two followups, in way too many words
1. Asymmetry of information about information
In the previous post, I identified government, health care, education, and finance as the “asymmetric information industry”. Arnold Kling makes an important point:
[I]nformation asymmetry is that the sellers know what they are selling much better than the buyers know what they are buying. However, I do not think this is what distinguishes those four industries. There are plenty of other situations of information asymmetry, including buying a house, buying a car, or buying a piece of electronic equipment.
I think what distinguishes these four industries is that the sellers themselves know less than what people expect. Educators do not know what, if anything, actually adds value. For all we know, test scores are determined by the backgrounds (mostly genetic) of the students, with remaining differences that are random and irreproducible.
Kling is right, of course. When writing the previous post, I considered switching to the term “uncertainty industries”, as both buyers and sellers of government, healthcare, education, and financial services are often in the dark about the degree to which transactions will provide value. But “uncertainty industries” suggests a similarity of confusion between buyers and sellers, which isn’t right. Sellers still have substantially better information. First, there is plenty of old-style information asymmetry in all of these industries: Politicians sometimes do know they are favoring or overpaying financially supportive suppliers. Health care providers sometimes do recommend tests and procedures that from a distance they would recognize as superfluous (even accounting for defensive medicine concerns). Educational institutions notoriously play up successes among graduates they know to be outliers. And, of course, the Wall Street tradition of “putting lipstick on a pig” is denied before every jury but widely and even fondly acknowledged when the context is nonspecific.
Still, as Kling observes, this kind of thing goes on in almost all industries. Sellers know more than buyers, salesman overstate benefits and downplay weaknesses of which they are aware, etc. So what makes these four industries different? Two things:
Information asymmetries are unusually difficult to resolve in these industries. A substantial fraction of people who buy a low quality house, car, or stereo eventually come to notice that. This makes it possible for new purchasers of these goods to manage their information problem by researching others’ experience and seller reputations. But in the four industries I’ve described, even after we have purchased services, we are often unable to evaluate their quality.
- Lots of Harvard grads do well, so reputation “yay!”. But people accepted to Harvard probably would have done well regardless of their choice of college. To the degree Harvard grads do unusually well, it’s hard to disentangle socialization and signaling effects from the benefits of education.
- In finance, if a merger destroys value or an investment performs poorly, it is rare that the loss can be traced back to poor work by an intermediary. It’s clear that a lot of RMBS were constructed shoddily, even criminally. Yet impeccably produced RMBS of a 2006 vintage would also have performed poorly. Ex post, with full benefit of hindsight, most investors can’t easily tell the difference. Investment banks that put shoddy deals together have not taken reputational hits relative to their peers.
- Government programs work well or poorly, perhaps provide some value but not as much as we hope. We rarely have apples-to-apples benchmarks by which to evaluate them.
- Health care outcomes are jointly determined by health care services and often unobservable aspects of patient health. These are hard to disentangle just to evaluate effectiveness. Ranking health-care services in terms of value-for-money, while stakeholders with diverse interests necessarily participate in the research, is very challenging.
In fact, despite ostentatious use of high technology and sometimes desperate fetishization of metrics, one might describe all four of these industries as premodern.
More interesting is Kling’s point: “sellers themselves know less than what people expect”. That is, service providers in these industries are themselves uncertain of the value they are able to provide. Yet providers work hard to hide and downplay their uncertainty. Politicians pushing new programs offer authoritative projections of brilliant outcomes, although many initiatives fail once the lights of the bill-signing fade. Healthcare, finance, and education are built around credentials and prestige, despite questionable correlations between these tokens and value provided. Healthcare, finance, and educational institutions market themselves hard, portraying themselves as professional, competent, and above all, effective. These claims are not certain to be lies: High competence might sit within the wide confidence intervals that would surround a fair evaluation. But successful institutions do, and must, misrepresent those confidence intervals (to others, and sometimes to themselves). After all, would you go under the knife of a surgeon who told you that he thinks he might be competent? In all of these industries, there is an information asymmetry surrounding the degree of certainty that the services provided will in fact provide value. Providers have reason to be far less confident of their ability to deliver than they lead their customers to believe.
Note that these problems are not just a matter of bad actors. These industries face intrinsically difficult information problems. We can condemn a used car salesman who finesses odometers, but we can’t condemn the surgeon who thinks he is a god. We need him to think he is a god, despite the evidence, so that he is willing to come to work and we are willing to permit the violence he will do to us. Absent reliable markers of quality, we imagine that unreliable self-evaluations are probably better than nothing. “At least he his willing to put his reputation on the line,” we say of the confident doctor when we choose him over his modest colleague, although an egotist’s reputation may not suffer more than anyone else’s when things fail to work out. If our heuristic is to take self-evaluations as informative, competitive forces demand that providers offer “aggressive” self-evaluations. And so they do, in all four industries.
That doesn’t mean politicians, doctors, teachers, and bankers should get a free pass for all the ways they mislead us. There are corrupt practices in these professions that we can detect, that we should condemn and sometimes criminalize. But as long as these are fields in which providers themselves can’t reliably evaluate the quality of the services provided, the rest of us will have a very hard time distinguishing between corrupt practices and natural variability of outcomes. Moreover, these industries are likely to foster particularly insidious forms of corruption. Human beings want both to do well and to do good. Uncertainty leaves insiders ample room to persuade themselves, genuinely, that practices they find remunerative are in fact “best practices”. Under most circumstances, corrupt actors try not to be discovered, and when they are discovered, they are ashamed. When corrupt practices are discovered among bankers, lobbyists, health insurers, pharmaceutical companies, and teachers, our op-ed pages overflow with explanations of how activities that may smell questionable to the uninformed nose are in fact in the public interest. The columnists may be quite sincere. In fact, if you had the sort of detailed understanding available only to industry insiders, you would surely agree with them.
Which brings us back to the original point: We need the “information asymmetry industry”. One way or another, we’ll have bankers, health care providers, educators, politicians, and other sorts of professionals the quality of whose work is difficult to evaluate, by practitioners or by outsiders, ex ante or ex post. But we should acknowledge these are problematic industries for a capitalist economy and a democratic polity. Forecasts that they will dominate, or prescriptions that we should specialize in these sectors to exploit alleged comparative advantage, should be greeted unenthusiastically. I hope that Timothy Geithner takes note.
2. You know that you are getting old when explaining how Marx was wrong now makes you a Marxist
Okay. This is kind of trivial, but it made me giggle.
In response to the previous post, commenter john c. halasz writes:
Your Tyrone has lots of hair on his head and a gray bushy beard.
Matt Yglesias makes the reference more explicit:
[S]ome recent posts from Steve Randy Waldman and Ryan Avent that seemed to me to be walking up toward a Marx-style theory of overproduction, crisis, and the collapse of capitalism.
John Halasz is a good commenter, but I don’t know how old he is. Wikipedia tells me that Matt Yglesias is just over a decade younger than I am. What made me laugh is that the story he describes as “walking up toward a Marx-style theory of overproduction, crisis, and the collapse of capitalism” is basically a retread of the story my parents and high school history teacher told me about why Marx was wrong. That led me to wonder — were Halasz and Yglesias ever told the same story?
Specifically, the story I was told in my impressionable youth was this: Karl Marx had been a sharp analyst, but he was a terrible futurist. He did a good job of describing the dynamic of capital accumulation and the near-term stresses that dynamic would put on the 19th and early 20th century societies. But his prescriptions about how societies would and should respond to those stresses were catastrophically mistaken. In particular, Marx thought that capitalists were trapped in an unstable dynamic of capital accumulation from which they benefited, on the one hand, but which led inevitably to collapse and from which they could not, as a class, escape. Individual capitalists who tried to be “enlightened” in some sense would simply be sloughed off by competitive forces and join the ranks of masses. In modern economic lingo, there was a collective action problem. Capitalists would not, could not, surrender their privilege voluntary, therefore violent revolution by the working classes was the only possible way forward.
I remember pride in my businessman father’s voice when he explained to me that this was wrong. Marx had underestimated the ingenuity and flexibility of capitalist societies, and particularly of the United States during the New Deal. Government intervened to solve Marx’s collective action problem, enabling capitalists secure their enlightened self-interest by keeping a distribution of prosperity sufficiently broad that the predicted collapse could be avoided. My parents were (and still are) center-left, but staunchly anti-Communist. My mother had “escaped” — that was always the word — Communist Romania; she was (and remains) deeply grateful to the countries (Israel and the United States) into which she was rescued. To my father, American capitalism’s adaptability and ingenuity had proved Marx definitively wrong, in the best possible way — by producing a stable society that served the vast majority of its citizens, while countries whose politicians had followed Marx’s prescriptions grew into monsters.
I am not a particularly original thinker. Most of my posts are mutations of ideas that people better than me have whispered in my ears. I used Tyrone, in the previous post, as an exaggeratedly arrogant mouthpiece for my father’s story, with the minor twist of letting technology rather than capital dynamics be the force that would lead to collapse, but for the ability of the system to adapt via new institutions. Having heard essentially the same explanation in high school history class, I took this story to be widely shared conventional wisdom, at least within the mainstream, slightly center-left milieu in which I adolesced.
That would have been 1985 or 1986, Ronald Reagan’s America. Communism was a living rival then. Stories of our relative material success, of our system’s ability to deliver far better lives, even to the “working classes”, than the Communists, were a matter of national security. Matt Yglesias lived his 16th year in a very different world. America was triumphant and forging the “Washington consensus”. “Right-sizing” had already been invented as a euphemism for firing people. The project that Reagan had begun by “standing up to” the nation’s air traffic controllers was well underway. If a young Matt Yglesias had the misfortune of chatting with me in, say 1997, I would have had little good to say to him about labor unions but would have enthused about the transformative power of free markets and technology. I like to think of myself as unconventional, but I like to think a lot of things. I think it fair to say that the conventional wisdom that surrounded a curious, very bright teenager in 1997 would have been different from what I experienced a decade earlier, for better and for worse. I think this matters, it affects us all a lot more than we think it does.
Anyway, I really did giggle when I realized that an argument I thought of as conventional wisdom about how America proved Marx wrong sounded, perhaps because my audience was of a different generation, vaguely Marxist.
I’m not taking issue at all with the substance of Yglesias’ post, which I think is smart and quite right. Health care costs are millions of people’s livelihood, and inefficient health care costs are a big part of that. Much of how modern economies survive is by protecting information problems and barriers to competition that sustain overpayments. This broadens the wealth distribution while permitting recipients the fiction that flows of purchasing power involve no transfers (“welfare”), only proud, self-reliant income. The theory of labor unions and the theory of an inefficient health sector are identical, except one is more transparent and the other has proved more capable of buying political protection. The problem, in both cases, is not that there are transfers, but whether the distribution of transfers — to whom, from whom — is wise and fair. By forcing ourselves to pretend there are no transfers, we prevent ourselves from even posing the question.
Perhaps I am a creature of the conventional wisdom of my day, but I want to tell it strong. It is not those who advocate, but those who prevent, stabilizing transfers of purchasing power, who are the true Marxists. These self-styled capitalists do not espouse Marx’s theories, but they do something much worse: They perform them. They behave in precisely the way that Marx expected capitalists to behave. They cripple the American system’s greatest strength — its ingenuity, flexibility, adaptability. They prevent the sort of collective action through which earlier generations proved that capitalism could made be consonant with decent, stable, and broadly prosperous societies. In doing so, they risk proving Marx right.
Update: Not unusually, commenters have had much more interesting things to say than I’ve said. Nicholas Gruen @ Club Troppo has made a full post of an excellent comment by Indy. Also, Arnold Kling has responded.
- 21-February-2011, 7:45 a.m. EST: Added bold up about Nicholas Gruen hoising Indy’s post, and noting Arnold Kling’s response
Thanks for this Steve. A great post (the first one above). I think you could have thrown in ‘management’ as one of your asymmetric info industries and then you could see what a pretty pass we’re in.
One of the things it puts me in mind of is all the hubris of ‘strategic planning’ with all the nonsense that’s involved in it. So much of this is a kind of anti-thinking in which one pretends that strategic planning is all about everyone having a say, feeling good, ‘aligning’ with their boss and their team. It’s all part of the shtick of confidence in the elite – or pretending you know what you’re doing.
So much of what comes out of these things is self-evident nonsense – visions of the future in ten years time, plans to get there, when the best one could do in one’s ignorance would be to look around for a few things that you could be confident you might be able to make work a little better with sufficient effort. Instead great visions are summoned up – all as a kind of cover for the profound ignorance of everyone concerned.
One of the implications that comes from the picture you’re paining is that the right ethos for the professions you nominate as the asymmetric information industries is modesty. Alas the culture of these industries – I think with the exception of education – is the exact opposite. Arrogance, ‘trust me’ and hubris.
The other thing that it’s worth saying is that what you’ve said also raises the question of surfacing information about the performance of these sectors. That’s very hard to do in some areas – like government – but one can get some good information if not comprehensively, then at least about some important snippets of performance. For instance my wife has a progressively deteriorating back. Should she have surgery. It’s entirely within the wit of man to develop systems that do a better job than what we have now to help me work out questions like “Which back surgeons are well regarded by those they’ve done back surgery on a year after the surgery”. One can track that information. But we don’t. It would also not be hard to track how gung ho surgeons are about operating – one could use Gruen tenders for instance.
But of course none of this is done. It’s true that policy makers are starting to get interested in this stuff, but they keep stuffing it up, for instance in the UK with crude targeting measures that resemble Gosplan rather than careful strategies to surface information whilst minimising the perverse incentives crude metrics can unleash.
February 20th, 2011 at 7:14 am PST
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I like your last paragraph. Capitalists would be smart not to behave entirely as Marx predicted they would.
February 20th, 2011 at 10:25 am PST
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They don’t risk doing so, they are doing so. The reason why Fordism worked was because the capitalists were made to realize (and were not allowed to forget) that it is demand that spurs growth, not supply. Consequently, at least at the level of policy, cooperation was to some extent enforced. Now, this started to go wrong from the 1960s onward, when US unions kept demanding pay rises while the first American entrepreneurs had already created very low-income competition, first in Japan (though their incomes rose pretty quickly) and then in the Tigers, all of whom were under western economic control. This created ‘support’ for union-busting even though the problem was that the US worker was being undercut by the capitalists who were moving abroad in search of high profit.
The situation as it started to develop moved ever more of the ‘early’ assembly work abroad, while only the final assembly (which is used to measure US industrial output) still occurred in the USA.
Yet this has lead to a continuing drop of aggregate income, and thus aggregate demand, in the part of the world that contains consumers. (I would love to understand why Japan corrected this so quickly while China for instance cannot; did the bombing [making room for new buildings etc] help?)
Meanwhile, ever more capital accumulated in the hands of people who want to be able to make profit with it, because they just can’t stomach the idea that “money is doing nothing”, so that they started to replace workers with machines, lowering AD even further. (And, just as importantly, they started to create asset bubbles in search of easy profits.)
Yet for some reason – basically because economists still tend to analyze only domestic markets, rather than world production/demand – this issue is ignored, and said to be ‘the effect of the market’. Never mind that the market cannot function this way at all. But the solution to this is not to appeal to those capitalists — because you will never be able to convince these capitalists who ‘perform’ their idea of the efficient market (personal profit leads to aggregate stable growth) that they are wrong — the solution is to simply crowd them out in the public discussion about what is a fair system of distribution, and to marginalize their opinions. Yet this is exceedingly hard not at least in part because their way of thinking has been taught to millions of MBAs and similar unsuspecting victims who have been taught new classical/real business cycle bullshit. And the only way to point this out is to start taking seriously the fact that we should be looking at world production and consumption much more seriously, because only when we start doing so, will it become clear why the arguments of the people who embody and politically represent this kind of thinking (Thatcher, Reagan, Bush, Blair, the various Swedish govts, Brown, Clinton and Obama) are false.
Anyway, if you want to read this argument for why looking more at the world as the locus of production is important, read David Harvey’s The Enigma of Capital.
February 20th, 2011 at 10:37 am PST
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Interesting the information asymmetry, if outcomes to date are compared to prior predictions based presumably on data, that has been evident over the life of the financial crisis in that it was primarily self-generated by a combination of those that are thought to be providers of information and the consumers of same. Pure bubble stuff, Steve.
An achievable project would be to perform the above (and excellent) Gruen tenders on the pundit industry over the last three and a half years.
February 20th, 2011 at 10:40 am PST
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The key descriptor phrase is “capacity to be objectively evaluated”. If the results of the output from one’s black-box industry are uncorrelatable to the inputs and processes then how does one make the decision on which adaptation, progress, and success depend? You have the spectrum between the ability to acquire firm-truth-value knowledge from, at the one extreme, pure mathematics and the hard-experimental sciences, which then proceeds from that point through fields with (to use Jim Manzi’s phrase) such increasing “causal density” that, even with “randomized clinical trials” it’s just not possible to acquire actionable intelligence on things like what is effective in social policy.
It is precisely those fields that, by their nature, escape our capacity for objective evaluation, that are the most able to achieve above-clearing levels of prices and wages. Rent-seekers realize this, and will seek to go into (and lobby to expand resource allocation to) these fields precisely because they are the ones where rent-seeking strategic behavior is most effective. It also helps when these fields have kind of a very primitive “The Good” connotation, warm-and-fuzzy, “more is always better” basic assumption that surrounds them – an assumption that is due, in part, to the fact that faith-like assumptions are necessary for anything where people cannot, for themselves, evaluate value – such as when they cannot tell whether particular assertions are True because they cannot tell whether they correspond to a branch of reality that is beyond assessment.
So to your list on unevaluatables, in additional to Health, Education, Government, you could definitely add Finance, and even certain claims of Science, Ideology, Philosophy, Politics, and Religion.
Almost any professional field, the claims of which can only be evaluated (if at all, much is unfounded pretense) by talented specialist experts, and which does not have an obvious reality-test accessible to the average man (such as the price and quality experiences in a competitive market), is a danger to the ability of that ordinary man to make good rational decisions that, through competitive incentives, encourage the institutions to innovate, reform and improve themselves.
The problem is this: You propose we need an “information asymmetry industry”. I say that evaluation may very well be impossible – beyond knowing – especially in the sense that the results will be universally understood to imply certain best practices. If people don’t look at your data and arrive at a consensus as to what that data means in terms how we should respond – then we cannot create the new institutions we requires because we cannot come to any objective agreement as to what they should do or how they should do it or whether they’re doing their job. You have an even harder imponderable meta-unevaluable-industry problem, and it’s turtles all the way down from there.
So, what is to be done? The only hope is to try to contain or minimize the power and relative size and dominance of unevaluables in our lives which get to achieve their special positions of profitability through their relationship with the state. Maximize accessibility and evaluability. Which optimizes decisions. Which incentives progress in reality-tested institutions experiencing competition. Which maximizes the long-term social benefits of those decisions.
February 20th, 2011 at 11:30 am PST
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Your view on capitalists and Marxism reminds me of the following book:
http://en.wikipedia.org/wiki/Saving_Capitalism_from_the_Capitalists
However, although the goal is same (“Saving Capitalism from the Capitalists”), the preferred methods seem to be very contrastive: You prefer “stabilizing transfers of purchasing power” by the government; They (Raghuram Rajan and Luigi Zingales) prefer “Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity” (as is the book’s subtitle).
I suppose you are in the same vein as Keynesianism on this matter, which is also criticized as communism, while in fact it has protected capitalism.
P.S.
Zingales’ following article is also suggestive:
http://nationalaffairs.com/publications/detail/capitalism-after-the-crisis
P.S.2
Foppe: “Yet this has lead to a continuing drop of aggregate income, and thus aggregate demand, in the part of the world that contains consumers. (I would love to understand why Japan corrected this so quickly while China for instance cannot”
Hint: “Income Doubling Plan”
cf) http://www.jimin.jp/jimin/english/history/chap4.html
February 20th, 2011 at 12:57 pm PST
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In a little follow-up to my comment on the problems of non-evaluable industries, I thought I’d share some insights from my own extremely bipolar (in terms of valuation) industry – the military.
At the lowest tactical level – good or bad decisions have immediate and stark life and death results, and there are causal connections between inputs and outputs that are obvious even to laypersons. Following training exercises we conduct post-mortems, “after action reviews”, and even the most junior enlisted soldier can often explain what went right and wrong because of the closeness-in-time and clear connection between cause and effect. In fact, American-style intense military training would be futile and impossible if they couldn’t understand these things. Thankfully, most can, something that is ensured through the testing that is part of the initial entry selection process.
On the other hand, at the highest strategic levels where decisions about the allocation of significant present-day resources are being made about managing international relationships and developing innovative capabilities that may or may bear fruit decades hence in terms of competitive-edge superiority, almost no one, not even the experts, can actually tell what constitutes a good decision.
You often hear about all the horrible waste and “dead-end projects” in the military, but the truth is, there’s almost no other effective way to deal with this long-term “non-evaluable” problem except through the shot-gun approach, which is to (most likely) over-allocate, and throw as much as you can afford of everything you can against the wall to see what sticks. What sticks is the seed for a new round of randomized variation in a process that resembles natural selection or genetic programming. Just like with biological life, evolution through mass waste, pain, and failure is, tragically, the only effective survival strategy in an overwhelmingly complex, hostile, and competitive environment of scarce resources. Ask your local investment banker.
It’s not much different from the world of long-term innovation researching corporations – the capacity of different nations (or companies) to afford the largest number of projects, and absorb the losses of the inevitable large numbers of dead-ends, can often determine who wins in the long run. Smaller players usually have to just sit this state-of-the-art game out, and free-ride in terms of catch-up development when their intelligence services eventually discover our new successful systems. Our edge costs one thousand times more than their copying, and usually only lasts a few years, but there’s no way around that.
But now let me get back to that concept of “actionable intelligence” because it’s just so fundamental to this discussion. Commanders have a certain freedom of maneuver and various possible courses of actions from which they must choose. The Intelligence collectors and analysts often have insanely gigantic amounts of the wrong information and never quite enough of the right information – the kind that makes it clear what to do right now. Think “Federal Reserve”.
All modern knowledge-research-analysis fields (of which Military Intelligence is one), have to come to terms with their peculiar limits of knowledge-acquisition. If you cannot test reality through market success, controlled experiments, or randomized clinical trials or other “gold-standard” investigations (for whatever reason; ethics, money, feasibility, etc…), then the pressure is to settle for silver and bronze and lesser-standard work that you *can* do. In Intelligence (and to a certain extent, in finance), it’s even worse, because you have a smart enemy, motivated because his very life is at stake in his efforts to try and conceal this information and even completely mislead you in a false direction.
The corrupting psychological temptation, however, is the tendency of researchers to unconsciously upgrade the value of the information they can produce because “it’s the best we can do” and it also reflects on the status and influence and reputation of your chosen field. Much “causal density” Social Science operates under these unjustified knowledge-acquisition-standard upgrade assumptions.
What you end up with are very weak relationships and correlations that only very slightly narrow down the enormous range of possibilities from which to choose. Knowing that your target lived in the Western half of a city of 400,000 last month is hardly better than knowing nothing at all if the only information that can be useful to you in terms of moving assets is knowing which block he’s in right now. The Intelligence Officer is often able to hand the Commander as much of this low-value information as he can possible stand, but even in sum it’s very rarely “actionable”.
But Commanders *want* to decide and act, an impulse and will to power instead of passive helplessness. It’s in their nature. And the urge is that “We can only make best decision we can with the information we have, and the information we have may be junk, but it’s the best we can do, so let’s use it.” The problem with this type of thinking, which seems reasonable on its surface, is that it creates a pretense of knowledge – a sense that one’s decision is justified when, in fact, it is not – and the pretense of knowledge leads to worse decisions than the admission and acceptance of one’s own ignorance, or even the pretense of ignorance.
It is now well known that Commanders will make better decisions not by desperate attempts to use the limited low-value knowledge they have, but by filtering and even disregarding all low-value knowledge as being essentially worthless and assuming instead that they have none. When you assume and accept your own ignorance in a scenario of great uncertainty, you shift your focus from forward movement to security – from concentrating on engaging in future risks, to concentrating on discovering and shoring up the vulnerabilities in one’s defenses against an unknown surprise attack. You seek to make your systems less brittle and more robust, while at the same time you reallocate your resources from trigger-pulling to information-collecting so that you can acquire the real, useful, high-value information “actionable intelligence” that you really need to make progress.
It’s no wonder then that when the feedback-loop between operations and intelligence was broken in the months after the initial invasion (again, because we were lulled into complacency), we floundered in Iraq, and when General Petraeus painstakingly reestablished it (at high cost), the situation improved quickly and dramatically. As usual, in practically all the media stories, there was almost no account of the status of this critical element, and hence no accurate narrative of the reasons behind what was really going on. Neither the war’s boosters nor its detractors had any idea why things were progressing the way they were, and this is most evident in that both the initial failure and later success were almost complete surprises to everybody except the Soldiers actually losing, but then winning, the war. Soldiers don’t get much press though.
I hope by context you can see how relevant this is to the whole “nonevaluable” state-alligned institution problem, in Health, Education, Social Policy, Finance, Government, (Macroeconomic?) etc… We have these fields that have such high “causal density” as to make even the best knowledge we have (or even, that we can have) not actually rising to the level of “actionable intelligence” of the kind that is useful to human decision makers. What we get, instead, is the unjustified upgrading of the knowledge we do have, the metrics fetish, and the overconfidence that comes from the pretense of knowledge.
When things are going well, we are lulled into the complacency of our own pretense at our mastery over reality, and we are tempted to take greater risks and “shoot for the moon”. But the pretense of knowledge is worse than the assumption of ignorance if we don’t make our systems robust to downside surprises.
In our inaccessible, non-evaluable institutions, if we admit (or even just assume) we have (or can have) no more good knowledge or ideas (“actionable intelligence”) for how to change practices to achieve much better results with our scarce resources, then we should probably become paranoid about waste and malinvestment, and misallocation, and also shifting our focus from progress to security – to defending against those things that could undermine our current level of success, or collapse the whole system.
If we are to build meta-non-evaluable institution, then that’s probably what they should do – as a kind of rationally-paranoid “national security veto” over incautious policy. Sometimes, it’s good to force the elite leaders of society’s institutions to behave in a manner as if the fields they lead are not, in fact, expert and invulnerable, but actually ignorant and fragile. The Dinosaurs were expert and invulnerable in their world – but in life, everything is ignorant and fragile when things change. And things always change. They taught me that in the Army.
February 20th, 2011 at 3:40 pm PST
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interfluidity » Two followups, in way too many words…
[…]These self-styled capitalists do not espouse Marx’s theories, but they do something much worse: They perform them. They behave in precisely the way that Marx expected capitalists to behave. They cripple the American system’s ….. Knowing that y…
February 20th, 2011 at 7:17 pm PST
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I am glad to be a visitant of this staring website ! , regards for this rare information!
February 20th, 2011 at 11:37 pm PST
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[…] Randy Waldman is onto something in this post. In the previous post, I identified government, health care, education, and finance as the […]
February 20th, 2011 at 11:49 pm PST
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Michael Hudson observes that never in his wildest dreams did Marx imagine that finance capital would come to replace industrial capital as dominate in the economy. This is a whole new ballgame.
Georgetown University Prof. Carroll Quigley wrote in Tragedy and Hope (1966), ch. 20:
“The powers of financial capitalism had [a] far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank… sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”
Michael Hudson followed up on this in Super Imperialism (1972, 2003). This agenda now seems to be unravelling for a variety of reasons, not the least of which is overreach.
While this may be the stuff of conspiracy theories (and their work has been used by conspiracy theorists, somewhat discrediting them, both), Quigley and Hudson exhibit professional credentials and methods, and they document their work.
The whole notion of “central bank independence” is essentially anti-democratic and contravenes liberal principles in that it puts control of the financial system in the hands of a smal group of interested people that are unelected and unaccountable, basically creating a command system beyond the reach of voters. It is an unholy alliance between government and capital at the highest levels.
February 21st, 2011 at 1:19 am PST
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Loved your comment Indy. Loved it!!
February 21st, 2011 at 7:11 am PST
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[…] interfluidity » Two followups, in way too many words […]
February 21st, 2011 at 7:25 am PST
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[…] Troppo have grabbed a fabulous comment from under a post on “Interfluidity” and turned it into a blog post. Here’s clips of that comment. I can tell I’ve […]
February 21st, 2011 at 8:55 am PST
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“Educational institutions notoriously play up successes among graduates they know to be outliers.”
And you know how many lives were ruined before they could even get started by for-profit institutions? These companies often charge 5 or 10 times what a community college charges and for a less prestigious, lower quality degree, and financed with private student loans of exhorbitant interest that can never be discharged in bankruptcy, and unlike government loans have no protections like income based repayment with any remaining balance forgiven after 20 years. See, for example, this floor statement from Senator Dick Durbin:
http://durbin.senate.gov/showRelease.cfm?releaseId=280866
February 21st, 2011 at 10:18 am PST
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“sellers themselves know less than what people expect”.
Oldie but goodie:
What’s the difference between a car salesman and a computer salesman?
The car salesman knows when he’s lying.
(This also works for legislators/legislative aides.)
February 21st, 2011 at 2:50 pm PST
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Well, as some other commenters have already noticed, “information asymmetry” can also be tantamount to rent-seeking, which is how I see a lot of Hi-Fi activity and which also occurs in the health care sector, (by doctors, hospitals, insurers, medical device manufacturers, pharma, etc.). And Stiglitz’ point was that in a lot, though not all, cases of information asymmetry, good public policy and apposite regulation can improve on “market” outcomes. Though figuring that out on a case-by-case basis is the hard part. (BTW it’s a rule of thumb that an uncompetitive tradable goods sector will tend to “force” domestic investment into the non-tradable sectors: hence we had a housing bubble. But I’ve scarcely seen any commentary about the rise in health care costs, which rose especially sharply during GWB1, along the same lines).
Yglesias’ point isn’t all that clever and certainly not new. It goes back to the debates between Ricardo and Malthus in the early 19th c. Ricardo was concerned that high land-rents and therefore high food prices and subsistence wages would inhibit the further formation of industrial capital investment, with aristocratic landlords drawing of the gains that “should’ accrue to industrial capitalists. (Hence he invented his theory of comparative advantage to “solve” the problem). But Malthus countered that those high aristocratic incomes were needed to provide demand for domestic industry. Keynes did note and commend Malthus’ point, though with what degree of irony, I can’t tell. Though I doubt Yglesias quite grasps the implications of what he is saying. At any rate, it’s been know ever since Ricardo that taxing rents is optimal policy, since that doesn’t interfere with market/productive efficiency, but rather helps to avoid market distortions. A land-value tax would go a long way to avoiding RE bubbles, but for the same reason, it would be fiercely opposed by financial and developer interests, as well as, by upper middle-class home-owners, since it would lower existing RE prices. (Though the latter could be compensated by replacing lost equity with long-dated, but tradable gov. bonds to be financed by the self-same tax).
Guessing from the above post, I’d say I’m about a decade older than SWR, and I’m a leftie. So my attitutde toward Marx is: Marx is dead, long live Marx. I.e. is work is 150 years old and obviously some of his historical projections and prognostications didn’t work out as he envisaged or intended, with a lot of water and blood under the bridge since, partly through flaws and impassibilities in his own thinking and partly through the sheer unknowability of the future and his inability to imagine the horrors that would come. But one can still learn a lot from his work and it remains of some considerable heuristic value. (His Vol. 3 account of financialization and its tendency to generate “stocks” of fictitious capital is especially resonant nowadays). But what’s not sufficiently or commonly appreciated is that his “tendential law of the falling rate of profit” was actually a complex thesis about technological development under industrial capitalism. (BTW his account is not based on over-production, but rather over-accumulation of capital stocks, with ever increasing output at ever-lowering output prices the effect and not the cause). And Marx did correctly foresee that competition would result in the oligopolistic concentration of production, due to economies of/increasing returns to scale and the greatly increased level of technical productivity achieved beyond the alleged cost-reducing effects of market competition. Of course, one of the obvious implications of that development is that prices are no longer market-determined, but rather costs are administratively allocated and prices strategically manipulated. But a further implication is that, given high long-run fixed capital costs are the major determinant, dwarfing labor or other input costs, when demand is high and rising, unit output costs decrease, but when demand sharply drops off, unit-costs similarly sharply increase, preventing the sort of price adjustments required to revive sales, or else resulting in bankruptcy. (GM, anybody?) Hence the Swope plan for cartelization as an initial response to the Great Depression and similar plans among German industrialists, which was one of the key reason why they largely supported Hilter’s rise to power. It seems to me, however much corporate oligopoly rents have been re-structured, due to technical change and globalization, the basic oligopoly problem is still relevant.
Of course, given my background and prejudices, it occurred to me during the mid-’90’s that those famous “contradictions” of capitalism were re-emerging, but in a new high-tech form. Especially as the maturation of IT and its merging with telecom gave rise to new forms of corporate organization and new possibilities for MNC-sponsored globalization, permitting the arbitrage not just of wages and currencies, but of taxes, regulations and much else. I.e. the general weakening of the capacities of governments to institute public policy and regulation. And thus any salutary balance in the inversely proportional distribution between wages and profits is being undermined. That surmise has been “deepening” in my small, slow mind ever since.
At any rate, to put Marx into his contemporary, heuristic context, I’ll link to the following interesting work. Having read the intro on Google books, it’s well above my pay-grade in technical and mathematical sophistication, but it seems to be confronting monetarist and New Keynsian macro head on, in a comparison with its own “heterodox” proposals. And judging by the capsule description, it seems tailored to converge with a Habermasian “discourse ethics” approach to public policy deliberation.
http://www.amazon.com/Macrodynamics-Capitalism-Elements-Synthesis-Schumpeter/dp/3540879315
February 21st, 2011 at 9:57 pm PST
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“So what makes these four industries different?”
marx answered: they all produce ideology.
February 22nd, 2011 at 12:58 am PST
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Indy:
Great comment indeed. One question and one comment:
“when the feedback-loop between operations and intelligence was broken in the months after the initial invasion … we floundered in Iraq, and when General Petraeus painstakingly reestablished it (at high cost), the situation improved quickly and dramatically.”
How is a broken feedback loop equivalent to acknowledging ignorance and playing defensive ball? (Not a challenge or a disputation; I really want to understand.)
In what ways did Petraeus fix that feedback loop/acknowledge ignorance?
What were the costs of that?
How/why did it deliver better results?
“if we admit … we have … no more good knowledge or ideas … for how to change practices to achieve much better results … then we should … defending against those things that could undermine our current level of success, or collapse the whole system.”
But doesn’t our presumed ignorance extend even to that? I believe (and I think Steve would agree) that undertaxing (not paying our bills since ’81, except in the 90s) and insufficient redistribution made our system brittle. Others suggest other causes. Who’s right? Which is the “defensive” policy?
February 22nd, 2011 at 9:24 am PST
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Steve, I’d like to hear your thoughts:
Given our presumed ignorance (and ignorance about our ignorance), on what grounds do you believe that higher taxes and redistribution would (have) yield(ed) greater prosperity and stability?
As you know, I completely agree with you, and I could explain my reasons. But I’m thinking yours would be far more interesting. (To me, at least; I already know mine.)
February 22nd, 2011 at 10:20 am PST
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@ Indy (#7)
I think Napoleon got this right when he said something like he would rather have a lucky general than a clever general. Without knowing he kind of grasped the concept of Knightian uncertainty before anyone else.
February 22nd, 2011 at 5:09 pm PST
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[…] Two followups, in way too many words Steve Waldman. Late to this, but I am not at all surprised at the second half of Steve’s post. Steve, where have you been? Didn’t someone tell you that knowing enough about Marx to discuss him intelligently means you had to have read him and therefore makes you a Marxist (at least in America)? I thought that was widely understood. And that’s too bad, because Marx was a great financial journalist. […]
February 23rd, 2011 at 5:35 am PST
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Capitalists hate the New Deal, even though it saved them, and have successfully worked to prevent another new deal. So it’s one step forward and two steps back, and Marx wasn’t wrong that the rich *can’t* keep themselves from provoking the people whose work they steal to violence, sooner or later.
Many of you can see that plainly from the outside, when you laugh at the obtuseness of a Mubarak or a Qaddafi who can’t see that it’s long past time to step away, but you can’t see it from the inside of the society you’re living in.
February 23rd, 2011 at 6:56 am PST
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Of course, all changes with the generations. My generation – which is one younger again and still going through the process of maturation – are well acquanted with Marx. Once again, he’s become popular in the universities and so, anyone interested in economics has probably read him.
Personally, I’m glad to have read Marx. He does indeed highlight many capitalists’ inherent tendency to self-destruct. He is also, without a shadow of a doubt, capitalisms greatest critic. If nothing else everyone young or old should read Joan Robinson’s essay on him and realise that, while he may not have been correct, he has a lot to say about the world we live in today…
February 23rd, 2011 at 7:59 am PST
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What a great piece! Here’s hoping that “performist Marxist” enters the lexicon.
February 23rd, 2011 at 9:05 am PST
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[…] […]
February 23rd, 2011 at 9:37 am PST
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Thanks Ives for the link and thanks to Steve and all commentors for interesting thoughts.
February 23rd, 2011 at 10:43 am PST
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“It is not those who advocate, but those who prevent, stabilizing transfers of purchasing power, who are the true Marxists. These self-styled capitalists do not espouse Marx’s theories, but they do something much worse: They perform them. They behave in precisely the way that Marx expected capitalists to behave. They cripple the American system’s greatest strength — its ingenuity, flexibility, adaptability. They prevent the sort of collective action through which earlier generations proved that capitalism could made be consonant with decent, stable, and broadly prosperous societies. In doing so, they risk proving Marx right.”
Brilliant really. And I thank you for this. All great thinkers eventually come to this realization, that preventing peaceful evolution foments revolution, that a mindless subservience to personal greed is essentially corrosive to and destructive of a free society, because it will undermine all lawful restraints.
February 23rd, 2011 at 11:03 am PST
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The asymmetry is everywhere in purchases. Making nearly any kind of purchase these days requires navigating opaque terms, arcane pricing, mine fields of fees, false options, jump-through-hoops rebate requirements, and complex service contracts that probably won’t warranty the defects already built into the product.
Planned obsolescence can become a problem in almost a matter of weeks for technology items. Heck, you cannot even develop a loyalty to hand tool or power tool makers, since there is a high likelihood that the brand has been monetized and quality cannibalized since your past purchase.
Choosing a retail investment provider requires extensive up-to-date knowledge of the scams and scammers.
Buying any insurance is a complete crap shoot. The providers of financial services don’t even pretend the relationship is bilateral.
The large print no longer giveth very much, and The small print no longer merely taketh away, it nullifies all hope.
How can we hope to get any information about products? Recall reporting in voluntary for the producers, there is no consumer protection agency to speak of, the media relies on producers for advertising revenue (if not actually owned by a producer), and the search engines stack product placement adds in front of actual individual opinions and reviews (which themselves are poisoned with phony astroturf reviews from the producers). Producers deliberately create assign a variety of ever-changing model numbers and false option configurations to their products so it is hard to comparison sop or compare notes.
Studies have shown that when flooded with too many choices, consumers actually make worse decisions.
What we have now is piracy and theft posing as a simulacra of commerce. Which s fitting, because we have a simulacra of government and regulation, operating along a simulacra of media, in a simulacra of democracy. Increasingly, the theft is moving to strong-arm extortion, as the government is working at the behest of the pirates to create mandatory and de facto captive markets and guaranteed revenues streams for the crooks.
People no longer bother to read agreements or even think that much about the terms of their purchases; they already assume that they are screwed, and hold little hope of recourse should the product fail to work, fall apart in a month, or blow up in their faces.
February 23rd, 2011 at 12:52 pm PST
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“Much of how modern economies survive is by protecting information problems and barriers to competition that sustain overpayments. This broadens the wealth distribution while permitting recipients the fiction that flows of purchasing power involve no transfers (“welfare”), only proud, self-reliant income. The theory of labor unions and the theory of an inefficient health sector are identical, except one is more transparent and the other has proved more capable of buying political protection.”
i have to say: this stuff is ludicrous. now the principle of capitalism is supposed to be bad business? standardized misallocation, price distortion, cronyism? either this post is a masterpiece of esoteric writing or waldman and the posters here have their heads so far up their asses they think stalin is marx? oh, wait, they do.
the absolute cornucopia of unreflected assumptions in the post and the comments indicates that one and all are in convenient denial of the other, more sharply contoured face of marx: that of the dialectical sociologist. briefly, the inefficiencies, distortions, etc., create social classes committed to their reproduction. vaguely social-democratic academics/econ bloggers are not immune.
marx is not so much wrong in anticipating a working class conscious of its specific historical enemy and exploitation, and therefore self-conscious of its role in that history and in the end of that exploitation and, indeed, of history — but correct in assuming that capitalism will democratize the stream by pissing in the water. reaction to marxism made 20th century capitalism. its success consists in implicating more and more people in its failure, such that rational withdrawal becomes a theoretical impossibility unto catastrophe. shit, even stalin’s version of totalitarianism didn’t achieve that.
February 23rd, 2011 at 1:01 pm PST
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[…] Two followups, in way too many words Steve Waldman. Late to this, but I am not at all surprised at the second half of Steve’s post. Steve, where have you been? Didn’t someone tell you that knowing enough about Marx to discuss him intelligently means you had to have read him and therefore makes you a Marxist (at least in America)? I thought that was widely understood. And that’s too bad, because Marx was a great financial journalist. […]
February 23rd, 2011 at 1:08 pm PST
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Marx was wrong because he didn’t take account of the fact that it’s not just capital that is scarce, labor is too. As the capitalists employ more and more labor, they bid up wages. Higher wages are not the result of benevolent capitalists, they’re the result of competition between capitalists for employees. (Note that this has nothing to do with government or unions. A union may be able to raise the wages of some workers, but it does so by limiting labor supply, i.e., keeping some people from working.)
The point is that the invisible hand works in markets for labor just like it does in other markets. Marx didn’t really understand Adam Smith at all. Or more likely, he did understand Smith but figured that his own readers wouldn’t, so he could get away with crap analysis by using really long and complicated sentences and paragraphs to obscure what he was saying. Seriously, have you ever tried to read Marx? Das Kapital may be the worst-written book in history.
February 23rd, 2011 at 1:59 pm PST
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“As Harvey points out, periodic crisis is indispensable for capitalism – it is the means by which capitalism renews itself. Crises devalue or destroy surpluses for which no profitable outlets can be found, clear-out inefficient capitals, push down wages through expansion of the ‘reserve army of labour’ and purge the system of debt for example, so creating the basis for renewed and reinvigorated growth.”
http://marxandphilosophy.org.uk/reviewofbooks/reviews/2010/241
A book review of David Harvey’s ‘The Enigma of Capital: and the Crisis of Capitalism.
Harvey teaches course on Marx’s Das Kapital at NYU.
February 23rd, 2011 at 4:41 pm PST
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As usual, one of the very few blogs that makes me think, frequently change my mind, introduces me to new concepts, offers novel and fresh insight, and all for free!!!
Every time I come to this sight and there is a new post, I am happy.
thank you very, very much.
February 25th, 2011 at 8:14 am PST
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>Every time I come to this site and there is a new post, I am happy.
What Fresno Dan said.
February 25th, 2011 at 7:08 pm PST
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Buyer beware. Yes, buyers know they have a disadvantage. Don’t listen to the IT sales person, find a customer. Get a reference. Being objective in a transaction – not buying the sizzle, is the consumer’s option. Consumers Reports has been a long term source of objectivity, though often we can’t afford to follow their advice. The automobile repair records and other reports about brand experience does inform the buyer. Presenting such information to a salesperson will be dismissed, unless it supports the sale they are trying to make.
In the health care environment, the patient that works with the doctor is likely to get better results. Those practitioners that incorporate the patient and family feedback are becoming more common, but those patients that expect to be fixed like an automobile are likely to be as satisfied.
Being oversold, buying features you can’t use or won’t be able to use without investment of time and training on your part, that’s consumer error.
Being sold AAA rated securities which are really junk is not asymmetry, that is fraud. The salesperson could be a lackey, or a conspirator.
We may find we’ve been born into some situations that we’d not have chosen, but with a growing sense of context and options, we can evolve out of them, developing the resources as we go.
Life is an unfunded mandate. Grow or die. Oppression can persist for centuries, but not forever. Asymmetry does shift.
February 26th, 2011 at 3:42 pm PST
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Buyer beware. Yes, buyers know they have a disadvantage. Don’t listen to the IT sales person, find a customer. Get a reference. Being objective in a transaction – not buying the sizzle, is the consumer’s option. Consumers Reports has been a long term source of objectivity, though often we can’t afford to follow their advice. The automobile repair records and other reports about brand experience does inform the buyer. Presenting such information to a salesperson will be dismissed, unless it supports the sale they are trying to make.
In the health care environment, the patient that works with the doctor is likely to get better results. Those practitioners that incorporate the patient and family feedback are becoming more common, but those patients that expect to be fixed like an automobile are likely to be as satisfied.
Being oversold, buying features you can’t use or won’t be able to use without investment of time and training on your part, that’s consumer error.
Being sold AAA rated securities which are really junk is not asymmetry, that is fraud. The salesperson could be a lackey, or a conspirator.
We may find we’ve been born into some situations that we’d not have chosen, but with a growing sense of context and options, we can evolve out of them, developing the resources as we go.
Life is an unfunded mandate. Grow or die. Oppression can persist for centuries, but not forever. Asymmetry does shift.
February 26th, 2011 at 3:42 pm PST
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