The Efficient Market Hypothesis and Philosophy

Looking through my old saved articles I rediscovered some saved posts from Sweet Talk Conversation, and I thought this particular one was quite clever and deserved a mention.

The author asks the question, can we apply something like the Efficient Market Hypothesis to other fields, like philosophy? Recall that in economics, the EMH has strong and weak forms, and his still hotly debated over which (if any) interpretation is correct. In the strong form, the market price of a good (typically a stock) reflects all possible information, whereas in the weak form temporary distortions are possible due to frictions.

By extension, if this concept is applied to the history of thought, you might come up with something like, for any good argument you hear, someone has already developed a good counterargument. In a strong form longstanding philosophical questions still being debated today are genuine stalemates. History has eliminated the bad responses to questions of free will, the nature of the mind and matter, the existence of God, etc., and the arguments that remain are the ‘good’ ones. The weak version might be some variation of ‘there’s a literature on everything.’

It’s a fun little read and something to think about, especially as I’m reading a couple of pieces right now on the history of ideas and whether they affect history.

 

 

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The End of Reason?

To start, this week’s episode of the Weeds highlights new research on the link between lead and crime. One of the great sociological mysteries in the United States has been the crime wave that began in the 60s and lasted until the 90s, when violent crime levels collapsed. The most tantalizing theory revolved around the use lead additives in gasoline; when accounting for the time lag in human development, the use and subsequent banning of such additives suspiciously matched crime levels. There’s a more complete summary at Brookings.

While that is fascinating in its own right, I’m using it as a jumping off point to what I really want to talk about, which is the end of reason (?). It’s been rolling around in my head for awhile that most of our (Western) social and political theory has its basis in the Enlightenment, which had several phases and branches, but were all linked by a focus on the primacy of reason. The ideas of science, progress, liberty, all were developed during the Enlightenment. Our modern world is founded on the glorification of the rational individual: it is the basis for democracy, human rights, the market economy, and scientific progress. The world is a better place because of it. But sometimes I wonder if we’ve wrung all the gains possible out of the assumptions around the rational individual. Has the Enlightenment run its course?

Here’s an analogy. Suppose you are trying to propel an airplane as fast as possible. To a first approximation, you can just use Newton’s law F=ma to figure out how big an engine you’ll need. You’ll get a lot of gains out of just that. But eventually, to make incremental gains in speed, you’ll have to start accounting for a lot of complicated things, like aerodynamics. You’ll have to redesign your airplane or risk having it be torn apart by the very air in which it moves.

Our political institutions were developed by Enlightenment thinkers; our Constitution was designed by them. Ideas about rights, responsibilities, and self-determination all come from the Enlightenment. And so the assumption of reason pervades them.

But we’ve increasingly learned all the ways in which the human mind is unreasonable. Shaped by evolution, our brain has many limitations that are becoming more and more apparent. The working assumption of rational individuals has worked pretty well for the last few hundred years, but as we are propelled ever faster by technological progress, I worry that we are reaching a point where our societal airplane needs to be redesigned before it undergoes catastrophic structural failure.

Some examples of what I’m getting at:

Advertising and Media

The whole point of advertising, and the media industry in general,  is to manipulate us into paying attention to and having positive emotional responses to products. It’s obviously not an exact science, but it’s becoming increasingly sophisticated. Tim Wu’s recent book, The Attention Merchants, is all about this. What does it mean to live in a world where individual is not in control of where her attention is focused? What if advertising becomes so good at activating our autonomous responses it’s close to 100% effective? Ideas of self-control and self-determination go out the window.

Politics

Ezra Klein recently interviewed Zephyr Teachout for his podcast, and during a discussion of corruption in politics she makes the point that our legal definition of corruption is very narrow, to the point of being almost useless. Money in politics doesn’t have to be an explicit quid pro quo to have an influence. Campaign contributions from particular interest need not consciously change a politician’s mind to have an effect; they can work through deeper, more emotional connections that favorably skew the politician’s views towards the donor.

Or in politics more broadly, the sheer bandwidth of information available and the fast pace of political life makes both voters and politicians worse off, on net. As with advertising, political campaigning continues to hone in on ways to activate our more base impulses without our being aware. Robert Colvile writes in his book The Great Acceleration, “In a flashy, charismatic age, we vote for politicians who promise freshness and novelty, who run against business as usual and the shabby compromises of power. The problem is that once these politicians get into power, they prove unable to meet those promises… Our disillusionment is all the more severe for having had our hopes raised in the first place – meaning that we will be less inclined to trust any politicians at all.” Lather, rinse, repeat.

The tribal pressures described in Democracy for Realists look only to get worse in the near future, as political actors continue to up the rhetorical ante to activate identities and mobilize support. Now to be sure, elections in the past have had worse rhetoric; just look at the election of 1800. But today we are constantly awash in this kind of information.

Society

Consider the idea of implicit bias, where our brains have uncontrollable biases towards and against different groups of people. If true to a great enough magnitude, how would we deal with favoritism/discrimination? You can’t make biological responses illegal.

And to bring the discussion back to lead poisoning, our criminal justice system is based on an idea of personal accountability. As a response to the crime wave of the latter 20th century, America embarked on a program of mass incarceration. But if crime was occurring largely because of malformed brains from environmental poisoning, can we justify such a system? Indeed, if most crimes are a result of either mental illness, underdeveloped brains, or crimes of passion, does a system of incarceration even make sense? I recently read an argument, from an economic perspective, that we should just get rid of prison entirely; the net benefit to society is negative.

In sum, I’m worried that our political and societal institutions don’t have the intellectual foundation to deal with the fact that we are creatures of biology, and are often not in conscious control of our actions. The assumption that we are creatures of reason with free will has built a fantastic world, but it may be past time to pour some new foundations.

Trump and the Paris Climate Accords

Most of the defenses for the Paris Climate Accords I’m reading fundamentally misunderstand the situation. They tend to present a laundry list of factual reasons why the decision to pull out is bad. Set aside the fact of rampant climate skepticism in the Republican Party. This decision was not made after a careful consideration of options. This decision was made because of the way it made the President feel.

Tyler Cowen often says that many things in politics are based on who should be raised and lowered in status, and Trump is the embodiment of this principle. Decisions are not based on policy outcomes, they are based on mood outcomes. In his speech announcing his decision, Trump said “The rest of the world is laughing at us.” That’s what this is about. It doesn’t matter if it’s not true. Perception is reality.

 

What I’ve Been Reading

Books:

Free Soil, Free Labor, Free Men: The Ideology of the Republican Party Before the Civil War by Eric Foner

This is an excellent history that examines in detail the formation of the Republican Party in the 1850s. I hope to write something longer about it, but a couple quick thoughts. It was very interesting reading this after Democracy for Realists, and keeping in my mind all the lessons from that book. One of the unanswered questions in Democracy for Realists was just how political coalitions form; Foner’s book is a history of just such an event. Another thing I found fascinating was how, despite 150 years of history, the nature of the Democratic and Republican coalitions were…not that different, at least in the North. The powerbase of Democrats was in large cities, particularly among immigrants. Those who were most supportive of Republicans were in more rural areas and tended to be business owners. For years I’ve had a mental model where the policies and makeup of the parties have undergone random drift over time. But now it seems that the coalitions have been much more enduring in some senses. Given that Democracy for Realists emphasizes the tribal aspect of party membership, this maybe isn’t so surprising.

A Colony in a Nation by Chris Hayes

This book is very good; in fact I can’t recommend it highly enough. I really enjoyed his first book, Twilight of the Elites, which came out in 2011 and has proved extremely prescient regarding the political situation in the United States. There’s reason to be skeptical of a book from a white liberal television pundit about race relations, but Hayes is very self aware; one thing I’ve always liked about him is that is tries to be very understanding and respectful of others’ views. The remarkable thing for me about this book is that it is able to speak to those who are skeptical of the Black Lives Matter movement, while also having interesting things to say to supporters as well.

Before the Storm: Barry Goldwater and the Unmaking of the American Consensus by Rick Perlstein

A very entertaining bit of narrative history about the 1964 presidential campaign. I’m struck by the parallels between the Trump and Goldwater movements. This is also a book I hope to write more on later; in the meantime, just watch this campaign ad and tell me you couldn’t have just aired it in 2016 unchanged (excepting the Vote for Johnson at the end):

Articles:

The New Class Divide: Makes the point that in the industrial era, class conflict was about exploited workers; now with the growing information economy, class conflict will be about ignored workers. Can liberal democracy survive in such an environment?

Why every smart liberal should read conservative philosopher Peter Lawler: Lawler recently passed away; I wasn’t familiar with him before, but a number of people I read noted his passing and so I checked out some of his stuff, like his last essay. I like it, and plan on reading more.

The ‘Right’ to Health Care is the Wrong Question: Ramesh Ponnuru aruges that in the health care debate, liberal and conservatives are largely talking past each other; everybody agrees about the need to provide health care, and the disagreement is about the method. I think he is too forgiving of particular factions of the Republican Party; while the ‘Reformicon’ wing that Ponnuru is part of is more sensible in these matters, it really seems that there are strong elements in the party that don’t believe this. But I can accept that perhaps my partisan brain is being too uncharitable.

Democracy for Realists, Part VIII

This entry will serve to wrap up the text of Democracy for Realists, though I plan on looking at events like the 2016 election through this lens in the future.

I want to dig a little deeper into the issues of interest groups, parties, and policy outcomes. Under the group theory of democracy, the types of policies that are proposed and implemented will result from the complex interaction of groups and parties. Groups provide motivation, parties provide structure.

Individuals in society are members of many groups simultaneously. Some attachments are strong, some are weak. Some change over time, some remain the same. A party is a coalition of groups that also has its own group identity.

Different societies have different kinds of groups, depending on the economic system, social organization, the contingency of history, etc. For example (since I just started reading Eric Foner’s classic history Free Soil, Free Labor, Free Men), on the eve of the U.S. Civil War, the North and South had very different economies and societal groups. The South was obviously dominated by plantation owners and slaves, a very hierarchical society with no mobility between classes. The North was more egalitarian (though not as much as they thought), and the Republicans of the time saw little distinction between the wage labor class and the business owner class, because today’s wage earner was tomorrow’s capitalist. In the large Eastern cities, the masses of new immigrants were a crucial component of the Democratic party, not out of any ideology, but because political machines like Tammany Hall served as proto-welfare systems and integration institutions. There was little overlap between the kinds of groups in the North and South, no large constituency bridging the gap between the two regions that could serve as a political force to hold the Union together.

Understanding just how and why certain groups ally with each other is one of the key questions Achen and Bartels leave us with. For instance, the modern Democratic coalition contains minorities, teachers, and younger urban professionals; the Republican coalition contains rural voters, evangelical Christians, and business interests. Why? If history had gone a little differently, could we imagine a coalition of business owners and minorities vs teachers and rural voters? Or are there underlying factors that make certain groups more likely to ally with each other? (Keep in mind that Achen and Bartels stress the degree to which parties can advance an ideology from the top down). For example, business friendly Republicans tended to be pro-immigration, because it was a source of cheaper labor, whereas union friendly Democrats were opposed to immigration. Now this is a source of tension within both parties as their broader positions on immigration have changed.

Something to keep in mind with all this is that even within party coalitions, not everyone has an equal say in policy:

“Descriptions of the actual policy making process return repeatedly to the same concepts – power and influence. Some officials, groups, and organizations are powerful; others are not, as classic studies of the policy-making process have emphasized…The resulting differences between them in getting their way are enormous. Sheer group size helps, but wealth, social prestige, and access to media of communication and persuasion often bring greater power, both in their own right and as resources facilitating organization. Thus, it is hardly surprising that, as E. E. Schattschneider…famously put it, ‘The flaw in the pluralist heaven is that the heavenly chorus sings with a strong upper-class accent.’ Similarly, contemporary political scientists…have provided detailed analyses of the dramatic socioeconomic biases in group politics.

[I]n more recent years, and especially in democratic theory, the topic [of power] is too often neglected. In the folk theory and retrospective voting models, every citizen is equal by assumption. Voting is supposed to equalize power: The rich and the poor all have one vote apiece, and they can listen to arguments and vote their interests equally well. But as we have shown, that naive view flies in the face of a great deal of social-scientific evidence.” (pp. 320-321)

Beyond the question of relative status of groups in society is the question of party organization. If it were possible to hold all else constant, and give two identical societies different party structures, we would expect this to lead to differing outcomes as well:

“In systems where parliamentary representation is allocated in proportion to party strength, small parties representing isolated social groups may hold outsize power in the making or breaking of governments, as has sometimes been the case with ultra conservative religious parties in Israel. On the other hand, political leaders in majoritarian systems may organize party coalitions and partisan conflict in ways that, for better or worse, effectively submerge certain group interests. At its best, the process of interest aggregation in majoritarian systems may involve shearing off the more self-interested or damaging or wicked demands of component groups, resulting in a stronger and more coherent electoral coalition” (p. 323)

It seems to me that Democrats and Republicans did just this for decades, submerging a white populist nationalist movement that is now rearing its head. It was somewhat of a question why nationalism had reemerged in Europe while not in America. European countries typically used parliamentary systems, unlike the US. In this way, both parties were able to benefit from a group while not taking the actions it wanted. (As another example, it has been cynically suggested that Republicans would never actually ban abortion, despite vigorous campaigning on the issue, because to do so would lead to a large demobilization of their base).

Compounding the difficulty of understanding the dynamics at play is the fact that group identity can be fluid. Even race, something we might expect to be static, can be dynamic in the long run. The Irish, Italian, and German immigrants to America were once thought to be fundamentally incompatible with the rest of ‘white’ America. But over time, they too were absorbed into the fabric of ‘normal’ America. When there are very clear visual signals of difference (e.g. skin color), the ability to bypass our normal psychological outgroup mechanisms may be more difficult. But many Asian communities seem to be being absorbed into ‘white’ America, and the same may begin to happen with some Latino communities as well.

(As an aside, this is why I’m a bit skeptical of all the takes that claim that Democrats have a clear demographic advantage as the relative proportion of minorities in society increases. That seems like Democrats taking those members’ votes for granted, waving away the fact that on a number of social issues, minorities and immigrants tend to be more conservative than the educated whites that make up the liberal core. If the social identity of Catholic Latinos were to shift to be more strongly identified with the evangelical anti-abortion coalition, then they might start voting for Republicans.)

One last question is why some groups are able to form more formalized interest groups. Think the NRA, Sierra Club, etc. These are more than just a smattering of people who agree on gun rights or environmental protections; they are formal entities who are able to raise money and exert pressure on politicians. Why should some interests be more likely to organize than others? Cue this Onion article.

I can see four possibilities. One is just randomness; through the contingency of history, some interests groups have managed to survive and become powerful. The second is that the nature of the issue matters: gun rights are very important to a significant number of people, so interest groups will naturally form around the issue. The flipside of this is that the organization itself is most important; it doesn’t matter the issue if the interest group is run by good people. Finally, it could just be a manifestation of Olson’s law where a small concentrated interest can get benefits with diffuse costs to the rest of society.

Democracy for Realists, Part VII: Not Against Democracy

Today’s post is a bit of an aside. I still want to go over in more detail what a group identity understanding of democracy might mean, as well as look at the 2016 election through this lens. But I just found new blog, Liberal Currents, that has a piece that is very relevant to the discussion here.

The title of the piece, ‘Not Against Democracy‘, is a reaction to the recent book by Jason Brennan, Against Democracy. The opening of the post summarizes some arguments against democracy, similar to those we have seen in Democracy for Realists; mostly the focus is on the failure of the folk theory.

What I found interesting was the author’s prime argument for democracy, which expands on Achen and Bartels’ defense of elections as the main good of democracy (as we saw last time).

To review, the great thing about elections is that they result in shared agreement about who rules.  But there are other systems that can do that as well. Hereditary monarchies, for example, have clear lines of succession that leave little ambiguity about who will rule. So, why is democracy better than a monarchy?

If we take as a given that any system of government will result in bad leaders some of the time, better to have a system that has a built in, peaceful method of transition than one that requires extralegal methods (assassinations, coups, etc) to remove a bad leader (or suffer a lifetime of poor governance).

He main thrust is that we should view elections as rituals of intensification:

Anthropologically speaking, voting is a ritual of intensification. Such rituals are undertaken during times of stress for the community—as when the political leadership might change—and they signal collective loyalty to the system so that all may see it and be comforted by it. We may demur that our preferred candidate did not win, or even that our preferred candidate never wins (and mine never does), but winning or losing is not the deeper point here. Rather, the exercise of democracy reaffirms the public commitment to a constant and orderly pattern of social life, and it does so in a way that inherently delegitimizes violence. Democracy may be of the state, but properly understood it is also a rebuke to the state, at least in the worst of its aspects.

Democracy does its good work—the work of keeping civil peace in a presumptive time of stress and danger—without depending at all on voters’ knowledge. Rituals of intensification don’t require a respectable scientific basis, or even a respectable metaphysics. Rituals of intensification work among peoples whom we might otherwise dismiss as superstitious, and they work among us, too, and they work for all of us because of our common evolutionary psychology. We are signaling creatures, and as such sometimes we find it necessary to signal to one another. And what better thing to signal than “Our social life, and our justice, must continue”?

On this view, one might object that democracy represents merely a psychological trick that we play on ourselves, like eating a full meal before we go grocery shopping. But look at the results: democracies are indeed more stable than other forms of government. They are more prosperous. They wage fewer wars against one another. They enjoy more liberty. And all of this begins, plausibly, with the social stability that democracies achieve at the dangerous moment when power changes hands.

There’s something rather gloomy in all this. Is the best we can really hope for a system that can only partially limit the effects of bad regimes, but not fully prevent them? That may be the central question we must grapple with in the near future.

Democracy for Realists, Part VI

In light of the evidence presented so far, we should be left with many questions, chiefly: Why is democracy the best form of government? Is democracy the best form of government?

Let’s return to the question that opened this series: what exactly is it we all like so much about democracy? The historical appeal of democracy has been the concept that voters should be represented, not merely governed. As the influence of the rationalist, individualist Enlightenment grew into the folk theory, the justification for democracy expanded into the idea that the power of government is located not only in the consent of the governed, but their political judgement as well. Given that we have already dispensed with this theoretical underpinning, is there anything left about democracy we can salvage?

Achen and Bartels believe that despite their shortcomings, elections are the fundamental strength of our system of government. They give the following reasons:

  1. Elections provide widely accepted agreement about who rules
  2. Regular party turnover ensures no one becomes entrenched in power
  3. 1 and 2 above give incentives for politicians to tolerate opposition
  4. Democratic political engagement has important implications for civic competence and other virtues
  5. Gives politicians incentive to avoid violating consensual ethical norms

I’ll note that I’m not so sure about 4 and 5. The authors leave unclear what 4 means; perhaps the argument is that, despite the fallacy of ‘feeling like we’re thinking’, democracy has positive spillover effects into other avenues of civic life? Regarding 5, the way the current administration has been playing out seems suggests that partisanship transcends (or shall we say…trumps) these norms. But the first three seem reasonable.

So, how do elections operate in the realist view of democracy?

First and foremost, a political campaign’s main function is to remind voters of their partisan identity; to activate and mobilize their base. The goal of a campaign is not to convince voters of the strength of their candidate’s political philosophy or policy program. As the authors write, “[A]t election time, voters choose a party validating their social and political identities, then rationalize their decisions with appropriate party-supplied reasons.” (p. 311)

“People sort out their group loyalties in ways that are meaningful to them, giving priority to some commitments while downplaying others. The result is that no group’s members belong exclusively to one party…Partisan loyalties reflect the way people understand their own lives, jobs, religious views, ancestral identities, family traditions, and personal ties. For ordinary citizens, parties make sense – if they make sense at all – in social identity terms, not as ideological frameworks.” (pp. 308-309)

(In this light, the legal structures in the United States around campaign spending and Super PACs are made all the more laughable, because issue advertising may as well be the exact same as advertising for a candidate; both are seeking to arouse the same feelings in voters. Issue ads may even be a more powerful motivator than regular candidate ads in many instances.)

The effects documented earlier in the book, like the importance of income growth in the six months before an election, and the reaction to natural disasters, still apply of course. But we should understand them as marginal effects – most voters are partisans, and only those with weaker attachments will be the swing vote. The larger the shock, the more the chance of swinging.

If we accept that elections are largely driven by group identity, with elements of randomness from external shocks, what are the implications for policy? To quote again from Achen and Bartels:

“In every society, policy-making is a job for specialists. Policies are made by political elites of one kind or another…Descriptions of the actual policy-making process return repeatedly to the same concepts – power and influence. Some officials, groups, and organizations are powerful; others are not…The resulting differences between them in getting their way are enormous. Sheer group size helps, but wealth, social prestige, and access to media of communication and persuasion often bring greater power, both in their own right and as resources facilitating organization.

If voters are to have their interests represented in the policy-making process, then, interest groups and parties have to do the work. And the organizations representing different interests have to have power in the policy-making process proportional to their presence in the electorate. The rich, the well-placed, and the well-organized cannot have extra power to advance their interests. Too often…naive reformers have imagined have imagined that the pseudo-democratization bestowed by plebiscites would solve all these problems cheaply and easily. To the contrary, spelling out the simple normative perspective of equal power in the context of an honest description of the policy-making process makes it only too clear how far we have to go to become seriously democratic.” (pp. 321-322)

A fact that is little appreciated among Americans is that our political parties are actually extraordinarily weak, despite strong partisanship. Our party system is very decentralized; anyone can choose to run as whichever party they wish in a primary; no approval from any sort of party leadership is required. In most other democracies, parties have at least some control over who runs, as with closed list systems or mixed member proportional representation systems.

As with everything, there are costs and benefits to any kind of electoral system. Ours was explicitly designed for a country without parties. Obviously, that situation did not last long, yet the founding generation’s skepticism of political faction remains deep in our DNA. We have a campaign finance system where we donate to individual candidates, not parties. We have, over time, removed more and more power from our parties as organizations – the leadership of the party no longer even has any say over who their own presidential candidates are (!).

Along with the dismantling of the folk theory, this may be the most important point of the book: “[E]ffective democracy requires an appropriate balance between popular preferences and elite expertise. The point of reform should not simply be to maximize popular influence in the political process, but to facilitate more effective popular influence. We need to learn to let political parties and political leaders do their jobs, too.” (p.303, emphasis original)

Our party system needs serious reform – parties need to be stronger, not weaker, if they are to serve as a countervailing force to the most powerful actors in society. The challenge is in finding a way to do that such that parties are not captured by those same powerful forces while remaining open to popular input.