Friday, January 07, 2011

Perspectivism, rational choice theory, and Blake

Lately, LI has been thinking about how to put together two theses in the Homo Economicus book. One thesis is that there is a multiplicity of matrixes of exchange even within modernity – and that the seeming hegemony of the money matrix, to the extent that it even defines the economic as opposed to the non-economic, is a phenomena that has certainly penetrated other matrixes – such as the complex gift and barter relationships of family, friendship and alliance – without fundamentally ‘commoditizing’ them. In one sense, my whole thesis is that there is a dialectic structure that governs the degree to which the hegemony of money, as reflected in the character of homo economicus, can actually dispense with other matrixes, since its survival is threatened by its monopoly of all spaces of exchange.

The other thesis is that rationality, as the economists define it, is linked to a realism that denies perspectives as anything other than representatives of ‘parts of reality’. Myself, I am a perspectivist of the ‘hard; variety – that is, I see no reason to put up with the idea that the parts of reality make up one reality. Reality, here, becomes a substitute for the God’s eye perspective – that point at which we can see the whole universe. Perspectivism denies that perspective can be constructed. It does not deny, it should be said, that certain processes might be shared among perspectives – say, a process for correlating statement and fact. Or even a process for ordering preferences. It simply denies that this formal characteristic has any substance. In other words, rationality within a perspective refers to the norms of the perspective, not to processes that transcend perspectives. Hard perspectivism contends that there is information in a given perspective – something that can be defined by simple axioms – that does not exist in other perspectives. In the clash of perspectives – which is the dynamic by which perspectives are made – this information can be completely lost – the way a passenger pigeon saw an oak tree no longer exists, for instance. I would not go so far as to say that different matrixes of exchange form completely different perspectives, but something similar might well hold – that is, that there is information in a barter exchange that can’t be transformed or translated into the money exchange. Etc.

In other words, I want to build a theory about economics based on this phrase of Blake’s:
How do you know but ev'ry Bird that cuts the airy way,
Is an immense world of delight, clos'd by your senses five?

Now, onto some reading notes.

“A body of data and theory has been developing within psychology which should be of
interest to economists. Taken at face value the data are simply inconsistent with preference
theory and have broad implications about research priorities within economics. The
inconsistency is deeper than the mere lack of transitivity or even stochastic transitivity. It
suggests that no optimization principles of any sort lie behind even the simplest of human
choices and that the uniformities in human choice behavior which lie behind market
behavior may result from principles which are of a completely different sort from those
generally accepted. This paper reports the results of a series of experiments designed to
discredit the psychologists' works as applied to economics.” – Grether, Plott

So begins a rather puzzling paper on the phenomenon of ‘preference reversal’, “Economic Theory of Choice and the Preference Reversal Phenomenon” (1979). It is puzzling because, as has been pointed out by Daniel Hausman, the two economists who introduce, in sweeping terms, an examination of a series of experiments that seemingly contradict the central tenant of the neo-classical theory of choice end the paper by retreating almost totally from their introduction:

“The fact that preference theory and related theories of optimization are subject to exception
does not mean that they should be discarded. No alternative theory currently available appears to be capable of covering the same extremely broad range of phenomena. In a sense the exception is an important discovery, as it stands as an answer to those who would charge that preference theory is
circular and/or without empirical content. It also stands as a challenge to theorists who
may attempt to modify the theory to account for this exception without simultaneously
making the theory vacuous.”

As Hausman puts it, “It is almost as if they conclude, “Since these awful data cannot be discredited, economists should ignore them, although not without first congratulating themselves for possessing such a splendidly non-vacuous theory.” (207)

Plott and Grether’s paper concerns an experiment in betting.

“Individuals under suitable laboratory conditions are asked if they prefer lottery A to lottery B as shown in Figure 1. In lottery A a random dart is thrown
to the interior of the circle. If it hits the line, the subject is paid $0 and if it hits anywhere
else, the subject is paid $4. Notice that there is a very high probability of winning so this
lottery is called the P bet, standing for probability bet. If lottery B is chosen, a random
dart is thrown to the interior of the circle and the subject receives either $16 or $0 depending upon where the dart hits. Lottery B is called the $ bet since there is a very high maximum reward. After indicating a preference between the two lotteries, subjects are asked to place a monetary value on each of the lotteries.”

Now, according to standard theory, if Lottery A is preferred to Lottery B, then Lottery A should receive a higher monetary value than Lottery B. That is, revealed preference should be coordinate with true preference.

What happened was quite different. The majority of respondents preferred the lottery with the lower risk and lower payoff, but put a higher price on the lottery with the higher risk and the higher payoff.

Lott and Grether’s paper builds on an early paper by two psychologists, Lichtenstein and Slovic (1971), who have continued to work on the psychology of preference to build, with Tversky and Kahnmann, prospect theory. Lott and Grether varied elements from the earlier experiment – for instance, the set of subjects was selected from the economics rather than the psychology department – but the results were consistent with the kind of preference ‘reversal’ revealed by the psychologists.

“Needless to say the results we obtained were not those expected when we initiated this
study. Our design controlled for all the economic-theoretic explanations of the phenomenon
which we could find. The preference reversal phenomenon which is inconsistent with the traditional statement of preference theory remains. It is rather curious that this inconsistency between the theory and certain human choices should be discovered at a time when the theory is being successfully extended to explain choices of nonhumans.”

Since these papers were published, a lot of experimental work has been done on the way people form preferences, and most of it is incongruous with the way that economists say that people form preferences. It is found that people’s preferences can vary widely over time; that the independence condition – seemingly irrelevant circumstances that are added to binary choices – can change the choices; that the order of preferences can be intransitive, so that we can’t even predict, from a choice, what the optimal preference is – and so on.

The decline of confidence in the foundational axioms of rational choice theory and its descendents has led to the current interest in behavioral economics and prospect theory. I’d like to put this work in relation to a fascinating paper by Avrin Offer on the survival of the Gift Economy in modernity: “Between the Gift and the Market: The Economy of Regard”.


Wednesday, January 05, 2011

the liberal myth of the economy as a board game

“Only through the forgetting of this primitive metaphor-world, only through the hardening and rigidifying of the primitive capacities of human fantasy that flowed out originally in a hot stream of images, only through the unbeatable belief, this sun, this window, this table is a truth in itself, in brief only through the fact that man forgets himself as a subject and really as an artfully creative subject, does he live with some rest, certainty and consequence. If he for one moment could escape out of the prison walls of this belief, immediately his self consciousness would be over and done with. Already it costs him some effort to admit to himself that the insect or the bird perceives a whole other world than humans, and that the question, which of both world perceptions is more correct is a completely senseless one, since here we have to measure with the standard of the correct perception, that is, a standard that is not at hand.”

(Nur durch das Vergessen jener primitiven Metapherwelt, nur durch das Hart- und Starr-Werden einer ursprünglichen in hitziger Flüssigkeit aus dem Urvermögen menschlicher Phantasie hervorströmenden Bildermasse, nur durch den unbesiegbaren Glauben, diese Sonne, dieses Fenster, dieser Tisch sei eine Wahrheit an sich, kurz nur dadurch, dass der Mensch sich als Subjekt und zwar als künstlerisch schaffendes Subjekt vergisst, lebt er mit einiger Ruhe, Sicherheit und Consequenz; wenn er einen Augenblick nur aus den Gefängnisswänden dieses Glaubens heraus könnte, so wäre es sofort mit seinem "Selbstbewusstsein" vorbei. Schon dies kostet ihm Mühe, sich einzugestehen, wie das Insekt oder der Vogel eine ganz andere Welt percipiren als der Mensch, und dass die Frage, welche von beiden Weltperceptionen richtiger ist, eine ganz sinnlose ist, da hierzu bereits mit dem Maassstabe der richtigen Perception d. h. mit einem nicht vorhandenen Maassstabe gemessen werden müsste. – Nietzsche.)

The metaphor-world of economics is never more entangled in its antinomies – like a crippled spider in its own web – than when it comes up against the odd question of the distribution of wealth. The neo-classic mainstream exists, in fact, in a world that it only recognizes as an irritant on the way to the utopian moment when the market absorbs all its children in a heavenly rapture – but if it were entirely blind to the fact that the state, that enemy of the good honest corporation and firm, plays a major role in economics, it would face the danger of being merely comic. The liberal solution to the endless differing of market heaven is that the state exists to create a “level playing field”. Mark Thoma, who runs the excellent blog, Economist’s View, just published an article on income inequality that contains a canonical version of this notion:

“I’ve never favored redistributive policies, except to correct distortions in the distribution of income resulting from market failure, political power, bequests and other impediments to fair competition and equal opportunity. I’ve always believed that the best approach is to level the playing field so that everyone has an equal chance. If we can do that – an ideal we are far from presently – then we should accept the outcome as fair. Furthermore, under this approach, people are rewarded according to their contributions, and economic growth is likely to be highest.
But increasingly I am of the view that even if we could level the domestic playing field, it still won’t solve our wage stagnation and inequality problems. Redistribution of income appears to be the only answer.”

I wrote a little response to this paragraph on Mark’s site.

“I've never understood the popularity of this belief in America. It seems a contradiction in terms. How can you "level" the playing field, and at the same time allow any unequal outcome? These are in direct contradiction with one another. Any 'playing field' in which one of the players gains a significant advantage will be vulnerable to that player using some part of his power or wealth to 'unlevel' the playing field to his advantage. There is no rule of any type, there is no power that will prevent this. The problem is thinking of the playing field as a sort of board game. You play monopoly and you accept the outcome as 'fair'. The problem of course is that in life, unlike monopoly, you don't fold up the board after the game is over and begin it all again - in other words, the economy isn't a series of discrete games that are iterated at zero.
Thus, the whole "equality of opportunity" ideology has never made sense. If it succeeds, it will dissolve itself as those who succeed most make sure that we do not go back to zero, and that our idolized 'competition' is limited to those in the lower ranks - for among the wealthiest or the most powerful, the competition is, precisely, to stifle and obstruct competition in as much as it injures wealth or power.
To not understand the latter fact is to understand nothing about the incentive for acquiring wealth or power. It is as if economists truly believe that billionaires are searching for the next billion to spend it on candy, instead of seeing them as political players building a very traditional structure of status that will allow them the greatest possible scope for exercizing power, including helping their allies and family and injuring their enemies.”

I am not satisfied that I have spelled out the structural dilemma here. In trying to build an economy with a non-interfering state that only guarantees that the ‘playing field’ is levied, you are building, in reality, a massively interfering state. There is no point at which equality of opportunity will, as it wear, work by itself. This is because the economy does not exist as a chain of discrete states – rather, what happens in time t influences what happens in time t1. The board game metaphor, however, exerts an uncanny influence over thought here. From Rousseau to Rawls, the idea of an original position has, unconsciously, created the idea that society is like a board game. That is, it has beginnings and ends; a whole and continuous game came be played on it; that game will reward people according to their contributions. And so on. Here, classical liberalism still has a grasp on the liberalism that broke with it to develop the social welfare state. Both liberalisms, for instance, can accept that the price of an apple is not ‘earned’ by the apple, but both bridle at thinking the price of a man – his compensation – is not ‘earned’ by the man. It must have some deeper moral implication.
As we have discovered, the liberal hope, in the sixties, that the social welfare system would so arrange the board game of society that equal opportunity is extended to all, and so dissolve – was based on the false premise that the players all recognize a sort of rule in which they would not use their success in making moves to change the rules of the game. But this is to fundamentally misunderstand the incentive in this ‘board game’ – success consists precisely in changing the rules in your favor. It does not consist in getting rewarded for one’s contribution to the aggregate welfare of the players of the game. The billionaire is of a different kind than the saint. And each, to use Spinoza’s phrase, must continue in their being in order to be at all.
The anti-liberalism of the last thirty or forty years is rooted in this liberal blindspot. On the one hand, the liberal allows his rhetoric to be taken hostage by a pro-forma anti-statism – surely we don’t want the corrupt state to reward the lazy and unscrupulous! Thus, social welfare is presented with a wholly utilitarian justification – it exists solely to help the industrious and the respectable. So the liberal concedes that the protector state is a second best arrangement – and slides easily into bemoaning middle class ‘entitlements’, as if surely the middle class should stand on its own. On the other hand, the state engineered by the liberals does keep growing – it keeps growing because the middle class desperately needs it to maintain their life styles, and it keeps growing because the wealthy use it as a reliable annex to acquire various monopoly powers and as a cheap insurance plan.

What the liberal seemingly can’t acknowledge is that a democratic republic, can only afford the ‘board game’ of private enterprise if the state uses its powers not simply to redistribute or to produce, but to limit – that is, to hedge in and countervail the vested influence of the wealthiest. Thus, the democratic state taxes not only to provide income to the state, or to redistribute money to the less ‘worthy’ – it also does so to materially weaken the wealthiest. Otherwise, the wealthiest will rather quickly take over the state and make a mockery of democracy.
Taxation is the guillotine by other means. Joseph de Maistre once wrote that the compact between god and the state is sealed by the blood shed by the hangman. Wrong about god, de Maistre was certainly right that all social contracts are sealed in blood. No democracy can survive if it forgets this fact.

The ethics of integrity or the Baker at Dachau

    Throughout the 19th and 20th century, one stumbles upon the lefthand heirs of Burke – Red Tories, as Orwell called them. Orwell’s inst...