Rationality, Irrationality, and Ignorance

I should just call this post Leeson vs. Caplan, but what I mean is the versions of Leeson and Caplan I have in MY mind...

Rational action is that which accounts for all the knowledge available, or at least that which would be relevant to the task at hand. Irrational would be to take information that is relevant to the problem and then to conclude falsely without relying on an informational error. Ignorance would be to conclude falsely because of an error in information. One thinks of adaptive expectations and limits to cognition when on things of ignorance.

So Leeson's work describes rationality which is found everywhere. Pirates are rational, the Roma are rational, Trials by ordeal are rational. Leeson is strictly right because he limits the definition of the group more than most people. This is a careful articulation of how the group functions. The pirates behave rationally given that they are on a boat together and are mostly outlaws. In a way Leeson shows that Pirates are more like Robin Hood than they are foaming at the mouth crazies. Contrast this with the way Pirates are typically considered (they destroy the peace as seen from the best interest of maritime travel). Leeson basically stakes his claims on the fact that groups are not ignorant of what it is in their best interest to be aware of, and therefore their behavior is rational (informed and maximizing subject to constraints).

How then would someone read Pirates as irrational. This is where I read Bryan Caplan into the mix. Caplan famously stakes a third category between rationality and ignorance. This category is called is irrationality. Caplan performs this trick by drawing a line between what is in the best interests of individual and what is actually chosen. If you ask the question about what is in the best interest of maritime travel, then you see the P-D game unraveling. The way that Caplan does this is to draw a contrast between what someone would chose privately, if they paid the full cost, and what someone would do publicly, when they free-ride. This standard welfare economics move shows that people will over-indulge when they pay too little cost. So then he says that irrationality is a good, like other goods. But what does irrationality literally buy you?

This is where I am reading into the debate. I start thinking about why someone would want to believe something irrational. Why might Unions believe that tariffs are a good idea (not only for them, but for the US)? Well the union has a position that they stake rationally for their own interest. Then they allow it to be argued as if it were in the interest of the nation. They must know that the interest of the whole nation is better served by lowering trade restrictions. So why might they consume this false or irrational argument despite the availability of very cheap information (so many economists are blogging now)?

I think that the real divide between rationality and irrationality is the demarcation of the group. When groups overlap and when individuals do not pay careful attention to the differences in membership between what North would call organizations (of which each individual is a member of several organizations at different sizes), then what looks like irrationality shows up. Leeson solves this by redefining the group to the point where the actions taken are rational (restricting the organization in question) -- rather than buying the fact that unions are actually arguing for the whole of the US he calls them out and says they are arguing for only the union itself. Caplan, on the other hand, seems to hold the question constant -- in my example, what is good for America. In doing this he allows for irrationality to persist by ignoring how groups define interest itself. This prevents the discussion from falling into a tautology.

I think you need both Leeson and Caplan to discuss the issue. Don't give up the question that is being asked, but consider how individuals define their own interests. Some back-and-forth between the two sides is needed to understand the problem.

More on Rules and a little on Bentham

Diana starts off the latest round of conversation talking about rules. I want to even take it back to a more basic point about rules.

What are rules designed to do?

If we proceed from a rule-utilitarian perspective than we have two routes to follow that I can think of. John Rawls has broken the path so well in terms of his reflexive equilibrium that many may only think of his approach, but I also want to consider a different approach that is less obvious. But first, we focus on Rawls.

The reflexive equilibrium is designed to produce rules that coincide with a desirable resulting state-of-the-world. Rules are adjusted like the throttle of a motor-bike to achieve the desired result. Each throttle is tuned to produce incentives necessary to reach the desired outcome. However, Rawls is not so naive as to not give us guidance as to what these throttles are aiming to achieve (his version of the teleos). The primary purpose is to achieve fairness and the possibility of allowing unfairness is only allowed in a dynamic context if the ultimate growth which results form the difference increases the least-well-off. Well certainly this changes the game for interpreting the rule-utilitarian approach. I defy you to find a better discussion of rule-utilitarianism than that which is surrounding the work of John Rawls. Even in economics, James Buchanan relies heavily on Rawls (both took Frank Knight very seriously, BTW). All of this is very rational and very optimistic about human reason. It also enshrines stability and order in rules.

Now that I have told you want is the standard approach to rule-utilitarianism, I want to go further. What I have discovered in reading late 18th and early 19th century texts is that before it was clarified by Rawls, some other thoughts were out there. The name of the game was to replace the interpretation of morality by clerics and create a secular basis for rationally articulating moral reasoning.

The work of the arch-utilitarian Jeremy Bentham is dripping with moral imagery while simultaneously dismissing rights-theory and organized religion. Bentham rejects what Hume would call superstition and enthusiasm, but he holds onto the subjective. [This last line is my own reading]. So what does a utilitarianism look like that includes this type of pursuit. It is something that is larger than the utilitarianism you have been taught was in Bentham.

For example: Bentham considers the question of committing suicide publicly when one's spouse dies. He considers the utility calculation for the individual to justify the position and to argue against it. Certainly the actor in question could be making an accurate representation of their decision, but also the person could feel as if society has put a great deal of pressure on them to do this. Barring an environment where we were clear about the person's actual intentions we would be against such a practice. We could assume society is implicitly compelling the act. However, were we to be convinced of the sincerity of their motivation to die with their spouse, we would be forced to stand aside and allow it to take place.

For a more pedestrian example, should people who borrow money be allowed to do so at high rates? They certainly are higher risk, but who if not the market should decide about the appropriate level of risk in a society (by bidding up returns)? Too many risk-lovers and the market becomes brittle. The 1997 Asian crisis is one concrete example of excessively brittle international relations. The US banking disaster in 2008 is another example of high risk. So what is a rule-utilitarian to decide? Why is it that Bentham breaks from other rule-utilitarians and critiques financial regulation (famously arguing that Smith's defense of usury laws was inconsistent with other parts of his own work)? Bentham believes that society progresses when people take risks. He also longs for more progress which he defines as a result of risk-taking. To use rule-utilitarianism as it is often used, to constrain growth in favor of stability, is to bias the result. There are types of rule-utilitarianism that favor risk, for example.

Ultimately, I want to construct an analysis of rule-utilitarians that distinguishes them according to their time-preference or preference for the status quo vs. progress. The results fly in the face of conventional left-right dynamics. For instance, social democrats and their penchant for redistribution implicitly believe in lower growth rates than do right wingers who are willing to embrace social mobility and high growth. I argue that the conservative / progressive dichotomy is reversed at least on this margin.

What say you?

Good Rules are a Public Good, Bad Rules are a Private Good

“Civilization advances by extending the number of important operations which we can perform without thinking about them. Operations of thought are like cavalry charges in a battle – they are strictly limited in number, they require fresh horses, and must only be made at decisive moments.” Alfred North Whitehead

F.A. Hayek builds on this insight by arguing that individuals can economize on knowledge by following specific rules of behavior. An individual solves the problem of “conducting himself successfully in a world only partially known to man” by “adhering to rules which had served him well but which he did not and could not know to be true in the Cartesian sense” (1973: 18).

Rules obviously hold an important place in the structure of civilization and, at least in Hayek’s discussion, they emerge out of a process of individual interaction and they change when the benefit of breaking the rule is greater than the cost of doing so to the individual.

More recently, James Buchanan (2011) argues that the process of rule formation cannot be judged based on an efficiency criterion because good rules themselves are public goods. There is therefore no such thing as market processes of rule creation in which entrepreneurs, lured by private profit, can be relied on to continually discover new and better rules.

While Buchanan is clearly arguing that there is no such thing as a market process for the discovery of rules, his argument does not preclude the possibility of analyzing the process of rule formation more systematically. Different social and institutional environments have different systematic effects on the types of rules we might expect to emerge. Take Buchanan’s own distinction between constitutional and post-constitutional rules, for example. They are distinct in the sense that rule creation in the constitutional sphere requires unanimous consent by all participants while rule creation in the post-constitutional sphere does not. If we draw on Hayek to distinguish between good rules and bad rules, we can suggest that good rules will be those that apply to every individual equally and are not designed with attention to specific circumstances but instead hold independent of the situation that an individual might find himself in (generality norm). It is clear that from behind the veil of ignorance, individuals will tend to consent to rules that have all of the characteristics just described. Since they do not have any information about their post-constitutional position in society, they will want to implement rules that benefit all. In addition, because unanimous consent is required, rules that benefit some at the expense of others would not pass even if individuals had knowledge about their specific situation in the post-constitutional position. On the post-constitutional level, however, individuals will be more likely to design rules that take into consideration their specific circumstances and benefit them directly at the expense of others. Because unanimity is no longer required, a majority can pass rules that allow it to extract resources from a dissenting minority. Such rules, by definition, have to violate the requirements of the generality norm.

Taking a more pragmatic perspective, good rules will emerge in environments in which all parties involved can veto the creation of a new rules. Bad rules will emerge in environments in which some are precluded from such a veto. If we weaken Buchanan's claim about the absence of an entrepreneurial process for a moment and assume that entrepreneurial alertness (at least) is omnipresent, we can use the idea of the entrepreneur to distinguish between different processes of rule creation. More specifically, we can say that institutional entrepreneurs in an environment in which they have to secure the support of a large majority of the population will be precluded from bringing about bad rule changes. The problem with the entrepreneurial perspective in this case is that most good rules will only provide small amounts of private benefits to the entrepreneur who discovers the new rule, because they are good rules that do not create rents (which is what Buchanan 2011 points out). In an environment where an institutional entrepreneur only needs the support of a relatively small part of the population, on the other hand, he will be much more likely to extract relatively greater private benefits for himself and his supporters. You can probably tell that this is getting close to the argument about concentrated benefits and diffused cost. As long as there are a minority that can bear the bulk of the cost of a rule and a majority that will reap the bulk of the benefits of the rule, post-constitutional rules will emerge that do not fulfill the requirements of the generality norm.

If you accept then, that good rules usually conform to the generality norm and that general rules rarely emerge in the absence of a unanimity requirement, you will have to agree that the post-constitutional process of rule formation will rarely produce good rules.

Child Care Quality and Regulation

I have been reading and writing a lot about childcare throughout the last year. Something I never thought I would do, but turns out to be quite interesting actually. It is also something I can talk to people about, which I was never able to do with the other things I have been working on. So I thought I would write up the few basic insights I’ve gained in researching this topic.

1. The quality of interactions between a child and its caregiver matters more than the frequency. What follows from this insight is that neither group size nor the ratio of children per staff matter all that much, but teacher training is essential. The cool thing is that the literature in early childhood psychology is in basic agreement with the economics literature regarding this insight.
2. When it comes to teacher training, the most important variable seems to be whether the caregiver has taken a college level class in early childhood education in the last year. This is something that friends of ours have confirmed anecdotally: they have three daughters and they have been hiring female students enrolled in USU’s Family Life Studies program, which combines various fields within the family, human development, and consumer science disciplines, as nannies. Our friends have reported that whenever their nannies have recently taken classes in early childhood development, their kids got to do many activities that are more engaging and would learn new things quickly. In fact, when asked how the nannies came up with the activities they would say things like “We learned this in class a few weeks ago and I thought I’d try it out.”
3. Things that negatively affect childcare outcomes are low teacher pay and high teacher turnover. Both of those variables are highly correlated as you might expect, since poorly paid childcare staff tend to be less committed to their jobs than better-paid staff.
4. European child care facilities tend to have better educated staff that receive higher pay than American day care center staff, largely because limits for child/staff ratios and group-size limits are not as low in Europe (this is not true for all European countries or all American states, but the consensus seems to be that on average child/staff ratios are higher in Europe).
5. One other problem with US childcare regulation is that small family day care homes, i.e. mothers taking care of a few other children in addition to their own in their own residence, are regulated in many states, which makes it difficult for such small family day care homes to operate. In order to operate legally, they have to undergo a number of health and safety inspections (not in all states but in a large number of states). Often, the cost of compliance is too high to warrant legal operation. This type of regulation severely constraints entry into the market for child care provision and as every econ 101 student knows, lower supply results in higher prices.
6. Another effect of this regulation is that because parents are relatively price sensitive, increasing regulatory cost often result in lower staff wages rather than being passed on to parents. As explained above, lower staff wages are one of the main culprits of creating a high quality care environment.

Overall, the lesson that I draw from this is that deregulation of staff-child ratios and groups size limits, as well as the removal of most health and safety standards for small family day care homes would result in better quality childcare outcomes in the US as well as lower prices. Currently health and safety are elevated as standards while childcare quality is largely neglected. Returning some of the decision making rights over how safe a care environment has to be to parents would lower barriers to entry into the child care sector, lower the cost of care, and probably also result in higher wages for child care staff (even though that may seem counterintuitive). I know not all parents may be well informed, but I do think that all parents have enough interested in their child’s health and safety that they would not drop them off at a day care construction site that does not follow any safety standards. Another thing I know for sure is that with snow on the ground 8 months out of the year, day care centers and homes in Utah do not have to have an outdoor play area to provide good care, even though that is one of the things they are required to have.

Deficits, Cognitive Bias, and Thinking Critically about Thinking

In a great book, Democracy in Deficit: The Fiscal Legacy of Lord Keynes, James Buchanan (1986 Nobel prize winner) and his student Richard Wagner (one of my professors) argued that spending is very closely related to reelection and that taxing works against reelection. The argument that we could spend when we were in bad economic times and save when we returned to prosperity (Keynes's countercyclical argument) gave rise to one of the enduring problems with the modern state -- fiscal opportunism. They called the balanced budget idea of government, "that old-time fiscal religion," and argued that only a balanced budget amendment could help save congress from the incentive to shy away from taxes and always increase spending.

California passed measures that has made it in effect a public referendum on every tax cut and every spending increase. This has led to California becoming completely bankrupt with no good way to get out of the fiscal mess. Voters easily vote for more programs and for tax cuts in the same ballot. In fact, people are watching California from China and arguing that democratic reforms could destroy the economy. There is a new assumption is that economic growth and democracy might work against one another.

The very essence of the argument of the republican idea of government was that representatives would have to be held to account for their stewardship of the resources that they are entrusted. I think one way to solve this issue of mis-allocation of resources is to trust them with fewer resources. I have little faith in the idea that we just need to elect better stewards.

Think about this example: In a business, no one cares how many times you failed before you succeeded. In politics, no one admits fault or past mistakes for fear that it will be used against them. This incentive means that dishonesty creeps into the system, little learning takes place and information is sharply limited. The only profit and loss signal is reelection (which is infrequent and clumsy, because it is not broken down to specific issues). Politicians go on TV regularly and refuse to comment on the substance of the issues for fear it will affect their ability to negotiate and vote trade later. It says something about our public discourse in this country that John Kerry's worst mistake was to change his mind in light of new evidence. George Bush's major selling point was that he was above changing his mind. This virtue would ensure a businessman failure, but a politician ought to have this to succeed.

On the other side of the debate are people who want the government to have more power. Obama goes to sleep every night thinking that no one could do a more honest and better job than he is doing. Strictly speaking, he might be right - given that anyone is making decisions for the 300 million people in this country. What these people seem to want is for politicians to make decisions for them. These individuals prefer the myth that there are guards on a wall ensuring that we won't have to tackle the difficult issues. After-all, they are elected to decided for us. This view assumes that only Obama has access to the information about the banks, about the war, about the economy. More trust is needed in his secret files that make it clear which decisions to make. People who have run a business of any size understand the importance of managers seeming to have a clear plan. However, asserting confidence doesn't save the manager when errors are discovered. The plan has to adapt. I am not sure that politics contains the necessary incentives for this to occur no matter who is wearing the hat.

At the end of the day, I have become convinced with the evidence arguing that the majority of how we view the world politically is derived neurologically (Jon Haidt, U Virginia). We can do brain scans and determine the more active centers of people's brains. To break it down to the most important dichotomy, we can look at the left-right political space in this country. Those with a greater portion of activity in the higher-order cognitive thinking areas tend to believe that we can reason our way out of every problem. They don't see natural connections between family members or small group affiliations, they see larger pictures, ethnic groups, political groups, and nations. They then "know" in some sense that greater data collection and more central control will help eliminate "errors" that others are making. Those that have less of this frontal lobe bias, when shown a picture made of dots, see the individual dots and have to have the picture pointed out to them to see it. They are more likely to be religious or traditional in other ways. They see the world made up of very strong social ties. These individuals are the ones that donate to charity, preferring help to come from knows how the one receiving the aid will use it to make themselves better off. Groups are smaller in this perspective and individuals are very meaningful pieces of the whole. These brain types fear outsiders and tend to see reasoning about issues as propaganda meant to ensure compliance rather than agreement.

Of course the frontal lobe types dismiss the others as less evolved. Actually, more research is being done to see if frontal lobe injury makes one more conservative. The implication here is that those that are conservative are brain damaged in some way. Actually, I don't know that this implication holds logically. Any good economist knows that there is a division of labor. The frontal lobe functions are necessary to making well-rounded decisions, but not enough to guarantee that well-rounded decisions are made. Too much focus on high-cognitive reasoning is like Spock from Star Trek. I think that there are good reasons that local knowledge and knowledge of meaningful social connections are important. What we tend to think, at least in academia, is that frontal-lobe activity takes the place of all of the other things that are important to being a well-rounded individual. We have spent so much time defending our nerdy habits that we don't realize the limitations of being nerdy. No one that I know of is doing good research on the impacts of this hypothesis on the political economy. I think it shows that the founders of this nation knew something about people when they wrote the constitution that we have forgotten over time. The reason we need competition between the federal and state levels is to help us balance between high-ideals and the way those ideals come into practice. I just hope that we can account for the goodwill of both sides amid a very frustrating political conversation and economic environment.

Guilt by Association fallacies and Academic Ethics

1) Universities accept private money for buildings, professorships, and other uses.

2) Little of this comes without normative implications and either explicit or implicit quid quo pro.

3) This has been the case for centuries, and in fact is the oldest model of academic funding (think Phillip of Macedonia).

I have recently been made aware of the political interest in universities that receive private funding. Considering that university professor's emails are public documents, we have plenty of evidence about what discussions were taking place about accepting money from private donors.

Does anything actually contribute to a substantial claim of ethical violation? No.

However, that truth seems to easy to dismiss in the age were scandal and the whiff of guilt is enough to start political movements.

It makes me very sad that academia stoops so low as to be susceptible to innuendo.

Being both a large oil refiner and a fan of free-markets is ipso facto proof of ethical corruption. I struggle even to care about logic that is so flawed, but yet it fully depresses me.

Standing Still

It is appropriate to acknowledge a long gap in posting.

What is it about standing still that creates a fear of starting out again?

Momentum is the life blood of academics. In thinking about the gap in blogging all I can offer to explain it is the existence of final exams. This has somehow created enough reason to ignore the blog. I know I was more productive when I was blogging each day, but was that because I was less exhausted or does the causality run in some other way? For example, discharging a thought or two as the day began allowed me to refocus on the tasks at hand while preserving my notes about what I woke up thinking about.

Well, I will see if I can get out of this torpor now that the semester is over...