For much the same reason [as Paul Krugman making Mankiw write a better textbook], competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet.

The absurdity jumps immediately to my mind — why vote with my feet if I can vote with my vote?! Why settle for the hassle of having to move to another town, state or even country just to get what I want from a democratic system?! Maybe if I perceive that old-fashioned „one person one vote“ thing as disadvantageous?

The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can — and often do — move to places offering a better mix of taxes and services.

This is seriously what Mankiw writes himself. And goes on to explain how the international race to the bottom forces countries to lower corporate tax. I wonder if he truly thinks that this is what people want. My impression is that the majority of voters feel blackmailed by corporations threatening to relocate.

To be fair, despite the FAIL in his main argument, he has a point and a half in two of his sidelines. The first is the issue of federalism. He’s right that if actual people (as opposed to corporations) are to have any realistic chance to vote with their feet, the whole country is too big a unit for policies. But I think that experimenting with different policies and then learning from each other is the much bigger reason why federalism can advance progress.

I give him a full point for his argument that redistribution policies need more centralized government:

Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals. If you are going to take from Peter to pay Paul, Peter may well decide to leave. It is perhaps no surprise that state and local tax systems are less progressive than the federal one.

Whether competition among governments is good or bad comes down to the philosophical questions of what you want government to do and how much you fear government power. If the government’s job is merely to provide services, like roads, schools and courts, competition among governmental producers may be as good a discipline as competition among private producers. But if government’s job is also to remedy many of life’s inequities, you may want a stronger centralized government, unchecked by competition.

Sounds like we should have some sort of global corporate tax after all?

• „the number of specialists has fallen by 90% since the 1950s, and at least 40% in the last decade alone“
• „supermarkets […] now sell 97% of our food, with four chains accounting for 76%“

Research is cited showing that „after the arrival of a big supermarket, participation in local charities, churches, campaign groups and even voting declines sharply“.

The more immediate effects are a diminishing choice of products, especially in the „real“ sense of things like local varieties of produce as opposed to different toilet paper colors.

Together with pressure on producers (called monopsony in the article) the dominance of big chains means a monopolization of business. As the „Red Tories“, a conservative UK thinktank finds, the grocery sector is largely closed to to new entrants.

This problem seems to me apparent in all sorts of industries and areas of business — the free market naturally leads to bigger and bigger agglomeration both in terms of huge companies and geographical specialization (e.g. 90%+ of footballs (for soccer) produced in Pakistan, similar number of laptops assembled in China, …), indeed reminiscent of the worst days of Soviet planned economy and similarly damaging to the environment and vulnerable to changes in demand or geopolitical events.

The question that frequently comes to my mind when I read this kind of thing is: we like to think of the free market in analogy to evolution. But while we can observe stunning diversity in nature, we have the opposite development in economy. I think on simple but probably central answer is: Nature has very powerful negative feedback in the form of parasites, whose role for evolution is I think widely underrated at least among non-professionals (non-biologists). With increasing population and dominance of a species in a certain area come dramatic increases in vulnerability to predation and especially parasites maintaining the balance, while business almost only knows size benefits.

Would it help to try and implement something similar for businesses? Some sort of progressive business taxation? Should antitrust regulation be stronger and act earlier? Or is centralizing business the way after all, but in public ownership?

The core argument is about how money came to be — which in most economic textbooks is explained as a logical development from a barter trade system, where you have to find somebody with a complementary need and offer in the marketplace. But this assumption about our economic past is soundly refuted by actual anthropological and historical research. It is very fascinating to follow the research as to what are actual probable pathways to money usage. And how economic activities were organized before that tells us a lot about how the economic system shapes even deep-rooted human qualities. The bottom line there is that behavior in accordance with „Homo Oeconomicus“ models probably only really came about after markets were invented. And it is because economists cannot (or don’t want to) imagine a human being with different ways of decision-making that they persist on the „money developed from barter trade“ myth despite solid evidence to the contrary. This is, again, in the service of not acknowledging the own status as a „reflexive“ social science which not only describes but also strongly influences human behavior and social processes.

So, first of all, how did people go about their business before money was around?

Anthropologists gradually fanned out into the world and began directly observing how economies where money was not used (or anyway, not used for everyday transactions) actually worked. What they discovered was an at first bewildering variety of arrangements, ranging from competitive gift-giving to communal stockpiling to places where economic relations centered on neighbors trying to guess each other’s dreams. What they never found was any place, anywhere, where economic relations between members of community took the form economists predicted: “I’ll give you twenty chickens for that cow.” Hence in the definitive anthropological work on the subject, Cambridge anthropology professor Caroline Humphrey concludes, “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing” [2]

A gift economy (even though that should not be read to imply selflessness) was probably the most common modus operandi among people who had established relationships, with rough judgments of equivalence between different kinds of goods:

a. The great flaw of the economic model is that it assumed spot transactions. I have arrowheads, you have beaver pelts, if you don’t need arrowheads right now, no deal. But even if we presume that neighbors in a small community are exchanging items in some way, why on earth would they limit themselves to spot transactions? If your neighbor doesn’t need your arrowheads right now, he probably will at some point in the future, and even if he won’t, you’re his neighbor—you will undoubtedly have something he wants, or be able to do some sort of favor for him, eventually. But without assuming the spot trade, there’s no double coincidence of wants problem, and therefore, no need to invent money.

b. What anthropologists have in fact observed where money is not used is not a system of explicit lending and borrowing, but a very broad system of non-enumerated credits and debts. In most such societies, if a neighbor wants some possession of yours, it usually suffices simply to praise it (“what a magnificent pig!”); the response is to immediately hand it over, accompanied by much insistence that this is a gift and the donor certainly would never want anything in return. In fact, the recipient now owes him a favor. Now, he might well just sit on the favor, since it’s nice to have others beholden to you, or he might demand something of an explicitly non-material kind (“you know, my son is in love with your daughter…”) He might ask for another pig, or something he considers roughly equivalent in kind. But it’s almost impossible to see how any of this would lead to a system whereby it’s possible to measure proportional values. After all, even if, as sometimes happens, the party owing one favor heads you off by presenting you with some unwanted present, and one considers it inadequate—a few chickens, for example—one might mock him as a cheapskate, but one is unlikely to feel the need to come up with a mathematical formula to measure just how cheap you consider him to be. As a result, as Chris Gregory observed, what you ordinarily find in such ‘gift economies’ is a broad ranking of different types of goods—canoes are roughly the same as heirloom necklaces, both are superior to pigs and whale teeth, which are superior to chickens, etc—but no system whereby you can measure how many pigs equal one canoe. [3]

The most common actual barter on the other hand is in long-distance trade, where people knew which goods the other party had, and that they had something to offer themselves which the others wanted. Graeber makes the argument that for that instance, there is no need to invent money when you can instead operate on the basis of „traditional fixed equivalences“. Instead, money would make you much more vulnerable to being robbed, and indeed it seems the Phoenicians, famous long-distance traders of the Classic World, adopted money usage very late.

And even in such trade among non-familiar groups, a social aspect seems to have been at least as important as the economic one:

The second example is the Gunwinngu of West Arnhem land in Australia, famous for entertaining neighbors in rituals of ceremonial barter called the dzamalag. Here the threat of actual violence seems much more distant. The region is also united by both a complex marriage system and local specialization, each group producing their own trade product that they barter with the others.

In the 1940s, an anthropologist, Ronald Berndt, described one dzamalag ritual, where one group in possession of imported cloth swapped their wares with another, noted for the manufacture of serrated spears. Here too it begins as strangers, after initial negotiations, are invited to the hosts’ camp, and the men begin singing and dancing, in this case accompanied by a didjeridu. Women from the hosts’ side then come, pick out one of the men, give him a piece of cloth, and then start punching him and pulling off his clothes, finally dragging him off to the surrounding bush to have sex, while he feigns reluctance, whereon the man gives her a small gift of beads or tobacco. Gradually, all the women select partners, their husbands urging them on, whereupon the women from the other side start the process in reverse, re-obtaining many of the beads and tobacco obtained by their own husbands. The entire ceremony culminates as the visitors’ men-folk perform a coordinated dance, pretending to threaten their hosts with the spears, but finally, instead, handing the spears over to the hosts’ womenfolk, declaring: “We do not need to spear you, since we already have!” [9]

In other words, the Gunwinngu manage to take all the most thrilling elements in the Nambikwara encounters—the threat of violence, the opportunity for sexual intrigue—and turn it into an entertaining game (one that, the ethnographer remarks, is considered enormous fun for everyone involved). In such a situation, one would have to assume obtaining the optimal cloth-for-spears ratio is the last thing on most participants’ minds. (And anyway, they seem to operate on traditional fixed equivalences.)

How did a need for money actually arise, then, and how could it happen? There are two answers — first as unit of calculation that was hardly ever handed over physically for long-distance trade and use in most notably temple bureaucracies. For this reason they usually took the form of equivalencies between „a common long-distance trade item [and] a common subsistence item“, e.g. silver and grain. Second, and to me quite surprisingly, it probably developed out of the legal system, where there was a need for specifying the appropriate compensation for material and moral offenses:

For example, Welsh and Irish codes contain extremely detailed price schedules where in the Welsh case, the exact value of every object likely to be found in someone’s house were worked out in painstaking detail, from cooking utensils to floorboards—despite the fact that there appear to have been, at the time, no markets where any such items could be bought and sold. The pricing system existed solely for the payment of damages and compensation—partly material, but particularly for insults to people’s honor, since the precise value of each man’s personal dignity could also be precisely quantified in monetary terms.

Here’s how Graeber sees the concept of Homo Oeconomicus as our natural state (which is implicit in the assumption that trade before money could only have taken the form of barter) refuted by these findings:

[…] it goes back precisely to this notion of rationality that Adam Smith too embraced: that human beings are rational, calculating exchangers seeking material advantage, and that therefore it is possible to construct a scientific field that studies such behavior. The problem is that the real world seems to contradict this assumption at every turn. Thus we find that in actual villages, rather than thinking only about getting the best deal in swapping one material good for another with their neighbors, people are much more interested in who they love, who they hate, who they want to bail out of difficulties, who they want to embarrass and humiliate, etc.—not to mention the need to head off feuds.

Even when strangers met and barter did ensue, people often had a lot more on their minds than getting the largest possible number of arrowheads in exchange for the smallest number of shells.

See the barter story above for illustration of the last point. The final argument is what all this implies for the role of Economics as a science, which is basically my old idea about necessary but mostly absent „reflexivity“:

At this point, it’s easier to understand why economists feel so defensive about challenges to the Myth of Barter, and why they keep telling the same old story even though most of them know it isn’t true. If what they are really describing is not how we ‘naturally’ behave but rather how we are taught to behave by the market—well who, nowadays, is doing most of the actual teaching? Primarily, economists. The question of barter cuts to the heart of not only what an economy is—most economists still insist that an economy is essentially a vast barter system, with money a mere tool (a position all the more peculiar now that the majority of economic transactions in the world have come to consist of playing around with money in one form or another) [10]—but also, the very status of economics: is it a science that describes of how humans actually behave, or prescriptive, a way of informing them how they should?

In a way, this really is an old argument: Whenever somebody tries to tell you a certain way of going about things, from gender roles to economic activities and social structures, is „natural“, they probably have an interest in you not looking for alternatives too hard. The sad thing is that they sometimes might not even be aware of this themselves, because their benefiting from the status quo is part of their unquestioned privilege.

(See the original article for all the references in [brackets])

The articles I found convinced me that I wasn’t wrong entirely thinking microcredit could help. But there’s a big BUT, or a number of them actually. An article in the New Yorker from 2008 titled What Microloans Miss provides a very readable introduction, but my primary source is an article called Microfinance Misses Its Mark from Aneel Karnani, published in the 2007 issue of the Stanford Social Innovation Review. It says that, first of all, microcredits help the not-so-poor better than the poorest:

One of the most comprehensive studies reaches a surprising conclusion: Microloans are more beneficial to borrowers living above the poverty line than to borrowers living below the poverty line.11 This is because clients with more income are willing to take the risks, such as investing in new technologies, that will most likely increase income flows. Poor borrowers, on the other hand, tend to take out conservative loans that protect their subsistence, and rarely invest in new technology, fixed capital, or the hiring of labor.

Now, even though that is already quite a problem (the way the poorest tend to spend microcredit money often brings them into a debt trap not much different from the one created by informal money-lenders, and the interest rates are still high for microcredit, mostly between 30% and 60% p.a.) it is not very surprising, and the fact that it can’t help everybody who needs help does not mean it doesn’t do any good.

So here are other negative aspects that are mentioned, and make a lot of sense from my own observations of business here:

A microcredit client is an entrepreneur in the literal sense: She raises the capital, manages the business, and takes home the earnings. But the “entrepreneurs” who have become heroes in the developed world are usually visionaries who convert new ideas into successful business models. Although some microcredit clients have created visionary businesses, the vast majority are caught in subsistence activities. They usually have no specialized skills, and so must compete with all the other self-employed poor people in entry-level trades.14 Most have no paid staff, own few assets, and operate at too small a scale to achieve efficiencies, and so make very meager earnings. In other words, most microenterprises are small and many fail – contrary to the United Nations’ hype that microentrepreneurs will grow thriving businesses that lead to flourishing economies.

This should not be too surprising. Most people do not have the skills, vision, creativity, and persistence to be entrepreneurial. Even in developed countries with high levels of education and access to financial services, about 90 percent of the labor force is employees, not entrepreneurs.15

It seems very obvious once you read about it, but still I must confess I never drew that simple comparison between the ratio of self-employed versus employees in developed countries and how we imagine to improve the economy of developing countries. And especially the stiff competition on the „entry-level trades“ is very observable — the number of things you can do for business on your own are very limited after all, it’s simple.

The people themselves see that similarly apparently:

The fact is, most microcredit clients are not microentrepreneurs by choice. They would gladly take a factory job at reasonable wages if it were available. We should not romanticize the idea of the “poor as entrepreneurs.” The International Labour Organization (ILO) uses a more appropriate term for these people: “own-account workers.”

Creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty. “Nothing is more fundamental to poverty reduction than employment,” states the ILO. And the United Nations Development Programme agrees: “Employment is a key link between economic growth and poverty reduction. Productive and remunerative employment can help ensure that poor people share in the benefits of economic growth.”

That microcredit-funded businesses don’t usually create employment for others was already mentioned. The New Yorker article has a good summary of what would do that:

What poor countries need most, then, is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation. In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need. It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”

The problem is a dearth not just of lenders but also of people willing to buy an ownership stake in companies, like the angel investors and venture capitalists that American entrepreneurs often rely on. Microfinance has led us to focus on lending, but it can be hard for young companies to get big purely on bank loans, which consume cash flow that could be reinvested in the business. Supplying the missing middle will require backers who want to invest in companies rather than just lend to them.

Interesting, especially the aspect of ownership, investing versus lending. Aneel Karnani, again, has a good image to make the advantage of bigger business easier to grasp:

To understand why creating jobs, not offering microcredit, is the better solution to alleviating poverty, consider these two alternative scenarios: (1) A microfinancier lends $200 to each of 500 women so that each can buy a sewing machine and set up her own sewing microenterprise, or (2) a traditional financier lends $100,000 to one savvy entrepreneur and helps her set up a garment manufacturing business that employs 500 people. In the first case, the women must make enough money to pay off their usually high-interest loans while competing with each other in exactly the same market niche. Meanwhile the garment manufacturing business can exploit economies of scale and use modern manufacturing processes and organizational techniques to enrich not only its owners, but also its workers.

Very convincing. And how can we get there? Karnani’s take-home message, together with only some country-comparison examples (that is an interesting bit in the article which I won’t quote more of here, because it basically backs the claims made before) is:

Overall, governments, businesses, and civil society would be well advised to reallocate their resources and energies away from microfinance and into supporting larger enterprises in labor-intensive industries. This is what is alleviating poverty in China, Korea, Taiwan, and other developing countries. At the same time, they should also provide basic services that improve the employability and productivity of the poor. Otherwise, they will miss the mark of lifting people out of poverty.

And how about what I, we (Action 5) can do? Maybe we could indeed help funding businesses that create employment, on the lower end of the „small-to-medium-sized enterprises“ mentioned. I feel that also education would probably improve if teachers and students had more of an idea what they are being educated for, instead of that almost magical thinking that with an education something good will happen in your life. Without jobs, usually, it won’t.

The idea is to, as a social scientist, be aware of the impact of one’s theorizing in the „object“ studied, and also of the fact that you are subject and object of your theories at the same time, because as a social (and in our times also unavoidably economical) being you are always also explaining your own behavior. Let’s have more of that, and more serious!

But this is a good start. The topic chosen as a humorous exercise in the article by Ariel Rubinstein titled „Freak-Freakonomics“, published in Economists’ Voice in 2006, is the hugely popular 2005 book „Freakonomics“ by Levitt and Dubner, which I partly read and (I think like Rubinstein) both enjoyed and felt a little uneasy about.

Let’s start with his definition of the problem of lacking reflexivity:

The book gives expression to the economic worldview that sees people as “economic agents,” responding to mainly material incentives (though in keeping with the new behavioral economic approach, the book also recognizes the existence of additional
psychological motives). This worldview seeks a simple explanation for the behavior of human beings that is consistent with their aspirations to attain a goal, attributing high importance to money and status and low importance to moral values. All human beings are seen as economic agents, except for one group of angels looking down at the world from above: the economists.

So, what happens if you look at this profession, that likes to comment on economic dealings from above, through their own glasses? Among readable detours, you can find a sting like this in Rubinstein’s text — why do economists earn more than mathematicians?

The chapter is inspired by Freakonomics’ discussion of the question of why “the typical prostitute earns more than the typical architect” (106). The comparison between architects and prostitutes can be applied to mathematicians and economists: the former are more skilled, highly educated and intelligent. Moreover, just as Levitt has never encountered a girl who dreams of being a prostitute, I have never met a child who dreams of being an economist. Like prostitutes, the skill required of economists is “not necessarily ‘specialized’” (106), so why do economists earn so much more than mathematicians?

Here, I offer a new explanation for the salary gap between mathematicians and economists: many economists are hired to justify a viewpoint. In contrast, I have never heard of mathematicians who proved a theorem to satisfy their masters.

Ouch! But I can’t help seeing a certain truth in this satire. And another example for what can go wrong in (economic) science, looked at as an economic activity:

Chapter 4: what do grocers and economists have in common? The title of this chapter competes with “What Do Schoolteachers and Sumo Wrestlers Have in Common?” (19). The chapter will begin with the findings of the study I will conduct on my grocer’s invoices. Eight out of fifty will be erroneous, including seven in the grocer’s favor and one (with a trivial error) in my favor.

I do not agree with Levitt, who asks “Who cheats?” and responds: “Well, just about anyone, if the stakes are right” (24). My grocer is not a cheater. But grocers, like economists, make mistakes, even without being aware of them, with a tendency to favor their own interests. The grocer wages a struggle for survival against the big supermarket chains and hopes for a large bill. The economist struggles for his professional advancement and wants his findings to confirm his hypothesis. In economics, there is no tradition of checking data and repeating experiments. In the few cases in which I conducted experimental research, I myself felt the pressure not to search further at a stage in which the experimental results went in my favor and to check findings seven times when they appeared not to support the assumptions I was sure were correct. All this should convince me to place no greater faith in an economist’s findings than in my grocer’s tally.

I very much appreciate the open relating of personal experience on top of the (convincing) economic argument. And there are very good examples of (probably, if not assumed to be consciously misleading) exactly that happening to the Freakonomics authors in the article. Pretty blunt mistakes revealed through simple re-analysis by Rubinstein.

Another, final, argument about experts turned on the „other“ expert — himself:

Levitt writes: “The typical expert … is prone to sound exceedingly sure of himself. An expert doesn’t so much argue the various sides of an issue … That’s because an expert whose argument reeks of restraint or nuance often doesn’t get much attention. An expert must be bold if he hopes to alchemize his homespun theory into conventional wisdom” (148). It is possible to suspect that this paragraph refers to Levitt: an expert, who is sure of himself, who presents a view other than his own only to disprove it, and who is brave enough to touch upon a subject like the right to abortion. But this paragraph is written in the book in disparagement of other experts (in “parental sciences”).

I wish somebody did that for every economic (and, of course, psychological, where this virtue is known more in theory than practice) publication. And I wish it would become common practice to reflect on your own perspective, motivations and resulting limitations for your results.

To finish with a „real-world“ (as opposed to the mostly for-entertainment character of Freakonomics) example of the topic which I’ve found particularly striking for a long time now: Milton Friedman. He proclaims a very general distrust for people caring about something else than their own interest. In the economic sphere this is popularized by his „four ways to spend money“ (from a Fox News interview in 2004, also somewhere on youtube):

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.

Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!

Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40 percent of our national income.

In the political sphere, he is famous for arguments for a very very small government (military and law enforcement), arguing for instance like this (from the introduction to his 1962 book „Capitalism and Freedom“, via Wikiquote)

Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.

Now, in this deep distrust for people’s willingness and/or ability (usually rather the willingness, called „incentive“) to further somebody else’s good, we are still for some reason to believe that the person putting forward these arguments, Milton E. Friedman, has the common good in mind, rather than his own or maybe that of a circle of friends. How does that make sense?

Not to me. Pretty much amounts to a logical contradiction. Either his argument is flawed, as in at least himself has to be excluded from the general assumption of self-interest. Or his argument cannot be trusted, for it is self-interested…

And in any case, I very much belief that his radical free-market arguments benefit some people and disadvantage others. And he (and people emotionally or financially relevant to him) would certainly be on the „right“ side of this.

The only discernible „luxury“ items on sale are drugs — cigarettes, alcohol, meat if you want to count that here Apart from that you get pots for cooking, water containers, soap, notebooks and pens, and very basic and local food items — bananas for cooking, rice, beans, tomatoes. You don’t even see too much fruit around, which is a petty for me personally but also I believe for people’s health. The services offered are similarly essential — bicycle repair, barber shops, „motorbike taxi“ and transport. And there are typing services, where your hand-written pages will be put into a computer for printing and copying. And, last but not least, a lot of people I think are more or less formally employed in helping with household chores. Here in my house there are two, but I feel at other times youths of different age pop in, help and eat…

This leads already to the production side, which I feel offers a very clear view of the concept of „value added“. The lower end is the mentioned „work for food“ concept. And I was told by teachers that many of the students would spend their afternoons like this: Two hours of walking to the river and back for 20 liters (some 5 gallon for my old-fashioned friends abroad) of water for their home, maybe a second round if the need is there. Then scrambling the bushes for firewood to be used for dinner preparation. So at nightfall, there is no homework done, clothes washed, or pleasure had from life. And what is the value generated in the process? A small contribution to what will eventually be a very modest dinner, together with many hours of peeling bananas, cooking different things one after another in a single pot over a small wooden fire. I don’t even dare trying to express that in terms of money. By the way, this story also explains the emphasis a youth magazine I read at school put on solar lamps for homework — I had wondered why people don’t simply do it in the afternoon… Then, of course, to continue the hierarchy of labor, there is agriculture, transporting and selling things, and the few skilled labor opportunities — barber, typist, motorbike driver.

Many of these activities strike me as painfully inefficient. Take the exams that I recently participated in composing — I was the only one to do that on the computer myself, and the colleagues were half shocked and half thrilled by the idea. The others wrote by hand on loose sheets of paper, to be collected and brought to the typist, who earns 500 TSH (25 Eurocent) for one page of output. That is the next fascinating point: Even in relation to local goods, the incomes and margins of profit are incredibly low. For 500 Shilling I can buy 2 small packages of roasted peanuts, and the price for typing one page is the same as for printing one page. The difference between buying and selling prices for the many shops are also very low. Human work is definitely not worth much here. And I feel the relationship to the value, the use, it produces is quite clear, as I said. If I transport a bunch of cooking bananas from one place where they are sold for 4000/= (the usual sign for Shilling) to another where they are individually sold for a total of 5000/=, my transporting, cutting up and selling has produced a value of 1000/=, no matter how long it took me and that I also need a bicycle to do it.

I also feel the way a whole society (or at least a region) can be stuck economically is visible here: Somebody should start with a more efficient, aggregate way of providing any of these goods and services, like selling water. But in order for his or her potential costumers to make use of that, they need an income — in other words: they also need to provide something to people others than themselves and their family. And somehow it seems almost impossible to start that cycle at only one point, which I think puts an end to many of the myriad smart little business ideas one could come up with here.

Another aspect is certainly capital, investment. A shop-keeper needs to hold a stock, a street vendor needs a bicycle to transport his stuff, a barber a room with electricity, mirror and an(electric) razor/shaving machine, not to mention the obvious case of the motorbike taxi. And this capital is still almost impossible to get with just a good idea and job qualification, despite an abundance of (mostly for-profit) micro-credit institutions by now. A new project partner of Action 5’s in Kenya had a plausible social business plan that would return its investment within a year and a half as profits. But they said even the micro-credit institutions want to see either an already running business and/or securities for their money.

Now, of course, there is a romanticism to this way of life. Self-prepared food is delicious and wholesome to an extent our mostly mass-produced stuff back home can’t reach. And the dominant (and hardly profitable) businesses, the small shops, also have a social aspect. People tend to buy everything in very small quantities — a single cigarette or maybe two, kerosene to light the lamp for one evening, rice for one meal, petrol/gas for one trip to town and back. I already get surprised looks when I buy a small bank-note’s worth of peanuts at once, 5 packages. I pass the shop every day on the way to school and back after all. And people who go to a shop always hang out there, meet the shop-keeper and other customers, chat and relax. But still I don’t believe it’s justified to say that this is just the way people choose to live. To many are the complaints from everywhere, too many the requests for help I get.

And this is a last point, of which I’m still not sure how close its relationship to the economic desolation is: the presence of (white) help workers and help industries. Firstly, this impacts the job aspirations of even and especially the well-educated young people. Their first choice is the government (for the security it provides, and maybe also a relic of the not-so-distant „socialist“ past), followed by international NGOs, and only then private businesses. Also, in terms of entrepreneurship, many seem to prefer starting their own little NGO with foreign money over starting a business (maybe this has to to with the aforementioned capital-problem). And secondly, pretty much anything that moves here involves foreign charity money, from water tanks for my school to the hospital to the roof of the local church. Now take into account that even the few things payed for by the government are in part funds from abroad. This seems to have almost become a reflex: our school needs books — find an NGO; I want my child to go to college — ask the white guy. In any case, the society and economy here are pretty much impossible to imagine without all these foreigners and organizations which permeate its every corner right now. And I can’t build up to much hope that the „new development aid“ will lead the way into more independence, after decades of different new aids have so obviously and utterly failed at that.

I am pretty much stuck myself right now with trying to sort that out mentally, trying to come up with the deep causes and possible ways forward for this situation. Maybe this feeling of mine is equivalent to the „problem trance“ we learn about concerning psychotherapy with especially depressive clients. I can’t help thinking, though, that the aid industry does after all contribute a lot to sustaining the misery, a conclusion I had always seen as free-market-ideology judging from the new genre of anti-aid books alone. At the same time, I most definitely don’t believe in the „just leave it alone“ message they often imply. I wish I knew more about how African economies do in the globalized markets right now, and what role that plays.

His argument is basically that the assumption of rationally maximized utility (elaborating the obvious flaws of which has been a favorite area of research in Economics recently) has come to much greater influence than it deserves because it is conductive to a certain way of doing science, which earns merit in the world of scientists:

But notice that I’ve framed this in terms of “reasonable” behavior; it’s a lot harder to tell these stories in terms of perfectly rational, maximizing behavior.

One response — a pretty good response — is, “So?” After all, maximization isn’t a fact about human behavior, it’s a gadget — an assumption we use to cut through the complexities of psychology and all that, one that can be very useful if it clarifies your thought, but by no means an axiom or a law of nature.

But maximizing models have a special appeal for modern academic economists: they require solving equations! They’re rigorous! They make it easy to show that you’re doing “real research”. And so maximization tends to acquire a bigger importance in economic thought than it deserves.

And he continues to claim that an essential part of what goes on in economic life has been lost in this process, because it didn’t go well with the preferred way to do research. Sadly, the part that would (have) helped a lot in dealing with (preventing) the Financial Crisis:

But from the 1970s onwards, what happened was that the drive to base everything on maximizing behavior narrowed the profession’s thinking — and, crucially, led first to a de-emphasis, then to a total forgetting, of the great insights about interaction. We created an economics profession which believed that Keynesian economics, and for that matter Bagehotian finance, had been “proved wrong”; whereas all that had really happened was that those things proved hard to model in terms of perfectly rational maximizing agents. Again, so?

I believe this to be true at least also in my field, Psychology — the current choice of method (which is, like Economics, centered around computation and modeling) is blind to many important aspects of what is going on in life.

The problem here is obviously how merit is ascribed by fellow researchers, how quality is defined. Social sciences (in which I include Economics, whether or not economists like that) are still trying to copy the (natural) Sciences in this respect. But I am hopeful, with people like this Nobel laureate speaking up. I wish we had a voice like that in Psychology.

But then, I feel that at least we are actually taught alternative ways of doing science, if only marginally. Are there any alternative methods in Economics waiting to be promoted?

After some more illustrative than enlightening back an forth on the „hunger-based poverty trap“ (poor people cannot eat enough to be strong enough to earn enough to eat enough) and examples of how poor people make choices that cause malnutrition themselves (spending money on tasty but little nutritious food or on non-food luxuries, mostly entertainment and drugs) they get to the point, and a quite interesting one. Here are some of the central ideas.

First, they refute the radical Homo Oeconomicus assumption that, by definition, people’s choices of consumption are to their best utility.

Should we let it rest there, then? Can we assume that the poor, though they may be eating little, do eat as much as they need to?

That also does not seem plausible. While Indians may prefer to buy things other than food as they get richer, they and their children are certainly not well nourished by any objective standard. Anemia is rampant; body-mass indices are some of the lowest in the world; almost half of children under 5 are much too short for their age, and one-fifth are so skinny that they are considered to be „wasted.“

And this is not without consequences. There is a lot of evidence that children suffering from malnutrition generally grow into less successful adults. In Kenya, children who were given deworming pills in school for two years went to school longer and earned, as young adults, 20 percent more than children in comparable schools who received deworming for just one year.

There are other good examples beyond the Kenya one, and the authors also point out that fixing many of the nutrition-related health problems could be achieved for small money, in reach even for the poor’s budgets.

The first and simple explanations for the problem, then, are information …

It is simply not very easy to learn about the value of many of these nutrients based on personal experience. Iodine might make your children smarter, but the difference is not huge, and in most cases you will not find out either way for many years. Iron, even if it makes people stronger, does not suddenly turn you into a superhero. The $40 extra a year the self-employed man earned may not even have been apparent to him, given the many ups and downs of his weekly income.

… and motivation:

We shouldn’t forget, too, that other things may be more important in their lives than food. Poor people in the developing world spend large amounts on weddings, dowries, and christenings. Part of the reason is probably that they don’t want to lose face, when the social custom is to spend a lot on those occasions. In South Africa, poor families often spend so lavishly on funerals that they skimp on food for months afterward.

And don’t underestimate the power of factors like boredom. Life can be quite dull in a village. There is no movie theater, no concert hall. And not a lot of work, either. In rural Morocco, Oucha Mbarbk and his two neighbors told us they had worked about 70 days in agriculture and about 30 days in construction that year. Otherwise, they took care of their cattle and waited for jobs to materialize. All three men lived in small houses without water or sanitation. They struggled to find enough money to give their children a good education. But they each had a television, a parabolic antenna, a DVD player, and a cell phone.

But what I found most interesting is the aspect of expectation, hope and something vaguely resembling self-efficacy:

The poor often resist the wonderful plans we think up for them because they do not share our faith that those plans work, or work as well as we claim. […]

We often see the world of the poor as a land of missed opportunities and wonder why they don’t invest in what would really make their lives better. But the poor may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. They often behave as if they think that any change that is significant enough to be worth sacrificing for will simply take too long. This could explain why they focus on the here and now, on living their lives as pleasantly as possible and celebrating when occasion demands it.

This, I think, is a connecting point both for what we can learn from the poor for our own lives, and for how we can help them. And I think that a small-scale development aid that involves a lot of personal contact and brings some recognition and „audience“ for the lives and struggles of the poor is a pretty good way of doing that. Which I hope and think we do with Action 5.

But with my few days of experience I also believe that the old-fashioned education systems here do a lot to discourage the kind of initiative and trust in one’s own abilities that could lead to more sustainable personal choices. Which makes me wonder about an aspect of poverty that I have never read anything about — the relationship between the poor and their own countries‘ elites. I would of course be grateful for any pointers here.

As I had previously tweeted, I was quite surprised by Joseph Stiglitz‘ remark that in his opinion there are some convictions that all serious economists should share: „resources are limited, incentives matter“. The context was that he didn’t agree with what many other distinguished economists held should be supported by everybody in the profession. Now, the problem with this greatest common denominator of his is that it is barely more than what I remember from a textbook as the definition of the discipline as being concerned with scarcity.

Is the situation of economics really so dire that after decades of science dealing with numbers from complete (non-inferential, every psychologist’s dream) real-world datasets, basic public policy issues are still in the realm of ideology? It seems so. Now, before (as usual …) arguing for a constructivist turn, let me put some of the central irreconcilable statements side by side:

From the original blog post that sparked the debate, by Stephen E. Landsburg:

For the government to consume more goods and services, somebody else must consume fewer.

Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else? The answer depends on the details of the transactions, but the most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.

Criticism by J. Bradford DeLong:

First, there is a full-employment assumption lurking underneath, which may or may not be valid.

Most important, however, is that there are actually not two parties to this situation–Robert Kendrick and the rest of us–but three: Robert Kendrick, the rest of us, and Robert Kendrick’s heirs. Looking over time, what happens when we tax Robert Kendrick and use the proceeds to boost government purchases (as opposed to paying down the debt) is:

• The government spends more on consumption and investment goods.
• Robert Kendrick leaves less to his heirs, whoever they happen to be.
• We today consume more government services (and benefit from additional government capital)
• We today consume less in our private capacities.
• We in the future consume more in our private capacities as Robert Kendrick’s heirs don’t have the money to consume in the future.

Another one by Paul Krugman:

So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.

And may I say that now is an especially peculiar time to think that taxes matter only if they reduce consumption. We have lots of excess capacity in the economy; the government can easily buy more goods and services without requiring that the private sector buy less. The only reason to raise taxes now, or promise future rises, is to address solvency concerns.

From a „Chris“ commenting on Landsburg’s blog:

If all there were in the world were currently produced goods and services, sure, you can’t have an excess supply. All markets clear, increase in someone’s consumption of currently produced good couldn’t happen except to be offset by reduction somewhere else. But if you have an excess demand for financial assets – which basically has to be true now given short term rates at zero there’s a market that’s not clearing – everyone wants to push consumption into the future and hold more safe financial assets – then you have an excess supply of currently produced goods and services.

No one else _has_ to consume any less. Essentially, the trick that you’ve pulled by taking his $84 million is to transfer it from those who want to hold cash to those who want to spend today, and there are those producers who have items that they can’t sell and will sell some of them.

Finally a reply from Landsburg, that seems to be aimed mostly at an argument like Chris‘:

Many are arguing in comments that increased government spending can lead to increased output. And so it can in many circumstances. But the increased spending yields the increased output whether or not Mr Kendrick gets taxed. The question here is: “What are the effects of trying to tax Mr Kendrick?” “What are the effects of government spending?” is a different question, no less interesting, but not the topic of this series of posts.

What fascinates me about these statements (and the debate as a whole) is that they all make perfect sense. Mankiw himself seems to see the problem in „people talking past each other“, which implies they just have different topics. But I disagree, because in the end they argue over the same practical question: Can I take money from the really rich and use it for the government? (As a sidenote: it is already an interesting feature of this scientific discourse that the question becomes one of „can“ instead of „should“ or „want“). So it comes down to different perspectives on the same problem.

Now, I am also tempted to hope that there is some way to determine the „right“ (meaning scientifically-empirically correct, not morally good) perspective. The issue seems at least partially due to inclusion or exclusion of different aspects — money vs. consumption vs. production vs. investment, the heirs (time perspective), employment, … I frankly don’t know enough about the subject to judge to what extent these decisions could be made in some sort of „evidence-based“ way. My suspicion is in any case that to a substantial degree they are a priori decisions, which ultimately can only be held accountable to the constructivist-pragmatist question: „How does this view affect my view of the world or my commitments to it?“ So, how can we bring a civilized way of talking about these values into economics (or politics, for that matter)?

PS: Re-reading the sources again I notice that both Mankiw and Landsburg make pretty blunt (and I’m wondering: conscious?) attempts at rescuing the argument by keeping out unwanted perspectives. Landsburg above who basically says „we are not talking about THAT right now, that has nothing to do with IT.“ And Mankiw who claims that it is enough to defend the much more general point that „the true incidence of a tax is not necessarily on the person who writes the check to pay the tax bill,“ ignoring the much more specific claim for government policy that was originally made.

The second, by David Henderson, stays closer to the story, and tries to make an interesting point. The claim is that increasing government welfare is actually the „scroogeish“ thing to do, contrary to what many would think at first, and that it is individual charitable giving that follows the true spirit of Christmas. These two approaches are polarized as coercion vs. compassion. I’m blogging about it because I think it is a recurrent theme in discussions, and maybe one issue where political „left“ and „right“ are truly separated by contradicting perspectives.

The different perspectives stem from different ideas about the original or „natural“ state. The „compassion“ party takes the distribution of wealth as it is as it’s starting point. From there it follows that giving is a charitable act, and that having taken from you without your consent is, well, coercion. On the other hand, the party titled „coercion“ by Henderson could better be called „rights“ approach, in my opinion. Here, the basic idea is that an unequal distribution of wealth is itself result of a coercive system, or of random differences between the talents and heritages (both material and cultural) of different people. Thus, taking from the wealthy is not coercion, but an attempt at remedying a coercive state of affairs. If you are poor and receive money, you are not being treated charitably, you get what is rightfully yours.

I suppose that any sensible position will incorporate something from both perspectives, even though my own would be leaning more towards what I called „rights“ approach. That’s why I’ve always taken some offense when the extremely rich are applauded too loudly for donating money, and I do think that proudly paying taxes is superior to charitable giving. I think it is important that those who receive can do so with a certain sense of entitlement. On the other hand, I understand that compassionate giving probably feels better than feeling you have to give. But maybe that could also be changed: in acknowledging that having a lot is mostly a blessing, and then giving with a feeling of giving something „back“.

The third article (by Steven E. Landsburg) centers around Scrooges frugal lifestyle, and makes the point that refraining from consumption is pretty much a charitable act already. I hope that, coming from a university economics professor, the simple and compelling analysis of what happens if you produce without consuming is true:

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.

The claim becomes harder to follow when you view non-consumption in the form it usually takes nowadays: putting money in the bank with interest. But I think when you assume that money is never taken out of the bank and eventually consumed after being multiplied by interest, the point holds:

Saving is philanthropy, and—because this is both the Christmas season and the season of tax reform—it’s worth mentioning that the tax system should recognize as much. If there’s a tax deduction for charitable giving, there should be a tax deduction for saving. What you earn and don’t spend is your contribution to the world, and it’s equally a contribution whether you give it away or squirrel it away.

I’d like to know more before my final judgement on this, but it is an intriguing thought.