Tuesday, December 16, 2014

Jean Tirole: "I'm a big federalist"

These words came after a question by the BBC journalist Zeinab Badawi to the 2014 Economics Nobel Prize asking whether it was true that Tirole was a federalist in favor of a European state. It was in the context of the "Nobel Minds debate" in BBC World during the past week-end. Unfortunately, the video does not seem to be available yet. Badawi's question in turn came after two questions by young ladies, the first of one by Maria asking whether it would be easier to regulte small terriotries like Catalonia and Scotland instead of Spain and the UK. Maria spoke with a Catalan accent (I know about this particular accent). Tirole's answer perhaps came as a surprise to Maria: "I'm a big federalist," reminding the audience that the objects that must be regulated are more and more international in nature: banks are multinational. Google, climate chnage, all have to be regulated at the global or at least European level. Tirole emphasized that he tries to be politically neutral, but he also left clear that he has little patience with the "horrible" policies of extreme parties. The euro zone institutions are weak, said Tirole, unlike the US: "I would like to have a common budget and a common law." Hopefully that will come, he argued, although "My ideas seem to be against the current because we don’t learn the lessons of history." The French economist defended the idea of a strong EU budget and a EU federal government that operates with higher transfers of sovereignty from the member states and that looks for coordinated solutions to the current economic crisis. It is therefore not only Thomas Piketty and Branko Milanovic who discuss federalism in their work among the economists. Now it will also be this year's Nobel prize.

Wednesday, December 10, 2014

The Coase theorem meets global federalism

I just explained to my MAREB students the Coase theorem yesterday, and today I read this post by Branko Milanovic. I told my students that the theorem (if property rights are complete and transaction costs are zero, the parties to collective problems reach efficient solutions) had been used to justify massive privatization, and other policies such as trading in pollution permits. Of course, the theorem is a theorem and not a description of reality. Like the two welfare theorems, the Coase theorem gives the false impression that efficiency and distribution can be easily separated, but they are not. Plutocracies create inefficiencies. The particular distribution of property rights in Russia is linked to the failure of democracy, and the failure of democracy makes it difficult to develop a modern well functioning economy. The expectation, as Milanovic argues, was that the oligarchs would demand the protection of property rights through the rule of law, as the rich did in the US in the past, but the oligarchs moved their resources to other countries (where no one asks them about the origin of their wealth), because that is easy to do with globalization, so they do not need to demand the protection of property rights in Russia. It is utopian to think about a democratic global government that regulates global capitalism and redistributes at a global scale, but it was also utopian to think about a Europe without borders in 1945. Markets need rules and redistribution, and today markets are global, so rules and redistribution should increasingly work at the global level. In 1945 rules to constrain capitalism were mostly a national work in progress, Europe was a dream and global federalism was not even a proposition. Today nation states have done most of their work and are increasingly obsolete, Europe is a work in progress and global federalism has moved from nothing to a dream. That's some progress.

Monday, December 8, 2014

Political Bubbles

I am reading the book "Political Bubbles" by three American political scientists, about the failure of the political system in the US that led to the financial crisis of 2008 and that failed to react quickly and deeply enough to it afterwards. The authors explain how economic market failure was accompanied by political failure to a large scale. This failure was the result of what they call the three "i's": institutions, interests and ideologies. Interests are those of wealthy members of the financial community that spend resources in trying and sometimes achieving to capture the political system. Ideologies are those of unfettered free markets, but also those of egalitarians that content themselves with the use of imperfect instruments. That is the case when redistributions is pursued by selling houses, in a coincidence of interests with those members of the financial community and with those conservatives that work to create an "ownership society." Interests and ideologies can work against the interests of the majority when institutions favour gridlock and the status quo. Some degree of commitment to past policies is desirable to promote stability, for example when there are valuable sunk investments. But sometimes flexibility and adaptation is needed, especially when social disasters are growing in likelihood. Something similar may be happening today with climate change. The three "i's" explain why the popular response to the crisis has been so moderate and why outrage has been unable to transform itself into a wide movement for deep reforms. They contribute to explain why in the face of the absolute disaster of free market policies, Barack Obama still only won by a small majority against John McCain in 2008. Or why the Occupy Wall Street movement only lasted briefly and had a small impact on mainstream politics.

Friday, December 5, 2014

Evolution and the technology of nationalist movements

During 99% of the evolution of the human species, our ancestors were hunter gatherers fighting for survival in the African savannah. In that technological and environmental context, cooperation among members of the same group and distrust of members of outside groups was an optimal adaptive strategy. As a result, the human mind developed preferences that reinforced the own identity by opposition to other identities. These preferences have survived to our days, and can be seen in nationalist movements and in the emotions and sometimes dangerous tendencies of sports fans. The problem is that today the environmental and technological context have completely changed, and therefore a sharp distinction between "us" and "them" has become maladaptive to the majority of humans. We should cooperate more, at a larger scale. Of course, it is still useful to some people, for example those that benefit from the weapons of mass distraction that are nationalist movements, in Europe, Israel, Asia and many other places. Elites benefit from the  mobilization of ethnic and religious feelings, as was predicted by John E. Roemer in an article where he explained why the poor do not expropriate the rich in democracies (because the rich are good at keeping the poor busy with identity clashes). Then the relatively poor (a good fraction of the majority) provide the labour factor in nationalist movements in the form of demonstrators and voters, and the elites, usually with the massive opportunist use of the resources and propaganda machines of rich regional governments (as in Quebec in the 1980s, or Scotland and Catalonia today), provide the capital. Of course, human capital also helps, especially where the labour factor is augmented by the power accumulated by well trained middle classes which, although being a minority (perhaps a cohesive and culturally homogeneous 30%), thanks to the structure of electoral laws, civil society and local institutions, may control the key nodes of society. Then, having a society mobilized on nationalism, but paralyzed on everything else, is perfectly possible. Political movements are the result of ideologies (beliefs), institutions and interests. But evolutionary forces and technology should not be underestimated.

Sunday, November 30, 2014

Hope in the struggle against prejudice

In my previous post I argued that one of the biggest obstacles in the struggle against prejudice is that most of us are not aware of what is going on in our brains. Our cognitive functions believe that they are in control, and we are not aware that most of our decisions are taken by our affective and automatic functions. Empirical social psychologists have difficulties in ascertaining what works and what does not work in policy efforts to reduce prejudice and stereotypes. The history of countries and communities that have descended from prejudice to violence or even genocide is not encouraging. But there are also stories that testify of the victory of tolerance and solidarity. In Canada for example, after decades of political debate dominated by nationalism and intolerance between communities in Quebec, today the province is dominated by federalists that have promoted inclusive policies that accept diversity and cooperative solutions. In another field, I am reading the book by David Winner on the history of Dutch soccer, "The Neurotic Genius of Dutch Soccer". One of the most interesting aspects of this essay, and to me one of the most unknown, is how after the defeat of the Dutch against the German in the final of the World Cup in 1974, The Netherlands were increasingly dominated by a biased interpretation of history that exaggerated the acrimony between Dutch and German, starting from the occupation in the Second World War and finishing with the fact that Germany had won that World Cup final in an unfair way. However, in the late 1990s many Dutch rectified that point of view, and many of them were able to practice self-criticism and realize that the Germans are also able to play excellent football, and that their players had no responsibility at all in the Holocaust, a responsibility that many Germans of the 1940s share with many Dutch, since there was a high level of collaborationism in The Netherlands, where the Jewish community was one of those that most suffered in those horrible times.

Thursday, November 27, 2014

We are not aware

Colin Camerer, in an article in 2005 about Neuroeconomics, argues that neuroscientific evidence on our behaviour can be summarized along two dimensions. In one dimension, brain functions can be either controlled or automatic (similar to what Kahneman calls slow and fast thinking). In another dimension, mental functions can be affective or cognitive. Economics for most of its history has dealt with controlled, cognitive processes, neglecting the other possibilities, but it is slowly starting to investigate them. Camerer also argues that most of the time, our controlled cognitive system is not aware of what happens when we employ automatic or affective ways of "thinking". Since the affective system is a dominant one, that means that humans most of the time do not know themselves. One of the examples he gives is the tendency of people not to admit that they have prejudices or stereotypes. That can be recognized every day in societies dominated by identity conflicts. Sadly, in Catalonia for example it is increasingly easy to find someone who says that Catalans are more open-minded that the rest of Spaniards, and at the same time do not admit that it is almost impossible that that is a rational statement. Some people also claim that the pro-independence movement is not nationalistic, but it is rational and purely based on... who knows (sometimes the reasoning is not easy to follow). Of course affect is not always a bad thing. Thanks to affect, we tend to reject unfair offers, which makes elites propose fair options for fear of creating conflicts. Only an autistic child (not even autistic adults) would play as rationally as predicted by game theory in this kind of interactions (called the ultimatum game).

Tuesday, November 25, 2014

Catalonia in a European frame

LSE's blog Europp has published an article of mine that starts like this "The current conflict in Spain over the constitutional future of Catalonia cannot be resolved without reference to our European reality. The leaders of the Catalan and Spanish governments are essentially fighting over something which no longer exists in Europe: national sovereignty. The controversy over how to democratically decide the future of Catalonia illustrates the difficulties of engaging in this debate without recognising the world of complex and overlapping sovereignty that now exists, and which has to some extent left the nation state behind. Antoni Zabalza, Professor of Economics at Valencia University, argued in an article in the Spanish newspaper El Pais on 21 November that projecting the data of participants in the ‘consultation’ of 9 November (where everybody who wanted to vote could do it) on a legal referendum with high turnout, the yes vote would reach 44 per cent of the electorate. The figure is similar to what could be projected from the vote of pro-independence parties in past regional elections. The question is whether these sources of information should be complemented with an official, decisive referendum on independence like the one that took place in Scotland. The Economist’s editorial proposing such a referendum, in their words to defeat independence in Catalonia, gives me the opportunity to express my opinion once more about this issue." The rest of the article can be read here.