Saturday, May 18, 2024

Complex social sciences

Some weeks ago, I read a review of three books in the Week-end Financial Times on Complexity Economics. I bought the three of them, written by Brian Klaas, J.Doyne Farmer and Maja Göpel. They are a good complement of  “How China scaped the poverty trap”, by Yuen Yuen Ang who also uses complexity arguments to explain the historical evolution of China, with references to other societies.

Klaas book, “Fluke,” is perhaps the most interesting and ambitious of the three, in the intersection between philosophy, natural sciences and social sciences. The book reviews the properties of complex systems, such as emergence, self-organization, non-linearity, interconnection, randomness and difficulty to make predictions (the latter, as in Taleb’s books). Complex is different from complicated in that when a part fails in a complex system, the other units change and adapt. Feedback loops, tipping points, and reverse causality are also characteristics of complex systems. These can be analyzed using network analysis and evolutionary dynamics.

In a complex evolving system, small causes can have big consequences. Applied to the human world, we are all part of an interconnected reality, the result of multiple contingencies that result in our existence. When we are born, we do not come into this Planet, but we emerge from this Planet. Klaas urges us to downplay the importance that our Western culture allocates to the individual. Our brains are the result of the interaction of many neurons, and an anthill is the result of many ants. These social insects invented agriculture before humans. We have evolved to develop a sense of self-awareness to survive, not to seek truth, and other beings have developed other skills that we do not have (flying wings, radars). 

We control nothing but we can influence everything. The complexity of human societies suggests to the author that instead of using the expression that something is or is not “rocket science,” we should instead say that something is or is not “social science.” At our state of knowledge, economic systems are more difficult to predict than some physical systems (such as planetary orbits).

To facilitate the connection with social scientists trained in traditional methods and models, books for a general audience discussing complexity should emphasize some elements of continuity with the more advanced existing methodologies. For example, I see a continuity with game theory, just with more players and less (or different) rationality, as in Bowles 2004 book on microeconomics.

For example, in the last part of the book I found useful thoughts that will help in my course on soccer and economics. When the context changes, randomizing strategies may be useful, as a tribe in Borneo does with the selection of the exact location of rice fields. Or as the animal species that follow mathematically perfect random rules in the ocean. It provides a new perspective on the use of mixed strategies, which so far I justified only in terms of being unpredictable in contexts such as penalty kicks or military strategy.

I also found useful the reference to Moneyball (the book and movie about how statistics revolutionized baseball) as a not necessarily desirable trend if brought to the extreme, because it makes the game more predictable. The notions of contingency, complexity and randomness may help explain why Moneyball techniques have been more successful in baseball (although there seems to be a backlash there as well according to Klaas) than in soccer, where the game, less dependent on set pieces, is more fluid and difficult to predict.

Sunday, May 5, 2024

Why sports clubs fail

Acemoglu and Robbinson wrote “Why nations fail,” an impressive and controversial book that concluded that nations fail when they do not find inclusive institutions to make growth and cohesion compatible. Garicano wrote “Why organizations fail,” an article summarizing the literature on the economics of organizations, concluding that organizations fail when they do not allocate talent well, and when they do not balance well the short run with the long run.

A subfield of organizations that deserves a specific treatment is Sports organizations and soccer clubs in particular. Admittedly, in the current institutional setting, these organizations are very difficult to manage, because of the pressure of promotion and relegation and the economics of superstars. But clearly some of them are better managed than others. 

Soccer clubs never totally fail, but they may decline significantly, when their officials do not follow a coherent line and only care about the very short run, like bad politicians or business managers. They are too big or too important in their communities to fail, and that’s part of the problem: the moral hazard that results from the impossibility of totally failing.

Until the reelection of Joan Laporta as president of FC Barcelona in 2021, the history of the rise and fall of what some called the greatest soccer club is explained in Simon Kuper’s book “Barça.” At the end of the book, he didn’t seem very optimistic about the president that had been eleted for a second time.

Since then, three years later things are even worse. Today, the men’s Barça team (the one that just 10 years ago was the world’s best) is out of the new Clubs World Cup of 25 teams, 12th in the ranking of teams in Europe, 3rd in the Spanish league and 2nd in Catalonia after Girona. The financial crisis of the club is even deeper than then, and the president has been unable to retain or assemble a professional economic team to address the problem.

Barça does not sign the players they need, but those that they can afford or that are offered to them by opportunistic agents. Young talent, something the club keeps producing in abundance, will receive offers from clubs that have better chances of winning big titles, more money and are better managed. The club should learn from the good and bad things of the past: look abroad to learn from the best, control populism in the transfer market and coach appointment decisions, and build on the good assets that the club still has: youth academy, women’s team, a popular brand (have a look at the new and good Barça One app)… The team that had the three best players of the world in 2010 (Messi, Iniesta and Xavi) has been allowed to decay. Since it will never disappear, it would be better to give it a more decent life.

Saturday, May 4, 2024

The federalist taboo

Wikipedia defines taboo as “a social group's ban, prohibition, or avoidance of something (usually an utterance or behavior) based on the group's sense that it is excessively repulsive, offensive, sacred, or allowed only for certain people. Such prohibitions are present in virtually all societies. Taboos may be prohibited explicitly, for example within a legal system or religion, or implicitly, for example by social norms or conventions followed by a particular culture or organization.”

People like me will be voting in the next few days in Catalan (May 12th) and European (June 9th) elections. The fact that the same citizens will be electing members of Parliament at two different levels, just above and below the state level (in our case, the Spanish level, on which we voted less than one year ago, a few weeks after we voted for our local representatives in the City Council), illustrates the federal character of our political reality. It is not that different from what happens in the USA, where voters have the right to participate in local, state and federal elections.

However, for some misterious reason, in Catalonia, Spain and Europe, we refuse to call this state of affairs “federal.” OK, perhaps there are historical reasons, or perhaps we are not a complete or a perfect federation, perhaps we lack some elements of that… but also do other realities that call themselves federal: for example, both Spain and Canada, two very decentralized countries, do not have a Senate as a powerful territorial chamber as in Germany, but Canada calls itself federal and Spain does not.

Spain today is Euro-Spain (in the EC since 1986), a member-state in the most integrated core of the EU: member of the euro-zone, and the Schengen area. It does not have an independent army, but it participates in NATO and in UN forces. The old nation state, in this very integrated region, is something of the past, but the sovereignists find this difficult to swallow.

Not only we do not call our federal features by the f word, but many of those in favor of better or more complete federal structures also refuse to call themselves federalists, or cautiously avoid the word. Just recently, two former Italian Prime Ministers, Letta and Draghi, and the French President, Emmannuel Macron, have made proposals (through reports, speeches or interviews) for a more integrated Europe, with stronger federal institutions, but in no part of their arguments does the f word show up.

It is a mistery to me why “federal” and its derivatives are almost taboo words, but sovereign and its derivatives are not. Part of it is the confusion around the term, although many other social or political concepts are also confusing and vague. If political scientists do not agree on a definition of federalism, or on whether Spain is a federation or not (certainly, it is not a unitary state or a confederation), it may be asking too much for people to have a clear idea of it.

But we live in an increasingly interconnected world, we live in a complex adaptive system that must be managed as such. Distributed but connected structures provide more stability and adaptabiblity than centralized or unconnected structures. And it is difficult to think of a better tradition and set of principles, other than federalism, to manage this complex reality.

Rodrik’s trilemma shows that in a hyperglobalized world, we may have to choose between national sovereignty and democracy. Federalism already provides stability to many regions of the world. But it is not a panacea, and there have also been failures and federal roads not taken. The nation-state remains a blueprint to solve conflicts, but it is rarely succeeding, as we see in former Yugoslavia or Israel-Palestine.

In Europe, we need to federate to defend ourselves (a typical motive for federations in history, from classical Greece to American native groups) but also to cooperate internally and externally, to harmonize taxes and fight against tax havens.

The defeat of national sovereignty is slow, as it is the victory of federalism. But there should be no doubt about the necessary winner.

Sunday, April 21, 2024

Markets usually efficient and governments sometimes effective?

The latest issue of Advances in Economics Education features a set of papers evaluating different aspects of the CORE Project to introduce new methods, materials and contents in economics teaching.

Sam Bowles and Wendy Carlin, two of the leaders of CORE, write about the importance of showing in textbooks the economic reality and contemporary economics research in dialogue with other disciplines, as a response to criticism following the Global Financial Crisis. The need for reform has been exacerbated in the midst of making sense of a pandemic, climate change, disruptive politics and wars. It was not enough since the mid 2010s with changing 15% of textbook  contents (as it was common until then), as it was not enough to Samuelson with his famous textbook after the Great Depression and the Second World War. As a result, CORE presents a new benchmark model of economics, founded in social interactions and in dialogue with the real world, where the perfect competition supply and demand cross is just a special case of secondary importance.

The other three articles in the issue reflect an external evaluation of CORE and in particular its free e-textbook The Economy. Carlos Coutinhas argues that regardless of one’s stance as a supporter or sceptic, CORE’s approach has had a profound impact, “leaving a lasting mark on the publishing and economics education landscape”. He also reports that these reform efforts may be insufficient for those in favor of more radical approaches such as feminist economics or ecological economics.

Paul Crosby and David Orsmond, acknowledging the strengths of CORE in speaking to the big problems of our time, provide the closest call in the collection to defending the traditional approaches. In particular, they claim that there is still value to keeping the basic supply and demand graphical model as a benchmark to explain most interesting things in economics. They praise the list of Mankiw’s “10 principles of economics” contained in the most successful of the traditional textbooks. These principles do not mention problems such as inequality or climate change, and include “markets are usually a good way of organizing economic activity” and “government can sometimes improve market outcomes.”

Jo Michell’s article is in my view the most interesting of the external evaluations. He focuses on some of the details of the theoretical benchmark that accompanies the textbook The Economy, in particular on the transition from micro to macroeconomics. He finds some weaknesses in how this transition is represented in CORE’s benchmark model. He has some other interesting remarks, such as a call to define a discipline like economics by its domain, not by its specific models. Still, he believes that CORE responds to a real need for reform, and that any remaining shortcomings are more problems of the discipline in general than problems of pedagogy or teaching.

CORE is the result of an effort to present economics as a set of tools to facilitate a dialogue between theory and the real world using the scientific method. At the same time, in the selection of topics and variables of interest (such as real wages and employment), it represents an economics for the working class, which happens to be the majority of the population. The old is gone, and the new is in construction and will probably always be. As the authors of these articles explain, CORE’s contents are not easy (the way to respond to students’ criticism was not to make economics “easier”, because that would have been to mislead them), and there is a role for instructors in making them digestible. But they are more interesting, and importantly students (in my modest experience) find them more interesting than traditional approaches.

After the (not universal) success of CORE, reliance on the old textbooks is difficult to justify. CORE’s materials are not the final word, but they are useful and of high quality, and they should be taken as a motivation to keep moving in ways to make economics as a discipline a more relevant set of tools for students, researchers and citizens.

Sunday, April 14, 2024

Economics for the working class

One of the great things, although not the only one, of The Economy, the free e-textbook of the CORE Project (in its 1.0 version and even better in the half-completed 2.0 one), is that it targets an audience of working class students, people that over their life will have employment and real wages as their main, but not exclusive, economic concerns. It makes sense, since it turns out that people who care about these things are a majority. Bringing a rigorous economics for the working class to the mainstream of the profession may be one of the greatest achievements of this Project. As Wendy Carlin, one of the leaders of CORE, once said, economics is not about shopping, is not about finance, it is about understanding and changing the world.

The e-textbook starts by analyzing the Industrial Revolution and how its exponential productivity growth was not translated into higher real wages until there were institutional changes that facilitated it, such as the labor movement and universal suffrage.

It presents the typical microeconomic model of constrained choice, not by analyzing the choice of bananas and apples, but the choice of working or studying hours by human beings like those in the classroom or their relatives. Next Bruno the boss and Angela the worker, two fictitious characters, are used to model the institutional history of labor relations, from slavery to the welfare state.

Before presenting markets in perfect competition in Unit 8, Units 6 and 7 analyze the firm as an institution. First, what happens inside the firm between owners and workers, how effort and salaries are determined. Second, using the relationship between the firm and its customers as a stepping stone for the aggregate labour market model, where Units 6 and 7 are put together to determine real wages and employment in the macroeconomy. 

The aggregate labour market model is then used to analyse short run fluctuations (positive and negative demand shocks) and how it is affected by fiscal and monetary policies. Inflation is described as a conflict among the claims on the value of output by capitalist owners and workers.

Unions are not one more interest group, but a critical institution that may affect the labor market equlibrium, including in a positive way (on employment and real wages) with the “union-voice effect.” The same aggregate labour market model can be used to analyze the effect of immigration in the short run and the long run. And alternatives to organizing work in the expanding fringes of the capitalist system, by worker cooperatives, are also addressed. 

Thursday, March 28, 2024

The good Artificial Intelligence

David Autor analyzes in this article the use of Artificial Intelligence (AI), in the context of the economic history of technological change in the last three hundred years. The analysis goes from artisans prior to the Industrial Revolution to generative Artificial Intelligence, passing through factory machinery and the role of computers.

A type of knowledge is expert when it is necessary and scarce at the same time. It is what, for example, artisans had in the stage prior to the Industrial Revolution, a knowledge that required a long training process, which only a minority could afford. These experts developed each product creatively, as a complete and differentiated unit.

The industrial revolution displaced artisans, producing a great increase in productivity, but relegating the majority of industrial workers to extremely hard work for miserable wages for several decades. Productivity increased because from then on each worker was in charge of a small part of the process, in a repetitive and specialized way, on a mechanized assembly line.

The Luddites (who protested the mechanization that wiped out artisans) were correct in their protest that it took five decades for industrial workers to see their real wages grow significantly, requiring the power of unions and the expansion of democracy, as well as additional technological changes. Then a middle class of mass experts did emerge (intermediate workers doing administrative tasks), but they followed rules and lacked discretion (they were not the ones who made the decisions), so they were vulnerable to the automation that computers brought from the second half of the 20th century. Until personal computing and the Internet arrived, these intermediate workers saw their real wages increase and began to swell an abundant middle class in developed societies.

Computers are very effective with routine tasks, but not with those that require tacit knowledge, such as improvised language, or recognizing the face of a child in an adult. AI is the opposite, much more effective with tacit knowledge than with routine tasks.

Already before the advent of AI, and also with it, it is important to start from the basis that tools are levers that allow us to improve human work, not substitutes for it. Think of the examples of calculators, electric saws or drills. These three examples have two characteristics in common: first, they make the task of those who work with these tools much easier; secondly, to be used they require some training.

In common with other stages of accelerated technological change, AI will not eliminate human work. Employment has not stopped growing with the emergence of new technologies, despite the fact that many professions have become obsolete. But other professions have been created and professions that already existed have been able to develop in a different way. The improvement in productivity that technological change allows generates new demand for new products and services that did not exist before or that were enjoyed by a small minority. The challenge is that the new jobs created contribute to improving the dignity and living conditions of working people. In this sense, David Autor speaks out against the “inevitabilism” of thinking that AI will make human work redundant (something that he does not consider desirable, as perhaps some supporters of basic income do, as is said in passing in the article).

Unlike other technological changes, however, AI can be complementary to decision-making (and not just routine tasks), which can make it easier for many more people to participate in it, eroding the monopoly power of some specialized professions, such as doctors or university professors (or football coaches, see this article in Nature). The existing AI already helps make decisions, although the final responsibility lies with the human being, for example accepting or not a suggestion to complete a sentence, or accepting or not the “smart car” warning about its speed and direction.

The text compares computers with classical music, which follows a series of rules reproducible in each concert, and AI with jazz, which allows improvisation and adaptation to changing circumstances. David Autor suggests that AI will allow what has happened to people who work in nursing to become widespread, a portion of whom have been enabled in recent years to assume functions (for example, prescribing) that could only be performed by people before who had a medical degree. This requires additional training, but not the same as was traditionally required for a medical degree, and this expansion of employment responsibility has been made possible by technological developments such as the connection and digitization of medical records. Analogous developments can occur in education.

In this way, AI can facilitate more affordable healthcare and education (or football quality), which are not in the hands of elites who monopolize the knowledge necessary to make decisions, whether in an operating room or a classroom. If we combine this with the demographic trends that are occurring, in the future there will not be a shortage of jobs, but rather there will be a lack of people who can work, although as in the past, jobs will disappear and new ones will emerge.

The problem is not the disappearance of work, but the dignity and remuneration of working people. The human decision will be irreplaceable. That is why self-driving cars have failed, because they do not know how to make quick decisions when reality is changing. The role of AI is not to drive a car, but to assist in driving.

The unique opportunity that AI offers humanity is to reverse the shrinking trend of the mass of decent-wage workers: to expand the relevance, reach and value of human experience to a broader set of tasks. Not only could this reduce income inequality and the costs of key services such as healthcare and education, but it could also help restore the quality, prestige and prominence that too many people and jobs have lost. This alternative path is not an inevitable or intrinsic consequence of AI development. However, for David Autor (in line with other economists such as Dani Rodrik or Daron Acemoglu) it is technologically plausible, economically coherent and morally convincing. Recognizing this potential, we should not ask what AI will do for us, but what we want it to do for us.

The article does not make a prediction, but rather points out a possibility. The same technology can have different uses depending on how institutions and incentives develop. Just as nuclear energy can be used to make atomic bombs or to produce energy without contributing to climate change, AI can be used to enrich a small minority, or to pit elites against each other, or to improve the life and work experience of the vast majority.

Tuesday, March 26, 2024

Lessons from the good populism

In this crucial electoral year of 2024 in Europe and the US, it is important that progressive candidates get the message right, and fine-tune their narrative with the objective of maximizing the number of votes, and stop the rise of a eurosceptic right and far right. Not everything is lost, as polls suggest in the UK (unfortunately, not anymore in the EU) and Catalonia (where the federalist Socialist Party comes ahead in all recent polling, after more than 10 years of a strong pro-independence revolt).

Those of us who are in academia and keep an active interest (and an interested activity) in politics, have also a duty to learn with a critical and cautious eye from all the existing and growing research and literature on "populism," and to contribute to it if possible.

I have certainly learned from reading the 2020 book by Thomas Frank, "The People, No." The message in the book, as well and in this article in The Guardian (also, this one) from the book's author, is that there is a good and positive "populist" tradition in the US, which has its origins in the "People's Party" of poor farmers at the end of the XIXth century. Frank claims that this progressive, egalitarian tradition should claim the property rights to the word "populist," as they were the first to use it as something positive, democratic and egalitarian. In Europe, it may come as a surprise that such a positive tradition exists, but it is one that has been claimed several times by the economist Paul Krugman as well. Frank reveals that some politicians (like President Obama) have used the term in a positive sense and in a negative sense on different occasions. But the book is more than a crusade to reclaim a word: it is a crusade to reclaim a popular movement that was anti-elitist but was against demagoguery and bigotry, and that was focused on income inequality above everything else. The author, who shows little patience for the recent social scientific literature on populism and its associated psychological biases and irrational voters and voting outcomes (with authors such as Mounk, Müller, Levitsky, or Mudde, from which I have also learned) argues that "Populist" has become shorthand for racist authoritarianism. But the first populists were progressive labor activists who fought for democracy.  According to Frank, genuine populism is neither new nor right-wing. 

The book is a very interesting history of ideas and facts. In general, it strongly criticizes the centrist wing of the Democratic Party and academic liberal orthodoxy for having forgotten that rich progressive populist tradition.

This progressive populism of the late XIXth century is the one that gave the US independent regulatory agencies, and that tried to spread education and culture to the masses, and unite white and black workers. That populism did not go against science and knowledge, but it went against orthodoxy. That tradition was followed in the XXth century by Franklin D. Roosevelt and by Martin Luther King (MLK), and therefore is an important ingredient of the New Deal and the fight for Civil Rights. Thomas Frank points out that the elite of academia (and especially prestigious economists, such as Schumpeter) did not endorse the policies of Roosevelt at the beginning, because they thought that they went against the established consensus. In the XXIst century the politician that better reflects this tradition is Bernie Sanders (Elizabeth Warren is also mentioned in the book).

In the past, Frank has been criticized for not being careful with data. For example, political scientist Larry Bartels (also an egalitarian, in my view) said in the past that his claim that the working class had abandoned the Democratic Party was an exaggeration. In an article in The Guardian about Paul Krugman, Frank mentioned Bartels.

Not all left wing populisms are like Sanders, Roosevelt or MLK: Corbin in the UK, AMLO in México, Iglesias in Spain, Maduro in Venezuela, Kirschner in Argentina, are not mentioned in a book that is only about the US.

Not everything Obama or other centrist Democrats did was wrong: Obamacare, gay rights... Not all non-income progressive causes (feminism, ecologism?) should be relativized as woke or culture wars. Democracy has problems (Kenneth Arrow cannot just be forgotten) and voters do have psychological biases. There are no simple recipes. But Thomas Frank has a point: there has been such a thing as good populism, and we can learn from it.