The most important meeting in the history of humanity

Unless we manage to contain climate change by the next few decades in a global effort, life in our planet will no longer be as we have known it. Oceans will grow, beaches and coastal cities will disappear and population movements will be massive. The poor will suffer more, and both developed and developing countries will have to introduce dramatic changes in the way people behave. All these issues will be discussed in the UN meeting starting tomorrow in Paris. Nation-states are ridiculous instruments in the face of this challenge. Humanity has to act cooperatively. This is what British writer Will Hutton has to say about the event today in The Guardian: "The most obvious response to climate change should be to transform the way the world generates energy. Living standards have risen 40 times over the last 250 years in the west, driven neither by the small state beloved of conservatives nor the large state favoured by socialists. Rather, the growth has resulted from a complicated interaction between capitalism and science and technology, of necessity publicly funded, creating wave after wave of transformations in the character of our economic base and the quality and quantity of what it produces. The same now has to be done for the world’s energy production. It needs to be technologically transformed to become as near carbon-free as possible, which will only work if there is a substantive global research and development effort led by governments, matching those of conquering space or winning a war, to explore the necessary technologies. Embracing global political solutions such as a global carbon tax or global emission caps are beyond political reach, given the range of entrenched interests, not to mention the stubborn refusal by many conservatives to accept climate change science. It will be innovation that will save the planet. This is the blisteringly obvious truth that should be written in neon in the skies above Paris at tomorrow’s launch of the 2015 UN climate change conference. Its goal is to try to agree binding agreements to limit the increase in global temperature to two degrees centigrade by 2100."

Woodrow Wilson, the racist

Since US President Woodrow Wilson is widely admired in pro-independence Catalan circles, because of his supposed position in favour of the self-determination of small nations, I thought some members of these circles might benefit from reading today's piece in the New York Times about his racist positions (after the piece, the paper has reinforced the point with an editorial):
"Perhaps best known for leading the United States during World War I and for trying to start the League of Nations, Wilson as president rolled back gains blacks had made since Reconstruction, removing black officials from the federal government and overseeing the segregation of rank­andfile workers. Raised in the South, he wrote of “a great Ku Klux Klan” that rose up to rid whites of “the intolerable burden of governments sustained by the votes of ignorant Negroes.” During Wilson’s tenure as president of Princeton, no blacks were admitted — “The whole temper and tradition of the place are such that no Negro has ever applied,” he wrote — though Harvard and Yale had admitted blacks decades earlier. Princeton admitted its first black student in the 1940s."
Although his position in favour of self-determination was basically a plot to weaken the losers of the first world-war, to the extent that it led to the sacralization of small nationalisms, it paved the way for subsequent catastrophes (including ethnic cleansing) some of which survive today, as the late historian Tony Judt came to acknowledge in a famous article about Israel and Palestine. The positions of Wilson on small nations and on racism may be completely unrelated. Or they may not.

The challenge of Durlauf to Piketty, in context

The mild criticisms of Steven Durlauf, editor of the Journal of Economic Literature, to Thomas Piketty in two debates in New York and Chicago would not lead one to anticipate the very tough review by Durlauf and his co-author Blume published in the Journal of Political Economy of the now famous book "Capital in the Twnety-First Century," by the French economist. The critique of the book has several fronts, including data, theory, policy, and the overall "methodological" approach of the book. The theoretical criticisms are to some extent already present in the reviews by Lindert and Milanovic, among others. This is not my field of expertise, but they point to the theoretical difficulties of making predictions about inequalities of personal income based simply on the rate of return on capital and the growth rate of the economy, as Piketty does. Blume and Durlauf's theoretical criticisms go beyond these macroeconomic issues and expand to the theory of justice ("lack of serious engagement with political phylosophy"), pointing out that there is nothing in the existing theories (both traditional and more recent such as in Sen or Roemer) that justifies basing a policy framework on claims about the 1 or 10% of the population instead of the other 90 or 99%. The data criticisms of Blume and Piketty have several fronts, but to me the most important one is the lack of consideration in Piketty's work of data on the distribution of welfare coming from the consumption of public goods. The criticisms on policy are basically about how Piketty neglects policy instruments against inequality that could go beyond taxation, such as political reforms that could reduce the weight of the rich in politics. But they also challenge some of the specific prescriptions of Piketty on some of these non-tax issues, such as policies on education financing. The reviewers dismiss the supposed erudition of Piketty that has been praised by some of his admirers, for example by blaming him for not being systematic in using literature as an evidentiary source (footnote 10 of the review, p. 755), and by writing that "when Piketty moves to topics for which he has not done original research, he is careless with theory, and empirical evidence is presented in an unreflective and selected fashion."
I have to say that I came to know the work of Durlauf very recently. His name just sounded familiar to me until I started reading his papers about complexity and economics, and about social capital, which are excellent pieces of scholarship and criticism, in my modest judgement. He and his co-author Blume claim to share the liberal (progressive) values of Piketty. So do I. Then, what does survive of Piketty after Durlauf's attack? In the view of this blogger (who has shared in the enthusiasm of seeing a book on inequality becoming a global best seller), a few important contributions still survive:
-The existence of strong inequality trends, derived from Piketty's and his co-authors research on top incomes from fiscal sources.
-Policy intuitions about the need to use policy instruments and institutions that go beyond the nation-state (like international taxation), which go beyond Acemoglu and Robinson in spite of Lindert's attempts to call for a synthesis in his review. Although Piketty himself downplays the importance of the fourth part of his book on policies, perhaps it will turn out to be his most enduring legacy.
-The need, as Milanovic claims (mentioning Freakonomics and "randomistas") to ask important and not trivial questions in economics, even though the answers should be more qualified (especially if Steven Durlauf is reading).

‘What do you want?’ ‘Cake!’ ‘Then we’ll serve cake.’

Today in the New York Times there is an article by racist Dutch politician Geert Wilders (one wonders what are the selection criteria for articles in the liberal media) where he asks for a national direct binding referendum on refugeee policy. He also criticizes political elites in the name of ordinary people, asks for his country to leave the European Union, and a return to national sovereignty (three of these points -namely direct democracy, national sovereignty and elite bashing, not the others -namely europhobia and xenophobia, are also made by Spanish leader of leftist populist Podemos party, Pablo Iglesias). This makes sense from the point of view of racist politicians: in the first year of Hitler in power, there where three referendums, as this is a great democratic method for demagogues in chaotic circumstances. Yet, as Nicholas Kristof reminds us in the next page in the New York Times, in January 1939, Americans polled said by a two-to-one majority that the United States should not accept 10,000 mostly Jewish refugee children from Germany. That year, the United States turned away a ship, the St. Louis, with Jewish refugee children; the St. Louis returned to Europe, where some of its passengers were murdered by the Nazis.

There is hope though. Here’s what Financial Times journalist Simon Kuper had to say about The Netherlands two weeks ago: “ The other day I was back in Leiden, the sleepy Dutch town where I grew up, listening to a rare politician tell a pro-refugee story. Ahmed Aboutaleb landed in the Netherlands from Morocco aged 15. Now he’s Social Democratic mayor of Rotterdam and, according to a poll in March, the most popular Dutch politician.

Aboutaleb walked into Saint Peter’s Church in Leiden flanked by enormous blond bodyguards — a scene unthinkable in the placid Netherlands of my childhood. He greeted the VeerStichting symposium with, “Nice of you to give this refugee shelter today.”(…)

He always listens. He says people want to know, “Are you still paying attention to me?” However, he adds, leaders then need to decide for themselves. Democracy, he says, isn’t opening your window and shouting, “‘What do you want?’ ‘Cake!’ ‘Then we’ll serve cake.’”

When it comes to refugees, Aboutaleb isn’t serving voters cake. In Leiden he quoted from the Koran in Arabic. He also noted, “A lot of talent from around the world flies over our heads to New York and London,” because many foreigners feel unwelcome in the Netherlands. And he said: “I think it’s fantastic to be in a position to help others.”

Aboutaleb discussed the refugee influx in practical, undramatic language as something the Netherlands can handle. The nearly all-white audience gave him a standing ovation.”

Fuzzy independence and wishful thinking

An interesting phenomenon of intellectual and political debates is how high calibre scholars are unable to apply the standards they use in their academic job when they participate in political debates. I knew of an example of this last week, after participating in Girona in an event about the future of fuzzy logic. I participated in this event as a result of a book chapter I wrote on "Fuzzy Logic and modern economics". I am basically an outsider to the field, but besides having an interest in the topic because my father is a great specialist in it, I have genuinely come to believe that there are some ideas there that can be useful for behavioural economics and related fields. At the end of the conference, I was told by one of the participants that two other scholars, also experts in the discipline, had been politely discussing with him about the desirability of the independence of Catalonia, and that the discussion had finished with a bet: if Catalonia is not independent after a reasonable period of time, the two pro-independence "fuzzy" scholars will invite the first one, who is not pro-independence, to have dinner. After thinking about it, I realized that this is probably in contradiction with fuzzy logic, to the extent that the category "independent countries" is a fuzzy set in XXI century Europe (that is, membership to the set is not a zero-one thing, but it is a matter of degree). If being independent means being an internationally recognized member state of the European Union, I would also bet that the two pro-secession scholars will lose their bet. But as things stand, EU member states these days are less and less independent, and less and less sovereign (ask the Greeks). Catalonia can be more independent, or less independent after the current drive. I think that today it is less independent than when the drive started three years ago. I honestly do not know if in two or three years it will be more or less independent. I wish that the degree of independence does not change substantially, but that the quality of its institutional relations with overall Spain and Europe improves. Of course, the scholars' bet had also a component of wishful thinking. Here's how to avoid it: talk to more people who disagree with you and open your mind. (By the way, I tried to do precisely this to predict the result of this Saturday's game between R. Madrid and FC Barcelona. In my economics and soccer class this week, I started by asking the students in my two classes to write down their estimated probability that RM would win. In one class, very few people wrote a figure above 50%, but in the second class they were more than half. I first wrote myself 40%, and after talking to them because they are more objective than myself, I updated my probability to 45%. Later, I checked information about the last 25 games in Madrid between the two teams, and it turns out that R. Madrid has won 44% of them. I also checked the betting markets, and these were assigning a probability of R. Madrid winning slightly below 50%. I wished it to be lower, but these are the facts after de-biasing myself. But at least the game is on Saturday and we will know: there will be clear feedback because soccer outcomes are less fuzzy than other categories. In comparison, the evolution of the institutional architecture of European nations and states will be a fuzzy never ending story in our post-Westphalian world).

Stanley Fischer on Central Bank Independence

Stanley Fischer is a rare economist who has the double condition of being a top academic economist (and co-author of my first textbook on macroeconomics) and having had very substantial experience in his field of expertise as a policy-maker in two countries. He was the governor of the Centrral Bank in Israel between 2005 and 2013, and he is currently the Vice-President of the US Federal Reserve. In his last published speech, he provides an excellent synthesis of the literature and practice of Central Bank independence. He explains very well how in a democracy strategic delegation into an independent authority must be accompanied by mechanisms of accountability. He explains how this is achieved in different ways in different countries, and in the particular case of the US, how many of the reforms that have taken place in the last 10 to 20 years have been about increasing transparency and accountability. These reforms have facilitated a positive contribution of the independent Federal Reserve in the last crisis (although he says nothing about the likely contribution of the institution to the previous financial bubble). One should be careful when it comes to making proposals to radically change the current mechanisms, because they have evolved by trial and error amidst enormous difficulties. In his speech, Fischer analyzes how this last financial and economic crisis has expanded the number of tasks of Central Banks. This challenges the old prescription of Jan Tinbergen of a tight correspondence between the number of objectives and the number of instruments. It also makes it more difficult to introduce powerful incentives for central bankers. In this context, he establishes an interesting distinction between Central Bank Independence and Monetary Policy Independence. For example, he argues that different functions in the same Central Bank can have different degrees of independence, typically more independence for monetary policy and probably less independence in the case of financial stability and supervision. But he admits that much more work and experience is needed to understand the implications of this multiplicity of tasks.

The politics of manipulation and deception

In the excellent last book by Akerloff and Fisher on the economics of manipulation and deception, there is a chapter on how the political arena is also full of incentives for manipulation and deception. However, after reading that chapter, one is left with the impression that they could have done a better job. A comprehensive treatment of the issue is yet to be done, but it is getting urgent. When I woke up this morning and watched the news on the Spanish public broadcaster while I was having breakfast, I was amazed to see that the 5 first headlines were devoted to the conflict between the central government authorities and the pro-secession Catalan regional government. My views on this particular topic are clear enough from previous posts in this blog. But it is quite clear that the central government (who has a tight grip on the public broadcaster, as the Catalan government has a tight grip on its own regional broadcaster) is manipulating media attention because it knows that a patriotic controversy has the potential of leaving corruption and austerity in the dark. A recent article by the New York Times on increasing censorship in Spanish media can only increase any democrat's concerns. This is part of what the NYT has to say:
"Newspapers almost everywhere have struggled to adjust to digital technology and declining advertising revenues.

But in Spain, the rapid restructuring of a shrinking industry — more than 11,000 journalists have lost their jobs here in seven years — has also prompted mounting concerns over whether Spain’s most established papers have lost their editorial independence amid the financial squeeze.

The industry here has faced a perfect storm that has included huge debts and the assertiveness of a conservative government under Prime Minister Mariano Rajoy and his Popular Party that has aggressively countered public criticism.

Mr. Rajoy’s government has been assailed by opponents for its passage this year of what has become known as “the gag law,” which imposes steep penalties for unauthorized political protests or the publishing of amateur video footage of police officers. On Thursday, a group of international media watchdogs published a joint report expressing concerns over media freedom in Spain and calling for repeal of the law and a loosening of the government’s control over the national broadcaster."

Complex humans

In the last book of the trilogy of JM Epstein about complexity and agent based modelling in social sciences, he presents a model of human decision making based on three components, which are well grounded in modern neuro-sciences:

-Affect (emotions). This is the mostly automatic mechanism by which our amygdala processes external inputs and delivers physilogical outputs (such as increased blood pressure or hormone production), for example as a result of fear. We developed this ability in our evolution as species thousands of years ago.

-Deliberation. As superior primates, we have the ability to spend time and neural resources thinking carefully about some issues, evaluating costs and benefits of certain courses of action. Of course, this "slow thinking" is also prone to biases, but it gives us the possibility of learning and computing.

-Social influence. We are also sensitive to the opinions, values and judgements of others. We belong to social networks, where the links we have to others and the strength of these links determine to some extent our disposition to acquire what we think are our own beliefs.

Of course, these three components interact, as some of the emotions are related to groups we belong to. Also, one component sets contraints on another one, for example deliberation setting limits to what we would be inclined to do purely by emotion. 

Epstein sets the stage for lots of applications of this framework, which itself connects with many branches of the existing literature on social and behavioural sciences.

How complicated is complexity?

Since I read the books by Samuel Bowles on "Microeconomics" and by Beinhocker on "The Origin of Wealth" some years ago I felt attracted to ways to model complexity in economics, for example by using agent-based modelling. I even have a chapter in my course on the economics of soccer on "last frontiers" of research devoted to examples of evolutionary social sciences, complexity and neuro-sciences. I keep reading about these issues. I took today from the library the three books in the trilogy by Joshua M. Epstein, and I printed two papers by Durlauf, one on the relationship of complexity economics to empirical methods, and another one on its relationship to public policies. What makes this combination of readings interesting is that Durlauf is quite critical of some of the work of Epstein. I'll read all this carefully. Meanwhile, I'm interested in finding ways to introduce evolutionary dynamics in the way that some aspects of public economics unfold, such as the fading nature of some units (nation-states) or the evolution of regulatory agencies. These idea of changing boundaries and endogenizing the existence, size and structure of agents has also been present in some of the work of Swedish scholar Lars-Erik Cederman. The good side of Durlauf's message is that complexity economics is less of a departure from mainstream economics. If after all these years I managed to understand some of mainstream economics, perhaps it is not too late to be able to understand and use techniques and insights from the economics of complex systems to see if they can help explain some of the phenomena I'm interested in about political economy, regulation, institutions and related fields.

Thinking about PPPs

I am helping to draft a guidelines document for Public Private Partnerships, and I just wrote this: "Both developing and developed societies face the challenge of improving productivity in the provision of public services and of innovating in areas such as urban and broader mobility, energy, communications, health, education, or other social services. By the nature of these sectors, it is unthinkable that these challenges can be addressed either by the private sector alone or by the public sector alone.

The private sector and the public sector have specific advantages. Private operators have very specific objectives, which facilitates the introduction of explicit incentives. They can also have the ability to attract highly qualified personnel in fast moving industries. And they have the experience of operating in market contexts. In an increasingly globalized world, private operators can have access to inputs or experience from a diversity of regions or countries. The public sector has the ability to take into account broader objectives, the legitimacy of democratic mechanisms (in democratic societies) and it can also mobilize vast resources if necessary due to its potential legitimate use of coercion. At the same time, in some sectors where long run professional commitments are needed, the public sector has shown an ability to attract personnel endowed with intrinsic preferences (these are also a feature of not-for-profit organizations). Both the public and the private sectors are necessary to tackle societal objectives in a well-functioning modern economy, and both are necessary to develop modern smart and sustainable cities. As argued by Grout (2003), “reforms focus on the improvement of incentives; but while incentives are critical, the special characteristics of public services (and the people who provide them) must be recognized in the implementation of new structures and incentive schemes.”

We are all cousins

I'm reading the second volume of Richard Dawkins' authobiography ("Brief Candle in the Dark") without having read the first one. My apologies for this lack of reading discipline. Well, actually, to be honest I bought it today in the science museum of Barcelona ("Cosmocaixa"), which offers the best combination in town of restaurant and bookshop. This famous scientist links many anecdotes using the sequence of his experiences as an academic and writer. Explaining how he interviewed prospective students at Oxford, he says: "Another favourite question to test their biographical intuition began: How many grandparents do you have? Four. And how many great-grandparents? Eight. And how many great-great-grandparents? Sixteen. How many ancestors do you think you had two thousand years ago, in the time of Christ? The brighter ones tumbled to the fact that you can't go on doubling up indefenitely, because the number of ancestors rapidly overtakes the billions of people in the world now, let alone the number that were alive in the time of Christ. That proved to be a good line of reasoning to coax them to the conclusion that we are all cousins, with numerous shared ancestors who lived not so long ago." This paragraph, together with the one where he calls the double college and department system at Oxford and Cambridge a "federal university" suggests that the famous atheist Dawkins is right in at least two lines of thought. Having said this, I will keep The Guardian's ironic book review in mind while reading the rest of the book.