Sunday, May 30, 2021

Stories that we tell ourselves

I first read about the importance of the stories that we tell ourselves and others in economics and social science in the book by George Akerlof and Robert Shiller (two Nobel Prize winners of different generations) “Animal Spirits”. I had attended a presentation by Akerlof when I spent some months in Berkeley in 2008. To be honest, at that time I thought it was what a nice man about to retire was doing as an afterthough to finish his career. Some time later I read “Narrative Economics” by Robert Shiller, and “Phishing for Phools” by the same two authors. And in-between we experienced the Global Financial Crisis, Brexit, Trump, many other national-populisms and now the Global Pandemic.

Around the same time, I read “The Economics of the Common Good,”by Jean Tirole, one of these books that great economists write for the broader pubic, but that only other economists like me read (or that is my impression). It is a great book, meant to summarize the work (and the perspective on the discipline of economics) of the great French economist after he received the Nobel Prize. In that book, in the chapter devoted to Behavioral Economics, Tirole presents three versions of the so-called Dictator Game, a two person interaction where one individual (the Dictator) has to decide how generous she is with another player (who doesn’t decide anything). Tirole explains the differences between the rationally selfish decision that we should expect (absence of generosity) and the outcomes of many experiments. In some of these experiments, for simple versions of the game, people can be generous. But in versions of the game where the decision-makers can hide their selfishness behind excuses (such as ignorance, or the existence of a horribly ungenerous possibility), then the Dictators can be as selfish as predicted by narrow-minded rationality. That is, our generosity depends on the stories that we tell ourselves, sometimes in a complex way.

I have seen what in my view are examples of this behavior in apparently normal people trying to justify their support for selfish nationalism behind the excuse of generosity. “I always think of the most vulnerable,” “if this (dead, prestigious) person had been around he would have done the same…” and many versions of the excuses that people use when they decide to be sophisticatedly selfish.

Of course, some people do not need much in terms of justification. It doesn’t seem that Trump or Bolsonaro and their closest followers need to hide their atrocious selfishness. But many other national-populists and elite members that promote populism can be very sophisticated when they need to. And they do it by telling themselves stories, or especially by promoting stories that others can tell each other. Needless to say, social media and corrupt media can do a lot to spread these stories like epidemics. Shiller used the models of epidemics with which we have become familiar lately to explain the rise and fall of stories -before the current pandemic.

All of us tell ourselves stories to try to justify our behavior and our decisions (usually taken by emotional reasons). But we must be aware of the risks of using stories that deviate too much from reality. In our times, we all must help people tell themselves true stories, especially about climate change and positive sum interactions. The alternative is extinction.


Sunday, May 23, 2021

The social responsibility of the firm in a post-Friedman era

The behavior of firms is ideally constrained by the regulatory and fiscal power of the State and by the competitive pressure of the markets. However, the processes of globalization and monopolization by large companies (especially technological multinationals) erode the disciplining role of the State and the market, so that if firms have profit as their sole objective, they become a source of inefficiency, inequality, deterioration of the environment and excessive accumulation of power. Reflection on these issues, which has made its way into some fora, including business institutions, at an international level, has so far had little echo in some countries like Spain, and it is time for it to come with more force. For this reason, it is necessary to raise the debate of a new purpose, necessarily broader, for firms, without this implying an impairment of a stronger role by effective governments with high capacity at all levels. In fact, a stronger State and a firm that is more capable of fulfilling its social mission and being a source of wealth, are complementary aspects, as revealed during the COVID-19 pandemic, and as it will be increasingly necessary in times of growing global and climate risks. 

In many cases a company oriented towards social objectives will be compatible with robust business finances, but we must be aware that this will not always be the case. It will not always increase profits. In any case, it is necessary to avoid that firms generate social problems to earn profits. This is one of the reasons why the separation of roles between the productive company, the market as an allocative mechanism and the redistributive state, becomes more ambiguous in an era of global disruptions, monopolization and capital mobility.  A new social contract must give rise to a more complex distribution of responsibilities (which also includes communities into the equation), with the objectives of increasing the productivity of our economy and, at the same time, contributing, in a context of coordination between levels of government and companies, to social objectives of equity and environmental sustainability. Greater participation of workers in company decisions, starting from the bottom with operational tasks and financial participation in ownership and profits, can contribute to improving transparency (necessary to facilitate control by all citizens) in decision-making, and to internalizing the effects of decisions on communities and promoting the creation and maintenance of good jobs (as Rodrik argued in our interview). 

Friedman claimed in the 1980s that under certain conditions, the firm's social responsibility was to make profits. Today these conditions are largely absent (due to the conditions that globalization imposes on the state and the market, and due to the power of large companies over rule-setting) and therefore the social responsibility of the firm must be broader. And it must begin by fulfilling its obligations to contribute to the State in a meaningful way through Corporate Taxes and Income Taxes for the high salaries of people with executive positions; and it must continue with a commitment to eliminate any form of corruption and improper influence over public decision-making. 

Friday, May 14, 2021

The dilemmas of dealing with a criminal past

The two last books written by the legal scholar Philippe Sands, “East West Street” and “The Ratline,” are great stories about the tragedy and crimes of the Holocaust, and how to deal with its memories. They should belong to the book shelves of anyone interested in the contemporary footprint of passed atrocities and the lingering impact they leave in communities and individuals. The two of them deal at the same time with the collective and the personal dilemmas of confronting the past.

“East West Street” is the story of four individuals whose lives are connected to the Nuremberg trial or to the city of Lviv (currently a Ukranian city, but Lemberg, Lvov or Lwow in the past, depending on which was the “sovereign” country). This city is where the grandfather of the author, one of the main characters of the book, was born, and where two of the other characters where also born (two Jewish legal scholars that played an important role in the Nuremberg trial). The grandfather of Sands was fortunate to leave first his home town, and later Viena, to live the rest of his life with the sadness of almost all the rest of his Jewish family having been killed by the Nazis.

Lviv, a key place in the two books, is a city where the buildings remain in the same place, but the name, the country (Germany, Poland, Russia, Ukraine) and the citizens change with wars, tragedies, ethnic cleansing and occupations. The memories that the local authorities select to promote also change. The fall of a multi-ethnic past, followed by atrocious crimes driven by blind nationalism, places Sands in the tradition of Stefan Zweig in “The World of Yesterday” and Claudio Magris in “Danube.”

“East West Street” discusses the legal dilema between the concepts of “genocide” and “crimes against humanity,” which first were used in the Nuremberg trials and were promoted by the two legal scholars, whose lives are explained in the book. Genocide emphasizes the murder of people for being members of a group, and crimes against humanity emphasizes the importance of the individual and how states can abuse their sovereignty to violate human rights. Although Sands is respectful of both concepts, he does not fully hide his higher sympathy for "crimes against humanity," as he believes that “genocide” may encourage group responsibility and “us against them” dynamics. He also wrote a very interesting article (a real anti-nationalist manifesto) in The Guardian in favor of a global, instead of a national, passport.

“The Ratline” amplifies a sub-story of “East West Street:” the different views of two children of Nazi leaders. Niklas Frank, the son of the Poland governor during the Nazi occupation Hans Frank (sentenced to death in the Nuremberg trial), is openly critic of his father, even to the extent of saying that he is against the death penalty, except for his father, about whom he wrote a book expressing his negative feelings. Horst Wächter, the son of Galizia District’s governor in Nazi times Otto Wächter, a friend of Niklas, takes a very different perspective: he is totally unable of confronting the reality of his father as a mass murderer, and is always finding excuses to forgive the latter’s participation in the Holocaust, such as arguing against all evidence that he felt trapped in the system, where he supposedly tried to minimize the atrocities. 

Otto Wächter went hiding after the fall of the Third Reich, and he died in Rome under the protection of an anti-comunist Catholic Bishop with Nazi sympathies, and the tolerance of the American secret services, which were recruiting Nazis as spies at the time, the beginning of the Cold War.

Horst is a gentle individual, and he keeps a constructive relationship both with Niklas and with the author of the book. The different approaches of Niklas and Horst are also the topic of a documentary, which can be watched for free in You Tube. The two sons have also in common that they were ostracized by many in their families just for openly talking publicly about the past. Family links of affection are put at risk by the exploration of the past.

The two books are a great read, and probably belong to the genre that the Spanish writer Javier Cercas (mentioned by Sands in "The Ratline" with admiration) has called “non-fiction novels.”

Besides the two books and the documentary, the full collection should include the Financial Times article “My father, the good Nazi,” a result of the conversations between Philippe Sands and Horst Wächter.

Sunday, May 9, 2021

Europe and our global political challenges

Today is Europe's day, and it is a good time to reflect about the necessary contribution of Europe to addressing the global political challenges of our time.

In Economics, we teach that free markets are not always like Adam Smith thought, but sometimes (many times, actually), they result into so called market failures, cases in which markets do not guarantee efficiency (maximizing the size of the welfare pie) at all. Examples of this include the existence of public goods, externalities or market power. In the past, the typical examples where traffic lights or defence for public goods, pollution for externalities, and telephone companies for market power. Local and national governments were designed to address these failures and fix the problems. The dominant market failures of our time, though, are global in nature and pose enormous political challenges.

Public Goods (goods that are non-rival and non-excludable) today are global financial and economic stability and peace and security. The provision of these public goods must be global in nature, as we are seeing these days with the scientific progress associated to COVID-19 remedies and vaccines.

Externalities (effects of actions not captured in prices) today also go much beyond the nation-states in many relevant dimensions, most obviously with the problem of climate change. National and local solutions are necessary, but they fall short in the absence of global action. For example, a global carbon tax would avoid adjustments at the border to neutralise the impact on trade, and would be much more effective than the current patchwork approaches.

Market Power (cases where some firms can raise prices without much worry) today is not about physical local networks, but mostly about large global technological multinationals, like Amazon, Apple, Google, or Facebook, which take advantage of fragmented polities to increase their market power, and their political power.

Initially, public goods, externalities and market power are efficiency problems, but they are inseparable from distributive implications, which must be addressed at the same time. These distributive implications are also global in nature.

We should fight for a currently hard to achieve global democratic government, but in its absence the big democratic jurisdictions, when they are in good hands, can provide leadership. This is a role that the EU is playing and can play more and more.

An integrated and stable Europe is making and can make an enormous contribution to addressing these market failures in their contemporary reincarnation of global political challenges. A federal and sovereign Europe that goes beyond their constituent member states is key to making progress in all these fronts. That is why I just signed this Manifesto, together with hundreds of Europeans.

Some economists fear that promoting activism about these issues may compromise the scientific standards of economics. But I can't see how you can teach these global political challenges without trying to convey to students the urgency of their activism to address these issues.

Saturday, May 1, 2021

The failure of gated soccer as an example

Some of the richest soccer clubs in the world attempted a few days ago to create a gated soccer community (a closed "Super League"), and they failed. Soccer will remain unified for the time being, with all its imperfections, but unified. The gated community that the clubs led by Real Madrid president Florentino Pérez wanted to create, is not really different from other gated communities where the wealthy want to isolate themselves as much as possible from the surrounding poorer communities in neighbourhoods, education or health.

It is because soccer is unified (the most unified sport), that there are compensating mechanisms at a global level. For example. As Branko Milanovic explained in an article some years ago, the rule that links soccer stars to only one national team is a compensating mechanism, by which the top players of any country, who go to play for the best European clubs, have to return typically to their home country for games between national teams. This is a compensating mechanism because, although they get much better as individual players working in the best European institutions, they have to give back some of their talent to their relatively poor home country and their fans, in international games and world cups.

Notice that the poor in soccer do not want only money. In such a popular sport, the separation theorem does not hold. In other sectors, we may be happy being compensated with money, and then each of us do anything we want with the money. But in popular sports, that does not work so easily, because we do not only want to be paid in money, we really want to be paid in kind. We want to see our teams playing, winning and performing with the best stars. In global unified soccer, there is some money compensation (true, many times tainted by corruption), but the most important compensation is seeing your top players in your national team, or having the hope that any modest team has a remote chance of being among the best because of the promotion and relegation mechanism.

The current unified system is imperfect because of corruption and lack of regulation and supervision by an non-existent global government, but untying unification is worse: there is no other option but improving globalization. This removes one of the exits of Rodrik’s trilemma. We are in this together, like it or not.