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.