Category Archives: Book review

Complexity Economics Shows Us Why Laissez-Faire Economics Always Fails

By Eric Liu and Nick Hanauer – Over the last three decades, an unprecedented consolidation and concentration of earning power and wealth has made the top 1 percent of Americans immensely richer while middleclass Americans have been increasingly impoverished.

Traditional economic theory is rooted in a 19th- and 20th-century understanding of science and mathematics. At the simplest level, traditional theory assumes economies are linear systems filled with rational actors who seek to optimize their situation. Outputs reflect a sum of inputs, the system is closed, and if big change comes it comes as an external shock. The system’s default state is equilibrium. The prevailing metaphor is a machine.

But this is not how economies are. It never has been. As anyone can see and feel today, economies behave in ways that are non-linear and irrational, and often violently so. These often-violent changes are not external shocks but emergent properties—the inevitable result—of the way economies behave.

The traditional approach, in short, completely misunderstands human behavior and natural economic forces. The problem is that the traditional model is not an academic curiosity; it is the basis for an ideological story about the economy and government’s role—and that story has fueled policymaking and morphed into a selfishness-justifying conventional wisdom.

It is now possible to understand and describe economic systems as complex systems like gardens. And it is now reasonable to assert that economic systems are not merely similar to ecosystems; they are ecosystems, driven by the same types of evolutionary forces as ecosystems. Eric Beinhocker’s The Origin of Wealth is the most lucid survey available of this new complexity economics. more>

What Peter the Great Discovered in Amsterdam: Inclusivity Creates Wealth

By Nick Cassella – After coming to power in the late 17th century, Peter the Great of Russia decided to escape the confines of the Kremlin and travel incognito across Europe for a variety of diplomatic and personal reasons.

During his European odyssey, Peter visited Holland and was amazed at the commercial success of the small nation.

Trade was clearly a factor, but so too was religious toleration. Holland at the time was what Mathis calls an “intellectual and artistic clearinghouse” where clever thinkers, who let their pen or mouth wander too far, escaped repressive regimes.

In this land of inquisitive minds, Dutch religious tolerance was born. While this principle was not encoded in law, people would “look the other way” so that Calvinists, Catholics, and others could live together peacefully and productively.

Peter began to realize that Dutch commercial prosperity largely derived from its tolerant nature. He left Europe “intrigued by the atmosphere of religious toleration” and swore to mitigate the intolerance and rigidity of the Russian Orthodox Church on his return home.

The levels of wealth inequality across the world and in nations is, to put it lightly, suboptimally distributed. The United States offers a sterling example. Brookings senior fellow, Richard Reeves, looked at Congressional Budget Office data and found the top 20 percent “saw a $4 trillion increase in pretax income in the years between 1979 and 2013” while “the combined rise for the bottom 80 percent…was just over $3 trillion.”

The only way to defend wealth distortion like this is to claim a well-functioning society necessitates great inequality. Just like the religious intolerance of yore, today’s exclusive brand of economics is clearly not the best way to organize a group of people, but instead represents the best way for a few individuals to maintain power and wealth. more>

In Praise Of Deviants

By George Bradt – Your team needs disrupters, rebels, challengers, and deviants to help it evolve and survive. That’s the main premise of my earlier article on Why The Highest Performing Teams Always Fail Over Time. Here we explore how to get more positive deviation, drawing from Andrew Benedict-Nelson and Jeff Leitner’s book “See Think Solve” on how to solve tough societal problems.

Benedict-Nelson and Leitner’s main premises are:

  1. Deviant behavior can subvert the social norms – informal, unspoken rules – preventing you from solving problems.
  2. Every tough problem is held in place by one or more problematic social norms.
  3. See the actors, history, limits, future, configuration, and parthood, then think about norms and deviance, before deviating from the norm to solve the problem.

Deviance can be positive or negative, evolutionary or revolutionary, unintentional or deliberate. more>

How Capitalism Actually Generates More Inequality

By Geoffrey M. Hodgson – At least nominally, capitalism embodies and sustains an Enlightenment agenda of freedom and equality.

Typically there is freedom to trade and equality under the law, meaning that most adults – rich or poor – are formally subject to the same legal rules. But with its inequalities of power and wealth, capitalism nurtures economic inequality alongside equality under the law.

Today, in the USA, the richest 1 per cent own 34 per cent of the wealth and the richest 10 per cent own 74 per cent of the wealth. In the UK, the richest 1 per cent own 12 per cent of the wealth and the richest 10 per cent own 44 per cent of the wealth. In France the figures are 24 cent and 62 per cent respectively. The richest 1 percent own 35 percent of the wealth in Switzerland, 24 per cent in Sweden and 15 percent in Canada.

To what extent can inequalities of income or wealth be attributed to the fundamental institutions of capitalism, rather than a residual landed aristocracy, or other surviving elites from the pre-capitalist past? A familiar mantra is that markets are the source of inequality under capitalism. Can markets be blamed for inequality?

In real-world markets different sellers or buyers vary hugely in their capacities to influence prices and other outcomes. When a seller has sufficient salable assets to affect market prices, then strategic market behavior is possible to drive out competitors.

Would more competition, with greater numbers of market participants, fix this problem? If markets per se are to be blamed for inequality, then it has to be shown that competitive markets also have this outcome. more>

The Liberal Conception Of ‘Freedom’ Is Incapable Of Addressing The Problems Of Contemporary Capitalism

By Andrea Lorenzo Capussela – In a forthcoming book, Branko Milanović identifies four ‘troublesome features’ in ‘meritocratic liberal capitalism’.

In its simplest form, liberal theory – equal rights for all citizens, which guarantee their freedom, which is in turn conceived as absence of interference – has no obvious answer to those problems. For if freedom is non-interference, then it is compatible with both inequality and private domination, at least within certain bounds, as neither directly interferes with people’s individual choices.

Indeed, accepting precarious employment is a choice. And as liberals cannot say that Milanović’s four ‘troublesome features’ pose a fundamental challenge to their idea of a good society, their answer is a Ptolemaic one: sets of diverse, if potentially effective remedies such as redistribution, poverty relief, active labor market policies, civic education, and policing fake-news.

For the liberal conception of freedom is not the only conceivable one. Another notion, equally negative, is the republican or neo-roman one, which views freedom as non-domination. If I depend on someone else’s arbitrary will, or am subject to their enormous and unchecked power, I am not free, irrespective of how that power is exercised.

Hence the paradox of the ‘free slave’, frequent in republican literature: liberal theory implies that the slave who has a kind master is free, as she suffers no interference in her choices; republicans object that this depends entirely on the master’s benevolence, which can be revoked at will and may have to be cultivated: domination and unfreedom remain, therefore, and typically lead to self-censorship and a slavish mentality. more>

Negative capability

By Paul Tritschler – The unconscious can perform astonishing feats of memory, but it can also play a remarkable role in creativity: sudden insights, solutions and life-enhancing ideas sometimes surface unbidden when the mind is adrift in unconscious reverie. If such chance awakenings are possible, how can you replicate those conditions to become more the author, and less the reporter, of your own meaningful life story? To find that elusive voice, we’ve got to search in the ‘now’, in the moment of true, lived experience that fleetingly exists between past and future. It is within that space that we must seek the locus of personal transformation and change.

But being in the moment, developing an awareness of ‘now’, means gaining control over our thoughts and the unconscious patterning of memory so that they don’t intrude. If we can’t wrestle control over things, then something has gone awry in the master-servant relationship – there is truth in the old aphorism: ‘The mind is an excellent servant but a terrible master.’

To overcome this complex bind, we must identify how the mind constrains us, and then we must break free. Among the traps of the mind, there is preoccupation with the past (including attachment to intrusive memories) and preoccupation with the future (including continual desire). By definition, these lures are incompatible with being in the moment. We must offload this excess baggage to glimpse what we are and what we might become. more>

Why Wealth Is Determined More by Power Than Productivity

By Laurie Macfarlane – The process of how wealth is accumulated has been subject of much debate throughout history.

If you pick up an economics textbook today, you’ll probably encounter a narrative similar to the following: wealth is created when entrepreneurs combine the factors of production – land, labor and capital – to create something more valuable than the raw inputs. Some of this surplus may be saved, increasing the stock of wealth, while the rest is reinvested in the production process to create more wealth.

How the fruits of wealth creation should be divided between capital, land and labor has been subject of considerable debate throughout history. In 1817, the economist David Ricardo described this as “the principal problem in political economy.”

The measure of wealth used by the OECD is ‘mean net wealth per household’. This is the value of all of the assets in a country, minus all debts. Assets can be physical, such as buildings and machinery, financial, such as shares and bonds, or intangible, such as intellectual property rights.

But something can only become an asset once it has become property – something that can be alienated, priced, bought and sold.

The amount of wealth does not just depend on the number of assets that are accumulated – it also depends on the value of these assets. The value of assets can go up and down over time, otherwise known as capital gains and losses.

The price of an asset such as a share in a company or a physical property reflects the discounted value of the expected future returns. If the expected future return on an asset is high, then it will trade at a higher price today. If the expected future return on an asset falls for whatever reason, then its price will also fall. more>

Updates from Chicago Booth

The robots are coming, and that’s (mostly) a good thing
By Nicholas Polson and James Scott – We teach data science to hundreds of students per year, and they’re all fascinated by artificial intelligence. And they ask great questions.

How does a car learn to drive itself?

How does Alexa understand what I’m saying?

How does Spotify pick such good playlists for me?

How does Facebook recognize my friends in the photos I upload?

These students realize that AI isn’t some sci-fi droid from the future; it’s right here, right now, and it’s changing the world one smartphone at a time. They all want to understand it, and they all want to be a part of it.

And our students aren’t the only ones enthusiastic about AI. They’re joined in their exaltation by the world’s largest companies—from Amazon, Facebook, and Google in America to Baidu, Tencent, and Alibaba in China.

As you may have heard, these big tech firms are waging an expensive global arms race for AI talent, which they judge to be essential to their future.

Yet while this arms race is real, we think there’s a much more powerful trend at work in AI today—a trend of diffusion and dissemination, rather than concentration. Yes, every big tech company is trying to hoard math and coding talent. But at the same time, the underlying technologies and ideas behind AI are spreading with extraordinary speed: to smaller companies, to other parts of the economy, to hobbyists and coders and scientists and researchers everywhere in the world.

That democratizing trend, more than anything else, is what has our students today so excited, as they contemplate a vast range of problems practically begging for good AI solutions. more>

Related>

The Urgency of Strengthening and Redefining HR

By Howard Risher – The problem, as summarized in the report’s Foreword by NAPA President Terry Gerton, is fundamental:

Over time, the alignment between the government’s mission, strategy, and tactics on one hand, and the capacity of its workforce on the other, has fallen further out of sync. The result has been an accumulating series of program failures that have grown into a genuine national crisis.

To call it a national crisis is not hyperbole.

Human capital management leads the 2017 list of GAO’s high-risk areas and workforce management is integral to each of the areas on the list. GAO’s focus was limited to the skills gap. In its report, GAO concluded, “OPM and agencies have not yet demonstrated sustainable progress in closing skills gaps.” It’s been on the high-risk list for 16 years.

The skills gap needs to be seen as the tip of the iceberg. Skills alone cannot produce improved performance. The Office of Personnel Management describes the problem on its website with this formula:

Performance = Capacity x Commitment

According to OPM’s website, “In a work setting, the capacity to perform means having available the competencies [skills], the resources [technology is an essential tool], and the opportunity to complete the job [empowered to make decisions]. If employees are missing these, the work will not get done and the results will not be achieved.” Commitment is synonymous with engagement. more>

The Tragedy of the Commons: How Elinor Ostrom Solved One of Life’s Greatest Dilemmas

By David Sloan Wilson – As an evolutionary biologist who received my PhD in 1975, I grew up with Garrett Hardin’s essay “The Tragedy of the Commons,” published in Science magazine in 1968. His parable of villagers adding too many cows to their common pasture captured the essence of the problem that my thesis research was designed to solve.

The farmer who added an extra cow gained an advantage over other farmers in his village but it also led to an overgrazed pasture. The biological world is full of similar examples in which individuals who behave for the good of their groups lose out in the struggle for existence with more self-serving individuals, resulting in overexploited resources and other tragedies of non-cooperation.

Is the so-called tragedy of the commons ever averted in the biological world and might this possibility provide solutions for our own species?

Evolutionary theory’s individualistic turn coincided with individualistic turns in other areas of thought. Economics in the postwar decades was dominated by rational choice theory, which used individual self-interest as a grand explanatory principle. The social sciences were dominated by a position known as methodological individualism, which treated all social phenomena as reducible to individual-level phenomena, as if groups were not legitimate units of analysis in their own right. And UK Prime Minister Margaret Thatcher became notorious for saying during a speech in 1987 that “there is no such thing as society; only individuals and families.” It was as if the entire culture had become individualistic and the formal scientific theories were obediently following suit. more>