The Autistic Intelligence of “Free-Market” Economics

28 12 2010

Autism: a disorder of neural development characterized by impaired social interaction and communication, and by restricted and repetitive behavior.  – Wikipedia.

Autistic Economics: a situation where one theory, that illuminates a few facets of its domain rather well, wants to suppress other theories that would illuminate some of the many facets that it leaves in the dark. – Post-Autistic Economics Network

The Problem: Markets are Incomplete as a Steering Mechanism

The received economic theory and embodied socio-biological system by which humanity lives today will not solve the larger ecological issue of our time, which is how do we live sustainably on this finite biophysical planet. A pricing system of ‘free markets’ coupled with an ideology of hyper individualism will now begin to extinguish not only human civilization, but much of the biosphere as well.

Such a system, so conceived, has led to unprecedented material welfare the world over, there is no doubt. Yet, it has been clear for some time that money-based free-market pricing is adaptive only moderately and in constrained situations. As recent economists such as Joseph Stiglitz and Nicholas Georgescu Roegen have demonstrated – for at least 50 years now – there is never a genuine, inter-generationally neutral valuation of resources, human time, merchandise, services etc that arises from money based prices. Even with some attempt to deliberately take into account buyer-seller asymmetry of information, cross subsidies, externalities, and monopolistic pricing and production – the four failures of markets to which the received economic theory admits – all prices and values are arbitrary. Georgescu Roegen calls prices “parochial.” The pricing system is not a reliable steering mechanism.

Individualism is a False God

More pernicious and troublesome to our human predicament today, however, is our collective, neurotic belief in individualism. I am talking in particular about American culture, where the individualist psychology creates a culture of predatory capitalism where exploitation of children, sick people, elderly, animals and the environment is considered routine and acceptable business practice. Historically, America has been the land of opportunity. People from all over the world have immigrated to it in order to leave the oftentimes oppressive, unfree and impoverished homelands of their ancestors; and to seek and build their own fortunes in this open, resource rich and “pro-business” nation state. What has transpired here over several generations, and now amplified by its apparent “triumph over communism,” is a self-perpetuating belief of constitutional libertarianism, that lives psychologically in practically every man, woman and child who grows up here.

This psychology, while in the past it may have served some “developmental” purpose, it is now completely at odds with the survival of our and other species of beings. In a nutshell, the nugget of American free market individualism, to which academic economists give lip service, is the lonely person whose view of life is strictly of self and self interest. His or her emotional, affective world is reduced to ego and egoistic advantage. His entire universe of feeling is reduced to, in the words of psychiatrist Trigant Burrow, “social adaptation in the light of personal and social gain.” All relationships, even intimate ones, are opportunities for self gain. In America today, pursuing one’s livelihood, engaging with others and with society is a solitary game of manipulation and exploitation.

Furthermore, as Burrow also identified, “in this artificial gauge of conduct measured by standards of personal advantage there has established in the individual a criterion of life that rests upon an unwarranted assumption of personal supremacy and absolute privilege.” “Each of us is an unconscious overlord striving to secure the supremacy of his own personality.” (p. 24…29?, Social Basis of Consciousness, Burrow) Through this neurotic distortion of life abetted by the American cultural belief in libertarianism there becomes this inflexible assumption of personal absolutism and autocracy. Every adult American is a petty tyrant. Each person is utterly self centered and autocratic.

It would be merely ironic, if it were not now catastrophic, that this orientation is emblazoned in a philosophy of political economy called “Neo-liberal” and “neo-classical” theory. This theory, espoused by such folks as Milton Friedman, Ronald Reagan, Alan Greenspan, Chicago economist and Nobel Laureate, Robert Lucas, the Bush/Cheney/Gerstner syndicate, even domestic terrorist Timothy McVeigh considers money and markets, coupled with extremely self-centered, sociopathic individuals to be a steering mechanism for society as a whole. It is social Darwinism dressed up as moral norm. Dog eat dog, trust is for fools, he who has the most toys wins, government is the problem, he who has the gold sets the rules, might makes right. What started with Reagan’s famous comment in 1980, “government is the problem,” climaxed in 2006 when Vice President Dick Cheney sneered, “So?!” when ABC correspondent, Martha Radditz pointed out that most Americans were against the war that his administration started.

At that moment, the Vice President of the United States needed no longer hide his contempt for democracy. His personal victory and ideological triumph were complete. His game plan was right in line with the hyper individualism, Social Darwinistic doctrine of our day: Get “elected” to office, pillage the public sector. When self interest is everything and public interest is a laughable nothing, then attaining absolute power and exploiting people by the millions is simply rational. By Cheney’s thinking, you would be stupid if you did not do this.[1] By the end of his term, 2008, the country was in ruins – overextended by adventurist war to the tune of trillions of dollars (to future taxpayers) per year, and freefalling into a financial collapse from which will probably take a century to recover. Needless to say, the reforms that will resolve this climax of the doctrine of self interest are beyond Cheney’s comprehension.

Not only is the external system of markets and money-calibrated exchange and investment incomplete, but the internal psychology of individualism is misguided, delusionary, and dangerous.

Markets Do Not Determine Right Scale

The free-market pricing system is not a generic problem-solving device that allows human culture to find a ‘natural dwelling’ in balance with the rest of the earth. Its ability to adapt human needs and physical options is adequate only in narrowly proscribed situations. It works in some places, but despite its widespread popularity among American economists and the American people in general, it is not going to solve our ecological problem of scale. Finding “right scale” – how big the human “footprint” should be – will not be achieved through the free-market system alone. Other forms of human communication and deliberation must be used as well (more here about this:   ) At best, the market as an economic mechanism is incomplete.

The classical/neoclassical theory of markets and prices, which has been operative since Adam Smith, has also been wrong about social inequality and poverty. But, as many have pointed out (such as Herman Daly), with steady economic – physical – growth over the past couple of centuries, the errors of the theory around inequality were mitigated. As long as everyone’s boats floated higher, it didn’t matter so much that inequality kept growing.

Now we are reaching the upper limits of physical impact that the human species can have on the earth. Over the next 40 years, if the human population doubles as demographers expect (see Exhibit 1), and these beings intend to attain a material standard of living equivalent to the USA (see Exhibit 2), there is no way this earth will sustain such a move without catastrophic alteration of itself. Nonetheless, with our free-market-pricing logic, we are driving headlong into this future.

Exhibit 1 Exhibit 2
Source: Angus Madison


By our conventional economic wisdom, particularly the free-market, money-calibrated pricing system, we will deplete all non renewable resources like oil and coal, and along the way, we will extinguish many if not most animal and plant species (so called “renewable resources”). A pricing system figures into this in only, as economist Nicholas Georgescu-Roegen would say, a “parochial” way.  No matter how scarce and therefore high priced these dwindling animate and inanimate things become, the simple fact of large numbers of human mouths will wipe them out. And, as an artifact of the money and market-priced system, ever-widening personal income disparities will generate some persons and corporate entities who CAN afford to purchase these very highly priced items.

To be clear, the intelligent and needed schemes, such as cap-and-trade systems or intergenerational equity schemes, are not strictly market systems, even though they may use markets for key parts of their process. In these systems, the upper limit of resource use, i.e. the right scale, is determined prior to the market process – by political debate and scientific consensus. The “cap” level is not a money-auction result. The cap quantity is, for example, the total amount of carbon to be allowed into the atmosphere; it is the total number of fish to be taken in one season; etc. These upper quantities are determined by stakeholders in deliberation. Rights to produce within that determined quantity is allocated by a market auction, but not the level itself. Strictly speaking, the process for managing resources with these schemes is outside of the so-called autonomous system of prices and interconnected markets. Thus, our “steering system” has extra-market devices and they are other than market competition.

The neo-liberal vision does not want to recognize this. It wants everything to be market driven.

Economy is a Communication Process and Markets Serve Only One Kind of Communication

The deliberation required to set and design the right scale of our human habitat is not widely recognized as categorically separate from the market process. Until this is recognized, and until the dynamics of that deliberative process are better understood and integrated with market activity, our world civilization will not have a generalized steering device concerning its economic actions. Indeed, the steering process we believe ourselves to possess – individualistic, self-serving action mitigated by competition – will make things worse. Prices and markets do perform adaptive functions here and there. But it is wrong to consider the pricing system as sufficient unto itself. Given the mandate to steer us collectively to right balance with the earth, the economic theory of free-market prices is glaringly inadequate. It won’t get us there.

Now, one of the virtues of the received neoclassical theory of economics (what I’ve been also calling the ‘traditional theory’ and ‘conventional wisdom’) is that it conceives itself as a communication system. This is true. Frederick Hayek wrote a wonderfully lucid piece in 1945 about how an economy of prices and free markets enables a society to manage its limited materials in the most adaptive and responsive way. Hayek’s statement as to how knowledge is used by and is distributed throughout society by thousands of independent budgetary decisions informed by market prices – a wholly decentralized process – is essentially a recapitulation of Adam Smith’s insight of the “invisible hand.”

Prices and markets perform an information processing function. What I am going to put forth in this essay is that markets are a specific instance and kind of communication, “information processing” device. Not only do we need other kinds of devices, but we need to articulate a broader, more general conception of communication in order to see new possibilities of a general steering device for spaceship earth and species being of homo sapien.

Communication and information processing is the solution to our ecological and social problems, to be sure. It is just not only with prices and markets. There is a more comprehensive manner of communication that will be the solution. In this essay, I attempt to articulate this more general conception of economy as a communication process.

Economics – both from theoretical and practical knowledge interests – needs a more comprehensive view of communication beyond the market and pricing system. This broader conception, as I will attempt to demonstrate, shows up most conspicuously (from the standpoint of traditional economics) as two new domains: the domain of intersubjective knowing among people (including science, deliberation of many kinds, culture, education, enterprise management, and so forth) and the domain of intrasubjective knowing – individual consciousness aka self consciousness, self actualization, etc. – as constituted in conversation.

Making this expansion of economics as communication requires an epistemological shift out of Cartesian duality toward what is being called a participatory epistemology. The characteristic of participatory knowing is that the awareness, whether individual or group, is part of a process of unfoldment. Objective detachment and rationality of the knower is never completely possible. There is always a quotient or component of indeterminacy, uncertainty, unconsciousness, and ambiguity. The individual person is sentiently dealing with a whole field of dynamically changing relationships with other persons and things. There is never an all knowing “God’s eye view” for the individual nor group. Any rational objective assessment that does happen, is more of a snap shot in time. Rational behavior in either markets or the broader economic process is not only “bounded” (as Nobel economist Herbert Simon suggests) but is only a stepwise, punctuated static fractal image, so to speak, of a much bigger chaotic, indeterminate and overdetermined process. How the human should “be” in this – including his or her action – will never be adequately conceived by a theory that subscribes to the Cartesian duality of subject-object. Cartesian duality, while valuable in many ways, is ultimately blind as a critical guidance of action in and engagement with the world. Another mode of awareness, complementary to the Cartesian mode, is needed. It is characterized as lucidity, intuitiveness, participation-in-process, non-duality.

The Solution: Conscious Economics

How we understand economy, at individual and collective levels, and in theory and practice, is what is critical for our finding our appropriate ecological footprint on the earth. Consciousness needs to be put squarely into it. Two critical aspects of consciousness here are the personal, which amounts to self observation and emotional maturity, and group, which amounts to cultivating a public receptiveness to pluralism, empathy and compassion.

The field of behavioral economics, although explicitly psychological, is not “conscious economics.” Too often, its unexamined intentions are how to get more productivity out of people; how to more cleverly market consumer goods to people; how to harvest capital gains in asset markets ruled by mob psychology; and so forth.

A conscious economics, stemming from a non-dual, participatory epistemology will lead to a completely reconstructed economy-ecology because it explicitly incorporates human intersubjective dimension (including how one shows up in conversation with others) as well as mindfulness of the individual, observing his or her own internal narratives and conversations. Once these interior depths and transpersonally emerged identifications are accepted into economy, then a much greater adaptability, power, and grace is possible.

[1] The Carlyle Group, Cheney and Bush’s investment firm, is one of the largest private equity firms in the world. Josh Kosman describes these firms as predatory. See “Private Equity: The Buy Out of America.”


Could Japan be a Model for a Post-Growth Economy?

17 10 2010

The New York Times launched a series of articles examining the effects on Japanese society of two decades of economic stagnation and declining prices. I am interested in this series for clues on what a post-growth economy could look like.

There are many comments and descriptions in the article that shatter accepted icons of what we believe to be fundamentals to economic growth. For example:

  • The younger generation in Japan — people who have known nothing of Japan’s super prosperous times of the ’70s and ’80s — is devoutly ANTI-consumption. They buy clothes at discount stores, don’t travel abroad and think spending in general is stupid.
  • Young Japanese men are called “herbivores,” meaning that they don’t have the will to succeed and work for long hours that their fathers did. In other words, a special kind of manhood is seen as necessary for economic growth.
  • A Japanese economist wishes inflation would return because it is the engine for “creative destructionism,” a reference to Joseph Schumpeter’s famous praise for entrepreurialism. Today’s deflationary environment, he says, is “just destructive destructionism.”

I believe that we face an imperative to go, in the words of Herman Daly, “beyond growth.” This means not consuming more than can naturally be regenerated. It means not having an inflationist economic system where debt-based money requires prices and output to either (a.) rise exponentially or (b.) have the whole whole economic edifice collapse. It means getting away from conceptions of wealth being tied to masculine power.

The deflation besetting Japan could be seen as a glass half full, not empty, in showing what a post-growth society could be.

Consciousness and Economics

1 09 2009

Healthcare provides good examples of the relationship of consciousness to economic outcomes.

For example, the other day my friend Patty K. sent me a factoid from Integrated Medicine: A Clinician’s Journal. It said,

Chronic disease accounts for 70% of annualized US healthcare costs, mostly due to continual hospital admissions for acute exacerbations or comorbidities of underlying chronic disease.3 Clearly, our current model of curative medicine is failing and not fiscally sustainable. We need an affordable, scientifically based model to bridge to an acceptable new medical paradigm—for doctors, patients, and the nation.

Here is a dramatic quantitative indicator — 70% of total healthcare costs in the nation — and it all stems from a mindset, in this case, about curative approaches to health taking a higher priority than preventative approaches.

To me this underscores the primacy of consciousness in economics. Thus, if you change the qualitative consciousness, and you will change the quantitative economic outcomes.

Another example of consciousness in economics is again found in healthcare. Here my friend Alok S. brought my attention to a great piece of investigative journalism of  Atul Gawande printed in The New Yorker.

It chronicles how norms and values are created and upheld by different groups, even when those groups are ostensibly doing the same thing, in this case, practicing healthcare.

One group of doctors and administrators in McAllen, TX is very entrepreneurial and financially incented, to say it kindly. As owners of their clinics, and making commissions on every referal to other specialists, the cost per patient care in that community is one of the highest in the country.

By contrast, other groups — such as those in El Paso, TX, or Minneapolis, MN — even though practicing the very same professions, take more of a service and collective sensibility to their work. Patients are NOT profit centers. Consequently, health care is delivered to their community at half the cost of the McAllen group.

In both examples, the consciousness of the economic agent determines objective cost outcomes. How that agent comes to have the particular consciousness is of great importance.

Traditional economics has assumed a very singular, mono-type of human being: rational, self interested, perfectly knowledgable about all relevant data to his or her economic well being.

Not only is this a silly view of human nature, but, as these two examples illustrate, it completely misses the real leverage point of making economic differences.

The emerging area of “behavioral economics” is a good start in breaking this down. But so far, in my opinion, the work relies on a very rudimentary behavioral psychology. The behavioral economist still holds him- or herself separate from the phenomena that he/she is observing.

What is needed is an economics science that is self-reflective and examines its ontological assumptions. This is what I am interested in. It is a conscious economics.

For more on consciousness and economics, click here:

Paul Samuelson Interview

1 08 2009

I’ve been meaning to note this great interview of Paul Samuelson, probably the single greatest economist of the 20th century following Keynes.

Paul Samuelson

My favorite lines from it are:

Regarding Alan Greenspan,

…he had been an Ayn Rander. You can take the boy out of the cult but you can’t take the cult out of the boy. He actually had instruction, probably pinned on the wall: ‘Nothing from this office should go forth which discredits the capitalist system. Greed is good.’

Regarding the nature of economic science,

There ‘s a lot of causality in economics, even though it’s very far from an exact science.

Regarding the relativeness of ‘rationality,’

I’m not sure most of the people that get caught up in the middle of a bubble can be described as irrational. It seems pretty rational to buy a house and flip it in the next few weeks at a profit when that’s been happening for along time.

Regarding what the coming big developments in economics will be:

Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come. And I think the recent period has illustrated that. The governor of the Bank of England seems to have forgotten or not known that there was no bank insurance in England, so when Northern Rock got a run, he was surprised. Well, he shouldn’t have been.

But history doesn’t tell its own story. You’ve got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.

The full interview, by Conor Clarke, The Atlantic, June 17, 2009 is here.

What is it to Be a Genuinely Noble Economist?

12 01 2009

A personal interrogation prompted by attending the American Economic Association Conference, San Francisco, January 2009

I had an enjoyable holiday that took me up and down California visiting friends and family. Along the way I had some beautiful hikes in the ever-marvelous California landscape. I capped off my trip by attending the American Economic Association’s annual conference that took place this year in San Francisco.

I am an economist, but I’ve never been sure if that was a conscious career choice or a reaction to circumstance. This, coupled with the atmosphere of economic crisis, led to a spontaneous outburst of moral introspection as I walked the halls and break-out sessions of this conference. I am still not sure if what I heard at the conference was a balanced view of current economics, or mere projection of my own inner doubts.

I heard a lot of tentativeness. Kenneth Rogoff of Harvard mentioned how widely the Washington Consensus is being questioned, especially outside of the economics profession. He reviewed a commission’s report on the past 30 years of World Bank research and projects. The commission’s conclusions were ambiguous as to what really worked for economic development. “I was amazed at how important non-economic factors are — politics and institutions,” admitted Michael Spence of Stanford, the report’s chief author.

Tentativeness was present among Federal Reserve economists. The new lending facilities are greasing the skids for non-bank market makers, according to Tobias Adrian of the New York Fed. When traders know they have guaranteed liquidity by the government, they are willing to take on more risk and clear a trade. But this only creates greater possibility for moral hazard – i.e. being irresponsible. “Should we create a credit facility for hedge funds?” he asked in droll somberness. Doubt!

In economics, there is this uncomfortable juxtaposition between knowing what is “really” going on (in the world) and doing the right thing. This manifests itself at both the personal level of the individual economist and the collective level of the profession as a whole.

The scientific, “positive” side of economics (knowing what is going on) is the bright area and where every one wants to shine. The moral, “normative” side (doing the right thing) is the black sheep and shadow of the two. The moral side is vague, problematic. The profession, in my opinion, gives it only lip service.

At the personal level, the conflict comes in the question, “For whom will you sing for your supper? For what cause and customer will you sell your skills of rationalization?” (Teaching economics is kind of a neutral position, in my opinion.)

The conflict has a ‘catch-22′ in it. Positive, orthodox economics holds that morality is not important at the individual level. All is preference. And the sum of individual actions, despite possibly being mutually antagonistic, nevertheless results in a social benefit and progress. Built into positive economics is the assumption that the normative component will work itself out in the aggregate.

Well, given today’s global warming and economic melt down, that happy outcome obviously didn’t happen. Maybe we need to focus more on ‘doing the right thing.’

In one session, presenters discussed specific incentive schemes for rationing resources. Here were some good practical policy formulations for dealing with protecting endangered populations of fish. Good work, yet I was surprised at the relative minor importance this kind of topic had in the overall scheme of the conference.

My observation reminded me of Herman Daly, University of Maryland (who was not present). Environmental economics, so construed today, he says, is a kind of half-baked add-on to economics. What is truly needed is an ecological economics, that is based on an entirely different “pre-analytic assumption.”

Ecological economics is based on the assumption that the human economy exists INSIDE OF the biosphere, not unto itself. In this framework, “resources” become explicit in the production function (along with “labor” and “capital”). And there are different classes of capital – “natural” and “built” – which, furthermore, are not substitutable.

Along with other distinctions, the ecological framework changes the whole economic game. Instead of maximizing output per unit biosphere, the objective becomes maximizing biosphere per unit output. Right scale (of the human presence in the biosphere) joins the two conventional systemic goals of efficiency and social equity.

An ecological economics is not going to arrive anytime soon, according to Dale Jorgenson, in the session on A New Architecture for the U.S. National Accounts. It is still a thing to be developed, he said. Valuing intangibles will always be hard, another presenter said. In fact, so hard that asset bubbles will never be detected by our current accounting conventions, according to David Stockton of the Federal Reserve Board. (However, Jonathan Parker, of Northwestern, pointed out how the United Nations’ System of National Accounts – the “SNA”-did better at seeing the asset crash coming than the U.S. National Income and Product Accounts.)

Accounting systems are important. They tell us how we are doing. Michael Boskin underlined Paul Samuelson’s remark that the national income and product accounts rank as one of the greatest inventions of the 20th century. “It’s hard to imagine a discussion of the economy without them,” said Boskin.

It is becoming clearer and clearer to me that measuring our ‘economic’ well being is the real question of economics and it depends on our own moral character.

Yet, moral character – the content of our character – is outside the realm of conventional economics, practically by definition. Moral character, emotional maturity, psychological depth, soul, individuation, self actualization, authenticity, integrity – whatever you want to call it – makes a difference in economics. And it is not just that different moralities have different economic outcomes. Different moralities lead to different kinds of economics. The former concerns individual choice, regardless of the moral fabric of society. The latter is an aspiration for a norm that one wishes a society, or one’s community, to live by. It is a desire for a way of living in relationship with others.

A good economist clearly sees what is and what could be. Nobility comes in choosing a greater social norm to support, than simply seeking a more attainable personal gain. And the choice is not necessarily altruistic, even in the face of big opportunity costs. A desire for a community of friends that one can trust and in which one finds support is as self-centered as any.

In a session entitled The Economics of Non Cognitive Skills, Dutch economist, Lex Borghans presented a way to marry personality to economics. “Where does personality show up in economics?” he asked. “Everywhere,” he said. In career decisions, in preference for merchandise, in investment returns to human capital, and so on.

There are economic consequences of different kinds of personalities, but what about the personality of the economist? Morality is an exogenous variable to the economist. It is less fun to shine light on one’s inner motivations, than it is to model emergent phenomena in self-contained systems of variables.

Again, the tension between positive and normative. How you construe your reality has an ethical injunction. If you see natural resources as purely a source of (current period) income, you will ‘drill, baby, drill.’ If you see it as capital, and its extraction is, therefore, drawing down capital, then you will tend to conserve it.

Thankfully, there was a session that addressed my dilemma. Debating Pluralism in Heterodox Economics. It was a mish mash of unrepentant Marxists, critical theorists, and sundry philosophers. The session was sparsely attended – maybe 20 people at most in the room. Still, one presenter, Andrew Mearman, University of West England, made some cogent remarks about ontology. Frederic Lee, University of Missouri, made a plea for greater pluralism in the field, to allow for multiple views and less hurt feelings. He offered a definition of economics as ‘social provisioning.’

On the second day of the conference, I ate breakfast in a greasy San Francisco café, next to the hotel where the conference was taking place. On the wall was a Homer Simpson cartoon. Homer’s little boy Bart has a sheepish look on his face. The caption reads, “If I do something bad, and nobody is there to catch me, does that make me good?”


Is this the ethic of the Economist, or just mine?!

After the conference, while driving home along the northern edge of San Pablo Bay (Highway 37), I heard a story on NPR’s Marketplace program. It was about Bernie Madoff and cheating the public. How is it possible? How to guard against it by regulation?

The reporter asked, how could Madoff have gone for so long (decades) without being detected by the regulators. There had been several complaints and filings made about his fund, but they were ignored by the SEC and others. The reporter went on to explain that many employees of the regulatory bodies went easy on the regulated firms. They hoped to get hired by them. In the private sector, such people – economists, for the most part – would make several times what they made working for the government.

The reporter interviewed behavioral economist, Dan Ariely, author of Predictably Irrational. Ariely described an experiment where people were given the chance to cheat in a simple game that had monetary gains.

The researchers paid an actor to stand up after 30 seconds and say, “I solved everything. What should I do?” – obviously cheating because nobody could finish all the questions so fast. The experimenters simply said, “If you’re finished, go home.”

What did this create? Did people cheat more or less after seeing this?

It depended on the sweatshirt the actor was wearing.

The experiment was run at Carnegie Mellon, in Pittsburgh. In Pittsburgh there are other universities including the University of Pittsburgh. All the students who participated were Carnegie Mellon students. If the cheating student, the acting student, was wearing a Carnegie Mellon sweatshirt, he basically got people to cheat more. But if he was wearing a University of Pittsburgh sweatshirt, he got people to cheat less.

When the person who cheats stands there with a Carnegie Mellon sweatshirt, he gives a social justification for a new social norm to emerge about cheating. But when he is wearing a University of Pittsburgh sweatshirt, all of a sudden people said, “This is cheating. This is what the other people in the bad school are doing. This is not what we’re doing.” And therefore people cheated actually less.

“The moment we remind people about their honor of themselves, their own standards, they stop cheating,” said Ariely in a phrasing that really captured me.

The interviewer pressed him: Will the publicity around Bernie Madoff – a guy who has been around a long time, a Wall Street insider and is now found out to be running a Ponzi scheme – will this inspire people to cheat more or less?

It depends on how we frame it, said Ariely. If we are framing it as he’s a part of Wall Street, it will be a part of the in group and will increase what is acceptable in the bankers’ eyes in terms of cheating. But if we are able to frame him as an outsider — somebody who is from a different investment firm, with a different approach not typical of Wall Street — then we might actually decrease cheating with that approach.

This reminds me of Jay Ogilvy’s theory of “the some” and how it sets up a provisional pluralistic culture. (See below for my review of Ogilvy’s book, Creating Better Futures.)

I was always attracted to study economics in order to be more streamlined in how I provisioned for myself. I wanted a style of work that cut to the chase and allowed me the greatest personal creativity and autonomy, with the least bit of kow-towing to someone else’s program.

Maybe this is because I am the youngest of three sons and have a problem with authority. It could also be that my father provided a good example of responsible, creative freedom. He was a self employed architect who designed, financed and built many a spec home.

In any event, economics, to me, offered the clues as to how to live like this.

I’ve always thought that economists are modern-day priests. They are today’s advisors to Kings. They filled the vacuum left by the Church during the rise of science, industry and secular society. The problem, I think, is that Priests, at the archetypal level, are absolved of morality, unlike the King. To be a King is to lead, and to lead requires acting from moral integrity. In today’s economics, and in my life, there is a need for leadership; a need for the Priests to become more like Kings.

All that I can tell at this point is that leadership requires three things: (1) Clarity about your innermost truth and desire; (2) Conviction about your purpose and gift; And, (3) courage to act from your conviction, whether it is popular among your peers or leads to riches or not.

Reaganomics, Supply-Side, Free-Market, Monetarist, Neo-Liberal, Washington Consensus – All Gone with the Wind!

1 10 2008

In the space of one week (in October, 2008), the supply-side, free-market dogmatists went from “Government is the problem,” to “Government is the solution.”  They went from “There is No Alternative” – Margaret Thatcher’s remark that global markets rule – to ‘hurry up and let’s find some alternatives.’

What happened?

What happened was that an imaginative, but thoroughly ungrounded ideology ran into hard reality. Reality won.

The ideology is that ‘government’ is not necessary. The reality is that humans are social beings, and that we are all on this earth together. And, until we go elsewhere, we inhabit this earth as a group, not as a bunch of warring individuals.

Whenever two or more people live in proximity, people need to explicitly or implicitly make agreement about how they will live with each other. Even if the agreement is not written down, as in the case of tribal peoples, this is a form of ‘government.’

The challenge is not whether government is a valid concept or not, the challenge is whether government will be democratic or authoritarian.

We’ve gotten ourselves into an upside-down world because, for a long time now (30 years at least), the people who openly held government in contempt, were the very same people who held government power. We had government leaders who claimed they didn’t believe in government leaders. Not surprisingly, it has led to silly, cavalier and reckless behavior. Indeed, the ‘government-is-the-problem’ proponents represent an emotionally immature person, and at the level of an insolent teenager who bristles at any kind of restriction of his or her behavior. When this kind of person has the upper hand in setting the ground rules for how we are to live with one another, you can expect all hell to break loose.

Now, hell has broken loose.

Timothy McVeigh was angry that he had to drive according to a speed limit. He didn’t recognize all the other people who contributed to his power to drive a vehicle. The engineers who created the car, the roads built at taxpayer expense, the other people on the road who also had a need to use auto transportation infrastructure. For a slight bit of curtailment of his freedom (i.e. not drive at 100 mph, but keep it to 65), the social group who empowered him in the first place all could have gotten along using a commonly shared physical environment. But he didn’t see it that way.

Ronald Reagan, Timothy McVeigh, George Bush – these rugged individualist, anti-government proponents don’t want to recognize the community in which they live. The closest they get to recognizing a social dimension in their lives is when using such financial terms as “counter-party” or “greater fool.”

The real challenge that we face today is in creating genuine democratic government. There is too much centralized power, political and economic. Global corporations and authoritarian national governments have too much say over day-to-day living arrangements in communities, cities and regions.

There exists a solution and it is to decentralize power – political and economic – and cultivate strong, vibrant regional economies.

At the heart of this vision is local ownership of local enterprise. The Washington Consensus – the myth that is disintegrating before our very eyes – held that jobs were all that mattered for economic growth. A large retailer, manufacturer or a large World Bank project could be inserted into a local area, and the job creation from this would lead to economic growth and prosperity.

But now, with 30 years of hindsight on this idea, we know that this doesn’t work.

Strong, resilient economies depend on more than jobs. In addition to jobs, they depend on enterprises buying inputs from other local enterprises, and they depend on profits of enterprises being remitted to local owners as well. Then, as these three distinct flows of funds (wages, cost-of-goods expenditures, and profits) are channeled – as much as possible – to other local enterprises and households, the region’s aggregate income and wealth rises.

These three flows of funds, compounded through multiple cycles of transaction, also lead to solid capital formation in the region. Capital formation is necessary because it provides the capacity for seed investment into new enterprises in the region.

On the contrary, when only one of the three ingredients is present – job creation – and profits and cost-of-goods expenditures go outside of a region, that region’s ability to grow is severely limited. Over time, a highly concentrated, extractive global economy emerges. Ultimately, it collapses. Witness the collapse occurring around you.

Strong, interdependent local economies, based on local ownership of enterprises, are the way out of our current crisis.

This simple framework has been lost in the mad rush to globalization and privatization of the past 30 years. Yet, this framework has proven itself throughout the modern era. Look at “regional economies” such as Singapore, Taiwan, and Hong Kong and specialized regions such as Silicon Valley, Hollywood and the Emilia-Romagna of Northern Italy. Economist Jane Jacobs, as far back as 1984 put together the massive empirical evidence of this vision (in her book, Cities and the Wealth of Nations).

Multiple, strong regional economies, engaged in trade with one another, are resistant to global collapse due to overconcentration of power.

What we want to create going forward is a world economy that is metaphorically similar to the Internet. The Internet is a very strong, resilient device because it is highly decentralized. If any one server, patch of servers or subnetworks fail, the global system keeps on ticking. Network traffic is simply re-routed around the problem spots.

We want to have a world economy based on similar principles of decentralization.

The strategy of strong regional economies is pro-trade, by the way. The key distinction is to have the exporting enterprises be owned by locals, not by invisible offshore entities. Local ownership is key because it provides the greatest capacity for self determination and sovereign power to locals. Local people are the best stewards of the environment, and the best arbiters of social issues pertaining to the community. Giving sovereignty to the peoples of a given place insures the greatest balance in the economic system, both at local and global scales.

This simple framework is also the basis for good government. Government in this framework is where local citizens truly have power to establish their livelihoods, to manage public resources, and to make agreements about how they want to live together.

Ownership of the enterprises that generate and govern the deployment of capital (human, financial, natural) must be re-localized, re-regionalized and decentralized from today’s status quo. Today’s status quo is extremely vulnerable to collapse and it is non Democratic. It makes an increasingly smaller group of families very rich, while impoverishing the mass of humans and depleting the environment.

The Washington consensus that there is no alternative but to have all powerful global corporations running the world is an ideology whose time has come and gone.

A new day is dawning. It is in strong regional economies that retain individual personality, that give the greatest governance to the citizens of the region, and that creates the greatest well being for all.