Bianca Steele

You Have to Read This

You have to read this article (“Why I Fired My Broker”) in the May Atlantic.  If I were still a subscriber, I would feel worse about it than I do.

In fact, he didn’t fire his broker; he fired his financial adviser.  He didn’t want to do business directly with a broker, because brokers get commissions and are in it for their own self-interest.  He didn’t want to buy into a mutual fund, because he didn’t know anything about the people who ran them.  He felt he needed—and deserved—personal attention, from a highly-qualified person who talked directly to him and had time to devote to his account and his account alone.  He didn’t want an adviser who made all his decisions based on a computer program.  He wanted a good adviser, one who could get the best returns possible, who could explain to him, briefly and in language he understood, exactly how.

The article is about how selfish and self-protective financial advisers have become, in the form of a complaint that the writer’s own broker no longer returns his calls.  The reader follows him as he visits big-name finance thinker after child of international financial guru and philanthropist, trying to get them to acknowledge the point of view of an investor who, because he only has $200,000 to invest, is forced into the financial equivalent of taking the crosstown bus instead of a cab.  (Remember Roger and Me?)

Unfortunately, it’s difficult to take seriously a journalist who begins by saying he thinks the stock market should have only an insignificant risk of loss within only a one-year time window.

Frames Versus the Invisible Hand

Via Will Wilkinson, Matt Yglesias says of financial firm CEOs: “surely we could agree that the executives at these institutions are primarily bad people.”  He goes on to elaborate, explaining that they are “greedy.”  This isn’t his main point, and he goes on to invoke Adam Smith and to “recognize that none of us are without sin,” but he says it more than once, and I think Wilkinson is right to point out that it’s not consistent with what Yglesias has represented his argument to be.

Yglesias’ post invokes a frame that it’s unusual to see in sophisticated economic reasoning: every problem can be blamed on a particular person, who both benefited directly from the problem in the most natural way, and committed a particular sin that necessarily would have caused that particular problem.  In this case, as the frame, and as Yglesias, would have it, the problem was not only caused by financial firms, but by the individual executives of these firms.  And it’s not just that their actions caused the problem because they made some mistake, because they were lazy, because they were incompetent, because they were out to get somebody else and lost track of what they were really supposed to be doing—they caused financial problems for other people because they were out to benefit themselves financially.  And it’s not just that their desire to get big bonuses or to drive up the price of their employers’ stock—or even their self-identification with the firm and its products, so that the firm’s gains felt like their own—led them to act in acquisitive ways, it’s that they were acting to benefit themselves instead of with the public good in mind.

There really is no other way to explain the stupidity of this kind of argument (at least I can’t think of one), than to see it as basically automatic, nearly unconscious.  It’s something you expect to hear from a guy who’s just finished yelling, “You kids get off my lawn!”

And what it misses is something important.  If we really think Adam Smith was right, it is important to have people around who will act with self-interest (their own and others’) in mind.  If we want to live in a modern society with complex institutions, it is important to have people around who are aware of the impact their actions have on the well-being of others without imagining that impact is direct.  And if we want to get anything done at all, it is also important to have people around who do not become paralyzed with fear every time it occurs to them that “none of us are without sin.”

Frames in the Business Section

A couple of posts ago, I commented slightly negatively on George Lakoff’s frame theory, but I actually think it is very valuable, so here is an example of how one might make use of the theory.

In today’s New York Times business section, Robert J. Shiller has a column addressing the idea that the experts could have or should have known the current crisis could or would happen.  Shiller’s column illustrates a particular set of frames that are sometimes found in business writing.

In 1989, Shiller heard an expert (Lawrence Summers) muse on his speculations that although nobody thinks it could occur, “a severe contraction, even a depression, could indeed come again.”  This is the people think a certain huge problem can never occur again, but in fact there is no reason to think the world has changed frame.  The state of affairs it describes may well be true, for any given situation, at any given time—but often it sounds alarmist, and one is tempted to think it has some of the attributes of a stopped clock.

The fictional scenario began with “lawyers and dentists explain[ing] to one another that investing without margin was a mistake.”  This is the problems are caused by certain kinds of licensed professionals who think they know something about a different field but really are ignorant frame.

The fictional crisis was then triggered when “a major Wall Street firm was forced to merge with another after a poorly supervised trader lost $500 million by failing to properly hedge a complex position.”  This is the problems are caused by subordinates’ failures to follow instructions frame.  There was no real problem, either with the regulations governing Wall Street firms, nor with the way executives were running the company, but only because a small number of employees were insufficiently disciplined.

All of these frames have one thing in common.  They all exonerate the people on top before the fact.  They all find problems only at the very bottom of the hierarchy.  They might permit a problem to be found just one level up from the very bottom—in the supervision or hiring of the lowest rank—but never explicitly put the blame on first-line managers.

None of the frames states ideas that are 100% inaccurate.  Sometimes people don’t follow the instructions given them by their managers.  Sometimes dentists and medical doctors misunderstand the ideas they hear coming out of other disciplines.  However, these frames do make it nearly impossible for any systemic issues to be identified publicly, not only by anyone who feels constrained to stay within the lines they indicate, but also by anyone who is dependent on information provided by those who feel so constrained.  Merely reversing the frame doesn’t work either, in part because the only information that can be provided is what fits into the frame.  It is not an unfair criticism of the New York Times to say that it reuses a limited set of frames over and over again, and that these frames very often indicate a neoliberal point of view.

Clive Crook: Blogs are destroying the credibility of academic economics

It’s difficult to want to write a blog post about somebody who’s just called bloggers the root of all evil -- particularly when he’s also just accused bloggers of politicizing issues that previously had been seen entirely objectively. It’s difficult to write without either condemning yourself or proving him or her right by getting all angry and polarizing.

Before piling on the blogosphere, Clive Crook, here, attacks academic economists who write for a popular audience. He suggests that when they write for an audience “not of their peers” (their real peers are their fellow Ph.D.’s who have access to JSTOR and huge libraries, presumably), their writing is no longer informed by the theoretical knowledge they possess as economists. Instead, he charges, they are using their economics knowledge -- and more importantly their prestige -- to promote one political party over the other: what they are telling their readers is different from what professional economists would accept as true. What they are really doing, he implies, is providing political partisans with “the economics they want”: an “economics” that is useful for achieving political results, not an economics that accurately describes the world in which they live (and, as a consequence, is useful for achieving results in that world).

I don’t know what could make Crook want to say a thing like this. But he goes on to blame the web for at least “aggravating” the problem. The blogosphere, he writes, “[c]elebrate[s] exasperation and incivility as marks of intellectual authenticity” -- as if such attitudes were not prevalent everywhere.

Hiring editors and fact checkers is probably not an option except for those employed by mainstream media outlets like The Atlantic Monthly and The New York Times. What should bloggers do then? Write only what could be awarded an “A” in an econ class at any major university anywhere in the US? Write only what’s been given the imprimatur of one of the designated “political economics writers” from their selected party (e.g., Krugman for liberals, Barro for Republicans)? Or just go away?

Henry Farrell, as usual, has a useful response here.

More on The Venturesome Economy

Fast Company has more on Amar Bhide's book The Venturesome Economy.  A lot of interesting points.  Just a few:

In claiming that those who have sounded alarms about U.S. competitiveness are “techno-fetishists or techno-nationalists,” Bhidé also miscasts their message by insinuating that they “fear catch-up” by other countries. But that’s a red herring; that camp does not fear catch-up if other nations achieve it through venturesome consumption, technological superiority, or old-fashioned market competition, what it opposes is when nations use protectionist trade strategies to gain a competitive advantage over U.S. firms by shifting the cost equation, taking technology without paying for it, or blocking or limiting U.S. firm’s access to their markets. It fears more that the United States has yet to truly grasp the serious threat posed by foreign economies and their companies, not just through their genuine technical strengths and attractive products in many cases, but also illegitimate approaches that erect unfair or protectionist trade policies that systematically disadvantage foreign competition.

...

The notion that U.S. firms may offshore their manufacturing (and jobs), but that the higher-valued added (and thus higher-paying) research, design, and management jobs will remain in the U.S. is becoming increasingly inverted. Intel’s recent decision to locate a $4 billion manufacturing plant near its R&D center in Israel (so the manufacturing facility could be close to its R&D site that spawned the innovation) shows that an economy that initially controls R&D and manufacturing can lose the value-added first from manufacturing, and then R&D. In other words, economies can use a branch-plant innovation approach to quickly become powerful competitors and migrate up the value curve to rapidly achieve competitiveness in high-value added industries, when once they were thought only to be low-skill, low-cost manufacturing centers.

...

But in the new global economy, knowledge is increasingly the major factor of production (as opposed to the tangible capital embodied in machinery, laborers, and financial capital that characterized the old economy). It is embedded in organizations and if organizations die so too does a significant amount of knowledge. Thus, losing international competitions in knowledge-based industries (whether through other countries’ interventionist policies or the superiority of their firms) means losing much more than just the firms; it means losing the value from these dispersed pieces of value now represented by unemployed workers and under-utilized suppliers.

The Venturesome Economy

The New York Times' "Ping" feature, by Steve Lohr, profiles Columbia professor Amar Bhide and his new book about technology funding in the United States (The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World). (That's not the business school in the background, by the way. It's Philosophy Hall. I admit the Rodin makes for a nice picture, but I also wonder why the Mead, McKim, and White buildings are almost always preferred for photographs over the Robert Stern.)

Bhide disagrees with the conventional wisdom. He thinks most Americans are much better prepared for the global economy than alarmist reports would lead one to believe, and thus there is little need for increased spending to ensure more Americans are participating in basic research. His opinion rests on the idea that many people are mistaken about America's strengths, which were never necessarily in top-level scientific research, but instead in the broad middle range: people without specialist technical training who figure out new ways to apply existing technology in the business and service spheres.

Bhide would like to see more emphasis on educating the people who work in that broad middle range, encouraging them to innovate, to think for themselves, to understand the principles of what they do so they might be able to improve how they do it. This makes a lot of sense.

What makes less sense is that we should stop worrying about whether Americans can compete/participate in that top range, where the most original innovations and scientific discoveries are made. Bhide seems to suggest that it doesn't matter where those high-level innovations occur, because they will be distributed globally no matter what. He then draws the conclusion that America should invest in its strengths (administration of, for example, retail businesses), in effect outsourcing the areas in which Americans are weak (areas which seem to include the kinds of innovation that require science and engineering training). This, however, does not follow.

Hopefully, that is a misunderstanding either on my part or on that of the reporter.

Dissent in Technocracy and Bureaucracy

I've been wanting a reason to link to Will Wilkinson's blog The Fly Bottle.  I disagree with him on a lot of points, and find a lot of his posts are over my head, but his arguments are good and his posts are interesting.  If you really are into many-screen essays on happiness theory, this is the place for you.

Earlier this week, he noted a counterintuitive observation made by another economics blogger: Technocrats in Singapore are more willing to criticize their government publicly than bureaucrats in the US are.  Wilkinson analyzes it in the context of democratic versus technocratic political systems:

In a democracy, policy shifts due to shifts in public opinion. Random changes in public opinion won’t do. They have to be coordinated. Opinion is coordinated through signaling and sanctions, both subtle and unsubtle.

So, as Wilkinson continues, a bureaucracy within a democracy is staffed by people who are chosen according to which segment of public opinion they personally adhere to (in other words, according to their political party or faction).  They are expected to represent, faithfully, something larger than themselves, and they are hired according to the likelihood they would be able to do that.  Whereas in a technocracy, like Singapore, Wilkinson argues,

In a Singapore-style technocracy, public opinion is just one of many constraints to take into account in formulating policy. But then public opinion can’t serve as the basis for a sense of the legitimacy of a policy or a policymaker

This means that what matters is competence.  If someone is doing the wrong thing, it is important to call him or her out on it.  Having an independent standard allows much more room for disagreement and intragroup criticism than a democratic system does.

That's all interesting, and I think Wilkinson has a point.  But I don't see so much of a difference between "bureaucracy" and "technocracy," on this question.  In modern states, bureaucracies are staffed mostly by civil servants chosen for their theoretical knowledge and technical competence.

I'd suspect the difference is mostly social.  When Americans work in large organizations, they expect to subordinate their differences to the group, and they prioritize getting along with their coworkers above expressing their individual opinions.  It seems counterintuitive in this context, because we have a stereotype that Americans are individualists while Asians hold the group in their highest regard.  But even in America there are contexts where dissent is praised, and it seems reasonable to guess contexts similar to those are the same across all cultures.

Detroit Bailout vs. Globalization

At TPMCafe, Steve Clemons of the American Policy Institute raises some interesting questions about the Detroit bailout w/r/t globalization.

GM said that it was taking all of the technology it could get its hands on -- whether from the labs or elsewhere -- and fully deploying it in China.

GM felt that this was a way to embed itself deeply in the Chinese economy over the next three decades and would keep the car manufacturer ahead of the more technologically-stingy Japanese firms as well as Daimler and Chrysler which had already had hiccups at that time in their China activities.

In a different realm, Citibank has been a leader in off-shoring, pushing more and more of its financial services support base overseas.

I'm not an expert on globalization, or for that matter, free-market theories generally, and I don't know how to balance America's role as a leader that can help developing economies grow, with the need to support American society as a whole -- including all of its members.  But I think his points need to be addressed.  Because the concerns Clemons raises are going to be shared by a lot of people.

The other day, I was talking to a handyman working in my house, and after asking me what I thought about the automakers' bailout, he suggested it wouldn't be necessary if people bought American.  His truck, of course, was parked right next to my reliable, fuel-efficient, short person friendly Japanese car.

I babbled for a little while about Japanese auto plants here in the US and how the Big Three are outsourcing to China anyway, how the American companies I and my husband work for have huge chunks of their workforce in other coutries already.  Then I whined a little about how tough it is when your position requires you to work with people in other timezones and you end up being on the telephone at 11:00 or 12:00 at night, sometimes on a regular basis.  But I felt like part of the problem: after all, we are management, practically -- or at least professional staff, which is close to the same thing.  I don't think what I said to him was helpful.

There's not much doubt of the fact that any bailout will require the Detroit automakers to become more efficient.  And there's not much doubt of the fact that becoming more efficient -- in the way the government's bailout will require -- is going to involve reduced costs and improved efficiencies.  And there's no doubt that means eliminating positions in the US and moving operations overseas.  And for those who remain -- one way or another -- getting rid of the old way of doing things and replacing that with something new and more rational.  How can this be made to look like a rescue to the people who are being asked to give up what they know?