Moral Hazard and Morals and Hazards

While the phrase "moral hazard" does not, I think, come from ethics (the concept originated in the insurance industry), moral hazard is actually a central and yet not-well-addressed concern in ethics. That is, moral behavior is almost always subject to abuse. That includes both mean-spirited abuse (con-artists targeting do-gooders, or bullies picking on someone who won't hit back), but also the more common, passive abuse displayed by homeless people who become content to live off of the goodwill of others who might otherwise be working--though, as a liberal, I guess I'm supposed to pretend like that is very rare. A better, and much more pervasive case of the latter emerges in Ezra Klein's discussion of Yglesias and Cowen's back-and-forth over replacing Medicare with block grants:

[Providing cash to be used at the recipients will instead of Medicare] has a lot of wonkish allure, particularly if you think, as I do and Matt does and Tyler does, that medical care is overvalued. But it misses the problem that leads to universal health-insurance systems: As a society, we are not willing to let people die painfully in the street, even if they have previously made decisions that would lead to that outcome. In reality, what terrifies all of us is what happens after someone takes the cash and then gets sick. .....

This is why Medicare is universal and the health-care law has an individual mandate. If we were willing to let people simply live with the consequences of their decisions, we could have a very different health-care system than we do. But we’re not — and, as a compassionate, rich society, I don’t think that’s such a bad thing. This is why we, like every other developed nation, are moving toward insurance solutions that assume an eventual need for health care. If we can’t say no credibly, then we need to say yes responsibly, and in advance. 

It's a fascinating point, and I think Ezra nails it. To understand Medicare, you have to go back to the reasons we care at all. For a true ethical consequentialist, the cash grant idea is probably right, since letting someone die isn't a problem if they received all the cash they were entitled to, and their choice to spend their healthcare money on something else made them happier on net. But for most people, the driving moral concern for Medicare is the one Ezra highlights--we don't like hearing about people dying when it could have been avoided. Period. And that is more of a deontological view--regardless of the greater universe of consequences, many people feel it's just wrong to let someone die.

But in reality, these "it's just plain wrong"  types aren't totally unconcerned with consequences, at least when they have some experience with the world--and that's because of moral hazard. Maybe at first we can maintain the moral stance that "it is always necessary to give money to those in need of urgent medical care"--but the truth tends to be not that we consider the statement in quotes is a categorical imperative, but rather that we can't stand unnecessary deaths, perhaps at a gut level. And thus as we learn that people might abuse fungible cash, the imperative becomes "provide cash when explicitly used to prevent unnecessary death". In a sense, we look for the most efficient means to avoid gut disgust, and to allow us to sleep easily. Welfare programs like Medicare should be understood in this context.

I wish more people involved in philosophy or policy research wrote more often about the detailed calculations people make--not in pursuing a consequentialist ethics--but rather in merely alleviating gut-level moral disgust. In particular, I wish we knew more about the implications of moral hazard-type situations for deontological views. Or at least were more willing to apply what we have been learning from psychological/neurological studies. I think that line of work would prove invaluable in understanding the dynamics of the policy debates that are typical of the modern welfare state.

Anacostia residents like Anacostia just fine, thank you

The GGW folks recently put the spotlight on streetcar plans in historic Anacostia, highlighting various proposals and popular responses. They note that, even if the streetcars manage to avoid increasing congestion and populated regions, some folks just don't want new folks coming in:

While some residents support the project under certain alignments, others oppose the project entirely. In addition to traffic and parking concerns, there was a palpable sense at the meeting that the streetcar is an unnecessary expense and will only benefit new residents.
 ...
Some residents articulated fears that the streetcar will bring wealthier, white residents to Anacostia, ultimately displacing folks currently living in the community. Others believe the streetcar will only serve riders from other parts of the District or commuters from Maryland. They have doubts that the streetcar will provide any new value to the existing community.

This line of reasoning leads to the conclusion that any projects that increase economic activity or attractiveness of Ward 8 are undesirable, because they risk attracting white people with money, who will destroy the way of life down there/"displace" current residents.

Now, as to the "white" part of the problem, which may just be speculation on the part of GGW, that attitude is indicative of a general complacency with the way of life in Ward 8. Often times, white is equated with wealthy, but it's important to remember that there is a sizable black middle class in DC, and they tend to comprise the population of people who complain at Ward 8 public forums. I've mentioned this before, but I suspect that black people east of the river enjoy their lives there more than white people suspect, and by letting the latter propagate those beliefs, the former can continue to enjoy their neighborhood without newcomers getting in the way and changing things up. Hence the loathing of a streetcar that would shuttle in capitol hill yuppies, and thereby let the secret out. Note that, among the black community clued into the benefits of live in Anacostia without the yuppie glitz, the middle class may already be competing for housing and displacing poorer residents, but you probably won't ever hear about it. This is all speculation, and not to say that those attitudes are unreasonable or, rather, unnatural.

As far as displacement goes, that might be a real concern. In the end, if you want to help people, you need to help people, not just their environs. In theory, most benefits of neighborhood improvements will be captured in housing prices, so the improvement is just a transfer to the homeowner (who may be a landlord).  Of course, the proximity of historic Anacostia to downtown makes it intrinsically valuable. On the one hand, one might argue it is the duty of the city to make the best use of that value, and if people have to move because of priciness, so be it. On the other hand, one might suppose that whatever development is going to happen is going to happen due to that value, and streetcar planning should factor in the preferences of future as well as current residents. On the third hand, if you really think your obligation is to current, low-income residents, then the best thing you can do is sabotage any sort of economic development, since, after-all, low-income people simply can't afford nice things or rent in nice neighborhoods. At least let them live in squalor in a culturally rich, centrally-located neighborhood close to jobs, as opposed to diaspora in the slum-burbs. But any city official is going to have to choose one of those lines to tow.

What Economics Doesn't Have to do with Libertarianism

Do economists really believe that they have anything to learn or say about philosophical libertarianism? I mean, free markets make sense, but "taxation as theft" type talk?

By "philosophical libertarianism," I refer to the deontological belief in the value of liberty and property--that violating liberty and property is wrong in and of itself. Major thinkers along those lines include Locke, Nozick (circa the mid-70s), and Rothbard. I recall Mankiw discussing Nozick as the counterpoint to Rawls in his intro textbook chapter on redistribution, as if Nozick presents a point in Anarchy, State, and Utopia that should inform economic discussions. And Bryan Caplan likes to remind us occasionally that reasonable people sometimes think that taxation is theft.

Economics as a discipline, though, is explicitly focused on economic outcomes. Economic theory is entirely, exclusively about the consequences of economic interaction for the agents involved.  Normative economics, then, can only be carried out under the umbrella of consequentialist ethics/political philosophy. That is, economics can only guide us to "better outcomes" if we are judging on the basis of outcomes. So the economist might choose an ethical framework, be it classical utilitarian, or Rawlsian, or egoistic, but it never be the type that Nozick or Rothbard have supported. Why? Because once you become concerned with "procedural fairness" and Kantian categoricals, then outcomes don't matter, and economics is therefore entirely irrelevant.

Now, if you are a textbook authors and have latent libertarian sympathies, maybe its worth warning incoming freshmen that Nozick might be right, and it might therefore be worth jumping ship before committing too much time to irrelevant study. But beyond that, I can't imagine why so many economists like to talk about those guys. At least any more than they like to talk about Islamic conceptions of sin and duty or Hellenistic stoicism.

Armchair Follies

The Economist's Democracy in America blog posted recently posted a response to Stephen Landsburg's (author of the Armchair Economist) outrage that an opponent to a constitutional ban on gay marriage made a rhetorical appeal instead of offering statistically significant results. Landsburg had said:

In a video that’s begun to go viral, University of Iowa engineering student Zach Wahls attempts to refute this notion [that gay people, on average, are less successful as parents] without offering a shred of evidence beyond a single cherry-picked case (his own) to prove that children of gay parents sometimes turn out just fine (except, perhaps, for their ability to reason)...

What’s particularly disturbing to me is all the chatter about how eloquent this kid is, as if eloquence in the service of intellectual misdirection were somehow something to be admired.

 The Economist blogger nails the response:

He's got no problem with gay marriage, as far as I know. And he certainly doesn't think people should undermine their honourable aims by behaving irrationally. So what gives? My guess is that, like a number of right-leaning economists, Mr Landsburg has a regrettable tendency toward tone-deaf, context-dropping, contrarian provocation based on an unexamined assumption that this is what it means to be bravely rational. It is not.

 That same thought kept popping into my head while reading The Armchair Economist. Landsburg and his intellectual brethren frequently make interesting analytical observations, however, the lessons and judgments that they seem to think follow are, well, tone deaf. His stubborn resistance to leaving his armchair allows him to construe the problems he wants to solve in a way that simply doesn't recognizably reflect the real world. Moreover, it allows him to act like everyone else is less rational (stupider, really) than him, because he never really stops to think about what everyone else involved might be thinking or what is really motivating their positions. But it's hard to take someone like that too seriously.

I'd also note that one of the major features that distinguishes right-wing from left-wing types is one's willingness to give other parties the benefit of the doubt--and it's probably a more important determinant than belief in "individual responsibility."

My Preference for Endogenous Preferences (which may be endogenous)

The recent financial crises has resulted in a chorus of voices claiming that we have exhausted the limited explanatory power of neoclassical economics. The leading problem with that view, most people seem to think, lies with the oversimplifications inherent to the rational actor model. As a result, there has been a wave of hype and excitement about the nascent fields of behavioral economics and neuroeconomics. That kind of out of the box thinking seemed like it could blaze the trail to a new kind of economics--an economics in which new understanding of perplexing economic and financial trends that had eluded neoclassical thinkers would finally come about.

But it wont. I think. The thing is, the primary paradigm of economic research suffices to account for many market phenomena. Of course, the original formulations of neoclassical theory left some phenomena unexplained (say, certain auction behavior). However, progress on those questions came not in the form of a true revolution, but rather a tinkering with the standard tools of rational actor theory (e.g. the development of game theory to explain auctions). To draw from Kuhn, one should distinguish between progress within a paradigm and a true scientific revolution. The development of game theory, institutional economics, and information economics were all cases of the former--the standard toolkit was expanded, but not replaced. That kind of progress has gone a long way (at least for explanatory purposes, if not forecasting). A true revolution requires a new paradigm that fully replace the old one, while providing an avenue to explain new phenomena.

Right now, behavioral economics constitutes a series of experiments that show that individuals behave in "predictably irrational" ways contrary to many predictions of standard economic theory. However, what's lacking is a consistent grounds for a new understanding of economies. What effort has been made to create a conceptual frameworks in which to place experimental findings has been akin to earlier efforts to tweak the existing paradigm--the goal is to find concrete rules which economic actors follow, be it rational maximization or some other heuristic--either way the mode of research stays the same.

Nonetheless, I do think that economic research is reaching a stasis point. Most papers these days are pained to find some setting of interest which lends itself to economic analysis--be it auctions of oil wells, regulation of a certain kind of forest, or new tax breaks in Swaziland--but the pace of progress in our understanding is slowing under the current framework. The aftermath of the financial crisis and the recession has made this clear, and the failure of neoliberal development policy has done so as well.

So I've been thinking: if there were a revolution in economics, what would it look like? What about the standard toolkit is holding economics back? It's worth mentioning that Kuhn found that most ideas that became revolutions were not new--in fact, they often were as old as the previous paradigm, but were never really necessary enough to be fleshed out. So it's probably something already out there.

My bet: endogenous preferences.

What do I mean by that? What unites all economic theory is that characteristics about the individual are treated as fixed and predetermined, or exogenous. Most importantly, our motivations are predetermined biologically (genetically, really), presumably. As if our conception of desirability and experience of satisfaction is absolute, and not materialized in our relationships with others.  As if fashion is absolute. As if social psychology doesn't exist.

And that's nuts. That sort of oversight should be implicated in the failure of economic forecasting, some of the "revolutionary" findings of behavioral experiments, and, above all, the inevitable failure of economic imperialism. And it's not like people don't know that its nuts--economic anthropologists and sociologists have been screaming at the top of their lungs about this stuff for decades, begging to be heard. These ideas are definitely out there, waiting for their moment.


Tyler Cowen recently  wrote a very good post on the related subject of methodological individualism (and the lessons to be learned from Foucault) a few weeks ago.  In economics, everything can be reduced to the behavior of individuals, just as in physics researchers boil everything down to the behavior of basic particles. But, as Cowen notes "actual historical explanation relies on the use of broad categories, classes, and exemplars, and in a manner which is not logically reducible to statements about individual beliefs and desires." Why? One important reason is that's how people understand the world, and that informs the decision-making process. If economics really wants to go imperialist in the pursuit of better development and business cycle models, they are going to have to deal with that fact sooner or later.

Maybe I'm overselling endogenous preferences. In truth, endogeneity of key individual attributes can be brought under the individualism umbrella. With sophisticated mathematics, one could develop an economic model in which individual attributes are both a product of external factors and the primary units of analysis. It would be very difficult to tie those models to concrete cases, but I bet it could be done. Above all, those models would create a framework for better understanding the world, even if it has to remain an abstraction--much as Walrasian equilibrium theory did. Would that sort of shift constitute a true revolution, then? It's hard to tell, but I'm guessing that sort of innovation, coupled with new inputs from biology/neuroscience, would result in a new sort of understanding of socio-economic phenomenon, and a new paradigm for research at that. The result could wind up being a framework which accounts both for run-of-the mill economic phenomena and for the strange results coming out of behavioral labs. Neoclassical economicsCBO to abandon DSGE or I/O models anytime soon).

When you search for "endogenous preferences" in google scholar is this one by Samuel Bowles. Bowles is now at the Santa Fe Institute, whose researchers the WSJ's has hinted are, in fact, the best promise for a new economics.

Economics Doesn't Care About Your Free Will

A while back, the New York Times ran a few interesting pieces on free will as part of "The Stone", their philosophy blog feature. Now that the academic community has come to accept that our minds are essentially physically determined systems, though, the debate quickly becomes tired. The big questions that lure most people to the subject--i.e. "do I really have agency, or are my actions predetermined?"--have been set aside and replaced by legalistic, technical discussions about responsibility and ethics--"given that the mind is a product of physical processes governed by the laws of physics, how can one assign responsibility for a wrongdoing?" However, I suspect that outside of academia, most people still carry with them the question of whether or not their thoughts and actions are really predetermined. Determinism is a hard pill to swallow.

What I find really interesting, though, is that, from the perspective of rational choice theory, our actions are effectively predetermined even if we have complete free will. In economic and decision theory models, people come to the table with preferences and a set of choices that entail various costs and benefits (and, to be accurate, certain beliefs about their situation). Even if individuals have complete free will, as long as people do what they are motivated to do as guided as their beliefs (this is what I understand to be meant by "rationality," and it is tautologically true), every decision and action will be a function of their beliefs, values, and choice set. That is to say that even if one has complete agency, the use of that agency is predetermined by one's innate preferences and the outside environment. Therefore, even back in the days when one could claim with impunity that the free mind was a thing apart from the brain, behavior could still be described as deterministic.

Admittedly, this account focuses narrowly on instrumental rationality. One might claim that we can escape from rational choice determinism through the choices we make about our values and beliefs. But that begs the question--on what basis are those higher-order decisions made? If we follow some higher ethical code as necessitated by rationality, then that code is determined outside our minds, and there must be some basis for us choosing to do so. It seems likely to me that, as long as the individual in question is an agent with a unified, self-consistent thought process, some sort of determinism will necessarily result. Of course, the brain is not really a unified, self-consistent thought process, but then we're getting back to the basic questions of the nature of brain processes and free will.

What's worth noting, though, is that in economic models, agency doesn't really matter either way. If we were somehow granted free will after lacking it beforehand, all that would change is that we would get to feel good about having free will. Life would go on the same.

Rising "Tide"

As someone who likes riding trains and travels to Norfolk at least once or twice a year, you'd think that I'd be pretty excited about "The Tide," Norfolk's almost-ready light rail system. 

But, as the people I know who live there are quick to point out, it doesn't really go anywhere that useful. The current route traverses the downtown area (mostly street-running), and then follows an old abandoned right-of-way through sparsely populated areas in the south of the city, and then just kind of... ends. Sure, there will be some transit-oriented development in those neighborhoods, what current residents do live there will have greater access to downtown, and (provided service is regular enough), it will be easier to move around the downtown area without a car. And yet, there is nothing particularly special or promising about the areas around the end of the line except that they surround a convenient right-of-way. 

Until you look at a larger map. While it's true that the right-of-way doesn't lead anywhere in Norfolk, the old right-of-way continues three miles directly into the heart of Virginia Beach's recently developed "Town Center," which is now a major commercial center and heart of one of the densest residential neighborhoods in that city. (On the map below, the red line is the current route, and the purple line is the continuation of the ROW to Virginia Beach Town Center). What's more, is that the right-of-way continues directly to the Oceanfront region of Virginia Beach, which is a major recreation/business destination. While connecting downtown Norfolk to a few random neighborhoods might only have a modest impact, connecting the largest commercial centers (passing through the most densely populated parts of Virginia Beach) in a region plagued by increasing traffic congestion will likely be a great boon for the metro area. 

So, yes, the current system route looks pretty silly. But Norfolk probably didn't build the system to look like it does now--they built it knowing that Virginia Beach would be lured into completing the line. The original proposals called for a line connecting the CBDs of Norfolk and Virginia Beach, but Virginia Beach pulled out in the end. Norfolk made a bold move in going ahead--the route they built will stand on its own, but probably won't flourish without a Virginia Beach extension. But with the line now built, an extension at least to the Town Center is a pretty tempting prospect for Virginia Beach. And it looks like they're starting to give way--a year and a half ago, Mayor Sessoms went ahead and arranged for the city buy the remaining section of the right-of-way. And the city's 10-year moratorium on the issue is finally up. Now one can only hope that poor management of Hampton Roads Transit doesn't botch it.

In the meanwhile, Norfolk will just have to make the best of the system they have--if it does actually get running.