I've been wanting to write something on this a really long time ago but I couldn't find time to do so. It's actually about application of the concept of confounders in our daily lives and learning. It is somewhat related to John Kay's Obliquity, which makes for a nice and easy read (and I highly recommend it to any self-righteous economist who thinks everything in the world is just about getting enough incentives in place). I first learnt about confounders in LSE100 (a course at LSE that I thoroughly enjoyed, raved about and accidentally did well enough at). It was almost common sense to me - of course there are things we cannot observe causing two different things which we could jointly observe, and would thus associate, possibly sometimes fabricating some sort of causation story for. Here's an example from the Wiki page:
We find that increase in ice-cream consumption is correlated with increase in incidence of drowning and we think that eating ice-cream may cause drowning (or vice versa) when it could be that people eat ice-creams on hot days and those are the days where more people take a dip in the sea or go to beaches and thus we observe more people drowning at the same time.
Perhaps that wasn't all that convincing because it was an example that is supposed to be obvious. Complexity arises when there are more than one variable involved and maybe when we are using proxies imperfectly. We make such mistakes not only in statistics but just inferences on a daily basis. We do make very smart guesses in our daily lives, such as that a ring on the fourth finger probably indicates the person is married but then of course it depends on whether that ring looks like a wedding band or some plastic accessory. The ring is the indicator and the marriage is its indication. But we obviously know that marriage is not about just the ring; and that aiming to get ourselves a ring doesn't buy us a marriage. Unfortunately, we sometimes behave this way when looking for a job.
As an Economics student in LSE, it is difficult not to be distracted by the vocal crowd of students who goes to networking receptions of companies from the financial industry - the same people from societies with vested interest in finance, banking, investments, etc. These are the people who may spend more time in interview rooms or assessment centers each week than classrooms or lecture theaters. These people are chasing jobs, or rather, those that gives them the money, prestige, and the external envy or perception of intelligence. Those are the indicators. And they think this indicates happiness or success (think about the last time you imagine you're in the shoes of some hot-shot banker and say to yourself, 'how nice it would be to get to drive big cars, buy big houses, don on expensive suits even if it means to be hated by the rest of the economy and insulted by the gutter press'). The joy and the satisfaction honestly is unlikely to come from the work itself for most people. Often, M&A bankers spend months studying potential deals that will not be struck and slides that are made simply goes into archives unseen or examined.
Stephen Ridley's story is an interesting analogy and many people complain that not all have the kind of talents that he did and would be able to achieve an alternative sort of 'greatness'. That sort of status associated with success is what people think makes them happy. In other words, money, together with the prestige, social status attributed to the work/job are the indicators, and they are confused with its indications - happiness, success, a good life. When things are laid out these way, we know there are confounders - all those money, status, 'good' job are nice things to have and maybe it just seem that people who 'have it all' are happy. They're expected to be, everyone thinks they are happy at least. You might know it when you get there; or you can try and discover the confounders - the little things in life that truly cheers you up. The autonomy over your time, the people you get to hang out with (your true friends, not the cool or rich people you hope to be friends with), the pure excellence in performing your job, learning to love the work you do and seeing the meaning of the things you do. Sure, you can get a high-flying job, then grow to like it, deal with its frustrations and end up being happy. More often than not, if you're struggling to even get there, it is quite likely it isn't for you in the first place.
I've written a lot on happiness (see here, here and here). We know of the confounders that has been leading us to the wrong things but there are more. A spirit of excellence might bring you a great job that pays well but it is the spirit and keeping on with doing what you like that makes you happy. If someone who doesn't like the work you do come to establish a relationship between the work itself and the happiness or worst, the pay and the happiness, he'd come to be very disappointed when he tries it himself. Likewise, some people are happy making money, they like the idea of getting good returns by taking risks and they accumulate savings/capital which they use to reinvest (ie. take more risks) and generate greater returns. They are rich and happy but they didn't derive their happiness from the riches. In the chapter 'Why the rich isn't necessarily the most materialistic' of Obliquity, John Kay points out that rich people usually amassed their wealth not so much because they were working for it but for something else they really believe in and can passionately engage themselves with.
Don't be misled; I'm not saying that appearances are always deceiving and that you should be cynical about all sorts of indicators; clearly when the GDP per capita of US is higher than that of China, we can trust that US is richer than China, at least financially speaking, and the bucks they're getting from the output their produce (however worthless they might be in your opinion). But that does not necessarily suggests the people in US are living better lives and further inferences about happiness cannot be drawn. So spend some of your life finding confounders and establishing a more reliable relationship between the variables of your life and what your objectives really are - then shut out the noise.
Moving on from Trade imbalances, I started work writing on prices around the world and was examining the Big Mac Index from The Economist when I discovered that some other geniuses at UBS has actually moved further to demonstrate differences in purchasing power of average wage-earners by calculating the time taken for them to earn a Big Mac in their country, which is totally cool! This is probably pushing my nerd reputation a little too far but anyways, it's worth a look.
The latest edition was published in 2009. And there you can see glaring differences in the standard of living and welfare of workers (albeit assuming that Big Macs were what the people wanted). The average Nairobi worker had to work more than two and a half hour in order to enjoy a Big Mac while the dudes in Tokyo, Toronto and Chicago could enjoy a Big Mac every 12th minute they worked. That is a difference of more than 12 times! By the time the Nairobi worker sits down to enjoy his first Big Mac, these other dudes would have enough money to buy more than 5 Extra Value Meals in their markets respectively.
If we do a slight comparison with the situation in the 2006 report, you'd realise further that while the guy at Chicago spent the same time working for a single Big Mac but the guy in Nairobi worked less in 2006! He became worst off 3 years later. In fact, he only had to work one and a half hour for a Big Mac in 2006. Apparently prices have rose so much more than wages that the poor Kenyan now have to work an extra hour before getting to enjoy his Big Mac.
Of course, this also reflects productivity differences between countries and talking about that, it's time for me to get back to work.
The UBS reports and updates are available on this page.
Competition is definitely cool, it rids the world of crappy stuff and drives everything towards excellence. The article by The Economist makes it appear as if aviation industry is only driven to compete when there is changes in technology that gives one or another a particular advantage. In many sense it is true, but with the airline industry seeking to reduce emissions, the aviation industry will have to make changes to keep up. It is interest that the main force outside the control of Boeing and Airbus is actually the competition that is taking place in the aviation engines industry.
It is not so obvious that throughout the supply chain, firms competing are actually pushing the next level of the chain to work harder as well. For industries like aviation where development is slow and orders take ages to complete, it was more obvious when firms are trying to take on new strategies or making more radical changes. At least they don't really have market segments to think about.
In James Surowiecki's recent article about the iPad and the shrinking middle market, he highlights how businesses targeting the middle market is finding themselves increasingly squeezed as the higher end products gets cheaper and freer information has made it difficult for firms who are making the 'ordinary stuff'. Competition have made the really good stuff cheaper (or cheaper stuff better, much like the way the aviation engines are trying to beat each other and end up improving the overall product quality of the aviation market) and information about products way more accessible to people. Things have either become cheap and good enough or work so nicely that you have to pay more; there is no point buying something in-between.
In many sense, this matches the widening income gap of the consumer market.
Clive Thompson from Wired wrote a great piece on Groupthink; the main question is whether you can persuade people to like something by convincing them that others also like it?
And the experiments cited in the article gave interesting results that leaves us somehow worrying if our 'destinies' are determined by pure luck. It appears that for the very best and very worst, evolutionary forces would more or less elevate or eliminate them in long run but for most of the ones in the middle, their fate could be a matter of chance.
The article seem to imply there's little way out of the problem of groupthink of such grand scale; it is suggested that the use of social cues for many decision-making is wired into our nature.
I was looking for George Arkelof and Robert Shiller's Animal Spirits in the library but it was on loan so I decided to look for something else in the Call Number 330 (which some library-goers might note is the 'Economics' section) area. I stumbled on 'Free Market Madness' by Peter Ubel.
Ubel's book is a pretty simple and short one, I took only one and a half day of on-and-off reading to finish it, one of my fastest timing for a non-fiction. Admittedly, the text and paragraph spacings are pretty wide and the book is thin for a hard-cover one. It is largely about behavioural economics, a topic which I hardly have a hard time understanding so the speed by which I finished the book didn't really surprise me. Nevertheless, I hardly consider Ubel's Free Market Madness to be that good a book.
For a start, I understand that Ubel is trying to make a case for government intervention in the economy for markets where consumers are ill-placed to make wise choices and where market imperfections like the inadequacy of useful information and the apparent misalignment of producer's interests and consumer's interests are significant. He focuses on the case of junk food causing obesity though he touched on other cases such as insufficient retirement funding and overspending on branded drugs. Unfortunately, while he makes a good case for the fact that humans are not entirely rational (something we all know at least implicitly), based mainly on the study of other behavioural scientists and economists, he didn't give very outstanding or original proposals on how to get around this problems. Even then, he fails to make a good connection with how the conflict between the short-term-self and long-term-self can be resolved by the governments; the question of what sort of happiness/well-being (long term or short term) the 'Big Brother' he is advocating should maximize it left to speculation by the reader.
The little technical issues in the examples he cited in his book is by and large criticized by David Gordon, senior fellow of the Mises Institute. Austrian School economists probably think that no one can be innocently obese; it takes two hands to clap and producers and consumers must agree on the transaction for it to take place. In other words, people are obese through a process of attempting to maximize utility within their own accounting. On the other hand, Ubel thinks that the faculty accounting on the part of the consumers need to be rectified - in other words, internalities need to be addressed. The problem is we cannot exactly agree on which accounting is correct; after all, if one's belief in the goodness of a product can provide additional positive experience in consuming it, the faculty accounting can have such a self-fulfilling effect. I believe I have the tendency to agree with the ordinary economists that humans would have a fair degree of foresight and self-control and in an event where they lack such discipline and ability, the market punishes them very much in the way evolution eliminates those who lack the fitness.
His proposals are rather unoriginal, citing stuff like fat taxes once mentioned in The Economist, default options, persuasion campaigns (largely moral suasion) and possibly outright ban. He did discuss implications on liberty and such but doesn't dwell much on it - often it seems to me like he's saying 'I just want everything to be good and right, I don't care how'.
I do agree with Ubel, that humans in our age needs more self-control and the public's awareness of the ills of the markets, the ills of different products that are so ubiquitous in our world today needs to be improved. This self-improvement in discipline and improvement of public knowledge can come from bottom-up rather than top-down. After all, given the circumstances today, it is likely that the group with better knowledge of the markets, those making wiser market decisions and the ones who have better self-control is going to thrive. Parents will have to recognize that and respond accordingly (not too much to hope for given the limited rationality of humans I hope) when educating their children and developing them. And I must have to say that in markets like healthcare and pharmaceutical products, doctors like Ubel himself will have to take the responsibility of protecting their patients from the ills of the market/industry. The imperfect information is really too serious in this market and Ubel is right to say that doctors are practically making decisions for patients - doctors' recommendations are almost equals to patients' choice (doctors can't possibly give their diagnosis to patients and get them to choose medicine for themselves). The government can only do so much to protect the doctors from manipulation by the industry and thus defend the interests of the patients. Physicians themselves will have to take the big step to be responsible doctors.
On the whole, Free Market Madness gives us good idea of how behavioural economics came into being and how traditional economic analysis of indifference is difficult to apply in today's complex world. As a result, rationality of human beings becomes undermined today. Beyond that, it makes a good alert on the problems humans might have with markets that makes us poor economic agents - in long run we will get exploited somehow. We will need to exploit back by becoming producers of certain exploitive products ourselves or try to defend ourselves through self-restraint and aggressive self-education. Otherwise, if the book is hoping to inspire any sort of action, it might need to be much more.
I've previously read Shock Doctrine and written a review on my personal blog; it was a time before ERPZ started and became active. Here's a reproduction of the original review:
After 2 months of reading I finally finished Naomi Klein's powerful book, Shock Doctrine. It was a long ride deep into the dark old mines of history on the different 'economic revolutions' all around the world: Argentina, Chile, China, Russia, Bolivia and Poland. It was a book that was written with intentions to put down Milton Friedman, clearly anti-corporatist and in some sense, anti-globalization. From this book I understand finally how the term 'anti-globalization' have been mis-interpreted by so many people, even myself. I once thought that it means being against the integration of cultures, economies and companies but then I realised it gets way deeper than that.
The idea of anti-globalization is usually used to mean being against the way the phenomena is taking place in our world, that inequality is rising and corporates are like taking over the world while people in poor countries work in sweatshops, suffer in silence and endure the hardship only to realise generations later that nothing changes. It is the discovery of a certain helplessness in the bottom layer of the world. Shock Doctrine is clearly about that, and more.
In a clear but otherwise way too long writing, Naomi presented a very complete picture of how pure ideology-driven economist are used by corporates and government to advance their self-interest. And of course, in a capitalistic perspective, self-interest is just profit and money. She didn't over turn free market theories on how a perfectly free market is able to dilute power and increase freedom but she did show that the approach that allows for extreme free market is not exactly compatible with democracy and worst of all, economist have been naive about how a free market can be brought to exist. Case after case cited in the book, firms are privatize just be selling it out to the private sector without proper valuation of the assets and this hasty act would not only delay the attainment of a market equilibrium that would be at least more socially optimal but also create new forces that increases the inertia of the market. In other words, it makes the market less free.
In the area of corporate America and politics, Naomi is suggesting that the corporate people have penetrated politics too deeply with CEOs becoming civil servants in top positions of the government and politicians being lobbied by powerful companies with CEOs receiving incomes more than 400 times the average person on the street. And because of that, government becomes ran like corporations, public sector jobs being slashed and direct public spending is reduced while outsourcing (locally, giving contracts to companies) all the functions that can be done by the private sector. Worst, it is infected by a touch of cronyism; and this probably explains why contracts are rarely distributed by bidding and that the contracts concentrate in the hands of the few big firms that are always 'aiding the government' with 'planning'.
It has been a good read anyways and while Naomi Klein has a rather extreme stance, my reading of Joseph Stiglitz (Globlization & its Discontents as well as Making Globalization Work) have helped me appreciate the gravity of the matters she was talking about and I could understand her thinking. As always, the writer do give us a gleamer of hope about what the future may turn out to be when the 'Shock Wears Off' and how we can prevent similar stuff from happening again. I would recommend this book for people who have no fear of heavy non-fiction reading, a thorough interest in learning how and why corporate America is seen in bad light.
By Wei Seng
Paul Krugman's article, published in The Straits Times, regarding the 2000s, gives quite a bit for thought. Paul Krugman is a famed American economist from Princeton who was awarded the Nobel Memorial Prize in Economics in 2008 for his theories on trade and economic geography. I have always loved to read his articles in The Straits Times because they have always been very insightful and succintly written, and always hit the nail on the head. This article that I introduce here is no different, but it's slightly different in tone from what he writes.
Usually, he adopts a rather neutral or slightly positive tone in his writings, even if they are regarding the economic crisis today (he studies economic crises, hence his expertise in commenting on them). But in this article he takes a rather pessimistic, negative view towards the decade that just passed us: the Noughties (2000s). He proposes calling it 'The Big Zero' because 'nothing good happened' and 'none of the optimistic things we were supposed to believe turned out to be true'.
And then he justifies with some general statistics based on America: almost zero job creation, private-sector employment decline, fall in median household income after adjustment for inflation, zero gains for houseowners, zero gains for stocks. Read the article for moredetails, but we all have seemed to come back to square 1, in 1999, or gotten worse off. So what's with all that optimism about the economy?
By right things were supposed to go well. There was confidence in the financial system, expressed by Lawrence Summers in 1999. Summers is, by the way, the current administration's top economist and in 1999 then deputy Treasury secretary. He believed then that America had 'honest corporate accounting', but this seemed to just vapourise if we look at this century. Even before the current financial meltdown, much earlier on there was Enron and WorldCom, two large and supposedly reliable firms that were exposed for dishonesty.
And then American politics does not seem to have a solution to the problem. The Democrats try to seek compromise in what they seek and their ideas are vehemently opposed by many as being too socialist, while the Republicans seem to believe that the solution to the problems caused by 'tax cuts and deregulation' is more 'tax cuts and deregulation'.
Certainly not a very inspiring decade. But this restricts itself to America of course. I must say that for most other countries it was probably not this bad. If we take the example of China, to call this decade The Big Zero would be to forget its ascent onto the global arena as a superpower. So... the Americans have it bleak but the Asians are having it better.