Tag Archives: economics

Why the world has gone crazy

Do you feel like the world has gone crazy of late? I do. It doesn’t seem that long ago that Western civilization was capable of making relatively rational political decisions that crossed party lines and balanced priorities. Now all of a sudden, we are in a world where people cheer for Donald Trump even as his trade policies destroy their jobs, or cheer for Brexit as it threatens to obliterate their livelihoods, or doubt climate change even as they either roast in overpowering heat or freeze in a roaring polar vortex liberated from our broken North Pole.

Just watching this weird collective calamity unfold freaks me out, and if Twitter is anything to go by, I don’t seem to be the only person feeling this way.

So what’s going on? What happened to the world? When did our society get so very stupid? I believe there’s a simple explanation, and I’m hoping that sharing it will help.

Human beings are the most dominant species on the planet not because of our intelligence, I’d propose, but because of language. Neanderthal man had a larger cranial capacity than Homo Sapiens and may well have been more intelligent on an individual basis, yet we out-competed the Neaderthals handily. Why? Because human beings are both smart and social. Language allows us to propagate information and learn from each other to an extent that no other species on Earth is capable of. We think and act collectively, and that makes us unbeatable (to date, at least).

However, just because we have intelligence and language, that doesn’t mean that the rest of how we share information is fundamentally different from the way that any other species does it. There are a lot of social species that can learn and cooperate. Ants and bees are damned good at it. Huge shoals of fish adapt in milliseconds to avoid predators. Vast herds of wildebeest direct themselves to water sources unknown to most in the group as if by magic.

The mechanisms by which all these species make decisions are pretty similar. You start off with a few individuals expressing a preference or an idea that their group-mates then start to copy. As the animals mingle, the good ideas (usually with a few more adherents) tend to propagate faster than the bad ones (with less). Eventually, almost every member of the group is behaving the same way and a collective decision has been made. This mechanism produces decent decisions an amazing amount of the time. Try Thomas Seeley’s Honeybee Democracy for an astonishing account of how it works.

As it turns out, there is plenty of evidence that human beings use this same copying rule. We mimic each other’s choices far more than we let ourselves believe. In his recent book The Formula on the social causes of success, Albert-Laszo Barabasi makes the case clearly. The Knowledge Illusion by Sloman and Fernbach goes into greater depth on the same topic. Or for even more compelling evidence, try Robert Cialdini’s classic book Influence.

And why do we mimic each other? Because it’s an incredibly cheap and effective way to coordinate. The reason why nature employs almost the same algorithm in such a large number of unrelated species is because it’s the easiest one for natural selection to pick out. It would be weird if we didn’t copy each other contagiously. After all, that’s what language is basically for.

But there’s a problem here: we no longer live under the conditions in which we evolved. And the conditions we have now are basically a perfect storm for shitty decision making. Let me explain.

While I was briefly working at Princeton, I had the great fortune to meet and interact with Iain Couzin and the members of his lab. Iain was a pioneer in the study of how social animals make decisions. I watched a terrific talk by one of his postdocs outlining the specifics of the mingling-copying mechanism one day and thought to myself: I bet it doesn’t work on networks.

What I mean is: I suspected that the mingling-copying approach to group choice-adoption would work really well when animals were always moving around and encountering new opinions, but if you locked animals onto a social network, the method would start to break down. Why did I suspect this? Because if you’re always copying the same people, local opinions will reinforce. It’s going to be much harder for good ideas to propagate through the whole group because they’ll face bottlenecks and blockades. In a social network, there are only certain routes from one person to another. It might be that the only way for a good idea to reach the people it needs to convince is through someone committed to an idea that’s fundamentally at odds.

It only took about two hours of coding to both reproduce Couzin’s basic result and demonstrate that my suspicions regarding the effect of social networks were correct. Furthermore, the bigger the network, and the more biased the distribution of node connections, the worse the decision making got. (In a biased network, a few nodes have loads of links radiating out of them and most nodes have very few.)

Then, when I put the animals with the bad ideas on the nodes with the most connections, the decision-making went straight to hell. All the benefits of copying each other went out the window. Suddenly,  bad ideas were winning all the time.

This is a problem, because that same mingling-copying algorithm in our heads encourages us to build social networks that have exactly the wrong kind of bias. These networks are what’s called ‘scale free’, another term that comes up in Barabasi’s work.

Imagine that you’re choosing some music to listen to. You ask five friends, and three of them happen to recommend the same artist. You’re then more likely to listen to that artist and than the others you were given, and also more likely to share her work with the next person who asks. This means that those nodes (artists) with a lot of links (attention) tend to get even more. You’re more likely to find yourself listening to Taylor Swift than a local band, for instance, unless you’re trying really hard to do otherwise. Similarly, you’re more likely to choose Google for a search engine than DuckDuckGo, and that’s going to affect what you subsequently see. As technology has advanced, our tendency to bind ourselves into these kinds of social networks has exploded into a kind of digital pandemic.

The upshot of all this, in case it’s not already obvious, is that our natural collective decision-making instinct, when combined with technology, creates networks that degrade the quality of the decisions we make. Fortunately, we seem to be noticing. The push-back against the effects of social media have started. But unfortunately, the problem doesn’t end there.

This same decision-making feedback effect drives how society allocates money to people. We assess how much a person is worth by the amount of success they already have. So, successful scientists get more rewards heaped on them. Painters who are already in the right galleries get into the right museums. And CEOs trade up to new positions with ever higher pay. It’s a feedback effect baked into our very nature as animals because we simply don’t have the time or information necessary to assess everyone exclusively on their merits.

(I can tell you from personal experience that my novels were taken more seriously after I worked at Princeton than I was before, despite the fact that the novels in question were written before I worked there. Princeton is a magic word that people use to assess likely intellectual aptitude because that’s cognitively much cheaper than trying to make a fresh assessment.)

We make up stories, of course, to justify the worth we allocate to companies, individuals, artists, etc, but stories aren’t science, and the science of how we make decisions is well understood at this point.

This is not to say that talent doesn’t count. You can’t even run a functional business unless you’re competent and hungry. Just like you can’t get your painting into even one gallery without some artistic ability. Achievement is hard work and the skills we need to succeed are very real. But those traits are just the table-stakes for the game of rich-get-richer success-roulette that follows. People consistently underestimate the effects of social feedback, just like they consistently underestimate how skewed wealth distribution curves actually are.

This is why our society is increasingly shaped by a small number of billionaires and a very large number of everyone else. Which is unfortunate, because nothing affects a person’s incentives like how much money they have. As a result, what looks like a sensible policy to the people with the most social power is inevitably going to diverge from what everyone else thinks is right, or indeed what’s actually objectively a good idea.

Of course, the more power those central individuals have, the louder their voices and the more likely that their opinions will affect decision-making. On top of that, those people directly connected to very powerful individuals have a massive incentive to support the beliefs of their bosses, otherwise their positions relative to social competitors are jeopardized. This drives the belief-systems of billionaires further away from the consensus understanding of what’s going on. They just don’t get the benefit of all the facts flowing through the rest of the social network. Consider the recent Time article on Donald Trump’s intelligence briefings for an example of what this looks like.

The upshot of this is that we make billionaires dumber, the more we pay them. This is not speculation or analogy, but a quantifiable impact you can model. The more attention billionaires receive, the less able they are to process information. And the more we power we give them, the more they’re likely to gain. And this is why we are in a global runaway cascade of stupid.

There’s another important factor that bears mentioning here. While we, as a society, are getting less able to respond rationally to unwelcome information, exactly the same process is happening inside the brains of those billionaires now running the show.

Here’s how that works. People who receive a lot of money for what they do are very likely to self-validate on that fact. What differentiates them from others is their apparent ‘success’, so they’re both likely to believe that their gains reflect some intrinsic personal quality and also to value that quality highly. After all, that’s what we all want: to be good at something and have it be recognized. And when you’re super-rich, people will line up around the block to tell you how great you are.

But as a billionaire gains more wealth, the satisfaction they gain from each bump in their fortunes decreases because it’s that much easier to achieve. They naturally habituate to the sensation, so each rush of triumph is less satisfying. This means that the more they gain, the hungrier they get for more of the same. Power and attention operate like a drug. This is another very well understood and extensively studied behavioral effect.

So here’s the next takeaway: we make the billionaires sadder, needier, and more desperate, the more we pay them.

Ironically, because of these same network effects, we’re more likely to believe that wealth and attention are valuable even as it harms us. We cannot help but be impacted by the consensus delusion that those enormous fortunes we see are somehow the product of a mysterious kind of personal excellence that we may yet be able to exhibit. We believe this despite the mounting evidence that the converse is true: that most super-rich people are idiots of our creation. Having made the people in the center of our society sick, we then acquire that same sickness. We try harder and harder to validate on the fuel that the billionaires run on even as it gets steadily less likely for us to ever succeed at it.

Historically speaking, this feedback process always goes to the same place. Those leading society lock in their wealth and make progressively worse decisions until some force comes along to disrupt the social disequilibrium that’s been created. That either happens through war, or invasion, or pandemic, or some other equally fun process. See The Great Leveler by Walter Scheidel for exhaustively complete and utterly convincing details.

The upshot of all this is that without very significant social re-balancing soon, we will be unable to confront climate change or any of the dramatic consequences that arise from it. And without action, a great many will die. My guess is that the next upcoming social shock will kill about a billion people. (I’ll explain that number in a later post.) Somewhere in that difficult time, people will take to chaining oligarchs to the decks of their own yachts and letting the raging hand of Nature take its vengeance, but by then it will be too late.

Is there a solution? Of course there is. We don’t have to be blind and ignorant to social feedback effects like the civilizations before us. We have network science for crying out loud. We have neuroscience. And so we have hope.

The number of oligarchs in the world is tiny and their power resides exclusively in our imaginations. So how about each nation coordinates its efforts to simply require that all the money that anyone has over some amount, (let’s say one billion dollars), be returned to the state and distributed throughout the population.

We don’t do this out of some idea of ‘fairness’. There is no notion of fairness invoked here. Neither do we do it because it is ‘right’ in some sense. Certainly it is impossible for the billionaires to have ‘earned’ that money in any meaningful sense but arguably that’s irrelevant. We are still talking about wealth redistribution, which is always a charged concept. So why do we do it? Because the alternative is that everyone loses, including the billionaires themselves. Either we tell them that the money is going back in the pot for their own good, or all the money everyone has goes away anyway.

Who gets that money? It gets shared out equally between every adult.

Is that ‘fair’? Shouldn’t we go further and hand it out proportionally? We could, but if we do that, we create a power vacuum and start fights and the whole process will break. It’ll be like that scene in It’s a Mad Mad Mad Mad World where they can’t decide on how many shares of the treasure there should be, only with machine guns and shrapnel bombs. So we keep it very simple. The more important step is to repeat the capping process five years later, and to keep doing it indefinitely.

But what happens if the billionaires simply hide their money overseas while the wealth survey is taking place, I hear you ask? Then they are forbidden from entering or trading in that country unless they participate in the program. Those people are watched and imprisoned if they’re caught. (Remember, these people still get to keep one dollar less than the one billion threshold. That’s still more than nine-hundred-and-ninety-nine million dollars. They still have more money than everybody else and far more than they can possibly spend. Their fate is nothing to be sad about.)

Why do I think this is a sensible approach? In short, because a social wealth distribution that cannot go over a threshold will reorganize itself. People who want to retain power won’t want their visible wealth to go over the limit so they’ll find other ways to exercise social control by sinking money back into society. This system will take time and effort to figure out, so while the system is likely to eventually be gamed somehow, in the mean time, there will be plenty of opportunity for new fortunes to arise and for rationality to return.

I see this approach as far better than trying to force-equalize society because forced equalization strips away the social incentive for individuals to succeed. It might seem fairer but it’s a surefire way to make an economy nosedive while an entrenched elite of self-appointed enforcers establish themselves to replace the oligarchs who’ve just been removed.

What you actually want is something like capitalism, but with a mechanism in place to prevent runaway idiocy of the sort we have now. People have tried to do that with progressive taxation, of course, but the institutions we might look to to effect that change have already been gamed via the current process of stupidification. That means we can expect those institutions to be remarkably sluggish in their response to our votes, and to draft legislation that is more arcane and full of holes than anyone wants. Look at the legislation imposed on banks after the Credit Crunch if you want an example of how that is likely to play out.

To my mind, the fix has to be something simple, blunt, and obvious, so that there is no wiggle-room for laws to be altered and cheated. We want a law you can can fit in a tweet, because that way it’s easy to apply a social check on whether it’s actually being carried out properly. And because the process exclusively impacts a tiny, overfed, and badly-confused minority, violence in its exercise might actually be avoided.

It wouldn’t work forever, of course, but it might buy us enough time to get rational about the world we live on, and how to keep it from burning up. And that would be a lot better than what we have now.

How do we implement such a change? That’s harder. It requires coordination and persistent agitation, and is undoubtedly the topic for another blog post.

In any case, that’s my take. If you disagree, or believe you have a better solution, I’d love to hear about it. I shall be reading the comments with interest.

 

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On Piketty

When I go into my local bookshop, the first thing I see on the table in front of me is usually new fiction, or a coffee table book, or something with celebrities in it. Today, it was Capital in the Twenty First Century, by Thomas Piketty. I love this.

It makes me feel all warm and fuzzy inside that a huge economics book is a bestseller. I don’t care that most people aren’t reading it cover to cover. I haven’t finished it yet myself. What’s great about it is that it represents a longing for a functional political ideology that does not involve handing our autonomy over to people who have already been proven to be crooked.

The gist of the book is simple. Examine data from the last two hundred years and a pattern emerges: over time, wealth accumulates in the hands of a few. Large-scale social shocks like war can reverse this, but then the trend begins again.

Of course, not everyone loves this book. There are many frowny faces from economic and financial circles. The Economist cites four major kinds of criticism to his work. While not an economist, I have just spent over a year at Princeton studying wealth inequality, I would like to add my twopenneth and address each concern in turn.

1: An antipathy to markets

Piketty is accused of being biased against markets right out of the gate. The allusion to Marx’s work in the title is, to some, a clear indicator of prejudice, and a political agenda. This response strikes me as weak. The main thrust of the book is an attempt to do proper data-driven economics. If the data reveals a flaw in our conception of markets, that’s science, not bias.

What I mean by this is, how else would you expect an economist sitting on his pile of data to present a book? If I did a bunch of research about, let’s say, car crashes, and discovered that faulty tires were to blame in almost all cases, would I title the book ‘Tires Make Us Safe’? Would I frame the book as a rousing defense of current tire technology? No, that would be cray cray.

Or perhaps the concern that it was his bias that made him go and collect all that data in the first place? Maybe he should be more like the last Republican presidential bid, and spend more time unbiasing his polls.

2: Inexact economics

Piketty has been challenged on the specifics of his economic tools, such as his definition of return on capital. And on ignoring certain base principles of the field, such as the fact that capital should fall as it accumulates. Not being an economist, I find it harder to comment on this. However, I confess I confront this notion with profound skepticism.

Economics is the study of trade, and appears to take this activity as a social axiom. However, any study of the social behavior of animals makes it painfully clear that trade requires a parity of power to function. In nature, where one organism can take from another without cost, it does so. Yet when I look at the field of economics, the fact that it is inevitably backed by a structure of power that can break down seems broadly absent. So holding Piketty to the standard of a field that doesn’t describe how power works in the first place seems a pretty weak defense.

You do not need economics for the chance accumulation of advantage in one group of agents to lead to an irreversible runaway effect. It is everywhere. Pick up a book on evolutionary dynamics. You will come across this idea very quickly. It is called ‘selection’, and it does not magically stop itself.

3: An assumption that the future will resemble the past

There are those who point out that only at a significant remove does our current era resemble the Gilded Age. For starters, wealth is more frequently allocated via large salaries than by large inheritances.

This is also a sad comeback. Those large salaries are not actually wages. They are the result of an investment of reputation. In effect, they are social network capital, not payment for labor.

We know this because CEOs cannot logically be worth as much as they’re paid for the work they do. The tech sector provides a perfect illustration of this. Look at the cross section of highly paid CEOs. Some are wealthy due to the business savvy, some via the theft of ideas, some from writing good algorithms, others transparently through luck. There is no intersecting formula that cuts across these characters that codes for outstanding leadership. Thus we must ask, if not quantifiable leadership skills, what are these people being paid for?

The answer is investment potential. Because celebrity CEOs have already succeeded, human beings are prone to allocate to them a high likelihood of future success. The idea of them is worth a lot, as a magnet for the contribution of further capital and the acceleration of sales, despite the folly that this entails. These people are retained because of the mystic aura they grant their companies.

Ironically, when engaged in repeat performances in other companies, these characters are more likely to fail than succeed. And it is precisely this noise in the system that gives people hope in creating new startups. Everyone believes they stand a chance, because, of course, they do. They know in their secret hearts that business is more chance than talent. Everyone also wants to believe, though, that after the fact their luck will be recognized as skill, and that they were really great all along. And due to our collective inability to differentiate between luck and skill, this often actually happens.

Lurking behind this criticism is another form of folly, though. Those who propose that the future is necessarily different from the past must do so in the face of data that shows an accumulation of inequality.

In previous social episodes in dozens of human civilizations, the concentration of power has terminated in war. The war is not necessarily directed at those accumulating wealth. It is often directed at those closest to the people suffering most who appear to have an advantage–often a minority group. However, the effect is usually the same, a shock to the social system that destroys enough order that society can equilibrate.

Those who look at the current accumulation of wealth who propose that it will not end in war are proposing that something else will happen instead. Not a climate disaster, mind you, but something nice. However, they don’t have any prior historical examples to support this claim. Instead, they have theories that are not backed up by data because the data doesn’t exist yet. This is like people standing in a burning building claiming that, because their roof hasn’t caved in yet, that their building is different and that they should not expect it to happen. For this building, they say, they built a really tall roof on sturdy wooden ratchets so that it keeps going slowly up, and this ensures that collapse is impossible.

4: Disagreement over what should be done

There are those who agree with Piketty’s assessment, but disagree with his notion of what should be done, namely: tax the rich. For instance, one commenter I read suggested the solution was to promote growth by investing in eduction. Except of course, we have seen investment in education, and we have seen growth, and neither have done a blind bit of good at the scales we’re talking about. You cannot back out inequality by trying to jolly everyone simultaneously into the middle class.

Nevertheless, I have more sympathy for this critique because, quite simply, I believe that the rich have already accumulated enough power that they will not permit themselves to be taxed. Instead, I suspect that war will do its customary job, aided in significant part by social unrest due to climate change. Witness the rise of radicalized politics in Europe as a thrilling precursor to the fun in store.

But herein lies my greatest concern about this entire scenario. The centralization of power simply happens because it can, just as water flows downhill. There is no surprise here. Watching this happen is rather like watching what happens to a slime mold investigating food sources in a petri dish. At first, there are questing threads of protoplasm everywhere. Then the mold identifies the food sources, locks onto them, and abandons the less productive parts of its structure. This is all great while the food source is present. Take the food away, though, and the mold is in trouble. It has lost all those experimental tendrils that formerly provided useful information.

In short, the centralization of power creates a society that is optimized but inflexible. This is because it has concentrated the extra capacity in the system in agents who do not actually need it. This means it is less able to resist environmental shocks. And it is this that we should be worried about, because we already know that environmental shocks are coming. A society with concentrated wealth is not only more prone to war, it is more likely to dramatically disassemble when the conditions that create wealth are disturbed.

Unfortunately, it is also normal for people to look at this kind of picture and deny it because they do not want it to be true. The irony though, is that without early, non-destructive changes, everyone loses. And perhaps, most ironically, the people who stand to lose the most are those who support the status quo, but who lack the luck, power, and ruthlessness to be the last person standing on the iceberg as it melts.

I say this because this is a pattern that readily shows up in simulations. The pattern of aiding the rich in the hope of joining their club is the one most likely to create personal catastrophe in the end-game. Witness the account in Freakonomics on why drug dealers live with their mothers, or why academia in America is imploding.  Those people who participate in the rat-race dollar-auction but who are not at the absolute top of the pyramid are the ones who bear the fallout when the system topples. This is because they have made the largest unsustainable investment in it. It is, in short, the kind of people who write articles for magazines pooh-poohing books like Piketty’s. The people who actually win do not write those articles. They have little people to do it for them. The threat to these acolytes, though, comes not from the disbelieving readership, but from those very icons of finance that they seek to reinforce.

For the rest of us, the options are simple. A: Get behind a progressive tax on extreme wealth. B: Get ready for war. Not next year, or the one after, but sooner than you’d like.

I know which one I prefer.