Multiple Ethical Equilibria

In The Bourgeois Virtue of Contingency, I explained my skepticism about McCloskey’s thesis that the industrial revolution took off due to a change in societal values, namely the adoption of a bourgeois ethic that gave dignity to merchants and commerce.

Using historical examples, I tried to show that norms and values arise spontaneously following changes to the boundary conditions of our rules and institutions. Of course, new values must ultimately shape institutions as well, but it will depend on the rate of diffusion and whether, once the ideas are out there, they can coalesce in a politically potent way.

In the conversations that followed, McCloskey criticized the Acemoglu and Robinson view of economic development as “add-institutions-and-stir.” She buttressed her criticism with examples, such as the failure of time clocks to correct nurse absenteeism in India. According to McCloskey, what was lacking was an ethic of professionalism — that is, the mutual expectation of professionalism from nurse to nurse required to instill the disciplining sense of an Impartial Spectator.

My caveat is to say that in this and every other case, the details matter. In a sense, introducing a mere time clock assumed too much in terms of existing social capital. For example, in a disciplined household, a parent’s stern look can alone induce obedience, while dysfunctional households often involve the most yelling and corporal punishment. It’s a phenomenon that, of all things, reminds me of monetary policy and what economist Nick Rowe calls the fallacy of concrete steppes. As Rowe explains it, by nature humans like linear explanations, a set of concrete steps like “add a time clock”, yet market equilibria are by nature non-linear:

Sometimes the future causes the present, because people’s expectations of the future affect what they do in the present…

Next week, millions of Canadians will get up and go to work about one hour later than they did this week, if we measure time by the sun. “What concrete steps will the government take to get Canadians to do this? Can anybody tell me that?

No, I can’t tell you that. I don’t have a clue what concrete steps, if any, the government will take. But I fully expect it will work. All the government does is announce that it wants us all to do this, and to put all our clocks back one hour. Maybe the government has the power to force government clocks back one hour, and force some government workers to start and leave work one hour later by the sun. But the rest of us just follow along, simply because we expect everyone else to follow along.

When monetary policy focuses on the concrete steps, we get a ballooning monetary base. Credible central banks, on the other hand, can conduct looser monetary policy simply by making a credible threat, keeping base money flat. In the context of parenting, the household with the screaming parent is like Japan during their Lost Decade, taking many concrete steps with no results, while the disciplined household uses credible expectations management, meaning the bed gets made with mom nary lifting a finger.

All social institutions have similar multiple equilibria, and so I am totally on board with rejecting the naivety of the “add-institutions-and-stir” view. Expectations and credibility are just as important as the concrete steps. Yet equating ethics with expectations is misleading, since expectations are largely engendered by facts about the institutions.

Aggregate demand stagnated in Japan because people’s spending was partially contingent on the expectations of other people’s spending, diallelus. The emptier theories explain this as a failing of “animal spirits.” Or as I can imagine McCloskey putting it, perhaps Japan lacked an ethic of monetary velocity…

Fig. 5.1 Multiple Equilibria

One final example: In my office absenteeism picks up on Friday afternoons (surprise!). This is despite many “training workshops” designed to encourage a culture of professionalism. The more effective technique, however, is for the boss to simply do an office walk-around every Friday at 4pm, and then let those absent hear about it Monday morning. Slowly, the boss can make his walk around less frequent but with a surprise element. Absenteeism will drop off, self-reinforced by mutual expectations and the lingering credibility of this “professionalism anchor”.

In the case of the Indian nurses, Acemoglu and Robinson report (pg 491) that the program was actually effective at first, but was progressively sabotaged by the administration “in cahoots” with the nurses. The lesson here is not the that an ethic was lacking, but that like monetary policy, credible expectations depend largely on the rule enforcer’s independence. It’s a lesson drawn straight from the work of Thomas Shelling:

A would-be reformer who wants to improve social welfare by changing people’s behavior to a better equilibrium must take care to identify a social plan that is in fact a Nash equilibrium, so that nobody can profit by unilaterally deviating from the plan. If a leader tries to change people’s expectations to some plan that is not a Nash equilibrium, then his exhortations to change behavior would be undermined by rational deviations. The point of this example is that, even when the better equilibrium is well understood, there still remains a nontrivial social problem of how to change everyone’s expectations to the better equilibrium. Such coordinated social change requires some form of socially accepted leadership, and thus it may depend on factors that are essentially political.

In this light, its almost self-aggrandizing to blame our First World incorruptibility on the absorption of certain values. Instead we should recognize that in the background of ostensibly voluntary obedience to the norms of property and exchange is a credible threat of incentive compatible rule enforcement. If that credibility evaporates, not surprisingly, so does most of our high-mindedness.

11 thoughts on “Multiple Ethical Equilibria

  1. On the other hand, there’s an ethical bottom to that credibility. From McCloskey’s response to Mokyr:

    “You can set up British-like courts of law, and even provide the barristers with wigs, but if the judges are venal and the barrister have no professional pride and if the public disdains them, the introduction of such an institution will fail to improve the rule of law.”

    Does credibility rely on a certain strength of character from enforcers? Does getting people with that sort of character depend upon the lack of an “honor tax” from the public?

    1. The issue is still a matter of credible enforcement and expectation management. If that court was backed by a powerful sovereign, you’d have to ask why it allowed such terrible judges to take the bench.

      This is all intertwined with Hart’s notion of the Rule of Recognition, a meta-rule that legitimizes the law.

      http://en.wikipedia.org/wiki/Rule_of_recognition

      Governments can lose legitimacy if its officials cease to recognize it as legitimate. It’s kind of circular and self-referential, but then again so are all expectation / network effects. Character and reputation are definitely factors. And if someone’s character is suddenly undermined (like an Anthony Weiner dick pic) it could mean a kind of “run on the legitimacy banks” and cause a political crisis or coup.

      A strong state can order, say, land reform, and have things go smoothly with minimal intervention (nary lifting a finger). Alternatively, a weak state could announce land reform and be met with a collective “LOL” from the landholders, who recognize the states threats as empty. That kind of state should start dragging people out of their house and really show it means business.

      Again to use the monetary policy analogy, a central banker can only declare a 2% inflation target and hit it if the market buys into his or her reputation for follow through. If the market gives a collective LOL then maybe you need a strong character like Paul Volcker…

      1. David Duke

        This rings a bell. Leaders in the American style of government can be impeached on grounds of bad character. I can’t find a specific reference, but I’m looking. Would those articles in the US Constitution have their raison d’etre in the Federalist or Anti-federalist papers?

      2. “If that court was backed by a powerful sovereign, you’d have to ask why it allowed such terrible judges to take the bench.”

        The answer would be because a court system is much larger than any sovereign could personally manage. No matter how centralized a system’s power structure, every actual order is only going to be carried out by the people on the ground, who are legion. Far, far too legion to pin the character on the judgment of a specific sovereign.

        The rest of your comment I agree with 100%. My father’s book is actually primarily about how legitimacy is currently bleeding like crazy from basically all established institutions at the moment.

  2. David Duke

    Technically, impeachment functions like a censure, but it also creates a trial in which evidence is weighed for or against removal of the office holder.

    Bill Clinton was impeached, but he was not removed from office. Kayfabe.

    What I’m actually interested in, though, is the delineated reasons for impeachment and removal. It’s not in the Constitution, but in some other derivative documents, the notion is clearly explained as a problem of character, not in the actual execution of the office.

    I wish I could find it. Otherwise, it’s just my imagination.

  3. Dears,

    Adam has it right (as he regularly does!). Over at a Liberty Fund discussion going on in July 2014 (my squib on this particular point will soon be up I think, on July 19 or so) I put it like this. Stipulate that —so that both are in the mix, as we all agree. Then Not-Growth implies EITHER bad Institutions (incentives, compulsory power, budget lines, Tom Schelling’s non-Nash equilibrium) OR bad Ideas (bad ethics, rhetoric, ideology, habits of the heart, mind, and lip). The trouble with a lot of neo-institutional work in economics is that it stipulates instead , so when Nations Fail the search is on for institutional failure. , rigorously. Sometimes it’s true, sure, if for example Institutions and Ideas are statistically speaking orthogonal (which I reckon would be something of a sociological miracle), or if Ideas never matter, much. But the point is that if Ideas are excluded from the get-go, merely by (materialist) assumption. then the science will sometimes get the wrong result. It plainly did in the example of the Indian nurses I drew from Acemoglu and Robinson. It’s equivalent to an econometric mis-specification. The alleged results will be biased and inconsistent. Better scientific procedure? Include ideas from the get-go, since we know they are sometimes very, very powerful, and hardly orthogonal to Institutions.

    Regards,

    Deirdre McCloskey

    1. Whoops. I used brackets, which the program read as “leave this out”. So you didn’t get my oh-so-sophisticated “logical equations”! So it reads strangely.

      Here’s the point:

      If we stipulate Institutions AND Idea imply Grrowth, then Not-Growth implies EITHER Bad Institutions OR Bad Ideas. If, on the other hand, as so many do, we stipulate Institutions (alone)imply Growrth, then we are going to think, erroneously, that Not-growth implies Bad Institutions, only.

      Deirdre

      1. Wow, thank you for stopping by!

        The thing that puzzles me about the whole institutions vs ideas framing, and what has always bothered me about institutional economics, is how very under-specified “institution” is in that literature. It seems as though they’re just these large physical structures that inject pain or pleasure depending on how they want to direct you.

        Meanwhile, it seems obvious to me that institutions are simply composed of ideas as well as practices, and that the real debate isn’t institutions vs ideas, but rather ideas vs practice (what I think maps more closely to what you call “habits of behavior”). And as you say, the recipe requires both rather than one or the other. And in the end they’re two distinct useful concepts but deeply intertwined.

    2. Thank you for your reply!

      Don’t get the wrong impression, I am a big fan of your overall project & I think you’re correct about how myopic attachment to a particular paradigm can cause extra confirmation bias.

      Since I have your attention, have you written anything on the view espoused by writers like Joe Studwell in How Asia Works that take a historical school or Friedrich List style approach to explaining development? I was quite persuaded by his account of how NE and SE Asia diverged. Namely, NE Asia had successful land reform that wrenched control from inefficient landlords and cause a boom in agricultural output. They then followed this on with successful ‘learning curve’ policies based on export discipline and culling losers (essentially accelerating the creative destruction process). SE Asia, in his view, failed at land reform for public choice reasons, then liberalized too early, especially in finance, and lost the chance to build technological capacity.

      I bought his arguments because a. they were very empirically motivated (he is no ideologue) and b. they were actually consistent with my Hayekian / Burkean model of institutional learning, i.e. they didn’t pick winners and losers but rather carefully crafted the rules of the game to accelerate decentralized technical accumulation.

      I am asking because in your work on the industrial revolution, you focus mainly on the abstract institutions like property rights and rule of law, while Studwell’s analysis suggests the details of these classic institutions matter a lot for getting that take-off.

      My next and final post of this series will be elaborating this argument and showing what I see as parallel institutional developments prerequisite to Englands take-off. Namely things like the Enclosure Acts, export supports, and how threat of war disciplined the gov’t to climb the tech curve.

      I would greatly appreciate any initial feed back or links to publications that will save me any embarrassment.

      Yours,
      Samuel

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