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.

Diffusion of Virtues

A quick response to Sam’s excellent critical piece.

As I mention in the about page, I’m honestly not sure if I believe McCloskey’s theory. But to be fair, she hasn’t really made her case yet—her last Bourgeois book demolished the alternate theories rather thoroughly but did not really make a systematic argument for her own theory. She said hand-wavy things like “the remainder (after the other theories are cleared away) is <her theory>.”

That said, I think I disagree with this:

practically speaking the line of causality must have run from institutions to values and not the other way around. Institutions determine the social relations that feed into our aesthetic and moral reaction functions.

I’m not so sure about this. The model in my head is always a diffusion of innovations one.

I think institutions are formed by the accumulation of practices and values; though it’s obviously a two-way street, as the already accumulated practices and values influence the probability of any given new practice/value diffusing. But at the risk of falling into the “endogeneity of everything”, I think institutional change must occur because of feedback from below. I think the case of China (as I understand it) is one where emboldened entrepreneurs were pushing the line until eventually the people at the top yielded a great deal rather than fighting it off as much as they had been.

I think that the institutions that existed at the onset of the Industrial Revolution could result in a ton of people wanting to be actors and writers mostly (which is what we have now) or it could result in people aspiring to be merchants and tinkerers (which is what happened at the time) and there are big material consequences to how our rhetoric shapes our aspirations in this regard.

The Bourgeois Virtue of Contingency

Liberty Matters is releasing an online discussion on Deirdre McCloskey’s The Bourgeois Virtues, starting with this lead essay by Don Boudreaux:

For years I accepted the ‘institutional’ account of the economic rise of the western world. … Enter McCloskey.  What, she asks, changed in the 17th century to spark mass flourishing? … McCloskey’s surprising yet compelling answer is that mass flourishing was sparked by a change in ideas about the dignity of commercial pursuits.

The essay is an excellent introduction to McCloskey’s arguments, usefully framing the lack of respect for commercial pursuits as a kind of societal “dishonor tax”. As norms flipped to view trade honorably, the market grew more extensive, which in turn expanded the base for market-tested Schumpeterian innovations, kicking off a growth explosion. Since Sweet Talk was founded in light of McCloskey’s work, I thought I’d give my 2 cents on this chicken vs egg debate between ideas vs institutions.

Even though I am unconvinced of McCloskey’s account, a theory based on virtues and ideas is undervalued within economics almost by definition.  It is deserving of much more serious attention. But, the question remains, does a ‘change in ideas’ stand up to the standard ‘institutional’ account of the industrial revolution?

McCloskey’s work focuses on the original industrial revolution, but I will consider modern growth miracles first, for a number of reasons: better data; living contemporaries; and radically different cultural contexts that help to avoid romanticizing the Anglosphere. This essay will be spread across three posts: on the apparent role of societal values; on the evidence from modern industrialization; and finally, on how this applies to the original industrial revolution.

Societal Values

Economists tend to be skeptical of “societal value” style arguments in general, for one simple reason: the no-arbitrage principle.  If a merchant can “buy low” on one shore and “sell high” on the other, in the long run he doesn’t cares if he loses his mother’s respect — not when he can buy it back with all the free lunches he’ll be earning.

Modern experience bares this out. For example, in a recent episode of NPR’s Planet Money they tell the amazing story of a how a 13 year old girl in North Korea started buying and re-selling fashionable winter gloves and socks, defying the law of the land in a society inculcated with the virtues of Joseph Stalin.

Overtime she became a kind of proto-wholesaler, and accumulated enough savings to afford true rarities like a laptop and the expensive cigarettes she ultimately used to bribe her way to freedom.

The story of this girl is just one example of what Ronald Coase and Ning Wang describe as “marginal revolutions” in their treatise How China Became Capitalist. Despite being on the tale end of an anti-Bourgeois “cultural revolution,” Coase and Wang detail how private farming kicked off China’s shift towards capitalism:

In September 1980 Beijing was forced to allow private farming in areas where ‘the people had lost their confidence in the collective.’ But once the floodgates of private farming were opened, it could no longer be controlled. By early 1982 it became a national policy. Chinese agriculture was decollectivized. Later in the official account of reform, Beijing would credit itself for launching agricultural reform. But the reform enacted by Beijing merely raised the purchasing prices of grain and increased grain import; private farming, which really transformed Chinese agriculture and freed Chinese peasants, did not come from Beijing.

Coase and Wang are in a similar in tradition to McCloskey. In this, his last book, Coase lamented that economics had lost its tradition as a moral science in favor of the cold calculus of resource allocation. And like McCloskey, Coase sought to rhetorically shift responsibility for economic growth down to private entrepreneurs and away from technocrats.

Nonetheless, the implicit model in Coase’s explanation is one of exogenous institutional change, namely the pragmatic lifting of prohibitions and barriers to things like private farming or the new activities of firms in Special Economic Zones. Even in stagnant economies, entrepreneurial potential is forever bubbling below the surface waiting for its conditions of possibility.

China is a great example of the danger of the “just so” stories within culturally determined economic development. In Confusing Confucianism With Capitalism, American Sinologist Harriet T. Zurndorf explains how Confucian values have been used to explain both China’s failures and successes throughout history. Among the Confucian pessimists were Harvard academics Talcott Parsons and John Fairbank:

Parsons asserted that individual actors, with particular cultural orientations, assumed the basis for action within a social system, but that a social system could be transformed by another cultural orientation. Such idealism furnished Fairbank with the theoretical conditions to demonstrate in his many publications that Confucian ‘traditional’ and authoritarian values had become a kind of ‘strait-jacket’ which inevitably inhibited China from appreciating modern innovating forces.  …

In contrast, the ‘Confucianism as stimulus’ viewpoint has been favoured by late twentieth century social scientists and historians eager to explain the success of East Asian economies in the 1980s and 1990s as attributable to ‘core’ Confucian values of hard work and thrift, the so-called ‘Confucian ethic’. …

That Confucianism may be connected to both negative influences on the development of the Chinese economy, such as particularism or collectivism, and positive influences like group cooperation demonstrates how inadequate this cultural analysis is to understanding economic and social change.

The upshot is that bourgeois values have historically chased commerce, not the other way around. This dynamic is present in the case of Confucianism as well, as its interpretation adapts to the contingencies of path dependent social structures.

One of my earliest influences was Robert Wright’s classic Nonzero. The book is very flawed, but full of insight. The one I still hold onto deeply was his analysis of how nonzero-sum relationships shape attitudes, such as international trade leading to greater peace and respect. It’s an analysis he deployed even more profoundly in his The Evolution of God. He persuasively argued, for example, that burgeoning trade with Hellenistic Athens and Jerusalem influenced the “love thy neighbor” humanism exalted by Philo the Jew, and in turn early Christianity.

This leads to a more fundamental point about the origin of our virtues. As I’ve argued across several posts, I view our moral sense as a part of human nature shaped by evolution for cooperation. Moral values and virtues are non-arbitrary, and they don’t simply ‘turn on’.

Rather, our morality is more like an innate grammar that can express its parameters differently depending on changes in our circumstances. The expansion of our “moral circle” as documented by the likes of Robert Wright, Peter Singer or Steven Pinker is one example. Nothing fundamental changed about our nature, yet our morality has become steadily more cosmopolitan as our social relations have globalized.

Whatever it was that caused bourgeois virtues to suddenly gain respect (taking the suddenness for granted), I suspect a similar process was at play. While it would be folly to deny the ultimate endogenity of everything, including our social institutions, practically speaking the line of causality must have run from institutions to values and not the other way around. Institutions determine the social relations that feed into our aesthetic and moral reaction functions.

More fundamentally, I remain skeptical that promotion of bourgeois virtues is even necessarily positive for a capitalist system. The social project of the New Left since Herbert Marcuse has been to lift society out of the “false consciousness” of capitalism. This heavily influenced the 60s counter-culture movement to reject all things mainstream, mass produced or commercialized in favor of an individualism I suppose Hayek could only have called “false“.

In the devastating critique Nation of Rebels, fellow Frankfurt Schoolers Joe Heath and Andrew Potter show how the counter-cultural critique of mass society sparked a cycle of arm races in cultural and commercial innovation, as cultural rebels sought social distinction only to be undermined by collective action. That is, creative capitalism was fueled by a culture that actively tried to subvert it. In the process, by denying the centrality of institutions Heath and Potter argue that the left did permanent damage to their ability to affect social policy.

Today, there is an intellectual ferment to raise the “false consciousness,” as it were, of modern anti-capitalist sentiment. In some sense McCloskey represents the Herbert Marcuse of the libertarian right, fusing Smithian sentimentalism to classical economics in the same way Marcuse fused psychoanalysis to Marx. That’s a worthy counter-counter-culturalism, and I am glad people like Don Boudreaux pay attention. Yet libertarians win more fights than the New Left precisely because we do not believe new ideals (even good ones) reshape society ex nihilo. It takes a lot of hard workeducation, and advocacy.

A Reddit thread related to this post can be found here.