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.