The main idea of this book is to summarize and present author’s decades long research in psychology of lying and methods and tools to recognize lies and obtain truth. In order to do this author presents his Truth Default Theory (TDT) and provides wealth of experimental data supporting this theory. Author also reviews competing theories and ideas and supplies reasons why they do not work.
PART I: THE SOCIAL SCIENCE OF DECEPTION
Chapter 1. The Science of Deception
This chapter starts with author recollection of listening book review of CIA agents on how they recognized lying. From this point he moves to discusses his qualifications as scientific researcher in just this area of psychology and how he came to this. He then present questions that such research supposed to answer:
1. What do people look for in order to distinguish between whether someone else is honest or lying?
2. What, if any, specific behaviors actually distinguish truthful communication from lies?
3. How accurate are people at distinguishing truths from lies?
4. Under what conditions are people more accurate or less accurate at lie detection, and what types of people, if any, are more skilled or less skilled lie detectors?
He also present results of previous research over decades that consistently shown human ability to recognize lies just slightly above random. Here is graph demonstrating these results:
Chapter 2. Cues
This chapter focuses on “cues.” Here is how author describes it:” We will take a close look at the research on:
(a) the behaviors that people think distinguish truths and lies,
(b) the behaviors that people actually rely on in distinguishing truths from lies,
(c) the behaviors that do and do not actually distinguish truths from lies.”
Here is the Summary:
What do people look for in order to distinguish whether someone else is honest or lying? People pay much attention to nonverbal behavior when assessing honesty and deceit. In terms of specific cues, there is a worldwide, cross-cultural consensus in the folk belief that liars avoid eye contact. But when behaviors that actually influence honesty assessments are analyzed, perceptions of plausibility, logical consistency, confidence, friendliness, and conversational involvement are quite important. What’s more, cues are not used in isolation, nor are they uncorrelated. Constellations of cues combine to create an honest or dishonest demeanor that guides people’s decisions about whether or not someone is honest. (There is more on this in chapter 13 when sender demeanor and the BQ [believability quotient] are discussed.)
What, if any, specific behaviors actually distinguish truthful communication from lies? The short answer is, not many. The only two cues that hold up consistently across various meta-analyses are that liars have larger pupils and higher pitch, on average, than honest senders. The differences are not large enough to have much practical use in lie detection. In general, there are few behavioral differences that distinguish truths from lies, and the differences that are there are not large, are inconsistent, and tend to diminish as scientific evidence accumulates.
Chapter 3. Deception Detection Accuracy
In this chapter author “examines people’s ability to distinguish truths from lies in traditional deception detection experiments. In both, priority is given to meta-analysis, looking at trends across larger numbers of studies rather than at the findings of individual studies. I strive to provide a coherent picture of what we know by focusing on findings that reliably replicate and by describing the big-picture implications of those results.”
This chapter answered two important questions:
How accurate are people at distinguishing truths from lies? People are slightly better than chance at distinguishing truths from lies in deception detection experiments. Accuracy is better than chance, but not by much. The across-study average is about 54% correct truth–lie discrimination.
Under what conditions (if any) are people more accurate or less accurate at lie detection, and what types of people (if any) are more skilled or less skilled lie detectors? The slightly-better-than-chance accuracy is remarkably robust and invariant. Some things make a difference of a few percentage points this way or that, but the slightly-better-than-chance holds across a wide range of conditions and methods. Besides answering these two critical questions, this chapter also highlights some important but underappreciated findings. One of these is the small standard errors in deception detection experiments involving multiple judgments per judge. The implication is that even small differences in raw accuracy can be statistically significant with ample effect sizes. Findings need to be understood in context. Second, the number of judgments strongly impacts the results, making unusual results based on small data untrustworthy. Third, raw accuracy (i.e., correct truth–lie discrimination) and accuracy for lies are not the same thing. The implication is that if people are better than chance at truth–lie discrimination, this does not mean that they are better than chance at recognizing lies per se. Finally, there is much more variability in senders than in judges. This suggests that viable explanations for findings need to account for both sender variability and judge constancy.
Chapter 4. Rivals
Here author describes competing theories that preceded his Truth Default Theory.
Author’s Summary: “This chapter provides a chronicle of prior theories of deception and deception detection. Ekman’s original leakage theory, Ekman’s updated perspective, four-factor theory, Bella DePaulo’s self-presentation perspective, Interpersonal Deception Theory, and Aldert Vrij’s cognitive load approach were each reviewed. I see much communality among Ekman, four-factor theory, IDT, and Vrij. In the next chapter, I offer the catchall idea of cue theories as a way to show the commonalities in the logic behind prominent deception theories and to show how theory has shaped research priorities and design. I offer a critical evaluation of these prior theories in specific, and cue theories in general. I hope it is obvious after this chapter why a new theory is so desperately needed.”
Chapter 5. Critiquing the Rivals
This is continuation of the previous chapter where author critiques rivals, their theories and then “provides a detailed rationale for the book and TDT. If prior theory were adequate and sufficient, there would be little to be gained from yet another theory. The case is made that prior theories have serious deficiencies and that the need for TDT is real and pressing.”
At the end of chapter author characterizes his rival as cults and summarizes them in such way:” Various camps of deception researchers have leaders who are revered by followers (e.g., Ekman, Burgoon, Vrij). The members of the various groups are very devoted to the system of beliefs that form the tenets of the various theories, and they see disagreement by outsiders over core issues as heresy. Each of the groups is relatively small in number, and each group sees the doctrines of rival theories as strange, sinister, and threatening. And, at least from my point of view, I think the admiration that the followers of the various theories have for their theories is both excessive and misplaced. Each of the rivals falls short in verisimilitude.”
PART II: TRUTH-DEFAULT THEORY
In this part author moves from critic of rivals to presentation of his Theory
Chapter 6. Truth-Default Theory Summarized
This chapter “provides a succinct and rough summary of TDT. Key definitions are provided. TDT is modular, by which author means that it is an organized collection of stand-alone mini-theories, hypotheses, and effects. Each of the modules is briefly described, and the propositional structure weaving them together laid out. But the chapter just provides an outline, with little explanation.”
TDT is a modular theory. The modules are various minitheories, models, effects, and hypotheses that can stand alone. They can be understood without reference to larger theory. Empirical support or disconfirmation for one module does not imply support or disconfirmation of another module. The modules discussed in the following chapters are:
• A Few Prolific Liars (or “outliars”; chapter 9)—The prevalence of lying is not normally or evenly distributed across the population. Instead, most people lie infrequently. Most people are honest most of time. There are a few people, however, who lie often. Most lies are told by a few prolific liars.
• Deception Motives (chapter 10)—People lie for a reason, but the motives behind truthful and deceptive communication are the same. When the truth is consistent with a person’s goals, he or she will almost always communicate honestly. Deception becomes probable when the truth makes honest communication difficult or inefficient. • The Projected Motive Model (chapter 10)—People know that others lie for a reason and are more likely to suspect deception when they think a person has a reason to lie.
• The Veracity Effect (chapter 12)—The honesty (i.e., veracity) of communication predicts whether the message will be judged correctly. Specifically, honest messages produce higher accuracy than lies. The veracity effect results from truth-bias.
• The Park–Levine Probability Model (chapter 12)—Because honest messages yield higher accuracy than lies (i.e., the veracity effect), the proportion of truths and lies (base-rates) affects accuracy. When people are truth-biased, as the proportion of honest messages increases, so does average detection accuracy. This relationship is linear and is predicted as the accuracy for truths times the proportion of messages that are true plus the accuracy for lies times the proportion of messages that are lies.
• A Few Transparent Liars (chapter 13)—The reason that accuracy in deception detection is above chance in most deception detection experiments is that some small proportion of the population are really bad liars who usually give themselves away. The reason accuracy is not higher is that most people are pretty good liars.
• Sender Honest Demeanor (chapter 13)—There are large individual differences in believability. Some people come off as honest. Other people are doubted more often. These differences in how honest different people seem to be are a function of a combination of eleven different behaviors and impressions that function together to create the BQ (believability quotient). Honest demeanor has little to do with actual honesty, and this explains poor accuracy in deception detection experiments.
• How People Really Detect Lies (chapter 14)—Outside the deception lab, in everyday life, most lies are detected after the fact, based on either confessions or the discovery of some evidence showing that what was said was false. Few lies are detected in real time based only on the passive observation of sender nonverbal behavior.
• Content in Context (chapter 14)—Understanding communication requires listening to what is said and taking that in context. Knowing about the context in which the communication occurs can help detect lies.
• Diagnostic Utility (chapter 14)—Some aspects of communication are more useful than others in detecting deception, and some aspects of communication can be misleading. Diagnostic utility involves prompting and using useful information while avoiding useless and misleading behaviors.
• Correspondence and Coherence (chapter 14)—Correspondence and coherence are two types of consistency information that may be used in deception detection. Correspondence has to do with comparing what is said to known facts and evidence. It is fact-checking. Coherence involves the logical consistency of communication. Generally speaking, correspondence is more useful than coherence in deception detection.
• Question Effects (chapter 14)—Question effects involve asking the right questions to yield diagnostically useful information that improves deception detection accuracy.
• Expert Questioning (chapter 14)—Expertise in deception detection is highly context dependent and involves knowing how to prompt diagnostically useful information rather than passively observing deception cues.
The TDT propositions provide a string of assertions, predictions, and conjectures that weave the constructs and modules together to describe and explain human deception and deception detection and to provide coherence. That is, the propositional structure shows how the various modules fit together. The propositions also provide specific, testable, and falsifiable predictions. The propositions are numbered one to fourteen and reflect the logical flow of TDT.
• Proposition one. Most communication by most people is honest most of the time. While deception can and does occur, in comparison to honest messages, deception is relatively infrequent, and outright lies are more infrequent still. In fact, deception must be infrequent to be effective.
• Proposition two. The prevalence of deception is not normally distributed across the population. Most lies are told by a few prolific liars.
• Proposition three. Most people believe most of what is said by most other people most of the time. That is, most people can be said to be truth-biased most of the time. Truth-bias results from, in part, a default cognitive state. The truth-default state is pervasive, but it is not an inescapable cognitive state. Truth-bias and the truth-default are adaptive both for the individual and for the species. They enable efficient communication.
• Proposition four. Because of proposition one, the presumption of honesty specified in proposition three is usually correct. Truth-bias, however, makes people vulnerable to occasional deception.
• Proposition five. Deception is purposive. Absent psychopathology, people lie for a reason. Deception, however, is usually not the ultimate goal, but instead a means to some other ends. That is, deception is typically tactical. Specifically, most people are honest unless the truth thwarts some desired goal or goals. The motives or desired goals achieved through communication are the same for honest and deceptive communications, and deception is reserved for situations where honesty would be ineffectual, inefficient, and/or counterproductive in goal attainment.
• Proposition six. People understand that others’ deception is usually purposive and are more likely to consider a message as potentially or actually deceptive under conditions where the truth may be inconsistent with a communicator’s desired outcomes. That is, people project motive states on others, and this affects suspicion and judgments of honesty and deceit.
• Proposition seven. The truth-default state requires a trigger event to abandon it. Trigger events include but are not limited to: (a) a projected motive for deception, (b) behavioral displays associated with dishonest demeanor, (c) a lack of coherence in message content, (d) a lack of correspondence between communication content and some knowledge of reality, or (e) information from a third party warning of potential deception.
• Proposition eight. If a trigger or set of triggers is sufficiently potent, a threshold is crossed, suspicion is generated, the truth-default is at least temporarily abandoned, the communication is scrutinized, and evidence is cognitively retrieved and/or sought to assess honesty–deceit.
• Proposition nine. Based on information of a variety of types, an evidentiary threshold may be crossed, and a message may be actively judged to be deceptive. The information used to assess honesty and deceit includes but is not limited to: (a) contextualized communication content and motive, (b) sender demeanor, (c) information from third parties, (d) communication coherence, and (e) correspondence information. If the evidentiary threshold for a lie judgment is not crossed, an individual may continue to harbor suspicion or revert to the truth-default. If exculpatory evidence emerges, active judgments of honesty are made.
• Proposition ten. Triggers and deception judgments need not occur at the time of the deception. Many deceptions are suspected and detected well after the fact.
• Proposition eleven. With the exception of a few transparent liars, deception is not accurately detected, at the time in which it occurs, through the passive observation of cues or sender demeanor. Honest-looking and deceptive-looking communication performances are largely independent of actual honesty and deceit for most people and hence usually do not provide diagnostically useful information. Consequently, demeanor-based deception detection is, on average, only slightly better than chance due to a few transparent liars, but typically not much above chance due to the fallible nature of demeanor-based judgments.
• Proposition twelve. In contrast, deception is most accurately detected through either (a) subsequent confession by the deceiver or (b) comparison of the contextualized communication content to some external evidence or preexisting knowledge.
• Proposition thirteen. Both confessions and diagnostically informative communication content can be produced by effective context-sensitive questioning of a potentially deceptive sender. Ill- conceived questioning, however, can backfire and produce below-chance accuracy.
• Proposition fourteen. Expertise in deception detection rests on knowing how to prompt diagnostically useful information, rather than on skill in the passive observation of sender behavior.
Chapter 7. Defining Deception (Beyond BFLs and Conscious Intent)
Chapter 7 takes a close look at issues in defining deception from the TDT perspective. Here is author’s definition of deception, lying, and honest communication:
• Deception is intentionally, knowingly, or purposefully misleading another person.
• A lie (or bald-faced lie, BFL for short) is a subtype of deception that involves outright falsehood, which is consciously known to be false by the teller, and is not signaled as false to the message recipient.
• Honest communication lacks deceptive purpose, intent, or awareness. Honest communication need not be fully accurate or true, or involve full disclosure.
Here author also looks at different types of deception such as self-deception, false statements, and failed deception attempts. He concludes: “An important implication is that message features like the truth and falsity of specific content, message intent, and message function or impact need to be distinguished because these things do not map perfectly onto one another. So, someone can say something that is objectively false, omit information, change the subject, and so forth, in a manner that is either intended to deceive or not. The objective truth or falsity of messages may or may not actually function as deception, and such messages may or may not be perceived as deception. In short, speaker intent, purpose, and message consequence in combination define deception, not the objective qualities of messages or information dimensions (discussed in the next chapter). Further, mere speaker intent is neither sufficient nor necessary in and of itself to define deception.”
Chapter 8. Information Manipulation (Beyond BFLs and Conscious Intent, P.2)
Beginning in chapter 8, a series of numbered original empirical studies are summarized testing relevant theoretical predictions. Author discusses in details Information Manipulation theory (IMT) and IMT2, providing review of several relevant studies.
Chapter 9. Prevalence
Chapter 9 explicates TDT’s first two propositions and the Few Prolific Liars module. The empirical support is detailed by reviewing multiple studies. Then author presents his interpretation: “TDT departs from most other theories of deception regarding the prevalence of deception. According to TDT, lying is infrequent relative to the truth. Lying is not normally distributed across the population but is instead highly skewed, with most lies coming from a few prolific liars. And, according to TDT, the frequency of lying matters in deception detection.”
Chapter 10. Deception Motives
In this chapter author examines motivation of people’s lying and delves into proposition five and the People Lie for a Reason module. It provides the first part of the answer to the mystery of accuracy in research that uses deception but is not about deception. Here are key TDT claims regarding motivation:
1. People lie for a reason. That is, deception is purposive. It is therefore not random.
2. Deception is usually not the ultimate goal but instead is a means to some other end or ends. That is, deception is typically tactical.
3. The motives behind truthful and deceptive communication are the same.
4. When the truth is consistent with a person’s goals, the person will almost always communicate honesty.
5. Deception becomes probable when the truth makes honest communication difficult or inefficient.
Then author provides experimental support of these claims.
Chapter 11. Truth-Bias and Truth-Default
Chapter 11 gets to the core of TDT, focusing on truth-bias and the truth-default and summarizing author’s research on them. The existence of the truth-default and the idea of triggers provide additional insight into the mystery of accuracy in research that uses deception but is not about deception. As before author discusses in details experimental results supporting his ideas.
Chapter 12. The Veracity Effect and Truth—Lie Base-Rates
Chapter 12 focuses on two important implications of truth-bias, namely, the veracity effect and the Park–Levine Probability Model. The focus is on the empirical evidence supporting these modules and proposition three. Chapter 12 explains why base-rates are so important. A very important here is that author provides clear falsification criteria and results of its experimental validation:
Chapter 13. Explaining Slightly -Better-than-Chance Accuracy
The focus in chapter 13 shifts to offering a coherent explanation for the prior detection-accuracy findings described in chapters 1 and 3. The companion modules A Few Transparent Liars and Sender Honest Demeanor are explicated, and the evidence consistent with proposition eleven is described. The mystery of normally distributed slightly-better-than-chance accuracy is solved. Here is a very important graphic representation of matched or unmatched demeanor and behavior, which somewhat confuse even professional interrogation experts:
Chapter 14. Improving Accuracy
Here author discusses the ways of improving accuracy. How People Really Detect Lies is described, along with the Content-in-Context, Question Effects, and Expertise modules. In the process, evidence for the twelfth, thirteenth, and fourteenth propositions is provided. Author reviews research documenting five paths to improved lie detection:
• Using evidence to establish ground truth and assessing the correspondence between communication content and ground truth.
• Using situational familiarity and contextualized communication content to assess plausibility.
• Using situational familiarity and contextualized communication content to assess motives for deception.
• Strategically questioning senders to elicit diagnostically useful communication content.
• Persuading liars to be honest and tell the truth.
Chapter 15. The TDT Perspective
This chapter wraps things up, restating key points of TDT and providing 5 keys to improvement in lie detection:
1. Correspondence of communication content with evidence
2. Content in context (situational familiarity)
3. Assessment of deception motives
4. Diagnostic questioning
5. Persuading honesty
MY TAKE ON IT:
This is the great book and I highly appreciate author’s scientific approach to his ideas and TDT’s experimental support. I guess it would allow to skip the whole lot of literature about truth finding via cues analysis. It also nicely demonstrates that I am not alone finding lie to be difficult even when necessary. The findings of this book are also very helpful in design of processes involving human action, making it clear that by removing advantages that could be provided by lying would remove motivation for doing this and consequently its occurrences.
The main idea of this book it to present a different view on human action. Author expands usual assumption that people act rationally, trying to maximize material benefits or emotionally, based on instinctive heuristics, by introducing the new form of motivation for action, that he calls “for self”. Consequently, he supports this idea by reviewing various areas of human behavior that, he believes, are not covered by conventional views of motivation.
PART I Life Is a Mixed Drink
1 Venturing beyond Purposeful Choice
Author starts here by rejecting the idea of exclusively purposeful choice: “Both rational choice and behavioral economics assume that action is purposeful, that people seek the outcomes that best gratify their preexisting desires. People either know their preferences and can describe them out loud, or sense them and act as if they understood what they wanted. The purposeful choice model can explain many things, but not everything. Certain actions are undertaken not for any tangible benefit but for their own sake. They cannot be ranked against, or traded for, other actions. These actions belong to a second realm of behavior that is neither rational nor irrational, but for-itself.”
Then he tells the story of his intellectual development from PhD candidate in Chicago school of economics with strong believe in economic rationality, to financial trading executive discovering joy of doings difficult projects for its own sake, and all the way through wealthy early retirement and post retirement projects when life’s enjoyment is not linked to specific material purposes.
2 Two Realms of Human Behavior
Here author moves to detail his main thesis discussing meaning of “For-Self” motivation and significance of Authenticity. He also reviews relationship between realms of “Purposeful” and “For-Self”, including their interactions and inequality when default is usually set to “Purposeful”. Author also provides graphic representation of his idea:
After that author proceeds to review in details all three parts of “For-Self” domain, dedicating a Part of the book to each: believes, people, and time.
PART II Belief
3 Acting in Character
Here author discusses how people have infinite variety of believes and how they depend on individual character. He refers to philosopher Charles Sanders Peirce to discuss adoption of believes:
- A new belief X is consistent with the things one already knows.
- An authority to which one has committed says that X is so.
- X is the style of thing that one is inclined to believe. In Peirce’s words, X is “agreeable to reason.”
- A new belief X, when subjected to the scientific method, corresponds to data in the world.
After that author move to discuss consequences of acting based on believes, providing 2 interpretations for each one as Purposeful and another For-Self:
- Disregarding Expert Opinion
- Clinging to False Beliefs
- Favoring Experiential Knowledge
- Reacting to Extreme Unexpected Events
At the end of chapter author looks for practical implications in such area as stock picking.
4 Making Money in Financial Markets: Anatomy of a Leap
In this chapter author moves to area of his expertise – Financial Markets and first reviews Efficient Market Hypothesis, then two forms o investing: Institutional and Individual, and finally tells his individual business story with financing big and risky project Thanet.
5 For-itself Decision-Making within a Group
In this brief chapter author once again retells business story, this time with stress on reconciliation of his For-Self decision-making with other people, usually investors. Interestingly enough he even manages to link it to the Bible story of Joseph and Pharaoh.
PART III People
Here author defines main categories of altruistic behavior and then looks in details at each one of them:
(1) selfish altruism, when an individual appears to subordinate his interests while actually promoting them;
(2) manners and ethics, when an individual observes social norms or adheres to established moral principles;
(3) care altruism, when one person cares directly about the well-being of another;
(4) mercy, when a person performs a sporadic altruistic act that defies rational explanation; and
(5) love altruism, which describes acts that transcend all preferences and do not stand in relation to them.
He also states that: “The purposeful choice model makes room for the first three types of altruism but not the last two.”
7 Public Policy
Author starts this chapter by applying Pareto efficiency to public policy. Then he moves to discuss moral dilemmas, including compulsory trolley problem and monetary value of human life.
PART IV Time
8 Changing Our Minds
This chapter is about choices across time, which includes planning and contradiction between current self that does planning and future self that suppose to implement it. Then author pontificate on planning horizon and discount of the futures.
9 Homo Economicus and Homo Ludens
The final chapter is about two different approaches: Homo Economicus and Homo Ludens, both of which drive human life. He also discusses freedom of choice, choice overload, need for meaningful challenges and consequently work. Finally, author suggest that economy should be changed to move away from Homo Economicus needs that becoming too easy to achieve in direction of Homo Ludens needs.
SUMMING UP Purposeful versus For-itself: A Peace Treaty
For summary author discusses behavior biases for rational choice or For-Itself, positive psychology, and provides updated graph of action drivers:
MY TAKE ON IT:
Generally, I am in agreement with author’s point that economics fail to explain human conditions and actions and there is need to go far beyond it to what author calls “for-itself”. However, I believe that it is not possible for human to do anything that could be strictly divided into “purposeful and for-itself”. It is because human is rather complex entity, which is continuously in process of changing condition of need to satisfy multiple, often contradictory needs and wants created by the brain’s evaluation of physical, psychological, and environmental conditions both: existing and preferable. The variance causes action to move from existing to preferable, which is one and only purpose of any action whether it purposeful, selfish, altruistic, or whatever. I wholeheartedly support all attempt to understand humans, but I am against all attempts to control them as long as they are not violent. My believe is that humans are best off if they are not controllable by others and have resources to achieve whatever they want to achieve.
Here is how author defines the main idea of this book:” A key proposition of this book is that economic fluctuations are substantially driven by contagion of oversimplified and easily transmitted variants of economic narratives. These ideas color people’s loose thinking and actions. As with disease epidemics, not everyone becomes infected. In the case of narrative epidemics, the people who miss the epidemic may tell you that there was no such important popular narrative.”
Part I The Beginnings of Narrative Economics
Chapter 1 The Bitcoin Narratives
Author starts it with the statement that he presents a new theory of economic change that introduces new element: contagious popular stories as important factor defining economic behavior. In this chapter he presents example of such narrative: Bitcoin and then discusses its relation to bubbles, its philosophical link to Anarchism, elimination of inequality, and globalization via removing nation-state control over money supply.
Chapter 2 An Adventure in Consilience
In this chapter author looks at consilience as unity of knowledge and presents his idea that it could be build on the basis of narratives. To support this idea, he presents search results in publications from different areas of knowledge:
Chapter 3 Contagion, Constellations, and Confluence
Here author states that economic narratives are pretty much similar to viruses and then looks at processes of contagion. Once again, he uses Bitcoin as example, comparing it with previous popular economic narrative of Bimetallism:
He also discusses how multiple economic narratives interact and intertwine between themselves, creating environment that drives econonic events in one direction or another.
Chapter 4 Why Do Some Narratives Go Viral?
Here author looks at why narratives are so important and why anthropologists find them in all human societies, regardless of their levels of development. He also looks at the nature of narratives, discussing difference between story and narrative and then providing example with invention that had significant impact on economy – rolling suitcase and how it could not become viable for about 100 years after it was patented in 1887. It took glamourous aircrews of big airlines start using rolling suitcases for them going viral and becoming ubiquitous.
Chapter 5 The Laffer Curve and Rubik’s Cube Go Viral
In this chapter author looks at another two viral phenomenon, one economic -Laffer Curve, and another just toy – Rubik’s cube. Here is diagram of popularity search for Laffer:
Chapter 6 Diverse Evidence on the Virality of Economic Narratives
Author starts this chapter by looking at underlying physiology of human brain related to stories and narratives. He then refers to philosophical writings to provide additional evidence that “going viral” is not a new thing, but rather natural condition of human existence that was around forever. Finally, he links it to various examples of impact of narratives on human behavior, including economic behavior. He also discusses heuristics that often define human behavior without any regard to formal logic and even, quite often, completely denying it.
Part II. The Foundations of Narrative Economics
Chapter 7 Causality and Constellations
Author starts this with note that just a few persons create new economic narrative and consequently cause big economic movement only if and when this narrative becomes accepted by many. Then author discusses direction of causality taking for example Friedman’s “Monetary history” and then reviewing the idea of “self-fulfilling prophecy”. Next stop is discussion of impact of random events on narrative including such events as anniversaries. Author also describes a number of experiments when intentional prompting caused change in behavior. The final part of the chapter is discussion of memory and impact of fake news that could cause real change of events.
Chapter 8 Seven Propositions of Narrative Economics
In this chapter author summarizes 7 propositions of narrative economics:
- Epidemics can be fast or slow, big or small. The timetable and magnitude of epidemics can vary widely.
- Important economic narratives may comprise a very small percentage of popular talk.
- Narratives may be rarely heard and still economically important. Narrative constellations have more impact than any one narrative. Constellations matter.
- The economic impact of narratives may change through time. Changing details matter as narratives evolve over time. Truth is not enough to stop false narratives.
- Truth matters, but only if it is in-your-face obvious.
- Contagion of economic narratives builds on opportunities for repetition. Reinforcement matters.
- Economic narratives thrive on human interest, identity, and patriotism. Human interest, identity, and patriotism matter.
Part III Perennial Economic Narratives
Chapter 9 Recurrence and Mutation
This chapter is about complex live of economic narratives, how they are created at some point and then move with time, sometimes moving into economic live and them disappearing in shadows, only later mutate and move back to live again. He provides a list of the biggest economic events in American history:
- A depression from 1857 to 1859, followed by the secession of southern states in 1860–61 and the US Civil War (1861–65). The Civil War was the most lethal war in US history, responsible for more US fatalities than all other US wars combined.
- A depression from 1873 to 1879 that led to the publication of the best-selling economics book of all time in the United States, Henry George’s Progress and Poverty (1879), which accused the unrestrained free-market system of producing worsening inequality.
- A depression in the 1890s comprising two NBER contractions, 1893–94 and 1895–97. The extended depression, during which unemployment always exceeded 8%, ran from 1893 to 1899. This depression coincided with an aggressive phase in US history, with the United States launching the Spanish-American War and the Philippine War.
- A series of three short contractions from 1907 to 1914, starting with the Panic of 1907, which ended only with the heroic advances made by J. P. Morgan and other bankers. These events led to the creation of the Federal Reserve System to prevent such banking crises in the future. These contractions were followed by World War I, which began in 1914.
- A brief but extreme depression from 1920 to 1921 that included the sharpest deflation ever experienced in the United States.
- The Great Depression after the 1929 stock market crash, which morphed into a worldwide depression. In the United States the extended depression ran from 1930 to 1941, with unemployment uniformly exceeding 8%. The Great Depression took its name from the 1934 Lionel Robbins book with that title. It comprised two NBER contractions, 1929–33 and 1937–38. The worldwide depression immediately preceded World War II.
- A severe recession in 1973–75, associated with a war in the Middle East and an oil embargo. Economist Otto Eckstein called this period the “Great Recession” in his 1978 book with that title, inviting comparison with the Great Depression. z
- A severe recession from 1980 to 1982, comprising two NBER contractions, a short contraction within the year 1980 and, soon after, another contraction 1981–82, associated with a war in the Middle East. At the time, this recession was called the “Great Recession,” again inviting comparisons with the Great Depression.
- A severe recession from 2007 to 2009, also named the “Great Recession,” once again inviting comparisons with the Great Depression, and this time the name really went viral and has stuck to this day.
At the end of chapter author identifies 9 specific narratives that he specifically reviews in the next 9 chapters.
Chapter 10 Panic versus Confidence
Here author analyzes raise and fall of panic or levels of confidence using search for frequency of use words in contemporary publications:
He then discusses crowd psychology which causes these movements and how they impact economy.
Chapter 11 Frugality versus Conspicuous Consumption
Here author discusses another somewhat polar narratives: frugality and need for saving that was prevalent before WWII and how it was substituted by the new narrative of “’American Dream” after WWII:
Chapter 12 The Gold Standard versus Bimetallism
This chapter is about another pair of narratives, this time related to intrinsic value of money, which had 2 picks: one at the end of XIX century with “Cross of Gold” images and later narratives of XX century with Gold Standard as tool to limit government monetary excesses:
Chapter 15 Real Estate Booms and Busts; Chapter 16 Stock Market Bubbles; Chapter 17 Boycotts, Profiteers, and Evil Business; Chapter 18 The Wage-Price Spiral and Evil Labor Unions;
These all are other long-living narratives, which author traces in similar ways through use of relative frequency of words in news and magazines. They all have intermediate ups and down when a narrative used to explain current events and then fades out when events change and some other narrative takes its place.
Part IV Advancing Narrative Economics
Chapter 19 Future Narratives Future Research
Here author discusses future and makes a number of important points about changes in future forms and circumstances of various narratives and anticipation of new technology changing contagion rates and recovery rates of future narratives. At the end he suggests how his approach should be used in future research and how incorporate narrative economics into general economic theory. He also suggests the great expansion of data collection efforts necessary for application of his ideas and specifies how it could be done:
- Regular focused interviews of respondents inviting them to talk expansively and tell stories in response to stimulus questions related to their economic decisions.
- Regular focus groups with members of different socioeconomic groups to elicit actual conversations about economic narratives.
- A historical database of focus groups conducted for other purposes in years past.
- Databases of sermons.
- Historical databases of personal letters and diaries, digitized and searchable.
Finally author suggests to conduct tracking and quantifying narratives in order “to better understanding the patterns of human thinking about the forces that cause economies to boom at times and to stagnate at others, to go through creative times and backward times, to go through phases of compassion and phases of conspicuous consumption and self-promotion, to experience periods of rapid progress and periods of regression.”
MY TAKE ON IT:
I find this book very interesting and I think that author’s approach would be much more effective than quantitative approach to economics that dominated the last 60 years of this field development, consistently providing proves of its inability to predict future developments even for the next couple of quarters. Interestingly enough, this approach somewhat reminds me of Mises’ believe that economics is about human actions and as such is not really good place for mathematical approach based on analysis of global equilibrium and computer modeling. However, it would take tremendous change in thinking of economists on tenure that I do not think could possibly happen, unless tenure is substituted by rewards for correct predictions of future economic developments.
The main idea of this book is that individual IQ scores have only marginal impact on individual prosperity, but IQ of a nation or hive, defined as average of its people, is much more important because it defines overall prosperity of the nation.
Introduction: Paradox of IQ
The paradox author presents here is that countries which do better on various international scholastic tests have higher GDP, however inside countries high IQ does not correlate with high income at the same level. Here is how author summarizes reasons for this:
Author identifies 5 channels for IQ to pay more for nations than for individuals:
“1. High-scoring people tend to save more, and some of that savings stays in their home country. More savings mean more machines, more computers, more technology to work with, which helps make everyone in the nation more productive.
- High-scoring groups tend to be more cooperative. And cooperation is a key ingredient for building higher-quality governments and more productive businesses.
- High-scoring groups are more likely to support market-oriented policies, a key to national prosperity. People who do well on standardized tests also tend to be better at remembering information, and informed voters are an important ingredient for good government.
- High-scoring groups will tend to be more successful at using highly productive team-based technology. With these “weakest link” technologies, one misstep can destroy the product’s value, so getting high-quality workers together is crucial. Think about computer chips, summer blockbuster films, corporate mega-mergers.
- The human tendency to conform, at least a little, creates a fifth channel that multiplies the effect of the other four: the imitation channel, the peer effect channel. Even a small tendency to conform, to act just a little bit like those around us, to try to fit in, tends to quietly shape our behavior. If you have cooperative, patient, well-informed neighbors, that probably makes you a bit more cooperative, patient, and well-informed.”
- Just a Test Score?
Here author looks at IQ tests as tool for intelligence measurement and points out that high scores in one area predicts skills in other. Then he discusses diverse methods of measuring cognitive skills and provides some research result for impact:” The payoff to a high IQ appears moderate. Those with IQs in the top 10 percent earned about 60 percent more than those in the bottom 10 percent.” Another research demonstrates that this impact did not change that much for 100 years. Finally, author discusses Emotional IQ noting that:” Better average social skills are typically just another benefit of having a higher IQ score, and since the economy is a social system, those social skills may prove important in explaining why higher-scoring nations tend to be more productive.”
- A da Vinci Effect for Nations
Here author extends the idea if consistent levels of IQ across different areas to Nations. First, he discusses ecological validity of tests. Then author moves to discuss main source of nations IQ – work of psychologist Richard Lynn and political scientist Tatu Vanhanen. Here is relevant graph:
- James Flynn and the Quest to Raise Global IQ
This chapter is about Flynn effect of IQ raising over time. Author discusses racial implications, politically correct suppression of research, impact of nutrition, health, education, and surrounding people on IQ not only of individuals, but also groups and nations.
- Will the Intelligent Inherit the Earth?
Here author moves to various experiments with delayed gratification and idea that smarter people are more patient. Author reviews various research results and financial results for savings rates and debts.
- Smarter Groups Are More Cooperative
This chapter looks at another very important area of human activity: cooperation. Once again research demonstrates correlation: smarter people are not only more patient, but are also better at mind reading to predict results of cooperation or lack thereof. To analyze this at the group level author looks at data from schools with high average SAT scores adn low, finding that students in former are more cooperative than in latter.
- Patience and Cooperation as Ingredients for Good Politics
Author starts this chapter with discussion of cooperation, providing example of informal truce during WWI. Then he moves to politics defining it as kind of recurring prisoners dilemma and linking it to institutions: “I contend that economic institutions—property rights, legal systems, political regimes—are often a collection of just the kinds of games for which higher average IQ pays off, games that are played day in and day out by judges, bureaucrats, politicians, and citizens.” . Author then brings in Coase Theorem: “If it’s easy for two or more parties to bargain with each other, they can bargain to an efficient, win-win outcome regardless of which party has the most power going in to the negotiation.” The final part of the chapter is about government and corruption as measured by the corruption perception index. Author makes an interesting point about IQ and corruption: “Average IQ predicts lower corruption across countries. Additional research that Potrafke and I collaborated on showed that both national average IQ and national math and science test scores do a robust job of predicting a nation’s degree of overall property rights enforcement.14 And University of Johannesburg economist Isaac Kalonda Kanyama found a moderate to strong relationship between national average IQ and yet another set of institutional quality indices created by the World Bank.15 In nations with higher average test scores, politicians tend to respect people’s property, government bureaucracies allow people and businesses to buy and sell with less interference, and bribery is less a part of daily life. In nations with higher average test scores, the government is more likely to let people and businesses find their Coasian bargains peacefully.”
- Informed Voters and the Question of Epistocracy
This chapter starts with example of gap between experts and population using issue of dosage. Then he moves to discuss uninformed voters as result of low numeracy and literacy of population. It is linked to IQ with high IQ voters being better informed, more active, and generally having different attitudes, usually more pro-market. Author also discusses here formation of political opinion via social pressure and information manipulation. On Epistocracy author brings in a paradox of democracy: expansion of franchise brings in low IQ masses that vote incorrectly from the point of view of high IQ elite. He ends with this: “As an economist I will make this forecast: if a nation can find an effective way to raise the information level of its voters, it will probably become more market-oriented, more socially tolerant, and more prosperous in the long run.”
- The O-Ring Theory of Teams
O-ring is reference to the piece of Shuttle equipment that failed causing catastrophe. Author uses this example to discuss that any system is as reliable as its least reliable subsystem. Author then expands this analogy to teams with good and bad workers and posits the question: If high IQ team is more productive, why individual IQ does not provide higher returns.
- The Endless Quest for Substitutes and the Economic Benefits of Immigration
Here author provides his solution to paradox: in high average IQ team even low IQ individuals much more productive than they would be on low average IQ team. This become foundation of author’s discussion on immigration. His claim is that low IQ and culturally different immigrants are becoming much more productive in high IQ team, consequently benefiting everybody. He then discusses impact of such immigration including on the political system of the new country.
- Poem and Conclusion
In the last chapter author become a bit poetic. Then he refers to research about top 5-10% of population with higher level of cognitive skills and whether they have disproportional impact on prosperity of the nation overall. The final inference is that individual IQ does not matter as much as overall levels of cognitive abilities and skills and politics should be directed to support their development. Author also expresses hope that Flynn effect would have global impact raising prosperity of currently lower-scoring countries.
MY TAKE ON IT:
I think that author’s attention and concentration on average IQ of the nation is somewhat strange because it does not exist. As many other thing that social “science” attempts to analyze, it is just an abstraction. IQ and other characteristics are characteristic of individual humans and sould not be applied to abstraction because it prevents clear analysis. What does matter is culture, expressed as a set of views and opinions in minds of majority of people regardless of their IQ. Average American regardless of IQ is culturally conditioned to believe that he/she is entitled to freedom of action in hope to obtain good returns if this action successful in satisfying needs of others who would pay. Whoever is the leader of the nation at the moment can help or hamper to this action, but not really define outcome. The flow of wealth is going from the bottom up with most of it supposed to stay at the bottom. Average Russian, also regardless of IQ, culturally conditioned to believe that decisive impact on his/her well being comes from whoever is the great leader, who now makes decisions and directs collective effort in creation of wealth, which them distributed down according to individuals’ position in society. Consequently, individual effort should be directed to improvement of position within society rather than to creation of wealth. IQ, either individual or national, hardly has much impact on wealth creation by overall society in either case.
Actually, table of cognitive abilities and IQ results by country nicely demonstrates my point. Both CA and IQ of Ukraine and Israel are exactly the same 93 and 95. Moreover the population of Israel to high extent came from Ukraine between 1880 and 2000, the last wave (10% of Israel population) coming after 1990. Israel’s GDP per capita is $42,452, while Ukraine $2,536, that is nearly 20 times difference. It is all despite Ukraine having large territory with the best agricultural land in the Europe, close to the rich EU countries, and vast industrial base built during Russian Empire and expanded by USSR. It is also mainly at peace, except for low scale conflict with Russia, which does not threaten its existence. Israel has miniature territory, is surrounded by enemies who seek its complete destruction and annihilation of its population, constantly suffers from terrorist attacks, constantly under political attack from United Nations, constantly under attack from anti-Semitic intelligentsia of nearly all countries. And, since national CA or IQ cannot explain this different in performance, something else should. Whether such explanation would be based on high individual IQ of Ashkenazi Jews that represent some 25% of population, or overall mix of Jewish cultures from all around the world that formed Israeli culture, or quality of air and water, it would be an interesting thing to explore.
The main idea of this book is to review and retell history of American “Great Society” that was supposed to end poverty and instead turned into nothing else than huge expense on bureaucracy and handouts, often resulting in increased misery of poor. Here is how author defines her objectives: “For today, the contest between capitalism and socialism is on again. Markets do promise strong growth; we do live in a creative society, the most creative in the world, creative enough to lift the nation to new heights. Yet new, progressive proposals bearing a strong resemblance to those of Michael Harrington’s and his peers’, from redistribution via taxation to student debt relief to a universal guaranteed income, are sought yet again. Once again, many Americans rate socialism as the generous philosophy. But the results of our socialism were not generous. May this book serve as a cautionary tale of lovable people who, despite themselves, hurt those they loved. Nothing is new. It is just forgotten.”
Introduction: The Clash
Author starts with the story of Michel Harrington – socialist and author of the book about poverty “The Other America”, which prompted this discussion among American upper classes of politicians, bureaucrats, and intelligentsia. Author briefly describes how this discussion turned into political action resulting in massive expense on variety of government programs that often ended in complete failure.
- The Bonanza (1960-1962)
This chapters starts with discussion of very popular TV series “Bonanza”, which author characterizes as one of attempts to answer to the key question of early 1960s: What to do with the newly found huge American wealth? Author briefly describes some key points of the New Deal, which seemingly established harmony between big government, big corporations, and big labor. Then she looks behind the façade at fight between corporations vs. unions vs. government and individuals who were involved at the highest levels. Author specifically looks at GE, which leaders Lemuel Boulware, Ralph Cordiner, and Charlie Wilson strongly rejected socialist ideas, supported capitalism, and later got Ronald Reagan involved in their effort, creating popular GE theater. Government responded by Justice department investigations and via its TVA administration attack against Reagan. Unions initiated strikes. It all ended with defeat for GE after massive intervention of Kennedy administration. It also killed Reagan GE theater and pretty much ended active ideological support of capitalism by big corporations
- Port Huron (1962)
This chapter is about famous student statement. It turned out that it was not some spontaneous expression of students’ feelings and ideas, but union organized and financed political action. The organizer was UAW boss Walter Reuther. Author retells history of his life, including his work in USSR after which he came out as convinced anti-communist, while retaining his believes a socialist. Then she moves to Tom Hayden, other personalities, discussions, and final result – Port Huron Statement was directed against military, supported unions, and three of Roosevelt’s four freedoms, missing freedom of worship. It also spawned SDS organization. After that author moves to relationship between Reuther and unions with Kennedy and then Johnson administrations.
- Great Society (May 1964)
This chapters starts with campaign of 1964 when Johnson and media succeeded in turning Goldwater into warmonger, while preparing huge expansion of government that was supposed to raise society to the new heights. This would be massive expansion of New Deal that democrats failed to achieve before. Author describes Johnson’s legislative success and a few failures, such as inability to eliminate “right to work” at federal level.
- Revolt of the Mayors (January 1965)
Here author describes struggle between local, state and federal powers using example of LA democratic mayor Sam Yorty. The struggle was about many issues, not last of them civil rights. The problem was that federal government dealt with abstractions when forcing all to be equal is always good, while mayors dealt with realities when middle class neighborhoods like Watts were turning unlivable, so middle class evacuated in mass. Author looks at multiple programs imposed on cities by federal government and analyses their consequences, including Watts riots.
- Creative Society (August 1965 – January 1966)
This starts with NASA and its achievements, then moves to the story of Intel and birth of Silicone Valley prompted by equity compensation in startup high tech businesses. Then author returns to politics of the period: attempts to declare welfare as property, civil rights, and right to work fights.
- Interlude: Looking for Socialism (September 1965 – January 1966)
Here author describes Tom Hayden’s unsuccessful attempt to initiate viable political movement for socialism. At the time American attention turned to Vietnam war, which prompted powerful political movement against it that leftists pretty much took over. They revived communist propaganda similar to “I saw the future and it works”, promoting beauty of totalitarianism in Soviet Union, China, Cuba, Vietnam, and elsewhere. Author describes travels of Hayden and others to North Vietnam that was celebrated by American intelligentsia, rather than punished as support for the enemy.
- Housing Society (January 1966 to July 1967)
This chapter looks at HUD and massive housing programs that were supposed substitute old poorly regulated housing created by independent efforts over long period of time with government planned state of the art, well regulated and controlled projects that would force on poor much better quality of life than they could produce themselves. Author describes political and legal actions that extended eminent domain beyond any conceivable limit and for all practical purposed deprived poor of what little residential property they had, substituting it with a place in government owned hosing with lots of strings attached. Author describes these strings and impact they had on destruction of family and overall way of live. Author also describes war against landlords, which led to elimination of any incentive for private investment into housing for poor and implementation of complete bureaucratic control.
- Guns Butter and Gold (Thanksgiving 1967 to March 1968)
This chapter starts with discussion of gold and its link to dollar that was still valid at the time per Bretton Woods agreements. Johnson administration profligate spending led to gold outflow from USA. Author describes attempts to increase gold mining. It follows by the look at relationship with UK. Author also reviews multiple additional crises: political between Johnson and Kennedy clan, scary pronouncement of environmentalists that were gaining popular support, Tet offensive in Vietnam, legislative failures, and finally primaries challenge. All this together led to Johnson dropping out from running for the second full term.
- Reuther and the Intruder (August 1968 to December 1968)
This starts with description of arrival of small foreign cars like Toyota and Volkswagen that were destined to undermine both American big automakers and their symbiotic partner – UAW. Author retells story of 1968 elections, internal struggle within democratic party, and actions of UAW boss Reuter.
- Moynihan Agonistes (1969 to 1970)
This chapter starts with discussion of unusual for liberal academic action: Moynihan joining Nixon administration. Then author reviews events of this period somewhat via Moynihan eyes. Nixon’s cooperation with reasonable left reached the point when he supported and even tried to promote guaranteed income. However, since it would eliminate welfare system, depriving its constituents of cash flow, the proposal failed. Author also deviates a bit into history of welfare ideas all the way to Engels, Webb, and Roosevelt to demonstrate how these ideas developed in the Anglo-American world. Author describes how practically all political powers left and right rejected the idea of family assistance and how other events related to Vietnam led to complete disruption between intelligentsia and Nixon administration. The chapter ends with description of two symbolic events marking the end of era: Moynihan resignation and death of UAW boss Reuther.
- The Governor of California (1970)
This chapter pretty much describes initiation of the new movement, which was pretty much against direction to increase welfare and government power. It starts with description of fight against integration of all LA schools ordered by judge and discussion of popular legal doctrine of welfare being property of its recipients. Author then demonstrates how it prompted growth of Reagan’s political career. Reagan strongly rejected both ideas because LA school integration would require busing, which was huge burden on middle class kids and parents. Author then describes a number of political fights in California that made Reagan a national political figure of serious statute.
- Scarcity: Burns Agonistes (1971)
This chapter starts with the story of residual payments for actors that Reagan achieved when he was the union leader, which become less and less valuable with inflation. The author then moves to discussion of inflation and overall economic decline that become evident in early 1970s practically destroying the very idea of affordability of massive welfare state. Author discusses details of interplay between FED chairman Burns and Treasury’s Connally who tried stopping inflation and save economy with price and wage control, closing gold window, and using other measures, but were not that successful.
Coda: Demolition in St. Louis (March 1972)
This ends book on symbolic note of demolition of Pruitt-Igoe – one of the most visible and expensive projects of welfare state. More than anything else it demonstrated that human beings, even very poor, are not subject to easy control by bureaucratic machinery, at least in democratic country were, one way or another, they manage to avoid such control.
MY TAKE ON IT:
This is an interesting take on history written with typical American attitude of believe that politicians and bureaucrats had initiated welfare state, promoted, and continue promoting it because they want the best for poor. The problem is that they choose erroneous method to do it and that is why it continuously fails and quite miserably at that.
I think it is very naive view that impedes resolution of the problem. I like the expression that I read once about Roosevelt’s brain trust and other enthusiastic promoters of big government solution in 1930s: “They come to do good and did well”. I think that regardless what such people think when they start as politicians or bureaucrats, “do well” is the real engine of their effort, and key here is “do well” at the expense of productive people misleading them into believe that it is done to achieve fairness for all. The programs, projects, justifications, and promotions change but lust for power and wealth via control over government machinery of coercion is constant. Therefore, no effort to have reasonable and limited welfare programs could possibly be successful until this obvious fact of lust for power is internalized by majority and countermeasures decidedly applied.
These countermeasures should make it an impossibility to gain wealth and power over others via political or bureaucratic career, which could be achieved only by making all senior political and bureaucratic position temporary with prohibition to any conceivable cashing in upon the end of such career. In short people should obtain their wealth in public sector before embarking on political bureaucratic career or forever forfeit hope to be much wealthier than average.
Here is how author defines his main idea: “The technocratic illusion is that poverty results from a shortage of expertise, whereas poverty is really about a shortage of rights. The emphasis on the problem of expertise makes the problem of rights worse. The technical problems of the poor (and the absence of technical solutions for those problems) are a symptom of poverty, not a cause of poverty. This book argues that the cause of poverty is the absence of political and economic rights, the absence of a free political and economic system that would find the technical solutions to the poor’s problems. The dictator whom the experts expect will accomplish the technical fixes to technical problems is not the solution; he is the problem.”
PART ONE: THE DEBATE THAT NEVER HAPPENED
Chapter One: Introduction
Author starts this with imagining routine, for developing countries, application of government power to move farmers from their village to another place happening in Ohio. Then he stresses that such raw and cruel power application in developing world would occur under direction of Western technocratic elite, which finds it inconceivable in their own countries. Then author presents his claim that technocratic approach of forcing people to do “right things”, whatever it is, is not working regardless of how much money provided as “help” to support it. Author also discusses in this introduction what he wants to achieve with this book, anticipating accusations that he expects to be pointed at him, and provides a detailed list of what this book is not about.
Chapter Two: Two Nobel Laureates and the Debate They Never Had
The laureates here are Gunnar Myrdal – promoter of soft authoritarianism with socialist central planning and Friedrich von Hayek – promoter of freedom, not only as value of and in itself, but also as source of economic prosperity.
Author then discusses debates that representatives of these two polar views should have, but never did:
- Debate on the Blank slate versus Learning from History
- Debate on the Well-Being of Nations versus that of Individuals
- Debate on Conscious versus Spontaneous Solutions
Finally, author states that Authoritarian point of view obtained practically unanimous support of intelligentsia, while its supporters, especially Myrdal understood that large scale planning does not work neither logically nor practically. So the only way to promote it is to avoid debates at any cost.
PART Two: WHY THE DEBATE NEVER HAPPENED-THE REAL HISTORY OF THE DEVELOPMENT IDEA
Author starts here from referring to Truman’s initiative to start foreign aid in 1949, which is considered the starting point of the process and then reject this idea and demonstrates that it had its roots in colonialism and locates its formative years between 1919 and 1949. This part reviews the development and implementation of Authoritarian, expert led development idea in three areas: China, Africa, and Colombia.
Chapter Three: Once Upon a Time in China
Author start this chapter with introduction of two economists: Condliffe, who supported free development and H.D. Fong who supported authoritarian model. Then he analyses role of racism, which was widely accepted among western intellectuals, who believed that people of “inferior” races could not develop their countries without external direction and control. Author also discusses consequences of Versailles treaty and its system of mandates. Author then moves to discuss development in China where revolution brought to power socialist Sun Yat-sen who fully supported idea of authoritarian development. Author then reviews role of American experts who brought in money from Rockefeller foundation and network from YMCA. He also looks at creation of the Institute of Pacific Relations (IPR) under leadership of H.D. Fong that start looking for development projects in China to implement authoritarian model. Author also discusses attempts to promote democratic development by Condliffe and Yuan-li Wu, which were not successful. All this ended, however, with communist takeover of China in 1948.
Chapter Four: Race, War, and the Fate of Africa
This is the story of another not very successful attempt of expert led development, this time in Africa under leadership of Lord Hailey. This one was driven by idea to save British colonies in Africa by preventing race war that was brewing from the mid of the century. There is interesting narrative here about contradictions between British and Americans when British blamed Americans for racism, while American could not stand even idea of Empire. Author then briefly discusses how out of all this was born African nationalism with strong authoritarian tendencies. As representative type author uses Kwame Nkrumah.
Chapter Five: One Day in Bogotá
This chapter moves to Latin America to trace development of Authoritarian, expert driven development in Colombia. Author starts with two events of April 9 1948: selection of Colombia as test case of development by World Bank and assassination of popular leader Jorge Caitain, which triggered long period of massive violence. Author also trace development US attitudes to Latin America during this period.
PART THREE: THE BLANK SLATE VERSUS LEARNING FROM HISTORY
This part starts with the story of Bill Gates claiming achievement of dramatic improvements in fighting child mortality in Ethiopia. Author looks at this in details and finds that it is pretty much result of poor statistics, which does not allow any serious analysis of results. Author evaluates this as example of “Blank Slate” attitude when experts believe they can apply technical solution to the country without any accommodation of its specifics such as history and cultural values.
Chapter Six Values: The Long Struggle for Individual Rights
Here author looks at history of emergence of individual values and consequently democracy. He tells the story of fight between Emperor Barbarossa (1154) against cities in Italy some of which were able to retain their rights and some were conquered. This difference in history is still shows now in prosperity levels of these places. Author then discusses collectivist values, which always are values of rulers and aristocracy versus individualist values, which lead to the freedom. He traces how individualistic values moved after expansion of trade. First from Mediterranean to Atlantic: from Italian cities to Dutch and British, and then to America. Author also analyses different effects of autocracy vs. democracy on values and how it impacts behavior. He specifically looks at case of Asian type of collectivist values, using the story of British man of Chinese origin Henry Lee who became Lee Kuan Yew – the Singapore autocrat who established seemingly very successful form of political autocracy combined with business freedom. Here author provides an interesting analysis of trust between people in different societies:
At the end of chapter author contemplates on individual rights and values being an end in itself and then discusses findings of research on what poor really want, which turned out pretty much the same that rich and definitely includes freedom. He then points out that tradeoff between freedom and autocrat led prosperity is often illusionary and burden of prove is on experts who promote such tradeoffs.
Chapter Seven Institutions: We Oppress Them If We Can
Here author discusses oppressive institutions, which experts usually support, claiming that forcing people into some kind of behavior or organizational structure they do not want, leads to quick material improvement. Author looks at few case studies that demonstrate that cost of oppression is high, while benefits are dubious or non-existent. Author provides a very interesting data based on history of African tribes that either were victims of slave trade or avoided this, demonstrating that history of oppression carries long lasting damage to culture and attitudes, making it much more difficult to prosper. Interestingly enough, it relates not only to oppressed, but also to oppressors.
Chapter Eight: The Majority Dream
Here author looks at two places: New York and Colombia. Both places started as colonies with slavery. Author traces one street block in New York – Greene Street, who owned this place, how they lived, and what they did. He traces how this place initially was owned by aristocratic family of Bayard whose economic power was based on slavery and sugar plantations back when New York was New Amsterdam. However, by 1780s they lost this property due to changes in economy and mass influx of immigrants, opening it to succession of businessmen whose well being was based on prosperous free economy. Author briefly retells history of Erie canal that made New York into huge hub for trade between American plains with their agricultural production and Europe with its advance manufacturing. Author also traces economic development of refugees Sephardic Jewish family Seixas, who prospered for centuries in this place and still do. Finally, author looks at change in infant mortality and how democracy positively impact this parameter.
PART FOUR: NATIONS VERSUS INDIVIDUALS
This starts with interesting example of how differently could be perceived the same fact by people with authoritarian and collectivistic mindset from individualistic. The fact is migration of professionals, in this case doctors from poor countries to USA. From authoritarian point of view: “America is Stealing the World’s Doctors”, indicating attitude that doctors are less than human, rather kind of commodity produced by the “World” so their migration is equivalent to “America is Stealing” this commodity. From individualistic point of view doctors are human and if they decide that America is better place for them to live and work, then it is just indication that America has better society, at least for doctors. Author also makes important point that authoritarian attitude treats individuals from different countries differently – nobody would even think to say that prominent American doctor was stolen by Africa if he would move there from USA.
Chapter Nine: Homes or Prisons? Nations and Migrations
This chapter is about migration between countries and nationalism. Author’s position is that migrants from poor authoritarian countries to rich and democratic West reduce overall poverty in the world, expand protection of individual rights, send money back home in excess of any official help to their countries and do other nice things. Author also discuss limits and negatives of nationalism.
Chapter Ten: How Much Do Nations Matter?
Here author discusses impact of national policies on economic development- research project that he worked on at the beginning of his career. The point is that it does have significant impact in extreme cases, but generally within limits of normalcy such impact is only marginal. Generally, it is more function of luck and circumstances, so except for periodic good or bad exceptions, the condition of nation is pretty stable. This brings author to discussion of measurement of these conditions and their changes, noise vs. signal, measurement errors, and such. Here is author’s overall conclusion: “In the debate on the prerogatives of nations versus the rights of individuals, the case for the former depended on development that happened mainly at the national level. Yet nations do not matter for development as much as the development community says they do. When they do matter, it is sometimes in a bad way, as we have just seen with Aleppo disease and trade-destroying borders. The worship of national growth success has often led to giving the national state more powers to pursue this success. The extreme emphasis on national growth performance is misguided, for it shows little evidence of paying off—or even of any way to know whether the national strategy really is paying off or not, according to questionably measured growth rates. The casualties as usual are the individual rights suppressed in the name of the nation’s collective pursuit of success.”
PART FIVE: CONSCIOUS DESIGN VERSUS SPONTANEOUS SOLUTIONS
Chapter Eleven Markets: The Association of Problem-Solvers
Here author presents an opposite way of thinking of contemporary high-level bureaucrats such as president of world bank versus thinking of Adam Smith and other supporters of freedom. Author discusses Smith’s approach as “Problem-Solving System” that includes such parts as division of labor, gains from trade, gains from specialization, and other features of free market. However, author stresses that it would be mistake to look at it as market vs. government problem. It is rather about individual rights vs. state power. Here is author’s formulation:” We have now reached another crucial moment in the argument of this book. The technocratic approach—solutions by experts—arguably gives us the worst of all worlds. Having experts in charge of solving society’s problems turns things over to agents who face neither a market test nor a democratic test. If they get the knowledge (including localized feedback) wrong, they suffer neither economic nor political penalties. If their solutions should happen to work, they get neither economic nor political rewards. So, there is nothing to spur them on to scaling up successes any more than there is anything to motivate them to kill off failures. The Invisible Hand spurs development through the virtuous circle of specialization, learning by doing, and gains from trade. The Invisible Hand guides nonexperts to something they are good at doing. They start selling it, and they get even better at it thanks to learning by doing. Trade allows them to keep increasing the scale of the virtuous circle, selling more and more, learning to do it better and better, till they take the world market by storm.”
Chapter Twelve Technology: How to Succeed Without Knowing How
Here author presents his point of view on what causes economic development and concludes that it is technology. Technology is another spontaneous order and author looks in details at multiple examples of its development, stressing that it is not really subject to planning or even knowledge of where its development will move, so there is no place here for government direction.
Chapter Thirteen Leaders: How We Are Seduced by Benevolent Autocrats
In this chapter author reviews so called autocratic miracles like Singapore and provides evidence that it is not as good as advertised. Author presents two potential reasons for autocratic success:” The first and stronger variant is simply that autocrats are better than democrats for development (by development in this context we usually mean “rapid economic growth”). The second, weaker variant is that the best autocratic leaders are better for growth than the best democratic leaders, while conceding that the worst autocrats are worse for growth than the worst democrats.” The he proceeds to reject both of them using factual data and parables.
Chapter Fourteen: Conclusion
In conclusion author summaries the ideas of this book based on various stories told in previous chapters, making the point that use of government power to achieve progress generally fails like it did in Ethiopia and Uganda, while uncontrolled natural development generally succeeds as it did on Green Street.
MY TAKE ON IT:
I seldom agree with anybody to such extent as with this author. For me it is obvious that relationship between people, whether as equals with voluntary exchange and cooperation, or as superior and inferior with top down control, define economic success or failure, and generate prosperity or misery. The one important thing I think author did not pay enough attention to is parasitic character of all authoritarian regimes. The typical policy of authoritarian regime in a country with successful economy is to control whatever limited freedom it allows to its productive population, while continuously transferring wealth to themselves. In most important case such as China, which is now trying present itself as viable and even superior alternative to democratic fee market system, this parasitic character expressed by using cheap labor and unlimited power of regime to ignore environment, health, and freedoms of its own population in order to obtain investment and technological transfers from Western hosts. This was successful for a few decades with great help of western elite, which become rich from such transfer. However, at some point, and such point seems to be achieved, population in host democratic countries would recognize that such parasitic transfer has very strong negative impact on their well-being, leading to disconnect between them and autocratic parasite. It is quite possible that we already observing such disconnect expressed by raise op populist powers and resentment against both parasitic allies: foreign autocracies and domestic elite.
The main idea of this book is to review the last 100 years of economic thought and actions and demonstrate how they all, after quite a bit of hype, proved to be deficient and failed to produce what is badly needed: reliable, workable, and implementable economic and political organization of society that would meet requirement of the people for good system. Probably the most important point author makes is idea of revival of Arthur Bentley’s ideas about group interest in pluralistic societies.
This starts with the note that our world is very fragile and something that seemingly rock solid could be dissolved by the event in the blink of an eye. As illustration author retells the story of typical auto dealership that was created and ran by quite typical American middle-class family for decades and then was destroyed by financial crises of 2008-9. Author presents it as a example of process that he investigates in this book: “the history of our move from an institution-oriented to a transaction-oriented society.” Author also looks at raise and fall of transactional society and discuss future that he believes will be based on networking
- Institution Man
Here author starts at the beginning of XX century when Institutional Man came into existence and then dominance. Author uses story of Adolf Berle to present ideas of institutions and institutional man that Berle developed. These ideas were pretty much in synch with New Deal and Berle presented them in a book:” The Modern Corporation and Private Property, which had two central arguments: first, that a relatively small number of corporations had rapidly come to dominate the American economy, and second, that because these corporations had so many shareholders (the biggest one, American Telephone and Telegraph, had more than half a million), they represented a historically new kind of economic institution that was not under the control of its owners. “. Consequently, these institutions in conjunction with institutions of government that would maintain leading role, should substitute private property and free market as economic foundation of society. Berle become one of the closest advisors of FDR and author describes this relationship and how it impacted American development in details. Berle died in 1971 just before all powerful corporations led by all-knowing government brought in near destruction of American economy via stagflation.
- The Time of Institutions
This chapter moves to the next two important thinkers on economy and society: Drucker and Polanyi. Author describes Drucker’s work with GM and its struggle with Unions, Dealers, and Customers. Here author links this with initial story of auto dealership in Chicago Lawn and how it started moving from prosperous suburb of Middle America of 1950 down the hill. Author also includes into discussion financial institution – Morgan Stanley, which become key player in investment market of public offerings with shares ownership distributed to such extent that Drucker in 1976 published book” called The Unseen Revolution, in which he announced, with typical flair, that the United States was the first truly socialist country in world history. That was because the workers now owned the means of production through their union and company pension funds’ new role in the stock and bond markets.”
- Transaction Man
Here author presents the next thinker – transaction man Mike Jensen, economist who in 1976 in his book ”The Theory of the Firm” started promoting idea of efficient markets, heavy computerization and mathematization of trading, combined with multitude of new financial tools: “ the derivatives markets—options, futures, index funds, swaps, mortgage-backed securities; anything that could be assembled out of existing financial instruments and then priced, packaged, and traded—had gone from being insignificantly small to producing billions of dollars in activity every year, far more than the traditional stock and bond markets.” One of the most important key ideas was recognition of agent – principal problem and corresponding attempt to remove it by getting management wellbeing directly linked to the Firm’s performance. One of effects of these ideas was boom in leveraged buyouts in 1980s. Author also describes debates between this approach and newly developed behavioral economics of 1990s. The chapter also closely traces personal and professional live of Jensen.
- The Time of Transactions: Rising
Here author moves away from theory and personalities of theorist to practical history of Morgan Stanley and raise of financial industry.
- The Time of Transactions: Falling
Here author moves to the fall of Morgan Stanley, starting with the story of dramatic expansion of mortgages, especially substandard, and linking it back to Chicago lawns, auto dealership, and Obama’s bailout.
- Network Man
In this final chapter author moves beyond financial crises to the new network and Social media environment. He briefly retells the story of Silicon Valley and present his final hero – founder and CEO of LinkedIn Reid Hoffman. Author uses this ultimate networking company as example of emerging new economy and Hoffman’s attitudes and actions as representative for the new economic relations. Author also discusses Hoffman political views and hate of Trump and everything Trump represents.
Afterword: An Attempt to Use a Tool
Here author concisely repeat his review of century of economic thought and action development and bring another personage: Arthur Bentley and his work on “role of business in politics and of politics in the economy.” The main point in his work was to switch analysis from broad classes to much more local and limited interest groups and seek reorganization on the basis of some process of reconciliation of interests, while maintaining pluralistic character of society.
At the end author summarizes the book this way: “What all the major thinkers in this book had in common was an intolerance for organizing the country, in particular the economy, around a never-ending political struggle among non-gigantic interest groups. This meant that in each case, they upheld a pure and alluring idea that was supposed to transcend the inherent contention and untidiness of life in a democracy. Adolf Berle wanted to put the corporation under government’s dominion. He had in mind a two-player game that would begin in conflict but mature into tranquility. Michael Jensen dreamed of a society built around the discipline imposed by markets. The corporation-based American welfare state that Berle helped create was a casualty of the rise of transactions as our governing economic principle. A transaction-based society is anti-pluralist by definition because it lets decisions rest entirely with markets that move instantaneously, and it disempowers groups that aim to attain their goals through political means. Reid Hoffman’s idea of a technologically enabled, network-based society has brought with it a pluralist-sounding rhetoric about distributing power, giving voice to the voiceless, and enabling political organizing. This stands in contrast to the new economic and political world that the Internet-based networks have created thus far, which looks awfully similar to the world made by the railroads and oil companies and electric utilities in their early days of bigness. Pluralism requires institutions that will enact and maintain democratic ideals. A network society promotes a form of pluralism that is virtual and institution-free. That is impossible. Our notional turn away from institutions doesn’t mean that institutions no longer exist. People are social; they naturally form themselves into groups. The more established groups become institutions, and the less established try to influence institutions; and institutions constantly struggle for advantage against one another. To remove institutions from the tableau of how society is supposed to work is, inevitably, merely to allow the powerful institutions to become more powerful and the more vulnerable ones to weaken. This has happened in almost every area of American life. Deregulation produced the greatest concentration of financial power in American history, in six big companies. The advent of the supposedly power-distributing Internet produced the five big companies that now dominate technology. Understanding institutions as necessary is the only real protection against a few institutions becoming too powerful. The great project of organizing economic life so as to give most people a sense of security, belonging, and hope is still an urgent one. The economy we have now is not doing a good job of generating social trust, political calm, or widely shared prosperity. Instead, it has produced a series of terrifying economic shocks that have given rise to equally terrifying political upheavals fueled by voters who feel so ignored and angry that they are willing to blow up the system just to see what happens. The solution to this problem surely will not entail returning to some fondly remembered arrangement from the past. History moves in only one direction, forward. But the tool that Arthur Bentley attempted to fashion, with its insistence on understanding the world in terms of a ceaseless but often productive contention between groups, where the best outcomes are complicated and inclusive bargains, provides useful guidance. Using it properly entails understanding that most people, even people who think of themselves as cosmopolitan, even in the age of globalization and the Internet, live parochial lives. They are neither atomized individuals nor part of a great undifferentiated mass of the public. What’s in front of them are the groups they belong to and the institutions they can see and touch: the schools that educate their children, their local governments, the places where they pray, their trade associations, their ethnic organizations, their political movements. Those are their means of protecting themselves, of improving their condition, of addressing their needs as they define them. Reaching people, doing right by people, building the next good society means using these institutions. Not transactions. Not big ideas.”
MY TAKE ON IT:
I think that it is generally good interpretation of history and economic thought. I would agree that so far none of attempts was successful in providing theoretical guidance for building better system. I also support ideas of pluralism, but I would not limit it to the group level, even small groups. I think all analysis should eventually go to the level of individuals. The group level would probably be sufficient a while ago when groups to high extent were defined by locality and commonality of personal features and therefore remained relatively stable. It is not the case now when social media and Internet made everybody connectable to everybody else in the world providing for complete instability of the groups and possibly of instant group formation on the huge scale. In my opinion the pluralism should be accepted at individual level, the one and only way to avoid tensions and conflict.