Catallaxy Files

polymathic pontification, bleeding heart economic rationalism and liberal secularist contrarianism

email: jasonsoon AT



  • Jason Soon
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    Saturday, May 17, 2003
    A Smarter Digital "Licence Fee" - Take II

    In my previous post on this topic (see here), I argued that the flat $1 per subscriber fee proposed by APRA would not be particularly effective in reducing file sharing of copyrighted material. The APRA proposal thus looks a lot more like a desperate grab for cash, than a thought out attempt to provide incentives for ISPs and end user to kick the file-swapping habit.

    There have been a few comments made on this post pointing out some of the limitations and flaws of my proposal. As I said at the time, my aim was simply to challenge myself to come up with a smarter licence fee. One that would actually encourage ISPs to be more proactive in dealing with piracy, and that would also recognise that a dial-up user who surfs for 3 or 4 hours a month should not pay the same fee as a user with a dedicated (typically broadband) connection.

    There are of course two sides to every story, so in this post I'll attempt to point out some of the more obvious pitfalls with the original APRA fee and the smarter proposal.

    Imposing a licence fee on a per user basis suffers from the same sort of pitfall that imposing a levy on blank recordable media does. Namely - it imposes a cost on end-users even where they are using the product or service for a lawful purpose. The smarter fee I proposed is as flawed in this respect as the original APRA proposal.

    Sarah may even wish to argue that it is more flawed. As she pointed out in comments on the smart fee, my proposal would tax heavy users more, even though there won't always be a correlation between volume of use and copyright violations. This is a good point, however I'll stand by my other argument that ISPs that charge for uploads will have a lower incidence of their users sharing (i.e. making available for upload) copyrighted material. Whirlpool is full of stories of people who have learnt the hard way that leaving file sharing on when you are charged for uploads is a "bad idea (tm)". Since ISPs who charge for uploads (and Telstra is not the only one, especially when you start looking at other ISPs fine print!) should have lower incidence of users sharing files, they should be rewarded.

    But would a licence fee (smart or vanilla), actually change end-user behaviour? The net position is likely indeterminate. Let us assume the ISP passes through the full cost of the licence fee. The price rise may cause some users to reduce their Internet usage, which may flow on to some reduction in file sharing.

    On the other hand - there appears no feasible way in which to make the end-user pay a licence fee based on the amount of files they actually download or share. Thus, as in the case of the simple fee on ISPs, it contains no real incentive for users to change their behaviour. It could even have the perverse impact of encouraging some users to be more active in downloading and sharing files. The logic here being that users may feel that payment of the licence fee creates an entitlement to download and share files.

    My view therefore is that reducing illegal sharing requires a few things to happen. Firstly, the convenience factor. Obtaining legitimate copies of digital music needs to become as easy as obtaining illicit copies. This means more sites offering music (and - video) in commonly acceptable and transferable file formats.

    There must also be convenient payment mechanisms developed. Micropayments is only part of the story. The other part is developing a payment mechanism that can be used by the main offenders for file sharing - teenagers and university students; groups unlikely to have a credit card. The popularity of pre-paid mobile phones should give some idea on what is needed.

    Lastly - the price of individual songs probably needs to come down a bit further. The $25 or so that one pays for a CD these days represents value in that it provides a fairly safe physical backup of ones music, yet can typically be converted with ease to an easy to utilise digital format. Paying $25 to download a digital copy of a song that may be difficult to backup, as well as limited in where and how it can be played, is not the same value.

    Evolution at work?
    A fascinating piece in Nature on the Moken people:

    In the sea, most of us are half-blind - but the Moken are king. This Southeast Asian tribe of sea gypsies can see twice as clearly underwater as Europeans, researchers have found.

    The semi-nomadic Moken, who have settled on Thailand's Surin Islands, use their superior visual skills to dive for food on the ocean floor. It's not known whether the ability is learned or genetic ...

    Moken children can distinguish underwater objects less than 1.5 millimetres wide; Europeans struggle to make out anything less than 3 mm across1, biologist Anna Gislén of Lund University, Sweden, and her colleagues found.

    "They use the optics of the eye to the limits of what is [humanly] possible," says Gislén. The team compared the sub-aqua vision of native Moken and holidaying European kids, aged 7-14 years.

    Unlike visiting children, the Moken swimmers constrict their pupils while diving, the team found. They can also squeeze their eyes' lenses more, making them thicker and better able to bend incoming light. The two processes bring blurry images into sharper focus, explains Gislén.

    "This is the first report I have ever seen about underwater divers and vision," says neurobiologist Howard Howland of Cornell University in Ithaca, New York. "It could be a learned response, albeit totally unconscious," he suggests. Alternatively, evolution may have favoured those with genetic adaptations for better underwater vision.

    Friday, May 16, 2003
    Mortgages - the end of Western civilisation
    Feminist turned anti-feminist crusader Bettina Arndt finds more things amiss with Western civilisation:

    Hakim suggests the substantial debts required to finance home purchase are resulting in women delaying childrearing and continuing longer in full-time work - which may well be contributing to the drop in fertility ...

    But putting off having children so easily drifts into permanent childlessness - as Jean Veevers from the University of Western Ontario showed in her groundbreaking research (published in the book Childless by Choice) ...

    It's a worrying thought that many couples may end up with an empty nest after struggling so hard to provide it. And it is also tough that women keen to stay home to care for their children may be missing out on their preference - a high price to pay for owning their own turf.

    Oh, the shame! That some couples might prefer owning their own home to having children while others might prefer to *gasp* be more financially secure before having children. It just doesn't make sense! And those evil usurers, tempting us into mortgages to turn us into sexless consumers.

    The Left can just be as silly as disilliusioned ex-feminists - some of them have claimed that HECS reduces fertility.

    Thursday, May 15, 2003
    Chua gets it wrong on Venezuela?
    Vladimir Dorta, who was born in Venezuela but is now a proud citizen of the US comments on the Amy Chua thesis which I blogged about before here. To recap, Chua argues that democracy and free markets are an unstable mix in many developing countries because of the inevitable reaction against market-dominant minorities. What Vladimir takes issue with is a piece Chua wrote for the NY Times using Venezuela as an example of her thesis. She characterises the recent instability in Venezeula as an example of race-conscious powerplays where the allegedly elite market dominant white minority is trying to wrest power back from the 'peoples' champion' Chavez.

    Vladimir writes:

    Besides being factually wrong in that the general strike was instigated by business forces (it came out of a business and labor consensus) and that Venezuelan labor unions are left-wing (they are ad hoc interest groups), Chua conveniently omits that the immense majority of Venezuelans supported the strike against Hugo Chávez, that it was led by almost every single person who belongs to an important community or organization and that it included practically all individuals of renown in the country. That is why it was a real general strike and why it was accompanied by huge marchs and demonstrations: big and small businesses including the nationalized PDVSA oil company, workers, teachers, professors, writers, poets, practically all NGOs, right, center and left (yes) of the political spectrum except for the few radicals that still support Chávez ...

    Blinded by her sweeping theory, Chua can’t accept that what may apply to Bolivia, for example, does not necessarily applies to Venezuela, even if both are undeveloped Latin American countries. The only reasonable words in the whole paragraph is that Venezuela’s population is about 80% mestizo, but it is so across the board and has been like that for at least 150 years, as a direct result of the last country-wide civil war that destroyed the vestiges of a mantuano class already decimated by the long and bloody war of independence fought fifty years before. In the decade of the nineteen fifties, Venezuela received close to a million immigrants, mainly from Europe, most of whom mixed with the existing population and the combination gave birth to the most beautiful women in the globe (literally, just check the Miss Universe and Miss Mundo contest histories). Ironically, some in Chávez’s cabinet, such as the vice president and the foreign minister, are as white as some of the opposing “business interests,” and whiter than PDVSA’s mestizo technocrats, most of whom speak English, by the way

    He also notes many other factual errors in Chua's application of her theory to Venezuela.
    Music Piracy and the Internet Copyright Debate: A Smarter "Licence Fee"

    (warning - long mini-essay)

    As Sarah highlights in her post below (big welcome Sarah!), the stakes have been upped in the online copyright debate with the prosecution of three Sydney students for running a music swapping service. This, as Sarah also points out, comes at the same time as the music industry has decided to go after three Universities in order to gain access to records and logs that will presumably also be used to target more students.

    What Sarah hasn't discussed is that earlier this year, APRA sent letters to ISPs seeking $1 per subscriber per annum in "licence fees" on the basis that:

    "APRA is aware that transmissions of its copyright music are occurring on the internet. At present, this use is unlicensed and therefore consitutes an infringement of APRA's copyright. Consequently, APRA has formulated a licence scheme to authorise this music use.

    As the law presently stands, it is the Internet Service Provider (the "ISP"), and not the content provider, who causes transmissions of APRA's music on the internet to the ISP's subscribers.

    Whilst there is no doubt a legal issue as to whether APRA can have this requirement enforced, I would argue that the current APRA approach will not be effective in reducing the transmission of copyrighted material, even if it is legally enforceable. The challenge I have set myself for this short essay therefore, is to demonstrate why the current "licence fee" structure will be ineffective, and then propose an alternate fee structure. Pointing out all the arguments against having such a fee, I'll leave for another day. In effect - I'm setting myself the challenge of assuming I'm working for APRA.

    Lets begin by considering the current $1 per subscriber licence fee. Assuming that the fee is enforceable, it thus becomes part of the variable costs of the ISP. Even if we assume the ISP passes the full cost of the fee on to its end users, this is unlikely to cause any end-user to change their file-swapping practices. Not only is the fee small, but the ISP and the end-user pay the fee irrespective of whether they are actively trying to discourage piracy (in the ISP case) or whether they are engaged in file-swapping (the end user case)

    What is needed then is a fee structure that creates the right incentives for providers and end-user to alter their behaviour, and ideally a fee structure that recognises the different file-swapping potential of different Internet access methods. A better fee structure then might have the following elements

    * Different fees for narrowband (dial) versus broadband. This recognises that an end user with a high speed , permanent connection has the potential to download (and more importantly ,share via uploads), a lot more music. It's also a good strategic move. Whilst the majority of ISP subscribers are narrowband, ISPs are more likely to accept the differential fees. As the number of broadband subscribers grows (Telstra alone is targeting 1 million Retail + Wholesale services), so too does the licence revenue for APRA.

    * Differential fees based on the ISP pricing structure, with higher fees for unlimited plans, and lower fees for lower volume plans and ISP's that charge for uploads.

    There are a few reasons for taking this approach.

    On a flat rate (unlimited traffic) plan, the end-user pays the same fee irrespective of the amount of data they download or upload. When the marginal cost of downloading or sharing files is zero, it can be expected that users will download music even where the marginal value of the song to the user is low, and they will happily share their collection since there is no penalty for doing so. By contrast, a user on a volume based plan must use their available quota more sparingly. Charging users for uploads provides a significant deterrent to leaving file-sharing software running, since sharing is no longer a costless activity. Thus, ISP charging policies which discourage file-swapping should be encouraged by lower licence fees.

    * Discounts for large ISPs. In order to maximise coverage and get large ISP's on side, the viability of offering a volume discount needs to be assessed. There is also a sound cost basis for offering volume discounts. Since the establishment of licencing arrangements with each ISP is a fixed cost (per ISP), the average establishment cost per subscriber is lower for large ISPs.

    As indicated earlier, such a licencing arrangement will have it's own pitfalls an inefficiencies, in a similar way to how a levy on blank recording media does. But if APRA wants to be seen by the online industry as being serious about reducing copyright violations, rather than simply going on a money grab, it needs to put more effort into building a licence arrangement that creates the right incentives.
    Music on the Net
    To add to Jason’s kind introduction yesterday, I should mention that my doctorate is now official. I am flattered to have been asked to join Catallaxy, and I hope that you’ll find my occasional comments on intellectual property and competition law issues interesting.

    I’ll start with one of my favourite topics: digital copyright.

    Digital copyright is being enforced more rigorously here in Australia, echoing the level of activity in the United States and elsewhere. One of the areas in which this is playing out is in the world of peer-to-peer file swapping services. Among others, the music industry has been particularly concerned by this development. Not only have services such Napster and Grokster been targeted, but universities with enrolled students using these services or creating their own have also been held accountable.

    An interesting development has arisen recently in Australia, where three students are facing copyright infringement charges for operating a music file swapping service (which is now, not surprisingly, closed for business). What makes this action remarkable is not just the fact that the three university students are being sued directly, but that the Australian Federal Police has brought the action, following on an investigation where they were assisted by Music Industry Piracy Investigations, an organisation that tracks file swapping activity on behalf of the music industry.

    So students can no longer hide behind their internet services providers (ISPs), which in this case are universities. (ISP liability is another big issue, which I hope to address at a later date.) The Australian music industry has already taken an interest in music file sharing: EMI and Universal are currently suing Sydney University, Melbourne University, and the University of Tasmania to gain access to their computer systems and so investigate possible copyright infringements. But now the students are being targeted directly. And not just industry, but the Australian Federal Police (which has powers roughly equivalent to the FBI) is getting involved.

    The irony of all of this litigation is that services like Napster created a consumer base comfortable with and hooked on downloading MP3-format music files from the Internet…which effectively created a new market for the music industry. The difficulty for the industry now is to develop a viable fee-based and legal download service. Perhaps Apple has now done it. We’ll just have to wait and see.

    Wednesday, May 14, 2003
    My firm is sending me off to do LSE Summer School so I shall be blogging from London in July and August this year (err, and studying too of course, I wouldn't want my firm's investment in my human capital to go down the sink). It should be fun. I'm taking the Public Finance course in Session One (July) and Advanced Micro in Session Two (August).
    Posner on the draft
    Richard Posner has a good article restating the general economic and philosophical case against conscription. It's absolutely surprising in this age that he even has to. What's even more surprising is that a lot of the push to reintroduce some notion of National Service is coming from the left. Conscription is something I usually associate with authoritarian conservatives of the sort that idealise Ancient Sparta but not so. This is the nasty side of the 'Bowling Alone' hoopla and that unhelpful term 'social capital':

    The most sweeping intellectual challenge to our reviving nineteenth-century liberalism comes not from the dwindling band of socialists, with their narrow focus on economic issues, or from the social or religious conservatives, with their narrow focus on abortion, homosexuality, religion, and a handful of other purely "social" issues, but from the communitarians. These political theorists think that liberalism as practiced in the United States today is causing people to lose all sense of communal responsibility. They argue that people are becoming self-preoccupied and thus indifferent to the claims of the community. As evidence they point to our high rates of crime and divorce and out-of-wedlock births; and to our declining rates of participation in communal activities such as voting; and even to the prevalence of commuting and the popularity of television-watching because these (the first especially) tend to be solitary activities .

    For many communitarians, the demon is commodification--the substitution of market services for non-market services. Private prisons, private tutors for four-year-olds applying for admission to $17,000-per-year New York City kindergartens, Duke University's sale of freshman places to rich kids, professional dog walkers, the auction of the electromagnetic spectrum, and surrogate-motherhood contracts: these are some of the gaudier examples. Of greater significance is paid child care, though those communitarians who are liberals in the modern sense do not care to dwell on this point. No longer do mothers feel morally obligated to take full-time care of their children themselves, or grandparents to step in for a busy or absent parent. The purchase of child care is now a legitimate option. The care of the elderly has to a great extent been shucked off to retirement and nursing homes supported by Social Security. And no longer is military service an obligation of citizenship. There is no draft; the army is a career like any other. Preoccupied with money-making and other private projects, many people evade taxes and jury duty, and in most elections fewer than half the eligible voters bother to vote.

    To the practical-minded, the communitarian movement founders on a dearth of useful suggestions for reversing--or even just slowing--the dismal decline that the communitarians bemoan. Most of their proposals echo those made by others on grounds unrelated to communitarianism. One does not have to be a communitarian to want safe, clean parks or high standards in education. Their distinctive proposals tend toward the quixotic, as in Robert Putnam's proposal for an annual Jane Addams Award for "the Gen X'er or Gen Y'er who comes up with the best idea" for restoring social capital; or to the unlovely, as in Michael Lind's program of "liberal nationalism," which proposes restricting immigration and using tariffs to prevent foreign countries from competing with us on the basis of lower wage rates in those countries

    As much satisfaction as it would give me to see the likes of Michael Leeden hauled off to fight in the wars he so fervently advocates, I'll resist the temptation.
    Embarassing fellow-travellers
    How not to do small government advocacy - Brad De Long (whom I must remember to add to my blogroll) points to a basic mathematical error made by Stephen Moore in a piece on dividend taxes (the error was first noted by CalPundit). Stephen Moore, you will recall, is the guy who thought that Mankiw wasn't good enough be the US government's chief economic advisor. While apologists for Moore will want to chalk this up as a mere 'calculation' error, it isn't. To me a calculation error is when you don't know what 12 times 3 equals - a mere deficiency of rote memory that a digital calculator can fix. Moore's error shows that he doesn't understand basic math which to me is the most 'g-loaded' of disciplines. We're talking basic abstraction abilities here, we're talking about someone who professes to be an economist (this mistake would be excusable for someone, say, a ballet dancer, who hasn't so much as looked at a number in years and whose familiarity with basic mathematical concepts is a bit rusty as a result) and we're talking published article, not real-time blog.
    New member
    After a series of recent departures, Catallaxy recovers its range of expertise with the addition of a new blogger, Sarah Strasser or to be accurate, Dr Sarah Strasser. Sarah recently submitted her Oxford doctoral thesis on the copyright implications of hyperlinking, and will be adding her valuable insights on copyright and competition law and other related matters to this blog when she can find the time.

    Tuesday, May 13, 2003
    Economics and evolution Part II
    Some recent responses to my first posting on economics and evolution.

    1) Greg Ransom of the excellent Prestopundit blog argues:

    Economics is not about individual behavior. Economics is about explaining something, a pattern, just like Darwinian biology is about explaining something, a special sort of pattern in our experience of the biological world (I'll reference some of my writings on this in a later post). This pattern is a social pattern. Smith had it right when he pointed us to an undesigned division of labor and social coordination of interactions which produced great riches. As Hayek points out, the "rationality hypothesis" is not essential to economics (and note well, it is twice false -- it is no hypothesis, and it doesn't define rationality).

    If you pretend that Krugman is right about what economics is about, Alex Roseberg has done the hard work of showing how the maximization strategy of the "rationality hypothesis" economists and the maximization strategy of the population biologist are at base insuperably different, not the least because the economists are working within an intentional framework, while natural science is inherently non-intentional

    2) Godless capitalist in my comments facility argues:

    the major, major point that Krugman skips over is that relating microeconomics to human biology (meaning behavior - what we are, not evolution - how we got there) makes it much more empirical. You can actually measure people's preference functions to initialize models of bounded rationality

    All interesting points. I'll need to read Rosenberg as Greg recommends. However I don't see how the way Krugman defines economics contradicts anything Greg is saying. I don't believe Krugman was saying that economics is about individual behaviour a la psychology. All he was saying was that economics attempts to explain the pattern of the social world in terms of methodological individualism . Perhaps Greg has a broader point that coming up with models that produce interesting results is one thing but in so doing, the assumptions underlying those models are forgotten to be only working assumptions so that what really holds when choices are being made is insufficiently studied. I suppose this is a question of where economics ends and sociology, history etc begins. Or it need not even be as harsh a dividing line as that. Krugman's main concern is with economic analytics that produce interesting, testable results and are the bread and butter of economics. What Greg is referring to is perhaps the need for more hard work on descriptive areas of economics - experimental economics, economic sociology and psychology (like the bounded rationality stuff Godless was referring to) and so on. And all these things are equally important and should be done - the problem is how to reconcile these richer findings into the analytics, So far no one has the answer to this yet which is why we fall back on maximisation, but as Krugman notes, biologists do the same thing too - but perhaps they're more self-aware of it and less a stickler for strict math which may be beside the point given what they (and economists) are studying. Austrian economists are also a lot more self aware and concerned with methodological issues than neoclassical. I have great interest and high regard for issues discussed by Austrians. However I think that in terms of analytics neoclassicals still reign supreme. In this area, Austrians are basically neoclassicals without the math to back them up (unless you count on work like Nelson and Winter's as part of the Austrian tradition).

    I don't see either why *intentionality* is important per se in economic.Indeed, if we want to take on the more ambitious task on progressing economics by adopting more realistic assumptions about human behaviour like bounded rationality & custom etc that seems to take us *away* from intentionality and closer to some blind groping process similar to the maximising notion in biology. So in practice they're not that likely to be that far removed. however I think that krugman's point that the two maximising notions are indistinguishable in practice is a good one. Blind groping attempts at attaining local optima driven by some selection process can be modelled *as if* they are maximising agents - this was Alchian's point. We could explain firms as profit maximising due to the fact that less efficient ones are selected out or we could assume they are profit maximising for modelling purposes. But it's still a moot point whether we are sufficiently justified in ditching the traditional assumptions at this stage and this goes back to Godless's point.

    I agree that bounded rationality is an important issue. What I'm more doubtful of is
    1) Whether incorporating bounded rationality into current modelling really makes any great difference to the results since economics isn't about predicting the exact details of behaviour but rather tendencies. thus it might have uses in areas like financial markets and explain their volatility and in agglomeration as Krugman explained but where else?
    2) Modelling is itself subject to economics. Is the benefit of capturing these extra gains worth the cost of throwing out the current maximising framework? until someone actually shows how bounded rationality, satisficing and Leibenstein's x-inefficiency can be used in a more than ad hoc way I'm not sure.

    Monday, May 12, 2003
    Russian Ark: Prognosis negative
    I am an absolute sucker for foreign films and arthouse cinema and have enjoyed a lot of such flicks this year - most recently two of the French 'Trilogy' series, Almodovar's 'Talk to her', and 'Read my lips'. Thus when I noticed the rave reviews for 'Russian Ark' I anticipated pleasures similar to those derived from the aforementioned movies. Alas, my expectations were confounded. One hour through this one-sided recreation of Tsarist Russia and I was already yearning for the orgiastic release of 1917.

    Go watch Russian Ark if you have some Russian roots, are an enthusiast for lovingly lingering camera shots of nice paintings and architecture and think that painstaking, detailed technical achievement for its own sake sans plot and characterisation qualifies camera-work as a movie. Otherwise don't.
    Economics and evolution
    The excellent Gene Expression blog (where I am a guest but have tended to make only pithy contributions) has commenced an excellent and intellectually exciting series of posts by newcomer David Burbridge which attempts to clarify aspects of theories of group selection and cultural evolution - this is compulsory reading for anyone with a serious interest in these issues and you can read his posts here, here, here and here.

    In his latest installment David writes:

    More recently, Karl Popper made the process of ‘trial and error’ central to his ‘evolutionary epistemology’, and pointed out the analogy with Darwinian selection, while Friedrich Hayek described the economics of the free market as a ‘discovery procedure’ in which actions that are not centrally planned or co-ordinated can nevertheless lead, by a process of selection, to efficient outcomes.

    But none of these approaches went beyond a vague and rhetorical analogy between cultural processes and natural selection

    I thought I'd just make this point as a footnote to David's comments - there have been recent attempts to better formalise the idea of evolutionary processes in economics. The most notable of these is Nelson and Winter's Evolutionary theory of economic change. Here is a link to an article which attempts to progress their attempts further. I'll also quote bits of the abstract as it provides a good summary of the Nelson and Winter model:

    The basic idea underlying the Nelson and Winter models is that a verbal account of Schumpeterian competition can naturally be transformed into a description of a computational process in which firms not only make short-term production decisions and investment decisions but also perform a search for new technologies. The latter search is successful in a probabilistic manner, and its successes and failures determine an evolutionary process of the industry. Although the simulation models of Nelson and Winter have played a central role in the "take-off" of evolutionary economics, they have never been fully documented and their differences have never been explored

    Although he doesn't present a formal model, interested readers should also consult Armen Alchian's seminal 1950 article in the Journal of Political Economy - Uncertainty, Evolution and Economic Theory".

    Now, I'm not sure to what extent economics has made any great strides on this since then.

    What's not commonly noted is that there have always been overlaps, and from the other side (that is, biology looking a lot like economics).

    I was inspired to research and write a fuller exploration of this but laziness prevailed and instead I found an already excellent summary of the relationship between economics and evolutionary theory in this 1996 talk by Paul Krugman (everytime Krugman stops trying to do a Maureen Dowd impersonation in the NY Times, he reveals himself to be the brilliant guy he actually is). So I'll quote pertinent bits of this talk instead (though you really should read the whole thing, as they say).

    Firstly Krugman notes the commonalities between the two fields

    Let me give you my own personal definition of the basic method of economic theory. To me, it seems that what we know as economics is the study of those phenomena that can be understood as emerging from the interactions among intelligent, self-interested individuals. Notice that there are really four parts to this definition. Let's read from right to left.

    1. Economics is about what individuals do: not classes, not "correlations of forces", but individual actors. This is not to deny the relevance of higher levels of analysis, but they must be grounded in individual behavior. Methodological individualism is of the essence.
    2. The individuals are self-interested. There is nothing in economics that inherently prevents us from allowing people to derive satisfaction from others' consumption, but the predictive power of economic theory comes from the presumption that normally people care about themselves.
    3. The individuals are intelligent: obvious opportunities for gain are not neglected. Hundred-dollar bills do not lie unattended in the street for very long.
    4. We are concerned with the interaction of such individuals: Most interesting economic theory, from supply and demand on, is about "invisible hand" processes in which the collective outcome is not what individuals intended.

    OK, that's what economics is about. What is evolutionary theory about?

    The answer, basically, is that evolutionists share three of the four concerns. Their field is about the interaction of self-interested individuals - who are often thought of as organisms "trying" to leave as many offspring as possible, but which are in some circumstances best thought of as genes "trying" to propagate as many copies of themselves as possible. The main difference between evolutionary theory and economics is that while economists routinely suppose that the agents in their models are very smart about finding the best strategy - and an economist is always defensive about any model in which agents are assumed to act with less than perfect rationality - evolutionists have no qualms about assuming myopic behavior. Indeed, myopia is of the essence of their view

    He also notes that economics is already closer to evolutionary theorising than most people think even though common critiques of economies are based on the idea that it suffers from physics envy:

    It is often asserted that economic theory draws its inspiration from physics, and that it should become more like biology. If that's what you think, you should do two things. First, read a text on evoluationary theory, like John Maynard Smith's Evolutionary Genetics. You will be startled at how much it looks like a textbook on microeconomics. Second, try to explain a simple economic concept, like supply and demand, to a physicist. You will discover that our whole style of thinking, of building up aggregative stories from individual decisions, is not at all the way they think.

    So there is a close affinity in method and indeed of intellectual style between economics and evolution. But there is another interesting parallel: both economics and evolution are model-oriented, algebra-heavy subjects that are the subject of intense interest from people who cannot stand algebra.

    And to that last point, here is a delicious bit of his talk where he manages to swipe Stephen Jay Gould and John Kenneth Galbraith at a single blow!

    Now it is not very hard to find out, if you spend a little while reading in evolution, that Gould is the John Kenneth Galbraith of his subject. That is, he is a wonderful writer who is beloved by literary intellectuals and lionized by the media because he does not use algebra or difficult jargon. Unfortunately, it appears that he avoids these sins not because he has transcended his colleagues but because he does does not seem to understand what they have to say; and his own descriptions of what the field is about - not just the answers, but even the questions - are consistently misleading. His impressive literary and historical erudition makes his work seem profound to most readers, but informed readers eventually conclude that there's no there there

    Krugman then goes on to tackle the point where evolution and economics differ, namely the maximising assumption and how evolutionary economists differ from the mainstream in that respect. But then he argues that even evolutionists adopt the maximising approach in practice! He goes to give a number of examples of this:

    evolution-minded economists seem to want the following:

    1. They want to get away from the idea that individuals maximize. Instead, they want to represent decisions as the result of some process of groping through alternatives, a process in which it may take a long time to get to a maximum - and in which the maximum you find may well be local rather than global.

    2. They want to get away from the notion of equilibrium. In particular, they want to have an approach in which things are always in disequilibrium, in which the economy is always evolving. Latterly there have also been some economists who want to merge evolutionary ideas with the Schumpeterian notion that the economy proceeds via waves of "creative destruction".

    Now as I understand it evolutionary economists basically believe that an evolutionary approach will satisfy these desires.

    To read the real thing in evolution - to read, say, John Maynard Smith's Evolution and the Theory of Games, or William Hamilton's new book of collected papers, Narrow Roads in Gene Land, is a startling experience to someone whose previous idea of evolution comes from magazine articles and popular books. The field does not look at all like the stories. What it does look like, to a remarkable degree, is - dare I say it? - neoclassical economics. And it offers very little comfort to those who want a refuge from the harsh discipline of maximization and equilibrium

    And ditto with equilibrium

    working assumption of Williams and most other evolutionary theorists, at least as far as I can tell, is that we should model the natural world not as being on the way but as being already there.

    The most telling example of this preference is the widespread use of John Maynard Smith's concept of "evolutionarily stable strategies". An ESS is the best strategy for an organism to follow given the strategies that all others are following - the strategy that maximizes fitness given that everyone else is maximizing fitness, with each taking the others' strategies into account. Does this sound familiar? It should: the concept of an ESS is virtually indistinguishable from an economist's concept of equilibrium...

    Evolutionary theorists, even though they have a framework that fundamentally tells them that you cannot safely assume maximization-and-equilibrium, make use of maximization and equilibrium as modelling devices - as useful fictions about the world that allow them to cut through the complexities. And evolutionists have found these fictions so useful that they dominate analysis in evolution almost as completely as the same fictions dominate economic theory.

    So what are the differences? Essentially Krugman argues that the main difference is that biologists are more self-aware about their use of maximisation as modelling tools. He then goes on to give one example from his own research where relaxing maximisation assumptions is necessary and where biologists are more relaxed about doing this than economists:

    Perhaps the most basic insight in these models has been the possibility of a cumulative process of agglomeration. Suppose that there are two regions, and one region starts with a slightly larger concentration of industry. This concentration of industry will provide larger markets and better sources of supply for producers than in the other region, perhaps inducing more producers to locate in that region, further reinforcing its advantage, and so on. It's a good story, and I am quite sure that in some sense it is correct. Yet when I and my students try to present this work, we often run into a surprising difficulty: theorists get very upset about the dynamics. Why, they ask, don't individuals correctly anticipate the future location of industry? How can you have such a model without forward-looking agents and rational expectations?

    Now the fact is that when you try to do rational expectations in such models they become vastly more difficult, and the basic point becomes obscured. In short, here is a situation in which going all the way to full maximizing behavior - and trying to avoid the disequilibrium, evolutionary dynamics I assume - makes life harder, not easier. It seems to me, at least, that this is a situation where economists would do a better job if they understood that maximization is a metaphor to be used only to the extent that it helps understanding.

    And when I run into this sort of critique I am envious of evolutionary theorists who do models like, say, the Fisher theory of runaway sexual selection, and can use myopic, disequilibrium dynamics without apology.
    Intelligent war-scepticism on the Right
    In the lead up to the US intervention in Iraq, The Australian was much pilloried by many commentators as being a US lapdog and cheerleader for the intervention - the critics of the Australian's coverage included left wing commentators and Stephen Mayne, who has pretensions to be an independent media watcher and who strangely enough claimed to support the intervention himself for unspecified reasons while blasting anyone as 'morally responsible for resulting deaths' who tried to make a reasonable case for it (based on my past and now cancelled subscription to Crikey, logical coherence was never Stephen's strongest point. He should stick to scooping dirt on politicians' personal lives).

    I examined this argument in my posting of January 13 and found it wanting based on what the Australian actually published in that period (unfortunately my archives have been bloggered but scroll down this cached item. Now in the May issue of Quadrant, the Australian's opinion editor Tom Switzer, whom I know to be a principled Burkean conservative realist get to present his own personal views about the matter. Not surprisingly hr presents a cogently argued case against the neo-con foreign policy agenda in the process of reviewing one of the neo-con bibles, Kaplan and Kristol's 'The war over Iraq'. While I don't necessarily agree with all of it (Tom was and is strongly against the Iraq intervention and I believe most of the worst case scenario predictions like the bloody reactions of the 'Arab street' have been refuted by experience and I don't necessarily agree with the weighting of the tradeoffs he presents anymore), he sets out a well argued case against the broader expansionist foreign policy agenda of the neo-cons. Quadrant isn't available online but here are some extracts from Tom's review. Perhaps next time those shrill elements of the left alleging conspiracy theories about the Murdoch press and Stephen Mayne will learn not to paint the Right with such a broad brush:

    Kristol and Kaplan maintain that Saddam was undeterrable because he was bent on suicide. But was this the case?

    Certainly, he was a brutal dictator who defied numerous UN resolutions. But he was also a shrewd calculator who only went to war twice during his three decade reign -- Iraq in 1980 and Kuwait in 1990 -- when he had good reason to think that his targets were isolated and weak. In those cases, deterrence did not fail; it just wasn't practiced. On the eve of Iraq's invasion of Kuwait, for example, the US ambassador in Baghdad unwittingly signalled that Washington would not oppose an attack ...

    These arguments do not mean that the US should have "coddled" or turned a "blind eye" to Saddam's regime; they merely justifed containment of Iraq (naval blockade, no-fly zone, UN sanctions regime) that kept Saddam in his box for over a decade. Such a realist strategy may lack the appeal of "liberation", but at least it recognised the dangers of unintendended consequences that a liberated Iraq could deliver.

    Another problem with the Kaplan-Kristol thesis is the assumption that the US can export democracy to Iraq. ...

    True, as Kaplan and Kristol point out, the US exported democracy to Germany and Japan after the Second World War, but the conditions and circumstances for it to flourish in those war ravaged nations were quite exceptional. After all, the US was prepared to support conquest and prolonged heavy-handed occupation of both nations after several years of one of the bloodiest wars in human history.

    Both were genuine and coherent nations which Iraq is not. Both had become valuable strategic assets against the looming Soviet threat. Both had a history of rapid modernisation. Both had remarkably literate and well-educated populations. Germany was part of the Western civilisation and shared the Christian religion. It had experienced nearly a decade and a half of self-generated democratic government under the Weimar republic as well as a generation of semi-democracy prior to 1914. And while Japan had never experienced democracy, it had enjoyed a period of indigenous liberalisation and some democratic movements in the 1920s and 1930s ...

    Still another problem with the Kaplan-Kristol thesis is the assumption that the US can impose its will and leadership all over the world without eliciting a global backlash. "Well," they snap, "what is wrong with dominance in the service of sound principles and high ideals?" Well, what is wrong is that other global hegemons that sought domination -- Napoleonic France, Nazi Germany -- always generated a hostile coalition of states that ganged up and challenged the big kid on the block. Why should America escape their fate? ...

    It is no exaggeration to say that the conduct of US foreign policy in the post-Cold War era, especially under this Bush administration, has alienated most of the rest of the world. . ...

    ... the point is not whether the rising tide of anti-American views are justified, but that they are widely held. And to the extent that they're globally held, they are inimical to the Kaplan-Kristol idea that the sole remaining superpower can have its way in the world without copping a global backlash ...

    Maybe, in light of the worldwide antagonism to Washington's Iraq campaign, the neo-cons will revisit those sensible conservative traits of prudence and much greater
    discrimination in the use of US power. And maybe, in light of the economic, political and emotional burdens that accompany an activist and ambitious US role in the world, the neo-cons will realise that a Pax Americana is incompatible with a domestic conservative agenda of small government and balanced budgets. But judging from the tone of The War over Iraq, don't hold your breath.
    Pusey update
    After a slow start, there is starting to be some critical coverage of Pusey's latest attack on economic reform. On Saturday, Peter Ruehl told us that if Pusey is a 'middle of the road social democrat' then he (Ruehl) is a 'cross-dressing Britney Spears groupie'. Today The Australian runs my comments on Pusey's error extravaganza.




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