Archive for October, 2015

On Deaton and Deserving

October 13, 2015

In Angus Deaton’s “view, theory is a complement to measurement, and generalizable insights arise only when the underlying economic mechanisms are elucidated and tested.” This appears in an article in today’s New York Times 
(http://mobile.nytimes.com/2015/10/13/upshot/why-angus-deaton-deserved-the-economics-nobel-prize.html).

But that’s hardly even half the story. Past this, theory and data should together be embodied in portable instrumentation measuring in a common language and distributed throughout interconnected stakeholder networks. Then economics ceases to be merely the study of economic behaviors and phenomena and becomes a living instantiation and ontological management embodying those behaviors and phenomena. For instance, theory-informed data on the economics of education may support robustly generalizable policies but can do nothing to support formation of common currencies for the exchange of literacy capital. For that, the rules, roles and responsibilities of market institutions must be structured with instruments facilitating the exchange of intangible assets. 

That is, to inform teachers’ instructional decisions for individual students as well as their pedagogical methods, and so to make teachers into effective cultivators of literacy and other forms of living capital, the theory-data-instrument package has to be systematically incorporated into the curriculum, assessment, and teachers’ continuing education and professional development. A start in this direction can be found in, for instance, the uses made of the Lexile Framework for Reading by various educational publishers and assessment agencies. 

Deaton’s “method of careful analysis of data from household surveys has transformed four large swaths of the dismal science: microeconomics, econometrics, macroeconomics and development economics.”

“This focus on empirics has been a boon for the field of econometrics, which is the application of statistical methods to economic problems. Mr. Deaton’s signature achievement in this area has been in forcing empirical researchers to pay closer attention to questions of measurement.”

“As the Nobel committee put it, Mr. Deaton’s ‘work covers a wide spectrum, from the deepest implications of theory to the grittiest detail of measurement.'”

Here we see a common but very shortsighted automatic connection between statistical data analysis and measurement. Statistical analyses usually do nothing to investigate, establish or deploy the three key features of measurement: a) the existence of a meaningful, invariant unit for expressing theoretically explained and empirically reproducible comparisons, b) the calibration, universal distribution and maintenance of instruments measuring in that unit, and c) the systematic incorporation of that unit in research and practice as the legally required expression of quantities exchanged in accord with financial, accounting, and regulatory standards. 

Had Deaton actually covered the full econometric spectrum the way the Nobel committee said, “from the deepest implications of theory to the grittiest detail of measurement,” his Nobel prize would celebrate the accomplishment of a whole new science of economics. That new science would not be, as today’s economics remains, primarily focused on centralized statistical analyses of data incorporating uncontrolled, unexamined, instrument- and sample-dependent variations in unit size. Hayek’s critique of socialism’s “fatal conceit” of central planning suggests that a more thoroughly capitalist economics would instead seek to form efficient markets for low friction exchanges of high quality information owned and controlled by individuals. 

Most readers first reaction to the preceding statements will be that these expectations are patently unrealistic and impossible for measurement in the economics of a wide range of sectors, from education to health care to social services to environmental resource management. But that reaction is based in ignorance of the decades of research and practice that have already put measurement in the hands of teachers, clinicians and others on the front lines of these fields. 

It is encouraging that “Deaton has turned his attention to measures of subjective well-being, including happiness,” and that he has “highlighted the problems in constructing coherent measures of global poverty.” But again, examination of his work shows no use of the well-established viability and value of the three key features of measurement, despite the large and readily available literature on the relevant theories, data, instruments, models, methods, software, and studies. 

How long will we continue rewarding and celebrating only ideas that fit our preconceptions concerning what’s possible? What will it take for truly new ideas to break out of our cultural blind spots and start informing explorations of alternative methods and possibilities? When will we start systematically testing more of our assumptions about what’s possible, instead of blithely chaining ourselves to perspectives that prevent us from fulfilling our dreams of a fairer, more equitable world? 

Deaton deserved a Nobel prize, as others have said, because the prize rewards particular ways of satisfying unspoken norms more than it encourages truly breakout disruptions of our expectations. 

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With Reich in spirit, but with a different sense of the problem and its solution

October 4, 2015

In today’s editorial in the San Francisco Chronicle, Robert Reich seeks some way of defining a solution to the pressing problems of how globalization and technological changes have made American workers less competitive. He rightly says that “reversing the scourge of widening inequality requires reversing the upward distributions [of income] within the rules of the market, and giving average people the bargaining power they need to get a larger share of the gains from growth.”

But Reich then says that the answer to this problem lies in politics, not economics. As I’ve pointed out before in this blog, focusing on marshaling political will is part of the problem, not part of the solution. Historically, politicians do not lead, they follow. As is demonstrated across events as diverse as the Arab Spring and the Preemption Act of 1841, mass movements of people have repeatedly demanded ways of cutting through the Gordian knots of injustice. And just as the political “leadership” across the Middle East and in the early U.S. dragged its feet, obstructed, and violently opposed change until it was already well underway, so, too, will that pattern repeat itself again in the current situation of inequitable income distribution.

The crux of the problem is that no one can give average people anything, not freedom (contra Dylan’s line in Blowin’ in the Wind about “allowing” people to be free) and certainly not a larger share of the gains from growth. As the old saying goes, you can lead a horse to water, but you can’t make it drink. People have to take what’s theirs. They have to want it, they have to struggle for it, and they have to pay for it, or they cannot own it and it will never be worth anything to them.

It is well known that a lack of individual property rights doomed communism and socialism because when everything is owned collectively by everyone, no one takes responsibility for it. The profit motive has the capacity to drive people to change things. The problem is not in profit itself. If birds and bees and trees and grasses did not profit from the sun, soil, and rain, there would be no life. The problem is in finding how to get a functional, self-sustaining economic ecology off the ground, not in unrealistically trying to manipulate and micromanage every detail.

The fundamental relevant characteristic of the profits being made today from intellectual property rights is that our individual rights to our own human and social capital are counter-productively restricted and undeveloped. How can it be that no one has any idea how much literacy or health capital they have, or what it is worth?! We have a metric system that tells us how much real estate and manufactured capital we own, and we can price it. But despite the well-established scientific facts of decades of measurement science research and practice, none of us can say, “I own x number of shares of stock in intellectual, literacy, or community capital, that have a value of x dollars in today’s market.” We desperately need an Intangible Assets Metric System, and the market rules, roles, and responsibilities that will make it impossible to make a profit while destroying human, social, and natural capital.

In this vein, what Reich gets absolutely correct is hidden inside his phrase, “within the rules of the market.” As I’ve so often repeated in this blog, capitalism is not inherently evil; it is, rather, unfinished. The real evil is in prolonging the time it takes to complete it. As was so eloquently stated by Miller and O’Leary (2007, p. 710):

“Markets are not spontaneously generated by the exchange activity of buyers and sellers. Rather, skilled actors produce institutional arrangements, the rules, roles and relationships that make market exchange possible. The institutions define the market, rather than the reverse.”

We have failed to set up the institutional arrangements needed to define human, social, and natural capital markets. The problem is that we cannot properly manage three of the four major forms of capital (human, social, and natural, with the fourth being manufactured/property) because we do not measure them in a common language built into scientifically, economically, legally and financially accountable titles, deeds, and other instruments.

And so, to repeat another one of my ad nauseum broken record nostrums, the problem is the problem. As long as we keep defining problems in the way we always have, as matters of marshalling political will, we will inadvertently find ourselves contributing more to prolonging tragic and needless human suffering, social discontent, and environmental degradation.

Miller, P., & O’Leary, T. (2007, October/November). Mediating instruments and making markets: Capital budgeting, science and the economy. Accounting, Organizations, and Society, 32(7-8), 701-734.