Archive for the ‘private property’ Category

Externalities are to markets as anomalies are to scientific laws

October 28, 2011

Economic externalities are to efficient markets as any consistent anomaly is relative to a lawful regularity. Government intervention in markets is akin to fudging the laws of physics to explain the wobble in Uranus’ orbit, or to explain why magnetized masses would not behave like wooden or stone masses in a metal catapult (Rasch’s example). Further, government intervention in markets is necessary only as long as efficient markets for externalized forms of capital are not created. The anomalous exceptions to the general rule of market efficiency have long since been shown to themselves be internally consistent lawful regularities in their own right amenable to configuration as markets for human, social and natural forms of capital.

There is an opportunity here for the concise and elegant statement of the efficient markets hypothesis, the observation of certain anomalies, the formulation of new theories concerning these forms of capital, the framing of efficient markets hypotheses concerning the behavior of these anomalies, tests of these hypotheses in terms of the inverse proportionality of two of the parameters relative to the third, proposals as to the uniform metrics by which the scientific laws will be made commercially viable expressions of capital value, etc.

We suffer from the illusion that trading activity somehow spontaneously emerges from social interactions. It’s as though comparable equivalent value is some kind of irrefutable, incontestable feature of the world to which humanity adapts its institutions. But this order of things plainly puts the cart before the horse when the emergence of markets is viewed historically. The idea of fair trade, how it is arranged, how it is recognized, when it is appropriate, etc. varies markedly across cultures and over time.

Yes, “’the price of things is in inverse ratio to the quantity offered and in direct ratio to the quantity demanded’ (Walras 1965, I, 216-17)” (Mirowski, 1988, p. 20). Yes, Pareto made “a direct extrapolation of the path-independence of equilibrium energy states in rational mechanics and thermodynamics” to “the path-independence of the realization of utility” (Mirowski, 1988, p. 21). Yes, as Ehrenfest showed, “an analogy between thermodynamics and economics” can be made, and economic concepts can be formulated “as parallels of thermodynamic concepts, with the concept of equilibrium occupying the central position in both theories” (Boumans, 2005, p. 31).  But markets are built up around these lawful regularities by skilled actors who articulate the rules, embody the roles, and initiate the relationships comprising economic, legal, and scientific institutions. “The institutions define the market, rather than the reverse” (Miller & O’Leary, 2007, p. 710). What we need are new institutions built up around the lawful regularities revealed by Rasch models. The problem is how to articulate the rules, embody the roles, and initiate the relationships.

Noyes (1936, pp. 2, 13; quoted in De Soto 2000, p. 158) provides some useful pointers:

“The chips in the economic game today are not so much the physical goods and actual services that are almost exclusively considered in economic text books, as they are that elaboration of legal relations which we call property…. One is led, by studying its development, to conceive the social reality as a web of intangible bonds–a cobweb of invisible filaments–which surround and engage the individual and which thereby organize society…. And the process of coming to grips with the actual world we live in is the process of objectivizing these relations.”

 Noyes (1936, p. 20, quoted in De Soto 2000, p. 163) continues:

“Human nature demands regularity and certainty and this demand requires that these primitive judgments be consistent and thus be permitted to crystallize into certain rules–into ‘this body of dogma or systematized prediction which we call law.’ … The practical convenience of the public … leads to the recurrent efforts to systematize the body of laws. The demand for codification is a demand of the people to be released from the mystery and uncertainty of unwritten or even of case law.” [This is quite an apt statement of the largely unstated demands of the Occupy Wall Street movement.]

  De Soto (2000, p. 158) explains:

 “Lifting the bell jar [integrating legal and extralegal property rights], then, is principally a legal challenge. The official legal order must interact with extralegal arrangements outside the bell jar to create a social contract on property and capital. To achieve this integration, many other disciplines are of course necessary … [economists, urban planners, agronomists, mappers, surveyers, IT specialists, etc]. But ultimately, an integrated national social contract will be concretized only in laws.”

  “Implementing major legal change is a political responsibility. There are various reasons for this. First, law is generally concerned with protecting property rights. However, the real task in developing and former communist countries is not so much to perfect existing rights as to give everyone a right to property rights–‘meta-rights,’ if you will. [Paraphrasing, the real task in the undeveloped domains of human, social, and natural capital is not so much the perfection of existing rights as it is to harness scientific measurement in the name of economic justice and grant everyone legal title to their shares of their ownmost personal properties, their abilities, health, motivations, and trustworthiness, along with their shares of the common stock of social and natural resources.] Bestowing such meta-rights, emancipating people from bad law, is a political job. Second, very small but powerful vested interests–mostly repre- [p. 159] sented by the countries best commercial lawyers–are likely to oppose change unless they are convinced otherwise. Bringing well-connected and moneyed people onto the bandwagon requires not consultants committed to serving their clients but talented politicians committed to serving their people. Third, creating an integrated system is not about drafting laws and regulations that look good on paper but rather about designing norms that are rooted in people’s beliefs and are thus more likely to be obeyed and enforced. Being in touch with real people is a politician’s task. Fourth, prodding underground economies to become legal is a major political sales job.”

 De Soto continues (p. 159), intending to refer only to real estate but actually speaking of the need for formal legal title to personal property of all kinds, which ought to include human, social, and natural capital:

  “Without succeeding on these legal and political fronts, no nation can overcome the legal apartheid between those who can create capital and those who cannot. Without formal property, no matter how many assets they accumulate or how hard they work, most people will not be able to prosper in a capitalist society. They will continue to remain beyond the radar of policymakers, out of the reach of official records, and thus economically invisible.”

Boumans, M. (2005). How economists model the world into numbers. New York: Routledge.

De Soto, H. (2000). The mystery of capital: Why capitalism triumphs in the West and fails everywhere else. New York: Basic Books.

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), 701-34.

Mirowski, P. (1988). Against mechanism: Protecting economics from science. Lanham, MD: Rowman & Littlefield.

Noyes, C. R. (1936). The institution of property. New York: Longman’s Green.

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Reimagining Capitalism Again, Part III: Reflections on Greider’s “Bold Ideas” in The Nation

September 10, 2011

And so, The Nation’s “Bold Ideas for a New Economy” is disappointing for not doing more to start from the beginning identified by its own writer, William Greider. The soul of capitalism needs to be celebrated and nourished, if we are to make our economy “less destructive and domineering,” and “more focused on what people really need for fulfilling lives.” The only real alternative to celebrating and nourishing the soul of capitalism is to kill it, in the manner of the Soviet Union’s failed experiments in socialism and communism.

The article speaks the truth, though, when it says there is no point in trying to persuade the powers that be to make the needed changes. Republicans see the market as it exists as a one-size-fits-all economic panacea, when all it can accomplish in its current incomplete state is the continuing externalization of anything and everything important about human, social, and environmental decency. For their part, Democrats do indeed “insist that regulation will somehow fix whatever is broken,” in an ever-expanding socialistic micromanagement of every possible exception to the rules that emerges.

To date, the president’s efforts at a nonpartisan third way amount only to vacillations between these opposing poles. The leadership that is needed, however, is something else altogether. Yes, as The Nation article says, capitalism needs to be made to serve the interests of society, and this will require deep structural change, not just new policies. But none of the contributors of the “bold ideas” presented propose deep structural changes of a kind that actually gets at the soul of capitalism. All of the suggestions are ultimately just new policies tweaking superficial aspects of the economy in mechanical, static, and very limited ways.

The article calls for “Democratizing reforms that will compel business and finance to share decision-making and distribute rewards more fairly.” It says the vision has different names but “the essence is a fundamental redistribution of power and money.” But corporate distortions of liability law, the introduction of boardroom watchdogs, and a tax on financial speculation do not by any stretch of the imagination address the root causes of social and environmental irresponsibility in business. They “sound like obscure technical fixes” because that’s what they are. The same thing goes for low-cost lending from public banks, the double or triple bottom lines of Benefit Corporations, new anti-trust laws, calls for “open information” policies, added personal stakes for big-time CEOs, employee ownership plans, the elimination of tax subsidies for, new standards for sound investing, new measures of GDP, and government guarantees of full employment.

All of these proposals sound like what ought to be the effects and outcomes of efforts addressing the root causes of capitalisms’ shortcomings. Instead, they are band aids applied to scratched fingers and arms when multiple by-pass surgery is called for. That is, what we need is to understand how to bring the spirit of capitalism to life in the new domains of human, social, and environmental interests, but what we’re getting are nothing but more of the same piecemeal ways of moving around the deck chairs on the Titanic.

There is some truth in the assertion that what really needs reinventing is our moral and spiritual imagination. As someone (Einstein or Edison?) is supposed to have put it, originality is simply a matter of having a source for an analogy no one else has considered. Ironically, the best model is often the one most taken for granted and nearest to hand. Such is the case with the two-sided scientific and economic effects of standardized units of measurement. The fundamental moral aspect here is nothing other than the Golden Rule, independently derived and offered in cultures throughout history, globally. Individualized social measurement is nothing if not a matter of determining whether others are being treated in the way you yourself would want to be treated.

And so, yes, to stress the major point of agreement with The Nation, “the new politics does not start in Washington.” Historically, at their best, governments work to keep pace with the social and technical innovations introduced by their peoples. Margaret Mead said it well a long time ago when she asserted that small groups of committed citizens are the only sources of real social change.

Not to be just one of many “advocates with bold imaginations” who wind up marginalized by the constraints of status quo politics, I claim my personal role in imagining a new economic future by tapping as deeply as I can into the positive, pre-existing structures needed for a transition into a new democratic capitalism. We learn through what we already know. Standards are well established as essential to commerce and innovation, but 90% of the capital under management in our economy—the human, social, and natural capital—lacks the standards needed for optimal market efficiency and effectiveness. An intangible assets metric system will be a vitally important way in which we extend what is right and good in the world today into new domains.

To conclude, what sets this proposal apart from those offered by The Nation and its readers hinges on our common agreement that “the most threatening challenge to capitalism is arguably the finite carrying capacity of the natural world.” The bold ideas proposed by The Nation’s readers respond to this challenge in ways that share an important feature in common: people have to understand the message and act on it. That fact dooms all of these ideas from the start. If we have to articulate and communicate a message that people then have to act on, we remain a part of the problem and not part of the solution.

As I argue in my “The Problem is the Problem” blog post of some months ago, this way of defining problems is itself the problem. That is, we can no longer think of ourselves as separate from the challenges we face. If we think we are not all implicated through and through as participants in the construction and maintenance of the problem, then we have not understood it. The bold ideas offered to date are all responses to the state of a broken system that seek to reform one or another element in the system when what we need is a whole new system.

What we need is a system that so fully embodies nature’s own ecological wisdom that the medium becomes the message. When the ground rules for economic success are put in place such that it is impossible to earn a profit without increasing stocks of human, social, and natural capital, there will be no need to spell out the details of a microregulatory structure of controlling new anti-trust laws, “open information” policies, personal stakes for big-time CEOs, employee ownership plans, the elimination of tax subsidies, etc. What we need is precisely what Greider reported from Innovest in his book: reliable, high quality information that makes human, social, and environmental issues matter financially. Situated in a context like that described by Bernstein in his 2004 The Birth of Plenty, with the relevant property rights, rule of law, scientific rationality, capital markets, and communications networks in place, it will be impossible to stop a new economic expansion of historic proportions.

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Reimagining Capitalism Again, Part I: Reflections on Greider’s Soul of Capitalism

September 10, 2011

In his 2003 book, The Soul of Capitalism, William Greider wrote, “If capitalism were someday found to have a soul, it would probably be located in the mystic qualities of capital itself” (p. 94). The recurring theme in the book is that the resolution of capitalism’s deep conflicts must grow out as organic changes from the roots of capitalism itself.

In the book, Greider quotes Innovest’s Michael Kiernan as suggesting that the goal has to be re-engineering the DNA of Wall Street (p. 119). He says the key to doing this is good reliable information that has heretofore been unavailable but which will make social and environmental issues matter financially. The underlying problems of exactly what solid, high quality information looks like, where it comes from, and how it is created are not stated or examined, but the point, as Kiernan says, is that “the markets are pretty good at punishing and rewarding.” The objective is to use “the financial markets as an engine of reform and positive change rather than destruction.”

This objective is, of course, the focus of multiple postings in this blog (see especially this one and this one). From my point of view, capitalism indeed does have a soul and it is actually located in the qualities of capital itself. Think about it: if a soul is a spirit of something that exists independent of its physical manifestation, then the soul of capitalism is the fungibility of capital. Now, this fungibility is complex and ambiguous. It takes its strength and practical value from the way market exchange are represented in terms of currencies, monetary units that, within some limits, provide an objective basis of comparison useful for rewarding those capable of matching supply with demand.

But the fungibility of capital can also be dangerously misconceived when the rich complexity and diversity of human capital is unjustifiably reduced to labor, when the irreplaceable value of natural capital is unjustifiably reduced to land, and when the trust, loyalty, and commitment of social capital is completely ignored in financial accounting and economic models. As I’ve previously said in this blog, the concept of human capital is inherently immoral so far as it reduces real human beings to interchangeable parts in an economic machine.

So how could it ever be possible to justify any reduction of human, social, and natural value to a mere number? Isn’t this the ultimate in the despicable inhumanity of economic logic, corporate decision making, and, ultimately, the justification of greed? Many among us who profess liberal and progressive perspectives seem to have an automatic and reactionary prejudice of this kind. This makes these well-intentioned souls as much a part of the problem as those among us with sometimes just as well-intentioned perspectives that accept such reductionism as the price of entry into the game.

There is another way. Human, social, and natural value can be measured and made manageable in ways that do not necessitate totalizing reduction to a mere number. The problem is not reduction itself, but unjustified, totalizing reduction. Referring to all people as “man” or “men” is an unjustified reduction dangerous in the way it focuses attention only on males. The tendency to think and act in ways privileging males over females that is fostered by this sense of “man” shortchanges us all, and has happily been largely eliminated from discourse.

Making language more inclusive does not, however, mean that words lose the singular specificity they need to be able to refer to things in the world. Any given word represents an infinite population of possible members of a class of things, actions, and forms of life. Any simple sentence combining words into a coherent utterance then multiplies infinities upon infinities. Discourse inherently reduces multiplicities into texts of limited lengths.

Like any tool, reduction has its uses. Also like any tool, problems arise when the tool is allowed to occupy some hidden and unexamined blind spot from which it can dominate and control the way we think about everything. Critical thinking is most difficult in those instances in which the tools of thinking themselves need to be critically evaluated. To reject reduction uncritically as inherently unjustified is to throw the baby out with the bathwater. Indeed, it is impossible to formulate a statement of the rejection without simultaneously enacting exactly what is supposed to be rejected.

We have numerous ready-to-hand examples of how all reduction has been unjustifiably reduced to one homogenized evil. But one of the results of experiments in communal living in the 1960s and 1970s, as well as of the fall of the Soviet Union, was the realization that the centralized command and control of collectively owned community property cannot compete with the creativity engendered when individuals hold legal title to the fruits of their labors. If individuals cannot own the results of the investments they make, no one makes any investments.

In other words, if everything is owned collectively and is never reduced to individually possessed shares that can be creatively invested for profitable returns, then the system is structured so as to punish innovation and reward doing as little as possible. But there’s another way of thinking about the relation of the collective to the individual. The living soul of capitalism shows itself in the way high quality information makes it possible for markets to efficiently coordinate and align individual producers’ and consumers’ collective behaviors and decisions. What would happen if we could do that for human, social, and natural capital markets? What if “social capitalism” is more than an empty metaphor? What if capital institutions can be configured so that individual profit really does become the driver of socially responsible, sustainable economics?

And here we arrive at the crux of the problem. How do we create the high quality, solid information markets need to punish and reward relative to ethical and sustainable human, social, and environmental values? Well, what can we learn from the way we created that kind of information for property and manufactured capital? These are the questions taken up and explored in the postings in this blog, and in my scientific research publications and meeting presentations. In the near future, I’ll push my reflection on these questions further, and will explore some other possible answers to the questions offered by Greider and his readers in a recent issue of The Nation.

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The Path to a New Consensus: A Practical Procedure for Resolving the Opposition Between Absolute and Relative Standards

August 26, 2011

The possibility of a new nonpartisan consensus on social and economic issues has been raised from time to time lately. I’ve had some ideas fermenting in this area for a while, and it seems like they might be ready for recording here. What I want to take up concerns one of the more contentious aspects of the cultural and political disputes of recent decades. There are important differences between those who want to impose one or another kind of moral or religious standard on society as a whole and those who contend that, within certain limits, such standards are arbitrary and must be determined by each individual or group according to its own values and sense of what makes a community.The oppositions here might seem to be irreconcilable, but is that actually true?

Resolving deep-seated disagreements on this scale requires that all parties accept some baseline rules of engagement. And herein lies the rub, eh? For even something as seemingly obvious and simple as defining factual truth has proven beyond the abilities of some highly skilled and deeply motivated negotiators. So, of course, those who adhere rigidly to preconceived notions automatically remove themselves from dialogue, and I cannot presume to address them here. But for those willing to entertain possibilities following from ideas and methods with which they may be unfamiliar, I say, read on.

What I want to propose differs in several fundamental respects from what has come before, and it is very similar in one fundamental respect. The similarity stems from the realization that essentially the same thing can be authoritatively stated at different times and place by different people using different words and different languages in relation to different customs and traditions. For instance, the versions of the Golden Rule given in the Gospels of Matthew or Luke are conceptually identical with the sentiment expressed in the Hindu Mahabarata, the Confucian Analects, the Jewish Talmud, the Muslim 13th Hadith, and the Buddhist Unada-Varga (http://www.thesynthesizer.org/golden.html; http://philosophy.tamu.edu/~gary/bioethics/ethicaltheory/universalizability.html).

So, rather than defining consensus in terms of strict agreement (with no uncertainty) on the absolute value of various propositions, it should be defined in terms of probabilities of consistent agreement (within a range of uncertainty) on the relative value of various propositions. Instead of evaluating isolated and decontextualized value statements one at a time, I propose evaluating value statements hypothesized to cohere with one another within a larger context together, as a unit.Instead of demanding complete data on a single set of propositions, I propose requiring and demonstrating that the same results be obtained across different sets of propositions addressing the same thing. Instead of applying statistical models of group level inter-variable relations to these data, I propose applying measurement models of individual level within-variable relations. Instead of setting policy on the basis of centrally controlled analytic results that vary incommensurably across data sets I propose setting policy on the basis of decentralized, distributed results collectively produced by networks of individuals whose behaviors and decisions are coordinated and aligned by calibrated instruments measuring in common commensurable units. All of these proposals are described in detail in previous posts here, and in the references included in those posts.

What I’m proposing is rooted in and extends existing practical solutions to the definition and implementation of standards. And though research across a number of fields suggests that a new degree of consensus on some basic issues seems quite possible, that consensus will not be universal and it should not be used as a basis for compelling conformity. Rather, the efficiencies that stand to be gained by capitalizing (literally) on existing but unrecognized standards of behavior and performance are of a magnitude that would easily support generous latitude in allowing poets, nonconformists, and political dissenters to opt out of the system at little or no cost to themselves or anyone else.

That is, as has been described and explained at length in previous posts here, should we succeed in establishing an Intangible Assets Metric System and associated genuine progress indicator or happiness index, we would be in the position of harnessing the power of the profit motive as an economic driver of growth in human, social, and natural capital. Instead of taking mere monetary profits as a measure of improved quality of life, we would set up economic systems in which the measurement and the management of quality of life determines monetary profits. The basic idea is that individual ownership of and accountability for what is, more than anything else, our rightful property–our own abilities, motivations, health, trustworthiness, loyalty, etc.–ought to be a significant factor in promoting the conservation and growth of these forms of capital.

In this context, what then might serve as a practical approach to resolving disputes between those who advocate standards and those who reject them, or between those who trust in our capacity to function satisfactorily as a society without standards and those who do not? Such an approach begins by recognizing the multitude of ways in which all of us rely on standards every day. We do not need to concern ourselves with the technical issues of electronics or manufacturing, though standards are essential here. We do not need even to take up the role of standards as guides to grocery or clothing store purchasing decisions or to planning meetings or travel across time zones.

All we need to think about is something as basic as communication. The alphabet, spelling, pronunciation, and grammatical rules, dictionaries, and educational curricula are all forms of standards that must be accepted, recognized and adhered to before the most basic communication can be achieved. The shapes of various letters or symbols, and the sounds associated with them, are all completely arbitrary. They are conventions that arose over centuries of usage that passed long before the rules were noted, codified, and written down. And spoken languages remain alive, changing in ways that break the rules and cause them to be rewritten, as when new words emerge, or previously incorrect constructions become accepted.

But what is the practical value for a new consensus in recognizing our broad acceptance of linguistic standards? Contrary to the expectations of l’Academie Francaise, for instance, we cannot simply make up new rules and expect people to follow them. No, the point of taking language as a key example goes deeper than that. We noted that usage precedes the formulation of rules, and so it must also be in finding our way to a basis for a new consensus. The question is, what are the lawful patterns by which we already structure behavior and decisions, patterns that might be codified in the language of a social science?

These patterns are being documented in research employing probabilistic measurement models. The fascinating thing about these patterns is that they often retain their characteristic features across different samples of people being measured, across time and space, and across different sets of questions on tests, surveys, or assessments designed to measure the same ability, behavior, attitude, or performance. The stability and constancy of these patterns are such that it appears possible to link all of the instruments measuring the same things to common units of measurement, so that everyone everywhere could think and act together in a common language.

And it is here, in linking instruments together in an Intangible Assets Metric System, that we arrive at a practical way of resolving some disputes between absolutists and relativists. Though we should and will take issue with his demand for certainty, Latour (2005, p. 228) asks the right question, saying,

“Standards and metrology solve practically the question of relativity that seems to intimidate so many people:
Can we obtain some sort of universal agreement? Of course we can! Provided you find a way to hook up your local instrument to one of the many metrological chains whose material network can be fully described, and whose cost can be fully determined. Provided there is also no interruption, no break, no gap, and no uncertainty along any point of the transmission. Indeed, traceability is precisely what the whole of metrology is about!”

Nowhere does Latour show any awareness of what has been accomplished in social research employing probabilistic measurement models, but he nonetheless grasps exactly how the results of that research will not realize its potential unless it is expanded into networks of interconnected instrumentation. He understands that his theory of networked actors coordinated via virtual threads of standardized forms, metrics, vocabularies describes how scientific metrology and standards set the benchmark for universal consensus. Latour stresses that the focus here is on concrete material practices that can be objectively observed and replicated. As he says, when those practices are understood, then you know how to “do the same operation for other less traceable, less materialized circulations” (p. 229).

Latour’s primary concerns are with the constitution of sociology as a science of the social, and with the understanding of the social as networks of actors whose interests are embodied in technical devices that mediate relationships. Throughout his work, he therefore focuses on the description of existing sociotechnical phenomena. Presumably because of his lack of familiarity with social measurement theory and practice, Latour does not speak to ways in which the social sciences could go beyond documenting less traceable and less materialized circulations to creating more traceable and more materialized circulations, ones capable of more closely emulating those found in the natural sciences.

Latour’s results suggest criteria that may show some disputes regarded as unresolvable to have unexplored potentials for negotiation. That potential depends, as Latour says, on calibrating instruments that can be hooked up in a metrological chain in an actual material network with known properties (forms, Internet connections and nodes, a defined unit of measurement with tolerable uncertainty, etc.) and known costs. In the same way that the time cannot be told from a clock disconnected from the chain of connections to the standard time, each individual instrument for measuring abilities, health, quality of life, etc. will also have to be connected to its standard via an unbroken chain.

But however intimidating these problems might be, they are far less imposing than the ignorance that prevents any framing of the relevant issues in the first place. Addressing the need for rigorous measurement in general, Rasch (1980, pp. xx) agreed that “this is a huge challenge, but once the problem has been formulated it does seem possible to meet it.” Naturally enough, the needed work will have to be done by those of us calibrating the instruments of education, health care, sociology, etc. Hence my ongoing involvement in IMEKO, the International Measurement Confederation (http://www.tu-ilmenau.de/fakmb/Home.2382.0.html).

References

Latour, B. (2005). Reassembling the social: An introduction to Actor-Network-Theory. Clarendon Lectures in Management Studies). Oxford, England: Oxford University Press.

Rasch, G. (1960). Probabilistic models for some intelligence and attainment tests (Reprint, with Foreword and Afterword by B. D. Wright, Chicago: University of Chicago Press, 1980). Copenhagen, Denmark: Danmarks Paedogogiske Institut.

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LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
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