Friday, April 29, 2016

Perhaps one can most quickly unravel the enigma of Pareto's personality by saying that his was the psychology of the disappointed lover. 

Monday, April 25, 2016

Is the Road to Hell Paved with Pareto Improvements?

In a large multiplayer prisoner’s dilemma, any change in any one individual’s strategy doesn’t affect anyone else, so a player can know that defection will be a Pareto improvement. We might say that the problem of social evil is that the road to hell is paved with Pareto improvements. -- Ted Poston, “Social Evil,” Oxford Studies in Philosophy of Religion, Volume 5
Poston's "social evil" is what previous authors have called a social trap or, more famously, the tragedy of the commons.

A Pareto improvement is a change that makes at least one person better off without making anyone worse off. According to the standard fable, voluntary exchange results in a Pareto improvement because each party in the exchange gets something they wanted more than what they gave up for it.

A prisoner's dilemma involves a situation where the individual payoff to each player for defection is better, regardless of whether the other player defects or co-operates but the collective payoff is maximized when both players co-operate.

In a large multiplayer prisoner's dilemma game, defection by some players may have no effect on the other players' outcomes, while defection by a large number of players may have catastrophic effects after some vaguely defined tipping point has been reached. Within limits, defections thus appear to result in a Pareto improvement, where some players are made better off and no one is made worse off.

In Fights, Games and Debates, Anatol Rapoport presented a production and exchange model that deserves to be much better known. It is a very elementary model and thus, as Rapoport warns repeatedly, the results should not be taken as a faithful depiction of what is likely to happen in reality. However, it offers some critical insights into "common sense" assumptions and specifically into the idea of Pareto improvement, which is also based on extreme simplification.

Rapoport's production and exchange "society" consists of two people who each produce goods and exchange with each other a uniform, fixed ratio of their products. The individuals derive utility from the goods they produce and, presumably, can increase their utility by exchanging some of the goods they produce for the different goods their counterpart produces.

Effort to produce those goods, however, is a disutility. The utility from goods increases logarithmically as the quantity of goods increases but the disutility of effort increases in proportion to the amount of effort expended.

Agents in this model can only change their utility by increasing or decreasing their own effort and output. Thus, plotted on a graph, X can only move along the x-axis and Y can only move along the y-axis. Under the stipulated conditions, a stable equilibrium can only be achieved when the utility of the proportion retained by each producer is larger than the disutility of effort.That is to say, the proportion retained cannot be too small and the disutility of effort cannot be too large.

In the absence of a stable balance, any relaxation of effort by one of the agents will lead to parasitism by that agent as the other will immediately compensate by increasing effort, the first agent will slack off more to compensate for the increased effort of the other -- and so on.

But even in the presence of a stable equilibrium, the total utility of the two agents, at the balance point, will be less than the total would be without exchange, as long as their production/effort decisions are guided solely by their own utility rather than by some agreement about how to link their production effort to achieve a "social optimum." This outcome is contrary to the "common sense" interpretations of Pareto improvement and Pareto optimality. As Rapoport cites his mentor, Nicolas Rashevsky, it turns out that:
The only 'ethics' which leads to the attainment of maximum joint utility in the model of society we have considered is the 'egalitarian ethic,' in which the concern for self and for other are of equal weight.
It would be easy to dismiss Rapoport's conclusion as pertaining only to very restrictive premises. This is a point that Rapoport reiterates throughout his exposition. But the objection applies equally to Pareto's model.

Vilfredo Pareto is not readily perceived as a proponent of the egalitarian ethic. In his model, though, Rapoport unpacked a tacit premise of Pareto that rational agents would act "as if" guided by some unacknowledged intuition of linkage -- one might even call this invisible intuition "moral sentiments."

Furthermore, the restrictiveness of Rapoport's assumptions may not be as unrealistic as it seems at first. The fixed ratios of exchange can be relaxed to merely widespread similarities in the ratios of exchange. The specification for a stable equilibrium that the proportion of an individual's product exchanged does not exceed the proportion retained can be rationalized by the fact that there is a roughly equal number of hours of unpaid household work performed in the world as there are waged hours of labor. All this is before we move on to the issue of "multiplayer games" -- of a society in which individual actions that ostensively do no harm may accumulate into "social evil."

In Beyond the Invisible Hand, Kaushik Basu examined the issue of outlawing yellow dog contracts, as the Norris-LaGuardia Act did in 1932:
It could he claimed that if one worker prefers to give up the right to join trade unions in order to get a certain job that demands this of workers, then this may be a Pareto improvement. But if such yellow dog contracts are made legal, then lots of firms will offer these contracts, and the terms for jobs without a yellow dog clause may deteriorate so much that those who are strongly averse to giving up the right to join unions will he worse off in this world. 
Basu proceeds to consider labor standards in cases in which there are multiple equilibria. He asks, "Should the law be used to set a limit on the number of hours that a worker is allowed to work?" His answer -- backed by reference to supporting empirical studies -- would earn the scorn of economists who fancy a lump of labor behind every proposal for shorter hours:
A statutory limit on work hours can, by limiting the supply of labor, push up the hourly wage rate, and it is possible that at this higher wage rate people would not want to work that many hours. In other words, the labor market may have two or more equilibria, in which case banning the long work-hours equilibrium is fully compatible with a commitment to the Pareto principle.
Unpacking Pareto optimality and Pareto improvement, as Rapoport's model of production and exchange does, undermines the premise of the road to hell being paved with Pareto improvements. If there is indeed a tacit moral sentiment, a secret egalitarian ethics at the heart of the Paretian idea, then any violation of trust will impose a loss of utility on everyone else -- perhaps even on the violator. Those individuals gains through defecting were only "improvements" assuming an ethical vacuum. What is the point of building a road to a hell when one is already there? In an ethical world, violations of trust are losses of utility.

UPDATE: I have made a pdf copy of the section on the production and exchange model in Rapoport's Fights, Games and Debates. Below is the equation for the utilities of the two members of the society:
In "An Empirical Refutation of Pareto-optimality?" Rupert Read argued that the empirical evidence in Wilkinson and Pickett's The Spirit Level suggests "the remarkable normative conclusion of making the Pareto principle, far from the “conservative” device it is often taken to be, a potential agent of radically-egalitarian/socialist distributive justice." I am arguing here that Rapoport's production and exchange model suggest a mathematical demonstration of the same unexpected conclusion. 

Friday, April 22, 2016

Equus Librium

A Vulgar Error:

An Infallible Maxim: 

Worstall's Malignant Lump

In an op-ed at the New York Times yesterday, Nick Hanauer and Robert Reich made the following observation:
In a cruel twist, the longer and harder we work for the same wage, the fewer jobs there are for others, the higher unemployment goes and the more we weaken our own bargaining power. That helps explain why over the last 30 years, corporate profits have doubled from about 6 percent of gross domestic product to about 12 percent, while wages have fallen by almost exactly the same amount.
According to Tim Worstall, Hanauer and Reich committed a lump-of-labor fallacy. Worstall objected specifically to their claim that raising the income cap for the overtime premium would force employers to either pay higher wages or hire more workers. Worstall's objection is that the employer's demand for labor will not remain the same if the cost of that labor goes up.

To be precise, Worstall's assertion is one version of the fallacy claim complex. It happens to be the version refuted by Maurice Dobb in 1929. As Dobb pointed out, workers are concerned with how much compensation they receive in return for the amount of effort required of them and not simply in the aggregate amount of employment in the economy. Working longer hours for less pay is not a bonanza for the workers even if it does lead to more aggregate hours worked in the economy as a whole.

 But again, Worstall's fallacy claim is but one version of a complex of claims, some of which contradict each other. I addressed this perplexing proliferation of claims in my contribution to Working Time: International trends, theory and policy perspectives. Refute one of the bogus fallacy claims and a substitute will immediately pop-up to take its place!

It is not easy to unpack what is going on inside the fallacy claim because its persuasive strategy is based on a "house of mirrors" effect. Whether disingenuously or unwittingly, fallacy claimants commit yet another version of the fallacy they attribute to others. Their error, though, is embedded in the perfect competition, perfect information, full employment, ceteris paribus abstractions of the standard equilibrium model of supply and demand. The name given to this set of abstractions by those who mistake them for a description of reality is "economics." When "economists" commit this vulgar error it is regarded by Worstall & Co. as an infallible maxim.

Now, it is conceivable that some of those accused of committing the lump-of-labor fallacy may indeed assume the proverbial "fixed amount of work to be done" or whatever. There can be bad arguments for a good cause. But, as A.C. Pigou pointed out in his refutation of the ubiquitous fallacy claim, "If it were a good ground for rejecting an opinion that many persons entertain it for bad reasons, there would, alas, be few current beliefs left standing!"

Wednesday, April 13, 2016

Siphoning Off the Increment to Pay for More Excrement

Paul Krugman rightly excoriates the "carbonized Keynesianism" of the Republican rationale for the Keystone XL pipeline. As I replied to Barkley a few days ago, however, calling it "Keynesianism" is a misnomer. Kalecki had another name for it. I would prefer "Keyserlingering."

Sandwichman has been connecting the dots between Keystone pipe dreams, dynamic scoring of tax cuts and the genesis of pseudo-Keynesian multiplier aberrations in the top secret Cold War doctrine of NSC-68.

1950 was a watershed year for the alchemy of "transmuting excrement into increment." Academic economists, Paul Samuelson and John Maurice Clark said it couldn't (or shouldn't) be done. But the chairman of President Truman's Council of Economic Advisers, Leon Keyserling, had other ideas:
...if a dynamic expansion of the economy were achieved, the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product.
In his article on "Evaluation of Real National Income" Samuelson had explained that including "such wasteful output as war goods" in the calculation of national income served only to indicate the potential for producing "useful things... in better times." NSC-68 contrived counting wasteful output as a direct contribution to maintaining the standard of living. This is the logic the Republicans employ when they extol the job-creating magic of Keystone. But, more subtly, it is also the logic William Nordhaus employs when discounting the net present value of the future costs and benefits of climate regulation.

Exorcising the weaponized, carbonized, dynamically-scored Republican pipe dreams will take more than pointing out the meagerness and hypocrisy of their job-creation claims. It requires a ruthless critique of the lingering Cold War growthmanship that is deeply embedded in the economic conventional wisdom across the political spectrum.

Sunday, April 10, 2016

Any N-person Game Whether Zero-sum or Not

In Chapter XII, "Coalitions,"  of Fights, Games and Debates, Anatol Rapoport wrote:
Any N-person game whether zero-sum or not can always be pictured as a zero-sum game by adding a fictitious (N + 1)-th player, whose winnings (or losses) equal the summed losses (or winnings) of all the others. Since the (N + 1)-th player makes no moves, his inclusion makes no difference in the original game’s strategic structure; but it is advantageous to include him, because his presence lets us treat every game as a zero-sum game. Zero-sum games are easier to treat from a unified point of view than non-zero-sum games. 
Here it may occur to ask why the difficulties of the non zero-sum game were at all emphasized if they can be circumvented by adding another player. Note, however, that adding a player to a two-person game turns it into a three-person game, which is complicated by the possibility of forming coalitions. ...
To be fair, when Paul Samuelson, Thomas Friedman, Alicia Munnell, George Shultz or other mouthpieces cut-and-paste "zero-sum game" words into their lump-of-labor boilerplate, they don't intend to refer to actual game theory but only use game-theoryish sounding terms to impress and intimidate the rubes. 

Friday, April 8, 2016

Krugman of Mass Destruction

UPDATE: See also Krugman, Ike, Keyserling, Keynes and Kalecki: "Siphoning Off a Part of the Annual Increment of GNP" in response to today's column by Krugman, "Bombs, Bridges and Jobs."

Paul Krugman, check your thoughts and your sources! In a blog post titled More Thoughts on Weaponized Keynesianism, Krugman wrote:
Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.
Economics is not a morality play but spending on bombs is NOT "as good as" spending on parks. In a comment, reader valuethinker from London pointed out that the lowest multiplier estimate for stimulus spending was for defense manufacture. This is not a trivial side issue but the core of the problem. Spending on the wrong things ultimately defeats the purpose of Keynesian stimulus. Keynes knew this. It's a shame Krugman doesn't know his Keynes.

In his post, Krugman also cited "the Kalecki point that admitting that the government can create jobs undermines demands that policies be framed to cater to all-important business confidence." Krugman linked to Rortybomb who linked to MRZine for the Kalecki paper. In that paper, Kalecki had more to say that is germane to Krugman's argument that "spending on bombs is as good as spending on public parks":
One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.

The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of 'sound finance', which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.

The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, 'discipline in the factories' and 'political stability' under full employment are maintained by the 'new order', which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

So, yes, "spending on bombs is as good as spending on public parks" -- even better if you're a fascist! By the way, Professor Krugman. You still haven't replied to my earlier letter.

Wednesday, April 6, 2016

Tuesday, April 5, 2016

Zero-Sum Foolery 4 of 4: Wage Prisoner's Dilemma

Soon after the wages-fund doctrine fell out of favor with economists, it was immediately attributed to trade unionists under the label of the "fixed work-fund fallacy" and then the "Theory of the lump of labour." In denunciations of the lump-of-labor fallacy, it has become fashionable recently to appeal to the notion of the "zero-sum game" in addition to the customary allegation of a "fixed amount of work to be done."

What follows is a brief sketch of the wage prisoner's dilemma that I modified from one posted last June. The outline can be elaborated by thinking of the dilemma in terms of Garrett Hardin's "Tragedy of the Commons" and Elinor Ostrom's analysis of common-pool resources. I have previously presented the perspective of labor power as a common-pool resource and a full treatment of wage prisoner's dilemma would incorporate those arguments. I've added a pay-off matrix at the end.

The principle of labor as private property is enshrined in the chapter, "Of Property," in John Locke's Second Treatise of Civil Government:
...every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his.
Except for the most part we are not talking about just "the labour of his body, and the work of his hands." We are referring to a complex division of labor, co-operation and means of production that dwarfs the manual labor of a person. Regarding this augmented labor power as a common-pool resource recognizes the greatly-enhanced social productivity of labor. The wages system is calculated to siphon off the lion's share of that social productivity and award it to the owners of capital.

How does that happen?

Consider the wage prisoner's dilemma: given a choice between working long hours for more money and working short hours for less money, many will chose to work longer hours. But if a preponderance of workers choose (or are compelled) to work long hours, they will oversupply the labor market, depressing wages. They may end up working longer hours for less money.

This is not rocket science. It is elementary supply and demand: an observed regularity. And, no, it does not imply or assume "a fixed amount of work to be done." If I flood the market with bananas, it is likely the price of bananas will fall even if the demand for bananas increases in response to the lower price. It is conceivable that the temporarily lower price could instigate a banana craze that subsequently overwhelms the initial price decline. But as a rule...

Imagine the following scenario:

One hundred workers are fully employed for 40 hours a week. The current wage is $10 an hour. Due to some inscrutable technical feature of the production process, it is determined that optimal scheduling requires workweeks of either 36 hours or 44 hours. However, weekly output per worker is the same for a 36-hour worker and a 44-hour worker. Hourly output is correspondingly higher for the 36-hour worker. Pay is determined by averaging total output and aggregate hours of the workforce as a whole.

After adjustment to the new schedules, the uniform wage rate will be somewhere between $9.09 and $11.11 an hour, depending on the proportion of workers who choose each schedule. Weekly pay will thus range between $328 and $400 for those working a 36-hour week and between $400 and $488 for those working a 44-hour week.

If half the workers choose a 36-hour week and half choose a 44-hour week, hourly wage will remain at $10 and thus the weekly pay will be $360 and $440 respectively.

One payoff matrix – out of 99 – for each worker would look something like the following, with the worker's choice occupying the rows:

Assuming an individual was indifferent about the loss of leisure time, that individual would be "better off" choosing a 44-hour workweek whether all the other workers chose 36 hours or 44 hours. Aside from that assumption, the best option would depend on the relative strengths of the worker's preference for leisure, risk aversion and assumptions about other workers' preferences.

This is, of course, an extremely simple-minded example. It is meant only to suggest that "zero-sum thinking" is not the sole possible explanation for people's anxieties about unemployment – it is unlikely to be the most plausible.

Despite all the arrogant rhetoric about zero-sum fallacies committed by advocates of shorter working time, early retirement, trade protectionism or limiting immigration, there doesn't appear to have been any research to substantiate the claims empirically. There has, however, been empirical research on prisoner's dilemmas or social traps, as the tragedy of the commons model is also known. Elinor Ostrom was one of the authors of "Cooperation in PD games: Fear, greed and history of play" that references Rapoport's earlier studies. "Take-Some Games: The Commons Dilemma and a Land of Cockaigne," by Peter Mitter is included in Paradoxical Effects of Social Behavior: Essays in Honor of Anatol Rapoport.

Another kind of game has evolved with a primarily didactic rather than investigative purpose. Julian Edney's nuts game and Linda Booth Sweeney's harvest game exemplify the commons dilemma or social trap learning game. In principle, there is no obstacle (other than time and money) to incorporating a harvest-type game into a research design similar to the prisoner's dilemma research conducted by Rapoport, Ostrom and their respective colleagues.

Monday, April 4, 2016

Growthmanship: The Rock and the Hard Place

President Obama:
Now, if we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes and businesses that are making profits have taxes -- are paying taxes. That's the most important thing we can do.
Yes, what Obama says is correct, as far as it goes. Let us not forget, though, that the "9-point-something trillion- dollar" debt (not "deficit") got racked up on the premise that this year's deficit would stimulate sufficient economic growth to enable "siphoning off" enough of the growth dividend in tax revenues to repay the deficit. The siphoning off phrase comes from NSC-68. We're living in the perpetual growth Utopia conceived by Leon Keyserling: debt requires growth, growth requires deficits, deficits accumulate debt, debt requires growth... The only thing "siphoned off" in this vicious circle is the option of taking a portion of productivity gains as increased leisure.

As Eugene McCarthy and Bill McGaughey pointed out in their 1989 book, Nonfinancial Economics: The Case for Shorter Hours of Work,

"The main reason that leisure is in disrepute among Treasury Department officials is that they can't tax it. A proposal such as the shorter workweek, which would redistribute the burden of work and its income more evenly, would reduce the tax collector's take from a given volume of economic activity. Therefore it cannot be."
Few people recall that the "voodoo" of supply-side economics was supposed to be that it would induce (or compel?) people to WORK MORE HOURS. This was clearly stated by Paul Craig Roberts, Reagan's Assistant Secretary of the Treasury for economic policy in a Wall Street Journal oped published on March 19, 1981.
"For the supply-side policy to work, taxpayers don't have to respond to lower marginal tax rates by giving up vacations, going on a double shift and saving all their income. When you have a work force of more than 100 million people, small individual responses result in a large aggregate effect. If the average number of hours worked per week rises from 35 to 35.5, GNP rises by $24 billion."
Well, folks, supply-side economics "worked" in the sense that it ratcheted up the working hours. It didn't work in the sense of generating a revenue dividend large enough to pay for the lower marginal rates. Oh, well. C'est la vie, eh?

Given the 'choice' between the guns-and-butter swindle of Keyserling and NSC-68 and the Reagonomics supply-side swindle, I'd opt for none of the above. There IS an alternative. But it requires valuing people more over money and time over tax revenues. So it won't happen. Or it will only happen over the dead bodies of most economists. "In any highly developed discipline," McCarthy and McGaughey wrote,
"there is a tendency to become so specialized and refined that its respected practitioners appear to lose common sense. If medieval philosophers counted the number of angels that could dance on the head of a pin, some contemporary economists deal in equally strange and fictitious concepts. To many of them, it would seem, money is reality, while leisure is an empty spot in time devoid of wealth-producing activities. Although U.S. economists in the postwar period have paid much attention to the techniques of financial manipulation by which governments might keep the economy on a prosperous course, they have paid far too little attention to the way people actually work and live. That approach has produced its own set of problems, more than a few of which appear now to be coming home to roost."

Zero-Sum Foolery 3 of 4: Forecast Factory

Long before the issue of anthropogenic climate change arrived on the doomsday agenda, Lewis F. Richardson anticipated climate modeling with his failed attempt to forecast weather numerically. His calculations predicted surface pressures 150 times higher than observed:
Paradoxically, then, the most time-consuming, precisely calculated forecast in history was also among the least accurate ever prepared by any method.
Some consolation could be had, though, from Richardson's fantasy of the "forecast factory." In A Vast Machine: Computer Models, Climate Data, and the Politics of Global Warming, Paul Edwards praised Richardson's metaphors of the factory for "reach[ing] to the heart of computing as a coordinated human activity that harmonizes machines, equations, people, data, and communications systems":
At the same time, they stand in stark contrast to today’s dominant metaphors of computation, which are mostly individual: the brain, memory, neurons, intelligence. Richardson’s forecast-factory remains a better description of the practical reality of computing. The limits of computer power, even today, stem from these human and material dimensions.
Richardson had more success investigating the mathematics of arms races. The September 1957 issue of Conflict Resolution was devoted to Rapoport's essay on Richardson's mathematical theory of war, an essay that Schelling described as "magnificent."

In his assessment of the failures and successes of Richardson's theory, Rapoport stressed the investigative rather than explanatory function of mathematical models: "Contrary to a prevalent meaning of 'model' in many theoretical formulations, the main function of a mathematical model is not an 'explanatory' one." The distinction is fundamental to Rapoport's profound methodological objection to the pretentious "rational" pursuit of solutions to problems and answers to questions. In Strategy and Conscience, Rapoport reaffirmed that "The important end product of such [experimental] research is not an answer but a question."

The value of game theory, Rapoport was later to insist, lay precisely in its demonstration of the limits of supposedly rational choice. This is an insight that the strategists have either never grasped or refused to acknowledge. Philip Mirowski has been scathing in his criticism of "the strategic community" – including Schelling – for their misrepresentations of "what game theory could ever hope to do." The strategists' "image of game theory was one of the purest instrumentality, of the labcoated expert 'thinking about the unthinkable.'"

Not all "unthinkable" things were eligible to be thought about, though. Some thoughts, namely Rapoport's eloquent critique of strategic thinking, had to be castigated and dismissed as "defeatist," "moralistic" – much as the economists feel compelled to ridicule the fallacies of those who refuse to genuflect to the prescribed articles of faith.

As Rapoport observed in his reply to Albert Wohlstetter's bitterly dismissive commentary on Strategy and Conscience:
...the cognitive assumptions of the strategists are neither revealed truths nor self-evident facts. They are rather derivatives of a power-oriented value system, which sharply delimits the cognitive horizon of its adherents. It is high time we stopped identifying narrowness of vision with 'realism.' It is high time to stop calculating long enough to think awhile, perhaps even to listen to the voice of our conscience.
Rapoport's reply compared the strategists' assumptions to the way that 19th century political economy "conceptualized man's economic activity in a way which made it appear inevitable that the poor must forever remain poor." Central to that conceptualization were reverence for what eventually became known as Say's Law and the wages-fund doctrine, which conceived the wages-fund as a zero-sum game in which trade union action to secure higher wages for one group of workers could only result in lower wages for others.

Sunday, April 3, 2016

Zero-Sum Foolery 2 of 4: Doomsday Climate Machine

We have met the doomsday machine and it is us.

The "doomsday machine" became a household word after Herman Kahn speculated about building such a device in his 1960 book, On Thermonuclear War. Stanley Kubrick's Dr. Strangelove: How I learned to stop worrying and love the bomb (1964), immortalized the doomsday machine in the following exchange between two Peter Sellers characters, President Merkin Muffley and Dr. Strangelove:
Muffley: Dr. Strangelove, do we have anything like that in the works? 
Strangelove: A moment please, Mr. President. Under the authority granted me as director of weapons research and development, I commissioned last year a study of this project by the BLAND corporation. Based on the findings of the report, my conclusion was that this idea was not a practical deterrent, for reasons which, at this moment, must be all too obvious. 
Muffley: Then you mean it is possible for them to have built such a thing? 
Strangelove: Mr. President, the technology required is easily within the means of even the smallest nuclear power. It requires only the will to do so. 
Muffley: But, how is it possible for this thing to be triggered automatically, and at the same time impossible to untrigger? 
Strangelove: Mr. President, it is not only possible, it is essential. That is the whole idea of this machine, you know. Deterrence is the art of producing in the mind of the enemy... the fear to attack. And so, because of the automated and irrevocable decision making process which rules out human meddling, the doomsday machine is terrifying. It's simple to understand. And completely credible, and convincing. 
General Turgidson: Gee, I wish we had one of them doomsday machines, Stainsy. 
Muffley: But this is fantastic, Strangelove. How can it be triggered automatically? 
Strangelove: Well, it's remarkably simple to do that. When you merely wish to bury bombs, there is no limit to the size. After that they are connected to a gigantic complex of computers. Now then, a specific and clearly defined set of circumstances, under which the bombs are to be exploded, is programmed into a tape memory bank.... 
Strangelove: Yes, but the... whole point of the doomsday machine... is lost... if you keep it a secret! Why didn't you tell the world, eh?
Also in 1964, Rapoport's Strategy and Conscience was published.

Rapoport used a systematic exposition of decision theory to demonstrate the essential irrationality of strategic thinking, which prides itself on its supposedly rigorous rationality. Of course, the strategic thinkers missed Rapoport's point, stayed calm and carried on thinking strategically.

It would be timely to revisit Herman Kahn's footnote on the feasibility of a doomsday machine and ask if it doesn't describe something that exists today and is actually in operation:
While I would not care to guess the exact form that a reasonably efficient Doomsday Machine would take, I would be willing to conjecture that if the project were started today [1960] and sufficiently well supported one could have such a machine by 1970. I would also guess that the cost would be between 10 and 100 billion dollars. … The mechanism used would most likely not involve the breaking up of the Earth, but the creation of really large amounts of radioactivity or the causing of major climatic changes or, less likely, the extreme use of thermal effects.
I have added emphasis to the phrase, "the causing of major climatic changes." Nowadays, we refer to it simply as climate change. Anthropogenic climate change is a doomsday machine. Who would have thought?

How and why does one build such a terrible thing? Well, it turns out one doesn't have to build it -- it builds itself. All one needs to do is to keep thinking strategically and to broaden the scope of strategic thinking from brinkmanship to growthmanship.

Kubrick read a reprint of an article by Thomas Schelling, "Meteors, Mischief and War," that had originally been published in the September 1960 Bulletin of the Atomic Scientists. In his article, Schelling reviewed Peter George's novel (published under the pen name of Peter Bryant), Red Alert. Kubrick tracked down the novelist and together they visited Schelling at Cambridge. The three of them concluded that the new ICBMs rendered the plot line of Red Alert no longer plausible. Dr. Stranglove was gestated in these deliberations.

A central issue Rapoport raised in Strategy and Conscience is the pressure on strategic thinkers to reduce non-zero-sum game situations to the zero-sum dimension. He stressed the  point again at a conference in Berkeley in 1964, discussing Schelling's investigation of the role of communication in non-zero-sum games:
In this situation, the center of interest has switched to persuasive skills. If the interplay of persuasive attempts can also be cast in the form of a game of strategy, the resulting game will be viewed as a zero-sum game, since persuading the other is conceptualized in strategic thinking as a "win," while having been  persuaded is interpreted as a "loss." Therefore, introducing communication in this manner reduces the non-zero-sum game to a zero-sum game on another level. 
There is thus a relentless pressure inherent in strategic thinking to cast conflict situations in the framework of zero-sum games, i.e., to view them as conflicts of irreconcilable interests. Schelling has said that thinking derived from game theory is trapped by the conceptualization of the zero-sum game. I heartily agree with this verdict and would amplify it by pointing out that even when situations are cast in non-zero-sum game models (of which Chicken is an example), strategic analysis, as it is usually practiced, leads toward a formulation which reintroduces the zero-sum game on another level.
Schelling's Strategy of Conflict (1960), was ranked in 1995 by Times Literary Supplement as one of the hundred most influential books published since World War II. Reviews by James Meade and Charles McClelland discussed Schelling's contribution in relation to Kenneth Boulding's Conflict and Defense and Anatol Rapoport's Fights, Games and Debates.

Boulding, Schelling and Rapoport collaborated in the Journal of Conflict Resolution in the late 1950s. But their relationship appears to have grown increasingly tense because of disagreements about the rationality and the military applications of strategic thinking.

Schelling reviewed Rapoport's Fights, Games and Debates and Strategy and Conscience and Boulding's Conflict and Defense. Both Boulding and Rapoport reviewed Schelling's Strategy of Conflict. Rapoport judged the greatest value of that book was to suggest "that the very framework of thought in which the strategist must operate precludes a breakout from our present situation..." Boulding's review was blunter, even impolite:
Schelling's world, rational as it pretends to be, is in reality a world of rational nightmare, devoid of "mercy, pity, peace and love," slipping into rational deceit, rational cruelty, endless and implacable rational hostility, rational despair, and rational terror. It all ends, one fears, in the rational lunacy of eventual mutual annihilation. One fears Schelling has been seduced by the RAND Corporation which he so much admires.
Paul Erickson offers a fascinating glimpse into the complicated relationships between these three men in The World the Game Theorists Made. Erickson cites reviews by Oskar Morgenstern and Martin Shubik of both Fights, Games and Debates and Strategy and Conflict, both of which are much kinder to Rapoport's book than to Schelling's. In his autobiography, Rapoport recalled that at first neither he nor Schelling realized that their positions were "poles apart" (Certainties and Doubts, p. 128). Perhaps it was the initial illusion of accord followed by the shock of discovering fundamental differences that stoked the apparent resentments.

Starting with his role as an adviser on environmental issues to the Carter administration, Schelling has written prolifically on the economics of global warming. In 1996, Schelling was the first to speculate about the strategic aspects of geo-engineering and ambiguously refers to himself as "perhaps" to be included among the "enthusiasts" for it.

My familiarity with Schelling's writing on climate change is limited, but judging from this 2008 Cournot Centre forum, Economics and Climate Change: Where Do We Stand and Where Do We Go from Here?, moderated by Robert Solow, Schelling's view of the urgency of action would appear to be more closely aligned with Martin Weitzman's than with either William Nordhaus's or Nicholas Stern's.  Responding to Stern's enthusiasm about prospective global emission reduction targets, Schelling observed that, "announcing a radical target for the future won't be taken seriously..."

Saturday, April 2, 2016

Zero-Sum Foolery 1 of 4: Game Theory Gamesmanship

It has become fashionable recently, in denunciations of the lump-of-labor fallacy, to appeal to the notion of a "zero-sum game" in addition to the customary allegation of a "fixed amount of work to be done." In this manner, pseudo-intellectual poseurs can evoke the urgency and panache of mathematical game theory without knowing the first thing about it.

Here are a few examples:
The main reason the lump of labor theory is wrong is that it is based on the assumption that everything that is going to be invented has been invented, and that therefore economic competition is a zero-sum game, a fight over a fixed lump. – Thomas Friedman, The World is Flat.
The idea that increased participation of older workers will negatively affect employment for younger people is known as the lump of labor fallacy. This fear of displacement is grounded in the assumption of a zero-sum labor market in which every job occupied by an older worker is one less potential job for a younger person. – World Bank, Live Long and Prosper: Aging in East Asia and Pacific (with credit to Munnell and Wu, and Zhang and Zhao).
The argument that jobs taken by low-skilled immigrants are jobs forgone to native-born Americans rests on the erroneous assumptions that immigrant labor can easily substitute for native labor and that employment is a zero-sum game. The fallacy, known as the lump of labor.” was popularized in 1891 by the economist David Schloss, who described it as the erroneous belief that the amount of work was fixed and could be parceled out in various ways. – Susan K. Brown and Frank D. Bean, "Population Growth" in Debates on U. S. Immigration, edited by Judith Gans et al.
One misunderstanding we ought to dispel immediately is the so-called lump of labor hypothesis. This philosophy maintains that there is a fixed amount of work to be done—a lump of labor—so if the elderly can be encouraged to leave the workforce, there will be more jobs for the young. This zero-sum thinking is simply wrong. Economists treat labor as one of the primary inputs into economic output, and the more input, the more output. – George P. Shultz and John B. Shoven, Putting Our House in Order: A Guide to Social Security and Health Care Reform.
As far as I can determine, Paul Samuelson was the first to use this analogy in a 1978 Newsweek column on the "Economics of Discrimination":
Upon thoughtful analysis of the nature of the economic system, economists find that it is essentially not a zero-sum game. Economists call it "the lump-of-labor fallacy" to believe that in any period – 1933 or 1978 – there are only so many jobs: it is false philosophy of despair, economists point out, to insist on cutting down on each worker's weekly hours in order to spread out an allegedly limited total of work and of income among as many people as possible.
Sandwichman has previously noted in passing the zero-sum allusions but hasn't paid much attention to them. That is about to change.

Arguably, the most likely assumption of the unidentified non-economists (those nobodies presumed to commit the alleged fallacy) is not a "zero-sum game" but a repeated prisoner's dilemma. It is Samuelson, Shultz, Munnell, Friedman and their ilk who plunge zealously into what Anatol Rapoport described as a zero-sum TRAP – which is to say, the conceptual reduction of non-zero-sum games to zero-sum games in order to render them "solvable" as a predetermined type of "problem." Attributing a zero-sum view to their opponents enables the propagandists to insinuate that their alternative is a bowl of cherries. If zero-sum is win/lose, then non-zero sum must be win/win, right?

The arguments supporting my critique of Samuelson et al.'s fraudulent game-theory gamesmanship are rather involved. So why would anyone want to spend time reading about the refutation of yet another bucket of boilerplate propaganda? Because this one bears not only on crap economic policy but also on crap arms race strategy and crap climate change policy, which I will get to in the second post in this series.

In his preface to Strategy and Conscience, Rapoport recounted an exchange he had with a strategist who had come to his university to talk about "Defense and Strategy in the Nuclear Age." Overcome with revulsion at the speaker's clinical detachment in addressing mass extermination, Rapoport asked the speaker, "how would he defend himself if at some future time he were a co-defendant in a genocide trial." The speaker respectfully replied that "he would plead 'partially guilty.'" But it was the response of many of his colleagues to his question that rattled Rapoport. They thought the very question was inappropriate and violated the standards of academic discourse. Somehow, even in discussing "the unthinkable," some thoughts must remain taboo.

Unlike Rapoport's strategist, the propagandists who recite the lump-of-labor, zero-sum fallacy catechism are unlikely to acknowledge even partial responsibility for promoting economic inequality and social injustice. After all, why should they? They were only repeating what they have heard and have been told to say. They didn't know what they were talking about.

Friday, April 1, 2016

Dynamic Scouring II: Cold War, Hot Planet

NSC-68 proposed a vast rearmament program to be financed through a "dynamic expansion of the economy" such that "the required resources could be obtained by siphoning off a part of the annual increment in the gross national product." This dynamic expansion "might itself be aided by" the military buildup.

As the above letter from President Truman to National Security Council Executive Secretary James Lay indicates, Truman was concerned about the "probable cost of such programs" and consequently"the effect of these Conclusions upon the budgetary and economic situation." He therefore directed that the Director of the Bureau of the Budget, Frederick J. Lawton, the Chairman of the Council of Economic Advisers, Leon Keyserling and the Economic Cooperation Administrator convene to consider those budgetary and economic implications of the report. According to Keyserling, Truman would not have been aware that it was Keyserling himself who had advised the NSC-68 author, Paul Nitze, regarding the notion of "siphoning off" part of the increment in GNP generated by the arms build-up to pay for the arms build-up.

In the wake of NSC-68 (and, incidentally, the Korean War) U.S defense spending increased from $13 billion in 1950 to $50 billion in 1953. Presidential candidate Eisenhower, in a scheduled September 23rd speech he never gave (it was preempted by Nixon's Checkers Speech), condemned both the inflationary and foreign policy implications of the Truman administration's national security strategy:
The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism... 
Now the weakness of the Democratic Party for 'cheap' or 'soft' money is well known. For the last 20 years, it has practiced this policy faithfully. Of late, it has given it a new twist: it is now called 'controlled inflation.' But this name does not mean what it says. 
It really means inflation plus controls. 
The way this policy has worked out is easy to describe. With one hand the Administration has been turning up the water pressure at the hydrant, while with the other hand it has been trying to check the water's flow. The Administration's controls over prices are nothing but weak stop-gaps... 
There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression.
Candidate Ike's proposed alternative to arms spending was... tax reduction. "Tax reduction is a way to boost consumer buying power and to let the people spend their own money instead of the government spending it for them." Soon after Eisenhower's election, President Truman wrote to him:
Washington, November 6, 1952. 
Top Secret 
Dear General: 
Following up my telegram of yesterday afternoon, I had a consultation with State, Treasury, Defense and Budget. 
There are some really fundamental things pending before the United Nations that must be met in a positive manner. I wish you would suggest somebody, in addition to the person who is to talk to the Budget Director, to discuss these matters authoritatively with the Secretary of State, the Secretary of the Treasury, and the Secretary of Defense.... 
There is a National Security Council problem pending regarding the allocation of resources. A preliminary report is due November 15th. 
All these things are vital policy matters which can only be decided by the President of the United States but I would prefer not to make firm decisions on these matters without your concurrence, although the decisions will have to be made. These things affect the whole American policy with regard to the free world. 
If you could designate someone to act authoritatively for you, or come yourself to sit in on these meetings, it would be the proper solution to the problem. 
Sincerely yours, 
Harry Truman
Oh, and, Ike, about that "National Security Council problem pending..." If you liked NSC-68, you'll love NSC-141, the Truman administration's "last will and testament" to its successor. Historian John Lewis Gaddis described NSC-141 as "in one sense an admission of failure… But it was also a staunch reaffirmation of the essential correctness of the Truman administration's strategy."

In other words, the strategy failed so good that much more of it needed to be done: continental defense, civil defense, the development of flexible multi-purpose forces... In short, "these programs for defense of the United States against atomic attack constitute new and distinct requirements and that resources additional to those now programmed should be made available to meet them."

It is in this context that the urgency and stringency of Bureau of the Budget Circular No. A-47 -- issued on New Year's Eve, December 31, 1952 -- becomes comprehensible. Budget Circular A-47 addressed the standards and procedures for developing budget estimates for water resources projects. Item 8, which dealt with "benefits to be included in evaluation" stipulated that "Until standards and procedures for measuring secondary benefits are approved by the Bureau of the Budget, the evaluation shall be based mainly upon primary benefits." Short shrift for the consultant panel's Report on Secondary or Indirect Benefits of Water-Use Projects.

Coincidentally, that report had specifically addressed the crowding-out of public works projects imposed by heavy defense spending:
For an indefinite time ahead, the prospect is one of heavy defense outlays, but with a diminishing strain on the construction industry, and a high average level of employment, with fluctuations ranging from moderate recession to full employment and inflation. With this goes very high taxes, both on personal and business incomes. The impact of the present high business taxes has not so far shown itself in reduced private investment -- the defense-stimulated demand and high profits have seen to that -- but it means that any particular increment of investment has to show a very high marginal return before taxes, in order to show a modest rate after taxes.... If the defense stimulus lessens, while taxes cannot be reduced more than a little, taxes may become a substantial handicap to high-level employment. One remedy is deficit-spending, with inflationary potential. In this setting, inflation and high taxes are alternative evils, which may combine. In the present phase of this situation, public works bear an unusually heavy burden of proof. 
To use the glib expression from NSC-68, the required resources for further expansion of defense outlays called for by NSC-141 could be obtained by "siphoning off" funds that might otherwise have been spent on civilian public works projects. The economic rationale for A-47 was thus not so much fiscal conservatism as it was about offsetting military-industrial profligacy with austerity elsewhere in the federal budget.

Let's return in closing to that earlier formulation of a "dynamic expansion of the economy" such that "the required resources could be obtained by siphoning off a part of the annual increment in the gross national product." The contention was that the massive increase in military spending "could be accomplished without a decrease in the national standard of living." The incoherence of this claim may be concealed by its obtuseness. Paul Samuelson's explanation from a 1950 article on "Evaluation of Real National Income" may help to clarify:
Production possibilities as such have no normative connotations. We are interested in them for the light they throw on utility-possibilities. This is why economists have wanted to include such wasteful output as war goods in their calculations of national product; presumably they serve as some kind of an index of the useful things that might be produced in better times.
That is to say, the "dynamic" increment in GNP resulting from the military buildup could only serve as an index of the extent to which the standard of living would not have been decreased if it weren't for the wasteful spending on war goods. Yes, and if we had some bacon, we could have bacon and eggs -- if we had some eggs. At the conclusion of his article on national income (in which he also criticizes the Kaldor-Hicks-Scitovsky criterion) Samuelson offers "one last warning": "to define what is feasible involves many arbitrary assumptions, some of them of an ethical nature."

So much for the "Cold War" in the title. What about the "Hot Planet" bit? Recall Samuelson's remark about "an index of useful things that might be produced in better times." There's a catch

Dr. Krugman Loves a Lump

Free Trade Claims that Deserve Some Lumps 
Alan Tonelson | Thursday, 31 March 2016 09:54 (EST) 
All knowledgeable students of economics know that a big reason for rejecting most critiques of U.S. trade policy is their allegedly heavy reliance (explicitly or not) on the “lump of labor fallacy.” 
As explained by economics Nobel-ist and New York Times columnist Paul Krugman, the fallacy holds that “there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs.” And it’s especially pernicious, Krugman explained, because it “feeds protectionism. If the public no longer believes that the economy can create new jobs, it will demand that we protect old jobs from new competitors in China and elsewhere.” 
So it was interesting, to say the least, to see a leading economist this week make clear that this fallacy isn’t so fallacious, and that its existence strengthens the case for U.S. policies that depart from the free trade norm. Even more interesting: His name is Paul Krugman.