Tuesday, April 12

Luck and the Idea Trap

In his article, The Idea Trap, Bryan Caplan observes that “If we look around the world, there is a lot of circumstantial evidence that bad performance is not self-correcting.” To arrive at the why of that state of affairs he notes that
the least pleasant places in the world to live normally have three features in common: First, low economic growth; second, policies that discourage growth; and third, resistance to the idea[s]. that other policies would be better
So far so good or rather so bad in this case. Ethiopian economic reality and government policy clearly demonstrate these points. 1., Aside from anecdotal accounts from Addis Ababa and foreign aid dependent GNP growth the economy is doing quite poorly. 2., The most basic building blocks of economic growth including private property and rational governance are missing.

3., Finally, Statements such as this "Land will remain state-owned as long as the EPRDF is at the helm of the country's leadership" that go against the sum of all human experience indicate that little will change in the future - especially given the state of Ethiopian 'democracy'. The author has a theory to explain why these things happen.
Imagine that the three variables I just named—growth, policy, and ideas—capture the essence of a country's economic/political situation. Then suppose that three "laws of motion" govern this system. The first two are almost true by definition:

1. Good ideas cause good policies.
2. Good policies cause good growth.

The third law is much less intuitive:

3. Good growth causes good ideas.

The third law only dawned on me when I was studying the public's beliefs about economics, and noticed that income growth seems to increase economic literacy, even though income level does not. In other words, poor people whose income is rising—like recent immigrants—have more than the average amount of economic sense; rich people whose income is falling—like the Kennedy family—have less.
This point is a bit tricky. Perhaps Caplan means that how vulnerable one is to bad times makes a difference in the set of ideas that one holds?
This bare-bones model has a surprising implication: There is more than one outcome with staying power. The good news is that you can have favorable results across the board. Good ideas lead to good policy, good policy leads to good growth, and good growth reinforces good ideas. The bad news is that you can also get mired in the opposite outcome. A society can get stuck in an "idea trap," where bad ideas lead to bad policy, bad policy leads to bad growth, and bad growth cements bad ideas.

Once you fall into this trap, all it often takes is common sense to get out. But when people are desperate, common sense gets even less common than usual. The recent flu vaccine shortage is a fine example. Common sense says that to alleviate a shortage of the vaccine, you should make it more lucrative to supply. But the reaction of much of the public is, instead, to lash out at greedy suppliers for failing to do their job.

The connection between growth and ideas is not so much logical as psychological. It is not logical for people to embrace counter-productive ideas just because conditions are getting worse, but they seem to do it anyway.
Caplan takes a look at the explanation that Whittaker Chambers gave for becoming a Communist.
[A] man does not, as a rule, become a Communist because he is attracted to Communism, but because he is driven to despair by the crisis in history through which the world is passing... In the West, all intellectuals become Communists because they are seeking the answer to one of two problems: the problem of war or the problem of economic crisis.7

Chambers does not bother to explain why he thought that Communism was an effective means of solving either problem. Few Communists did. But the worse the world looked, the more certain they became that the solution to war was to repeat the Russian Revolution over the entire globe, and the cure for economic crisis was to expropriate all the entrepreneurs and collectivize agriculture.

In other words: Teach the malefactors of great wealth a lesson they will never forget. Most contemporaries did not become Communists, of course, but all over the world, deteriorating conditions seemed to inflame bad ideas, leading to bad policies, leading to still worse conditions.
It seems Caplan is saying that bad ideas are the result of faith defined as “a set of principles or ... belief that does not rest on logical proof or material evidence“ or as “the body of dogma of a religion.“

So how do you change faith and get ideas that work? Caplan sees
[t]he answer, in my model, is luck. An economy in the idea trap usually stays in the idea trap. But once in a while, it wins a little lottery. Maybe the president of the country happens to read Bastiat during his last term, and decides to try a more free-market approach. This increases growth, which in turn improves the climate of public opinion. And maybe—just maybe—public opinion changes enough to elect another president who embraces his predecessor's reforms.
Luck!? That is a rather depressing point of view taken at face value so let us see what Caplan means. To fundamentally change policy, ideas must change and it takes visionary leadership to look beyond the basic housekeeping functions of rule such as staying in office .

Even democracies can make bad decisions such as Argentina did in the 1940s and 1950s. In single party states such as Ethiopia public accountability is absent as a factor so it all depends on the luck of the draw. Which leaders make it to the top of the revolutionary party food chain determine what happens.

This causes two related problems. The set of skills needed to deal with the political milieu of a revolutionary party may not be best suited for an enterprising peace time state. In addition, bad decisions in the economic realm may reinforce the exigencies of political staying power so all to often priorities are not what observers would expect.

So Caplan is right in a sense. ‘Luck’ may not be the right word but the words ‘cruel fate’ together may be. The author continues
Failed socialist policies were rarely abandoned, and often inspired more radical steps. Disappointment with the Soviet Union inspired radical Maoist policies like the Great Leap Forward and the Cultural Revolution. Second, when glasnost and perestroika hit the Soviet bloc, the standard of living in Communist countries had never been better. It was low by Western standards, but vastly better than in the hungry days of Stalin. There is no reason why the Soviet Empire could not have endured to this day. Its leadership simply lost faith.

The standard view is that they lost faith because their policies did not work. But if that were true, the Soviet Union would have ended seventy years earlier. The normal reaction to failure was to repeat it on a grander scale. My account, in contrast, is that the long-suffering Soviet people finally had some good luck named Mikhail Gorbachev.
[...]
Depression and disarray benefit the Lenins of the world. That is when the public is most receptive to nonsense, to scapegoating sneaky foreigners and greedy corporations. The voice of reason, in contrast, gets its most sympathetic hearing when things are running smoothly, so the public is calm enough to think rationally about how to improve on the status quo, and maybe even appreciate how much their favorite scapegoats do for them.
All in all a great article and not just because it fits ethiopundit’s preconceived notions (which in our humble opinions are supported by the overwhelming tide of human history). Read the whole thing.

# posted by ethiopundit : 4/12/2005


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