Frans de Waal, Good Natured

de Waal takes a look at aspects of human morality that can be found in the animal kingdom. The book contains a large number of interesting moral vignettes starring various animals; in this post I'll just write up a very broad outline of the "big questions."

There can be little doubt that in many species the strong can annihilate the weak. In a world of mutual dependency, however, such a move would not be very smart. The real problem is not why aggression is tempered -- it needs to be -- but how cooperation and competition coexist. How do individuals strike a balance between serving their own interests and operating as a team? How are conflicts resolved without damage to social ties?

Sympathy

[T]he question at the heart of this chapter is not so much whether any creatures other than ourselves can feel sympathy based on empathy (too much an all-or-nothing phenomenon), but which elements of human sympathy are recognizable in other animals.

[Sympathy] is easily aroused but quickly forgotten; when remembered but not acted upon, its failure to produce action is easily rationalized. We are softened by the sight of a hungry child, but hardened by the sight of thousands. (John Q Wilson in The Moral Sense.)

Rank and Order

According to socioecologists, who look at the natural environment to explain social dispositions, the optimal condition for evolution of egalitarianism is dependency on cooperation combined with the option to leave the group... The reverse, of course, is equally true.

In short, the dismantling of despotic hierarchies in the course of hominoid evolution brought an emphasis on leadership rather than dominance, and made the privileges of high status contingent upon services to the community.

Quid Pro Quo

Early human evolution, before the advent of agriculture, must have been marked by a gradual loosening of the hierarchy. Food sharing was a milestone in this development: it both marked the reduced significance of social dominance and provided a launching pad for further leveling. In a straightforward rank order, in which dominants take food from subordinates, the food flow is unidirectional. In a sharing system, food flows in all directions, including downward. The result is the relatively equitable distribution of resources that our sense of justice and fairness requires.

Getting Along

Community concern can be defined, then, as the stake each individual has in promoting those characteristics of the community or group that increase the benefits derived from living in it by that individual and its kin... The higher a species' level of social awareness, the more completely its members realize how events around them ricochet through the community until they land at their own doorstep... Conscious community concern is at the heart of human morality.

Viviana Zelizer, The Purchase of Intimacy

I'll try to come back to the issues explored in this book from a different angle soon, but here goes a brief summary.

People often worry about the mingling of social and economic transactions. They feel that the market erodes moral values and personal relationships; putting a dollar value on something renders it not sacred and essentially cheap (hence the inappropriateness of paying friends for small favors, and the taboo against prostitution). They also feel that personal relationships can contaminate professional settings -- for example, it is improper for certain personal boundaries to be crossed by doctors and lawyers with regards to their clients. As a result people intuitively arrive at a "hostile worlds, separate spheres" doctrine -- economic and social transactions are best left separate, and only trouble comes from mixing them.

Zelizer's book is an effort to move past this dichotomy. She notes that it is simply not the case that money and intimacy never go together -- in fact, "no household lasts long without extensive economic interaction among its members... money cohabits regularly with intimacy, and even sustains it."

The thrust of her argument is as follows:

People engage routinely in the process of differentiating meaningful social relations, including their most intimate ties. They undertake relational work. Among other markers, they use different payment systems -- media -- to create, define, affirm, challenge, or overturn such distinctions... Such distinctions apply to intimate social relations... relational work becomes even more delicate and consequential when intimacy comes into play.., people manage to integrate money transfers into larger webs of mutual obligations without destroying the social ties involved.

She argues that hostile worlds arguments are popular because:

People regularly invoke hostile worlds doctrines when they are trying to establish or maintain boundaries between intimate relations that might easily be confused... participants often employ hostile worlds practices, using forms of speech, body language, clothing, uniforms, and spatial locations to signify whether the relationship between this man and this woman is boss-secretary, husband-wife, patron-prostitute... They thus prevent confusion with the wrong relationship.

I'll come back to the general themes of the book much more soon.

Alan Fiske, Structures of Social Life

This book is a rather long and dry review of academic research in anthropology, sociology, psychology, philosophy, and so on. But I think it provides a useful framework for understanding social relations.

Fiske writes: "It is my hypothesis that people actually generate most kinds of social relationships out of only four basic models: Communal Sharing, Authority Ranking, Equality Matching, and Market Pricing. These implicit models are the psychological foundations of social relations and society."

Communal Sharing is "a relationship of equivalence in which people are merged... so that the boundaries of individual selves are indistinct."

Authority Ranking is a hierarchical relationship (a "transitive asymmetrical relationship," says Fiske. Heh.)

Equality Matching is "an egalitarian relationship among peers who are distinct but coequal individuals."

Market Pricing is a "relationship mediated by values determined by a market system." Quid pro quo and all that.

(Fiske says that American ideology tends to confuse Equality Matching with Market Pricing, but the latter takes into account market values instead of strict equality.)

These models of social relations determine norms for both contributing to and withdrawing from group resources, as well as exchange between group individuals. They can also be used to describe how people determine the meaning of (physical) things. For example, it may be family policy for every child to have the same possessions (each person with one bicycle) -- the bicycle is then a token representing equal status for its owner (in addition to having other uses and meanings). But a bicycle may also represent high status or a particular group affiliation. The relational models can also be used to categorize the ways in which people:

• try to influence others
• think about land
• understand morality
• interpret misfortune
• justify aggression

and so on.

I'm not sure how particularly useful this arrangement is, although I hope that it would help provide a language for talking about the intersection of economic and social domains. It is not clear that you can describe societies as being committed to some models more than others; it looks like all models are used in different times and contexts.

William Stoczkowksi, "Explaining Human Origins"

Stoczkowski begins by noting "what every schoolchild knows" -- elements of human origin stories repeatedly found in French and Russian textbooks. The prehistoric environment was cold and harsh, "teeming with savage animals." People led a difficult existence, constantly suffering and afraid. But then they learned to use tools, to control fire, to live in groups, and to build shelters. This allowed them to triumph over the hostile environment despite their physical weaknesses. He further notes that Enlightenment philosophers had essentially the same view of human origins. The origin stories are characterized by some crucial assumptions:

• Environmental determinism (harsh environment directly stimulates learning and development)
• Materialism (culture is determined by material conditions)
• Utilitarianism (human activity is based on achieving practical ends)
• Individualism (culture exists to benefit individuals)

A very different account of human origins was presented by Marshall Sahlins in 1968. He argued that the original humans lived in a state of well-being, very different from the "decadence" of contemporary civilization. They had plenty of food, were content with little, had plenty of leisure time, felt happy and unworried, and enjoyed freedom and equality. Sahlins' pessimism about the present and future was strikingly matched by his optimism about the past. His account works as a simple reversal of the more common story of human progress and triumph over nature.

Stoczkowski analyzes 24 "scenarios of hominisation" published between 1820 and 1986. Common themes include tools, bipedalism, free hands, langauge, social life, large brain, superior smarts, reduced canine teeth, cooperation, sexual division of labor, food-sharing, and hunting. This list has not changed significantly over the course of the sample; when features such as bipedalism, large brains, and social cooperation are considered carefully (birds and dinosaurs are bipedal; whales and elephants have large brains; many apes cooperate with each other, and even use and make tools), it becomes apparent that they are included not necessarily because they objectively distinguish humans from animals.

On the other hand, there are a number of possibilities for why there would be recurring themes in origins stories (beyond Stoczkowski's obvious pick, that powerful hidden "common-sense" assumptions have dominated a diverse range of Western anthropological thinking in the past couple of centuries):

• Empirical evidence
• Logic (nothing else is thinkable)
• Theory (for example, natural selection theory imposes certain constraints)
• Ideological concerns

In general, these are all rejected -- the scenarios are from a variety of ideological and theoretical schools, and constraints of evidence and logic are specifically checked for each. For example, nine of Stoczkowski's scenarios discuss sexual division of labor and food-sharing as arising from the advent of hunting. The authors of the scenarios generally stress that men would be better suited to hunting -- because men were predisposed to it, because women were hampered by child-rearing. But women are not always excluded from hunting; hunting does not always require great mobility; women are not necessarily immobilized by child-rearing duties; and women are sometimes included in hunting but barred from using the same tools as men, casting doubt on theories that emphasize economic efficiency. Furthermore, it is also quite logically possible to conceive of "sexual division of labor" as being essentially a taboo that prohibits women from certain activities (due to hunter-gatherer beliefs about animal and menstrual blood, for instance).

So it seems that modern anthropological theories of human origins enjoy credibility that is largely based on conformity to "common-sense" anthropology, rather than conformity to evidence or logical constraints. This illustrates "the weakness of our imagination" and that common-sense ideas can persist for centuries without significant change, creating links between different historical and cultural contexts.

The Market System, by Charles Lindblom

Lindblom's book explores the "market system -- how it works and what to make of it."

To place the market system in context, he urges the reader to "think society, not economy." Human beings engage in massive amounts of social coordination to feed, clothe, and entertain themselves. To educate a child requires buildings, books, teachers, people who educated the teachers, raw materials to build the buildings, and so on -- a nearly unfathomable number of people. The market system is one method by which society achieves coordination -- others include the state, the family, the corporation (a command structure in a market milieu), and "civil society" (including political parties, lobbying organizations, museums, charities, and research laboratories).

For an object or service to potentially fall under the domain of the market system, it needs to (a) be controllable (i.e., respond to an on/off switch); (b) be scarce; and (c) be obtainable without compulsion. The market system relies on the principle of "quid pro quo" -- an individual can make claims based on voluntary transactions he makes with others.

But not everything that could fall in the domain of the market system actually does. There are a number of objections to the application of the market system, particularly that the process of the market is immoral, unethical, or simply inappropriate in some areas.

For example, consider the following ideas:

• Blood should be donated, not sold
• Family members should not engage in financial transactions with one another
• Social solidarity is undercut by the very process of buying and selling
• Buying insurance reveals a lack of faith in God's care [a bit non-mainstream]
• Some people oppose shopping as a matter of principle
• Some activities are only enjoyable if done for free
• High culture needs to be subsidized by the government
  
• Drugs and prostitution are often illegal
• People should not be able to buy guns (or have private armies for that matter)
  
• Education should be provided universally, without regard to ability to pay for it
• People with nothing should still be taken care of, not frozen out
  
• Government officials need to be isolated from the market -- corruption is bad
• It may be cheaper to bypass the market (for example, to collect trash)
• Entrepreneurs seek state protection and privileges
• People doubt the competence and motives of individual choice, and want deliberating collective authority over some decisions (such as food regulation, environmental issues)

So the actual domain of the market system is somewhat less than its theoretical maximum reach, for a number of reasons -- which may be good or bad.

In the spirit of placing the market system in a larger context, it should be pointed out that quid pro quo is not the only basis on which a society can justify individual claims to resources. There can also be claims based on birth, ancestry, group membership, good conduct, prowess, and simple human status. Furthermore, the market system places a particular value on certain kinds of contributions, but it neglects to value non-market contributions (raising one's own children) and does not even necessarily value market contributions appropriately (no way to take into account dependencies on existing infrastructure; there are also spillover and monopoly issues).

I've neglected to mention the pro-market arugment in this summary, because that is best left to the discussion of the economics textbooks. In contrast to the pro-market argument, there are leftist concerns with inequality, the poor, and elite manipulation of the masses. (Lindblom mentions some other worries about the market -- namely, that work is degrading, that the market encourages people to view each other as means rather than ends, and that the market ethic corrupts moral values by glorifying greed and naked self-interest, but thinks these worries are misplaced.)

Lindblom also discusses whether the market system adds to or subtracts from human freedom (it's complicated), and whether the market system enhances or obstructs democracy (it's complicated). A key question is the extent to which elites are able to manipulate the masses (via advertising, in both the market and political contexts). [His suggested story seems to go as follows: democracy got its start with the rise of merchant/entrepreneurial elites who curbed the state's powers before launching an informational assault to obstruct fuller democracy.]

In the end, the take-away message is: Think society, not economy. Lindblom concludes: "What kind of society do you want?"

Bringing Monkey Back

Monkey fell asleep for six months. Will start posting again soon.

The Difference Between Statistically Significant and Not Statistically Significant is Not Statistically Significant

By Andrew Gelman and Hal Stern.

The difference between 25+-10 (statistically significantly different from zero) and 10+-10 (not statistically significantly different from zero) is 15+-14 -- not statistically significant.

A good example was the research linking homosexuality to the number of older siblings -- number of older brothers was statistically significant, number of older sisters was not, but the difference between the two effects was not statistically significant!

Gerd Gigerenzer has an article "Mindless Statistics" criticizing the use of statistics in the field of psychology. Psychologists use the "null ritual" to publish papers and advance their careers, but don't take statistics seriously. Practicioners suffer from cognitive illusions which emphasize the "usefulness" of finding a statistically significant result.

If an effect with p<0.01 is found, the probability of the null hypothesis being true is not known, nor is the probability that the effect will be found in future experiments.

Marketing Models

Yonay and Breslau, "Marketing Models: The Culture of Mathematical Economics"

Sociologists often criticize economists for using unrealistic models and for focusing on formal models instead of empirical research. However, the authors look to approach economists as anthropologists approach foreign societies, without using their own standards to evaluate what they see. They focus on "mainstream economics" and in particular on "model-building" which is the "keystone of the economic discipline."

Models in economics are not meant to be realistic but insightful -- capable of highlighting important mechanisms that can explain important phenomena. Economists advance their careers by finding holes in widely accepted theories; they are interested in empirical phenomena to the extent that there is a blind spot in the literature regarding it.

Even as existing theories are revised, there are a set of standard assumptions that are culturally dictated (some assumptions are easier to make than others, because everyone else is also making them). Mainstream economics is committed to methodological individualism (modeled agents are individuals) but not necessarily rationality (although properly modelling deviations from rationality is largely a matter of gut feel and intuition). However, nonrational behavior in economics must still be formalized -- "you must say something." Models must be "close enough" to the real world but also need to be tractable, so that an equilibrium solution exists. Equilibrium solutions are emphasized not because economists believe that the world is static, but because they impose a consistency test on models, meaning that the model is a possible explanation for whatever needs to be explained. As models become more complex, it becomes harder and harder (perhaps impossible) to find an equilibrium solution.

It would be interesting to think about the strengths and limitations of relying on formal models requiring equilibrium.

Shortages

In the 1950's, economists Alchian, Arrow, and Capron wrote a paper discussing the existence of a shortage of scientist/engineers in America.

What exactly does a shortage mean? For economists, it's essentially a matter of price not being able to adjust to clear the market. If apples cost 10 cents each but not everyone wanting to buy apples at this price is able to do so, then there is a shortage of apples. In a properly functioning market, this should not happen -- the price of apples should rise until the market clears. Only price controls can prevent this from happening! The government can cure shortages by not interfering with the market.

The layman usually has another meaning in mind. A dramatic increase in the price of apples might lead to a shortage of apples at the old "normal" price. While people are concerned with the "proper" price of apples, economists understand prices as simple market-clearing mechanisms and therefore pretend not to share the intuition that there are proper prices and improper prices. For example, the authors mock the idea of a proper price by discussing those who claim that there is a shortage of servants (instead of realizing that servants are now able to command much higher wages on the market -- hurray!) Such an example is only partially useful rhetorically, because it avoids confrontation with the idea that a dramatic increase in the price of food might be morally problematic.

People who refer to shortages may also believe that engineers are socially undervalued. Not surprisingly the authors find this claim dubious. They are responsive to the notion that competition with the Soviet Union dictates that we increase our supply of engineers, but do a good job pointing out the limits of that logic.

The authors do allow for "dynamic shortages," where institutional factors and market inefficiencies lead to prices adjusting slowly (but in the right direction). They acknowledge possible market inefficiencies due to uncertainty, myopia, monopsonies (the government has considerable market power as a major employer of engineers), and externalities. The monopsony effect is probably particularly relevant -- a large employer of engineers is more exposed to wage increases and therefore more reluctant to provide them. There is also the fact that while greater demand for engineers drives up their wages and serves as a signal that more workers should become engineers, there is a considerable time lag due to the long training period.

There is a discussion of how engineers decide how much education to puruse. It seems misguided to me -- at one point the authors suggest that wages for MSc engineers should be the same as wages for PhD engineers, accounting for education costs (including time), but this would only be true for marginal engineers and even then it would only be true if the PhD didn't serve a useful signalling function (not everyone might have the "choice" to pursue a PhD, constrained only by earnings).

This paper is very long (over 100 pages) and it would be possible to go into a lot more detail, but that doesn't seem like a particularly good use of time. I note the authors discomfort with actively suggesting to children that engineering is a good career (clearly indicating an "inaction is morally more excusable than action" worldview) although the points they make regarding the hidden costs of more engineers are good (more engineers = fewer doctors, all things being equal).

The authors emphasize two reasons why prices should be allowed to fluctuate in a free market. (1) Prices serve as a signal to encourage greater production. (2) Fluctuating prices ensure that resources are allocated efficiently (put to their most produtive use).

Game Theory and "Commitment"

Jack Hirshleifer, "Game-Theoretic Interpretations of Commitment"

Where to begin? We can start by looking at the examples of game situations that Hirshleifer uses to illustrate his points.

1. Chicken. Two people drive cars directly at each other. If one of them bails out, the other wins; if neither bail out, they both get killed.

2. Land or Sea. The British choose to attack by land or by sea. The Americans choose to defend either the land or the sea. The Americans win if they defend where the British attack, otherwise the British win.

3. Prisoner's Dilemma. Two prisoners have to choose whether or not to rat out their co-conspirator. If both prisoners keep quiet, they each face a small punishment. But if one of them sells out, he gets off free while the other gets screwed.

4. Battle of the Sexes. A boy and a girl try to arrange a date. The boy prefers to attend a sporting match while the girl prefers to attend the opera. However, each prefers going on a date to not going on a date.

The games all involve two self-interested parties that must each be concerned with the other's actions. In Battle of the Sexes, interests are largely aligned; in Land or Sea, interests are entirely opposed. In Prisoner's Dilemma, the optimal outcome involves cooperation but each party has a selfish interest in defecting. Chicken has a similar structure to Prisoner's Dilemma...

The alignment of interests in Battle of the Sexes means that it is advantageous to have the first move (in this case, decide where you want to go for the evening). The opposite is true in Land or Sea (it is better to be able to react to your opponent). Flexibility is a crucial advantage in Land or Sea but is somewhat of a hindrance in Battle of the Sexes. We can view "commitment" as the opposite of the flexibility -- it's the ability to lock in your move, to tie your hands. Often tying your hands can be an advantage. A child who throws an uncontrollable temper-tantrum gains an advantage over a responsive parent.

If the Prisoner's Dilemma is not an anonymous one-off, parties may reach an optimal outcome through the use of promises and threats. For example, consider the announcement that "like will be met by like." This is essentially a promise that cooperation will be matched by cooperation (because pure cold calculation implies that defection will be matched by defection). If the promise is sufficiently credible, then it will be in the other player's interest to cooperate. (It is not necessary for the promise to be 100% credible.)

Similarly, in Chicken, the second player might announce that "I will defect." This is a threat to crash the car if the other player stays on the road. If the threat is sufficiently credible, then it will be in the other player's interest to bail out. One way to make the threat credible would be to remove the steering wheel and conspicuously throw it out of the window.

It is also possible to combine a threat with a promise. For example, in Chicken a player might announce that "like will be met by like." The advantage in combining a threat with a promise is that the credibility of the promise can make up for a deficiency in the credibility of the threat.

It seems likely that this sort of analysis can provide insights into human passions such as anger and gratitude.

Daniel Wegner - "Self is Magic"

Wegner suggests that consciousness and self-control is a type of magic -- it is remarkable that we can wish for something and then have it happen! "We are enchanted by the operation of our minds and bodies into believing that we are 'uncaused causes,' the origins of our own behavior."

Since we don't perceive the true physical causal links in our behavior -- neurons firing in our brain -- we have incomplete self-knowledge. Although it seems that we understand ourselves, this sense of understanding is an illusion. Wegner stresses that we are amazed by our own behavior, but this does not seem quite correct to me -- we often take ourselves completely for granted. His parallel with watching a magic trick seems strained. It is true that humans often resist attempts to "pull back the curtain" on our mental operations, however.

There are three key sources of the experience of conscious will -- consistency, priority, and exclusivity.

Consistency. Participants in an experiment were instructed to perform a voodoo curse on an experimental confederate, who later feigned a headache. The participants did believe that they had exerted some influence on the victim (even if the headache was only psychosomatic). But the feeling of responsibility was significantly strengthened among participants who were led to dislike the confederate before applying the curse. This consistency between desire and outcome led to a sense of conscious control (over something that in fact had not been caused at all).

Surely our interest in following sports is related to this effect. Why do people root for sports teams? Furthermore, many people would not want to watch a tape of a sporting event after its completion, even if they were unaware of the outcome. Somehow the unpredictability of a "live" game is more compelling than the unpredictability of a tape of the same game.

Consistency can be undermined by distractions that separate thought from action. This reduces the feeling of voluntariness for actions. Wegner suggests that this effect may underlie hypnosis.

Priority. "The matter of timing is crucial in the perception of willed action, so crucial that even happenstance events may be perceived as under one's control when they occur just after one has happened to think about them."

Exclusivity. "People see their thoughts as causing events to the degree that there are no other plausible candidate causes." If you are thinking of ordering a dish at a restaurant and someone at your table strikes first, you may be tempted to change your order. Milgram's famous torture studies can be interpreted to reveal that humans are quick to experience "agentic shift" -- to view themselves as instruments of others. The experience of conscious will is therefore very dependent on there not being other possible causes (in particular, other social agents).

Wegner moves on to discussing "Breaking the Spell." Lovers who explain why they feel love experience a diminishing feeling. At the same time, people feel that understanding and explaining evil is very close to condoning it. To retain our appreciation of evil, we need to resist understanding it. Furthemore, "explained" beliefs lose importance, but beliefs that are used to provide explanations gain in value (to the believer).

Wegner believes the illusion of self is so persistent and strong that it will not fade, not even after being explained. For example, in one experiment people were asked to judge the moral responsibility of a muderer. If the murderer had shot his victim under overwhelming duress, participants judged him less responsible, as expected. But if the murderer had wanted to do it, he was judged as more responsible, even if his want had not been the actual causal factor. (Red flags: Wegner's conclusion -- that moral responsibility is not a matter of simple causal logic -- is not as straightforward as it might seem.)

The next question is why the feeling is so persistent. Going back to biological foundations (natural selection), we ask: why would natural selection have designed minds that experience the self illusion? Why can't people just act -- why do they need to feel aware? Why do they need to feel in control?

Wegner suggests three possible avenues for the evolution of self-magic:

Social signalling. The experience of conscious will is a signal that the self is "authoring" an act; this in turn can be communicated to others. I am afraid that there seems too much taken for granted in Wegner's account, which really should start at the very beginning.

Social task allocation. Conscious will allows people to know their limitations. Once again, this account seems to presume too much.

Social control. Conscious will readies individuals to accept responsibility. The inner feeling of doing provides a conscience. This definitely hits on something fundamental but I need to spend more time thinking about it.

FURTHER READING:
Baumeister, R.F. (1997) Evil: Inside human cruelty and violence. W.H. Freeman.
Woolfolk, R.L. et al. (2006) . Identification, situational constraint, and social cognition: Studies in the attribution of moral responsibility. Cognition, 100, 283-301.

Re-booting the Blog

OK I'm starting all over again now.

Intervening in the Market is Bad!

The fundamental theorems of welfare economics indicate that markets can be extremely effective ways of determining social production and allocating goods. It should follow that interfering with the market mechanism can be quite costly.

For example, consider price controls. Superficially, it looks like price controls -- "artificially-generated" lower prices -- benefit consumers and hurt firms. However, in a state of disequilibrium supply does not meet demand and consumers will find that they are not able to consume as much as they would like at the fixed price. This creates a rationing problem that needs to be solved in some way. Some consumers will certainly become worse off due to the restriction on trade that they face.

Or consider sales taxes. Say watches cost $6 each in a "free market." Consumers who would gain more than $6 in value from consuming an additional watch will purchase one; firms who can produce an additional watch for less than $6 will do so, and they will engage in mutually beneficial transactions. But if the government charges $1 tax on each watch sale, then a transaction will only occur if the consumer values the watch at least $1 more than its cost. So some parties lose out. Indeed, the loss to the parties is greater than the gain to the government -- this is the deadweight loss of taxation.

If we assume that all parties are identical -- a "representative consumer" or "representative firm" shall we say -- then it follows that everyone in general is hurt by price controls and sales taxes. However, if parties have sufficiently different, then it may be possible that price controls or sales taxes benefit certain parties at the expense of others. The exposition followed so far has not focused on differences.

The Theorems of Welfare Economics

We model a "free market" consisting of consumers, firms, and goods. To keep things simple, we will focus on a single good, butter, and lump all other goods together under "wealth."

Butter can be bought and sold at the market at a single price. Firms produce butter and then sell it to consumers. Consumers seek to maximize the "utility" they enjoy from having wealth and consuming butter, but they can only consumer more butter by giving up some of their wealth. Firms seek to maximize profits by producing butter at a cost and then selling butter to consumers. (Firms are coincidentally also owned by consumers, whose wealth is partly dependent on the profits generated by the firms they own.)

What determines the "single price" in the market? An unspecified process known as "reaching equilibrium." If the price of butter is too high, then producers will be encouraged to produce lots of it, but then will not be able to sell all of it at this price. If the price of butter is too low, then consumers will want to buy lots of it, but producers will not produce enough to meet demand. In either of these cases, there will be "pressure" to move prices in one direction or the other. At the equilibrium price, this pressure disappears -- the market clears.

There are two questions to consider: 1) how much butter is produced and 2) how much of the produced butter is allocated to each consumer.

For consumers, more butter is better, although the gains in utility from more butter decrease as more butter is consumed ("diminishing marginal utility"). The consumer faces a tradeoff in enjoying more butter and paying for it. The first unit* of butter is likely to bring in a lot of utility, worth more than the price of butter, but as additional units of butter are consumed this eventually becomes untrue. So the consumer's consumption is determined by

Marginal Utility of Butter to Consumer = Cost of Butter to Consumer (= Market Price)

For firms, the cost of producing butter typically decreases with the initial production of a few units, due to fixed costs; it later eventually rises. Because they want to maximize profits, firms increase production until the gain from selling more butter (market price) no longer exceeds the cost of making more butter. So the firm's production is determined by

Marginal Cost of Butter to Firm = Market Price

So the market determines the total amount of butter produced, and how it is allocated to consumers.

We next compare the performance of the "free market" to the performance of an Omniscient Planner who selects how much butter is to be produced by each firm and how much butter is to be consumed by each consumer. To avoid getting too bogged down with normative comments, we only compare outcomes if one is at least as good as the other for every consumer.

1. If the planner wants to produce the same amount of butter as the market solution, it is impossible to do it cheaper than the market solution.

2. If the planner decides to produce more (less) butter than the market solution, then it is possible to select a better outcome.

3. If the planner produces the same amount of butter as the market solution, but distributes it differently, then it is possible to select a better outcome.

The basic argument is that if one consumer would prefer cash to butter, and another would prefer butter to cash, then they could each made better off at no cost to anyone else by simply trading butter for cash. This will be the case when we are not at the market equilibrium.

From this reasoning we have the two Fundamental Theorems of Welfare Economics:

1. Market equilibria are Pareto optimal.
2. All Pareto optimal outcomes can be achieved through market equilibria (and the redistribution of initial wealth).

*Being able to define butter in "units" is one of a myriad of assumptions used here. Some more important assumptions are: 1. being able to assume away the equilibrium process; 2. firms lacking any sort of market power and being easily undercut by competition; 3. consumers' utility functions are completely independent; 4. optimal outcomes are described with minimal reference to the distribution of wealth.

This post will be modified again in the future, but I need to move on now.

More Soros on Market Fundamentalism

Page 143:

Market participation and rulemaking are two different functions. It would be a mistake to equate the profit motive that guides individual participants with the social considerations that ought to guide the setting of rules... How can [market fundamentalists] get away with it? Their first line of defense is that they are simply modelling how people behave: "People may talk about right and wrong, but when the chips are down they act according to their interests."...

But... they are not modeling actual behavior; rather, they are building models on a peculiar assumption of rationality. Second, values are reflexive, and market fundamentalism tends to reinforce self-serving behavior in politics... Third, even if their models corresponded to reality, that would not make their argument right. Economic actions have social consequences that cannot be dismissed on the grounds that people are selfish.

That is where the market fundamentalists' second line of defense kicks in: "Markets tend toward equilibrium, so the pursuit of self-interest also serves the public interest." ...

Soros questions both the existence of equilibrium and claims that "it is not the tendency to equilibrium that creates wealth, but the release of creative agencies... [which] does not ensure social justice." Emphasis added, because I am not sure what he means.

He points out that markets take existing distributions of wealth as given; that common interest does not find expression in market behavior; and that financial markets are inherently unstable. Therefore political processes, despite their flaws, are necessary.

Soros on Values

Pages 112-115:

People have bemoaned the lack of shared social values throughout history, but there is one factor at play that makes the present different from other times: the spread of market values that give precedence to self-interest over the common interest... lasting relationships have been replaced by individual transactions... national economies have been superseded by an international economy, but the international community, insofar as it exists, shares few social values...

We are inclined to take social or moral values for granted... "intrinsic" or "fundamental"... Nothing could be further from the truth... Social values are reflexive. They are influenced by social conditions and, in turn, play a role in making social conditions what they are...

Social values express a concern for others. They imply that the individual belongs to a community... whose common interest takes precedence over individual self-interests... [M]arket fundamentalism... maintains that the common interest is best served by everyone pursuing her own self-interest. That gives the pursuit of self-interest a moral blessing. Those who adopt the creed tend to come out ahead because they are not encumbered by moral scruples in a dog-eat-dog world -- and such success can be reinforcing...

[Humans] tend to reach out for values that extend beyond their narrow selves. Even when they pursue their self-interest, they seem to have a need to justify their behavior by appealing to principles that go beyond themselves. As Henri Bergson pointed out, morality can have two sources: tribal belonging and the universal human condition.

Page 125:

Although social values and moral precepts are in doubt, there can be no doubt about the value of money. That is how money came to usurp the role of intrinsic values.

Soros on Types of Socities

Pages 106-108:

Instead of a dichotomy between open and closed society, I now envisage open society occupying a precarious middle ground, where it is threatened by dogmatic beliefs of all kinds -- some that would impose a closed society, others that would lead to the disintegration of society...

...many things are possible in revolutionary situations that are inconceivable in normal times... When I was fourteen, in 1944, the Germans occupied Hungary and engaged in genocide against the Jews; I might not have survived had it not been for my father. He realized that this was a far-from-equilibrium situation in which the normal rules did not apply... I learned that the same rules do not apply at all times... Bureaucratic institutions, in particular, are constitutionally ill-suited for the task. That is why they tend to break down and collapse if the dynamic disequilibrium becomes too severe...

The fact that I had to revise a dichotomy and replace it with a tripartite division should warn us how precarious these divisions are. That does not detract from the values of the insights they provide, but it reminds us forcefully that the categories have been introduced by us and are not found in reality.

Soros and Social Science

Page 48:

In my opinion, there is a better way to protect scientific method than the one Popper suggests. All we need to do is declare that the social sciences are not entitled to the status that we accord the natural sciences. This would stop pseudoscientific social theories from masquerading in a borrowed suit of armor; it would also discourage the slavish imitation of natural science in areas where that is not appropriate. It would not prohibit the scientific study of human behavior, but it would help scale down our expectations about the results. My suggestion would also constitute a major loss of status for social scientists, so it is unlikely to be very popular among them.

Page 82:

Economists such as Robert Solow reject my interpretation because it does not provide any determinate explanation or prediction of market behavior. They are right, of course. My contention is that reflexivity injects an element of uncertainty that renders financial markets inherently unpredictable. I claim that recognizing this fact puts us in a better position to anticipate and react to market moves than does a supposedly scientific theory; but I have not produced a scientific theory.

Soros and Self-Criticism

Page 33:

I sought out a number of politicians who had served in previous governments and asked them how they would handle the situation. To a man, they said they would apply the same policies they had followed when they were in power. Rarely had I met so many people who had learned so little from experience.

Page 35:

But other charismatic personalities have not arrived at their leadership positions following the same route... They probably remember that they always tried to get others to believe in them, and eventually they succeeded. They are not consumed by self-doubt, and they do not need to repress the urge to express it... People do not want their leaders to be fallible. That is one of the worst defects of our contemporary democracies.

Soros and Reflexivity

Soros, "Open Society," page 7:

On the one hand, the thinking participants seek to understand the situation in which they participate. I cal this the passive or cognitive function. On the other hand, they participate in the situation that they seek to understand. I call this the active or participating function. Instead of a one-way street, there is a two-way interaction... The intererference introduces an element of indeterminancy into both functions that would be absent if the two functions operated independently of each other. That is what I call reflexivity.

Page 13:

Karl Marx claimed that the material conditions of production determined the ideological superstructure; Sigmund Freud claimed that human behavior was dictated by the unconscious; and classical economic theory was based on the assumption of perfect knowledge... In accordance with the standards prevailing in the nineteenth century, the explanation had to be deterministic in order to qualify as scientific.

Page 15:

The paradox of the liar was for the longest time treated as an intellectual curiosity and was neglected because it interfered with the otherwise successful pursuit of truth. Truth was defined as the correspondence of statements to external facts.

Page 21:

We should remember, however, that our fallibility is liable to create a gap between intentions and outcomes. Instead of the futile pursuit of the perfect design -- whether in the form of communism or in the form of markets that tend toward equilibrium -- we should content ourselves with the next best thing: a society that holds itself open to change and improvement. This is the concept of open society.