The Persistent Effect of Exposure to Civil Conflict on Political Beliefs and Participation: Evidence from the Peruvian Civil War

Authors: 
Benjamin Anderson and Ramiro Antonio Burga

Master’s Program:
Barcelona Graduate School of Economics – Economics of Public Policy

Paper Abstract:

This paper provides empirical evidence of the persistent effects of exposure to civil conflict on political beliefs and participation. We exploit the variation in geographic incidence of conflict and birth cohorts to identify the long-term effects of exposure to violence on belief in democracy, trust in institutions, opinions in support of civil rights, voting turnout and casting of blank ballots, and participation in civic organizations. Conditional on being exposed to violence, the average person exposed to violence during certain sensitive stages of life still holds slightly more negative opinions about the value of democracy and are less likely to participate in civic / political organizations in the long-run.

Presentation Slides:

About the paper

Motivation:

Political preferences heavily dictate the role of the government, the policy making processes that emerge, and potentially even the institutional framework, itself (Besley and Case, 2003; Aghion et al., 2004). Furthermore, consequential effects of various forms of political institutions is a primary focus of Political Economy, and justifiably so, for the array of welfare implications encompassed within, including, economic growth, inequality, health outcomes, and many others (Acemoglu et al., 2001; 2002). In countries where citizens have been exposed to violence during sensitive periods of life, it may be more difficult for governments to gain trust and build support for democratic processes and good institutions.

Pathways/mechanisms:

There are many logical pathways which one could speculate that civil conflict might affect citizens’ political beliefs; perhaps the most conspicuous of which being trust. Lack of protection, safety, and government accountability could lead to a decrease or lack of trust in the government, while exposure to violence, fear tactics, and other criminal behavior could result in distrust toward other members of society (Jaeger and Paserman, 2008; Rohner et al., 2013). Secondarily, residual effects of civil conflict in the form of fear, in particular for safety, could dissuade citizens from various forms of political participation (Salamon and Evera, 1973).

Summary of findings:

We examine the effect of exposure to conflict during sensitive developmental periods of life on persistent changes to various measures of political beliefs and participation. The results show that the average person exposed to conflict during the age range 13 to 17 will have slightly more negative opinions about democracy well over a decade after the conclusion of the violence. Very minor long-term effects are also present for participation in civic organizations. Our results show that the average person exposed to conflict during the age range of 7 to 12 has a decreased likelihood of participating in civic organizations of approximately 3% to 6% for each additional year that the individual experienced violence in his/her district during this period of life. While these effects are economically small, it is notable that any long-term effect is detected given the likely presence of strong attenuation bias as discussed in our threats to identification. We find that the most sensitive stages of life for the formation of political beliefs, with respect to exposure to conflict, are the pre-teen and teenage years. Contrary to the effects of violence exposure on human capital and labor market outcomes, we do not find effects occurring at the earliest life stages.

Inferences:

  1. The detection of effects in both belief and action variables not only helps to validate one another, but it also suggests that beliefs indeed translate to actions. This connection provides some evidence that changes in political perception also corresponds with political behavioral change.
  2. Even though the effects we detect are relatively small, they might have been severe during and shortly following the civil war.
  3. Although we are unable to further analyze heterogeneous effects, the effects could be quite large for certain individuals who may have been exposed to more extreme amounts or types of violent acts.

Policy Implications:

Knowledge of the size and temporality of these consequential effects of civil conflict on political beliefs and participation as well as mechanisms which drive these changes would be invaluable. This would allow policy makers to develop targeted strategies to help combat the destructive effects of violence on citizens’ political beliefs and behavior that could undermine the healthy growth, development, and stability of society.

On the experience:

The thesis was almost certainly the most fun and rewarding assignment of the year, despite the imposing time constraint. Having received rigorous training to acquire the tools needed for such a project, and having discovered and nurtured our own interests via exposure to a multitude of prominent literature in various applied topics throughout the year, it was exciting to unleash the knowledge we had gained and apply some of our empirical techniques to a new and interesting research question of our own.

Throughout the program, but especially during the thesis, we were fortunate to have access to the knowledge and support of professors. Aided by some enthusiastic and accomplished mentors, we evolved our expectations of ourselves. Their expertise in areas related to those of our paper – conflicts, violence and political economy – optimized the quality of feedback and constructive critique we received in the process. The final presentation to our directors, professors and peers was another valuable component. It served as a welcome challenge that exercised essential communication skills, not only for conveying complex ideas to an audience, but adroitly and favorably reacting to questions and criticism.

The feeling of accomplishment derived from materializing a quality piece of empirical work is great motivation to build on for the future. Just one year ago, not only would this project have been impossible to execute, even the vision of it coming together was unfathomable. By the final term, we knew that we were prepared; now, we carry forth these tools, creativity, and confidence in our abilities.

On working with a coauthor:

At the outset, the thought of working with a coauthor for the thesis did not sound ideal, but ultimately, it had many advantages. It offered another opportunity to gain from the international and cultural diversity of one another and to develop these working and personal relationships; it was an invaluable intangible experience for which we will be forever thankful. Our complimentary skillsets and working styles prevented this beast from ever becoming a burden. We are proud of what we were able to achieve given the constraints, and ended up with a final project that far surpassed anything that we could have done independently within the same amount of time.

 

Photo: “Mamá Macha” © 2006 Mauricio Delgado Castillo

This post is also published on The Barcelona GSE Voice

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Collective Action and Social Welfare Optimization – A White Paper and Meta-Analysis

 

I. What are the questions?

A recent article I read in Quartz via The Atlantic entitled, “What I learned about selfishness after using the ‘prisoner’s dilemma’ on my college class,” was thought provoking, yet unsatisfying [1]. I was concerned with its simplistic investigation of the connections between the pertinent core issues: rationality, humaneness, selfishness, individuality, personal preferences, collective action, and social welfare. It was a provocative article that presented a basic, canonical game theoretical model in a context ripe for stimulating multidisciplinary discussion, but unfortunately, it was void of sufficient objective information to justify inferences about these underlying problems or their solutions.

Amidst my whirlwind of thoughts as I was reading, I was also struck by the apparent novelty of the game for most readers. Topics such as the ones presented in the article are far too important to leave ambiguous, vacant of objective understanding of the issues, triggering peoples’ instinctually overconfident harmful speculation, misinterpretations, and opinions devoid of any academic validation, which proliferate of misinformation.

These days, the copious amount of whimsical assertions of right and wrong, or good policy and bad policy, formed on bias and inadequate understanding, come as no surprise given our collective lack of education and lack of respect for empirical fact, our limited geographic and cultural experiences, our cognitive dissonance and confirmation biases, and the very finite conscious processing power of the human brain. Fortunately or unfortunately, in today’s world nothing and no one is trivial – our beliefs and our decisions affect human lives! This is often difficult for us to see, as we are grotesquely incapable of thinking on a global scale.

As humans, our conscious brain has difficulties visualizing approximately 100 things (say people in a room, leaves on a tree, or grains of sand in a cup) [2]; we cannot even begin to comprehend the number of people living on earth today – over 7.1 billion! Without an objective starting point and the proper tools, this very finite processing power precludes the most basic understanding of our complex world on its present global scale, and prohibits the most primitive awareness of what will make it better.

In our world that evolves much faster than our understanding of it, let alone our ability to empirically plan it, how should we move forward in this high-stakes modern age? How should we approach the big puzzles like those at the crux of the article: How do we achieve collective action to optimize (global) social welfare, and avoid “the tragedy of the commons”? I proceed to illustrate these issues in my Meta-Analysis and Personal Manifesto. This is merely an elementary step to highlight the serious challenges and possible solutions to Collective Action and Social Welfare Optimization.

II. Understanding the problem

A. The fundamental condition: appreciation for knowledge

Models (e.g. the prisoners’ dilemma) and theories (e.g. game theory) can be extremely informative. They facilitate applied researchers’ identification of causal channels, which in turn develop our understanding of challenges in our world and build appreciation for its degree of interconnectedness and complexity, thus expanding our perspectives. The variation of the classic prisoner’s dilemma (the commons dilemma) game in the article resembles realistic collective action problems. We need these intellectual frameworks to approach the problem. From a general framework, we can critically reason through best-response strategies for oneself and the other players, and the outcomes based on rational best-response (Nash equilibria). A simple mode can also elicit relevant questions like, “how could the outcome have changed if communication was enabled, and credible commitments and interpersonal trust prevailed?”

Going with this example, if we were to allow for communication between players, in order to achieve the cooperative outcomes, the additional conditions of sufficient trust and homogeneity of preferences must be present. In this game, if all students wanted to maximize the number of points awarded to the class on the final grade and minimize inequities (i.e. social welfare maximization problem), then they could work together. However, if too many students don’t communicate, don’t trust one another, or don’t care about achieving the same objective, then coordination fails. Further knowledge is critical to understanding more complex and realistic collective action problems, but these key conditions, preferences and generalized trust, guided by morality, remain central to the core solutions.

Models in Public Economics illustrate welfare theorems quite clearly. The standard micro approach aggregates society’s preferences to form its utility function [3]. We typically take these preferences as given during any analysis. Then the analyst/social planner begins contemplating Pareto Efficient policies and weighing different approaches to welfare maximization based on the peoples’ preferences. Typical approaches take the form of either a) policy that maximizes society’s aggregate utility (Utilitarian), or b) policy that minimizes inequities between the utilities of individuals or groups within the society (Rawlsian), or c) something in between.

In public policy – but especially as citizens and voters – we may be getting ahead of ourselves to begin the discussion with our choice definition of “efficiency” (whether a Utilitarian or a Rawlsian approach should be taken). By taking preferences as given, we limit ourselves from the very beginning. These basic microeconomic models of social welfare inform us that the limited ways to change equilibria boil down to 1) redistribution, or 2) changes in peoples’ preferences. (I will not open up a discussion on redistribution, and with respect to the latter, no, I’m not proposing a Machiavellian plot).

Microeconomics demonstrates how sweeping changes in our world can arise simply as a result of changing individual preferences. In this discussion, I’m referring generally to any definition of preferences that one can think of including utility derived from consumption of various products or services, as well as utility derived from non-market goods like the environment and helping others. Since preferences are so influential in their determination of market outcomes, then why don’t we scrutinize them more often in our analyses, or challenge them when we see that our micro-decisions might have destructive macro-effects? – It’s surely not because preferences are cemented at birth. Preferences evolve over time. Preferences can also be intentionally molded by external forces, for better or for worse, such as in political campaigns, marketing, media, and our peers and role models. In the case of marketing, campaigns create demand where there previously was none. In politics, strategy can push and pull the electorate. In these examples, the objectives to alter peoples’ preferences generate a shift in the demand curve, which result in new, more desirable equilibria for the company or the political party, which thus reel in more money or votes, respectively. I will argue that through their effects on preferences, education, experiences, and morality – when used appropriately – can result in equilibria that improve aggregate welfare by shifting society’s social utility function.

A social welfare-improving shift cannot be forced by inorganic drivers and private interests. It should be precipitated by improved information and knowledge that creates a new consciousness of self, others, and the world we live in. An educationally and socially informed shift in preferences is the natural catalyst for realistic and sustainable welfare enhancements. Rather than merely opening the door, revised aggregate preferences will establish ethical businesses and social enterprises as the new norm. While many people would argue that we’re human and we each want different things, or that shifting preferences is costly, the fact of the matter is that collective action is everyone’s problem. Therefore, it’s not acceptable to contemplate excuses to avoid doing one’s part – perhaps because one stands to be relatively unaffected – when it’s the lives of everyone on earth that’s at stake, young and old, as well as all of the future generations.

Even a little convergence in preferences can go a long way towards achieving a socially optimal outcome. However, when our preferences so greatly diverge, it is all the more difficult to achieve a satisfactory solution for aggregate social welfare. Our divergence in personal incentives and preferences is exacerbated by our infamous, conspicuous disparities in endowments of wealth and privilege. For example, beliefs about the returns to personal initiative (i.e. “hard-work”) versus “free-riding”, the risk of borrowing to invest in human capital, and utility from various consumption decisions, drastically fluctuate based on many variables including where one falls in the wealth distribution.

Despite our motivation to maximize our personal utility, Behavioral Economics provides sheds light on our frequent failures act rationally. Aside from altruistic motives, which sometimes explain why humans don’t make the individually optimal decision, there many other explanations. Psychologically, we rationalize, trivialize, and cloud our judgement with personal biases. Troublingly, cognitive limitations also play a huge role. Independent of human behavioral irrationalities, the sheer computational complexity of the cost-benefit analyses we must internalize are frequently (and often severely) miscalculated, resulting in suboptimal decisions. The problem is not practice. We internalize a cost-benefit analysis in almost every decision we make, whether or not we realize it.

One general, yet complicated, case is that of money and happiness: A “self-made” person who amasses a fortune does not necessarily imply a more rational decision maker than the average person. The accumulation of a fortune, independent of inheritance or great luck, more accurately indicates one’s ability and desire to make money in the market using one’s skills and assets rather than one’s decision-making capabilities for utility maximization. In short, one’s time spent accumulating wealth and the ability to consume, after attaining a certain bliss point, may come at the expense of one’s utility. This is intertwined with a similar limitations on our abilities to balance and value the present and future, which leads us to frequently inappropriately discount time (undermine future welfare by overemphasizing the present, or vice versa). If we’re often so inadequate at successfully calculating a personal cost-benefit analysis to act in accordance with long-run utility maximization, then how can we possibly consider all the variables necessary to make choices that optimize society without making major sacrifices to our own welfare?

We must improve our collective knowledge if we hope to avoid the pitfalls of uninformed preferences. In reality, decisions are much more complex and dynamic than we’d like to admit, or that our theoretical modeling can allow for. Sometimes expected outcomes are often not achieved in real life due to search costs, transactions costs, and informational asymmetries, which we misjudge or assume away in basic models. It can be heartbreaking to realize that following your dreams by moving out of a “bad” neighborhood or leaving one’s home country for a dream job has negative impacts on those left behind, especially when others like you are doing the same. For example, models of segregation in cities show that – absent of “taste-based” discrimination – disadvantaged citizens still bear the brunt of residential sorting’s negative externalities which occur as a natural result of interactions between the education, labor, and housing markets [4]. The notorious “brain drain” phenomenon operates similarly. Overwhelmingly, good intentions are simply not enough. Therefore, to begin this convergence, we need to start small, identifying the simplest things which we know are at least an infinitesimally small improvement over the status quo.

To make matters even more complicated, for preferences to substantially converge, we must consider that it’s not only one’s own resources and endowment that affects one’s happiness and utility, it’s also obviously dependent upon the utility and behavior of others. As the Quartz piece points out, it’s innately human to have empathy [1] (though the amount of it varies by the individual and it’s often dependent on manmade groupings we use to categorize one another). Empathy and care for the wellbeing of others is the bright side of interpersonal utilities and non-rational preferences are often a good thing if it’s coming from a place of generalized love for humanity (hopefully combined with some educational awareness, of course). Our downfall is another fact of human nature: jealousy and greed.

Regardless of satisfied needs – let’s say a shirt to wear to work, a safe car to drive, or a safe house in a safe neighborhood – interpersonal comparison of utilities can bring us down. The culture that we live in doesn’t help, where in-group biases abound and dreams of luxury and out-consuming the “competition” dominate the television. It is a combustible mix to combine poverty, severe inequality, and poor education. Selfish, shortsighted values and consumption habits can start by destabilizing households and lead to undermining society, as a whole. Often, our decisions are so negatively influenced by our cultural downfalls that they even fail the test of individual rational payoff maximizing behavior!

Interestingly, cognition also fails – in different ways based on gender demographics – to meet the criteria of rationality when it comes to competition. Male overconfidence (discrepancy between one’s belief in their abilities relative to others and their actual abilities relative to others) leads men to over-compete in tournament settings (promotion, investing, business management, etc.) [5]. For women, this phenomenon is reversed. The result is an inefficient outcome in which neither men nor women choose to compete in a way that maximizes their individual payoffs because, in the case of men, inappropriate assessments their own abilities relative to the other competitors, or in the case of women, aversion to competition [5].

I think it’s important that we become keenly aware of behavioral or cognitive traits like overconfidence and “taste” for competition. While competition may, in some cases, lead toward positive outcomes like increased productivity, we must carefully consider the tradeoffs like erosion of trust, health, teamwork and social cohesion, and the tendency to be opportunistic at the expense of others. Do our institutions and regulations harness our evolutionary instincts for good, or further incentivize these type of behaviors in ways that aggravate negative effects on society?

In large part, the ability to distinguish rational choices from self-harming ones is embedded in the need to provide more widespread quality education. This will lead more people to behave consciously of the fact that our world deserves respect for its complexity, and will lead to better understanding and decision-making regarding issues such as environmentalism, discrimination, racism, violence, healthcare, and poverty. Education will pave the way for more common ground for the world’s more than 7.1 billion people – independent of nationality, race, and creed – and this one planet that we share. We need to expand our awareness of reality, including how our actions and policies affect the world, often in many ways unseen and unknown, and our future learning.

In their book, Creating a Learning Society, Joseph Stigliz and Bruce Greenwald draw from a wealth of existing research to demonstrate how closing knowledge gaps is central to growth and development [6]. This conclusion goes beyond education’s recognized positive externalities like reduction of criminality and violence [7] [8], increased labor mobility [9], improved infant health outcomes [10], knowledge spillovers [11] [12] [13], and social cohesion and participation in democratic institutions [14]. Stigliz and Greenwald emphasize creating a learning society is elementally critical to sustaining improved living standards in advanced countries [6].

Why is it that virtually every college student – or even high school student – isn’t getting exposure to basic models, like the one in the article, which have enormous interdisciplinary relevance and general practicality for all levels of collective action problems? The tools should better equip us to improve our own welfare, as well as society’s; tools such as financial literacy, and all sub-disciplines in economics, sociology, political science, psychology, anthropology, environmental sciences and all others connected to social welfare. The scale of ignorance to these simple tools that help make sense of how to improve the human condition highlights our ineptitudes as decision makers. How can we seek to achieve collective action, if the general population has no formal framework for understanding fundamental problems? What is an education worth if it doesn’t provide sufficient contextual knowledge to allow for practical application of things like grammar or mathematics; or even scratch the surface as to the wealth and diversity of human knowledge across academic disciplines? Of course, access to education is a challenging topic in itself; similarly, there will never be consensus as to the ideal educational curriculum for each individual, but there are some obvious improvements that can be made.

We can think of necessary improvements occurring at the extensive (access) – and intensive (thoroughness and quality) margins. By addressing some of the grave deficiencies in our education systems, we can help people to more efficiently sort into utility maximizing positions in the labor market. Currently, even for the best educated, an array of informational asymmetries obstruct the success of individuals, their ability to efficiently sort into specialized areas of study and labor, and their contributions to society. In tandem, multidisciplinary exposure (prior to advanced skilling) and improved access, could perhaps not only promote the skill development, but also improve sorting by helping to erode informational asymmetries between the individual and life’s opportunities. A thorough, well-balanced education can help us to better understand our own problems and those of our society. If at times we already lack altruism, how can we achieve desirable collective outcomes if we also lack essential cognitive skills? In world filled with selfish and non-rational agents, we expect neither empathy nor the rational “best-reply”, a combustible mix that leaves us in neither a cooperative nor a Nash equilibrium!

To see further proof of the essentiality of education, let’s take consumption theory in provision of public goods. Here, we face a similar predicament as that of the commons dilemma in the article. In a decentralized solution, each member of society independently chooses to invest some amount of personal resources to contribute to the creation of a public good. Intuitively, individuals value both their private consumption and consumption of the public good. The rational decision for each individual is found by equalizing their private marginal valuation of the public good with their private marginal cost. Under standard assumptions (including rationality), the result is a Nash equilibrium in which society faces under-provision of the public good [3]. When decision-making is decentralized, members of society do not calculate the positive effect of the quantity of their contributional investment on other members of society; they only calculate their own costs and benefits [3]. The assumption of rational agents and decentralized decision-making leads to a disappointing outcome – so what are the alternatives?

A social planner, allowing citizens no freedom of choice (i.e. a benevolent dictator), could allocate taxes such that optimal provision of this public good is achieved; this case is obviously unrealistic due to its bold institutional and political assumptions [3]. Other, more favorable, solutions to this analysis involve further, scarcely realistic conditions. In the completely decentralized scenario, optimal public good provision is possible if all members of society agree on the amount of the public good to be provided [3]. While in the centralized case, the social planner requires extremely rich, detailed information about society’s preferences and, further, that the social planner does not face adverse selection from citizens (members of society do not act on the incentive to misrepresent their preferences for the public good for individual gain) [3].

The constant across all of these unsatisfying solutions is that we’re dealing with rational agents. Remaining within the context of consumption theory, the contrast I would like to pose is a slight digression from the standard assumption of rationality: let’s assume now that members of society are some part humanistic and some part rational. Relaxing the assumption of strict rationality and substituting this gap with altruistic motives leads to a solution much closer to optimal public good provision, maximizing society’s aggregate utility [15]. Imagine this public good is education. Do our heterogeneous, self-guided interests yield suboptimal provision? Subsequently, could deficiencies in education at the extensive and/or intensive margin be driving adverse effects on society with cyclical repercussions?

Collective action experts like Elinor Ostrom, who devoted her career to building a more integrated understanding of the dynamics of coordination problems, made major contributions. Her work demonstrates that asymmetries between agents often generate detrimental outcomes, and that there are humanistic elements involved. These asymmetries – rather, the need to minimize them – are central to my focus on how individual preferences translate to aggregate preferences, hence how micro discrepancies can amount to extreme outcomes at the macro level. In her book, Governing the Commons, she reveals how a multitude of variables including knowledge and know-how, psychological, sociological, anthropological, political and institutional factors, bargaining power, and virtually all other context, influence outcomes [16]. Ostrom used a dynamic (repeated periods) game of prisoner’s dilemma to demonstrate successful resolutions can be achieved via incorporating the right combination of the following conditions: 1) enforcement via punishments, 2) communication, and 3) trust and reputation [16]. Unfortunately, however, the typical policy debates hastily focus on either a more centrally planned economy or a more freely regulated private market as the easy resolution, distracting our focus from the importance of the combination of conditions 1-3.

An appreciation and quest for knowledge, can give us direction when our intuition leads us astray, and present us with tools for objective valuation of the tradeoffs, up to the point where we must resolve philosophical or moral dilemmas. Is loosening regulation to allow riskier pharmaceutical drugs to market saving lives or destroying them? Is raising the interest rate in the midst of an economic recovery a responsible way to prevent more major shocks (for an interesting start to the argument see this opinion piece by Joseph Stiglitz in Project Syndicate [17]), or do credit constraints undermine the recovery by disproportionately adversely affect workers seeking more and better jobs with higher wages; and which has the greater effect on aggregate growth – or equitable growth – or should we be shooting for something in the middle? Or, is the interest rate a blunt instrument that often serves as a distraction from even more effective policy tools that should be paid more attention given the current institutional circumstances?

Not everyone has the same answer. The tradeoffs to these questions, and so many others like environmental protection and national healthcare and social security budgets, are enormously more complex than this basic discussion. Academic knowledge provides the foundation from which we must approach these intricate and interconnected valuation problems, in order to exclude misinformation and bias from the outset and to more fully understand the complete range of consequences of our decisions. These examples of important collective (theoretically, under a democratic system) decisions not only affect the present generation, but future generations. Borrowing from future generations, whether it’s money, healthcare, or environmental resources, these are all part of the academic, philosophical and moral dilemma over social welfare optimization.

B. The role of ethics

As humans, we face problems that knowledge cannot completely resolve, leaving us to reconcile with moral implications to our decisions, as well. This is a complex matter. Humans almost certainly differ on issues that pertain in part to ethical or moral grounds. For example, when the colonists arrived to America, ethical views of property rights were a stark example of how humans’ cultural preferences had grown apart. Colonists had rigid views of property rights designed to insulate people from expropriation from others (including the government), and the Native Americans’ was one of a much more empathetic, trusting, and forward-looking perspective; to a large degree going as far as putting the welfare of the planet and its other living things on par with the welfare of man.

Treat the earth well: it was not given to you by your parents, it was loaned to you by your children. We do not inherit the Earth from our ancestors; we borrow it from our children.

–Ancient Native American Proverb

These two polar opposites – from the most noble (altruistic), to the self-interested (rational) – are just one example of how drastically preferences can vary based on one’s viewpoint and ethical considerations, or lack thereof. Garrett Hardin, in his famous article, “The Tragedy of the Commons,” finds that in the context of environmental constraints, our long-run consumption maximization problem has no technical solution; it requires a fundamental extension in morality [18]. After first objectively understanding the problem, a vastly improved social outcome is made possible by integrating reasonable moral guidance; in this example, sufficiently preserving tomorrow’s resources at that cost of more self-interested consumption today.

How, then, should one form preferences as to achieve coordination and minimize asymmetries? I’m suggesting that preferences should be formed by integrating, within reason, individual rationality with a social cost-benefit analysis. A hybrid personal and social cost-benefit analysis can largely resolve negative externalities (and enhance positive externalities) that arise from our own actions. This effectively converges our preferences slightly, and brings us closer to the socially optimum equilibrium [15]. Weighing our decisions from a social point of view changes our aggregate demand, internalizing positive and negative externalities that would otherwise lead us to losses for society caused by under- and over-consumption, respectively. In aggregate, small changes to individual preferences, where we integrate not just our private marginal costs, but also the social marginal costs, can cause a major shift in the demand function, which in turn results in major improvements in social outcomes as a result of new equilibria [15] [3].

Immanuel Kant provided a helpful framework for ethical decision-making. Kantian Ethics require us to consider two questions whenever we decide to act: (i) Can I rationally will that everyone act as I propose to act? If the answer is no, then we must not perform the action. (ii) Does my action respect the goals of human beings rather than merely using them for my own purposes? Again, if the answer is no, then we must not perform the action [19]. The “veil of ignorance” method developed by John Rawls provides further insight and perspective to help us weigh our decisions from the standpoint of society instead of self-interest: “No one knows his place in society, his class position or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like [20].” The idea is that if all of your attributes were randomly reshuffled and you had to proceed from there, you would more carefully consider the disadvantages and advantages of others unlike yourself.

C. Consolidating what we know

As is now clear, it’s first essential that we are educated and informed. Next, we require the condition of ethical decision making, which includes genuinely conveying our preferences and demonstrating them through our actions whenever possible in a way that provides rich information and a meaningful signal to others and policy makers. To summarize so far, it’s up to each individual to 1) get educated with an essential base of multidisciplinary education and real-world experiences with people and places of diverse characteristics, 2) to question, challenge, and to reconcile this new information with one’s mindset, experiences, behavior and morality, and 3) to make real changes in our lifestyle.

We can do more by simply becoming socially conscious of our personal consumption, charity, and willingness to speak out and improve objective, benevolent communication on these issues. Before we vote with our wallet, we can think, “what statement am I making, what signal am I sending, where could this dollar have a more positive impact, what vicious cycles am I fueling, what is the environmental footprint of my excess, what are the ethical standards of the provider of the goods and services?”. Unfortunately, the behavior and consumption habits that we observe in reality are proof of the fact that our preferences do not reflect those of aggregate society.

I’m emphasizing that these solutions are embedded in the free market, but they will only be achieved if individual preferences begin to align with aggregate welfare. The importance of “socially rational” preferences which I am advocating essentially suggests rethinking our personal incentives and how this changes the dynamics and consequences of Adam Smith’s invisible hand concepts (with far fewer assumptions needed in terms of imperfect credit and risk markets and transaction costs), where socially rational decisions lead to slightly less asymmetric outcomes, and depend less on initial endowments. Re-thinking our preferences by internalizing a social cost-benefit analysis prior to our decisions minimizes the need for costly and inefficient interventions that rely on formal aggregation of citizen’s preferences and political economy feasibility consideration. Socially rational preferences alter market outcomes and precipitate policy change through our institutions. Policy change without a major shift in preferences is not only politically cumbersome, but also forcibly altering market prices through taxes or subsidies can cause huge distortions in the long-run [21].

Furthermore, we know that we cannot complacently rely on institutional change (civic engagement is also part of Kantian ethics, though) because social choice theory warns us how messy it is to aggregate preferences through a voting system. Arrow’s Theorem proves the difficulties in achieving satisfactory institutionalized change: in ordinal preference rankings there are no procedures (sorry Democracy) to satisfy basic conditions for collective decision-making [22]. Contrastingly, in the market, preferences do matter, and they dictate almost everything, including positive changes via democratic institutions once our preferences align strongly enough. Redistribution can be used to address residual discrepancies between the current state of society and a more desirable equilibrium, but this should always be thought of as an unreliable backup because of the aforementioned challenges with ordinal preference aggregation, as well as various other frictions, on complex issues like taxation and government spending. With socially informed preferences, we will shift the equilibrium outcomes we observe even in the free market (of course with sufficient protection against market failures and corrections for residual externalities like consumer safety, human rights, and environmental protection), but the economic outcomes and the institutional rules of the game will always reflect the preferences, decisions, and actions of the individual agents within it.

In our conversations about social welfare, we must be weary of distractions, disguises and misguided information that can undermine our collective future. We must make a greater effort to improve our knowledge, while reconciling our ego with ethics, to enhance our collective social consciousness. We often avoid confronting these discussions as if they threaten the status quo, or as if the inertia is too great for one person to change anything. These big issues in our world might not seem so daunting if we all just start small. Just starting is the hardest part, but a collective nudge can break the inertia. Collectively, our nudges can redirect momentum. Remembering the Kantian logic, what if we as voters or consumers all acted in the same way? With today’s powerful communication tools, we can almost rationally start to consider ourselves and our actions pivotal, as social networking and group mobilization can be achieved in momentous velocity and volume.

III. What are the solutions?

It is an academic, philosophical, and moral movement that will manifest the positive changes that, from an aggregate perspective, we hope to see. This change begins from within, with a hope, a dream, and a belief. Knowledge exclusive of morals and morals completely void of knowledge lack worth, but through nurturing and interacting the two there is hope. This new world will not develop overnight. It took thousands of years of humans literally cutting down others to get to where we are today. Now, we have the immense privilege, responsibility, and luxury of being able to make small changes, simple day-to-day decisions, which optimize social welfare – or at least minimize damage – as we go about maximizing our own utility.

Our world is the richest it has ever been. And while it is hard to align preferences in such an economically and culturally diverse world, it’s not just the top 1% that need to respond – it is all of us, all the way down to the poverty line. It’s easy to point fingers and say who has the most money to make an impact, but trade places for a moment. With the vast majority of people from rich countries living above the poverty line and behaving just as – or more – selfishly as you and your peers in the top 1%, would you trust the commons and the current status quo with a meaningful gift from your own elite fortune, and have the faith that those financial resources will be optimally divided, utilized and invested? We, too, must start showing some proof that we understand the importance of both rationality and ethics.

Too much good can be achieved to let the prisoner’s dilemma pit the wealthy against the middle, ultimately leading to the misfortune of the poor who inevitably suffer the harshest consequences. We cannot free-ride on the ethical decision making of others; we must each demonstrate our position with informed action, not just words. Don’t underestimate the power and potential for change in sheer number of lives, especially when people are unified. When the tradeoffs to action reach a break-even point, the establishment will change, but it takes the masses at the middle to follow a path of convergence toward a new cognitively informed social conscious.

The simple decision even NOT to consume at times, NOT to compete based on interpersonal comparisons, and NOT to marginally improve the present at the decimation of one’s (or others’) future. We need to invest in knowledge and invest in morality. Be careful not to mislead others, or to put your own interests over the health of your family household, your community, and global society, all in the name of whatever shortsighted form of consumption brings you immediate gratification. Ensure that self-interests are not also driving you to feed an unhealthy or toxic culture in the home, the community, or the workplace.

For example, greed dominates much of business culture; we see that regardless of the social value of production or end products and services, unhealthy competition within the workplace, including the insane use of performance enhancing drugs, can ultimately be detrimental to the health of society; mentally, physically, and emotionally. As our individual and collective consciousness shifts, so will preferences and behavior, but again, totally unforced. We’ll be amazed how the power of the markets respond. Markets will blossom for social enterprise and collapse for anti-social ones; resources will naturally make their way into the socially optimal destinations.

Sometimes the failure to make these small changes is referred to as indifference. Sometimes the conscious decision to exploit others’, including those who choose to do right, depending on the context, is called free-riding, opportunism, or sometimes it’s called being Machiavellian; whatever it is, it’s an intentional motivation to profit at the expense of others and capture the rents of their contributions that would otherwise benefit the whole. Cutting others down for selfish gain and stealing from the table of society, ultimately sets a precedent. When the sun sets on our lives, the future generations are left do deal with the consequences of our actions and whatever culture we have perpetuated. The knowledge (or ignorance) as well as non-market goods such as cultural ethics and environmental resources we bequest to future generations – these ethical intergenerational transfers – are pivotal in the social welfare optimization problem.

We shouldn’t use the law of man to substitute our need to build trust, among other virtues. Trust leads to reciprocity and is self-fulfilling. When we make laws to insulate ourselves entirely from the need to trust others, we fuel greed and even hateful behavior towards those outside of our in-group. Institutions and rule of law can provide assistance, but why should we entrust our residual welfare that is outside of our control to public policy if we, first, cannot trust each other? It’s naïve to believe too strongly in favor of solutions on one end of the spectrum or the other in hopes that it will solve all the problems, as there are constraints on both sides. Rather, we must find some way to inch toward common ground. Like most elements that comprise and mold preferences, trust is not built overnight.

Of course, every great individual who works to break the mold and has the boldness and bravery to be a leader in these fields is helping to raise awareness, shift preferences, and make a direct impact. The full potential of the positive impact, however, cannot be realized until aggregate demand shifts from the ego to the commons, thus solidifying the place of ethical business and social enterprise as sustainable in a competitive market place, free from the environmentally damaging, human rights indifferent, and consumer safety-cutting businesses and conglomerates that dominate almost every lucrative sector, fueling their growth by means of investors that care about nothing more than private returns. It is all interconnected, but nothing can change until we change our collective social conscious; and this begins with ensuring access to education. Without an education, an understanding of the issues is vacant, and even the best of moral intentions can go awry or have unintended effects.

Avoiding traps like statistical discrimination, although perhaps individually rational, in aggregate and in repetition, has a reinforcing effect of vicious cycles. In Thomas Schelling’s model of segregation, seemingly insignificant micro-motives of each individual (here as it relates to their tolerance or intolerance levels for members of a different group in the neighborhood) translate to extreme shifts in macro-behavioral outcomes, where small, ordinary personal preferences catalyze massive change, which can mean the difference between residential integration and segregation [23]. Small levels of personal intolerance can result in extreme intolerance at the macro level; this is an example of how internalizing social benefits only for oneself or one’s in-group can have serious consequences on the rest of society.

Segregation creates poor social networks and negative peer effects, which are potential contributors to poverty traps. Segregation makes it difficult to build social capital – including friendships and productive social network coordination, identity and culture, and trust and reciprocity – that is necessary for social mobility and improving welfare of minorities. The market reacts (unfavorably) to segregation, ultimately reinforcing socioeconomic problems. Although cycles and systems are not well understood empirically, the consequences can often be obvious in cases of intergenerational poverty, dynamic collective action games, education, etc., generating negative feedback loops and fueling confirmation bias.

Just like relative appraisals of interpersonal utilities, comparing personal costs and sacrifices put toward altruistic deeds and contributions to social welfare, is a trap to be avoided, as it can be as destructive of a force as any at tearing us apart and misaligning our preferences. We must each do what we reasonably can without feeling wronged by others who we judge to be more selfish than ourselves. Whether or not there will always be selfish people, we cannot fight greed with jealousy or contempt. Admittedly, these decisions are not easy when a business, personal, or even family sacrifice enter the social cost-benefit analysis. Love, generosity, reciprocity, hope and positivity are the only means to conquer what we perceive to be hate, injustices and egotism of others.

There is hope. Ethics and morals have come a long way. There is less war and murdering than ever, there is more charitable giving than ever, and there are world leaders and the Pope talking about the environment and equality (of many varieties). Also, humankind keeps growing. We’re currently over 7.1 billion, and while we consistently hear about tragedies, we often don’t hear enough about the overwhelming fraction of people in the world who are doing well, who have their freedom, have food, water, and shelter, and access to healthcare and life expectancies decades longer than we would have thought imaginable a couple of centuries ago. We must fight the psychological temptation to slip into attitudes of anonymity permitted by our cognitive limitations to accurately calculate the contribution of our actions on the global scale and an infinite time horizon. We must realize that when we form preferences and make decisions, in this world, we’re each affecting other human lives!

We even have communication tools like never before to help us discuss these issues and to come to some consensus, at least starting with the smallest things. There must always be the first steps. It’s apparent to me, at age 28, that leaders of the previous and current generations have taken the first steps; for proof, look no farther than the academic leaders referenced herein, or take, for example, the multitude of individual activists, organizations, and social enterprises of the past and present in the areas of education, civil rights, development, etc. I’m convinced that current and future generations will keep taking these small steps in the right direction; as well as small steps in new directions, more educationally enlightened, philanthropic, and moral directions.

We cannot allow our limited conscious cognitive abilities, laziness, or selfishness to be an excuse. All of us must reconcile our ego with ethics, as these problems that manifest socially and economically are at their roots both academic and ethical. Even the first steps demonstrate honesty in action, and foster the growth of generalized trust. Truth must be demanded from businesses, and pro-social marketing campaigns must be scrutinized for authentic validity. Powerful companies, with massive informational advantages over vulnerable people cannot implicitly be left to their own devices when the incentives of money and shareholders often clash with social welfare. Transparency must be demanded in everything – from labels on the food we eat, to terms of our employment contracts and healthcare benefits, to online data collection. There will be initial costs, but such is the definition of an investment. Sometimes we must lose in order to gain. It’s up to all to start taking small steps, to change inertia, and then to accelerate with caution, guided by the expansion of knowledge and morals. Continue to hold your decisions to a social cost-benefit analysis. Even if you are not always the primary beneficiary of your own investment (or charity), do the ends justify the means?

IV. References

[1] D. Selterman, “What I learned about selfishness after using the “prisoner’s dilemma” on my college class,” Quartz, 28 August 2015. [Online]. Available: http://qz.com/489083/what-i-learned-about-selfishness-after-using-the-prisoners-dilemma-on-my-college-class/. [Accessed 10 September 2015].
[2] G. Dvorsky, “​How to Comprehend Incomprehensibly Large Numbers,” io9, 26 February 2014. [Online]. Available: http://io9.com/how-to-comprehend-incomprehensibly-large-numbers-1531604757. [Accessed 10 September 2015].
[3] A. Mas-Colell, M. D. Whinston and J. R. Green, Microeconomic Theory, New York: Oxford University Press, 1995.
[4] R. Benabou, “Workings of a City: Location, Education, and Production,” Quarterly Journal of Economics, vol. 108, no. 3, pp. 619-652, 1993.
[5] M. Niederle and L. Vesterlund, ” Do Women Shy Away from Competition? Do Men Compete Too Much?,” National Bureau of Economic Research, vol. No. w11474, 2005.
[6] J. E. Stiglitz and B. C. Greenwald, Creating a Learning Society: a New Approach to Growth, Development, and Social Progress, Columbia University Press, 2014.
[7] L. Lochner, “Education, Work, and Crime: A Human Capital Approach,” International Economic Review, vol. 45, no. 3, pp. 811-843, 2004.
[8] S. Machin, O. Marie and S. Vujić, “The Crime Reducing Effect of Education,” The Economic Journal, vol. 121, no. 552 , pp. 463-484, 2011.
[9] S. Machin, K. G. Salvanes and P. Pelkonen, “Education and Mobility,” Journal of the European Economic Association, vol. 10, no. 2, pp. 417-450, 2012.
[10] J. Currie and E. Moretti, “Mother’s Education and the Intergenerational Transmission of Human Capital: Evidence from College Openings,” The Quarterly Journal of Economics, pp. 1495-1532, 2003.
[11] E. Moretti, “Estimating the Social Return to Higher Education: Evidence from Longitudinal and Repeated Cross-sectional Data,” Journal of Econometrics, vol. 121, no. 1, pp. 175-212, 2004.
[12] E. Moretti, “Human Capital Externalities in Cities,” Handbook of Regional and Urban Economics, vol. 4, pp. 2243-2291, 2004.
[13] E. Moretti, “Workers’ Education, Spillovers, and Productivity: Evidence from Plant-level Production Functions,” American Economic Review, pp. 656-690, 2004.
[14] T. S. Dee, “Are There Civic Returns to Education?,” Journal of Public Economics, vol. 88, no. 9, pp. 1697-1720, 2004.
[15] J. E. Roemer, “Kantian Equilibrium,” The Scandinavian Journal of Economics, vol. 112, no. 1, pp. 1-24, 2010.
[16] E. Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge University Press, 1990.
[17] J. Stiglitz, “Fed Up with the Fed,” Project Syndicate, 7 September 2015. [Online]. Available: http://www.project-syndicate.org/commentary/us-fed-interest-rate-hike-low-inflation-by-joseph-e–stiglitz-2015-09. [Accessed 10 September 2015].
[18] G. Hardin, “The Tragedy of the Commons,” Science, vol. 162, no. 3859, pp. 1243-1248, 1968.
[19] “Kantian Ethics,” Sacramento State University, [Online]. Available: http://www.csus.edu/indiv/g/gaskilld/ethics/Kantian%20Ethics.htm. [Accessed 10 September 2015].
[20] J. Rawls, A Theory of Justice, Harvard University Press, 2009.
[21] K. L. Judd, “Redistributive Taxation in a Simple Perfect Foresight Model,” Journal of Public Economics, vol. 28, no. 1, pp. 59-83, 1985.
[22] K. J. Arrow, “A Difficulty in the Concept of Social Welfare,” The Journal of Political Economy , pp. 328-346, 1950.
[23] T. C. Schelling, “Dynamic Models of Segregation,” Journal of Mathematical Sociology, vol. 1, no. 2, pp. 143-186, 1971.

 

 

How to Achieve Enduring Innovation

Last week, as I treaded through the Prado museum on ailing feet — with the Thyssen-Bornemisza museum still ahead of me — I marveled at the deluge of treasures from different points in the evolution of modern history. These periods yielded innovations in art and technology drastically eclipsing the pace of generations immediately preceding. I began speculating about the exact set of conditions that fueled these “golden eras”, and how these conditions could be met globally to facilitate most conducive climate to another “enlightenment” period of great human advancement. Another leap forward would be significant to presumably produce technological and intellectual treasures enhancing the lives of future generations.

The set of conditions that seems like the most logical starting point (backed by historical cases), would undoubtedly include widespread access to and dissemination of information, knowledge, and education. On the historical timeline, we live in an age in which one could argue that there is already an abundance of free knowledge and information. It is also true that the world has made great strides in the global fight against poverty. BUT, what if, we consider the opportunity cost of poverty (both absolute poverty in the cases of undeveloped countries and relative poverty in the cases of wealthy countries)?

Improving educations and economic opportunities at all levels on the human development ladder would indisputably lead to new bounties of transferable knowledge and improvements, thereof. Educational and economic opportunities will make the global information markets more conducive to discovering and maximizing talents. Would the opportunity cost of fighting poverty include accelerated innovation in clean energy, efficient healthcare systems; or even more simply by stifling violence, environmental damage, and excessive population growth? Healthcare, for instance, even in the most advanced societies can benefit from merging the focus on extending lifespan with the concept of improving healthspan (optimal holistic health and wellness throughout one’s lifespan). Likely, future innovations would extend to areas unseen and benefit generations, as well as the global environment they’ll be living in.

Aside from the inherent altruism, fighting poverty makes artistic and scientific participation more inclusive by attacking asymmetries in information and knowledge. In our modern world of extreme capital wealth, such necessary investments in human development are possible to achieve! We have the tools to realize unprecedented innovative participation. Human and economic development can be both a means and an end!

You must let suffering speak, if you want to hear the truth.
― Cornel West

(Image © Benjamin Anderson 2014)

Economic Inequalities – Where to Start?

Entering my brush-up courses for graduate school in one week, I ponder the most pressing challenges for the future of a policy economist focused on development and more equitable economic opportunity for all. The (unsatisfactory) growth of human capital with relation to aggregate incomes and the distribution of personal incomes within and across societies plays an increasingly central role in political debates and the demands of citizens worldwide, as information improves global awareness of forces marginalizing the conditions of those with the lowest incomes.

I wrestle with what seems like an overlooked starting point to this issue. As a person born, raised, and educated in the developed world, isolated from extreme poverty, what is more critical – to focus on alleviation/elimination of extreme poverty that affects the developing world, or relative poverty that persists in the developed world alongside massive wealth? Will decimating relative poverty exacerbate the poverty plaguing the undeveloped world by contributing to a concentration of capital that creates a dichotomous world, similar to the growing inequality trends occurring within many of the world’s richest nations (in particular the U.S. case); or will a disproportionately large increase in the wealth and well-being of the relative poor create an economic climate of socially responsible globalism and development aid that fulfills the economic proverb preached by some since the dawn of the modern conservative economic era in the U.S., that “a rising tide lifts all boats”? Both ends have good intentions, but which produces the greatest net gain (measured in all indicators of quality of living)? In order to answer this question, both require carefully researched, coordinated, and executed policies to achieve the optimal effect. Both must holistically assess and measure costs and benefits, seen and unseen, such as:

  • Number of lives positively affected
  • The net effect on said lives
  • The magnitude and direction of effects on differential aspects of life
  • The marginal returns to improvement in factors contributing to quality of life stratified by the individuals’ and populations’ utility preferences
  • Risks of failures and implementation
  • Who is hurt in the short-run
  • What is the “breakeven point”, or the point at which people have opportunity for growth, a “foot on the ladder” of development, and development is sustainable with no further need of planned aid because people have the tools they need to grow
  • Might rich countries and multinational corporate powers perceive potential threats coming from new competition, and might this pose a political barrier to action
  • Might controversy and class “warfare” regarding relative power and influence somehow emerge as a result of more equitable societies; or other negative unforeseen consequences

Secondarily, but necessarily, the costs and benefits to the financiers/rich for investing what’s necessary to fight poverty must be accounted for. Theory would support a long-run gain for those investing the capital – opening and expanding new markets and bolstering demand – via empowering growth.

These are complex issues, not to be oversimplified, and necessitating analysis by multiple disciplinary perspectives working together; not to mention political cooperation and united, competent implementation. Truthfully, I think some of these questions are beyond the capabilities of human understanding, and are much deeper and more significant. What is certain is that love is at the roots of the solution. What is also certain is we must not simply pontificate, but we must labor to understand and analyze in the most efficient way we know how. We must utilize and build upon the academic arsenal available to take on these challenges.

Laziness, selfishness, and apathy are the enemy of the fight against poverty and severe inequalities in capital. Unfortunately, these traits are part of human nature and a significant component of the inertia of the rich world today. How can one begin to tackle problems so complex and with innumerable interrelated drivers? Most importantly, we must act! Bring on the books, and bring it on, world!

Social distinctions can be based only on common utility.

– Declaration of the Rights of Man and the Citizen, article 1, 1789

(written 8/24/14; image © Benjamin Anderson 2014)