Counterfactuals are the story

The Dominion Post ran a story, picked up from the Telegraph, that showed the importance of c0unterfactuals. The story was about Mitt Romney’s son and his experience with the UK healthcare system, the NHS.

One day in Sheffield, however, a stomach complaint led him to a local doctor, who had terrible news: symptoms indicated that he might have colon cancer. Even worse, Mitt Romney later recalled, “the waiting time for a colonoscopy was six weeks – enough time to make an operable, curable cancer become an inoperable terminal condition”.

They had it checked out in a private clinic, and everything was fine.

What Romney concluded from this experience was that socialised medicine was worse that the private system in the US. This conclusion is driven specifically by the counterfactual that he chose for evaluating the experience. That choice then determined the outcome.

We can put this in a 2×2 grid:

What the Romneys had experienced in the US was great healthcare, because they could pay for it. When they tried to use the NHS, they found that it was only okay — they could get treatment, but it wasn’t timely enough for them. Since great > okay, then private > public.

They neglected to take into account that this assessment is conditional on being rich. They chose a counterfactual that applied to their own situation, and extrapolated it to everyone. However, everyone is not rich. For poor people, a public system at least provides some healthcare. For people in the middle (not shown), the solution is indeterminate, and likely to be driven by genetics and preferences. For that reason, a mixed system is likely to be best.

The Romneys could have chosen a different counterfactual. They could have said, this experience tells us what it is like not to be rich. Then, the logic is great > okay –> rich > poor. The type of healthcare system doesn’t come into it.

The example also shows another human tendency — making sense of the world by telling stories. It isn’t enough to relate the actual events. We also make sense of those events by putting them into larger contexts or wider narratives. Thus, a scary episode in England becomes proof that public healthcare doesn’t work. McCloskey tells us that economics is like story-telling (pdf),  while Cowen looks at it from the other direction and says that novels are like models (pdf).

Stories are implicitly or explicitly based on some counterfactual. In the counterfactual, another nail was used to secure the horseshoe and the kingdom was saved. In the counterfactual, Oedipus wasn’t filled with hubris and let his father have the right of way. And in the counterfactual, everybody is rich and has good private health insurance.

In economics, as in real life, we should remember that these are just fables.

Accepting a euro break-up

Tyler Cowen points to his own 2005 post and this statement:

It would be ironic if the strongest argument against the Euro was simply the eventual need to dissolve it.

I immediately thought of Slavoj Zizek’s commentary about Jean-Pierre Dupuy on climate change: the only way to deal with climate change is to accept that it is our future. As long as it is but a potential, one future amongst many, it is a mere potentiality that we can conveniently ignore. If, however, we begin to think of it as our destiny, then we can push against it.

Zizek:

the way we act is determined by our anticipation of the future and our reaction to this anticipation.

He then quotes Dupuy:

The catastrophic event is inscribed into the future as destiny, for sure, but also as a contingent accident: it could not have taken place, even if, in futur anterieur, it appears as necessary.

From that perspective, it is only by accepting the certainty of a euro break-up that Eurocrats can paradoxically begin to create plans to avoid it. Thus, the ‘need’ to dissolve the euro might become the strongest argument against it, but might also motivate efforts to save it. As long as break-up was unthinkable (just a few months ago), then the parties involved were not willing to take the necessary steps to ensure its survival. Now, perhaps, they may try.