Counterfactuals are the story

26/07/2012 Comments Off on 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.

Eurozone stories

29/11/2011 Comments Off on Eurozone stories

How can we think about the eurozone problems? It is very hard to think of them as they are. It is hard to keep in mind the number of countries, with their different fiscal positions managed by separate governments, and also remember the European banks and global investors and the multiple bond offerings, plus the supranational organisations. I’m a bear of very little brain.

So, we simplify. The experts are telling stories and analogies, and then try to work out the conclusions. Brad Delong points us to Wolfgang Münchau:

The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.

This massive erosion of trust has also destroyed the main plank of the rescue strategy. The European Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.

This piece is filled with poetry:

  • a run on the eurozone — A bank run is about self-fulfulling panics, balance sheets, and confidence in the ability to repay debts/depositors. It sounds very scary. But the eurozone is an economy; people produce things and buy things. The economy can grow and continue to pay on claims against it, regardless of asset problems.
  • erosion of trust — This implies an force of nature. Rhetorically, it begs the question of whether it can be stopped or turned around. It makes collapse inevitable.
  • the main plank — Political platforms are built from planks, but they are fancy words rather than actual promises. The rescue strategy now seems less like a plan and more like campaign rhetoric.
  • firepower — Now, the EFSF is a tank or a battleship. It is fighting, but against whom and for what cause? Will it be full of sound and fury (shock and awe), but signifying nothing?
  • contagious spread of the disease — The EFSF becomes human (or at least biological). The eurozone problem has again become natural, just one of those things that humans can ‘catch’. This also suggests that an external doctor needs to administer to the patient.

How can we put all these metaphors together? Is the EFSF is a machine of war, needing a bit of extra weaponry to destroy the enemy? Or is it a feeble invalid, needing to be administered to? What about the crisis — is it an unstoppable force of nature that will eventually collapse the euro? Is it instead a panic attack that could be calmed with the right intervention? Or even still, a dread disease for which there is no cure, and we must flee or be infected?

Of course, it is none of these things. It is a group of people negotiating and renegotiating contracts over debts and repayments. That image isn’t as poetic. However, it lays bare the fact that people created the problem, and people can fix it, too.

Narratives to policies

11/11/2011 Comments Off on Narratives to policies

Alright, we’ve had the set-up; now, the punch line.

The parties have different stories about how the economy works. Policies are evaluated first on whether they fit these stories. If they fit, they are prima facie ‘good’.

Take the asset sales policy. TVHE has sparked a good discussion with several posts about how to evaluate the economic impacts of sales. I’d suggest, however, that asset sales are already good or bad (or possible) because of the way they fit the story.

For National, the selling is the point . It isn’t a question of how much value can be realised, or what trade-offs get made. National’s story is that Government will be transformed; selling major government assets is proof of the commitment to change. It doesn’t matter what we get for them. The important thing is to do it.

Labour, by contrast, already knows the deal will be bad. Market prices for everything are already wrong, and in particular are skewed against labour (small ‘l’). Regardless of the outcome, the mere fact of a market transaction signals that investors, particularly foreign investors, are going to rip off the New Zealand public. That’s how the story goes.

The minor parties (leaving aside the New Economic Party, of whose existence I was ignorant until I saw a hoarding last night) have stories that don’t commit them one way or the other. The sales can fit their narratives as long as they have the right details. This is sensible politics – keeping their options open – but it also means that the real economic analysis and debate should come out of the minor parties.

The Act Party can explain how removing the governmental impediment will allow the market to provide power efficiently and encourage innovation. The Greens can describe how sales might be good, as long as the right measurements/policies/incentives are in place to foster sustainability. The Maori Party can focus on the impacts on Maori. How does it affect power prices for lower-income families, development of Maori resources, and employment or training for Maori workers?

We could take the same approach to thinking about employee skills training. I’m contributing to an MED workshop next week on the topic. If we have stories that tell us Workers are already skilled and capable, it is hard to see where skills training fits. National, Labour, and Act have this narrative. Workers are capable; they are either held back by Government or swindled by investors. Why would they need training? The Green and Maori Parties can fit skills training more easily into their narratives. They are saying that workers need to be prepared for the future economy (Greens) or the wider economy (Maori), in order to benefit from it. Training is therefore already a good idea, before we even know what it entails.

The point, I guess, is that economic analysis is an afterthought. The narratives determine whether the policies are ‘good’ ideas.

Election: National’s economic story

08/11/2011 § 1 Comment

Drawing on McCloskey and others, I have been thinking about the ‘economic story’ that the parties are telling for the election. Stories have heros who are transformed by their trials. They have obstacles or villains to test the heros. They start with a setting – the world pottering along as it does – until a dark stranger comes into town or a change falls over the land.

What story is the National Party telling?

Let’s start with what they’ve said. They will balance the books to lower debt and interest rates. They will create incentives ‘ for people to work hard, save and get ahead’. They will also build ‘better roads, broadband and other infrastructure so businesses can grow’.

In this story, the People and Businesses are caught in a grey muddling-through. There is no reward for working hard, and poor infrastructure makes it too hard, anyway. This will all change when the government pays off its debts, aligns the incentives, and rebuilds the infrastructure. Then, our economy will prosper and life will be in Technicolor (once more).

In this story, People and Businesses will not be transformed because they don’t need to be. They are already capable of the economic growth we could have.  They merely need to be released.

If the hero of a story is the one who is transformed, then the hero is Government. Government starts as dissolute spendthrift and becomes a mate helping spruce the place up. But that’s a political story. The economic underpinning is of People and Businesses who are good-hearted and creative, who are sufficient unto the task but held back.

Not all the policy details fit the story. The $150 million advanced technology institute, for example, seems like a poorly connected sub-plot. The obvious fudge is calling it investment that unlocks the existing creativity, but the spending targets specific industries. It suggests that maybe some Businesses aren’t quite sufficient enough.

‘Asset sales’ play a central role in the story. National has identified two different obstacles that Government must overcome to become our mate. For People, the problem is too much taxing and even more spending. For Businesses, the problem is not enough infrastructure. Government must therefore both spend less and spend more. Asset sales are a deus ex machina to resolve this conflict and allow the story to be internally coherent. It’s like finding out in chapter 20 that Great-Auntie’s little book of poetry from chapter 1 is really a signed first edition and you really can buy a gown, go to the ball, and meet the prince.

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