Me-ism, and other Reasons for Economists to Think Big about Development

Why should economists continue to work on such ambitious Big Ideas in Development -- what drives Development?  Freedom? Property Rights? Human Capital? Whether you are just like ME? One good reason is that most people are going to have their own Big Ideas anyway.  If economists and other social scientists refuse to discuss Big Ideas, then people will just base them on some random anecdote or on laughably casual empirics. (I once heard a prominent non-development economist say he understood underdevelopment after his first 5 minutes in a poor country.)

One way that casual back-of-the-envelope empirics seems to work is I judge other peoples more favorably the more they are like me.   

One of the worst forms of Me-ism is racism. What could be more direct than just assume the rich people are racially superior to the poor people? Racism was the prevailing explanation in "Development Economics" for 5 centuries until racism became politically unacceptable (and was refuted scientifically). 

Racism (like other forms of Me-ism) is just lazy empirical work. You go for some superficial correlate of development that has no other evidence behind it --other than your instinct that everybody should be judged by how similar they are to you.

So thank goodness that many development economists are continuing to write about all the above topics. They may not achieve 100% airtight evidence, they may not definitively resolve what causes what, but I think they do better than the Me-ists and the racists who decide the answer in the first 5 minutes.

The Answer

....that no single key, no formula can, in principle, solve the problems of individuals or societies; that general solutions are not solutions, universal ends are never real ends.... ...that liberty--of actual individuals, in specific times and places--is an absolute value; that a minimum area of free action is a moral necessity for all men, not to be suppressed in the name of abstractions or general principles so freely bandied about by the great thinkers of this or any age, such as ... humanity, or progress...names invoked to justify acts of detestable cruelty and despotism, magic formulas designed to stifle the voices of human feeling and consience.

This is Isaiah Berlin describing the views of the great Russian thinker Alexander Herzen (1812-1870), although I think he was also describing the views of the great Russian thinker Isaiah Berlin. It's from one of my all-lifetime-favorite books, Russian Thinkers. (HT Dennis Whittle for reminding me of the Herzen chapter.)

Berlin presents the lite version of Herzen in a direct quote from his autobiography:

'Human life is a great social duty,' [said Louis Blanc], 'man must constantly sacrifice himself for society.'

'Why?' I asked suddenly.

'How do you mean "Why?"-but surely the whole purpose and mission of man is the well-being of society?' [said Blanc]

'But it will never be attained if everybody makes sacrifices and nobody enjoys himself.'

Another version of this I heard a long time ago, not sure where:

The purpose of life is to live for others.

Then what should the others live for?

The “guy named Bob” theory of Development

Development discussions often seek “answers” to “how to develop?” But to whom do we tell the answers? We assume the existence of someone who can take our answers and turn them into actual Development. Let’s call this person “Bob,” as in the following diagram:

But who is Bob? Of course, many autocrats would happily volunteer to be “Bob,” and many development experts show some sympathy for such a “benevolent” autocrat. Indeed the whole Bob theory of development seems to imply coercion of everyone else at several points along the way, as illustrated below. So Bobism is a great ideology to justify autocracy. But is the deprivation of freedom “worth it”? Who gets to decide? And even if autocrats like Bob were OK, Bob faces many other problems going from experts to the development outcome, as further illustrated below. So, frankly, the “guy named Bob” theory of Development is not really very satisfying.

Skeptics and thermostats

UPDATE 12:50PM: Please assume I'm an idiot (see end of post) Many have suffered from being in a building where there was a centralized thermostat for the whole building (or the whole floor), with the predictable result that some rooms are way too hot or way too cold. (Sounds like a metaphor, watch for it...)

Things were even more extreme in the former Soviet Union, where there were centralized heating plants for a whole city, and the hot air would then be pumped out to individual homes and offices. So basically the whole city had one centralized thermostat.

What a nice and simple solution there is: give each room its own thermostat. First, there is automatic adjustment from the thermostat to keep it from being too hot or too cold. Second, the people in the room at any one moment can choose to adjust the thermostat according to their preferences.

A thermostat is a very simple knowledge processing device. So this is a great metaphor for (here it comes!) the advantages of decentralized knowledge over centralized knowledge  (Hat tip to Adam Martin for the Facebook conversation that sparked this idea).

When skeptics (like me) criticize the uselessness of very aggregated centralized knowledge on "how to do development", we get labeled nihilists, like we're saying nobody never knows nothing nowhere nohow. But what we're really saying is that centralized knowledge is an impossible dream for overall economic development, but decentralized knowledge can work very well.

In sum:

1) Skeptics like me are not criticizing ALL knowledge, just saying some types are useful, and others are not. And so the best systems are those that can gather and process decentralized knowledge.

2) Well-functioning markets and democracy give people their own thermostats.

PS {Insert here your own favorite example of the centralized approach to global problems at Davos starting today.}

UPDATE 12:50pm on Please assume an idiot:

In response to commentators:

(1) have I ever heard of any situation where centralized knowledge plays a full or partial role? Yes

(2) does that change the above argument? No

The 100 Bestest Global Thinkers

The Foreign Policy magazine ranking of the top 100 Global Thinkers just came out. The rankings can be a bit mysterious, like college football rankings that confuse Texas Christian University with a real football team. I myself had a two-year run in the top 100 for still unexplained reasons. Alas, a late-season loss to Collier State University doomed my chances this year. I wouldn't mind as much if there were not way too many politicians and high ranking government officials this year, few of whom have previously been suspected of Thinking.

On the bright side, wonderful development-connected economists have been added this year: Carmen Reinhart, Ken Rogoff, Raghu Rajan, Paul Romer, Sendhil Mulanaithan, Daron Acemoglu (and Esther Duflo and Nouriel Roubini repeated from last year).

Please suggest your own favorite thinkers from this year's 100. And of course, this being Aid Watch, feel free to volunteer any least favorites.

The Rock Star theory of rising inequality and development successes

from Alan Krueger's study of "Rockonomics" Top 1% Rock Stars are getting more and more of Rock Income.

The explanation? Cheaper audio equipment means top stars can capture more of the market. Why listen to the second-rate stars when the first-rate produce an unlimited number of recordings for you to listen to them? (And then you want to go to their concerts too?)

Does this have something to do with the general rise in inequality in the US? In the world?

Are rock stars also a good analogy for other development successes? Stay tuned.

G20 summit's Seoul Development Consensus: please comment

UPDATE: OK I give up, I'll be the bad guy again (see end of post) I present selections of the text of the Seoul Development Consensus for Shared Growth without comment, inviting instead the readers to comment:

Be economic-growth oriented and consistent with the G20 Framework for Strong, Sustainable and Balanced Growth

Prioritize actions that tackle global or regional systemic issues

Differentiate, yet complement existing development efforts, avoiding duplication

Focus on feasible, practical and accountable measures to address clearly articulated problems

In close consultation with our developing country and LIC partners, as well as relevant international and regional organizations with development expertise, we have also identified nine areas, or “key pillars,” where we believe action and reform are most critical to ensure inclusive and sustainable economic growth and resilience in developing countries and LICs. These areas are: infrastructure, private investment and job creation, human resource development, trade, financial inclusion, growth with resilience, food security, domestic resource mobilization, and knowledge sharing. Creating optimal conditions for strong, sustainable and resilient economic growth in developing countries will require reform and transformation across each of these interlinked and mutually reinforcing key pillars.

UPDATE: OK I think I miscalculated, the Seoul Consensus is so completely free of substance that I couldn't get much comment (thanks to the valiant souls below who tried).

So it's my bitter lot in life to play the bad guy who says the obvious nasty things, like:

This summit set the lowest possible expectations on development, and then heroically failed to meet them.

Did it occur to any of the G20 sherpas that it would have been better to say, "we have nothing new on development" than to produce such vacuous babble then actually goes backward even from the dismally modest record of previous summits?

I guess the main puzzle is why the Koreans let themselves be insulted by having this Nothingness named after Seoul.

Physics Envy in Development (even worse than in Finance!)

Andrew Lo and Mark Mueller at MIT have a paper called "WARNING: Physics Envy May Be Hazardous to Your Wealth," also available as a video.  The takeaway, which is equally relevant to Development as to Finance (the actual topic of the talk),  is that inability to recognize radical UNCERTAINTY is what leads to excessive confidence in mathematical models of reality, and then on to bad policy and prediction.

Imagine how much harder physics would be if electrons had feelings! (Richard Feynman)

The key concept of the paper is to define a continuum of uncertainty from the less radical to the more radical. You get into trouble when you think there is a higher level of certainty than there really is.

1. Complete Certainty
2. Risk without Uncertainty (randomness when you know the exact probability distribution)
3. Fully Reducible Uncertainty (known set of outcomes, known model, and lots of data, fits assumptions for classical statistical techniques, so you can get arbitrarily close to Type 2).
4. Partially Reducible Uncertainty (“model uncertainty”: “we are in a casino that may or may not be honest, and the rules tend to change from time to time without notice.”)
5. Irreducible Uncertainty:  Complete Ignorance (consult a priest or astrologer)

Physics Envy in Development leads you to think you are in Type 2 or Type 3, when you are really in Type 4. This feeds the futile search for the Grand Unifying Theory of Development.

Type 4 "model uncertainty" seems even more likely in development than in finance, theory is a lot better developed and produces more precise hypotheses in the latter than in the former (but even I am not so skeptical to think that we are in Type 5 in development).

What to do about large uncertainty in development? Obviously not a question that can be answered in one sentence.  Maybe we can start by discussing social systems that allow decentralized agents to solve their own problems that feature less uncertainty, and doesn't require any centralized agent to know the uncertain whole model of the whole system.

When Fat Cats Bet on Fat Tails

UPDATE 9:30am get me rewrite! Readers ask for more clarity on what my point is, so a little added rewriting. There has been a lot of passionate moral debate about US income inequality (Greg Mankiw recently got a torrent of abuse for the horrific sin of admitting that he was a rich person).  But you have to UNDERSTAND income inequality before you CONDEMN it. By the end of this post, I'll suggest a different angle.

So what if we step back from the moral judgments and just try to describe the upper echelons of US riches. Figure 1 below shows the likelihood of each level of income in the US income distribution, using the same logarithmic graph which was greeted with total incomprehension wild enthusiasm in a previous post.

In this graph, the vertical axis shows your chances out of 10,000 in reaching the income level shown on the horizontal axis, assuming very stupidly that you are typical of the entire American population. 1 out of every 10,000 Americans clears on average more than $10 million a year (the data are from the great and famous paper by Piketty and Saez). Every movement on either axis multiplies by 10. So 10 out of 10,000 (or 1 out of a 1000) have to settle for being only millionaires instead of deca-millionaires. 1000 out 10,000 (or one out of 10) clear a measly $100,000 a year. (Since the line in Figure 1 is almost straight, we could say the upper limits of the income distribution fit a Power Law, which as mentioned in the previous post is a special type of fat-tailed distribution that many people (at least three) find fascinating.)

Figure 2 shows an alternative way of becoming rich at great odds. This is an exact power law with a slope of -1, meaning that if your chances get 10 times worse, you get 10 times the payoff if you succeed.

We call this alternative income-generating-process “Las Vegas.” The line shows the payoff if you bet $10,000 at the odds shown. Ignoring the tiny detail that the house takes its cut, betting a fixed amount at longer and longer odds follows an exact Power Law.

So is getting rich in America just a matter of making a big bet at very long odds? It’s not the worse metaphor ever – an awful lot of things all have to go right for somebody to become very rich, so the odds are indeed long. A lot of economic outcomes follow Power Laws – the sizes of firms, the sizes of cities, the export value of different exported goods, the cumulative growth of nations, etc. – for similar reasons.

So what if one of the contributing factors to income inequality is just that finding your own personal VERY BIG HIT is rare? This is equivalent to the usual description of income inequality as a very small proportion of the population having a VERY LARGE INCOME. Moreover, by comparing Figure 1 and Figure 2, you can see the payoff from the "bet" in figure 1 is not large enough to be a  "fair bet" in the sense of fully compensating for the very long odds. (Mischievous Question to provoke discussion: does this mean the income distribution is unfair to the rich?)  And furthermore the rest of us want somebody to take on the very long odds of finding a VERY BIG HIT, like the movies Titanic and Avatar, or the iPhone and iPad, because the very big payoff reflects how valuable the Big Hit is to consumers.

So (as @dillardsarah on Twitter suggested as a summary of this post) could inequality just be big, valuable, unlikely bets paying off?

Of course, not everyone faces the same betting odds in the American income distribution, which is when the passionate moral debate kicks back in.

And now going for the Aid Watch record on global charity cluelessness…

Aid Watch received the following tidbit from a trusted source. It was posted on a community list-serve:

Does anyone have any old men's size  8.5-9.0 sneakers they would like to get rid of? Like, lawnmowing sneakers, that sort of thing?  I'm running a mud race on Sunday and at the end the muddy destroyed sneakers will be donated to Green Sneakers, a non-profit that recycles old sneakers and donates them to people in need around the world. If you have a decent pair that can withstand a mud run, I'd be happy to take them off your hands.

Despite the great popularity of Aid Watch posts like Nobody wants your old shoes (by Alanna) and  A suggestion for the 1 million shirts guy (by Laura) it would be safe to say that all of us in this business still have a little  educatin' left to do.

Stop me before I paradox again

Robin Hanson offers these thoughts on big-picture thinking (HT Dennis Whittle):

I’ve ...noticed that among smart folks, the most successful keep their smarts on a short leash. They use their smarts to make the sale, win the case, pass the test, get published, etc., but they don’t use much smarts to consider whether they really want to make the sale, win the case, etc. ...

In contrast, on average smart folks gain far less success when they seriously apply their smarts to big pictures, reconsidering what they want, what we really know, how the world is organized, what they can do to make the world a better place, and so on. They go off in a thousand directions, and while some might break new ground, on average such smart folk gain much less personal success, and may well do less to help the world.

As some of you might have guessed, I am very sympathetic to portraying big-picture thinking as low-payoff. Big picture development will happen not from a Great Thinker achieving Development, but from a lot of little thoughts and actions by a lot of creative, motivated individuals operating in political, social, and economic systems that facilitate liberty.

Of course, the idea that big-picture thinking is low-payoff is Itself a big-picture idea with an incredibly high payoff.

David, Ban, Bill, and Alice

The always wonderful David Rieff takes on the MDG summit:

With the fatuousness that has marked his administration from the outset, the U.N. secretary general, Ban Ki Moon, has now issued a document called “Keeping the Promise,” timed to coincide with the 2010 meeting of the U.N. General Assembly and the summit on the organization’s so-called Millennium Development Goals that is taking place simultaneously.

And yet, in true Alice in Wonderland style, the great and the good of the world (those eminent persons so beloved of U.N. commissions).... are acting as if the MDGs are a realistic program.

...only if one fetishizes the idea of civil society as a kind of universal ideological solvent, and believes that, in tandem with scientific innovation, the road to our collective salvation is now open to us, can such optimism be justified.

But this was always the line at the Gates Foundation, and it is now clear that this view has won the president’s and Secretary of State Hillary Clinton’s backing. USAID’s contribution to these Pollyanna-ish fantasies is a document adorned with the title, “Celebrate, Innovate, and Sustain: Toward 2015 and Beyond.” .... The policy initiatives it is committed to are summarized on its website as being “focused on addressing critical development challenges by using science, technology and innovation in creative, yet practical new ways. If we are to secure a prosperous and peaceful future for our children, we must harness innovation to help people around the world unlock their potential to improve their communities and societies.”

Reading this, it is hard not to feel that ... for the Obama administration all development aspires to replicate the experience of Microsoft. For what is being proposed here are “solutions” in the purely technical sense. But development is not a software problem that can be resolved—as Bill Gates and Paul Allen developed new products for their corporation—by bringing the best minds together to brainstorm innovative [sic] solutions. Development is a matter of culture, of politics, and of justice, far more than it is a matter of technology or, for that matter, the technologized vision of human beings that can, without embarrassment, speak of ‘unlocking’ people’s potential as if they were seams of some precious mineral buried in the dirt.

In this Gates/Obama vision of the world, all the fundamental ideological questions have been solved .... There are no great ideological contradictions, just issues of “empowerment,” “good governance,” “transparency,” and “accountability.” The world as a global Seattle, a global Cambridge, Massachusetts: What an idea! That this is nonsense should be obvious, at least if one lets go of the idea that because what the administration would like to accomplish, and, more broadly, what the Millennium Development Goals represent, are good and moral, these ambitions as they are currently being articulated have any chance of being realized.

.... as long as those who claim the mantle of the moral arbiter can say, with a straight face, that we still have a chance of eradicating global poverty by 2015, or, if not then, at least not very long after that, we are living in a world of lies, no matter how well intended.

...Before you know it, the only licit tale about our world becomes the fairy tale.

And because of that, let Lewis Carroll have the last word. "If I had a world of my own,” he wrote in Alice, “everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?”

Knowledgeable, powerful expert in charge of development strategy admits he is fictional

Just a day after completing the country’s Comprehensive Development Strategy, the expert in charge of Development admitted that he does not actually exist. The expert had done a superb job prioritizing the needs of the poor across 9 major sectors and hundreds of development interventions, not to mention mainstreaming gender and the environment. He had calculated the country’s financing requirements to attain the Millennium Development Goals, as well as the country’s needs for neutral, humanitarian peacekeeping forces to end the civil war, along with a post-conflict strategy to re-integrate combatants, and a timetable for fair, competitive elections. The regrettably fictional expert had drawn upon a large body of country and sector work to identify best practices to successfully treat a range of development challenges facing the country, such as AIDS, malnutrition, malaria, lack of infrastructure, illiteracy, war, rule of law, governance, the fragility of the state, and the absence of economic growth. The expert had coordinated the actions of the 37 Development partners operating in the 9 major sectors and 147 sub-sectors within a Public Sector Medium-Term Expenditure Framework.

The knowledgeable and powerful but nonexistent expert had also integrated into the country’s Comprehensive Development Strategy the Human Resources Strategy, the Empowerment of the Poor Strategy, the Gender Framework, the Post-Conflict Strategy, the Climate Change Response Program, the Governance Framework, the Capacity-Building Initiative, the Country Ownership and Participation Strategy, and the Comprehensive Peace Agreement. The expert had inclusive participation by all stakeholders, including Development Partners, government officials, and civil society, in designing the Comprehensive Development Strategy.

Leading aid agencies expressed doubts that the expert’s claims to be nonexistent were valid, and promised to address the issue of expert fictionality in the next donor meetings in Geneva.

Postscript: the Onion recently reported a similar problem with US Homeland Security.

Be careful what you export

Our distant ancestors had a biological constitution awfully similar to our own, and, like us, only 24 hours in a day. Arguably the main reason we have so much better lives than them is that we have better ways of doing things (broadly conceived). So it makes a great deal of sense that much of the work in development planning and foreign aid consists in exporting ways of doing things. Technology and scientific know-how are the most easily obvious examples, but we also export methods of organization and governance. People in poorer nations don't have the nice things we do, so it must be because their ways of doing things aren't as effective as our own. If we could just convince them to do things the way we do them then everyone would be rich, and Bill wouldn't get any reception in Ghana either. So wealthy nations have spent a lot of time trying to export their newest and best makes and models of laws, regulations, and government agencies to the rest of the world.

One problem with this approach--one among many--is that it assumes that our every institutional and organizational innovation is beneficial. We call this "Whig history." And while it's hard to argue that wealthy nations don't have an overall mix of institutions better adapted to producing wealth, it's quite another to assume that they're superior (at wealth production) to poor nations' institutions on every margin. It could be that the evolution of our ways of doing things has taken a wrong turn in one or more spheres of activity.

Two recent articles raise the concern of Whig history, in ways relevant to ongoing debates in development. Eustace Davis writes at African Liberty that:

Governments world-wide are struggling to solve the problem of deficiencies in their schooling systems.  Politicians, teachers, educationists, administrators, employers, parents, politicians, policy analysts and students have differing ideas on how the problem should be solved.  All agree that something is wrong.  All have ideas on the kind of tinkering that is needed to fix the problem. The framework within which schooling functions is seldom or ever questioned; a framework that is little changed since schooling was nationalised in England in the late 19th and in the US in the early 20th centuries...

Schooling systems everywhere have become frozen in time. Schools are configured much as they were, and function in the same way they did, a century ago. A 1910 child would feel very much at home in a ‘modern’ school environment, whereas everything else in the world we live in has changed dramatically over the past 100 years.

Davis is concerned that the whole world copied England's public educational institutions after they changed for the worse (see also James Tooley's work on this topic).

And this article reports on the work of historian Eckard Höffner on 19th century Germany's copyright law, or lack thereof. Höffner argues that the absence of copyright law facilitated the spread of knowledge that was critical to Germany's industrialization and flowering scientific community. There is certainly no shortage of debate about the role of intellectual property in international development, but most of it assumes that IP law is wealth-enhancing in wealthy nations. Are we sure? How sure should we be before we export our IP laws?

Are these convincing examples of Whig history gone wild? Are there others?

A Lecturer answers The Big Question

Two of my favorites, Chris Blattman and Megan McArdle , recently had a great dialogue on "is aid depressing?" I don't have anything to add--read them! However,  their dialogue does remind me of  The Big Question that I and many others get whenever we give lectures on economic development. Inevitably, after every single lecture I have ever given, the first question is ... What Can I Do to End World Poverty?

How to respond? On one hand, I want to (and usually do) salute the questioner for their willingness to give of themselves for those less fortunate. I admire their idealism and commitment.

On the other hand, I find this question to be unproductive and frustrating. It sounds mean, but the honest response (which I have never given) is, "look, the biggest problem to solve in economic development today is NOT what you can personally do to end poverty."  Poor people do not perceive THEIR biggest problem to be that rich people are agonizing how to help them.

More constructively, I want to say: Don't be in such a hurry. Learn a little bit more about a specific country or culture, a specific sector, the complexities of global poverty and long run economic development. At the very least, make sure you are sound on just plain economics before deciding how you personally can contribute. Be willing to accept that your role will be specialized and small relative to the scope of the problem. Aside from all this, you probably already know better what you can do than I do.

But I do salute you again, and I do believe when there are enough people like you, you will cumulatively make a difference.

What aid critics could learn from movie critics

The Wall Street Journal yesterday had an article on "2010: worst movie year ever?". Movie critics have a way with words that leaves us aid critics in the dust.

Hollywood is fighting a war on numerous fronts, and losing all of them.

And movie critics are even worse at something aid critics are often accused of: much more focus on the negative than on constructive positive suggestions -- "just stop."

Stop making movies like "Grown Ups," "Sex and the City 2," "Prince of Persia" and anything that positions Jennifer Aniston or John C. Reilly at the top of the marquee. Stop trying to pass off Shia LaBeouf—who looks a bit like the young George W. Bush—as the second coming of Tom Cruise. Stop casting Gerard Butler in roles where he is called upon to emote. And if "Legion" and "Edge of Darkness" and "The Back-up Plan" and "Hot Tub Time Machine" are the best you can do, stop making movies, period. Humanity will thank you for it.

Scorchingly negative movie critics are like aid critics in their social function -- clear away all the bad stuff to make room for the good stuff. Without movie critics, we'll have an octogenerarian Sex and the City 8. With critics, we have some hope of some day having another Godfather or Annie Hall.

The answer is 42! Why Development is not about solutions, it’s about problem-solving systems

UPDATE, Wednesday, July 14: I'm glad we had a good reflective discussion in the blogosphere on these ideas, not the usual polemics. Thanks to all of the bloggers I've noticed who have now commented on this post: Aid Thoughts, Nancy Birdsall at Center for Global Development, Innovations for Poverty Action, Metamorphoses, PSD Blog at the World Bank, and Dennis Whittle at Global Giving (please let me know if I left anyone out). UPDATE, Sunday July 11: new round of the Hayek wars as they relate to this post (see end of this post below)

UPDATE, Friday evening: Russ Roberts comments on this post at Cafe Hayek.

Yesterday we ran a blog post that fits into a now classic genre in development commentary. This genre, after some discussion, always ends with a conclusion like: “Solution X (a transparency law, microcredit, malaria bed nets, conditional cash transfers, web-based clever thing, eliminating business red tape, etc.) is moderately helpful, but a long way from a panacea.” Of course, nobody really claims explicitly “X will be a panacea!” But each new X is systematically oversold, expectations are raised way too high, and the expectations are always later disappointed.

Here's why direct solutions to problems cannot foster development. Each direct solution depends on lots of other complementary factors, so the solutions can seldom be generalized across different settings; Solutions must fit each local context. Solutions that generate the highest payoff in each setting should be a higher priority than the lowest payoff solutions. Since there is little or no feedback on how well each solution is working in each local situation, there is little possibility for any such adjustments.

Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up.

Good systems make the private returns to decentralized problem-solvers close to the social returns. Again oversimplifying to drive home the big point, the market does this with private goods (even allowing for well-known exceptions of market failures), and a free political system is the best way known to do this for public goods (reward political actors in line with the social return to their actions).

The problem-solving systems could very well use some of the same solutions that were discussed above (a transparency law, microcredit, malaria bed nets, conditional cash transfers, web-based clever thing, eliminating business red tape). This leads to much confusion, as people then try to directly imitate particular solutions in the absence of a problem-solving system, which as stated above, leads to disappointing results.

A famous joke is that the Answer to the Ultimate Question of Life, the Universe, and Everything is 42.{{1}} Indeed, 42 could come out of a problem-solving system to solve a particular problem (the guests at my party have brought seven six-packs, will I have enough beer?), but is rather unlikely to generalize to other problems.

The problem-solving system is adapting solutions to local circumstances. And even more importantly, a problem-solving system coordinates the efforts of many different problem-solvers with nobody in charge (for example, in the market, prices serve as signals to coordinate the actions of many different suppliers to solve the problems of demanders).

Direct solutions to problems (say, using aid programs) still may be worthwhile as benefiting a lot of people. But a long list of many such solutions is not development; development is the gradual emergence of a problem-solving system.

UPDATE, Sunday July 11: new round of the Hayek wars as they relate to this post:

Friedrich Hayek is obviously the main source of inspiration for the ideas in this post.  But hasn't Hayek now been totally discredited by his association with Glenn Beck? A nice article in the NYT Book Review by Jennifer Schuessler discusses the Beck-Hayek phenomenon.

Beck was invoking Hayek to make the "slippery slope" argument that an extensive systemof social services leads inexorably to something like Fascism or Communism.  Hayek's association with this argument looks a lot more dubious once you realize that he was IN FAVOR OF an extensive system of social services. As Schuessler notes:

“The preservation of competition,” {Hayek} wrote, is not “incompatible with an extensive system of social services — so long as the organization of these services is not designed in such a way as to make competition ineffective over wide fields.”

Schuessler also notes Hayek's 1960 essay “Why I Am Not a Conservative”

I had the same argument with (guess who?) Jeff Sachs back in 2006 when he attempted to smear Hayek in a similar way.

Mr. Sachs disses the great Hayek by repeating the old canard that Hayek thought any attempt at taxpayer-funded social insurance would put us all on the "Road to Serfdom." This is an especially strange charge, since Hayek (while certainly opposed to the social engineering that proponents of a full-blown welfare state usually have in mind) himself calls for some form of taxpayer-funded social insurance against severe physical deprivation on pages 133-134 of "The Road to Serfdom." Mr. Sachs, who is currently best known for his star- driven campaign to end world poverty, has apparently spent more time studying the economic thinking of Salma Hayek than that of Friedrich.

Hayek's Road to Serfdom is a superb statement of how a spontaneous order was responsible for Western prosperity, following rules based on individual liberty, and Western prosperity was NOT the result of social planners trying to directly solve social problems. That's how it inspired the post above.

OK let's now go watch the spontaneous order of the World Cup final.

[[1]]Douglas Adams, Hitchhiker’s Guide to the Galaxy[[1]]

Thank you, World Cup fans, I now understand institutions for development

UPDATE July 8, 2010 12:10pm: link to a great new article on the spontaneous evolution of rules in the history of football (see end of post) I learned a lot from the furious debate that followed the post about rules vs. norms, regarding whether Uruguay cheated Ghana.

My original notion was that intentionally breaking the rules to prevent a loss was cheating, and that it was too bad norms prevalent in Football World did not penalize such behavior more fiercely so that it wouldn’t have happened in the first place. (A column in today’s Wall Street Journal agreed with me. Maybe we’re just both fervent Ghana fans.)

But let’s shift now from normative to positive economics. Do the norms in the Football World let you sometimes break the rules intentionally and suffer the official penalty, without any further normsy punishment of everlasting disgrace? From the numerous comments the post received (assuming they weren’t all concealing Uruguayan ancestry), the answer appears to be yes. (Read the comments on the original post; also read Steve Horwitz's great post on the blog Coordination Problem.)  Many commentators pointed out similar intentional rule violations in American sports, which the norms of American sports fans appear to tolerate. Norms in sports (as in economics) evolve spontaneously to fit the needs of participants (fans, players, or businessmen), and so deserve some respect before a rush to judgment. Possible cautionary lesson #1: arrogant people (code word for Americans) should not pass judgment on other societies they don’t understand (like Football World).

Other people pointed out the complexities of rule systems that include penalties for breaking the rules. You don’t want excessively draconian penalties (like the death penalty for contract violations or handballs), or nobody would engage in mutually beneficial activities in the first place, like contracts or football matches. And, with that caveat, no penalty system can be perfectly designed so that it never pays to break the rules in any and all situations. Some egregious case where it paid to break the rule could cause an over-reaction towards excessive penalties or dysfunctional rules (possible examples in financial and economic reforms as well as football).

Norms play a useful role in not only strengthening the incentives to keep the formal rules, but also in complementing the formal rule-formal penalty system. Norms can handle the subtleties of when intentionally breaking the rules and accepting the penalty is OK and when it is not. So for example, social norms might forgive a businessman who chooses to break a contract because of something unforeseen like a fire in his factory, but not so much a businessman who lied about whether there was really a factory fire. In football, I assume fan norms would still be pretty tough on a minor football player on one team who intentionally causes a long-lasting and disabling injury to the best football player on the other team. Possible cautionary lesson #2: Norms are complicated. Norms may evolve in a useful way that no single person can fully understand. Norms can be smarter than I am or you are.

Back to normative economics: I can still express my own opinions – I still think Ghana should have won. Now, that that’s over: Go Spain! (Sorry, Dutch and German fans, but none of your banks’ foundations awarded my research institute 400,000 euros.)

UPDATE July 8, 12:10pm:  just found a great new article on the history of football (in its many varieties) as an example of the spontaneous emergence of rules (HT Facebook friend Gonzalo Schwarz).

UPDATE 2: PS if my memory is correct, neither Netherlands nor Spain were beneficiaries of any of the egregious rule violations and blown calls by refs during this World Cup. Maybe playing by the rules is a winning strategy after all.

The Androids are coming, is aid ready?

This post is the second in a series by Dennis Whittle. Dennis is the CEO of GlobalGiving, an international marketplace for philanthropy. In my last post, I argued that the "operating system" used by the current international aid agencies is stuck using IBM punch cards while the rest of the world has moved on to cell phones, laptops, and iPhones.

In the old system, you had to type programs into a stack of hundreds of punch cards, walk them down to the computer center, hand them to an operator, and wait in line for them to be processed. The lower you were in seniority, the longer you had to wait.

Contrast that with today, when hundreds of millions of people have their own computers, and several billion people have access to cell phones. iPhone and Android platforms now provide a way for hundreds of thousands of individuals to create and distribute new software. That software may or may not succeed in the marketplace, but it can be downloaded and used, and the most popular new apps get flagged to other users.

What would an analogous distributed operating system look like for the aid business?  The design of any such operating system has to address five questions:

1. Who decides which problems aid should address?
2. Who comes up with the solutions?
3. Who gives the funding?
4. Who competes to implement the solutions?
5. Who gives feedback on how well the solutions work?

The existing system is closed. It assumes these questions will be answered by experts within one of the "mainframe" organizations like the World Bank, the UNDP, USAID, or one of the big NGOs.

Unlike 60 years ago, the expertise, resources and technology now exist to make a new decentralized and distributed aid system possible. Many more people—and not just experts—have relevant developing country experience (for example, the Peace Corps alone has over 250,000 alumni). Regular Americans give over $25 billion each year to charitable causes abroad—about the same amount as the US official aid budget. And PCs, internet, cell phones and related technologies now make it possible to connect all of these people and resources directly to the people who need help.

Marketplaces that directly connect funders to projects include GlobalGiving, DonorsChoose, MissionFish, GiveIndia, HelpArgentina, Conexion Columbia, Betterplace (Germany), GreaterGood South Africa, Net4Kids (Netherlands).  Markets need quality information, and groups such as Guidestar, New Philanthropy Capital, GiveWell, Great NonProfits, Philanthropedia, Keystone Accountability, Charity Navigator, and the BBB Wise Giving Alliance have begun to operate mechanisms that collect and make available data from a wide variety of sources. Technology startups such as Frontline SMS and Ushahidi are making it possible for beneficiaries to have direct input into what they need ex-ante (schools? health clinics? microcredit?) and how well projects are being implemented once underway.  Other initiatives (for example, Jumo) are in the planning stages.

Not all of these new initiatives will succeed.  But within a few years, it will be possible for any person or group in the world to help answer any of the five questions above that form the core of the aid operating system.  If the existing agencies that run closed systems don't adapt to this new set of conditions, they will become as irrelevant as old IBM mainframes.

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Related post: Is aid stuck using IBM punch cards?

Rules vs. Norms in Development, or more importantly, Did Uruguay cheat Ghana?

Today there is a great discussion of rules vs. norms because it applies to something people REALLY care about: World Cup football. Uruguayan player Luis Suarez illegally blocked a sure Ghana goal with his hands, a goal in the last seconds that would have won Ghana the game. He was ejected according to the rules and Ghana awarded a penalty kick, which they missed, and then Uruguay subsequently won. Did Suarez cheat? An article on GhanaWeb says yes.  Others say no. A major neutral, the Wall Street Journal (which now has a surprisingly good sports section) backs Ghanaweb: Uruguay cheated "big-time." One side would say Suarez realized his team would surely lose if he let the ball go past his hands and lawfully and rationally chose to take the penalty to give his team a chance; the other side says intentionally breaking the rule to prevent a loss was unforgivably unsportsmanlike.

One possible fix is to perfect the rules. If it pays to break the rules, they must be bad rules. The rule could be changed to give an automatic goal in this situation.  However, it's not that easy --  it's impossible to have perfect rules. (The "automatic goal" rule would have worked here, but general application would  inevitably lead to new disputes about whether the ball would really have gone in.)

The other solution to imperfect rules is to supplement them with norms. With strong norms in business, a businessman who exploits a loophole to cheat another businessman will often find himself ostracized and will lose a lot of future business, so he doesn't cheat. Norms can handle complex situations more flexibly than explicit rules, so they are an essential complement to rules.

Unfortunately for Ghana and for a lot of cheating victims in business, norms have to reflect a wide and deep consensus of what is right and a willingness to punish the cheater. If everyone agreed now that Suarez  had cheated and will ever after see him as the equivalent of a thieving child-beater, then maybe he would not have used his hands in the first place. Unfortunately, as often happens in developing countries, neither the rules nor the norms were strong enough to prevent cheating and we are the worse for it.