dw2

21 March 2013

The burning need for better supra-national governance

International organisations have a bad reputation these days. The United Nations is widely seen as ineffective. There’s a retreat towards “localism”: within Britain, the EU is unpopular; within Scotland, Britain is unpopular. And any talk of “giving up sovereignty” is deeply unpopular.

However, lack of effective international organisations and supra-national governance is arguably the root cause of many of the biggest crises facing humanity in the early 21st century.

That was the thesis which Ian Golding, Oxford University Professor of Globalisation and Development, very ably shared yesterday evening in the Hong Kong Theatre in the London School of Economics. He was quietly spoken, but his points hit home strongly. I was persuaded.

DividedNationsThe lecture was entitled Divided Nations: Why global governance is failing and what we can do about it. It coincided with the launch of a book with the same name. For more details of the book, see this blogpost on the website of the Oxford Martin School, where Ian Golding holds the role of Director.

It’s my perception that many technology enthusiasts, futurists, and singularitarians have a blind spot when it comes to the topic of the dysfunction of current international organisations. They tend to assume that technological improvements will automatically resolve the crises and risks facing society. Governments and regulators should ideally leave things well alone – so the plea goes.

My own view is that smarter coordination and regulation is definitely needed – even though it will be hard to set that up. Professor Goldin’s lecture amply reinforced that view.

On the train home from the lecture, I downloaded the book onto my Kindle. I recommend anyone who is serious about the future of humanity to read it. Drawing upon the assembled insights and wisdom of the remarkable set of scholars at the Oxford Martin School, in addition to his own extensive experience in the international scene, Professor Goldin has crystallised state-of-the-art knowledge regarding the pressing urgency, and options, for better supra-national governance.

In the remainder of this blogpost, I share some of the state-of-consciousness notes that I typed while listening to the lecture. Hopefully this will give a flavour of the hugely important topics covered. I apologise in advance for any errors introduced in transcription. Please see the book itself for an authoritative voice. See also the live tweet stream for the meeting, with the hash-tag #LSEGoldin.

What keeps Oxford Martin scholars awake at night

The fear that no one is listening. The international governance system is in total gridlock. There are failures on several levels:

  • Failure of governments to lift themselves to a higher level, instead of being pre-occupied by local, parochial interests
  • Failure of electorates to demand more from their governments
  • Failure of governments for not giving clearer direction to the international institutions.

Progress with international connectivity

80 countries became democratic in the 1990s. Only one country in the world today remains disconnected – North Korea.

Over the last few decades, the total global population has increased, but the numbers in absolute poverty have decreased. This has never happened before in history.

So there are many good aspects to the increase in the economy and inter-connectivity.

However, economists failed to think sufficiently far ahead.

What economists should have thought about: the global commons

What was rational for the individuals and for national governments was not rational for the whole world.

Similar problems exist in several other fields: antibiotic resistance, global warming, the markets. He’ll get to these shortly.

The tragedy of the commons is that, when everyone does what is rational for them, everyone nevertheless ends up suffering. The common resource is not managed.

The pursuit of profits is a good thing – it has worked much better than central planning. But the result is irrationality in aggregate.

The market alone cannot provide a response to resource allocation. Individual governments cannot provide a solution either. A globally coordinated approach is needed.

Example of several countries drawing water from the Aral Sea – which is now arid.

That’s what happens when nations do the right thing for themselves.

The special case of Finance

Finance is by far the most sophisticated of the resource management systems:

  • The best graduates go into the treasury, the federal reserve, etc
  • They are best endowed – the elite organisation
  • These people know each other – they play golf together.

If even the financial bodies can’t understand their own system, this has black implications for other systems.

The growth of the financial markets had two underbellies:

  1. Growing inequality
  2. Growing potential for systemic risk

The growing inequality has actually led to lobbying that exaggerates inequality even more.

The result was a “Race to the bottom”, with governments being persuaded to get out of the regulation of things that actually did need to be regulated.

Speaking after the crisis, Hank Paulson, US Treasury Secretary and former CEO of Goldman Sachs, in effect said “we just did not understand what was happening” – even with all the high-calibre people and advice available to him. That’s a shocking indictment.

The need for regulation

Globalisation requires regulation, not just at the individual national level, but at an international level.

Global organisations are weaker now than in the 1990s.

Nations are becoming more parochial – the examples of UK (thinking of leaving EU) and Scotland (thinking of leaving UK) are mirrored elsewhere too.

Yes, integration brings issues that are hard to control, but the response to withdraw from integration is terribly misguided.

We cannot put back the walls. Trying to withdraw into local politics is dreadfully misguided.

Five examples

His book has five examples as illustrations of his general theme (and that’s without talking in this book about poverty, or nuclear threats):

  1. Finance
  2. Pandemics
  3. Migration
  4. Climate change
  5. Cyber-security

Many of these problems arise from the success of globalisation – the extraordinary rise in incomes worldwide in the last 25 years.

Pandemics require supra-national attention, because of increased connectivity:

  • The rapid spread of swine flu was correlated tightly with aircraft travel.
  • It will just take 2 days for a new infectious disease to travel all the way round the world.

The idea that you can isolate yourself from the world is a myth. There’s little point having a quarantine regime in place in Oxford if a disease is allowed to flourish in London. The same applies between countries, too.

Technology developments exacerbate the problem. DNA analysis is a good thing, but the capacity to synthesise diseases has terrible consequences:

  • There’s a growing power for even a very small number of individuals to cause global chaos, e.g. via pathogens
  • Think of something like Waco Texas – people who are fanatical Armageddonists – but with greater technical skills.

Cyber-security issues arise from the incredible growth in network connectivity. Jonathan Zittrain talks about “The end of the Internet”:

  • The Internet is not governed by governments
  • Problems to prosecute people, even when we know who they are and where they are (but in a different jurisdiction)
  • Individuals and small groups could destabilise whole Internet.

Migration is another “orphan issue”. No international organisation has the authority to deal with it:

  • Control over immigration is, in effect, an anarchic, bullying system
  • We have very bad data on migration (even in the UK).

The existing global institutions

The global institutions that we have were a response to post-WW2 threats.

For a while, these institutions did well. The World Bank = Bank for reconstruction. It did lead a lot of reconstruction.

But over time, we became complacent. The institutions became out-dated and lost their vitality.

The recent financial crisis shows that the tables have been turned round: incredible scene of EU taking its begging bowl to China.

The tragedy is that the lessons well-known inside the existing institutions have not been learned. There are lessons about the required sequencing of reforms, etc. But with the loss of vitality of these institutions, the knowledge is being lost.

The EU has very little bandwidth for managing global affairs. Same as US. Same as Japan. They’re all preoccupied by local issues.

The influence of the old G7 is in decline. The new powers are not yet ready to take over the responsibility: China, Russia, India, Indonesia, Brazil, South Africa…

  • The new powers don’t actually want this responsibility(different reasons for different countries)
  • China, the most important of the new powers, has other priorities – managing their own poverty issues at home.

The result is that no radical reform happens, of the international institutions:

  • No organisations are killed off
  • No new ones created
  • No new operating principles are agreed.

Therefore the institutions remain ineffective. Look at the lack of meaningful progress towards solving the problems of climate change.

He has been on two Bretton Woods reform commissions, along with “lots of wonderfully smart, well-meaning people”. Four prime ministers were involved, including Gordon Brown. Kofi Annan received the report with good intentions. But no actual reform of UN took place. Governments actually want these institutions to remain weak. They don’t want to give up their power.

It’s similar to the way that the UK is unwilling to give up power to Brussels.

Sleep-walking

The financial crisis shows what happens when global systems aren’t managed:

  • Downwards spiral
  • Very hard to pull it out afterwards.

We are sleep-walking into global crises. The financial crisis is just a foretaste of what is to come. However, this need not be the case.

A positive note

He’ll finish the lecture by trying to be cheerful.

Action on global issues requires collective action by both citizens and leaders who are not afraid to relinquish power.

The good news:

  • Citizens are more connected than ever before
  • Ideologies that have divided people in the past are reducing in power
  • We can take advantage of the amplification of damage to reputation that can happen on the Internet
  • People can be rapidly mobilised to overturn bad legislation.

Encouraging example of SOPA debate in US about aspects of control of the Internet:

  • 80 million people went online to show their views, in just two days
  • Senate changed their intent within six hours.

Some good examples where international coordination works

  • International plane travel coordination (air traffic control) is example that works very well – it’s a robust system
  • Another good example: the international postal system.

What distinguishes the successes from the failures:

  • In the Air Traffic Control case, no one has a different interest
  • But in other cases, there are lots of vested interest – neutering the effectiveness of e.g. the international response to the Syrian crisis
  • Another troubling failure example is what happened in Iraq – it was a travesty of what the international system wanted and needed.

Government leaders are afraid that electorate aren’t ready to take a truly international perspective. To be internationalist in political circles is increasingly unfashionable. So we need to change public opinion first.

Like-minded citizens need to cooperate, building a growing circle of legitimacy. Don’t wait for the global system to play catch-up.

In the meantime, true political leaders should find some incremental steps, and should avoid excuse of global inaction.

Sadly, political leaders are often tied up addressing short-term crises, but these short-term crises are due to no-one satisfactorily addressing the longer-term issues. With inaction on the international issues, the short-term crises will actually get worse.

Avoiding the perfect storm

The scenario we face for the next 15-20 years is “perfect storm with no captain”.

He calls for a “Manhattan project” for supra-national governance. His book is a contribution to initiating such a project.

He supports the subsidiarity principle: decisions should be taken at the most local level possible. Due to hyper-globalisation, there are fewer and fewer things that it makes sense to control at the national level.

Loss of national sovereignty is inevitable. We can have better sovereignty at the global level – and we can influence how that works.

The calibre of leaders

Example of leader who consistently took a global perspective: Nelson Mandela. “Unfortunately we don’t have many Mandelas around.”

Do leaders owe their power bases with electorates because they are parochial? The prevailing wisdom is that national leaders have to shy away from taking a global perspective. But the electorate actually have more wisdom. They know the financial crisis wasn’t just due to bankers in Canary Wharf having overly large bonuses. They know the problems are globally systemic in nature, and need global approaches to fix them.

ian goldin

20 February 2013

The world’s most eminent sociologist highlights the technological singularity

It’s not every day that the world’s most eminent sociologist reveals himself as having an intense interest in the Technological Singularity, and urges that “Everyone should read the books of Ray Kurzweil”. That’s what happened this evening.

The speaker in question was Lord Anthony Giddens, one of whose many claims to fame is his description as “Tony Blair’s guru”.

His biography states that, “According to Google Scholar, he is the most widely cited sociologist in the world today.”

In support of that claim, a 2009 article in the Times Higher Education supplement notes the following:

Giddens trumps Marx…

A list published today by Times Higher Education reveals the most-cited academic authors of books in the humanities…

As one of the world’s pre-eminent sociologists, Anthony Giddens, the Labour peer and former director of the London School of Economics, will be used to academic accolades.

But even he may be pleased to hear that his books are cited more often than those of iconic thinkers such as Sigmund Freud and Karl Marx.

Lord Giddens, now emeritus professor at LSE and a life fellow at King’s College, Cambridge, is the fifth most-referenced author of books in the humanities, according to the list produced by scientific data analysts Thomson Reuters.

The only living scholar ranked higher is Albert Bandura, the Canadian psychologist and pioneer of social learning theory at Stanford University…

Freud enters the list in 11th place. The American linguist and philosopher Noam Chomsky, who is based at the Massachusetts Institute of Technology and whose political books have a broader readership than some of his peers in the list, is 15th…

Lord Giddens is now 75 years old. Earlier this evening, I saw for myself evidence of his remarkable calibre. He gave an hour-long lecture in front of a packed audience at the London School of Economics, without any notes or slides, and without any hesitation, deviation, or verbal infelicity. Throughout, his remarks bristled with compelling ideas. He was equally competent – and equally fluent – when it came to the question-and-answer portion of the event.

LSE Events

The lecture was entitled “Off the edge of history: the world in the 21st century”. From its description on the LSE website, I had already identified it as relevant to many of the themes that I seek to have discussed in the series of London Futurists meetups that I chair:

The risks we face, and the opportunities we have, in the 21st century are in many respects quite different from those experienced in earlier periods of history. How should we analyse and respond to such a world? What is a rational balance of optimism and pessimism? How can we plan for a future that seems to elude our grasp and in some ways is imponderable?

As the lecture proceeded, I was very pleasantly impressed by the sequence of ideas. I append here a lightly edited copy of the verbatim notes I took on my Psion Series 5mx, supplemented by a few additions from the #LSEGiddens tweet stream. Added afterwards: the LSE has made a podcast available of the talk.

My rough notes from the talk follow… (text in italics are my parenthetical comments)

This large lecture room is completely full, twenty minutes before the lecture is due to start. I’m glad I arrived early!

Today’s topic is work in progress – he’s writing a book on the same topic, “Off the edge of history”.

  • Note this is a very different thesis from “the end of history”.

His starting point is in the subject of geology – a long way from sociology. He’s been working on climate change for the last seven years. It’s his first time to work so closely with scientists.

Geologists tend to call the present age “the Holocene age” – the last 12,000 years. But a geologist called Paul Crutzen recommended that we should use a different term for the last 200 years or so – we’re now in the Anthropocene age:

  • In this period, human activity strongly influences nature and the environment
  • This re-orients and restructures the world of geology
  • A great deal of what used to be natural, is natural no longer
  • Human beings are invading nature, in a way that has no precedent
  • Even some apparently natural catastrophes, like tsunamis and volcanoes, might be linked to impacts from humans.

We have continuities from previous history (of course), but so many things are different nowadays. One example is the impacts of new forms of biological threat. Disease organisms have skipped from animals to human beings. New disease organisms are being synthesised.

There are threats facing us, which are in no ways extensions of previous threats.

For example, what is the Internet doing to the world? Is it a gigantic new mind? Are you using the mobile phone, or is the mobile phone using you? There’s no parallel from previous periods. Globally connected electronic communications are fundamentally different from what went before.

When you are dealing with risks you’ve never experienced before, you can’t measure them. You’ll only know for sure when it’s too late. We’re on the edge of history because we are dealing with risks we have never faced before.

Just as we are invading nature, we are invading human nature in a way that’s unprecedented.

Do you know about the Singularity? (A smattering of people in the audience raise their hands.) It’s mind-blowing. You should find out about it:

  • It’s based on a mathematical concept
  • It’s accelerating processes of growth, rapidly disappearing to a far off point very different from today.

Everyone should read the books of Ray Kurzweil – who has recently become an Engineering Director at Google.

Kurzweil’s book makes it clear that:

  • Within our lifetimes, human beings will no longer be human beings
  • There are multiple accelerating rates of change in several different disciplines
  • The three main disciplines contributing to the singularity are nanotech, AI, and biotech
  • All are transforming our understanding of the human body and, more importantly, the human mind
  • This is described by the “Law of accelerating returns”
  • Progress is not just linear but geometrical.

This book opens our minds to multiple possibilities of what it means to be human, as technology penetrates us.

Nanotech is like humans playing God:

  • It’s a level below DNA
  • We can use it to rebuild many parts of the human body, and other artefacts in the world.

Kurzweil states that human beings will develop intelligence which is 100x higher than at present:

  • Because of merging of human bodies with computers
  • Because of the impact of nanotech.

Kurzweil gives this advice: if you are relatively young: live long, in order to live forever:

  • Immortality is no longer a religious concept, it’s now a tangible prospect
  • It could happen in the next 20-40 years.

This is a fantastic expansion of what it means to be human. Importantly, it’s a spread of opportunities and risk.

These were religious notions before. Now we have the real possibility of apocalypse – we’ve had it since the 1950s, when the first thermonuclear weapons were invented. The possibility of immortality has become real too.

We don’t know how to chart these possibilities. None of us know how to fill in that gap.

What science fiction writers were writing 20 years ago, is now in the newspapers everyday. Reading from the Guardian from a couple of days ago:

Paralysed people could get movement back through thought control

Brain implant could allow people to ‘feel’ the presence of infrared light and one day be used to move artificial limbs

Scientists have moved closer to allowing paralysed people to control artificial limbs with their thoughts following a breakthrough in technology…

…part of a series of sessions on advances in brain-machine interfaces, at which other scientists presented a bionic hand that could connect directly to the nerves in a person’s arm and provide sensory feedback of what they were holding.

Until now, neurological prosthetics have largely been demonstrated as a way to restore a loss of function. Last year, a 58-year-old woman who had become paralysed after a stroke demonstrated that she could use a robotic arm to bring a cup of coffee to her mouth and take a sip, just by thinking about it…

In the future…  it might be possible to use prosthetic devices to restore vision – for example, if a person’s visual cortex had been damaged – by training a different part of the brain to process the information.

Or you could even augment normal brain function in non-invasive ways to deliver the information.

We could learn to detect other sorts of signals that we normally don’t see or experience; the perceptual range could increase.

These things are real; these things are happening. There is a kind of geometric advance.

The literature of social scientists has a big division here, between doomsday thinkers and optimists, with respected thinkers in both camps.

Sir Martin Rees is example of first category. He wrote a book called “Our final century”:

  • It examines forms of risk that could destroy our society
  • Climate change is a huge existential risk – most people aren’t aware of it
  • Nanotech is another existential risk – grey goo scenario
  • We also have lots of weaponry: drones circulating above the world even as we speak
  • Most previous civilisations have ended in disaster – they subverted themselves
  • For the first time, we have a civilisation on a global scale
  • It could well be our final century.

Optimists include Matt Ridley, a businessman turned scientist, and author of the book “The rational optimist”:

  • Over the course of human civilisation there is progress – including progress in culture, and medical advances.

This is a big division. How do we sort this out? His view: it’s not possible to decide. We need to recognise that we live in a “high opportunity, high risk society”:

  • The level of opportunity and level of risk are both much higher than before
  • But risk and opportunity always intertwine
  • “In every risk there’s an opportunity…” and vice versa
  • We must be aware of the twists and tangles of risk and opportunity – their interpenetration.

Studying this area has led him to change some of his views from before:

  • He now sees the goal of sustainability as a harder thing than before
  • Living within our limits makes sense, but we no longer know what our limits are
  • We have to respect limits, but also recognise that limits can be changed.

For example, could we regard a world population of 9 billion people as an opportunity, rather than just a risk?

  • It would lead us to put lots more focus on food innovation, blue sky tech for agriculture, social reform, etc – all good things.

A few points to help us sort things out:

  1. One must never avoid risk – we live in a world subject to extreme system risk; we mustn’t live in denial of risk in our personal life (like denying the risks of smoking or riding motor cycles) or at an civilisational level
  2. We have to think about the future in a very different way, because the future has become opaque to us; the enlightenment thought was that we would march in and make sense of history (Marx had similar thoughts), but it turns out that the future is actually opaque – for our personal lives too as well as society (he wonders whether the EU will still exist by the time he finishes his book on the future of the EU!)
  3. We’ll have to learn to backcast rather than forecast – to borrow an idea from the study of climate change. We have to think ahead, and then think back.

This project is the grand task of social sciences in the 21st century.

One more example: the possibility of re-shoring of jobs in the US and EU:

  • 3D printing is an unbelievable technological invention
  • 3D printers can already print shoes
  • A printer in an MIT lab can print whole systems – eg in due course a plane which will fly directly out of the computer
  • This will likely produce a revolution in manufacturing – many, many implications.

Final rhetorical question: As we confront this world, should we be pessimists or optimists? This is the same question he used to consider, at the end of the talks he used to give on climate change.

His answer: we should bracket out that opposition; it’s much more important to be rational than either pessimist or optimist:

  • Compare the case of someone with very serious cancer – they need more than wishful thinking. Need rational underpinning of optimism and/or pessimism.

Resounding applause from the audience. Then commence questions and answers.

Q: Are today’s governance structures, at local and national levels, fit to deal with these issues?

A: No. For example, the he European Union has proved not to be the vanguard of global governance that we hoped it would be. Climate change is another clear example: twenty years of UN meetings with no useful outcome whatsoever.

Q: Are our human cognitive powers capable to deal with these problems? Is there a role for technology to assist our cognitive powers?

A: Our human powers are facing a pretty difficult challenge. It’s human nature to put off what we don’t have to do today. Like 16 years taking up smoking who can’t really see themselves being 40. Maybe a supermind might be more effective.

Q: Although he has given examples where current governance models are failing, are there any bright spots of hope for governance? (The questioner in this case was me.)

A: There are some hopeful signs for economic governance. Surely bankers will not get away with what they’ve done. Movement to address tax havens (“onslaught”) – bring the money back as well as bringing the jobs back. Will require global co-operation. Nuclear proliferation (Iran, Israel) is as dangerous as climate change. The international community has done quite well with non-proliferation, but it only takes one nuclear war for things to go terribly wrong.

Q: What practical advice would he give to the Prime Minister (or to Ed Miliband)?

A: He supports Ed Miliband trying to restructure capitalism; there are similar moves happening in the US too. However, with global issues like these, any individual prime minister is limited in his influence. For better or for worse, Ray Kurzweil has more influence than any politician!

(Which is a remarkable thing to say, for someone who used to work so closely with Prime Minister Tony Blair…)

15 April 2012

Hope for healing healthcare

Filed under: books, change, Economics, healthcare, market failure, medicine, passion — David Wood @ 12:45 am

Within the space of the first few pages of his book “The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care“, T.R. Reid had me chuckling at some of his descriptions of healthcare systems around the world. Within these same few pages, he also triggered in me a wave of anger and disbelief. He’s a veteran foreign correspondent for the Washington Post, and his writing skills shine throughout his book. Marshaling personal anecdotes from his experiences during visits to healthcare facilities in ten different countries, with historical accounts of how these healthcare systems came to have their current form, his writing addressed both my head and my heart.

Given the title of the book, it’s no spoiler for me to reveal that the episode in the first few pages that triggered my feeling of anger and disbelief was located in the USA. NY Times journalist Nicholas D. Kristof also read T.R. Reid’s book and had the same reaction as me. He retells the story in his article “The Body Count at Home“:

Nikki White was a slim and athletic college graduate who had health insurance, had worked in health care and knew the system. But she had systemic lupus erythematosus, a chronic inflammatory disease that was diagnosed when she was 21 and gradually left her too sick to work. And once she lost her job, she lost her health insurance.

In any other rich country, Nikki probably would have been fine, notes T. R. Reid in his important and powerful new book, “The Healing of America.” Some 80 percent of lupus patients in the United States live a normal life span. Under a doctor’s care, lupus should be manageable…

As Mr. Reid recounts, Nikki tried everything to get medical care, but no insurance company would accept someone with her pre-existing condition. She spent months painfully writing letters to anyone she thought might be able to help. She fought tenaciously for her life.

Finally, Nikki collapsed at her home in Tennessee and was rushed to a hospital emergency room, which was then required to treat her without payment until her condition stabilized. Since money was no longer an issue, the hospital performed 25 emergency surgeries on Nikki, and she spent six months in critical care.

“When Nikki showed up at the emergency room, she received the best of care, and the hospital spent hundreds of thousands of dollars on her,” her step-father, Tony Deal, told me. “But that’s not when she needed the care.”

By then it was too late. In 2006, Nikki White died at age 32. “Nikki didn’t die from lupus,” her doctor, Amylyn Crawford, told Mr. Reid. “Nikki died from complications of the failing American health care system.”...

Alas, the case of Nikki White is very far from being an exception. Kristof notes the estimates that “18,000 Die a Year for Lack of Insurance” each year in the US. (And numerous online responses to his blog post give other sad personal experiences.)

But here’s what I found really stomach-churning in the opening pages of T.R. Reid’s book:

Many Americans intensely dislike the idea that we might learn useful policy ideas from other countries, particularly in medicine. The leaders of the healthcare industry and the medical profession, not to mention the political establishment, have a single, all-purpose response they fall back on whenever someone suggests that the United States might usefully study foreign healthcare systems: “But it’s socialized medicine!”

This is supposed to end the argument. The contention is that the United States, with its commitment to free markets and low taxes, could never rely on big-government socialism the way other countries do. Americans have learned in school that the private sector can handle things better and more efficiently than government ever could.

In US policy debates, the term “socialized medicine” has been a powerful political weapon…  The term was popularized by a public relations firm working for the American Medical Association in 1947 to disparage President Truman’s proposal for a national healthcare system. It was a label, at the dawn of the cold war, meant to suggest that anybody advocating universal access to healthcare must be a communist. And the phrase has retained its political power for six decades…

I was reminded of the remarkable claims at the beginning of this year by would-be President Rick Santorum that the “NHS devastated Britain” and caused “the collapse of the British Empire”.

T.R. Reid had been bureau chief for the Washington Post in both London and Tokyo, and had lived in each of these cities for several years with his family. That gave him considerable first-hand experience of the healthcare systems in these two countries. The book arose from a wider set of visits, including France, Germany, Canada, India, Nepal, Switzerland, and Taiwan. He had two reasons for all these visits:

  1. To inquire about possible treatments for a shoulder injury he had sustained many years previously, but which had recently flared up again, becoming increasingly painful and hard to move. As he explained, “I could no longer swing a golf club. I could barely reach up to replace a lightbulb overhead or get the wine-glasses from the top shelf. Yearning for surcease from sorrow, I took that bum shoulder to doctors and clinics… in countries around the world”
  2. To seek, more generally, for “a solution to a much bigger medical problem… a prescription to fix the seriously ailing healthcare system” of the US.

He retells his diverse experiences with good humour and great insight. Along the way, he lists and punctures “Five Myths About Health Care in the Rest of the World” – myths that are widely believed in some parts of the US, but which have limited basis in actual practice:

  1. It’s all socialized medicine out there
  2. Overseas, care is rationed through limited choices or long lines
  3. Foreign health-care systems are inefficient, bloated bureaucracies
  4. Cost controls stifle innovation
  5. Health insurance has to be cruel

For example, on whether cost controls stifle innovation, he notes the following:

The United States is home to groundbreaking medical research, but so are other countries with much lower cost structures. Any American who’s had a hip or knee replacement is standing on French innovation. Deep-brain stimulation to treat depression is a Canadian breakthrough. Many of the wonder drugs promoted endlessly on American television, including Viagra, come from British, Swiss or Japanese labs.

Overseas, strict cost controls actually drive innovation. In the United States, an MRI scan of the neck region costs about $1,500. In Japan, the identical scan costs $98. Under the pressure of cost controls, Japanese researchers found ways to perform the same diagnostic technique for one-fifteenth the American price. (And Japanese labs still make a profit.)

And the facts and figures throughout the book are relentless and comprehensive:

  • Average life expectancy at birth in the United States is 77.85 years. “That means the world’s richest country ranks forty-seventh, just ahead of Cyprus and a little behind Bosnia and Herzegovina, in terms of longevity. The United States is among the worst of the industrialized nations on this score; for that matter, the average American can expect a shorter life than people in relatively poor countries like Jordan”
  • “For those Americans who are uninsured or under-insured, any bout with illness can be terrifying on two levels. In addition to the risk of disability or death due to the disease, there’s the risk of financial ruin due to the medical and pharmaceutical bills. This is a uniquely American problem. When I was traveling the world on my quest, I asked the health ministry of each country how many citizens had declared bankruptcy in the past year because of medical bills. Generally, the officials responded to this question with a look of astonishment, as if I had asked how many flying saucers from Mars landed in the ministry’s parking lot last week. How many people go bankrupt because of medical bills? In Britain, zero. In France, zero. In Japan, Germany, the Netherlands, Canada, Switzerland: zero. In the United States, according to a joint study by Harvard Law School and Harvard Medical School, the annual figure is around 700,000”
  • “The one area where the United States unquestionably leads the world is in spending. Even countries with considerably older populations, with more need for medical attention, spend much less than we do. Japan has the oldest population in the world, and the Japanese go to the doctor more than anybody – about fourteen office visits per year, compared with five for the average American. And yet Japan spends about $3,000 per person on health care each year; we burn through $7,000 per person”
  • “When a Harvard Medical School professor working at the World Health Organisation developed a complicated formula to rate the quality and fairness of national healthcare systems around the world, the richest nation on earth ranked thirty-seventh… just behind Dominica and Costa Rica, and just ahead of Slovenia and Cuba…”

(For more about the WHO comparative rankings of healthcare systems, see e.g. Wikipedia’s coverage. T.R. Reid addresses various criticisms of the methodology in an Appendix to his book.)

Rising above the facts and figures, and the various anecdotes, the book provides a handy framework for making sense of the different systems deployed around the world:

“Fortunately, for all the local variations, health care systems tend to follow general patterns. In some models, government is both the provider of health care and the payer. In others, doctors and hospitals are in the private sector but government pays the bills. In still other countries, both the providers and the payers are private.”

There are four basic models:

  1. The Bismarck Model: “Both health care providers and payers are private entities. The model uses private health insurance plans, usually financed jointly by employers and employees through payroll deduction. Unlike the U.S. health insurance industry, though, Bismarck-type plans are basically charities: They cover everybody, and they don’t make a profit”
  2. The Beveridge Model: “Health care is provided and financed by the government, through tax payments. There are no medical bills; rather, medical treatment is a public service, like the fire department or the public library. In Beveridge systems, many (sometimes all) hospitals and clinics are owned by the government; some doctors are government employees, but there are also private doctors who collect their fees from the government. These systems tend to have low costs per capita, because the government, as the sole payer, controls what doctors can do and what they can charge”
  3. The National Health Insurance Model: “The providers of health care are private, but the payer is a government-run insurance program that every citizens pays into. The national, or provincial, insurance plan collects monthly premiums and pays medical bills. Since there’s no need for marketing, no expensive underwriting offices to deny claims, and no profit, these universal insurance programs tend to be cheaper and much simpler administratively than American-style private insurance. As a single payer covering everybody, the national insurance plan tends to have considerable market power to negotiate for lower prices. NHI countries also control costs by limiting the medical services they will pay for or by making patients wait to be treated.”
  4. The Out-of-pocket model: “Most medical care is paid for by the patient, out of pocket, with no insurance or government plan to help”.

Which all these systems apply in the US? The answer, surprisingly, is: All of the above – but not done in an efficient way.

Chapter by chapter, the book highlights ways in which the various medical systems keep costs lower (e.g. through having simpler administration) and deliver generally higher quality than applies in the US.

But two examples are even more important than any mentioned so far. These are the examples of Switzerland and Taiwan. Both of these are countries where significant reforms in the healthcare system have recently taken place – putting the lie to any viewpoint that complicated healthcare systems are incapable of major improvement:

Neither of these countries looks much like the United States of America… Still, both countries have important parallels to the United States. Both are vigorous democracies marked by fierce competition between political parties that look a lot like our Republicans and Democrats. Both have finance and insurance industries that are rich and politically influential. Both are ferociously capitalist places, and both have jumped aboard the digital revolution to build advanced, high-tech economies. Most important, both Taiwan and Switzerland had fragmented and expensive health care, similar to the American system – until they launched their reform campaigns.

In both countries, payment for medical care was dominated by health insurance plans tied to employment; in both significant numbers of people were left with no coverage at all. Even with large numbers of people uninsured, both countries were pouring considerable amounts of money into health care. In both Taiwan and Switzerland, as in the United States…, a growing chorus of voices began demanding universal coverage, arguing that every sick person should have access to a doctor…

In both cases, the results of the reforms have been very positive. To take the case of Taiwan:

Almost overnight, some 11 million Taiwanese who had no medical insurance suddenly had access to doctors and hospitals, with the Bureau of National Health Insurance paying most of the bill. This created a flood of new demand for medical services. The market responded with a flood of new supply: Clinics, hospitals, dentists, optometrists, labs, hostels, and acupuncture centers sprang up everywhere…

The most striking result of Taiwan’s new system is a healthier population with a longer healthy life expectancy and much higher recovery rates from major diseases. This is particularly evident in rural areas, where it was difficult or impossible to see a doctor before the new system took place…

As a system started from scratch, with uniform rules and procedures for every doctor and patient and state-of-the-art paperless record-keeping, Taiwan’s new health insurance system is the most efficient in the world. The 1994 law seemed hopelessly optimistic when it set a limit of 3.5% for administrative costs; in fact, the system has done much better than that, with paperwork, etc. accounting for only 2% of costs most years (and sometimes less). That’s about… one-tenth as high as the administrative burden for America’s private health insurers. As a result, even with explosive growth in the consumption of medical services, national health spending in Taiwan remains at about 6% of gross domestic product (as opposed to about 17% of GDP in the United States). This has kept costs low for patients…

As for the healthcare reforms in the US, under President Obama, T.R. Reid points out that they miss various elements of the reforms undertaken in both Taiwan and Switzerland:

  • Even with the reform in place, there will still be around 23 million Americans without healthcare insurance in 2019
  • American health insurance companies will still be able to get away with various practices (for denying payments to patients) that are banned in every other rich democracy
  • Much of the argumentation in favour of the reform has emphasised economics (not a bad thing in itself), but the moral and ethical drivers which were at the forefront in the debates in Taiwan and Switzerland have had a much lower profile in the US.

The final passage in the main body of the book puts it like this:

The sad truth is that, even with this ambitious reform, the United States will still have the most complicated, the most expensive, and the most inequitable healthcare system of any developed nation. The new law won’t get to the destination all other industrialized democracies have reached: universal healthcare coverage at reasonable cost. To achieve that goal, the United States will still have to take some lessons from the other national healthcare systems described in this book.

I’ll touch on four points in my own conclusion:

1. The moral argument for healthcare reform

The time I’ve spent recently reading Jonathan Haidt’s “The Righteous Mind” and watching him speak at a couple of events in London, has made me more sensitive to the fact that different people have different moral “tastes”, and can assign different priorities to six major dimensions of moral sensibility:

  • care vs. harm
  • fairness vs. cheating
  • liberty vs. oppression
  • loyalty vs. betrayal
  • authority vs.subversion
  • sanctity vs. degradation.

Failure to appreciate this fact leads of lots of bewilderment, as summarised in William Saletan’s New York Times review “Why won’t they listen?” of Haidt’s book. As T.R. Reid highlights, the current US healthcare system may well fail important moral tests on grounds of care vs. harm, and by being “unfair”. However, the arguments of people like Rick Santorum against the reform act build on different moral dimensions – e.g. liberty vs. oppression. These arguments find it particularly objectionable that, under these reforms, many people will be obliged (“oppressed”) into purchasing healthcare insurance. That’s seen as a fundamental denial of liberty.

Another insight from Haidt is that, in these circumstances of conflicting moral intuitions, reasoning often fails. One of his key summary points is as follows:

Moral intuitions come first, strategic reasoning comes second, to justify the intuitions we have already reached.

That’s not to say further discussion is pointless. As William Saletan puts it:

Haidt believes in the power of reason, but the reasoning has to be interactive. It has to be other people’s reason engaging yours. We’re lousy at challenging our own beliefs, but we’re good at challenging each other’s. Haidt compares us to neurons in a giant brain, capable of “producing good reasoning as an emergent property of the social system.”

Our task, then, is to organize society so that reason and intuition interact in healthy ways. Haidt’s research suggests several broad guidelines. First, we need to help citizens develop sympathetic relationships so that they seek to understand one another instead of using reason to parry opposing views. Second, we need to create time for contemplation. Research shows that two minutes of reflection on a good argument can change a person’s mind. Third, we need to break up our ideological segregation. From 1976 to 2008, the proportion of Americans living in highly partisan counties increased from 27% to 48%. The Internet exacerbates this problem by helping each user find evidence that supports his views…

2. A surprisingly effective example of lower-cost healthcare

So, what happened to T.R. Reid’s shoulder? Out of the all the recommendations from different doctors around the world, which was the best?

Doctors in several countries – including the US – recommended expensive, invasive, reconstructive surgery – even though all these doctors noted that there was no guarantee the surgery would be successful.

But the advice T.R. Reid ultimately found most useful involved a very different kind of technology, with roots going far back into time. That treatment was in India, and was based on Ayurdveda – which, like yoga, is derived from ancient Hindu scripture. It included

  • Eating only bland food (lentils and rice, primarily) during the course of the treatment, on the theory that the body should be under minimal strain during treatment
  • Daily massages involving hot oils and powerful hand movements (“to smooth the bodily routes that the prana needs to follow”)
  • Six times each day, imbibing “a vile assortment of herbal medicines, most of which tasted like spoiled greens or aging mud”
  • Attending a temple within the hospital grounds, “to perform poojah, or reverence, tot he Hindu god of healing”
  • Undertaking various yogic exercises
  • Accepting advice to “relax, and to forget whatever stresses and worries”
  • Reading one of the key Hindu scriptures, the Bhagavad Gita.

After several weeks of this treatment, the results were unmistakable. The shoulder had a much greater range of movement than before, and the pains were much reduced:

To this day, I don’t know why it happened. Was it the massage, the medication, the meditation…? In any case, the timing was definitely propitious. Ayurveda worked for me. I didn’t have a miracle cure; my shoulder was not completely healed. But my pain decreased, my range of motion increased, and I was definitely better – and all without the trouble or cost of a total shoulder arthoplasty…

Note that the book also describes some alternative medical treatments that were not successful – including other herbal medicines in Nepal, and acupuncture in Taiwan. And as mentioned, the Ayurveda did not provide “complete” healing. What’s more, Ayurvedic clinics increasingly incorporate x-ray machines, stethoscopes, and other western tools. But this section of the book was an intriguing reminder to me that I’d love to dig more deeply into material such as William Broad’s “The science of yoga: the risks and the rewards“.

3. Every healthcare system is under increasing financial strain

Despite the many successes of healthcare systems covered in the book, T.R. Reid was clear that all these systems are under increasing financial stress. He quotes the (somewhat tongue-in-cheek) “Universal Laws of Healthcare Systems” as articulated by economist Tsung-Mei Cheng:

  1. No matter how good the health care in a particular country, people will complain about it.
  2. No matter how much money is spent on health care, the doctors and hospitals will argue it is not enough.
  3. The last reform always failed.

As the author states,

All national health systems, even those that do their job well, are fighting a desperate battle these days against rising costs.

We live in a technological age, and technology – in the form of new miracle drugs, new medical devices (e.g. man-made shoulders) and new procedures – plays a huge role in modern medicine. This is unquestionably a good thing… but it is also an expensive thing.

But good technology, wisely applied, can reduce healthcare costs, rather than simply make them more expensive. For example, as T.R. Reid points out, suitable early tests can do wonders in preventive medicine. One place I’ve covered this topic before is in “Smartphone technology, super-convergence, and the great inflection of medicine“.

4. The good news in American medicine

Lest it be thought that T.R. Reid, the author of “The healing of America”, is unduly negative about America, or unpatriotic, let me draw attention to a 53 minute PBS documentary he has recently released: “The good news in American medicine“.

Whereas “The healing of America” gathers inspiring examples of best practice from around the globe, “The good news in American medicine” gathers inspiring examples of best practice from around the US – and draws out some important economic and moral principles along the way. (Quote: “A whole lot of this is about doing the right thing“.) Just as I recommend the book, I also recommend the video.

27 July 2011

Eclectic guidance for big life choices

Filed under: books, challenge, Economics, evolution, leadership, market failure, psychology, risks, strategy — David Wood @ 10:34 pm

“If you’re too busy to write your normal blog posts, at least tell us what books you’ve liked reading recently.”

That’s a request I’ve heard in several forms over the last month or so, as I’ve been travelling widely on work-related assignments.  On these travels, I’ve met several people who were kind enough to mention that they enjoyed reading my blog posts – especially those postings recommending books to read.

In response to this suggestion, let me highlight four excellent books that I’ve read recently, which have each struck me as having something profound to say on the Big Topic of how to make major life choices.

Adapt: Why Success Always Starts with Failure, by Tim Harford

Adapt: Why Success Always Starts with Failure draws out all sorts of surprising “aha!” connections between different areas of life, work, and society.  The analysis ranges across the wars in Iraq, the comparative strengths and weaknesses of Soviet-style centrally planned economies, the unorthodox way the development of the Spitfire fighter airplane was funded, the “Innovator’s Dilemma” whereby one-time successful companies are often blindsided by emerging new technologies, different approaches to measuring the effectiveness of charitable aid donations, the risk of inadvertently encouraging perverse behaviours when setting grand over-riding incentives, the over-bearing complexity of modern technology, the causes of the great financial crash of 2008-2009, reasons why safety systems break down, approaches to tackling climate change, and the judicious use of prizes to encourage successful breakthrough innovation.  Yes, this is a real intellectual roller-coaster, with some unexpected twists along the way – revelations that had me mouthing “wow, wow” under my breath.

And as well as heroes, there are villains.  (Donald Rumsfeld comes out particularly badly in these pages – even though he’s clearly in some ways a very bright person.  That’s an awful warning to the others among us who rejoice in above-average IQs.)

The author, Tim Harford, is an economist, but this book is grounded in observations about Darwinian evolution.  Three pieces of advice pervade the analysis – advice that Harford dubs “Palchinsky Principles”, in honour of Peter Palchinsky, a Russian mining engineer who was incarcerated and executed by Stalin’s government in 1929 after many years of dissent against the human cost of the Soviet top-down command and control approach to industrialisation.  These principles are designed to encourage stronger innovation, better leadership, and more effective policies, in the face of complexity and unknowns.  The principles can be summarised as follows:

  1. Variation – seek out new ideas and try new ideas
  2. Survivability – when trying something new, do it on a scale where failure is survivable
  3. Selection – seek out feedback and learn from mistakes as you go along, avoiding an instinctive reaction of denial.

Harford illustrates these principles again and again, in the context of the weighty topics already listed, including major personal life choices as well as choices for national economies and international relations.  The illustrations are full of eye-openers.  The book’s subtitle is a succinct summary: “success always stars with failure”.  The notion that it’s always possible to “get it right the first time” is a profound obstacle to surviving the major crises that lie ahead of us.  We all need a greater degree of openness to smart experimentation and unexpected feedback.

The Moral Landscape: How Science Can Determine Human Values, by Sam Harris

That thought provides a strong link to the second book I wish to mention: The Moral Landscape: How Science Can Determine Human Values.  It’s written by Sam Harris, who I first came to respect when I devoured his barnstorming The End of Faith: Religion, Terror, and the Future of Reason a few years ago.

In some ways, the newer book is even more audacious.  It considers how we might go about finding answers to big questions such as “how should I live?” and “what makes some ways of life more moral than others?”  As some specific examples, how should we respond to:

  • The Taliban’s insistence that the education of girls is an abomination?
  • The stance by Jehovah’s Witnesses against blood transfusion?
  • The prohibition by the Catholic Church of the use of condoms?
  • The legalisation of same-sex relationships?
  • The use of embryonic stem cells in the search for cures of diseases such as Alzheimer’s and Parkinson’s?
  • A would-be Islamist suicide bomber who is convinced that his intended actions will propel him into a paradise of abundant mental well-being?

One response is that such questions are the province of religion.  The correct answers are revealed via prophets and/or holy books.  The answers are already clear, to those with the eye of faith.  It is a divine being that tells us, directly or indirectly, the difference between good and evil.  There’s no need for experimental investigations here.

A second response is that the main field to study these questions is that of philosophy.  It is by reason, that we can determine the difference between good and evil.

But Sam Harris, instead, primarily advocates the use of the scientific method.  Science enters the equation because it is increasingly able to identify:

  • Neural correlates (or other physical or social underpinnings) of sentient well-being
  • Cause-and-effect mechanisms whereby particular actions typically bring about particular changes in these neural correlates.

With the help of steadily improving scientific understanding, we can compare different actions based on their likely effects on sentient well-being.  Actions which are likely to magnify sentient well-being are good, and those which are likely to diminish it are evil.  It’s no defense of an action that it makes sense within an archaic, pre-scientific view of the world – a view in which misfortunes are often caused by witches’ spells, angry demons, or spiteful disembodied minds.

Here, “science” means more than the findings of any one branch of science, whether that is physics, biology, psychology, or sociology.  Instead, it is the general disciplined outlook on life that seeks to determine objective facts and connections, and which is open to making hypotheses, gathering data in support of these hypotheses, and refining hypotheses in the light of experimental findings.  As science finds out more about the causes of human well-being in a wide variety of circumstances, we can speak with greater confidence about matters which, formerly, caused people to defer to either religion or philosophy.

Unsurprisingly, the book has stirred up a raucous hornet’s nest of criticism.  Harris addresses most of these criticisms inside the book itself (which suggests that many reviewers were failing to pay attention) and picks up the discussion again on his blog. He summarises his view as follows:

Morality and values depend on the existence of conscious minds—and specifically on the fact that such minds can experience various forms of well-being and suffering in this universe. Conscious minds and their states are natural phenomena… fully constrained by the laws of Nature (whatever these turn out to be in the end). Therefore, there must be right and wrong answers to questions of morality and values that potentially fall within the purview of science. On this view, some people and cultures will be right (to a greater or lesser degree), and some will be wrong, with respect to what they deem important in life.

As Harris makes clear, this is far from being an abstract, other-worldly discussion.  Cultures are clashing all the time, with lots of dramatic consequences for human well-being.  Seeing these clashes, are we to be moral relativists (saying “different cultures are best for different peoples, and there’s no way to objectively compare them”) or are we to be moral realists (saying “some cultures promote significantly more human flourishing than others, and are to be objectively preferred as a result”)?  And if we are to be moral realists, do we resolve our moral arguments by deference to religious tradition, or by open-minded investigation of real-world connections (investigations such as those proposed, indeed,  by Tim Harford in “Adapt”)?  In the light of these questions, here are some arguments that deserve thought:

  • There’s a useful comparison between the science of human values (the project espoused by Harris), and a science of diets (what we should eat, in order to enjoy good health).  In both cases, we’re currently far from having all the facts.  And in both cases, there are frequently several right answers.  But not all diets are equally good.  Similarly, not all cultures are equally good.  And what makes one diet better than another will be determined by facts about the physical world – such as the likely effects (direct and indirect) of different kinds of fats and proteins and sugars and vitamins on our bodies and minds.  While people still legitimately disagree about diets, that’s not a reason to say that science can never answer such questions.  Likewise, present-day disagreements about specific causes of happiness, mental flourishing, and general sentient well-being, do not mean these causes fail to exist, or that we can never know them.
  • Likewise with the science of economics.  We’re still far from having a complete understanding of how different monetary and financial policies impact the long-term health of the economy.  But that doesn’t mean we should throw up our hands and stop searching for insight about likely cause and effect.  The discipline of economics, imperfect though it is, survives in an as-yet-incomplete state.  The same goes for political science too.  And, likewise, for the science of the moral landscape.
  • Attempts to reserve some special area of “moral insight” for religion are indefensible.  As Harris says, “How is it that most Jews, Christians, and Muslims are opposed to slavery? You don’t get this moral insight from scripture, because the God of Abraham expects us to keep slaves. Consequently, even religious fundamentalists draw many of their moral positions from a wider conversation about human values that is not, in principle, religious.”  (I especially recommend Harris’s excoriating demolition of surprisingly spurious arguments given by Francis Collins in his surprisingly widely respected book “The Language of God: A Scientist Presents Evidence for Belief“.)

Mindsight: The New Science of Personal Transformation, by Daniel Siegel

The next book on my list serves as a vivid practical illustration of the kind of scientifically-informed insight that Harris talks about – new insight about connections between the brain and mental well-being.  Mindsight: The New Science of Personal Transformation contains numerous case histories of people who:

  • Started off lacking one or more elements of mental well-being
  • Became a patient of the author, Dr Daniel Siegel – a Harvard-trained physician
  • Followed one or other program of mindfulness – awareness and monitoring of the patterns of energy and information flowing in the brain
  • Became more integrated and fulfilled as a result.

To quote from the book’s website:

“Mindsight” [is] the potent skill that is the basis for both emotional and social intelligence. Mindsight allows you to make positive changes in your brain–and in your life.

  • Is there a memory that torments you, or an irrational fear you can’t shake?
  • Do you sometimes become unreasonably angry or upset and find it hard to calm down?
  • Do you ever wonder why you can’t stop behaving the way you do, no matter how hard you try?
  • Are you and your child (or parent, partner, or boss) locked in a seemingly inevitable pattern of conflict?

What if you could escape traps like these and live a fuller, richer, happier life?  This isn’t mere speculation but the result of twenty-five years of careful hands-on clinical work by Daniel J. Siegel, M.D… one of the revolutionary global innovators in the integration of brain science into the practice of psychotherapy. Using case histories from his practice, he shows how, by following the proper steps, nearly everyone can learn how to focus their attention on the internal world of the mind in a way that will literally change the wiring and architecture of their brain.

Siegel is, of course, aware that drugs can often play a role in addressing mental issues.  However, his preference in many cases is for patients to learn and practice various skills in mental introspection.  His belief – which he backs up by reference to contemporary scientific findings – is that practices such as meditation can change the physical structure of brain in significant ways.  (And there are times when it can relieve recurring back pain too, as in one case history covered.)

Siegel defines the mind as “an embodied and relational process that regulates the flow of energy and information”.  He goes on to say:

So how would you regulate the mind?  By developing the ability to see mental activity with more clarity and then modify it with more effectiveness… there’s something about being able to see and influence your internal world that creates more health.

Out of the many books on psychotherapy that I’ve read over the years, this is one of the very best.  The case studies are described in sufficient depth to make them absorbing.  They’re varied, as well as unpredictable.  The neuroscience in the book is no doubt simplified at times, but gels well with what I’ve picked up elsewhere.  And the repeated emphasis on “integration” provides a powerful unifying theme:

[Integration is] a process by which separate elements are linked together into a working whole…  For example, integration is at the heart of how we connect to one another in healthy ways, honoring one another’s differences while keeping our lines of communication wide open. Linking separate entities to one another—integration—is also important for releasing the creativity that emerges when the left and right sides of the brain are functioning together.

Integration enables us to be flexible and free; the lack of such connections promotes a life that is either rigid or chaotic, stuck and dull on the one hand or explosive and unpredictable on the other. With the connecting freedom of integration comes a sense of vitality and the ease of well-being. Without integration we can become imprisoned in behavioral ruts—anxiety and depression, greed, obsession, and addiction.

By acquiring mindsight skills, we can alter the way the mind functions and move our lives toward integration, away from these extremes of chaos or rigidity. With mindsight we are able to focus our mind in ways that literally integrate the brain and move it toward resilience and health.

The sections in the book on meditation are particularly interesting.  As Siegel has become aware, the techniques he recommends have considerable alignment with venerable practices from various eastern traditions – such as the practice of “mindfulness“.  However, the attraction of these techniques isn’t that they are venerable.  It is that there’s a credible scientific explanation of why they work – an explanation that is bolstered by contemporary clinical experience.

Good Strategy Bad Strategy: The Difference and Why It Matters, by Richard Rumelt

From a great book on psychotherapy, let me finish by turning to a great book on strategy – perhaps the best book on strategy that I’ve ever read: Good Strategy Bad Strategy: The Difference and Why It Matters.  The author, Richard Rumelt, Professor of Business and Society at UCLA Anderson School of Management, is a veteran analyst of strategy, who gained his first degree as long ago as 1963 (in Electrical Engineering from the University of California, Berkeley).  He speaks with an accumulated lifetime of wisdom, having observed countless incidents of both “bad strategy” and “good strategy” over five decades of active participation in industry.

“Strategy” is the word which companies often use, when justifying their longer term actions.  They do various things, they say, in pursuit of their strategic objectives.  Here, “strategy” goes beyond “business case”.  Strategy is a reason for choosing between different possible business cases – and can provide reasons for undertaking projects even in the absence of a strong business case.  By the way, it’s not just companies that talk about strategy.  Countries can have them too, as well as departments within governments.  And the same applies to individuals: someone’s personal strategy can be an explicit reason for them choosing between different possible alternative courses of action.

It’s therefore a far from ideal situation that much of what people think of as a strategy is instead, in Rumelt’s words, “fluff” or “wishful thinking”:

It’s easy to tell a bad [strategy] from a good one. A bad one is full of fluff: fancy language covering up the lack of content. Enron’s so-called strategy was littered with meaningless buzzwords explaining its aim to evolve to a state of “sophisticated value extraction”. But in reality its chief strategies could be summed up as having an electronic trading platform, being an over-the-counter broker and acting as an information provider. These are not strategies, they are just names, like butcher, baker and candlestick maker…

Bad strategy is long on goals and short on policy or action.  It assumes that goals are all you need.  It puts forward strategic objectives that are incoherent and, sometimes, totally impractical.  It uses high-sounding words and phrases to hide these failings…

The core of [good] strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors…

Bad strategy tends to skip over pesky details such as problems.  It ignores the power of choice and focus, trying instead of accommodate a multitude of conflicting demands and interests.  Like a quarterback whose only advice to teammates is “Let’s win”, bad strategy covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values.  Each of these elements is, of course, an important part of human life.  But, by themselves, they are not substitutes for the hard work of strategy…

If you fail to identify and analyse the obstacles, you don’t have a strategy.  Instead, you have either a stretch goal, a budget, or a list of things you wish would happen.

The mention of a specific company above – Enron – is an example of a striking pattern Rumelt follows throughout his book: he names guilty parties.  Other “guilty parties” identified in the midst of fascinating narratives include CEOs of Lehman Brothers, International Harvester, Ford Motor Company, DEC, Telecom Italia, and metal box manufacturer Crown Cork & Seal.

Individuals that are highlighted, in contrast, as examples of good strategy include titans from military history – General Norman Schwarzkopf, Admiral Nelson, Hannibal, and Hebrew shepherd boy David (in his confrontation with Goliath) – as well as industry figures such as Sam Walton, Steve Jobs, Intel’s Andy Grove, IBM’s Lou Gerstner, and a range of senior managers at Cisco.  The tales recounted are in many ways already well known, but in each case Rumelt draws out surprising insight.  (Rumelt’s extended account of Hannibal’s victory over the Roman army at Cannae in 216 BC indicates many unexpected implications.)

Why do so many companies, government departments, and individuals have “bad strategy”?  Rumelt identifies four underlying reasons:

  • A psychological unwillingness or inability to make choices (this can be linked with an organisation being too decentralised)
  • A growing tide of “template style” strategic planning, which gives too much attention to vision, mission, and values, rather than to hard analysis of a company’s situation
  • An over-emphasis on charismatic qualities in leaders
  • The superficially appealing “positive thinking” movement.

Rumelt’s treatment of “positive thinking” is particularly illuminating – especially for a reader like me who harbours many sympathies for the idea that it’s important to maintain a positive, upbeat attitude.  Rumelt traces the evolution of this idea over more than a century:

This fascination with positive thinking, and its deep connection to inspirational and spiritual thought, was invented around 150 years ago in New England as a mutation of Protestant Christian individualism…

The amazing thing about [the ideology of positive thinking] is that it is always presented as if it were new!  And no matter how many times the same ideas are repeated, they are received by many listeners with fresh nods of affirmation.  These ritual recitations obviously tap into a deep human capacity to believe that intensely focused desire is magically rewarded…

I do not know whether meditation and other inward journeys perfect the human soul.  But I do know that believing … that by thinking only of success you can become a success, is a form of psychosis and cannot be recommended as an approach to management or strategy.  All [good] analysis starts with the consideration of what might happen, including unwelcome events.  I would not care to fly in an aircraft designed by people who focused only on an image of a flying machine and never considered modes of failure…

The doctrine that one can impose one’s visions and desires on the world by thought alone retains a powerful appeal to many people.  Its acceptance displaces critical thinking and good strategy.

As well as pointing out flaws in bad strategy, Rumelt provides wide-ranging clear advice on what good strategy contains:

A good strategy works by harnessing power and applying it where it will have the greatest effect.  In the short term, this may mean attacking a problem or rival with adroit combinations of policy, actions, and resources.  In the longer term, it may involve cleverly using policies or resource commitments to develop capabilities that will be of value in future contests.  In either case, a “good strategy” is an approach that magnifies the effectiveness of actions by finding and using sources of power…

Strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort…

A much more effective way to compete is the discovery of hidden power in the situation.

Later chapters amplify these ideas by providing many illuminating suggestions for how to build an effective strategy.  Topics covered include proximate objectives, chain-link systems, design, focus (“pivot points”), competitive advantage, anticipation and exploitation of industry trends (“dynamics”), and inertia and entropy.  Here are just a few illustrative snippets from these later chapters:

In building sustained strategic advantage, talented leaders seek to create constellations of activities that are chain-linked.  This adds extra effectiveness to the strategy and makes competitive imitation difficult…

Many effective strategies are more designs than decisions – are more constructed than chosen..

When faced with a corporate success story, many people ask, “How much of the success was skill and how much was luck?”  The saga of Cisco Systems vividly illustrates that the mix of forces is richer than just skill and luck.  Absent the powerful waves of change sweeping through computing and telecommunications, Cisco would have remained a small niche player.  Cisco’s managers and technologists were very skillful at identifying and exploiting these waves of change…

An organisation’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia.  In such a situation, organisational renewal becomes a priority.  Transforming a complex organisation is an intensely strategic challenge.  Leaders must diagnose the causes and effects of entropy and inertia, create a sensible guiding policy for effecting change, and design a set of coherent actions designed to alter routines, culture, and the structure of power and influence.

You can read more on the book’s website.

The book is addressed to people working within organisations, with responsibility for strategy in these organisations.  However, most of the advice is highly valid for individuals too.  Are the big personal goals we set ourselves merely “wishful thinking”, or are they grounded in a real analysis of our own personal situation?  Do they properly take account of our personal trends, inertia, entropy, and sources of competitive power?

31 December 2009

The constant economy

Filed under: books, Economics, green, leadership, market failure, vision — David Wood @ 2:54 pm

I’ve had mixed thoughts when reading Zac Goldsmith‘s “The constant economy: how to create a stable society” over the last few days.  It makes some useful contributions to an ultra-important debate.  However, the recommendations it makes frequently strike me as impractical.

Zac has been one of the advisors to the UK Conserative Party on environmental matters.  He is now the Conservative prospective parliamentary candidate for the Richmond Park constituency, which is adjacent to the one I live in.  It’s possible that his views on environmental matters will have a significant influence over the next UK government.

Some of the examples in the book made me think, “Gosh, I didn’t realise things were so bad; things can’t be left to go on like this“.  I had these thoughts when reading, for example, about the huge decline in fishing stocks worldwide, and about the enormous swathe of plastic waste in large parts of the Pacific Ocean.

Other parts, however, made me think, “Hang on, there’s another side to this story” – for example, for some of the incidents described in the chapter about the Precautionary Principle, and for the section about nuclear power.

This book is like a manifesto.  Mixed in with real-world anecdotes and analysis, each chapter contains a list of “Voter Demand Box” items.  For example, here’s the list from the chapter on “A zero waste economy”:

‘Take back’

People should have a legal ‘take back’ right enshrined in consumer law.  This would give everyone the right to take any packaging waste back to the shop it was bought from, and impose an obligation on retailers to recycle that waste once it was received.

Paying people to recycle

No more landfill

Using the right materials

Built to last

Government buying power

Incineration, a last resort

And from the chapter “An energy revolution”:

Find out the truth about oil

A cross-party taskforce should be established immediately to draw up a risk assessment.  It should not invite the traditional fuel industry to take part, as it would effectively be studying a risk scenario that says their maths is incorrect.  The taskforce should be required to publically report its findings within a year.

At the same time, we should also expect our government to put pressure on the UN or International Energy Authority to undertake a review of the world’s oil reserves.  If the economic models of every nation on earth are based on the assumption of everlasting oil supplies, it is reasonable that they should know how much oil actually exists.

Capture the heat

Reward the pioneers

Break the rules

Invest!

We urgently need a renewable energy fund to provide substantial grants for the research and development of radical new clean energy technologies.  From wave power to clean coal technology, potential solutions remain in the pipeline due to a lack of investment.  Government should provide that investment.  Diverting money that would otherwise be spent subsidizing fossil fuels or the nuclear energy could provide billions of pounds for research, support and, crucially, for upgrading the national grid.

Stop paying the polluters

Whilst there are elements of good sense to all (or nearly all) of these recommendations, this set of items needs a lot more work:

  • The items are uncosted, and generally open-ended;
  • It’s often unclear how the recommendations differ from policies and processes that are already in place;
  • There’s no prioritisation (everything is equally important);
  • There’s no roadmap (everything is equally urgent).

Despite this weakness, this book still has merit as a good conversation starter.

The book’s introduction provides a higher-level picture.  Here’s the opening paragraph:

The world is in trouble.  As human numbers expand and the resource-hungry economy grows, the natural environment is suffering an unprecedented assault.  Forests are shrinking, species are disappearing, oceans are emptying, land is turning to desert.  The climate itself is being thrown out of balance.  In just a few generations, we have created the biggest threat to the natural world since humanity evolved.  Unless something radical is done now, the world in which our children grow up will be less beautiful, less bountiful, more polluted and more uncertain than ever before.

The top-level recommendations in the book are, in effect:

1.) The need for first-class political leadership on environmental issues

We need political leaders who can free themselves from the constraints of pressure groups, whose vision extends far beyond the next election, and who can motivate strong constructive action (rather than just words):

Politicians in Britain, as elsewhere, can see the rising tide of concern over green issues, and in many cases know what solutions are required.  The environment has never been so high on the political agenda…

Yet few politicians are prepared to take the action needed.  Nothing happens.  Time ticks by, the situation becomes more urgent – and government does nothing.  Why?

Politicians are terrified of acting because they believe that tackling the looming crisis will involve restricting the electorates choices.  They believe that saving the planet means destroying the economy, and that neither business nor voters will stand for it.  They fear the headlines of a hostile media.  They fear, ultimately, for their jobs.  It always seems easier to do nothing – and to let the situation drift and hope that someone else takes the risk…

2.) The need to adapt market economics to properly respect environmental costs

Our defining challenge is to marry the environment with the market.  In other words, we need to reform those elements of our economy that encourage us to damage, rather than nurture, the natural environment.

The great strength of the market is its unique ability to meet the economic needs of citizens.  Its weakness is that it is blind to the value of the environment…

Other than nature itself, the market is also the most powerful force for change that we have.  The challenge we fact is to find ways to price the environment into our accounting system: to do business as if the earth mattered, and to make it matter not just as a moral choice but as a commercial imperative

Note: this is hardly a new message.  For one, Jonathon Porritt covered similar ground in his 2005 book (with a new edition in 2007), “Capitalism as if the world matters“.  However, Zac has a significantly simpler writing style, so his ideas may reach a wider audience – whereas I confess I twice got bogged down in the early stages of Jonathon’s book, and set it aside without reading further.

3.) The need for better use of market-based instruments such as taxation

We need to change the boundaries within which the market functions, by using well-targeted regulation.

Taxation is the best mechanism for pricing pollution and the use of scarce resources.  If tax shifts emphasis from good things like employment to bad things like pollution, companies will necessarily begin designing waste and pollution out of the way they operate…

The other major tool in the policymakers’ kit is trading.  Carbon emissions trading is a good example of a market-based approach which attaches a value to carbon emissions and ensures that buyers and sellers are exposed to this price.  As long as the price is high enough to influence decisions, it can work…

Note: it’s clear that the existing carbon trading scheme has lots of problems (as Zac describes, later in the book).  That’s a reason to push on quickly to a more effective replacement.

There’s also a latent worry over Zac’s confident recommendation:

It’s crucial that wherever money is raised on the back of taxing ‘bad’ activities is used to subsidise desirable activities.  For example, if a new tax is imposed on the dirtiest cars, it needs to be matched, pound for pound, on reductions in the price of the cleanest cars.

The complication is that once the higher taxation drives down usage of (in this example) the dirtiest cars, the amount of tax earned by the government will be reduced, and the “pound for pound” balance will break.  It’s another example of how the ideas in the book lack detailed financial planning.  Presumably Zac intends these details to be provided at a later stage.

4.) We need a fresh approach to regulation

Direct controls force polluting industries to improve their performance, and can eliminate products or practices that are particularly hazardous…  Markets without regulation would not have delivered unleaded petrol, for instance, or catalytic converters.  Without regulations requiring smokeless fuel, London’s smogs would still be with us.

This approach, however, needs to be effective.  With some products and processes, the regulatory bar needs to be raised internationally to avoid companies chasing the lowest standards globally.  We also need a change in our regulatory approach, away from an obsessive policing of processes towards a focus on outcomes.  If the regulatory system is too prescriptive, there is no room for innovation, and no real prospect of higher environmental standards…

5.) We need to measure what matters

Almost every nation on earth uses gross domestic product (GDP) to measure its economic growth.  The trouble is, expressed as a monetary value, GDP simply measures economic transactions, indiscrimately.  It cannot tell the difference between useful transactions and damaging ones…

Chopping down a rainforest and turning it into toilet paper increases GDP.  If crime escalates, the resulting investments in prisons and private security will add to GDP and be measured as ‘growth’.  When the Exxon Valdez oil tanker ran aground and spilt its vast load of oil on the pristine Alaskan shoreline, US GDP actually soared as legal work, media coverage and clean-up costs were all added to the national accounts…

US Senator Robert Kennedy said something similar:  “GDP does not allow for the health of our children, the quality of their education, or the joy of their play”, he said.  “It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.”

But the pursuit of economic growth, as measured by GDP, has been the overriding policy for decades, with the effect that the consequences have often been perverse…

A number of organisations have tried to assemble a new tool for measuring progress.  But the result is invariably a toolkit that is monstrous in its complexity and too impractical for any government to use.  A neater approach would be for the government to establish a wholly independent Progress Commission, staffed by experts from a wide variety of fields: economists, environmentalists, statisticians, academics, etc…

Whichever indicators are selected, the results would be handed each year to Parliament and the media.  The government would be required to respond…

Note: again, the suggested practical follow-up seems weaker than the analysis of the problem itself.  The economy has been ultra-optimised to pursue growth in GDP.  That’s how businesses are set up.  That’s going to prove very difficult to change.  Attention to non-financial matters is very likely to be squeezed.

However, it’s surely good to have the underlying problem highlighted once again.  Robert Kennedy’s stirring words ring as clearly today, as when they were first spoken: March 1968.

Let’s keep these words in mind, until we are confident that society is set up to pursue what matters, rather than simply to boost GDP.

Further reading: The book has its own website, with a blog attached.

24 December 2009

How markets fail – part two

Filed under: books, Economics, market failure, regulation — David Wood @ 2:46 am

Free markets have been a tremendous force for progress.  However, they need oversight and regulation.  Lack of appreciation of this point is the fundamental cause of the Great Crunch that the world financial systems recently experienced.  That’s the essential message of the important book by the New Yorker journalist John Cassidy (pictured right), “How markets fail: the logic of economic calamities“.

I call this book “important” because it contains a sweeping but compelling survey of a notion Cassidy dubs “Utopian economics”, before providing layer after layer of decisive critique of that notion.  As such, the book provides a very useful (if occasionally drawn out) guide to the history of economic thinking, covering Adam Smith, Friedrich Hayek, Milton Friedman, John Maynard Keynes, Arthur Pigou, Hyman Minsky, and many, many others.

The key theme in the book is that markets do fail from time to time, potentially in disastrous ways, and that some element of government oversight and intervention is both critical and necessary, to avoid calamity.  This theme is hardly new, but many people resist it, and the book has the merit of marshalling the arguments more comprehensively than I have seen elsewhere.

As Cassidy describes it, “utopian economics” is the widespread view that the self-interest of individuals and agencies, allowed to express itself via a free market economy, will inevitably produce results that are good for the whole economy.  The book starts with eight chapters that sympathetically outline the history of thinking about utopian economics.  Along the way, he regularly points out instances when free market champions nevertheless described cases when government intervention and control was required.  For example, referring to Adam Smith, Cassidy writes:

Smith and his successors … believed that the government had a duty to protect the public from financial swindles and speculative panics, which were both common in 18th and 19th century Britain…

To prevent a recurrence of credit busts, Smith advocated preventing banks from issuing notes to speculative lenders.  “Such regulations may, no doubt, be considered as in some respects a violation of natural liberty”, he wrote.  “But these exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments…  The obligation of building party walls [between adjacent houses], in order to prevent the communication of a fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

The book identifies long-time Federal Reserve chairman Alan Greenspan as one of the villains of the Great Crunch.  Near the beginning of the book, Cassidy quotes a reply given by Greenspan to the question “Were you wrong” asked of him in October 2008 by the US House Committee on Oversight and Government Reform:

“I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms…”

Greenspan was far from alone in his belief in the self-correcting power of economies in which self-interest is allowed to flourish.  There were many reasons for people to hold that belief.  It appeared to be justified both theoretically and empirically.  As Greenspan remarked,

“I had been going for forty years, or more, with very considerable evidence that it was working exceptionally well.”

Cassidy devotes another eight chapters to reviewing the history of criticisms of utopian economics.  This part of the book is entitled “Reality-based economics“.  It is full of fascinating and enlightening material, covering topics such as:

  • game theory (“the prisoners dilemma”),
  • behavioural economics (pioneered by Daniel Kahneman and Amos Tversky) – including disaster myopia,
  • problems of spillovers and externalities (such as pollution) – which can only be fully addressed by centralised collective action,
  • drawbacks of hidden information and the failure of “price signalling”,
  • loss of competiveness when monopoly conditions are approached,
  • flaws in banking risk management policies (which drastically under-estimated the consequences of larger deviations from “business as usual”),
  • problems with asymmetric bonus structure,
  • and the perverse psychology of investment bubbles.

In summary, Cassidy lists four “illusions” of utopian economics:

  1. The illusion of harmony: that free markets always generate good outcomes;
  2. The illusion of stability: that free market economy is sturdy;
  3. The illusion of predictability: that distribution of returns can be foreseen;
  4. The illusion of Homo Economicus: that individuals are rational and act on perfect information.

The common theme of this section is that of “rational irrationality”: circumstances in which it is rational for people to choose courses of action that end up producing a bad outcome for society as a whole.  You can read more about “rational irrationality” in a recent online New Yorker article of the same name, written by Cassidy:

A number of explanations have been proposed for the great boom and bust, most of which focus on greed, overconfidence, and downright stupidity on the part of mortgage lenders, investment bankers, and Wall Street C.E.O.s. According to a common narrative, we have lived through a textbook instance of the madness of crowds. If this were all there was to it, we could rest more comfortably: greed can be controlled, with some difficulty, admittedly; overconfidence gets punctured; even stupid people can be educated. Unfortunately, the real causes of the crisis are much scarier and less amenable to reform: they have to do with the inner logic of an economy like ours. The root problem is what might be termed “rational irrationality”—behavior that, on the individual level, is perfectly reasonable but that, when aggregated in the marketplace, produces calamity.

Consider the [lending] freeze that started in August of 2007. Each bank was adopting a prudent course by turning away questionable borrowers and holding on to its capital. But the results were mutually ruinous: once credit stopped flowing, many financial firms—the banks included—were forced to sell off assets in order to raise cash. This round of selling caused stocks, bonds, and other assets to decline in value, which generated a new round of losses.

A similar feedback loop was at work during the boom stage of the cycle, when many mortgage companies extended home loans to low- and middle-income applicants who couldn’t afford to repay them. In hindsight, that looks like reckless lending. It didn’t at the time. In most cases, lenders had no intention of holding on to the mortgages they issued. After taking a generous fee for originating the loans, they planned to sell them to Wall Street banks, such as Merrill Lynch and Goldman Sachs, which were in the business of pooling mortgages and using the monthly payments they generated to issue mortgage bonds. When a borrower whose home loan has been “securitized” in this way defaults on his payments, it is the buyer of the mortgage bond who suffers a loss, not the issuer of the mortgage.

This was the climate that produced business successes like New Century Financial Corporation, of Orange County, which originated $51.6 billion in subprime mortgages in 2006, making it the second-largest subprime lender in the United States…

The book then provides a seven chapter blow-by-blow run through of the events of the Great Crunch itself.  Much of this material is familiar from recent news coverage and from other books, but the context provided by the prior discussion of utopian economics and reality-based economics provides new insight into the individual tosses and turns of the unfolding crisis.  It becomes clear that the roots of the crunch go back much further than the “subprime mortgage crisis”.

The more worrying conclusion is that many of the conditions responsible for the Great Crunch remain in place:

In the world of utopian economics, the latest crisis of capitalism is always a blip.

As memories of September 2008 fade, revisionism and disaster myopia will become increasingly common.  Many will say that the Great Crunch wasn’t so bad, downplaying the government intervention that prevented a much, much worse outcome.  Incentives for excessive risk-taking will revive, and so will the lobbying power of banks and other financial firms.  If these special interests succeed in blocking meaningful reform, we could well end up with the worst of all worlds.

As Cassidy explains:

It won’t be as easy to deal with the bouts of instability to which our financial system is prone. But the first step is simply to recognize that they aren’t aberrations; they are the inevitable result of individuals going about their normal business in a relatively unfettered marketplace. Our system of oversight fails to account for how sensible individual choices can add up to collective disaster. Rather than blaming the pedestrians for swarming the footway, governments need to reinforce the foundations of the structure, by installing more stabilizers. “Our system failed in basic fundamental ways,” Treasury Secretary Timothy Geithner acknowledged earlier this year. “To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.”

Despite this radical statement of intent, serious doubts remain over whether the Obama Administration’s proposed regulatory overhaul goes far enough in dealing with the problem of rational irrationality…

In his final chapter, addressing the question “What is to be done?“, Cassidy advocates a few specific proposals, ranging from the specific to the over-arching:

  • Banks that create and distribute mortgage securities should be forced to keep some of them on their books (perhaps as much as a fifth) – to make them monitor more closely the types of loan they purchase;
  • Mortgage brokers and mortgage lenders should be regulated at the federal level;
  • The government should outlaw stated-income loans, and enforce the existing fraud laws for mortgage applicants, which make it a crime to misrepresent your personal finances;
  • Wall Street needs taming … the more systemic risk an institution poses, the more tightly it should be controlled;
  • The Federal Reserve should set rules for Wall Street compensation and bonuses that all firms would have to follow … the aim must be to prevent rationally irrational behaviour.  Unless some restrictions are placed on people’s actions, they will inevitably revert to it.

Footnote: For more by John Cassidy, see his online blog.

16 December 2009

How markets fail – part one

Filed under: books, Economics, market failure — David Wood @ 1:45 am

I’m currently enjoying reading the new book by John Cassidy: “How markets fail: the logic of economic calamities“.

I was led to this book by the review of it in the Economist:

In “How Markets Fail”, Mr Cassidy, a British writer for the New Yorker, recounts the story of America’s housing boom and its devastating bust. It is more than just an account of the failures of regulators and the self-deception of bankers and homebuyers, although these are well covered. For Mr Cassidy, the deeper roots of the crisis lie in the enduring appeal of an idea: that society is always best served when individuals are left to pursue their self-interest in free markets. He calls this “Utopian economics”.

This approach turns much of the book into a very good history of economic thought…

Having set out the tenets of Utopian economics, the author then pokes holes in them. Individual self interest does not always benefit society, he argues, and draws on a deep pool of research (what he calls “reality-based economics”) to support his case…

I’m half-way through the book.  It’s a bit like a who-done-it page-turner: each additional section introduces new twists and turns.  I can hardly wait to find out what happens next 😉

But in the meantime, in parallel, I’ve got a minor market failure of my own to explore.  I’ll be grateful for insight that any readers can provide.

As well as being a fan of books, I’m a fan of audio books.  I’ve been downloading audio books from Audible.com for at least four years.  They’ve got a good selection.  However, I’m often surprised to notice that various books are missing from their catalogue.  I think to myself: such-and-such a book is really popular: why don’t Audible provide it?

The market failure I mentioned is that Audible frequently do have these books in audio format, but if I ever find them on their site, and click on them to buy them, they for some reason display a most irritating message:

“We are not authorized to sell this item to your geographic location”

It appears that the UI of Audible tries to hide such books from people, like myself, who are based in the UK.  (I’ve heard similar reports from people who are based in Australia.)  But sometimes there are glitches, and some of these books can be glimpsed.

For example, the front page of their website currently promotes an audio book that caught my attention immediately:

The Strangest Man: The Hidden Life of Paul Dirac, Mystic of the Atom

Paul Dirac was among the great scientific geniuses of the modern age. One of the discoverers of quantum mechanics, the most revolutionary theory of the past century, his contributions had a unique insight, eloquence, clarity, and mathematical power. His prediction of antimatter was one of the greatest triumphs in the history of physics.

One of Einstein’s most admired colleagues, Dirac was in 1933 the youngest theoretician ever to win the Nobel Prize in physics. Dirac’s personality is legendary…

Back in my days at Cambridge, I learned a lot about Dirac – both from studying mathematics, and from researching the philosophical implications of quantum mechanics.  Some of my lecturers had been taught, some decades earlier, by Dirac himself.  He’s a fascinating character.  I’d never come across a book about Dirac before.  So I jumped at the chance to download this audio book – until I hit the message

“We are not authorized to sell this item to your geographic location”

It doesn’t help me if I log out of the international website, Audible.com, and log into the UK-specific site Audible.co.uk instead.  I’ve learned from bitter experience that books which are “not authorized” for sale from one site fail likewise to show up on the other one.  Nor can I find this audio book on any other site.

What’s going on here? There are at least some customers in the UK who are prepared to spend money to purchase these audio books.  What’s the rationale for a restriction?  Why can’t we willing customers find a market where our “demand” can be balanced by “supply” of these audio books?  (Is it that the owner of the book is somehow reserving the opportunity to sell the audio book, in the UK, in due course, at a higher price than Audible are presently prepared to charge?)

Of course, this particular case of apparent market failure pales in comparison to the failures reviewed in Cassidy’s book – calamitous outcomes such as environmental degradation, lack of development of much-needed medicines that would primarily benefit poorer parts of the human population, and the recent global financial crisis.  My reason for writing about this case is that it is so annoying when it happens!

29 September 2008

Market failure and mobile operating systems

Filed under: Economics, fragmentation, leadership, market failure — David Wood @ 9:57 pm

In seeking to talk about economics, and about market failure, I’m moving way outside my depth. There seem to be so many different viewpoints about economics, each appearing reasonably plausible to me (when I read them in isolation), yet all contradicting each other. It’s a tough subject! What one writer sees as a market failure, another writer sees instead as a failure of individual actors within that market – and so on.

However, one of my correspondents has made a series of thought-provoking comments about market failure in the particular field of mobile operating systems. I believe these comments are sufficiently unusual and also sufficiently intriguing, to deserve consideration by a wider audience – despite my reticence to broach the subject of economics. The comments arose in the responses to an earlier posting of mine, “De-fragmenting the mobile operating system space“. To quote from these responses:

Currently, mobile developers withstand very high development costs due to a very fragmented mobile ecosystem, meanwhile mobile OSes enjoy a much lower developing cost than they would if they had to built compatible OSes between versions: therefore, a de-fragmentation process would move developing costs from mobile developers to mobile OS developers, that is, mobile OS companies/foundations would have to internalize those costs.

But developing an OS with full source or binary compatibility between versions is an order of magnitude more expensive than building one with broken compatibility, and it gets worse with time and versions. Moreover, building a de-fragmented mobile OS requires committing considerable resources (people, money, time) in the present, sunk costs that must have positive expected returns in the future (at least to cover developing costs and money opportunity costs).

Will foundations/consortiums (Symbian, LiMo, OHA/Android), given their non-profit nature, carry these investments in the present to obtain stable software platforms in the future? As Adam Smith wrote, displaying good will and hope is not enough: mobile foundations/consortiums/companies committing resources in the present must charge higher prices in their future and profit handsomely from their risky investments, otherwise the effort will stop…

To paraphrase:

  • Economic incentives on individual mobile operating systems will lead these operating systems to diverge from each other;
  • This divergence will mean that application developers (and providers of middleware, etc) will suffer greater difficulties, because of having to spread their efforts across larger numbers of diverse mobile operating systems;
  • As things stand, no one who is in a position to actually do something to reduce the divergence of mobile operating systems, has a sufficient financial incentive to make that happen;
  • So we can actually expect things to get worse for application developers, rather than better.

(I’m over-simplifying what my correspondent actually says; see the original for the full argument.)

Tentatively, I have the following answers:

  • I believe that things will actually get better for application developers, rather than worse;
  • It’s my experience that major players in the mobile phone industry can, on occasion, take actions based on strategy rather than business case;
  • This requires strong self-discipline on the part of these companies, but it’s not unknown;
  • Action on strategic grounds becomes more likely, the more clearly the argument is made that the actions that make sense in the short-term are actually detrimental to longer term interests;
  • The other key factor in this decision is whether the various actors can have a high degree of confidence in at least the medium-term viability of the software system they’re being asked to collectively support.

So, in line with what I’ve argued here, what we need to do is to keep on pushing (in creative and diverse ways) the merits of the case in favour of de-fragmenting mobile operating systems – and to keep on highlighting the positive features of the mobile operating systems (such as Symbian OS) that are most likely to enable at least medium-term success for the whole industry.

Incidentally, one big contribution that the shareholders and customers of Symbian are taking, towards that end, is to agree to standardise on S60 as the UI framework for the future. They’ve taken that decision, even though both UIQ and MOAP(S) have much to commend them as alternative UI frameworks on top of Symbian OS. They’ve taken that decision for the greater common good. New phones based on the UIQ and MOAP(S) UI frameworks will continue to appear for a while, during a transitional period, but the Symbian Foundation platform software is standardising on the S60 framework. Elements of both UIQ and MOAP(S) will be available inside the Symbian Foundation platform, but the resulting system will be compatible with S60, not UIQ or MOAP(S). That’s a decision that will bring some pain, but the shareholders and customers have been able to support it because:

  • S60 is now (in contrast to the earlier days) sufficiently flexible and mature, to support the kinds of user experience which previously were available only via UIQ or MOAP(S);
  • Indeed, S60 now has flexibility to support new types of UI experiences, whilst maintaining common underlying APIs;
  • Distribution of S60 will pass out of the hands of Nokia, into the hands of the independent Symbian Foundation.

I also believe that the disciplines of binary compatibility that have been built up in Symbian, over several years, are significantly reducing the difficulties faced by developers of add-ons and plug-ins for Symbian software. Because of this discipline, it now costs us less to maintain compatibility across different versions of our software. It’s true that some practical issues remain here, with surprising incompatibilities still occasionally arising in parts of the software stack on Symbian-powered phones other than Symbian OS itself. But progress is being made – and the leading nature of the Symbian platform will become clearer and clearer.

To finish, I’ll give my response to one more comment:

Samsung is gaining market share and producing S60 devices. Let’s suppose that Samsung starts snatching portions of market share from Nokia, do you really think anyone believes that Nokia would refrain from intentionally breaking compatibility to derail Samsung, if that would be necessary?

I can see that there might be some temptation towards such a behaviour, inside Nokia. But I don’t see that the outcome is inevitable. Nokia would have to weigh up various possible scenarios:

  • Symbian Foundation quality assurance tests will notice the compatibility breaks, and will refuse to give Symbian accreditation to this changed software;
  • The other licensees could create their own fork of the software (which would have official endorsement from the Symbian Foundation) and build up a lot of momentum behind it.

Instead, Nokia – like all users of Symbian Foundation software – should be inclined to seek differentiation by providing their own unique services on top of or alongside Symbian platform software rather than by illicitly modifying the platform software itself. That’s a far better way to deploy skilled software engineers.

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