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Archive for June, 2010

I think James Kwak makes some great points on applying behavioural economics to the current crisis. We must not let that approach excuse the worst of corporate excesses:

First, it doesn’t do to say that ordinary people are irrational in making ordinary everyday decisions, and therefore we have to accept that companies will be irrational in making big decisions — like, say, whether to drill holes in the Earth’s crust a mile under the ocean. As they say, people make big bucks to make these decisions, and we expect them to use a little more reasoning than the kind we evolved on the African grasslands…

The problem is that there is a systematic bias within these companies against certain assessments and in favor of others. That is, the guy who shouts, “Danger! Danger!” will be ignored (or fired), and the guy who says, “Everything’s fine, the model says disaster can strike only happen once every hundred million years” will get the promotion — because the people in charge make more money listening to the latter guy. This is why banks don’t accidentally hold too much capital…

On top of that, it isn’t even true, as a matter of fact, that the companies involved failed to estimate the risk of disaster…

This isn’t inability to quantify the likelihood of unlikely events; this is willfully looking the other way.

Thaler also wants to make the point that regulators are incapable of understanding the complex technologies involved, whether in finance or in oil exploration. But while this is undoubtedly true to an extent, it also misses the main point.

The most frightening part of Lustgarten’s interview has nothing to do with BP. It’s about the use of hydraulic fracturing (or “fracking,” apparently with no intended reference to Battlestar Galactica) to drill for natural gas. In fracking, a mixture of water and chemicals is injected underground under extremely high pressure to break up rock formations and release trapped natural gas bubbles. According to Lustgarten, there is no scientific understanding of what happens to those chemicals — many of which are toxic — and whether they end up in our drinking water. Yet the Energy Policy Act of 2005 forbids the EPA from regulating fracking under the Safe Drinking Water Act — by simply stipulating, without proof, that the chemicals are removed after being used, and therefore there is nothing to regulate.

If this reminds you of the Commodity Futures Modernization Act, it probably should…

This is what happens when you have a weak regulatory agency crippled by pressure from above (and political appointees who are opposed to regulation) and a private sector that simply does whatever it pleases in pursuit of profits. It’s not individual irrationality; it’s power, pure and simple. Free market economics has already whitewashed enough egregious corporate behavior. Let’s not repeat that mistake with behavioral economics.

Combining behaviorial economics with power analysis would be an excellent step towards making it a form of real-world economics. Power analysis would help provide some of the “why?”, not as in “why do people make certain decisions,” but “why are certain people in position to make those decisions?” The preferences that are behind decision-making are not merely exogenous either. I think behavioral economists understand these concepts at an intuitive level, but I don’t think they sufficiently incorporate them into their formal models.

 

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Douglas Rushkoff understands the bigger picture implications of how the Obama administration handles the BP oil spill. This, of course, relates to the problem of corporate personhood stemming from limited liability, and opens up space for us to think about alternative approaches to the firm in our society.

In the latest round of empty fist waving by Obama and apologetic posturing by BP, the President raised the issue that while BP has spent a few tens of millions on the cleanup effort and damages so far, the company’s annual dividend to shareholders is about $10.5 billion. The company is acting as if all its resources are being diverted to address this spill, when – financially anyway – this is clearly not the case. So as a way of changing the widespread perception that it is underspending on the crisis, BP suggested it might “suspend” – meaning pay later, not never – its quarterly dividend. A gesture of goodwill.

What a brilliant move. By suggesting they might suspend their dividend, BP initiated widespread panic about what would happen if that dividend were compromised in any real way. All of a sudden, business newspapers and cable channels begin calculating just what this means for shareholders – those people and institutions who park their money in an oil company and expect returns. How many pension funds have invested in BP? And how many retirees in England have made the oil a company a central part of their retirement portfolios, and are depending on these dividends to maintain their quality of life?

So now, instead of an transnational oil company against the American gulf fishermen, beach workers, and ocean itself, it’s the interests of presumably innocent British pensioners against American workers. We’re supposed to limit BP’s liability for wrecking our lives and our planet, because of the impact that appropriate penalties will have on those collecting dividends off the oil company’s crimes against us. This means bailing out the company by using government funds to pay for its spill.

[Photo design by J-cal76 at LogoMyWay, ht:dfr]

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Local Producers

Unity Gardens Inc.

Better known for bygone things, as the former home of Studebaker and now the former home of the College Football Hall of Fame, the city of South Bend, IN is looking towards the future in food. The efforts of local activists have recently put the city on the cutting edge of local, urban, and sustainable food movements.

The Unity Gardens, Inc. are hoping to build a community with fresh, locally sourced food widely available to all who need it. Founded just two years ago, the gardens promote neighborhood and community gardens throughout the city, on any open space that can be found including vacant lots and public spaces. You can follow the Unity Gardens on their blog, which claims that the Unity Gardens were founded to grow food and communities within a framework of sharing. As the motto states, “We are growing more than vegetables here!” Aside from providing food, they hope to bring together people from diverse backgrounds to build a stronger community and economy.

Closely related is South Bend’s Garden Farmers Market, which will be open in 2010 for the third summer in a row. There has been a growing popularity in farmers markets across the US in recent years, and this has been part of the reason the number of small scale farms has actually increased in 2009. The South Bend Market creates space for people to purchase food from and get to know their farmers. Knowing your farmer is one of the best ways to learn of the full impact of your decisions for the people who produce your food and the land it is produced on.

[This post is the fifth in a series that looks at six very different efforts to build a more sustainable food system in the United States. These efforts challenge us to think about food as not just a commodity, but more as a relationship with the Earth.]

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Re: Friday Links

Well, another blog “feature” goes in the dustbin today. I’ve decided I no longer have the energy to put together links every Friday, and I don’t know how much value the feature was adding. I honestly don’t know how Mark Thoma and others do it on a daily basis. I think I’ve been over-consuming information, so I’m trying to take a more measured approach to blogging, but that’s a topic for another day. Anyways, I have a post lined up for later that should be interesting and a little different. Happy Friday.

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Two years ago, I spent a semester studying in Uganda, two weeks of which were dedicated to studying grassroots development. We were exposed to several approaches- community-based advocacy, collective savings and loans arrangements, and grassroots skills and capacity building. With the exception of our visit to an AIDS advocacy group that had rendered a visit (and then funding) from Prince Charles at one point, most of these efforts revolved around internal resource pooling, rather than resource extraction through the political system.

While experiencing all of this, I was continuously trying to see how the Alinksy model of relational power building could apply in an LDC. For the unacquainted, Alinksy posited that there are two types of power- organized people and organized money. The only way for citizens to achieve results in the political space is to organize themselves around issues in their self-interest and demand accountability from their elected officials. At the time, my perception of this approach’s applicability in a less-developed context was blurred by the idea that in a poor country, there aren’t many resources to be extracted. If budgets are being supported by donors, then what crumbs are left over for collective action?

I hadn’t thought about this issue much since I left Uganda. However, this weekend, I was fortunate to encounter a pastor and community organizer from Rwanda at a social justice retreat at my church. John Rutsindintwarane, now secretary general of the Lutheran Church of Rwanda, spoke about his experiences applying the Alinksy model in his local parish. He learned the model after a chance encounter led him to a training led by PICO, an organization of faith-based community organizations on the West Coast. He took on the work of holding relational meetings with villagers in Mumeya, in Rwanda’s Eastern province. 22 villagers of all ages and genders were elected as an organizing committee, and within 4 months, had conducted 2,000 hours of one-on-one meetings.

They learned that the most pressing issue was the lack of a health center, and decided to build a health clinic. They began the construction themselves, but to complete the project they secured meetings with political figures, starting with the mayor, and slowly worked their way up the political food chain, eventually meeting with the Minister of Health. The relational nature of the organization provided the power to hold accountable politicians who might otherwise take advantage of diffuse interests and lack of information. The health clinic was built with the help of funding from the government, improving the lives of 17,000 local citizens, and now Fr. John is working with priests in a number of other parishes to train them in community organizing. Their organization is called Congregations Rebuilding Community in Rwanda.

My posts on this blog tend to operate at a much more abstract level, so forgive me for zooming out for a second- there is a broader economic lesson to be learned. While it’s unclear how scalable this approach is in an LDC, it is clear that there are resources to be had. For the last decade, the World Bank in particular has turned its focus to governance issues, which are most often relevant for a simple reason- weak institutions lead to wasted resources. A number of academic economists now pay lip service to the importance of strengthening civil society organizations to improve accountability. However, I’ve never seen this type of community organizing advocated. Maybe they don’t realize it, but when economists talk about institutions and civil society, it’s this type of community organizing that they’re ultimately calling for. Whether we’re talking about Rwanda, Washington DC, London, or even the US at large, there are resources to be had. There are also powerful forces and hidden incentives marshalling those resources to various interests. The best way for ordinary citizens to get their share is to create their own power by organizing. I now believe this is true in any context, and I’m grateful for having met Fr. John to learn from his experiences.

For more information about CRCR, visit their page on PICO’s website.

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Maxine Udall has a great post about Adam Smith and his belief in societal progress based on ethics. Here’s an excerpt:

Smith viewed society as progressing to greater “opulence” and more virtue. However, he recognized that moral sentiments are shaped by a society’s practices…[individuals] will over time shape norms and institutions, which in turn will cause moral sentiments to progress.

Or regress.

It is when I come to this part of Smith that the 18th century no longer brings comfort to me. I find myself asking…How does failure to hold investment bankers and rating agencies accountable affect the hard-wired sense of fairness and the moral sentiment of resentment that many of us feel? If BP is not held accountable, how will that trickle down and shape the moral sentiments of the citizenry? Will our inner impartial moral arbiter waiver as we confront decisions about how we should act toward our neighbor, our community, and our nation?

Adam Smith believed humanity (or at least England) was progressing in wealth and in ethics. To date, we have all tended to focus on the financial aspects of these crises in corporate judgment and management. I’m pretty sure Adam Smith would also have noticed that the potential for moral hazard extends far beyond the relatively unscathed main players. There will almost certainly be a moral trickle down that corrupts production and exchange at all levels of our society. An advanced, technologically complex nation that cannot or will not achieve the basics of accountability and restitution (aka justice) with financial and corporate entities that have harmed its citizenry deeply and lastingly is (I very much fear) evidence of the beginnings of a failed state. That the failure will be economic and moral, as well as political, is probably no coincidence.

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The dairy farmer

rawvolution

Organic Pastures Dairy Farm founder Mark McAfee invented and built North America’s first and only “mobile milk barn,” which allows dairy cows to graze and roam in pastures  without having to return to the barn for milking. This circumvents many of the problems associated with factory farming, for example there is no need for manure “lagoons” that contaminate water tables. And it provides milk that is completely organic and from grass fed cows.

But the family owned and operated farm goes beyond organic: they sell their milk raw. That is, the milk is not pasteurized. I am not going to get too much into the debate over raw vs. pasteurized milk, but there do seem to be many people claiming benefits to the immune system because the bacteria promote biodiversity in the intestines. And studies show that 90% of lactose intolerant people can drink raw milk. (If this debate interests you, read more here or here or let me know what you think.)

Even if  you want to try raw milk, however, state laws make it very difficult as it is illegal to sell it in most states. In some, it can only be sold if labeled as pet food. Of course there are ways to circumvent those laws; since you can drink milk from your own cows, some people buy “cow shares” and purchase raw milk from local farmers. But perhaps in an attempt to protect the consumers, lawmakers have actually made or more difficult to stay healthy.

[This post is the fourth in a series that looks at six very different efforts to build a more sustainable food system in the United States. These efforts challenge us to think about food as not just a commodity, but more as a relationship with the Earth.]

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