Very simple thoughts about the politics of crisis

I am not nearly good enough at macroeconomics (and probably not clever enough) to understand the economic crisis itself. Here is how I think about the politics of it.

The world contains a huge variety of human interactions. One simple way to classify them is: some are games of decreasing returns and some are games of increasing returns. Suppose many people can do more or less of something -- say, withdraw more or less money from a bank, or spend more or less time looking for work. In a game of decreasing returns, when other people do more of it, you will gain by doing less. In a game of increasing returns, when others do more, you will gain by doing more too.

Most ordinary economic activities are of decreasing returns. If many other people go into cheesemaking, the price of cheese will go down and you might wish to choose a different career. If Turkey is this year's cool holiday destination, then it's going to be expensive -- why not try Greece? Decreasing returns are self-equilibriating, like one of those toy men you can't push over. There is only one equilibrium, and this makes life cognitively easy. For example, prices will naturally guide you to optimal decisions, and prices will change only a little bit when underlying conditions change.

But there are some activities which are naturally of increasing returns. Starting a revolution, or fighting in a battle, is easier if everyone else is trying to do it simultaneously. If others take their money out of the bank, then you should beat them to it before the bank goes bust. Life in increasing returns land is hard, because there are multiple equilibria. If everyone else is doing it (whatever "it" is), so should you; if not, not. Getting it right takes not just individual effort, but also the ability to coordinate and communicate with your fellow players. That is especially important when one of the equilibria, such as a bank run, is definitely bad.

My explanation of increasing and decreasing returns. Equilibria are yellow blobs. Art is not my strong point.

It is, and should be, a great goal of economic policy to keep us in decreasing returns world as much as possible. But sometimes -- especially given modern banking, but also because intergroup conflict is a perennial possibility -- we will find ourselves in the other, scarier world. Being in that world, as I said, puts a premium on the ability to coordinate -- that is, to work together: to trust our leaders, and to find our fellow players predictable.

In decreasing returns world, nationality and culture don't matter; simpler mechanisms substitute for them. In increasing returns world, nations matter, because they are the central ways humans have of organizing themselves to act collectively. Culture matters because it is the medium by which we can share and harmonize our expectations with others. When we move into this world, suddenly it matters whether we are Germans, Greeks... or Europeans. That is why the dream of a borderless market, without a society behind it, is a utopia.

Voting

The blogosphere debates the rationality of voting. (As usual I am behind the curve here.) Andrew Gelman:

In swing states (or for close non-presidential elections), though, it’s a different story Aaron, Nate, and I have estimated the probability of your vote being decisive in a swing state as being in the range 1 in a million to 1 in 10 million. Low, but not zero, and Aaron, Noah, and I argue that it can be make sense to vote because of the social benefits that a voter might feel arise from his or her preferred candidate winning.

Phil Arena:

First, being pivotal to the outcome of your state is not the same as being pivotal to the outcome of a presidential election.

Kindred Winecoff:

Even still Arena is giving Gelman's argument more credit than it deserves. In fact, Gelman doesn't have an argument. He simply pretends as if there was a utility function out there such that it would make sense for people to vote at 1/10,000,000 odds (those are only the swing state voters, not the median or modal or otherwise typical voter). So far as I know no such utility function has ever been modeled or tested against peoples' actual subjective utilities, and Arena points out numerous analogous situations in which folks generally behave differently -- getting in a car crash, getting shot while on campus, etc. -- despite similar or better (worse?) odds.

Actually, David Myatt has a paper showing that, in a plausible model of voting, one's probability of pivotality is 1/N, where N is the number of voters, and that for some standard utility-based models of altruism, that should be enough to get you to vote (because you are providing a benefit to N people). Warning: the paper is not as easy to read as a blog post. As I understand it, David is not arguing that this kind of instrumental rationality does explain why people vote; he is arguing that it could explain it, and that therefore two critics of rational choice theory from the 1990s are mistaken.

Source: mociun.tumblr.com via jessica on Pinterest

I remember the 90s!

Relatedly, at ESA Tucson I saw Ulrike Malmendier present a field experiment - not currently available online - on why people vote, arguing that it is related to (1) social pressure and (2) the cost of lying. This seems a more hopeful approach than constructing game-theoretic arguments alone - though, NB, the paper combined data with theory to estimate parameters of a model, rather than just directly estimating vote probabilities.