Category Archives: economics

Trusting people and machines

Trust is fundamental to human activities. How is it changing?

Would you trust Sophia, a robot that is a citizen of Saudi Arabia?

On a day-to-day basis, people put a lot of trust in others. As I walk down a suburban street, I trust that a driver will follow the curve of the road rather than drive straight into me. The driver trusts the engineers who designed the car that it will not explode, at least not on purpose. Buying an aspirin is premised on trusting the chemists and manufacturers that produced the drug.

            When trust is betrayed, it is a major issue. When, last year in Australia, a few needles were discovered in strawberries and other fruit, it was national news. People normally assume that fruit purchased from a shop has not been tampered with.

            Paedophilia in the churches was covered up for decades. When it was finally exposed, it destroyed a lot of trust in church leadership and the church as an institution.

            Scientific knowledge is based on observation, experiment and theorising, but also relies heavily on trust between scientists, who need to rely on each other to report their findings truthfully. This helps explain the enormous condemnation of scientific fraud, when scientists manipulate or fake their results.

            In certain areas, public trust has plummeted in recent decades: trust in public institutions including government, corporations and the mass media. Opinion polls show large declines. In Australia, trust in financial institutions had been dropping due to scandals, and that was before the royal commission revealed widespread corruption. When people can’t trust their financial advisers, what should they do?

Public trust in Greek institutions has plummeted.

            In order to ensure fairness and good practice, governments set up watchdog bodies such as ombudsmen, environmental protection authorities, anti-corruption commissions and auditor-generals. One of the casualties of the banking royal commission has been the credibility of financial watchdogs such as the Australian Securities & Investment Commission (ASIC). Rather than sniffing out bad practice, they were complacent. Whistleblowers reported problems, but ASIC ignored them. The message is that members of the public cannot rely on watchdog bodies to do their job.

Who can you trust?

Rachel Botsman has written an insightful and engaging book titled Who Can You Trust? She argues that in human history there have been three types of trust.

            First was local trust, based on personal experience in small communities. If someone you know helps, or fails to help, in an hour of need, you can anticipate the same thing in the future. Local trust is still relevant today, in families and friendships. People learn who and when to trust through direct experience.

            Next came institutional trust, in churches, militaries, governments, and professions such as medicine and engineering. People trusted those with greater authority to do the right thing. In the 1950s, high percentages of people in countries such as the US said they had a great deal of trust in their political leaders. However, institutional trust has taken a battering in recent decades.

“So why is trust in so many elite institutions collapsing at the same time? There are three key, somewhat overlapping, reasons: inequality of accountability (certain people are being punished for wrongdoing while others get a leave pass); twilight of elites and authority (the digital age is flattening hierarchies and eroding faith in experts and the rich and powerful); and segregated echo chambers (living in our cultural ghettoes and being deaf to other voices).” (p. 42)

            Botsman writes about the rise of a third type of trust: distributed trust. People trust in systems that involve collective inputs, often anonymous.

Distributed trust

Suppose you want to see a recently released film. If you rely on local trust, you ask your friends what they thought of it. If you rely on institutional trust, you see what the producers say about their own film: read the advertisements. Or you can rely on distributed trust. For example, you can look up the Internet Movie Database (IMDb) and see what different film critics have said about the film, see what audience members have said about the film and see the average rating audiences have given the film.

            If you take into account audience ratings from IMDb, you are trusting in two things. First, you’re assuming that audience members have given honest ratings, and that the film’s promoters aren’t gaming the system. Second, you’re assuming that IMDb’s method of collecting and reporting ratings is honest. After all, IMDb might be getting payoffs from movie producers to alter audience ratings.

            Botsman says distributed trust seems to be reliant on technology but, ultimately, human judgement may be required. Of course, people design systems, so it’s necessary to trust the designers. However, after a while, when systems seem to be working, people forget about the designers and trust the technology.

            One of Botsman’s examples is the self-driving car. Developers have put a lot of effort into figuring out what will make passenger/drivers feel safe in such cars. This sounds challenging. It turns out that the main problem is not building trust, because after being in a self-driving car it seems quite safe. The problem is that drivers become too trusting. Botsman thinks her young children will never learn to drive because self-driving cars will become so common.

            Botsman has a fascinating chapters on the darknet, a part of the Internet frequented by buyers and sellers of illegal goods, among other nefarious activities. Suppose you want to buy some illegal drugs. You scroll through the various sellers and select your choice. How can you be sure you’ll receive the drugs you ordered (rather than adulterated goods) or that the seller won’t just run off with your money and not deliver the drugs? Botsman describes the trust-building mechanisms on the darknet. They include a rating service, rather like Amazon’s, and an escrow process: your payment is held by a third party until you’re satisfied with the goods. These darknet trust-enablers aren’t perfect, but they compare favourably with regular services. It turns out that trust is vital even when illegal goods are being bought and sold, and that reliable systems for building and maintaining trust are possible.

            In Sydney, a high-rise apartment building called the Opal Tower had to be evacuated after cracks were found in the construction. Experts debated when it was safe for residents to return to their units. Some commentators blamed the government’s system for checking compliance to building codes. Could trust in builders be improved by learning from the systems used on the darknet?

Blockchain

Botsman’s special interest is in the blockchain. You might have heard about the electronic currency called bitcoin. Used for purchases online, it can provide anonymity, yet embedded in the code is a complete record of every transaction. Furthermore, this record can be made public and inspected by anyone. It’s as if a bank published online every transaction, with amounts and dates, but without identifying who made them.

            Botsman says bitcoin is a sideshow. The real innovation is the blockchain, the record-keeping code that enables reliable transactions without a middleman, such as a bank, taking a cut. It sounds remarkable, but blockchain-based operations have pitfalls. Botsman describes some disasters. When a new currency system was set up, someone found a glitch in the code and drained $60 million from the currency fund, one third of the total. The programmers and founders of the system were called in to intervene, which they did, preventing the extraction of currency.

            Blockchain seems not quite ready to provide a totally reliable trust system, one not reliant on human intervention. But lots of people are working to achieve this goal, as Botsman revealingly describes.

Trust and political systems

For me, the value of Who Can You Trust? is in highlighting the role of trust in contemporary life, especially as trust in institutions declines drastically. It made me think in a different direction: political alternatives.

Rachel Botsman

            The political philosophy of anarchism is based on the idea of self-management: people collectively make the crucial decisions affecting their lives without systems of hierarchy, namely without governments, corporations or other systems of domination. The usual idea is that there are assemblies, for example of workers who decide how to organise their work and what to produce. Assemblies elect delegates for coordination by higher-level groups.

            This model of self-management relies on two types of trust. The assemblies have to be small enough for dialogue in a meeting and thus rely on local trust. The delegate structure parallels distributed trust, as long as the delegates remain bound by their assemblies and acquire no independent power

            Another model is demarchy, which also dispenses with governments and corporations. In a local community, decision-making is carried out by citizens panels, with maybe 12 to 24 members each, whose members are selected randomly from volunteers. There could be panels for transport, manufacturing, art, education and a host of other topics. In essence, all the issues addressed by governments today are divided according to topic and allocated to randomly selected groups of citizens.

            Because they are randomly selected, panel members have no mandate, so their terms are limited. For coordination, experienced panel members would be elected or randomly chosen for higher-level panels.

            Demarchy relies on local trust, especially on the panels, and on distributed trust, namely trust in the system itself. This distributed trust is similar to the trust we have today in the jury system for criminal justice, in which randomly selected citizens deliberate together and make judgements. People trust a randomly selected person, who has no personal stake in the outcome, more than they are likely to trust a lawyer or a politician.

            Botsman’s analysis of trust and technology raises a fascinating option: what would it mean to combine distributed trust based on technology with the local/distributed trust in political systems like anarchism and demarchy?

Brian Martin
bmartin@uow.edu.au

Supply and demand: think again?

Some of the things we learn in economics classes may not be as simple as they seem.

            One of the basics taught in economics classes is that the price of a good is determined by supply and demand. There’s a curve showing how the supply varies with the price and another curve showing how the demand varies with the price. Where the two curves intersect determines the price.

            This seems plausible, but I must admit I never thought deeply about these curves. So I thought I’d try to figure out what the supply curve might look like for product I know something about: printed books.

            What happens to the supply of a book when the price goes up? Well, most books are sold at the same price until they go out of print: the price doesn’t go up at all. Sometimes remaining print copies are “remaindered”: they are sold off to discount booksellers at a rock-bottom price, maybe $1 each, and the discount booksellers mark them up a bit, maybe to $2 or $5, though they are still a bargain compared to the original retail price.

            When the book goes out of print, then it’s usually possible to buy used copies, for example via booksellers who sell through Amazon. If there’s still a demand, then some suppliers jack up the price. On the other hand, if the demand is great enough, the publisher may do another print run, so then the supply is suddenly increased.

            So what does the supply curve look like? Here’s what the textbooks say.

Whoops. The textbook curve doesn’t seem to fit what happens with printed books. Instead of supply increasing as the price increases, the price stays the same and then, if there’s still a demand for the book as supply dwindles, the price goes up.

Ryan on economics

            If this is as confusing to you as it was to me, then read Michael Ryan’s book The Truth about Economics. Ryan was a high tech executive who decided to become a school teacher in Texas and, after having to teach economics, became sceptical about some of the basics. To him, the claims in the standard textbooks used in the US didn’t make sense. So he wrote a book to explain, in simple terms, what’s going on.

            According to Ryan, the supply and demand curves in textbooks like Paul Samuelson’s Economics and Gregory Mankiw’s Principles of Economics simply don’t apply in many situations. The texts say that the curves apply when other things are equal. The trouble is that other things often aren’t equal.

            Even worse, Ryan shows that some of the data provided in the textbooks to show the operation of supply and demand are made up. Rather than using actual data from markets, the numbers in the texts are chosen to give the right answer, namely the answer that agrees with the theory. In other words, the authors work backwards from the theory to generate data that shows that the theory works.

            If your mind goes blank at the sight of a table of numbers or a graph, you will find Ryan’s book challenging. Actually, though, it is easier than most economics texts, not to mention econometrics research papers, because Ryan patiently explains what is going on.

            The Truth about Economics made me think for myself about supply and demand. I already knew about some of the abuses involving pharmaceutical drugs. Some companies exploit their patent-protected monopolies over drugs by raising prices unscrupulously, even though it costs no more to make the drug than before. When patients desperately need the drug, the demand is inelastic: it doesn’t change much even when the price goes up.

            Another example Ryan uses is buying a car. He notes that there are different price ranges. You might be in the market for a low-cost Nissan Versa or a top-of-the-range Porsche. Most buyers only want one car, and want it within a particular price range. The result is a very different sort of supply-and-demand diagram.  

          As well as markets for goods and services, there are also markets for labour. Ryan analyses what US textbooks say and is withering in his criticism. He presents arguments showing why raising the minimum wage makes almost no difference to unemployment rates. Instead, raising the minimum wage benefits workers at the expense of owners and managers. Ryan points to the ideological role of conventional economic theory, at least as presented in US textbooks. He quotes from standard texts to show the authors’ hostility to trade unions. This raises the suspicion that some facets of economics texts are more a glorification of capitalism than a neutral presentation.

            Could it be that generations of students have studiously learned about supply and demand curves and never questioned whether they actually described what happens in real markets? That is what Ryan claims. He presents ideas about groupthink to explain the economics profession’s continued commitment to a model based on questionable assumptions and for which there are so many counterexamples — such as book sales. As for students, Ryan believes most are too young and inexperienced to question textbooks, or they just suppress their rebellious thoughts.


Michael Ryan

            I’m not here to endorse Ryan’s critique. Instead, I recommend it as a way to encourage you to think for yourself about markets.

            Ryan argues that high-school students should be given the option of taking courses in financial literacy, learning the basics of bookkeeping and profit-and-loss statements. Financial literacy, he says, is far more relevant to the lives of students when they are in jobs and perhaps running their own businesses. However, Ryan is excessively optimistic to imagine that, based on his analysis, a movement will arise to introduce financial literacy courses throughout the US.

Learning about economics

You may have no interest in economics, but if you do, what’s the best way to learn about it? I’d say there are three things to look at.

            First are expositions of the dominant neoclassical perspective. Currently in the US the most popular textbook is Gregory Mankiw’s Principles of Economics, so you could start there, but just about any basic text would be fine.

            Second, to avoid simply accepting standard ideas without question, you can also look at critiques. Ryan’s The Truth about Economics is one possibility. Steve Keen’s Debunking Economics is a more advanced analysis.

            Contrary perspectives have been put forward for decades. Ryan quotes from early economists like H. L. Moore, who challenged Alfred Marshall’s dominant ideas about supply and demand. That was in the early 1900s.

            You can dip into the large literature on political economy, which is based on the idea that the economic system cannot be understood separately from the political system. John Kenneth Galbraith in a number of books, for example Economics and the Public Purpose, showed the value judgements built into orthodox economics.

Those with a mathematical bent can appreciate John Blatt’s 1983 book Dynamical Economic Systems in which he showed that the assumption of equilibrium in markets, an assumption that underlies a vast body of econometric theory, is untenable. Blatt also wrote a paper, “The utility of being hanged on the gallows,” that challenged the assumptions underlying utility theory, central to much work in economics.

            Third, it is illuminating to look at alternatives to standard economic theory. For example, you can read about local currencies, which provide a radically different way of thinking about markets.

A more radical alternative is the sharing economy based on an expansion of the commons, with production done collaboratively without pay, as with free software. Then there are models or visions of economic systems that avoid reliance on organised violence. Current market systems do not qualify because the power of the state is required to protect private property. I have found only four models or visions of economic systems that could operate without organised violence: Gandhian economics, anarchism, voluntaryism and demarchy.

            If you’re going to study standard views, critiques and alternatives, what’s the best order to approach them? My suggestion would be to look at all three in tandem, because each throws light on the others.

            It is not surprising that the discipline of economics is, to a considerable extent, a reflection and legitimation of the existing economic system. Challenges are needed to orthodox economic theory as part of challenges to the dominant economic system. That means there is still quite a lot worth investigating, indeed entire realms. Most likely, though, improved theory will depend on economic alternatives becoming a reality.

Brian Martin
bmartin@uow.edu.au