Thursday, August 28, 2008

Do gaps between wanting and liking explain government paternalism?

At the end of my last post I raised the question of whether gaps between wanting an liking - craving things that bring little or no happiness once we have them - provides grounds for government paternalism. I have previously referred to an article in which Glen Whitman discusses various ways in which people deal with self-control problems without paternalistic interventions (here). In an article discussing government paternalism, Edward Glaeser provides some good reasons why flaws in decision-making should make us more, not less, wary about trusting governments (‘Paternalism and psychology’, Regulation, Summer 2006). For example: “If incentives to make good decisions increase the quality of decision-making, then ... private decisions should be better than public decisions: government decision-makers do not care as much about the individual’s well-being as the individual himself does” (34).

As well as suggesting that gaps between wanting and liking could possibly justify paternalistic interventions by government , Colin Camerer has suggested (here) that the existence of such gaps might help to explain paternalistic interventions that are already in place. An obvious example is prohibition of addictive drugs. Sin taxes on tobacco and alcohol could have similar motivations, but these taxes have also been promoted on other grounds e.g. correcting externalities and raising revenue. The provision of “cooling off” periods for consumer purchases can be explained in terms of allowing time for consumers to re-consider purchases they have made in a “hot” emotional state. When restrictions are imposed on people who are considered to be mentally incompetent, one of the reasons may have to do with impairment of the brain circuitry that restrains impulsive actions. Regulations to protect children and young adults may also be motivated partly by beliefs about the development of the brain circuitry that controls impulsive actions.

Defenders of liberty have conventionally argued, along with J.S. Mill, that children should be protected: “Those who are still in a state to require being taken care of by others, must be protected against their own actions as well as against external injury” (“On Liberty”, 1859). There is a “slippery slope” in this argument, however, as is evident in the fact that Mill goes on to argue that despotism is a legitimate mode of government “in dealing with barbarians” provided the objective is “their improvement”.

I find it easier to understand how Mill could justify extension of paternalism to protect “barbarians” than to explain why adults in democracies would vote in favour of paternalistic policies to restrict their own freedom. Paternalism, by definition, is about treating people like children. Do a majority of adults in democratic countries really want to be treated like children?

My guess that if adults were asked that question there would not be many who would say that they do want to be treated as children. But a lot of adults seem to lack sufficient confidence in their own capacity to make the right decisions and stick by them. This applies in a wide range of areas from personal safety e.g. wearing seat belts to financial security e.g. investing in superannuation. Rather than asking family and friends to help them learn how to cope with their emotional impulses, or to seek professional help, a lot of people have come to want governments to regulate everyone’s behavior.

Tuesday, August 26, 2008

What are the implications of the gap between wanting and liking?

Neurological research by Kent Berridge suggests that separate brain mechanisms control wanting and liking (described here). In Daniel Nettle’s words, we can crave for something very much but take little or no pleasure in it once we have it (“Happiness”, 2005: 126).

As a former smoker I think I already understood this before I had heard that separate brain mechanisms control wanting and liking. After a while the main pleasure in smoking was the temporary release from craving.

Nettle argues that the evolutionary purpose of the wanting system is to trick us into seeking things like status and resources even though such things may not make us happier. In his view we tend to want such things because they were important to the reproductive success of our ancestors: “The things we want in life are the things the evolved mind tells us to want, and it doesn’t give a fig about our happiness”.

Nettle suggests that the wanting system “draws us to compete for promotion or a higher salary; a larger house or more material goods; an attractive partner or 2.4 children” (152). It seems to me that a lot of people might feel that such goals were worth pursuing even if they knew that they were not likely to be much happier if they managed to achieve them.

Colin Camerer has given several examples of wanting-liking gaps that more clearly challenge the conventional economic view that people make rational choices (‘Wanting, liking and learning: neuroscience and paternalism’, here). In the case of drug addiction, wanting can be created by a desire to avoid the pain of withdrawal even though drug use is not actually pleasurable. People suffering from obsessive compulsive disorders feel a strong desire to perform particular acts even though they obtain little pleasure from them. Shopaholics want to buy goods that they don’t use. People who make excessive use of their credit cards may be too strongly influenced by the wanting system, instead of weighing up the pleasure of having the goods against the cost of paying for them.

Camerer introduces the learning system into the analysis: “Learning is a process by which the wanting system comes to know what the liking system likes”. He suggests that the conventional economic view that what people like can be inferred from the choices that they make only holds in “the special case where learning has taught wanting what is liked” (109). This is the case where people have learned from past mistakes.

Camerer suggests that some gaps between wanting and liking may justify government paternalism of various kinds. However, such proposals raise many questions. Is there any reason to believe that gaps between wanting and liking are of less importance in making political decisions (voting) than in making market choices? If we vote for paternalistic government, what are the chances that we will like the kind of government that we get? Would we actually like living under a paternalistic government that relieved us of the personal challenge of dealing with gaps between what we want and what we like? Would this help us to become the kinds of people we would like to become?

Saturday, August 16, 2008

What is happening to Whitlam's legacy of fair play in industry assistance?

The Australian government has just released a report into the car industry commissioned from a committee led by Steve Bracks, the former premier of Victoria. The committee has recommended an extra $2 billion in budgetary assistance to the industry on top of an amount of similar magnitude to be paid under existing programs.

Few people would be surprised that Steve Bracks has recommended additional assistance to the car industry. After all, this industry is concentrated in Victoria, while the taxpayers who will bear the cost of the recommended assistance are spread around the whole of Australia.

It is reasonable to presume that the government set up this ad hoc review precisely in order to obtain a recommendation of additional assistance. If it had approached the issue with an open mind it would have sent a reference to the Productivity Commission – the organisation that normally conducts such industry assistance reviews.

In reading the Bracks report I was particularly interested to find out how it would reconcile claims that the Australian car industry needs further assistance in order to become internationally competitive with often heard assertions that the Button car plan, introduced in the 1980s, had been a big success in helping the industry to become internationally competitive.

The Bracks report argues that the competitiveness of the industry has declined because the Australian dollar has appreciated against the currencies of the major automotive producing countries. That explanation doesn’t hold water. Other industries are having to cope with exchange rate appreciation without additional assistance. If the car industry needs a special round of additional assistance this suggests that it is still fundamentally uncompetitive in the Australian environment.

One of the good things about the Bracks report is its recognition that assistance to the car industry “comes at a cost to other industries and consumers” (92). So, what is so special about the car industry to warrant this additional assistance at the expense of other industries?

I could not find a satisfactory answer to this question in the report. There is some discussion of spillovers but nothing definitive to suggest that they are more important than in other industries that have been adversely affected by exchange rate movements. The report does not consider why this industry should be given preferential treatment. The people undertaking the review lacked the economy-wide perspective required to balance the claims of this industry against those of other industries.

If the government accepts the recommendations of this dodgy review it will be seen to have trampled on what has possibly been Gough Whitlam’s most positive legacy – a system of fair play in industry assistance. The government needs to be reminded of what Whitlam said in setting up the IAC (predecessor of the Productivity Commission) in 1973. I quote from his second reading speech:
“It will be apparent that the reference to the Commission of questions relating to assistance for individual industries cannot be optional. If some industries, particularly those which stand to lose most from public exposure of their claims, can avoid the process of public inquiry the fundamental purpose of the Commission will be frustrated”.

Those words seem to me to be just as relevant today as in 1973 – and this picture sums up the direction in which the Rudd government's industry policy is heading.

Tuesday, August 12, 2008

Does a positive-sum attitude promote happiness?

I finished a recent post wondering whether there is any evidence that people who view life as a positive-sum game are generally happier that those who view it as a zero-sum game. I have not been able to find any direct survey evidence relating to this question. However, there are two different avenues of research that seem to me to be relevant.

The first is a study by Bruce Headey using German panel data which assesses the effects of different life goals on happiness (“Life goals matter to happiness”, Discussion paper 639, DIW, 2006). Headey suggests that goals relating to personal success can be viewed as zero-sum, whereas altruistic goals and goals relating to family life are positive-sum goals. The rationale for this classification is the view that a lot of success goals involve competition to acquire positional goods – as in the game of “monopoly”, success comes at the expense of other players. However, Headey’s success goals do not seem to me to be all about competing for positional goods. He includes “fulfilling your potential” as a success goal even though this does not necessarily involve competition with others.

Nevertheless, Headey’s results are interesting. He finds that “success goals” have little effect on happiness at a point in time, but persistence in pursuing such goals has a negative effect on happiness. Altruistic goals have positive effects on happiness, but the results for family goals were somewhat ambiguous.

The second avenue of research relates to neuroeconomics experiments in which participants play games relating to cooperation and trust. It seems reasonable to suppose that people who believe that others can generally be trusted would tend to have a positive-sum attitude to life. The results of this research tend to confirm that this is so.

Participants in games in which players are rewarded if they cooperate will often reject offers that they consider to be unfair, even when this means that they suffer a pecuniary loss. Unfair offers activate parts of the brain involved in negative emotional states such as disgust. This suggests one reason why people should be less happy in countries with high levels of corruption, insecure property rights and low levels of trust. Unfair processes and systems invoke feelings of disgust. A further reason is the effect of low levels of trust on transactions costs and hence on economic outcomes (as discussed by Paul Zak and Stephen Knack in ‘Trust and Growth’, “The Economic Journal”, 2001).

Research by Paul Zak (described here) suggests yet another reason to expect people to be more happy in countries with low levels of corruption and high levels of trust – the pleasure that people obtain from being trusted and the positive effect this has on their behaviour.

In the trust game, player A has the option of giving some of her attendance money player to player B whom they do not know. The amount given to B is tripled, and then B is given the option of giving some money back to player A. If A can trust B to reciprocate there is potential for mutual benefit, but B has no economic incentive to reciprocate. The experimenters found that oxytocin – a hormone that rises during social bonding – increased in B when A showed trust by investing a lot. When trust is shown only a small proportion of players (sociopaths) fail to reciprocate by sharing their gains.

Summing up, it would seem that there are a variety of reasons why people who view life as a positive-sum game should be happier than those who view it is a zero-sum game. They do not perceive their happiness as depending on acquisition of positional goods which are beyond the reach of most people. They do not perceive themselves to be living in an unfair society in which they need to be very careful to guard against the opportunism of others. They perceive themselves to be living among people who trust them and frequently feel the satisfaction which comes from being trusted.

Martin Seligman's consideration of the evolutionary purpose of postive feelings is also relevant. He writes: "Just as negative feelings are a "here-be-dragons" system that alarms you, telling you unmistakably that you are in a win-lose encounter, the feeling of positive emotion is also sensory. Positive feeling is a neon "here-be-growth" marquee that tells you that a potential win-win encounter is at hand. By activating an expansive, tolerant, and creative mindset, postive feelings maximize the social, intellectual, and physical benefits that will accrue" ("Authentic Happiness", 2002: 44). This view turns my question inside out. It implies that happiness is a positive-sum (or win-win) attitude.

Friday, August 8, 2008

Would a chain index provide a better guide to change in the quality of life?

A chain index is an index that is constructed from information about changes in a variable from year to year, rather than by measuring absolute levels of the variable. A chain index is likely to be more accurate if we can measure change from year to year more accurately than we can measure absolute levels.

I think there is reason to believe that survey information yields more accurate information on change in quality of life than on absolute quality of life. I have explained why in a previous post (here).

In the following chart I have used information published by the Pew Research Center to construct a chain index of the quality of life from survey data on respondents assessments of their current quality of life and their assessments of their quality of life five years earlier (here). This provided estimated of the change in quality of life over the previous five years. The data on change in quality of life was annualized and converted to percentage changes. After gaps in the data were filled in by interpolation the series was converted into the form of the chain index shown below.

The happiness index shown in the chart is constructed from the Pew Research Center’s survey data on current quality of life.

The quality of life index shown in the chart actually shows a larger increase than the increase in real GDP per capita over this period. I therefore find it difficult to accept that the increase in quality of life was actually as large as is shown. The main point of the exercise is to suggest that the quality of life in the U.S. probably increased over this period by a larger magnitude than indicated by the happiness index shown in the chart.

(Research presented on this blog – as on any other blog - should be viewed with more caution than peer-reviewed research presented in academic journals. For quality assurance purposes I am prepared to make detailed results of research available to anyone who wants them and the data available to anyone who wants to replicate studies.)

Can our quality of life improve without us becoming happier?

Surveys undertaken by the Pew Research Centre enable comparisons to be made between ratings of quality of life at the present time and ratings of quality of life five years ago. The results for the U.S. (here) indicate that while respondent’s average ratings of current quality of life had moved up and down by small amounts when asked at various times over the last 40 years, they consistently reported that their quality of life was substantially worse five years ago - indicating that they perceived that they had experienced ongoing improvements in the quality of their lives.

These results suggest that people can perceive that the quality of their lives is improving even though their reports of quality of life at different points of time indicate that there has been no increase. Some people might suggest that this means that people have faulty memories of the quality of life they enjoyed in the past. I acknowledge that memories can be faulty, but I see no reason why people should systematically view the past as having been worse than the present. On the other hand, I can think of a good reason why current reports of quality of life may not show much change over time in the face of objective evidence of improvements in standard of living.

The use of survey information to measure the current quality of life involves the implicit assumption that when people rate their quality of life they do so relative to absolute standards. Respondents in the Pew survey are prompted to think in terms of a ladder of life in which the top step represents the best possible life and the bottom step represents the worst possible life. The use of successive surveys to measure change in the quality of life entails the assumption that perceptions about what constitutes the best possible life and the worst possible life remain fixed over time.

When you think about this, however, how can it be possible for anyone in a relatively high-income country to know what the best possible life, or the worst possible life, might be like throughout their own life-time? If you asked someone to rate how satisfied they were with life in the 1940s they would not have had much idea of the kind of life they might be able to live in 60 years time. They would not have known that many of the household appliances and communications devices that we now have would be within reach within their own life-time. They might have wished that such things could be invented and made affordable – just as I wished as a child in the 1950s that I could have a 2 way wrist radio like the one Dick Tracey had – but I don’t think such things would have been contemplated as actually attainable.

It is widely accepted among happiness researchers that in high income countries increases in standards of living may not translate to increases in happiness because aspirations tend to rise as incomes rise. I am not sure that many have realized, however, that if this process involves a change in perceptions about the best possible life it is changing the scale against which people are assessing their quality of life. Thus a person who felt that her quality of life had improved over time might report ratings of her quality of life at different points in time which indicated that she had stayed on the same rung of the ladder. The apparent conflict of perceptions has occurred because the ladder has shifted upwards.

If our aim is to use surveys to measure of happiness, as an emotion, it may be appropriate for the ladder (measurement scale) to move upward as perceptions change about the best possible life. If we are attempting to measure quality of life, however, we should recognise that an upward movement of the ladder - which occurs because of a change in perceptions of the best possible life - is itself evidence of improvement in the quality of life. In my view we should accept what people say when they report ongoing improvements in the quality of their lives and also to accept that this will not necessarily make them feel any happier than in the past.

In my next post I explore the possibility of using perceptions about changes in quality of life to construct a chain index showing how the perceived quality of life has changed over time.

Monday, August 4, 2008

Why does Rudd persist in misrepresenting Hayek?

In “The Australian” today (4 August 2008) Australia’s prime minister, Kevin Rudd again misrepresents the views of Friedrich Hayek. He also did it before becoming elected (here).

After stating that he believes in a compassionate society, Rudd writes:

“That is why we explicitly reject Hayek’s view that society has no obligation to others who are unknown to us and his preparedness to allow fundamental social institutions such as the family to fend entirely for themselves against unrestrained market forces”.

I have read enough of what Hayek wrote to know that he would never write anything like: “society has no obligation to others who are unknown to us”. That statement makes no sense. It seems to suggest that “society” exists apart from the people who comprise it. Rudd might believe this, but Hayek was certainly opposed to that view.

Hayek recognised explicitly that in “a highly mobile open society, an increasing number of people are no longer closely associated with particular groups whose help and support they can count on in the case of misfortune”. He states:

“The assurance of a certain minimum income for everyone ... appears not only to be a wholly legitimate protection against a common risk to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born” (Law, Legislation and Liberty, V 3, 55).

So, why does Rudd persist in misrepresenting Hayek? I don’t know. Perhaps he is suffering from a learning disability.