Although medical doctors are not blamed for not predicting the exact time of a patient's death, economists are blamed when they fail to predict the timing of a crisis. Both doctors and economists are much better at explaining what happens when it happens. Sometimes, it takes time and a lot of evidence to reach conclusions. There is one particular field where most professional academic economists have reached a consensus: large sports events are bad for the economy. In a few weeks, sports-mad TV audiences all over the world (myself included) will enjoy a new edition of the Olympic Games. For the first time, however, the majority of the public opinion of the host country and city are against the event. The relays of the Olympic torch are being boycotted in Rio. 24 years ago I participated in the relays of the Olympic torch in Barcelona 1992 and all the city were celebrating and joining the big party. One of the differences between now and then is that now we know about the work of excellent social scientists like Andrew Zimbalist and Bent Flyvbjerg and many others. Their lesson is clear: the social costs of the Olympic Games and similar large sports events are higher than the social benefits. In Barcelona we were very lucky to have unique historical circumstances, and to coordinate the games with a historical process of urban transformation right after a military dictatorship that had marginalized our city. However, even in Barcelona we had white elephants and cost overruns. The problem is not Brazil, it is the Olympic Games and the abusive monopoly that sports governing bodies have over bidding cities. Until the structure of global sports is not deeply reformed, the tax payers of abused countries will keep footing the bill and suffering the consequences.
Blogs are a great instrument of communication, as long as one is selective. Blog posts by social scientists are not science, but commentary. But it is great to know the opinions by Krugman, Milanovic or Piketty almost in real time. In the past, many people would have paid to have a conversation with John Maynard Keynes, or at least access to his blog. Besides, good blogs have useful links to academic articles and books. Of course, science advances in academic articles, which should be full of footnotes, qualifications and nuance. But suggestions in blogs may help encourage scientific advances. For example, the comments by Milanovic about the work by Acemoglu and Robinson, linking them to the Washington Consensus and Francis Fukuyama, are just commentary, but they amount to a very interesting thread to follow. One could argue that "Why Nations Fail," the very successful book by Acemoglu and Robinson, is not much more rigorous than a very long blog post. There was a recent very good (gated) article in the Financial Times by Giles Wilkes on how he learned to love the economic blogosphere. This particular set of blogs is not limited to economists. Wilkes especially recommends a blog by a computer programmer, Steve Randy Waldman, called Interfluidity. I am happy to see that in the last post, Waldman says this: "Like a lot of people, I think, I’m a bit dazed by the fact that apparently, really, the British public has voted to leave the EU. I’d prefer we lived in a world that was coming together rather than fraying apart." There is a lot more nuance in that post, but since this is my blog and I don't have to obbey any editor, I am free to quote selectively.
Anatole Kaletsky argues that "The Brexit vote is no more irreversible than any other election or
referendum, provided the EU is willing to adopt some modest reforms." Actually, I agree. Either British voters will change their mind and be convinced that access to the common market means free movement of people, or they will be convinced that official Brexit is just a very small change relative to the package of very small reforms negotiated by David Cameron. In other words, in any case things will not change much.The reason is that national sovereignty is a fiction in an interconnected Europe and that binary referendums are just a way to lie to the electorate by trying to convince them that complexity does not exist. Kaletsy also says this: "
Instead of rushing
Brexit, Europe’s leaders should be trying to avert it, by persuading
British voters to change their minds. The aim should not be to negotiate
the terms of departure, but to negotiate the terms on which most
British voters would want to remain.
An EU strategy to avoid Brexit, far from ignoring British voters, would show genuine respect for democracy.
The essence of democratic politics is responding to public
dissatisfaction with policies and ideas – and then trying to change the
judgment of voters. That is how numerous referendum outcomes – in
France, Ireland, Denmark, the Netherlands, Italy, and Greece – have been
reversed, even when deeply emotional issues, such as abortion and
divorce, were involved.
If European leaders
tried the same approach with Britain, they might be surprised by the
favorable response. Many Leave voters are already having second
thoughts, and Prime Minister Theresa May’s uncompromising negotiating
position will paradoxically accelerate this process, because voters now
face a much more extreme version of Brexit than they were promised by
the Leave campaign."
In his last book, "The Moral Economy," Samuel Bowles argues that a key objective of public policies should be to produce good people. That is, acknowledging the endogeneity of people's preferences, policies and institutions should be designed with the realistic objective of influencing social norms and values. The main message of the book is very similar to the one I read just before (by coincidence), "The Good, the Bad and the Economy," written a few years ago by Louis Putterman. Another similarity is that Bowles also systematically uses results from economic and social experiments to show that humans are not the self-interested caricatures of economics textbooks, but individuals that care about others and experience emotions. The new book addresses the issue of the separability between economic incentives and intrinsic preferences, which is an implicit assumption of much traditional work in public economics. It convincingly shows that economic incentives may crowd out (or crowd in) intrinsic motivations and therefore must be used with care. Towards the end of the book, there are nice examples of how this can be done. The author of "The Moral Economy" argues that the whole literature on optimal incentives in economics ("mechanism design") can also be interpreted as an extension of the laissez-faire view that markets can deliver efficiency under some conditions. When these conditions are not met, "mechanism design" used to promise that "principals" can set up incentives that harness the self-interest of individuals to obtain an efficient outcome. More recently, however, Bowles argues that mechanism designers have reached the conclusion that it is impossible to perfectly combine Pareto efficiency (the precise efficiency standard favoured by welfare economics) with both voluntary participation and preference neutrality (can I call this the Bowles' trilemma?). That is, if you do not want to coerce individuals to participate in relations that do not make them better-off, it is going to be very difficult to achieve full efficiency if individuals do not have pro-social preferences. Trilemmas have become fashionable ways to describe tensions in economic policies and institutions. A while ago, Branko Milanovic was very kind to elaborate on the answer to a question I posed to him on the compatibility of his trilemma with the famous one proposed by Rodrik. Now I wonder if the Milanovic and Rodrik's trilemmas can be combined with Bowles' trilemma. If they cannot, we would have a trilemma's trilemma. But there is no "Trillas tri-trilemma": I believe they are not incompatible. If globalization cannot be stopped, the nation-state and democracy will have an uneasy coexistence (that's something we are witnessing every day, especially in Europe, but not only): that's the message from Rodrik. And migration restrictions can hardly coexist with huge inequalities between countries: that's the message from Milanovic. After reading Bowles, I would add that if we want to keep basic individual freedoms (voluntary participation, for example migration) and aspire to some global social good (for example, efficiency), a key policy ingredient should be to try to influence individual preferences. What about that as a program for a realistic global federalism that acknowledges the difficulties of combining universal preferences with the day to day experiences and reference points of working people? The last paragraphs of the book could be an introduction to the next one by Sam Bowles. He writes about the difficulties of addressing the global scale problems of our knowledge intensive societies with the economic tools of the past: "I do not know whether an approach to constitutions, incentives, and sanctions adequate to this challenge can be developed. But we have little choice but to try." I couln't agree more.
The only good thing about the Brexit result is that now I can see many intellectuals with a high reputation saying very similar things to those I have been saying about nationalism in this blog (and in its Spanish/Catalan cousin) for the last five years. For example, Zadie Smith says:
"A referendum magnifies the worst aspects of an already imperfect
system—democracy—channeling a dazzlingly wide variety of issues through a
very narrow gate. It has the appearance of intensification—Ultimate
democracy! Thumbs up or thumbs down!—but in practice delivers a
dangerously misleading reduction. Even many who voted Leave ended up
feeling that their vote did not accurately express their feelings. They
had a wide variety of motives for their vote, and much of the Remain
camp was similarly splintered.
Some of the reasoning was almost
comically removed from the binary question posed. A friend whose mother
still lives in the neighborhood describes a conversation over the garden
fence, between her mother and a fellow North London leftist, who
explained to my friend’s mother that she herself had voted Leave in
order “to get rid of that bloody health secretary!” Ah, like so many
people across this great nation I also long to be free of the almost
perfectly named Jeremy Hunt, but a referendum turns out to be a very
ineffective hammer for a thousand crooked nails." And she finishes with a Yugoslav warning, not very different form what I wrote some days ago: "A few days after the vote I came to France, to teach my NYU
students in their Paris summer program, something that I suppose will
not be so easy to do very soon. Straight off the train, I headed to
dinner and sat down in a restaurant opposite one of my colleagues, the
Bosnian-born writer Aleksandar Hemon, ordered a drink, and pronounced
Brexit, melodramatically, “a total disaster.” Novelists are prone to
melodrama. Hemon sighed, smiled sadly, and said: “No: just ‘a disaster.’
War is the total disaster.” Living through Yugoslavia’s bloody
sovereignty implosion gives a man a sense of proportion. A European war
on that scale is something Britain has avoided intimately experiencing
for more than half a century now, and in defense against which the EU
was in part formed. Whether we go any further down the road marked
“disaster” is up to us." Before taking the Balkan road there is no doubt an American station, about which Jonathan Freedland says: "There are lessons here aplenty for Americans contemplating their own
appointment with nationalist, nativist populism in November. They may
think that there are not enough of the white, poor, angry, and
left-behind to win an election. But Brexit suggests that when that
constituency can be allied to a conservative cause that has millions of
other, more ideologically-motivated devotees, victory is possible. It
suggests that hostility to migrants, a cynical trampling on the truth,
and a cavalier disdain for expertise can work wonders, such is the
loathing of anything that can be associated with the “elite.” And it
suggests that even great nations, those whose democratic arrangements
were once regarded as a beacon to the world, are capable of acts of
grievous, enduring self-harm." At least I'm in good company.
The old nation-states of Europe, and those who lead movements that aspire to become new European nation-states, live in the contradiction of proclaiming their sovereignty but at the same time having accepted decisions in the recent decades that imply the transfer of their sovereignty to the European level. This is most clear in the Eurozone, where member states have transferred monetary sovereigty to the European Central Bank, and fiscal sovereignty to the fiscal rules associated to the zone. The increasingly consensus view is that this transfer of sovereignty is insufficient, and that it should be accompanied by a European Treasury with a large budget and taxation powers, accompanied by some legislative mechanism that complements the European Parliament. But also countries that are not members of the Eurozone live under the myth of sovereignty. British voters were called to vote in a referendum some weeks ago under the premise that the decision to leave the European Union was in their hands that day. Their "independence" and their "freedom" was at stake that day. Their surprise came the very day after the vote, when they heard their government, and the leaders of the Brexit campaign, argue that, contrary to what had been said during the campaign, they would delay the official request to leave the Union, because to leave, a negotiation that would last at least for two years would be necessary. They also learned that the decision to leave was subject to many constraints: you couldn't just leave and cherry pick some aspects of the relationship with the rest of Europe. In particular, they could not pick free trade and abandon free movement of citizens at the same time. The EU will not accept it. The British voters are not as sovereign as to cherry pick which aspects of Europe to retain and which to discard. At the same time, below the UK level, some sub-national levels began to claim some degree of sovereignty. It turns out that the fact that the Brexiteers had not won in Scotland, London, Gibraltar or Northern Ireland is a very significant fact that complicates the decision to leave for a variety of reasons. Whose is the sovereignty? Which is the relevant "demos"? These are old questions, questions that the evolution of Europe in the last decades, with all its problems, has made obsolete. Sovereignty is shared. If the UK, an old imperial nation with a consolidated democracy, is not fully sovereign, the implication for member states of the Eurozone and for aspiring new nation-states is obvious.
Following the advice of Jordi Brandts, I have been reading with great pleasure the book "The Good, the Bad, and the Economy," published in 2012 by economist Louis Putterman. It's difficult to say what this book is about because it is about so many things. It includes a history of life in our planet, with a special emphasis on the human species. On this, an endnote to one of the chapters includes this amazing link to the journey of humanity from its origins in Africa to the colonization of most of the Planet. It also includes a history of economic thought, from Adam Smith and before, to evolutionary, experimental and behavioral economics. Demanding readers will perhaps miss a few schools of thought, such as the economics of transaction costs pioneered by Ronald Coase, but the author is probably entitled to emphasize those topics that he knows best in such a synthesis of pretty much everything. Putterman has two important messages for the reader. The first is that humans are guided both by self-interest and by altruistic values, and that both are the result of the selection forces of evolution. The second is that the differences in development patterns in our world are the result of the slow forces of evolution. In history, there is a lot of continuity and path dependence. The fact that what today we call developed countries are richer than other parts of the world has its roots in advantages that started to materialize millenia ago, because of mainly geographical reasons similar to those explained by Jared Diamond in his books. Of course, progress towards a more equitable development will depend on tapping on the altruistic resources of humanity at the same time as using our self-interest to devise new technologies and ways of producing which allow us to overcome many of our social problems.
According to The Guardian, after the Brexit vote, an inter-party commission in the UK is accelerating its proposals to promote reforms towards a more federal UK. This acceleration would include a transition from a notion of sovereignty based on the centre "devolving" sovereignty to the nations, metropolitan cities and regions, to a notion of shared sovereignty where Scotland, Northern Ireland, London and other entities would have full sovereignty on all those responsibilities that are not clearly shared and pooled. The proposals for a federal future for the UK are endorsed by a number of representatives from all the mainstream political spectrum, including Labour leaders and former Liberal-Democrat and Conservative leaders Menzies Campbell and John Major. After a very narrow national victory of the Brexit vote in the irresponsible referendum called by David Cameron, the leaders of the Brexit campaign are finding it impossible to transform their promises in realities, among other reasons because London, Scotland and Northern Ireland are against them. The proposals of this group are so far silent on the relationship that the constituent parts of the new Federal Kingdom will have with Europe, but it seems clear that it cannot be that London is in the EU and, let's say, Guilford, is outside the EU. Therefore, most probably the Federal Kingdom will have to agree on a form of relationship/belonging to the EU that is not very different from the current form of belonging/relationship. No-one said that federalism in the XXI Century would be easy. We live in a complex world, a world on institutional diversity and innovation. But the old sovereign nation-state is dead.
I have recently seen interviews with Nigel Farage and Marine Le Pen where they express their concern for the increasing racism that can be seen in Europe. These two leaders get very serious when they are asked if they worry about increasing acts of xenophobia in their countries and in other places. It is part of their public relations campaign to try to explicitly distance themselves from the very values that they have been promoting for years. Their explicit words have to do with freedom, democracy and the people. Their innuendo and their campaigning below the radar has to do with promoting hatred against the foreign and the immigrants. It is progress that they do not want to install a military government and supress elections. And it is very important for decent people to understand that they are not like Hitler. Actually, in some ways they are more difficult to defeat, because they use the tools of democracy to undermine not democracy itself, but the quality of institutions, separation of powers and respect for minorities (which are fundamental aspects of a healthy democracy). They want to keep majority voting as the only remaining aspect of democracy, at least if they find a way to make it play in their favour. Seen from abroad, Farage, Le Pen and Trump are racist opportunists. Seen from home, they look respectable and try to speak softly (well, Trump not yet, but he'll learn as the presidential election gets closer). If you see your local politicians yelling about democracy but promoting campaigns against some "foreign" enemy (the Mexicans, the Turkish, Brussels, Madrid), you should worry. (I write this the day that the so far main Catalan secessionist party has decided to change its name to Democratic Party of Catalonia).
Catherine Baker, a
historian, argues that Brexit has echoes of the break-up of Yugoslavia: “The
break-up of Yugoslavia took the public through a downward spiral of collapsing expectations, each
dragging people into a new sphere of uncertainty and fear: from the Yugoslav
system being more successful than its capitalist and Warsaw Pact neighbours, to
the reverse; from it being unthinkable that the union of republics would break
up, to it seeming inevitable that it would; from living an everyday working
life to seeing your standard of living and the whole economy collapse beyond
repair; from Communism being the ideology you learned at school, to an entire
system of political power and property ownership falling apart; from moving
normally around your town, to fearing for your safety on the streets, based on
what others read as your ethnicity. Even if these were ill-founded – historians
still debate whether or not Yugoslavia had too many long-term weaknesses to be
viable when it was unified in 1918 – they were part of people’s common sense,
until they could not be. When I teach courses about the break-up of Yugoslavia
and the social contexts behind the 1990s wars, British students start seeing
their own society differently. The issues at stake for Britain and its
constituent entities have many resonances with, and important differences from, Yugoslavia – but perhaps the most
troubling parallels come from how politicians and the media brought
Yugoslavia to the point of collapse and co-operated to intensify fear and
hatred once Slovenian and Croatian secession was inevitable.” Similarly,
another historian, Fedja Buric, argues that “The Brexit
any other, was supposed to let the people speak. The trouble is, that they did
not speak in unison and now the raison d’être of this
multinational state has disappeared. In the early 1990s, Yugoslavs also went to
their referendums to determine their willingness to stay in another federation.
The result was bloodshed and the fragmentation of Yugoslavia into squabbling, dysfunctional mini
nation-states. What can a dead country teach the (barely) alive one? The
Yugoslav case defies the notion that democracy is an essential good in
itself, that it brings stability and that it liberates people. In Yugoslavia,
the 1990s began with a genuine mobilisation of grassroots engagement with the
political process. New political parties sprang up overnight. People
demonstrated, asking for all sorts of things. Referendums were announced. New
futures were promised. The decade ended in a bloodbath, the country tearing
itself apart into dysfunctional or nonfunctional nation-states. The end
tally: over 100,000 dead, more than 2 million displaced, new borders erected
and a future poisoned by hate, division and nationalist-coloured corruption. If
there is one lesson the UK should take from Yugoslavia it is this: referendums
are terrible. These brief exercises in direct democracy not only fail to solve
existential societal questions, but they bring to the fore societal divisions
that had previously been channeled into civil political discourse (like in the
UK) or, yes, been politically repressed (like in the case of Yugoslavia). What
the Brexit debacle should teach us is that referendums are more often than not
populist tools that allow demagogues to use the politics of resentment in a
democratic way. Sure, referendums are democratic. But, they can also be deadly.”
The Brexit issue defies binary logic. The UK was
not cleary inside the EU ten days ago, and will most probably not be clearly outside
the EU 10 years from now. I would recommend not accepting a bet about whether the UK will eventually be in or out of the EU some day in the future. It will be impossible to prove whether you won or you lost the bet. In my view, the relationship of the UK element with the EU set is a clear case of fuzzy logic.
That’s one of the reasons why binary sovereignty plebiscites are a bad idea: the in/out referendum projects an impression of false clarity when the issue is complex and ill defined.
markets after the first week have not been as negative as some had expected.
But contrary to what Krugman argues (as you can see, I am high in self-esteem
today) perhaps it is not because Brexit is not so bad in the short run, but
because Brexit has actually not taken place. The leaders of Brexit are divided,
the UK government does not want to invoke article 50 yet, and a new consensus is
evolving by which the UK basically wants to keep all the rights and obligations of EU
membership perhaps without sitting in the (main) table. Among other reasons to avoid the break-up of the UK itself. I am not the first to argue that sovereignty events are difficult to interpret: does a setback to anti-secessionists increase or decrease the probability that secession will take place? Well, it depends on the evolution of subsequent events. And events after the referendum have not been very good news for the brexiteers. They are not only divided but they have been exposed as liars and reckless. It is not clear at all that they are prevailing.
Predicting methods are among the losers in the Brexit referendum and in the Spanish election. The night before the referendum I confidently sent an email to some friends reassuring them that betting and prediction markets were safely forecasting a remain victory, almost for sure. My apologies. The Economist immediately wrote an article after the referendum claiming that polls were better than prediction markets, because the latter were victim of all the behavioural biases that affect financial markets. However, four days later, polls also miserably failed to predict the Spanish election. Poll results published the night before the election (as well as those published during the campaign) predicted that the Socialist Party would be clearly overcome in votes by the populist left, and that all the leftist parties together would have more seats in Parliament than the sum of the right and the center-right. Even in the election day, exit polls made a similar predicition, only to be ridiculed by the real results a couple of hours later. With the benefit of hindsight, pundits have concluded that the Brexit result had a significant impact on a decisive part of the electorate: conservative voters rallied around the Popular Party and the populist left lost some cautious voters. If this is true, this would not be an explanation for the polls from Friday to Sunday. The impact of the Brexit result on the Spanish election is not a random issue. The Brexit result was a clear possibility, and once it took place, its impact on voters was not something that could not be explained. The political chaos that followed the referendum in the UK was a warning against those parties that promote plebiscites and that do not have a clear commitment to the European Union. The referendum provided information (a public good) that was relevant in Spain. The consequence was that the populst left would lose a significant number of votes (other were lost during the campaign for other reasons). Both polls and predicition markets got it wrong. Next time we should mobilize Tetlock's superforecasters.