Last week I wrote critiquing a vaguely-held but nonetheless influential counter-culture faith in win-win solutions solving everything. Today I want to talk about its equivalent in economics and hint at a parallel between new-age niceness and Tea Party libertarianism that will be the subject of a later article.

Free-market capitalism is a system that generates win-wins until there are no more win-wins to be had, until a market reaches what’s called Pareto-optimality, a state in which there is “no more room for a deal,” no more transactions that would be seen by both parties as to their advantage. Beyond Pareto-optimality any transaction that would be to one party’s advantage would be to another party’s disadvantage-in other words, a win-lose.

A market is deemed “efficient” when there are no constraints that would hinder reaching this state of maximum win-win fulfillment. A regulated market that restricts the sale of certain unsafe products is called “inefficient.” From this free-market perspective, if there’s one party that wants to sell heroin, and there’s another party that wants to party and is willing to part with money for that heroin, there’s room for a win-win deal and it’s inefficient to constrain the parties by preventing the transaction.

Mind Readers Dictionary : Play in Popup

Mind Readers Dictionary: The Podfast : Play in Popup

Except for libertarians (free-market extremists), economists are quick to point out that efficiency isn’t everything. Society has goals that can’t be met by exclusive reliance on win-wins. Though there’s a win-win deal in that heroin sale, it’s a loss to society overall. Likewise, though the destitute can’t pay for food and therefore can’t engage in a win-win with the food vendor, society prefers not to have the destitute die of starvation. The incompatibilities between market efficiency and society’s goals are called “market imperfections.”

Governments step in discouraging some activities (heroin sales between consenting adults) and encouraging others (food sales to the destitute) to actually create market inefficiencies that compensate for market imperfections. Governments, in effect, put their thumbs on the scales, discouraging some win-wins and encouraging some win-loses. They have a number of tools at their disposal for doing so. Laws banning the sale of heroin, taxes discouraging the sale of tobacco, laws forcing the sale of medical services to the poor, subsidies like food stamps that give the destitute the wherewithal to purchase food when otherwise they couldn’t.

One way to think about this is that there aren’t really any two party deals. There are always three parties: the two who do the business deal and society. What we really want is win-win-wins, where everyone is happy. There are lots of those. We buy products from folks who want to sell them and society benefits overall. But since not all deals are win-win-win someone has to make sacrifices. I pay taxes–a loss to me–but a win to society. Companies selling dangerous products lose sales because of taxes on their products (sin taxes they’re called), a loss to them but again a win to society. I dream of solving everything with win-win-win solutions but in practice there have to be some losses.

Another way to think about it is that society is, in part, you and me, representing our better judgment. I want to do deals that benefit me today, but my better judgment doesn’t want me to do deals today that hurt me tomorrow even if they’d be wins for me today. So I win when society wins, or rather my better judgment wins even though my immediate preferences lose.

In passing I’ll note that this is a compromise to the Golden Rule. What I’d have done unto me is that I could win always and following the Golden Rule I wish the same for you. But sometimes we lose anyway. To make the Golden Rule work we have to break the Golden rule sometimes. I call this the Golden Paradox.

Government, at its best, can serve as the umbrella policy for us all, looking out farther over time and space–over time in tending to what we’ll need in old age and what our children will need; and over space to the needs of others like us, others who are in a situation we might not but nonetheless could find ourselves in–the poor for example, who, maybe we aren’t today but could someday become given the vicissitudes of life.

I say our better judgment and therein lies the rub. My better judgment isn’t my constant judgment. It flickers into focus far less frequently than my immediate impulsive judgment. This is the human condition. We are all born believers in our impulses, wanting to win always. We have to learn to sacrifice and the learning doesn’t come easy. It comes especially hard during downturns and disappointments, when expectations that once were met aren’t met anymore.

We become crybabies when we lose our perks and partners, and when suddenly society surprises us with new better judgment calls to action to prevent major long term catastrophes like the climate crisis. Our first impulse is to yell “Give us our stuff back! We demand more!”

Ingenious and inventive rhetoricians that we are, we have to come up with a way to yell this without looking like crybabies. It’s not hard. Give us a minute and we can devise a moral crusade in support of anything we want. Here’s an example:

Win-wins are better than win-loses. They’re more efficient and efficiency is good. Trust efficiency. It makes the best possible world. I know I’m demanding that I win here, that I don’t have to pay new taxes, but really it’s not about me. I’m looking out for society when I say let me win here.

That is the Tea Party rallying cry. It’s the heart of libertarianism. Yes, I just said that we are all born Libertarian.

There has long been a debate about how much government intervention is appropriate, basically how much to let things settle at Pareto-optimality through efficient markets and how much to offset the resulting market imperfections. The arguments pro and con intervention are based on some combination of theory and historical evidence.

You couldn’t design a better set of circumstances than the past five years for driving a case that market efficiency isn’t everything and that government intervention is absolutely necessary. Lately, letting market efficiency have its way more than ever and cutting back on government intervention, we’ve really screwed the pooch. And the pooch is us (See the editorial below).
It’s telling that even though all our recent catastrophes point to the limits of efficiency, the libertarians somehow seem to interpret it all as vindication for their argument that government is bad and markets should be left alone. What it tells, is just how ideological and idealistic libertarians are. They are hands-off not just about the intervention of government, but about the intervention of evidence and any complicating ideas. They have three ideas they hold more sacrosanct than the dreamiest Jim Jones follower:

  1. Government is less efficient than business.
  2. Market efficiency is everything.
  3. People (I) want to win so we should let them (me).

Lately I’ve been looking for a new definition of progressivism, the counter-force to such folly. I consider the question synonymous with a philosophical one: What is Wisdom? See, it’s not like trying to figure out what qualifies someone to be a member of my rock band. I’m not interested in progressivism as one among many offerings. I actually don’t know what you’d call it, nor do I care. When asking what a progressive is, I really mean what’s the right attitude for facing forward into the present day’s combination of confusing mess and spectacular opportunity-not easy to distinguish from one another from this vantage point.

For me wisdom or progressivism or both can’t be defined by what you believe but by how you come to believe. The world changes and the question of interest is how you track and adapt to the changes. The enemy of wisdom is ideology of any stripe, confidence in a one-rule-fits-all approach. However that does burden wisdom with deciding which rules to apply when. That’s why wisdom has to be about how we interpret rather than merely what our interpretations are.

I’ve got plenty of progressive friends who seem to think that our beliefs and principles are what define the movement: “I believe Gay Marriage should be allowed and that the Iraq war was a mistake. That’s what makes me progressive.” I now see that me and my progressive friends have made bad bets. Our opposition to nuclear power and genetic engineering are looking not well thought through to me lately (see Stewart Brand’s excellent book Whole Earth Discipline for the reasons why) I aim to learn from our mistakes as well as from the mistakes being made by our opposition. I don’t mean just switching policy positions based on new insights, but ever improving methodologies for deciding how to live and what to advocate.

A few take-aways from this exploration:
●     No one-rule-fits-all solutions.
●     Watch out for my inner libertarian who demands that my better judgment sign off on my immediate impulses.
●     Not everything worth accomplishing can be accomplished with immediate win-wins.

The Regulation Crisis
James Surowiecki
The New Yorker
June 14, 2010

A few weeks after B.P.’s Deepwater Horizon oil rig blew up and crude started spewing into the Gulf, Ken Salazar, the Secretary of the Interior, ordered the breakup of the Minerals Management Service-the agency that was supposedly in charge of offshore drilling. It was a well-deserved death: during the past decade, M.M.S. officials had let oil companies shortchange the government on oil-lease payments, accepted gifts from industry representatives, and, in some cases, literally slept with the people they were regulating. When the industry protested against proposed new regulations (including rules that might have prevented the B.P. blowout), M.M.S. backed down. Franklin Delano Roosevelt, when he hired the famed stock manipulator Joseph P. Kennedy as the first head of the S.E.C., said, “Set a thief to catch a thief.” M.M.S.’s modus operandi was more like setting a thief to help other thieves get away with the loot.
M.M.S.’s bad behavior was unusually egregious, but it’s hard to think of a recent disaster in the business world that wasn’t abetted by inept regulation. Mining regulators allowed operators like Massey Energy to flout safety rules. Financial regulators let A.I.G. write more than half a trillion dollars of credit-default protection without making a noise. The S.E.C. failed to spot the frauds at Enron and WorldCom, gave Bernie Madoff a clean bill of health, and decided to let Wall Street investment banks take on obscene amounts of leverage, while other regulators ignored myriad signs of fraud and recklessness in the subprime-mortgage market.
These failures weren’t accidents. They were the all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary at best and downright harmful at worst. The result is that agencies have often been led by people skeptical of their own duties. This gave us the worst of both worlds: too little supervision encouraged corporate recklessness, while the existence of these agencies encouraged public complacency.
The obvious problems of graft and the revolving door between government and industry, in other words, were really symptoms of a more fundamental pathology: regulation itself became delegitimatized, seen as little more than the tool of Washington busybodies. This view was exacerbated by the way regulation works in the U.S. Too many regulators, for instance, are political appointees, instead of civil servants. This erodes the kind of institutional identity that helps create esprit de corps, and often leads to politics trumping policy. Congress, meanwhile, often takes a famine-or-feast attitude toward funding, allocating less money when times are good and reinflating regulatory budgets after the inevitable disaster occurs. (In 2006 and 2007, for instance, Congress effectively cut the S.E.C.’s budget, even as the housing bubble was bursting.) This makes it hard for agencies to do consistent work. It also contributes to the sense that regulation is something it’s O.K. to skimp on.
Given that we still spend tens of billions of dollars on regulation every year, it may seem odd that attitudes can matter this much. But the history of regulation both here and abroad suggests that how we think about regulators, and how they think of themselves, has a profound impact on the work they do. The political scientist Daniel Carpenter, in “Reputation and Power,” his magisterial new history of the F.D.A. (one of the few agencies that’s been consistently effective), argues that a key to the F.D.A.’s success has been its staffers’ dedication to protecting and enhancing its reputation for competence and vigilance. That reputation, in turn, has made the companies that the F.D.A. regulates more willing to respect its authority. But that’s a rare success story. In most other cases, as the idea of regulation began to seem less legitimate, regulators became less effective and companies felt more free to ignore them.
The social psychologist Tom Tyler has shown that acceptance of a law’s legitimacy is the key factor in getting people to obey it. So reforming the system isn’t about writing a host of new rules; it’s about elevating the status of regulation and regulators. More money wouldn’t hurt: as the conservative economists George Stigler and Gary Becker point out, paying regulators competitive salaries (as is done, for instance, in Singapore, which has one of the world’s least corrupt, and most efficient, bureaucracies) would attract talent and reduce the temptations of corruption. It would also send a message about the value of what regulators do. That’s important, because what the political theorists Philip Pettit and Geoffrey Brennan have called “the economy of esteem” is crucial to making public service work. Offering regulators the kind of reputational rewards that, say, soldiers or firefighters get will make it easier for them to develop a similar sense of common purpose.
That doesn’t mean that the government needs to start putting out “Men of the S.E.C.” calendars, but it does need to instill in regulators the sense that their actions matter. As Carpenter argues in a recent essay, successful regulation, by filling information gaps and managing risk, fosters confidence in the safety and honesty of markets, which in turn makes them bigger and more robust. The pharmaceutical industry, for instance, would be much smaller if people were seriously worried that they might be poisoned every time they took a new drug. And though executives chafe at financial regulation, the protection it provides makes investors far more likely to hand them money to play with. If we want our regulators to do better, we have to embrace a simple idea: regulation isn’t an obstacle to thriving free markets; it’s a vital part of them. ♦