Can an Explanatory System be Consistent and Interesting?

I just finished reading a chapter by Andy Abbott on Causal Devolution (link is to the article version), or how ‘causalism’ (the contemporary ANOVA version of causation) mucked up sociology in the second half of the 20th century. The piece is well-written and easy to follow, like most Abbott, and makes several compelling cases (such as the need to re-value descriptive work, a case he makes elsewhere also). Near the end of the piece, though, I think Abbott makes a misstep.

Throughout the piece, Abbott references the fuzzy boundary between causal analysis and explanation, arguing that many early accounts spoke of the first but meant what we would now call the second. Abbott thinks explanation (like description) is great, and indeed sociology ought to be doing a whole lot more of both so that people will pay attention to us and we’ll have useful things to say. Specifically, Abbott thinks our explanations should be consistent and interesting:

The main desiderata of explanation are consistency and interest. First, even though disciplines grow in fits and starts – pushing out here, surrendering there – our knowledge becomes great only when it has internal consistency. Our theories, our explanations, our methods, and our research programs should resonate with and support one another. In addition to this consistency, our knowledge of society should meet a second standard: it should produce… a comprehensive, interesting, and compelling account of social life. [Abbott 2001, p. 121]

Here’s the problem: interesting accounts are ones that are inconsistent with what we already know. Murray Davis, in a fabulous and fun piece from way back when titled “That’s Interesting: Towards a Phenomenology of Sociology and a Sociology of Phenomenology” (1971), argues that theories or arguments are interesting to us only when they violate our assumptions about the world. This piece is used as a method’s article here at Michigan, where we are taught that in order to get anyone to care about your research you have to frame it as somehow upsetting what they think they know about the world. The literature review, for example, serves to set up the precise bit of conventional wisdom (conventional to the discipline) that you are going to show to be incomplete or misleading. Good enough as practical advice, I suppose, though I read Davis’s article a bit more critically. Specifically, I think our systematic, institutionalized, rewarded bias towards the interesting (as opposed to, say, the thorough) makes Abbott’s idea of a consistent and interesting disciplinary take on the world impossible. If the system explains things consistently, it will cease to be interesting (at least to us); if it continually generates interesting explanations, how could it be consistent?

So, nice try Andy, but I think we can’t have this cake and eat it too, at least without first having a lot of disciplinary soul-searching about just what we should find “interesting”.

Market Devices, Stable Markets and Counterfactuals (Or, Maybe Harrison White Was Wrong)

One of my favorite pieces of economic sociology, and one of the most foundational in the field, is Harrison White’s Where Do Markets Come From?. In that paper, White disputes dominant economic models of markets, arguing that such models rely on businesses making decisions on hypothetical demand and supply curves, rather than actually observed data. White generates stable markets that fit some observed data using only data available to individual firms – specifically, the quantities produced by their competitors, the price competitors charge, and the firm’s own production cost schedule.

I’ve always liked the way White takes economics to task for assuming that actors act on information they can’t possible have. But…

Today, I’m reading through documents for a professor I’m working for. Many of the documents are what Callon, Millo and Muniesa might call “Market Devices” – specifically, in this case, forecasts of supply and demand based on all kinds of technical and political assumptions. The details aren’t important here, but the end result is: page after page of hypotheticals, given form, and made actionable. If I were an executive of a company in this industry, I could open up this book and say, ah yes, here’s how much of the product will be demanded in 5 years, and in 10, and here’s how much production capacity currently exists, and all the known planned expansions. Etc. Yeah, the projections are just projections – but they are projected, and thus can be used in decision-making.

So, as a provocative closing, I’ll ask – does the performativity approach imply that (at least for markets with a sufficient amount of economization, enough market devices) White was wrong? What can we learn from comparing these two approaches (and the standard economic account)? Is there a way to merge the two approaches?

Four Arguments for the Free Market

This morning, as part of an independent study, a cohort-mate and I discussed Talcott Parson’s The Structure of Social Action. The book is a bit surreal – the entire thing is almost a shaggy dog story in the Sociology of Knowledge, wherein the theorists he reviews (Marshall, Pareto, Durkheim and Weber) are proven to be correct simply because they said vaguely similar things at the same time in different places. Let’s just say the strengths of the book, and its enduring legacy, are neither in its style nor the logical strength of its main conclusions. I don’t mean to be too harsh – there was a lot of interest in the sections we read, especially on the development of liberal political thought and Sociology’s emergence as a reaction against it.

But none of that has much to do with the thrust of this post – the free market. Somewhere in his exposition of liberal theory from Hobbes to Marshall (my copy is elsewhere at the moment [EDIT: Page 104, about Malthus' idea that competition served as a social regulation mechanism, Parsons doesn't actually use the phrase free market]), Parsons notes that the importance of the free market for liberal* theory has a lot to do with the way it prevents anyone from exercising power over anyone else, and less to do with the way it maximizes productivity. Parsons is not the only one to make this argument – it shows up also in a lot of the work in the “corporate governance” tradition in the mid-20th century, authors like JK Galbraith and Carl Kaysen argue that the rise of large corporations is potentially dangerous because such corporations have discretion in a way impossible under a competitive market.

More generally, I think in sociology we can sometimes forget that the Free Market has been praised, defended and fought over not simply because of its virtues in allocating resources. Rather, I can think of four analytically distinct arguments in favor of relatively unfettered markets as the best way to organize economic life**:

1. Market allocate scarce resources efficiently. This is the most commonly used argument, and is associated most strongly with the entire neoclassical economic tradition. Supply matches demand, markets clear, everybody maximizes their welfare. Hooray! It’s most closely related to the next argument.

2. Markets take advantage of all of the information in society. This view is expressed most clearly in Hayek’s famous essay, The Use of Knowledge in Society. Hayek argues there that centralized planning systems cannot adequately capture all of the everyday and local sorts of knowledge about production techniques, materials, demand and more possessed by workmen, shopkeepers, etc. all the way on up. Top-down coordination fails because information is too expensive to centralize, and the free market reigns supreme because it lets society have a kind of distributed cognition. It’s mostly an argument against central planning.

3. Markets generate the perennial gale of Creative Destruction, that is, innovation that produces wondrous new goods and cheaper and better ways to do everything. This view obviously comes straight out of Schumpeter and his classic work Capitalism, Socialism and Democracy. Schumpeter argues that markets are good not because they allocate resources efficiently on a moment to moment basis (and thus refutes argument 1 above), but rather because they promote innovation. Businesses with some limited monopoly power emerge naturally, and are healthy, as they provide some stability in the face of the perennial gale, while simultaneously investing in the R&D that produces it. Capitalism = Innovation. Innovation = Win.

4. Markets limit discretion and power. This argument is most famously explicated and belittled in Karl Polanyi’s The Great Transformation. According to free market liberals, in a competitive market, no actor has the power to set prices (see any microeconomics textbook), and thus no actor has power over any other. The system runs itself, no one fights, and no one tells anyone else what to do. Polanyi calls this a “stark utopia”, and argues that it is as unreal and destructive as the communist utopias inspired by Karl Marx and lambasted as impossible by liberals. As mentioned above, authors concerned about the rise of the large corporation in the 20th century also draw a lot on this notion of the market. Anti-trust law, for example, is seen not just as a way to make the market more economically efficient, but also to prevent the enormous build-up of power in the hands of the corporate elite.

Ok, so there you have it. Four arguments in favor of the Free Market (along with some bits of some counter-arguments). Enjoy! And leave a comment if you think I’m missing any, or grossly mis-characterizing the ones I have.

* In this post, I use liberal in the older, non-American sense, relating to the “liberalism” of thinkers like Locke, and the “market liberalism” of free market proponents throughout the ages. Parsons actually does a nice job of parsing these arguments (especially the early emphasis on individualism as a normative claim about how things should be rather than a positive claim about how things are), but for my purposes there’s no real need to disaggregate, as the arguments I’m getting to are all in the 20th century.
** Note, I’m not arguing for any of these in particular, I just want to put them out there and associate them with a few names to see what y’all think.

When did homo economicus become such a jerk?

(Note: The following is basically a reaction paper I wrote for an independent study. I’m going to be posting some of these, when the spirit moves me. This one was based on a reading of some chunks of Marshall’s Principles of Economics and Mancur Olson’s The Logic of Collective Action.)
Alfred Marshall’s Principles of Economics was the first dominant neoclassical economics textbook. First published in 1890, Marshall’s Principles brought the mathematical tools of Jevons and Walras to the masses, as well as introducing several innovations of its own (such as quasi-rents, as a way to describe the rent-like income derived from the exploitation of capital investments). What Principles did not do, however, was exclude from its analysis all human motivations outside of narrowly conceived economic self-interest. Contemporary influential works, from outside of the neoclassical tradition, included a thorough analysis of human motivations (see, for example, Veblen’s The Theory of the Leisure Class). Marshall focuses on self-interest, and its capacity to explain the workings of the economic system, but he explicitly includes other motivations as necessary parts of our understanding. By the 1950s, however, as Marshall’s text gave way to Samuelson’s, and the mathematical-Keynesian synthesis became ascendant in economic theory (cf. Yonay 1998), the caveats and nuance of the original conception of economic man were lost along the way. In this post I will explicate Marshall’s understanding of human nature, and contrast it to that of Mancur Olson, to argue that Olson’s highly influential work created a pseudo-problem by taking the notion of homo economicus a bit too seriously.

On page 1 of the tome that is the Principles of Economics, Marshall introduces the study of economics as the “study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.” (One wonders if Marshall was in contact with Weber!) In the next paragraph, Marshall goes on to argue that “the two great forming agencies of the world’s history have been the religious and the economic.” The study of economics is relatively recent in growth, Marshall argues, because only recently have economic affairs become a separated realm: “Business is more clearly marked off from other concerns; the rights of individuals as against others and as against the community are more sharply defined…” (5) Thus, it now makes sense to study economics as a separate field.

Marshall cautions, however, that we should not characterize the modern age by the rise of competition. Rather, “It is deliberateness, and not selfishness, that is the characteristic of the modern age.” (6) With more echoes of Weber, Marshall parameterizes modernity by the rise of the rational actor, not by selfishness. Why not? Because the modern era does not show an overabundance of selfishness:

“…family affection leads to much more self-sacrifice and devotion than it used to do; and sympathy with those who are strangers to us is a growing source of a kind of deliberate unselfishness, that never existed before the modern age. That country which is the birthplace of modern competition devotes a larger part of its income than any other to charitable uses, and spent twenty millions on purchasing freedom of the slaves in the West Indies.” (6)

Indeed, Marshall goes so far as to claim that “No doubt men, even now, are capable of much more unselfish service than they generally render: the supreme aim of the economist is to discover how this latent social asset can be developed most quickly, and turned to account most wisely.” (7, emphasis added) So, it is pretty clear that Marshall did not think of modern man, nor primitive man, as primarily motivated by self-interest.*

Decades later, Mancur Olson published a highly influential work of social and political theory that helped bring rational choice-style analysis to the forefront of organizational and political theory: The Logic of Collective Action. Olson argues that existing theories of group behavior naively assumed that actors with common interests would naturally aggregate into groups that acted on behalf of those common interests. Through a combination of game theoretic logic and persuasive rhetoric, Olson demonstrates that except in certain special circumstances (such as when one actor gains tremendously more than the others, or when groups are very small and commitments can be enforced easily), self-interested individuals will not invest in public goods. All that’s well and good except… why would our prior be that individuals are narrowly self-interested? Indeed, given that self-interested individuals cannot easily act collectively, doesn’t the existence of so many forms of collective action suggest precisely that individuals are not self-interested?

To be fair to Olson, the object of his study is not to explain the existence of collective actors, but rather their absence. Olson reiterates this in his conclusion: “The existence of large unorganized groups with common interests is therefore quite consistent with the basic argument of this study. But the large unorganized groups not only provide evidence for this basic argument of this study: they also suffer if it is true.” (167) Certainly, there is merit to analysis of the difficulties that such large groups face in organizing, and the role that various commitment mechanisms and enforceable regimes can play. That said, I wonder to what extent Olson’s solution creates a pseudo-problem – the explanation of those groups of collective actors that exist. By focusing solely on self-interest, by being unwilling to let altruism (in varying quantities) explain anything, Olson (along with most of rational choice theory and economics in the 20th century) creates conundrums that would never have troubled Marshall.

* Marshall also notes that even self-interest is often interest on behalf of one’s family. Otherwise, why work hard to leave an inheritance? Or provide at all for one’s children?

Random Thought of the Day: Econ Soc vs. Behavioral Econ

Why has behavioral economics been so much more influential in mainstream economics and popular debate than economic sociology? Perhaps this question is too easy, and admits too many good answers, but I wonder if there is something to be learned by asking it. Both subfields/perspectives have come to the fore in the last 30 years (with 1981-1985 being the genesis of the new economic sociology, roughly, and behavioral econ starting perhaps in the late 70s with Kahneman and Tversky). Both position themselves as strong critiques of prevailing economic orthodoxy, and both are grounded in critiques of the neoclassical homo economicus. But reading stories about the failures of recent economic theory to predict or help in the current crisis, and the likely directions forward, it’s clear that behavioral econ will be a big star (for example, Akerlof and Shiller’s new book uses behavioral explanations for the financial crisis). Economic sociology, on the other hand, has not really showed up, in spite of the many works written by economic sociologists of potential relevance, or that look at the crisis head on. We’re just off the radar – too small, or too wacky, or too impenetrable. I’m not sure.

I’m not writing this post to complain about Sociology’s policy irrelevance, but rather to question what makes the two critiques differently influential. One obvious place to look, sayeth my sociological training, is the institutions and actors and resources pushing for each. But I have a nagging feeling that there is something deeper at play here, something to do with the accessibility of arguments about individual rationality vs. those about the social constructions (in various ways) of economic actors. Economists have long had the nagging feeling, sometimes stated sometimes not, that their models of human action are too stripped down and too perfect. Behavioral econ offers a way forward that adds some seeming realism to those models by adding in the most obvious calculative errors, but does not fundamentally criticize an individuals-first world-view. The semi-rational man replaces the rational one, bubbles form and burst, recessions and depressions are explained, and the underlying ontology of the world persists.

Economic sociology, I would argue, claims that the individual is not the building block of society, but rather that individual actors are incomprehensible outside of their networks, and that the individual and society co-constitute each other. That is, like the broader discipline, sociologists argue that individuals are not prior to the social. How exactly we do this varies. Granovetter strongly opposed norm-driven models that replaced the undersocialized economic actor with an oversocialized Parsonian one, whose actions were determined by society’s needs. More recent work, influenced by the Actor-Network tradition in science studies, examines the construction of economic actors through overlapping webs of organizations and technologies, eschewing discussions of “society” entirely for a focus on the local (although a local that can be quite large). Either way, the economic actors of economic sociology are not simply rational agents with trembling hands, but rather a different sort of thing, constructed actors with histories and contexts. That historicity (which is not the opposite of reality! cf. Murphy 2000) challenges dominant liberal notions across American society (at least).

Perhaps this difference can help explain (in addition to all those classic arguments about dollars and prestige and whatnot, although prestige itself is endogenous here) why so many of the same substantive conclusions are reached by behavioral economists and economic sociologists and yet the former have become prominent while the latter remain a bit more underground.

Meet the Merchants of Death

Today’s New York Times has a fascinating, and depressing, look into the exciting new world of life insurance derivatives. That’s right, the same people that brought you such joyous inventions as the sub-prime mortgage have a new plan – securitizing life insurance. Some key quotes from the NYT piece:

Goldman, leading the way as always, with an index of death:

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

The big problem? Unexpected increases in longevity. The solution? Well… “Oh no, not again” comes to mind:

In addition to fraud, there is another potential risk for investors: that some people could live far longer than expected.

It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.
…
In many ways, banks are seeking to replicate the model of subprime mortgage securities, which became popular after ratings agencies bestowed on them the comfort of a top-tier, triple-A rating. An individual mortgage to a home buyer with poor credit might have been considered risky, because of the possibility of default; but packaging lots of mortgages together limited risk, the theory went, because it was unlikely many would default at the same time.
…
A bond made up of life settlements would ideally have policies from people with a range of diseases — leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet.

But nothing bad could come from incentivizing financial capitalists to prevent increases in longevity, right?

But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?

I’m imagining a cyberpunk novel, set 15 years from now, when a brilliant young researcher working in a corporate lab discovers a one-shot cure for cancer and is hunted down and killed before she can publish because the firm’s CFO has over-invested (both personally, and the corporate coffers) in life-insurance derivatives.

More banal, and more likely, is simply the creation of yet another reason to oppose meaningful health care reforms.

There is some resistance, likely to be futile:

Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.”

What do you bet that will go anywhere?

And I’ll finish with something from the, stop-me-if-you’ve-heard-this-one-before department:

“It’s an interesting asset class because it’s less correlated to the rest of the market than other asset classes,” Mr. Terrell said.

Oh no, not again.

Hogwarts, Year 2

Today begins a new school year at HogwartsMichigan. It’s a bit funny for me, as after 3 years of being a graduate student, I’m finally starting my official 2nd year of graduate school (1 at UCSD, 1 off but auditing courses, 1 at Michigan). On deck for this term, course-wise: a required overview logics of inquiry/research methods course, an independent study of mid-20th century social theory mentioned in a previous post, and a class in the Anthro department on Actor-Network Theory. So, it’s going to be a pretty theory heavy term for me.

Everybody ready? Let’s go!

RetroBlogging – John Kenneth Galbraith’s “The New Industrial State” QOTD

Following up on yesterday’s quote from Burnham (1941), we have an amazing quote from Galbraith (1978) on the primacy of economic goals in public policy, and the problems with focusing solely on what is measurable:

[T]extbooks, teachers and economists in high office regularly warn that economic judgments are not the total judgment on life. This warning having been given, economics is then, routinely, made the final test of public policy. The rate of increase in income and output in National Income and Gross National Product, together with the level of employment, remain the all but exclusive measure of social achievement. This is the modern morality. Saint Peter is assumed to ask applicants only what they have done to increase the GNP.

Skipping one paragraph, and with not as punchy a last line, JKG continues:

There is a further advantage in economic goals. The quality of life is subjective and disputable. Cultural and aesthetic progress cannot easily be measured. Who can say for sure what arrangements best allow for the development of individual personality? Who can be certain what advances the total of human happiness? Who can guess how much clean air or uncluttered highways are enjoyed? Gross National Product and the level of unemployment, on the other hand, are objective and measurable. To many it will always seem better to have measurable progress toward the wrong goals than unmeasurable and hence uncertain progress toward the right ones.

I think I could frame my current research project by asking of this quote, “How did this come to be?”

Mid-20th Century Social Theory Syllabus Advice

Recently, socblogger celebrities Andrew Perrin and Kieran Healy posted their graduate social theory syllabi on their respective blogs. Like most grad social theory classes, these two focused on the classics – Marx, Weber, Durkheim – with a smattering of interesting contemporaries (e.g. Bourdieu) and antecedents to contemporary work. The two theory sequences I’ve taken (at UCSD and Michigan) had much the same structure.

A cohortmate of mine and I decided this summer that we wanted to focus on the part in between – the folks from the 1930s (or so) to the 1970s (or so) that set the stage for contemporary debates, but are now little read (in required courses anyway). We learn to criticize some of this work but don’t really know what it was or why it was influential (Parsons being the exemplar). So, the two of us decided to run an independent study we are affectionately calling “Theory 3″, with a focus on mid-20th century American and European social theories we’ve heard of but not read much of. Unfortunately, this left us in the awkward position of constructing a syllabus about authors we knew little about! We scraped things together, Googling syllabi and asking around, and we’re fairly happy with what we’ve come up, but we’d love to have your input. Here’s the syllabus. What do you think?

RetroBlogging: Burnham’s “The Managerial Revolution” QOTD

I’m right now working on a project where I’m going through some big mid-20th century economic and political sociology works (e.g. Galbraith, Bell, etc.) to look at how they talk about the separation of ownership and control. This morning’s task is Burnham (1941) The Managerial Revolution. Burnham argues that we must think of management/owners as disaggregated into four groups (technical managers, profit-oriented executives who don’t actually make anything, finance-capitalists and small stockholders with no actual control) who all have different outlooks on life. All of which leads to our retro-sociology quote of the day:

The different things which these different groups do promote in their respective members different attitudes, habits of thought, ideals, ways and methods of solving problems. To put it crudely: the managers tend to think of solving social and political problems as they co-ordinate and organize the actual process of production; the nonmanagerial executives think of society as a price-governed profit-making animal; the finance-capitalists think of problems in terms of what happens in the banks and stock exchanges and security flotations; the little stockholders think of the economy as a mysterious god who, if placated properly, will hand out free gifts to the deserving.

I think the last line is particularly great (and not just because it’s a great, early-ish example of the modern use of the phrase “the economy”).