Making markets work for people

The idea that markets are perfect if left free is profoundly wrong argues Robert Shiller, Nobel Prize winning economist, who was speaking at the RSA today. 

The concept of the perfection of markets is attributed to Adam Smith, but says Shiller, even he didn’t entirely believe it. 

In fact in the modern free market economy businesses grow up around human weakness. Markets are built on phishing and we have no idea as individuals how pervasive this is. 

He gave a couple of examples: cigarettes and slot machines.  The Malboro Man  grew out of research showing that the rugged cowboy was the character which the target customer most closely identified with – everywhere in the world. So Malboro cigarettes have huge consumer preference despite the evidence from research that all cigarettes taste pretty well the same. 

Gambling, he points out, is addictive and destructive. And slot machines are among the most addictive especially when you optimise them to take advantage of the weakness. It turns out, he says, that the optimal time between button pushes is 3.5 seconds. If the flow is broken the player may walk away. So now they are designed to do nothing to break the cycle. 

Shiller argues we need regulations to combat this characteristic of markets to phish. 

“If we didn’t have regulations we would have slot machines everywhere,” he argues. 

“Government intervention should not be considered evil.”

Rise of the robots

Silicon Valley entrepreneur and author Martin Ford believes automation is going to have a profound effect on society, an effect we are unprepared for. Speaking at the RSA today Ford said that as a group economists are generally sceptical about the impact of automation and AI. The reason is historic – it has always proved a misplaced worry in the past. 

But it is different this time for three reasons:

  • The exponential nature of technological change
  • The increasing cognitive capability of technology 
  • And the fact that general purpose technology is increasingly ubiquitous. “There are no safe havens any more”.

One argument is that we will create new jobs as old ones are replaced. However, he argues the new industries are not labour intensive – say, 5% of the work force for the same revenues. “90% workers are still in jobs which existed 100 years ago,” he says. “The entire economy will be more like Google and less like GM in the future.” 

Productivity and compensation decoupled in the 70s and now the benefits have accrued to the capital owners not the workers, he argues. This is because before the 70s automation helped workers become more efficient – since then it is competing with them. 

Technology is no longer just coming after the low skilled (education is the traditional solution); now technology is climbing the skill ladder. 

“Machines do not consume – businesses must be able to sell what they produce,” he says. This means a shift from labour to capital, from workers to owners. “When you take purchasing power from average people and give them to the rich you take demand out if the market – Bill Gates isn’t going to buy 1000 restaurant meals.”

We have a choice between a utopian future or dystopia. In the long run he believes one fundamental answer is a universal basic income. Politically, he says, this is almost unthinkable right now. But if we are going to avoid dystopia we will need to seriously consider options like this. And to pay for it? “Logically we are going to have to shift taxation from labour to capital.”

Beyond Ideas


It was doubly ironic that Robert Rowland Smith, a writer and philosopher (an ideas based profession if ever there was one) chose   the RSA (an organisation whose central mission is ideas) to urge us all to move beyond ideas at a talk today.

He says we live in a culture which believes in making things happen rather than letting things happen: “We wait for ideas to rescue us.”

He argues that this focus on ideas keeps us removed from reality. Ideas and reality aren’t connected, he says. They are the “cousins of the lie”.

He says there are many ways of seeing the world. 

The first is what he calls the Google Glasses approach. This is our common approach. Like Google Glass we look at the world through a filter. This is a mediated view designed to help us interpret rather than experience the world directly, what philosophy would call a hermeneutic way of seeing. 

In contrast his second way of seeing is data driven – a phenomenological way of seeing the world. 

Using this way of viewing we simply describe the world without trying to interpret. “The effort of seeing is very hard” though, he warns.   

The third way is what he calls Hazing  – losing focus on the particular in front of you and therefore seeing more of the context. “Understanding increases when you lose focus and you see more of the whole.”

The final way is what he describes as a Meta way of seeing. This involves moving above yourself and seeing yourself as one of the actors in the scene. This allows us to appreciate our place in the whole as we are spared of the need of interpreting the world.

Smith says he is often called on to help artists of all types who are experiencing a creative block. He says they mostly think what they need are fresh ideas. But he says this is wrong. 

Creativity is solitary and non-ideas based he argues. He has invented a term – “Soulus”  – to describe what is solitary and unique about each individual. 

True creativity comes, not from an idea which is rooted in someone else but from within. It’s in the images from our subconscious which come to us in our dreams, for example.

The final idea Smith spoke about was perdition – being lost. 

“When we are looking for an idea we are looking for navigation,” he says. Getting lost is where we find our most innovative thoughts, he says,  when we are being open to what is not formed. 

“Unless you are truly lost you are not empty enough to come up with unique creative ideas.” There’s that word again!

How Big Data affects our lives

Big Data is as much of a threat to civil liberties as the misuse of genetic information and should be subject to exactly the same kind of ethical debate.

Professor Frank Pasquale, speaking at the RSA today, gave chilling examples of firms insisting employees use tracking (phones, FitBits etc) to track their lifestyles and then correlate the data with work performance. This, he says, is a big threat.

His argument focusses on three problems:

Collection. Technologies are adopted because they are slightly better than existing techniques, Pasquale argues, but they are still poor. That leads to frequent errors and If that happens  correcting it at source is difficulty. And even if it is corrected at source that doesn’t mean it will be corrected everywhere. This needs to changed, he argues, so there is a robust method for correcting errors everywhere they have been used. That is difficult, he acknowledged, but critical.

.  We are rapidly becoming an administered society, Pasquale believes, and phenomena such as Red/Yellow/Green pre-classifications are commonplace but opaque.  There are numerous examples of abuse, he says, such as people’s credit scores being penalised because they tried to dispute their credit score. “This is a Black Box problem,”he says.  The problem is that these systems are serving those who are scoring consumers not the consumers themselves. “It has become almost a quasi-judicial role,” he says. “A kind of Big Data Star Chamber.”

Uses of data. Credit card companies analysed their data and found something very interesting- people paying for marriage counselling on a card are more likely to subsequently default. This finding can then be used to raise rates or lower credit limits. This he says is very troubling as effectively we are penalising people who seek marriage guidance – a perverse outcome. The answer is to eliminate certain types of sensitive data such as health and sensitive behavioural data.

Pasquale pointed out that with the genetic revolution society decided that the issues were so important that we decided we needed serious ethical debate. Big Data, he says, is of a similar magnitude as an issue and needs a similar ethical debate.

One of the problems in this space is that national jurisdictions vary so much in how they handle the privacy issue. Pasquale says governments use this lack of standardisation sometimes to get around their own country’s rules. The answer, he believes, is more harmonisation of standards globally.

There are some very powerful uses that Big Data could be put to which would benefit humankind – improving response to illness, for example, by analysis of large anonymised data sets of medical data. And he points to another positive example in the treatment of returning veterans of the US Army. Veterans traditionally have a much higher suicide rate than the general population. The Durkheim Project aims to monitor the social networks of returning veterans and perform sentiment analysis to compare with patterns detected in the social networks of those who have previously committed suicide. This is done with full consent and is, he says, an excellent example of the positive use of Big Data Analytics.

Frank Pasquale is Professor of Law at the University of Maryland and an Affiliate Fellow at Yale Law School’s Information Society Project.

Can altruism be more effective?

  Moral philosopher Peter Singer gave a compelling argument today at the RSA for the utilitarian approach to charity. He believes that not only should we give more of our incomes away but we should make sure it is as effective as possible. 

You get much better value for your money investing in developing countries than in developed. It costs much more money to make an equivalent difference in Britain than in a developing country. 

He is a supporter of the Effective Altruism movement which he says originated in Oxford and has been growing in influence for the past decade. He cited organisations such as Giving What We Can which encourage  people to give 10% of salary but also promote an analytical approach to its allocation. 

The idea which initially sounds very appealing isn’t without its problems, however. Singer himself raised several questions: How do you decide what the best thing to do? How do you compare cataract removal with maleria net? How to treat non-human animals compared to humans?  How do you measure the value of giving to organisations which try to change government policy rather than directly intervene? 

Despite these challenges he believes trying to allocate resources based on effectiveness could transform philanthropy. 

“Most people don’t research and even those who do mostly do very little,” he said. Any improvement would be a good thing. Similarly he resists giving out a target for the percentage of income which should be given. Much better to start somewhere and then review. 

His ideas create discomfort though. Do they mean we shouldn’t invest in charities serving developed countries? Isn’t the logical conclusion a reductionist one where the single most effective organisation gets all the money? How do you value volunteering rather than cash? 

His answer is again pragmatic – applying an evidence-based approach to giving (time or money) will make the world better, even if it is far from perfectly implemented. 

Why information grows

A short history of information from the Big Bang to the modern complex economy. That was basically the entertaining talk Cesar Hidalgo, who leads the Macro Connections group at MIT Media Lab gave at the RSA last  Thursday.

He started with the universe made up of matter, energy and information. Information is expressed by how physical things are arranged and you need to spend energy to create information. Take a deck of cards – shuffle the deck and you have the same matter, but arranged differently. That is information. DNA is also information. For information to exist it needs to be embedded in matter.

However, for information to grow – which is the subject of his investigation – it has to develop the capacity to compute. Computation is much more widespread that we usual think. For example trees are able to compute, he says – they know which way to grow their roots and their branches, when to shed and when to grow their leaves and how to fight off diseases.


So living organisms can grow information but they are limited by their own internal physical properties as defined by their genetic codes.  Humans are the only species to break through that limit. By using computation to make our imaginations real we grow the total amount of information. “Products are embodiments of imagination and information.” In other words we “crystallise imagination”.

So why do we do this? In order to transmit the skill of others who you may never have met in the form of products. He provides a good example of how much value imagination provides. Take a supercar such as the Lamborghini Veneno which costs $3.9m. If you rearrange the matter in the car by crashing it into a tree at speed you still have exactly the same amount of matter, but after the crash the idea of the car is totally different and so is the value.

So, humans found a way to crystallise information but we have a finite capacity to accumulate knowledge. So we need to organise the work in a network so that different people provide different parts of the puzzle. But embodying information in a network of people is hard and there are limits on the size of the effective network, trust being the key ingredient.  “Trust reduces the cost of transactions,” as he puts it.

Societies differ in their intrinsic levels of trust. Familial economies are low trust societies where only family members can be trusted. These societies therefore have small networks and basic industries and they tend to want the state to step in to solve all problems.

High trust societies on the other hand have networks of people organised in firms and have larger and more complex industries (aircraft manufacture, for instance) . They tend to self-invent institutions to help them where they need it.

Therefore the differences in income are differences in computational abilities, Hidalgo argues.

As societies get more complex the next step up from networks of people in the growth of information is networks of firms.


There is what Hidalgo calls a re-embodiment of computation  in ever more complex structures. And economies highly nested and activities cluster together.

It is therefore possible to predict quite accurately which categories of exports countries will move into by studying what they are exporting now.

Thus he believes the information theory of economics is much more useful as an indicator of economic strength than GDP.



The Road to Character


 The columnist David Brooks says there are two types of virtues, resume virtues and eulogy virtues – the things that are said about you after you are dead. We spend our lives chasing the first but in the end it’s the second that we most desire, deep down. 

Speaking today at the RSA he talked about the concept of Adam 1 and Adam 2  – the idea coined by Joseph B. Soloveitchik to describe the external and internal lives of people. 

Brooks says these two live by different logic. And the danger comes when the two are out of balance. If there is too much Adam 1 a core piece of the personality (Adam 1) becomes less impressive each day. He believes this is what is happening today and he says there are several reasons for that including lack of time, the increasing prevalence of social media and the fact that our culture is now focussed on self worth. “We’ve told a couple of generations how great they are and they believed us.”

The result is an increased desire for fame and the loss of the capacity to have sophisticated moral conversations.  

He says if you use Google Ngrams to analyse the popularity of certain words it is clear economic words are up, moral words are down. 

So what are activities that Brooks believes lead to moral depth? 

First, humility – not self-deprecation but the ability to truly  see yourself from a distance. “The essential drama is in overcoming your own weaknesses.”

Second, suffering. “We wouldn’t call someone deep unless they had suffered.” Sometimes people shrivel when they suffer, he says, but it can develop self knowledge, empathy and even transcendence. 

Third, a capacity for great love. 

The word “character” has migrated from an Adam 2 world to an Adam 1 world, he says, and it is now something which helps you get on. It needs to be reclaimed. 

The happiness industry

  The current obsession with attempting to quantify happiness is having a detrimental effect on society said Will Davis speaking at the RSA today in a talk entitled: how Government and big business sold us wellbeing. 

There are myriad examples of the kind of quantification he is talking about :

  • The rise of happiness statistics 
  • The rise of wearable technology and mood quantification 
  • The rise of new methodologies in fields like Neuroeconomics which seek to show that dopamine, for example, has a direct impact on economics
  • The rise of face and voice scanning technologies collecting data on moods
  • And the notorious Facebook experiment on whether mood can be influenced by manipulating what people see in their news feeds

So why is this happening particularly now? For three reasons he says:

1. The rising importantance of psychological engagement in workforce. 

2. The dramatic rise of depression and anxiety increasingly framed as illnesses rooted in physical causes

3. The fact that we now live in a society where experiments can be run in everyday life. 

His belief is that we need to challenge the argument that it is self-evident that happiness can and should be measured.  

The roots of this trend go back to Jeremy Bentham’s utilitarianism at the end of the 19th Century. 

Bentham was concerned about the danger of abstract language which he felt could be used to manipulate- terms like the “devine right of Kings” or the “rights of Man”. But Davis believes there are philosophical contradictions with Bentham’s approach. 

Happiness was being simulataneously being asked to fill two roles; in one the ethical status of happiness is of being good in itself, in the other it is also measurable and empirical. Davis says the concept constantly flips between the two.

Mindfulness is a good example. The current trend for mindfulness bolts together the metaphysical and the supposedly empirical and scientific.

The risk is that the capacity to explain what we feel is undermined and unhappiness is increasingly seen as being capable of remedy by medial intervention.
We therefore end up granting external authorities power over us – such as the The Diagnostic and Statistical Manual of Mental Disorders which defines quite specially things like depression.  

What is needed he says is a reauthorisation of people to describe how they feel in terms which transcend the purely empirical. We need to be free to be the “authorised narrators of our own happiness.”

“Settling ethical questions by resorting to matters of fact is dangerous,” he says, as is locating sources of unhappiness in individual bodies and brains rather than in the world around them (inequality, for instance).

“Sometimes its important for people to have something to be unhappy about.”

Towards an economy that works for us

We are now living in an age of total bureaucracy says David Graeber, anthropologist and leading figure in the Occupy movement, speaking at the RSA last week. There is now a web of planetary organisations including global corporations, NGOs, institutions like the IMF and Workd Bank which has merged into a single web-like bureaucracy.  

Bureaucratic institutions are really about limiting imagination, implying that there is simply no alternative to the global capitalism system.

This has profound consequences, he believes. Take the Liberal Democrats volte face in 2010. Graeber points out the LibDems promised free education before they ended up in the coalition government, but subsequently backed tuition fees. The argument was that we had to raise the money because we owed money and the bond-holders wouldn’t trust us if we defaulted on our loans. So rather than break a promise to international financiers which might mean they wouldn’t lend in the future, the LibDems broke a promise to the electorate which might mean they wouldn’t vote in the future. “They would rather break democracy than break the financial system.” 

So what’s to be done?

Graeber believes there are three things that need to happen.

First, develop true democracy. His time with the Occupy movement taught him just how threatened the global bureaucracy is with groups congregating, discussing and making decision. Very challenged. Changed laws anything to stop free association.

Second, return to valuing real work, rather than “bullshit jobs“. Capitalism is supposed to remove non-productive jobs, but this simply hasn’t happened, Graeber argues. What has happened is a redefining of work as good in and of itself. “The more pointless and unrewarding your job, the more like a ‘real’ job it is.”

People are complaining that robots will replace work, he says. “If ever there was a sign that an economy is stupidly organised.”

Third, start forgiving debt. Debt has achieved a sanctity which puts it above democracy and humanity. 

He also spoke about what he called the “war on imagination”. 

Old fashioned bureaucracies were good at creating eccentrics, he said – the Manhattan Project was full of them. “Modern bureaucracies can’t tolerate them” he says, and that’s the reason our rate of invention of genuinely significant innovations has fallen so dramatically and hence why economic growth is so lacklustre.