World Economic Forum Recap & Review

Courtesy of the World Economic Forum Twitter account

The 2016 World Economic Forum (wef) Annual Meeting took place this year in Davos Switzerland where the overall theme this year was “Mastering the Fourth Industrial Revolution”. The fourth industrial revolution is one of “cyber-physical systems”, which is largely characterized by automation, driver-less cars, artificial intelligence, big data, etc. While these technological advances will have and are already beginning to have a profound impact on our society and economy, of major concern simply put is the pending labor economic shift like none we’ve ever seen before.

While there were many additional topics of discussion from Greece to China, to food and cancer, adding those to this article would create one far too broad and redundant for a single blog post. A few of the relevant panels concerning labor economics within the fourth industrial revolution included: “A World without work?“, “Creating 75 Million Entrepreneurs: Is this Possible?“, “The Future of Growth: Technology-Driven, Human-Centred“, and “Educating the Masters of the Fourth Industrial Revolution

Effectively what’s at stake is the future of jobs (i.e. labor) in the World economy. A collaborative study by Oxford University economics and computer scientist researchers predicts that “According to our estimates, about 47
percent of total US employment is at risk.” (Frey et. al 2013) Technological advancement in the past has made previous jobs obsolete and the economy was somewhat able to adapt with higher and lower skill service sector work. The fear is that the new wave of automation may bring about an environment where the scale of work obsolescence is so vast that high skill, high education, white collar jobs even in the service sector will also be at risk. We have seen computer replacement of jobs creep further and further into the workplace including professions such as journalism, financial services, psychiatry, law, driver-less vehicles, marketing, etc. and the uncertain future of how large this can extend is still being hotly debated.

From the mood in the room and various perspectives on the topic, we can see that this economic symposium  will not simply be one of pragmatic solutions but perhaps more similarly reflect the debate about Climate Change, taking different shapes in various regions of the World. Most leaders of developed European countries appear to at least be willing to discuss public solutions to the problem including thoughts on a guaranteed minimum income. In the United States, and much of the developing World including China and India, the discussion appears to be emerging more into one of denial, clinging to old and antiquated systems, and intense conflict between those who (in the short term) stand to benefit and those who do not. Many academics however, including very highly esteemed economists such as Economics Nobel Laureate Dr. Christopher Pissarides, have similarly gone the way of the European community while those who serve to benefit from increased wealth concentration at the top willing to accept the possibility of job loss, are more likely to summon the traditional pure capitalist solutions : innovation and entrepreneurship.

Much like Climate Change, a massive transformation to our economy is coming and it is up to this generation to decide how it looks. While this change will progress over many decades, the important thing is focus the debate on solutions rather than on denial. We must summon the courage to face this head on and decide on the best solutions, public, private, or other to act on.

References:

Autor, David H. “Why are there still so many jobs? the history and future of workplace automation.” The Journal of Economic Perspectives 29.3 (2015): 3-30.

Frey, Carl Benedikt, and Michael A. Osborne. “The future of employment: how susceptible are jobs to computerisation.” Retrieved September 7 (2013): 2013.

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A Review Continued: Choosing Not to Choose

If you recall from my previous review of Cass Sunstein’s book Nudge, you may have inferred that I take an intrigued although skeptical perspective of his work. I find the topics of conversation extremely interesting and import for the public to take part in though often believe certain ascertains to be over simplified or not in keeping with what can be observed empirically. That is not to say there is no common ground to be had, if anything it is the opposite as I state when I conclude the review.

In reviewing Sunstein’s latest book Choosing Not to Choose, I take somewhat of a less traditional route in that I believe a substantial portion of my thoughts were in fact covered quite well in a review I would encourage all to read by Ryan Doerfler a Lecturer in Law and Bigelow Teaching Fellow at the University of Chicago Law School. As such, rather than provide a redundant critique, I will instead offer my thoughts which were not covered by Doerfler’s review.

If you were hoping for a purely antithetical rebuttal, you will be surely disappointed. Choosing not to choose does have it’s logical place. A most everyday example I’ve personally experienced is with movies. Deciding to watch a movie is most often far more straight forward than deciding what movie to watch. Recent industry reports contend that this psychological phenomenon is in itself is a huge contributing factor to why cable TV is still around. Sometimes, it is easier to be given a narrow or even singular option based on algorithms (think Pandora radio) than to spend time endlessly searching and contemplating the best option for yourself. Similar studies go a step further and suggest a perspective similar to Sunstein’s, as satirized by the sitcom The Big Bang Theory, that by choosing mundane decisions to default, we preserve our “cognitive energy” for use in more profound or important decisions.

In Choosing Not to Choose, we may in fact have short-term benefits of statistically making more favorable choices and reducing our cognitive load, however, I contend that in so doing we may also risk undermining our cognitive abilities. The phrase “the brain is a muscle” while cliche’ is also a valid analogy. Training your brain is extremely important to allows for optimal cognition. This theory is very much consistent with many Alzheimer studies. Weighing the options and making decisions is a crucial skill for humans. The more we begin to automate rather than mindfully practice these skills in everyday lower risk scenarios, the less adept we are to make logical, informed, rational choices with big consequences which cannot and should not be automated as Sunstein suggests (like career choices, finding a spouse, making strategic business decisions, etc.) Instead of automating your decisions and giving in to your System 1 style of thinking, practice mindfulness and using System 2 thinking in more of your life. You not only become more appreciative of your everyday events, but will be far more skilled than your counterparts at making decisions.

Sunstein also asserts, in rather conventional Austrian Economics style, that in competitive markets firms would impose limits on defaults options and ultimately benefit consumers. I am extremely suspect of that claim, and car dealerships appear to work as both a very unfortunate and salient example for Mr. Sunstein. Car dealers in general are the notorious example of the imperfect market where a firm has substantial leverage over their customers. Let’s say a consumer buys a car and it needs repair. Chances are the consumer is all but oblivious to what is actually broken let alone how to fix it or what is required to do so. The dealer is meanwhile perfectly able to use this information gap to their advantage to gouge prices. The customer meanwhile has little opportunity to go to a competitor who has implemented the same practice. If the customer would like to conduct the repairs themselves they are unlikely to be satisfied as the cars themselves have been designed to be purposefully challenging to work on without special training and often require obscure tools. (see below for a tool not sold in stores that I needed to change an O2 sensor on my car). In theory, competitive markets should alleviate this pain but in practice, the information bias along with a host of other factors results in a market that all but falls short of this fallacy.

I mentioned earlier that although I have a different interpretation of the economic evidence than Mr. Sunstein, I think there certainly can be common ground to be found as our differences revolve mostly around a singular concept. I infer Sunstein’s point of view as slightly “Libertarian” if you will in that he contends the objective of choice architects is to remain as hands off as possible to allow individuals the freedom to choose the best options for themselves while perhaps offering frameworks and tools with the goal of helping people statistically overcome many behavioral economic barriers and choose those options which are actually in their own self interest and utility function. My point of view is largely in keeping with this perspective of personal freedom though I take a slightly more cautious view regarding the unfortunate and often overlooked externalities such systems can result in, in real world scenarios.

We may want to believe that our decisions, and particularly the options and opportunities available to us are independent of the actions of others, though a large body of research on topics such as common pool resource problems would suggest otherwise. One person’s choice to smoke for example can affect you in many ways: increased healthcare premiums or taxes, it may affect your air quality if you’re within ear shot, it could make it more likely for your children to pick up the habit, it sustains a very long and lucrative supply chain which may lure workers whom could otherwise have been employed making a more positive impact on society, etc. It is our responsibility therefore as an organized society to be continuously debating the balance between personal freedom and externality mitigation. The perspectives offered by Sunstein in his books should play an important role as they are largely Pareto efficient, but are nevertheless far from a complete solution to these socioeconomic issues.

 

Book Review: “Nudge: Improving Decisions About Health, Wealth, and Happiness”

Richard Thaler and Cass Sunstein’ “Nudge” is a well reviewed book by two highly acclaimed authors from the University of Chicago Booth School of Business and Harvard University School of Law respectively. The basis of the book is to bring about the notion of “Libertarian Paternalism” as an economic policy perspective. Libertarian Paternalism is often illustrated as an alternative to more authoritarian forms of regulation, where concepts in behavioral economics are used to the advantage of policy makers or choice architects to “Nudge” individuals towards better decision making.

Part I offers a fairly decent intro into behavioral economics. For those familiar its largely an overview of Khaneman’s Thinking Fast and Slow, not much of a surprise given Thaler and Khaneman’s  history together. Thaler and Sunstein however present the subject in less of an esoteric sense, largely making use of example as their primary tool of informing. From naive investing practices, to credit markets, social security, prescription drugs, and others, the author’s provide a smorgasbord of real life applications.

The book generally offers interesting insights into what one may consider the “low hanging fruit option” of how to balance personal freedom/choice while still implementing policies to statistically benefit society at large. For instance, the authors provide an example at a school cafeteria lunch line. Rather than simply eliminate unhealthy food options, a strategic choice architecture of where food is located in the food line can be chosen utilizing behavioral research concepts to improve the likelihood consumers will make better (i.e. healthier) decisions about food consumption.

While Thomas Leonard provides an interesting critical take that “The irony is that behavioral economics, having attacked Homo Economicus as an empirically false description of human choice, now proposes, in the name of paternalism, to enshrine the very same fellow as the image of what people should want to be. Or, more precisely, what paternalists want people to be. For the consequence of dividing the self has been to undermine the very idea of true preferences. If true preferences don’t exist, the libertarian paternalist cannot help people get what they truly want. He can only make like an old fashioned paternalist, and give people what they should want.”

My criticisms however take a somewhat different tone. Both Leonard and the authors make the assumption that any form of “paternalism” from a policy or choice architecture standpoint is designed to help people get what the truly want. As I discuss in my post “The True Purpose of Paternalism” the purpose of any public policy, choice architecture, or paternalism is really to serve the public good. In this case, one can argue that paternalism should be not be used primarily to preserve was people truly want, though that may be a side benefit, but to balance the prevention of externalities.