#economics

src: FT, article

Core Idea:

• fallibility: “in situations that have thinking participants, the participants’ view of the world is always partial and distorted”
• reflexivity: “these distorted views can influence the situation to which they relate because false views lead to inappropriate actions”

Reflexivity:

• thinking participants:
  • cognitive function: understanding the world (world -> mind)
  • manipulative function: affecting the world (mind -> world)
• knowledge = true statements
• “if there is interference from the manipulative function, the facts no longer serve as an independent criterion by which the truth of a statement can be judged”
  • e.g. “This is a revolutionary moment.” That statement is reflexive, and its truth value depends on the impact it makes.11 I mean, I get what he’s trying to do, but I think he’s delving too deeply into epistemology for no good reason. It’s not about the veracity of a statement, but about the power of words to be self-fulfilling (i.e. have consequences down the road)

In the real world, the participants’ thinking finds expression not only in statements but also, of course, in various forms of action and behavior. That makes reflexivity a very broad phenomenon that typically takes the form of feedback loops. The participants’ views influence the course of events, and the course of events influences the participants’ views. The influence is continuous and circular; that is what turns it into a feedback loop.

Feedback loops:

• can be either positive or negative
• negative: brings view and situation closer together, positive: further apart22 is this right? at the very least that’s not how I thought about it.
• negative = self-correcting (and leads to equilibrium)
• positive = self-reinforcing
  • cannot go on forever, because the view would be too far from reality

via FT’s Free Lunch.

Nobel Laureate George Arkerlof’s paper on “The Market for Lemons”

It was a pioneering analysis of how markets fail to achieve efficient transactions when consumers have worse information about the product than the sellers. In the used-car example, because some unscrupulous used-car traders try to pass off “lemons” as “peaches”, consumers are aware that not all cars are what they seem to be, and discount the value they are willing to put even on the cars of perfectly respectable sellers. Because it is hard to distinguish lemons and peaches in the dealership yard, all used cars are tarnished by this risk.

I talked about this in my Introduction to Economics class, on a simple example of inefficient markets. Interestingly, you can think of #misinformation along the same lines, as a marketplace of ideas, as well as recent riots:

These provocations are, therefore, of a piece with social media propaganda campaigns that spread misinformation. Again, trust is the casualty: the effect of misinformation is not so much to spread false beliefs as to eliminate confidence in truthful ones. As the title of a book by Peter Pomerantsev captures so well, the outcome is that “nothing is true and everything is possible”.

We should understand the effect of agents provocateurs in America’s equal justice protests in the same way. The effect of seeding vandalism and rioting amid the protests is to make it hard to distinguish legitimately angry but peaceful protesters from violent mobs. As a result all are tarred with the same brush.