Of Cats and Cashflow: Human sentimentality and the flaw in economic rationalism

Last Christmas, I paid $5000 for a cat.

$5000.

For a cat.

“Cat” here, in case you should be wondering, is not the title of an avant garde piece of sculpture by some breaking new artist, or a colloquial reference to a rare wine or other exclusive gift for a loved one. Nor indeed, anything special in the feline department.

Just an ordinary cat that my 9 year old daughter had saved her pocket money to rescue from the Animal Shelter. Yes, okay, it’s accepted family lore that he is actually a pedigree animal who somehow found himself down on his luck on kitty skid row – but I can accept there may be a degree of parental self-delusion in that particular idea.

Whatever his back story though, as the warm summer evenings of 2013 began to lengthen, heralding the winding down of business and arrival of the holiday season, all thoughts of casual beachside barbecues and Christmas relaxation were rudely dashed for me one Saturday morning as young Pedro – having manfully picked a fight with a passing car – dragged his sorry frame into the house and collapsed theatrically in the middle of the living room floor.

After a quick cat scan at the local veterinary hospital (no, not a moment of levity playing on my feline friend’s biological order there – a real actual honest-to-goodness “cash up front please sir” CAT scan cat scan) showed up the incontrovertible evidence of a clean and comprehensive break right through the young street fighter’s pelvis, the therapeutic choices came to a quick fork in the road. One path led to major surgery, emptying of savings accounts (“kids – hands up who’s going to University. Not so fast there you two”), and having a half-shaved grumpy convalescing cat locked in a cage in our cosy house through the warmest weeks of summer. The other, to a quiet, calm, fully funded holiday season. Even a couple of weeks of really nice vacation. As well as the sticky point of explaining to my daughter why her precious kitty wouldn’t be joining us for Christmas dinner.

The path we chose (and I say “we” here entirely in the blame-shifting and shared responsibility sense – my wife’s version of this story may differ on the precise extent to which each of us couldn’t stomach the tough decision making) probably tells you everything you need to know about why I’m never likely to make the annual list of Australia’s 10 hardest hearts. And why you shouldn’t take my advice on anything to do with finance.

The point is, this doesn’t qualify as an investment decision. It’s not like I had some brilliant plan to parlay this $5000 outlay into a major stream of retirement income. Even if the cat in question is possessed of the kind of dashing good looks that could make him a major star in pet food commercials…if he could at some point stop trying to take a chunk out of any hand with the temerity to pat him without explicit permission.

No, it just turns out that little tiny titanium screws are really expensive. If you want them put somewhere useful by a veterinary surgeon, anyway.

The much pampered and perhaps overly tolerated Pedro - a few lives down from his initial quota of 9 perhaps, but still going strong as an extended metaphor for social relativism. And definitely not just a shameless attempt to elevate my viewing stats through use of a cute cat picture.

The much pampered and perhaps overly tolerated Pedro – a few lives down from his initial quota of 9, but still going strong as an extended metaphor for social relativism. And definitely not just a shameless attempt to elevate my viewing stats through use of a cute cat picture.

And there, laid bare for the world to see, lies the fundamental flaw with economic rationalism. People are not reliably rational actors on the world stage – we all bring our personal values, idiosyncrasies and biases to economic decision making.

For those of you who might not be fully familiar with the concept, economic rationalism (market liberalism, for readers from outside Australia) is the dogmatic view that markets and money can always do everything better than governments, bureaucracies and the law.

In the more prosaic words of Michael Pusey – Professor of Sociology at the University of New South Wales: “Forget about history and forget about national identity, culture and ‘society’…Don’t even think about public policy, national goals or nation-building. It’s all futile. Just get out of the way and let prices and market forces deliver their own economically rational solution.”

This philosophy underpinned a sharp step to the right across much of the Western political sphere in the 1980s and 90s – think the Hawke-Keating-Howard years in Australia, Thatcherism and its correlatives in Europe – and has more recently been used as the basis for a strict balance sheet approach to management in many areas of wider society – education, housing, the arts, even environmental policy.

This deference to accounting undeniably has a certain elegance to it – a simple coherent narrative that can easily be painted on a placard, or broadcast in a 6 second sound bite. Like Creationism re-packaged for a political audience though (and with many of the same elements of true belief and ideological fervor), the sneaky trick here is that while this is dressed up as analytical economics, really it is all about political philosophy – the ideology of unfettered personal freedom. Don’t get me wrong – it is entirely proper for economic rationalists (or anybody else) to allow value judgments about freedom to define their policy prescriptions. It is improper and, more importantly, incorrect, however, to claim that these ideas flow simply from the laws of economics, and possess some sort of inescapable mathematical truth.

The beauty of mathematics, of course – the reason political and social movements have long sought to co-opt it to their crusades – is that it gives defined, absolute solutions. Put your numbers into an equation, and you get an answer at the end. To as many significant figures as you like. This allows us to do amazing things – like build giant flying machines from aluminium and carbon fibre that can carry hundreds of passengers around the world in a matter of hours. Or land a spacecraft on the surface of Comet 67P/Churyumov-Gerasimenko hurtling through space 510 million kilometres from Earth.

Real world problems though – especially anything touched by the inordinate complexity of human social psychology – commonly fail to lend themselves to mathematical solution. The real world simply has too many possibilities and undefined variables – such that equations have no solid foundations they can be anchored to.

To make problems tractable – to allow mathematics to give us that pure, crystalline answer – we usually make certain assumptions to tie down the open ended possibilities and give us a solvable domain to work within. The danger here though is of ending up with what the great 20th Century physicist and public champion of science Richard Feynman used to call a spherical cow argument (readers of my earlier posting on University fees “More Pennies for Your Thoughts” will have seen a longer explanation of this concept) – an assumption that, while making your equation solvable, also removes any meaningful relationship to the physical system it purports to represent – and when that happens the clean precision of a mathematical solution can be misleading. Or worse.

The NASA engineers plotting the journey of the Mars Climate Orbiter to the Red Planet in 1999 produced incredibly precise solutions. They also assumed the output of one of the key pieces of navigation software on the Orbiter was in metric Newtons of force…when it was actually in pounds of thrust. Oops. This rendered their solutions elegant, precise…and dead wrong, with the $USD 125 million satellite coming in too close to the planet and breaking up in the Martian atmosphere.

Perhaps more than such elementary cases of error, however, the important thing to grasp in a social context is that you can use framing assumptions to distort the result in any direction you might desire. Want to argue against the opening of a new coal mine? Include some cost assumptions about externalities like atmospheric pollution, environmental risk, and increased traffic to show the economics don’t stack up. Or as I showed in an earlier blog, want to argue in favour of higher University fees? Make some helpful assumptions about the financial advantage accruing to a graduate while discounting the societal benefits and increased tax revenue from a more educated population.

Even in the best of circumstances though – if we assume (at the risk of vanishing into the never ending hall of mirrors that is self-referential logic) all our assumptions are correct and appropriate – the critical point to remember is that economics cannot tell you what is the right choice. Morality and values do not drop out of financial equations like wisdom paying out from a philosophical poker machine. Any investment decision comes down to a balance of short term sacrifice against long term gain. Instead of spending your money on something now, you invest it in the expectation of gaining greater reward at some future point.

When it comes to quantifying outcomes – basic economics – that can be a pretty straightforward calculation. “If I have $1000 now, would it be better to stuff it in my mattress or invest it in government bonds for 10 years”. Okay, there are still some assumptions to make about yields and the potential of unexpected events like your significant other throwing your mattress in a skip while you’re at work. Or a plunge in the commodity price on which a government had based all its economic projections, driving it to default on its debts (Hmmmmm…so how is the iron ore market going, by the way?)

By and large though, you can produce a pretty robust solution to that kind of question and say which one is likely to give you the higher return over a 10 year period.

Defining what the sensible decision is based on those results though – now there’s the challenge – with a crack arising in the logic around defining how great a long-term premium is required to make the short term sacrifice worthwhile.

Let’s say that Mike believes that the pleasure he derives from eating a custard slice is an appropriate trade for the 30 seconds it might shave off his life (or the hour in the gym it will take to work off all that delicious vanilla flavoured excess), whereas Susan doesn’t think the momentary pleasure of the creamy mouthful is worth the sacrifice. Who is right? Both are, of course. It’s a question of values and opinion, it has no absolute solution – no single true answer that trumps or invalidates all others.

Orthodox economics is very clear that policy recommendations must rest on both economic analysis AND a set of values. There is no objective adamantine economic ‘truth’ – the social implications of financial modeling depend on your personal beliefs and values.

Even Milton Friedman – often held up as the philosophical father of Economic Rationalism – understood this qualification, stating:

“As Liberals, we take freedom of the individual, or perhaps the family, as our ultimate goal in judging social arrangements.”

No special pleadings or claims of incontrovertible quantitative support there – Friedman is perfectly comfortable acknowledging that his social policy ideas (a fountainhead that fed both Reagan and Thatcher in their glory days of social engineering and reform, let us remember) are based on an ideology. And that’s fine. On that basis, you can assess and debate his arguments, and decide for yourself whether that’s the model you would like to see underpinning the society you live in. Friedman, unlike the hardline Economic Rationalists who have followed in his intellectual wake, allows that alternative social models may be equally valid if you don’t happen to share his values.

Like, for example, valuing a deeply ungrateful cat (and the happiness of a small child) more than a new sofa or a week in Paris.

And hey – at the end of the day, even if we were all perfectly rational actors making our life decisions on the basis of pure logic and mathematics, that might not actually be the lasting social panacea the Economic Rationalists hope for. You’ve seen what happens to the planet Vulcan in J. J. Abrams’ 2009 Star Trek re-boot, right?

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4 thoughts on “Of Cats and Cashflow: Human sentimentality and the flaw in economic rationalism

  1. vaitken

    Great post – we need more discussion about the hidden ideologies behind public rhetoric. And I’m sure the cat was worth it for the deep message to the kids that we should take our responsibility for looking after those in our care seriously. Your wife does sound eminently sensible though in wanting to have a balanced conversation about such a big financial decision. However I’m sure the emotional power of three big sets of eyes (a-la Puss from Shrek) would have put paid to any alternative decision pretty quickly.

    Reply
    1. Dr Geoff Batt Post author

      Thanks for your comment. Yes – as you can tell if you’ve read many of my previous posts, I’m a firm believer that you can usually find the fingerprints of ideology behind social policy…and anyone who tells you differently is selling something (to mis-quote Westley/The Dread Pirate Roberts from “The Princess Bride”). Personally, I prefer political debate where the protagonists are honest about their beliefs and defend ideas on their intellectual merits. After all, if you don’t believe in your social vision enough to stand behind it openly, why should anyone else be prepared to follow you?

      Reply
  2. Exploration and Development

    In response to your reply on social policy and political debate, wouldn’t that be nice to see, honest beliefs backed by intellectual merit!

    Interestingly the more extreme the ideology the more transparent the protagonist is as to their ideological drivers, with usually an inverse relationship to intellectual merit.

    For a very interesting discussion of Economic choices and how they relate to decision making, there is an excellent book called Poor Economics which highlights the disconnect between a lot of accepted economic rationales and the reality at play among the bottom 50% of income earners. Many of the decisions this group take and the way they solve problems relate to human psychology, and are universal. People act in apparently surprising ways from an economic standpoint, and the individuals involved are sometimes not even aware of the reasons behind their choices, and maintain a fictional set of values or ideas purporting to relate to their choices – which in reality were largely governed by other factors entirely. Game theory has been successfully applied to economics and helps to quantify risk and reward, but there are many more subtle attributes at play.

    Social networks and complex systems analyses appear more relevant to economics than classic risk reward, input, output and productivity measures.

    Reply
    1. Dr Geoff Batt Post author

      Absolutely – I’d say manipulation of social networking and conditioning are at the core of the Economic Rationalist movement. We all want to feel that we’re smart and make economic decisions for all the right reasons, so a figure of authority coming along and saying “look, my numbers say this is the right thing to do” can slip past our defences, even if morally or intellectually it seems dubious. Sometimes the Emperor really does have no clothes.

      Reply

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