While browsing the internet, it is not uncommon to read conspiracy theories from cynics and seeming cranks. You will read statements such as:
Universities are leeches designed to extract as much money from students and taxpayers as possible, in order to make life as pleasant as possible for high-level professors and administrators. They exist to benefit themselves. Universities publish an unending stream of self-serving propaganda, saying how if only we spend even more on schools, we will have more economic growth and lower inequality.
The Federal Reserve is a corrupt tool of the financial interests. It exists to serve rich bankers at the expense of the hard working citizen.
The Silicon Valley elite capitalists, such as investor and YC founder Paul Graham, or founder Mark Zuckerberg, wish to increase high tech immigration so that their companies can pay lower wages for workers. They are talking their book.
These statements strike us as being crazy and misguided. And for good reason. I have met some of these elites. While I cannot peer into Paul Graham’s or Mark Zuckerberg’s soul, they never struck me as being Scrooge McDuck capitalists, trying to crush their workers to squeeze out every last penny. Long ago, I had a small group lunch with the now president of Yale. I never got the sense that he was dying to make parents take out second mortgages to fund his latest vanity project.
Virtually every reputable economics professor views the Federal Reserve as a benevolent agency, trying to what is best for the country and the economy in a tough world. The economics profession is a small world. If there was a conspiracy, if behind closed doors the Federal Reserve officials were saying “suck it, plebs,” the professors would know it. If the professors were all covering up the conspiracy, someone would leak the inside information. In these days of wikileaks, unnamed sources, data breaches and tell-all memoirs, it is harder than ever to keep secrets.1
Thus, outsiders discredit themselves when they make accusations of conscious conspiracy. Any person of even mid-level status knows that the statement is flatly false. They know that the accused elites genuinely do seem to care about helping people. They know there is no conspiracy. Thus they discount the self-interest theory and pay no further attention.
This is a troubling problem. Because in fact, all three statements above, are, in a sense, true.
At issue, is what we mean by “intent.” When we say that a university schemes to take as much money as possible to further its own interests, the actual scheming or intent can occur at several different levels:
1) Conscious intention. What the people involved actually think about and reason about. What are they say to each other behind closed doors.
2) Subconscious intent. Much mental calculation happens in the subconscious. Motivated reasoning seems to be the default human thought process. Our subconscious calculates what is to our advantage, and then crafts arguments to defend the advantaged belief. Humans have evolved to be very good at detecting lies and insincerity. Thus the most successful lie to advance your own interests, is the lie you actually believe yourself.
3) Memetic intention. Memes were a concept invented by Richard Dawkins to refer to “an idea, behavior, or style that spreads from person to person within a culture.” The theory is that ideas can replicate themselves, just as genes do. A living thing is a thing that replicates, therefore, memes can almost seem to be living things. A memeplex is a group of memes, like an organism is a group of genes. They evolve and mutate. Just as we say a “virus tries to find ways evade white blood cells” we say a “memeplex tries to make those who attack it low status.” For example, I doubt that the Catholic bishops who came up with the concept of “mystery of faith” did it as a cynical ploy. But it is a great way to for a memeplex to shut down questioning of the memeplex’s own premises, thus enabling it to spread. The intent is not always conscious on the part of individuals, it is a product of natural selection.
4) Empathy and social network self-interest. Social networks exist. People are more likely to have empathy for people within their own Dunbar number. People are more likely to helpful to members of their own network. So even if there is no overt conspiracy, if all your friends are bankers, then obviously you are going to be more attuned to the problems of bankers than the problems of the common man. When you design policy or advocate policy, the design of the policy will be guided by the advice of bankers.
5) Institutional intention. Let us say some members of an institution believe that the institution has outlived its purpose and that their jobs are wasteful. Other members have the sincere but delusional belief that the institution is carrying out a grand mission. The deluded believe that acquiring more resources and growing the institution is of vital importance for the good of the world. The disillusioned members end up quitting or finding some quiet niche. The true believers fill the leadership ranks and end up doing whatever it takes to expand the institution. Furthermore, the people and departments that are good at getting funding and good at promoting the brand, expand and get more leadership, regardless of whether that funding was actually good for society. Thus even while the all members of the institution believe they are doing good, due to selection effects, the institution as a whole acts a self-aggrandizing organism.
This last dynamic was defined as Pournelle’s Iron Law of Bureaucracy:
Pournelle’s Iron Law of Bureaucracy states that in any bureaucratic organization there will be two kinds of people:
First, there will be those who are devoted to the goals of the organization. Examples are dedicated classroom teachers in an educational bureaucracy, many of the engineers and launch technicians and scientists at NASA, even some agricultural scientists and advisors in the former Soviet Union collective farming administration.
Secondly, there will be those dedicated to the organization itself. Examples are many of the administrators in the education system, many professors of education, many teachers union officials, much of the NASA headquarters staff, etc.
The Iron Law states that in every case the second group will gain and keep control of the organization. It will write the rules, and control promotions within the organization.
Some government bureaucracies have the very nasty dynamic that when they screw up, they create bigger problems, and thus get more funding to solve the bigger problem. Often, no one gets fired. The leaders of the problem-creating department now have more employees and thus more status and authority. Thus the system actively rewards those who work against the stated goals of the institution (again, they are not intentionally subverting the institution, they are often deluded).
The word “intent” breaks down because we do not have a handy English word to describe subconscious, institutional, or evolutionary intent. Many low-status outsiders observe the institution acting like a vampire, but they do not understand the internal dynamic, so they assume that the selfishness is conscious, when it is not. Their mistaken analysis of the internal dynamic makes them look like cranks, even though the overall observation is correct.
Because intent is so complicated, it hardly makes sense to even analyze it. To judge an institution, watch what it does. Look at the pressure that shapes its decisions.
Consider the pro-immigration Silicon Valley capitalists. I doubt Paul Graham fantasizes about bringing in hordes of programmers to push down wages, so that he can make an extra buck. That is ridiculous. But, he spends most of his time with startup founders and other investors. His grand thesis is that what is good for startups, is good for the country where the startups live (I generally agree with this thesis). So naturally, out of pure empathy, he feels pain when the founders recount some trouble getting a visa for themselves or a key employee. The social circle of elites like Graham, Zuckerberg and Gates include few workers who have been squeezed out of their jobs by H1B’s. So the concerns of ordinary tech workers are reduced to a footnote and omitted from the FWD.us plan-of-action.2
Consider the Yale president. President Salovey will want to champion some noble new initiatives. That is the role he was hired for. But how to pay for it? If he cuts funding for some diversity program he will have protesters at his door. If he cuts a department, professors will be outraged. If he cuts the new gymnasium renovations, they’ll lose out on matriculation from rich and prestigious elite students. Thus the pressure is always to get more money, to grow, to expand. The pressure is to raise tuition, seek more government grants, seek more tax benefits from running a giant real estate conglomerate. Does President Salovey ever lay in bed, trying to sleep, thinking to himself, “You know, the primary benefit of Yale is really having a monopoly on a social network. It is wrong to exploit that social network, to make parents take out second mortgages to get access to it. Maybe we should charge less. We could do without the new electronic media center.” Perhaps he does think that. But there is no pressure to make him act on such thoughts.
Consider the Federal Reserve. It is incorrect to claim that the Federal Reserve is run by the banking industry in a command and control manner. But the two are very cozy. The door revolves. And even if you eliminated the revolving door, the banking industry has real power because of the information asymmetry. The bankers know the mechanics of the financial system, and thus when the system breaks, the bankers get to make the plan to fix it.3 Thus policy plans that originate in the banking sector are often the policy plans that get passed. And look at the results. There were trillions in bailouts for Wall Street. Many financiers net gained from the entire boom-bust cycle, while the ordinary citizen has net lost. Inflation has run higher than the interest on CD’s, thus taking away money from ordinary Americans each year. Favored institutions get loans at low rates to buy up coveted property. Local banks and shops struggle to compete. If you observe the results, the conspiracy theorists have a point.
Consider media companies. Do journalists get promoted for making good predictions and fired for making wrong predictions? Do clicks and advertising dollars correlate with truth value? Do foundation grants and donations from the wealthy correlate with truth value? If not, why should we expect these institutions to be giving us an accurate view of reality?
The bottom line is do not judge any person or institution by what they say. Watch what they do. Find where the pressure is. Trace their social network. Who gives them advice? Who do they want to impress? Examine where the incentives lie. Examine the selection process by which people or departments or ideas get promoted. In the long term, an institution is forged by pressure, not by lofty goals and intentions. Thus the conspiracy critique is often simplistic and naive, but effectively true.
So how do we resolve this? If all institutions only exist to benefit themselves, how can we ever have anything good in life?
The only way is to align incentives is to make it so that an institution only prospers if it actually serves its beneficiaries.
Paul Graham wrote a fine essay about how startups only do well if they make something other people want. Startups need to be good to survive. The key principles that make this work in the startup world are exit, choice, and open entry.4 If customers can choose another product, if a competitor can pop-up and offer something better, than a company will only succeed by producing a high quality product or service.
How to fix the incentives of a financial regulator? The regulator and the bank deposit insurance company should be one. Even better, have multiple insurance companies. Bailouts would be paid out of collected insurance premiums. The insurer would charger higher premiums for more risky practices, just as any insurance company does. The insurance company would refuse to cover banks that had complicated derivatives that the insurer did not understand. If the insurance company does a bad job and runs out of funds, the equity stakeholders and the entire management structure get wiped out. The company executives should have their bonuses clawed back from the last decade. Over time, the institutions would then select for managers who could balance risk and reward, who could support lending without making catastrophic mistakes that result in a bailout.5
How to fix the incentives of universities? For starters, create a separation between education and credentialing. If the two are legally combined in the same institution, the institution has no incentive to actually educate, but has much incentive to keep raising tuition, in order maximize the intake from its gate-keeping role. Force colleges to keep student loans on their own books. Don’t have the government take the loans off their hands. Even better, replace funding via general tax revenue with funding for a particular school based on a tax of the alumnae of that school (after all, why is it fair to have those who did not go to college, who often make lower incomes, pay taxes to support the universities?). Make it so that the school only gets paid if it actually raises the earning power of its graduates.
Sometimes an industry is a natural monopoly. Consumer choice is impossible. In that case, you must put the institution directly under the control of its beneficiaries. If you are running a government healthcare service such as Medicare, do not put it under the control of Congress, because Congress is pushed around by the doctors lobby and the hospitals lobby. An individual votes for their Congressman based on dozens of different issues, and thus cannot vote on Medicare alone. Due to the logic of collective action, the concentrated interests have more influence. Thus the existing system has many conflicts of interest, for instance, doctors play outsized role in determining the payment guidelines. To make Medicare work for the beneficiaries, have a board of trustees that is directly elected by all people receiving Medicare. The board’s sole role would be to administer Medicare for the benefit of the recipients.
Insiders generally know the details of how things work, but are often blind to the over-arching pattern of who is winning and who is losing. They are often quite deluded about the divergence between stated intentions and actual results.
The outsiders can see these patterns, but don’t understand the details, so come across as cranks when trying to do analysis. Should the outsiders gain authority, they have no real power, because they do not know how to work the levers to operate the machine. They don’t even know where the levers are. When they try to fix the machine, they get duped, get discredited, and end up out of power again.
An aim of this blog is to combine the outsiders skepticism with some of the knowledge I have learned from being a fly-on-the-wall in the corridors of power. My urge to insiders is to examine your results, and not just your intentions. My urge to outsiders is to read insider accounts and learn how the machine works, so that you do not sound like whiny cranks when you write critiques.
That is not to say that conspiracies do not exist. The Federal Reserve is not a conspiracy now, but it was literally a conspiracy when it was created. And remember the Red Scare and the accusations of communists conspiracy by the McCarthy and Birchers? There was in fact a conspiracy. Read Elizabeth Bentley's personal account of her time in the American Communist Party. It is both a riveting tale and fascinating history. See a summary here.
But these days it is more difficult to keep a secret. It is amusing to read tell-all books about the Obama administration. There was one passage recounted from a leaked source, in which Obama is in a private meeting yelling at his team for leaking stories of internal meetings.
Of course, we will never know for sure how many conspiracies are kept secret, because if they are successfully kept secret, then we do not know about them.↩
Also, the pro-immigration stance is not just a matter of empathy. The tech elite have a true desire to align with the progressive movement on this cause, out of both personal sympathy for the cause and as a form of appeasement, since these founders often come under fire for being associated with various forms of inequality. Thus we see the FWD.us website trumpeting the progressive party-line, without any engagement with the smartest arguments made by the other side of the debate.↩
Boston College finance professor Ed Kane says: "Regulators see themselves in an impossible situation when they get to a crisis. The failure occurs in not understanding the risks as they build up in good times, or what appear to be good times, before things go badly. The risks aren't easy to see and bankers make them deliberately so. An environment of concealment is deeply ingrained in the culture of regulators and giant firms. Much of what the banks do is kept confidential on the grounds that clients are entitled to some degree of confidentiality, and that puts the regulators at a disadvantage. They can never get all the information they need or pass all of what they do get up the chain of command to the top authorities at the central bank to properly assess what's going on."
A psuedonymous bank regulator describes the problem of the regulator: "The permanent government is composed of well-educated people who have little practical experience in the industries they regulate. We are asked to regulate incredibly arcane sections of complex industries and we are entirely unaccountable for the resulting regulations. For example, the financial reform bill asks regulators to put limits on proprietary trading. This is a business that no one really understands beyond, perhaps a few specialized traders. How is someone with a college degree who has lived in Washington since he graduated supposed to implement this regulation? The only way to understand the true phenomenon of regulatory capture is to put yourself in the position of a member of the permanent government. Your a well-educated person who is being asked to put significant limits on a multi-billion dollar industry. If you don’t crack down enough, the financial system might be brought down by the failure of a large bank. If you crack down too much, decreased profitability could weaken the banking system, jobs could leave the US, GDP could decline, New York state could fail, etc. What is such a person to do?"↩
And specifically, what makes markets work are the choices of savvy buyers. Companies that exclusively target uninformed and less-than-savvy populations, often make money by tricking people or encouraging vice, rather than by providing a good service.↩
There is already is a bank insurance company: the FDIC. In my opinion, the Federal Reserve was a big mistake, and the FDIC was the correct institution for stabilizing the banking system. Even better would be to have four or five competing FDIC's. I wrote about this in my essay, how to reform the banking system.↩