Duct Tape, the Eurozone, Status-Quo Bias, and Neglect of Innovation

In 1995, I visited my Swedish relatives. We argued about the Euro. They thought it was a good idea, I thought it had a serious weakness.

ME It ties together economies that are different.

MY AUNT It reduces the chance of war in Europe.

You could say we were both right. There have been no wars between Eurozone countries (supporting my aunt) and the Eurozone is now on the verge of breaking apart for exactly the reason I and many others pointed out (supporting me).

Last week a friend said to me that Europe was in worse shape than America. I was unconvinced. I said that I opposed Geithner’s “duct-tape solution”. It would have been better to let things fall apart and then put them back together in a safer way.

MY FRIEND Duct-tape works.

ME What Geithner did helped those who benefit from the status quo and hurt those who benefit from change. Just like duct tape.

This struck me as utterly banal until I read a one-sided editorial in The Economist:

The consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen. . . .  the threat of a disaster . . . can anything be done to avert disaster?

and similar remarks in The New Yorker (James Surowiecki):

The financial crisis in Europe . . . has now entered a potentially disastrous phase.. . . with dire consequences not just for Europe but also for the rest of us. . . . This is that rarest of problems—one that you really can solve just by throwing money at it [= duct tape]

Wait a sec. What if the Eurozone is a bad idea? Like I (and many others) said in 1995? Why perpetuate a bad idea? Why drive further in the wrong direction? Sure, the dissolution will bring temporary trouble (“disaster”, “dire consequences”), but that will be a small price to pay for getting rid of a bad idea. Of course the Euro had/has pluses and minuses. Anyone who claimed to know that the pluses outweighed the minuses (or vice-verse) was a fool or an expert. Now we know more. Given that what the nay-sayers said has come to pass, it is reasonable to think that they (or we) were right: The minuses outweigh the pluses.

You have seen the phrase Japan’s lost decade a thousand times. You have never seen the phrase Greece’s lost decade. But Greeks lost an enormous amount from being able to borrow money for stupid conventional projects at too low a rate. Had loans been less available, they would have been more original (the less debt involved, the easier it is to take risks) and started at a smaller scale. Which I believe would have been a better use of their time and led to more innovation. Both The Economist‘s editorial writer and Surowiecki have a status-quo “duct-tape” bias without realizing it.

What’s important here is not what two writers, however influential their magazines, think or fail to think. It is that they are so sure of themselves. They fail to take seriously an alternative (breakup of the Eurozone would in the long run be a good thing) that has at least as much to recommend it as what they are sure of (the breakup would be a “disaster”). I believe they are so sure of themselves because they have absorbed (and now imitate) the hemineglect of modern economics. The whole field, they haven’t noticed, has an enormous status-quo bias in its failure to study innovation. Innovation — how new goods and services are invented and prosper — should be half the field. Let me repeat: A few years ago I picked up an 800-page introductory economics textbook. It had one page (one worthless page) on innovation. In this staggering neglect, it reflected the entire field. The hemineglect of economics professors is just as bad as the hemineglect of epidemiologists (who ignore immune function, study of what makes us better or worse at fighting off microbes) and statisticians (who pay almost no attention to idea generation).

MORE Even Joe Nocera, whom I like, has trouble grasping that the Euro might be a bad idea. “The only thing that should matter is what works,” he writes. Not managing to see that the Euro isn’t working.

11 Responses to “Duct Tape, the Eurozone, Status-Quo Bias, and Neglect of Innovation”

  1. Joseph Buchignani Says:

    You’ve been beating the idea generation drum for a while.

    My blog and twitter feed at http://www.aquatic-ape-diet.com is an example of an exo-self geared for max idea generation.

    The infrastructure behind it isn’t fully visible, but is described at http://www.cyborganize.org

    It is not just idea generation that counts – it’s idea capture, processing, development, and feedback.

    My system is primarily focused on maximizing individual idea development, whereas you mostly talk about network effects, as far as I’ve noticed.

  2. Terry O. Says:

    “James Surowiecki: This is that rarest of problems—one that you really can solve just by throwing money at it ”

    I have borrowed $x, which I am unable to repay because I chronically spend more than I earn. So if I borrow more that will “solve” things?

    My 8 year old knows better.

    Where do they find these “experts”?

  3. Felix Says:

    Nice article. It’s good to see people arguing against “there is no alternative”.

    Interesting also, that people, who profit from the status quo have no shame arguing (threatening) with war.

    http://www.zerohedge.com/news/bring-out-your-dead-ubs-quantifies-costs-euro-break-warns-collapse-banking-system-and-civil-war

  4. David Says:

    A lot of people have trouble getting their heads around these recurring financial problems, their causes and potential remedies. Obviously a complex system can be viewed in different ways, using various simplified models to try to understand it. Incorrect models do not lead to useful insight.

    I think the best model is that of a Ponzi scheme.

    In a Ponzi scheme, you will generally see the scheme operator offer complex-appearing and opaque investment vehicles to the Ponzi investors. The early investors get generous returns, the Ponzi operators pay themselves very well, but at some point the money is gone and all remaining “investors” holdings are worthless.

    A Ponzi operator can simply sit on the money, like Madoff, or actually make risky investments with it, claiming to the “investors” that the investments are not as risky as they actually are.

    In the ongoing banking “crisis”, you have seen the investment banks offer complex investment vehicles with great returns for early investors, take a generous cut for themselves, then suddenly, all of the “investments” are worth nothing or next to nothing.

    The challenge for the investment banks has been to get the governments of the world to purchase, in one way or another, these “investments” and give them large sums of money to keep the scheme running longer.

    Viewing the events using this model, the remedies to avoid future “banking failures” are simple. Ban all “investment vehicles” except savings accounts, company stocks, bonds, and simple mortgages. Keep the banking reserve requirements robust. In addition, and this is how this links to the Euro discussion, make sure every country has their own currency.

    Something along these lines was done after the 1929-1933 crisis. It does not look it will happen this time.

  5. Seth Roberts Says:

    I think the best model is that of a Ponzi scheme.

    I think your idea is good. Why was Madoff so successful? Because people (investors) were encouraged to be ignorant and passive. To fail to understand. To fail to ask. That was normal. Madoff was not only one who profitted — the whole financial industry profitted. As you say. Yet the reporting about Madoff blamed Madoff (and the SEC). The broader culture (the encouragement of ignorance and passivity — reliance on experts) was never criticized, at least in what I read.

  6. Joseph Buchignani Says:

    Here’s an example of a suppressed innovative idea, and a discussion of why it happens: http://vault-co.blogspot.com/2011/11/its-magnetic-reversals-stupid.html

  7. MetaThought Says:

    Ban all “investment vehicles” except savings accounts, company stocks, bonds, and simple mortgages.

    That would mean a drastic reduction in the financial sector, which makes up a large chunk of GDP of many developed countries.

    Of course, the fact that a lot of money is spent on financial services instead of elsewhere (mal-investment!) is ignored.

  8. Aaron Blaisdell Says:

    “Had loans been less available, they would have been more original (the less debt involved, the easier it is to take risks) and started at a smaller scale. Which I believe would have been a better use of their time and led to more innovation.” Seems like the same principle in economics as we’ve written about for reinforcement learning in rats and pigeons.

    In regards to duct taping the EU, I’m familiar with the term shotgun wedding, but perhaps we need another term for shotgun anti-divorce.

  9. Rubashov Says:

    Not only does accepting student diversity help students be all they can be (instead of all that they would be if they were us), it makes grading much more pleasant. In my research methods class, for example, since I switched my final project from “analyze this set of data using the methods I taught you” to an open-ended “Find a question that interests you, gather your own data, answer it, and make a video about your discovery,” I’ve gotten wonderful, creative work.

    Today I received one video from a bunch of guys who tested whether appliances actually stop bullets like they do in the movies (hint: they don’t. None of them will do particularly well on the written final, but they successfully carried out a piece of independent research and discovered something useful about their world on their own. That’s worth a lot.

    BTW, have you tried “contract grading,” where you give students a menu of varied assignment choices/styles for them to individually pick from?

  10. Becky Hargrove Says:

    Hemineglect is a good term and one I had not been familiar with. But it’s not just the failure of economists to study innovation. There seems to be a lack of research regarding ways in which the innate drive to succeed might be incorporated into present day economic activities.

  11. Seth Roberts Says:

    Not only does accepting student diversity help students be all they can be (instead of all that they would be if they were us), it makes grading much more pleasant. In my research methods class, for example, since I switched my final project from “analyze this set of data using the methods I taught you” to an open-ended “Find a question that interests you, gather your own data, answer it, and make a video about your discovery,” I’ve gotten wonderful, creative work.

    I had the same experience. When I gave students much more choice, the quality of their work went way up. They learned much more, wrote better about what they had done, and made more thoughtful comments about their experience.