While writing the previous post on Neoliberalism and Micromotives, I dug out my old copy of The Mystery of Capital and was reminded of this quote:

Economics, over the years, has become more and more abstract and divorced from events in the real world. Economists, by and large, do not study the workings of the actual economic system. They theorize about it. As Ely Devons, an English economist once said at a meeting, “If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’”

…from Ronald H. Coase, The Task of the Society

James Surowiecki writes in the New Yorker this week about the failure of neoliberalist “Washington Consensus” policies to lift Bolivian peasants out of poverty. He argues that while neoliberalism gets the big picture strategy right — privatization of state-owned enterprises, balanced budgets, free trade, and openness to foreign investment — it doesn’t place enough emphasis on the details, “and it’s increasingly clear that when it comes to development God really is in the details.” While a campaign of economic shock therapy in 1985 was successful in stopping Bolivia’s runaway inflation, per-capita economic growth since then has averaged just half a percent a year.

Neoliberalism failed in Bolivia because a macroeconomic checklist is not enough to make an economy work. Incorporating a new business in Bolivia, for instance, takes fifty-nine days, entails fifteen separate procedures, and costs twice as much as the average person earns in a year. So, according to a recent World Bank study, most of Bolivia’s businesses remain “informal,” which means that they have no legal protection, and limited access to credit markets.

The functioning of an economy certainly depends on the legal and institutional infrastructure a government establishes, but at the end of the day it is the constant stream of small, individual decisions people make that actually create an economy. Anticipating and engineering these micromotives is a key component to achieving the economic outcomes we want.

For much more on the small details of developmental economics, see The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Peruvian economist Hernando de Soto.

Read more: Morales’s Mistake, by James Surowiecki

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Via Marginal Revolution

As a follow up to my previous post on The Paradox of Choice, here’s a great introduction to Barry Schwartz’s critique of the overwhelming amount of choice available in modern consumer society. Swarthmore has posted an hour-long video lecture entitled Too Many Choices: Who Suffers and Why?

Previously: The Paradox of Choice

Barry Schwartz’s book The Paradox of Choice: Why More Is Less has been high on my reading list for some time. This past weekend I bought it and am a few chapters in so far. Here’s Publisher’s Weekly’s summary:

Like Thoreau and the band Devo, psychology professor Schwartz provides ample evidence that we are faced with far too many choices on a daily basis, providing an illusion of a multitude of options when few honestly different ones actually exist. The conclusions Schwartz draws will be familiar to anyone who has flipped through 900 eerily similar channels of cable television only to find that nothing good is on. Whether choosing a health-care plan, choosing a college class or even buying a pair of jeans, Schwartz, drawing extensively on his own work in the social sciences, shows that a bewildering array of choices floods our exhausted brains, ultimately restricting instead of freeing us. We normally assume in America that more options (“easy fit” or “relaxed fit”?) will make us happier, but Schwartz shows the opposite is true, arguing that having all these choices actually goes so far as to erode our psychological well-being. Part research summary, part introductory social sciences tutorial, part self-help guide, this book offers concrete steps on how to reduce stress in decision making. Some will find Schwartz’s conclusions too obvious, and others may disagree with his points or find them too repetitive, but to the average lay reader, Schwartz’s accessible style and helpful tone is likely to aid the quietly desperate.

It’s been a great read so far, I’ll post more as I make progress…