World War I and the Era of Bounded Rationality

I just finished listening to a Great Courses lecture series about World War I by Prof. Vejas G. Liulevicius of the University of Tennessee.  The course is a great learning experience. Understanding the tragic miscalculations of World War I is necessary to understanding the history of government, management and economics during the last century, including the expansion of state power and the rejection of classical liberalism on behalf of state activism, which is necessarily militaristic despite ideologically motivated claims to the contrary.  

 March and Simon’s concept of bounded or cognitive limits on rationality, which is usually applied to business strategy, is omnipresent in the history of World War I.   Bounded rationality, or the physical, financial, and mental constraints on rational choice,  is tightened with respect to the larger-scale decisions of government.  

Many aspects of the Great War suggest  a sharp expansion in the importance of cognitive limits on rationality.  These include the mistaken enthusiasm of the August Madness, i.e., the international public enthusiasm about the war when it first began; the difficulty of strategic and tactical adjustment to the technology of mechanized warfare; the resultant failure of many of the military strategies such as at the Battles of Verdun, Gallipoli, and the Spring Offensive; the Germans’ secretive propaganda efforts, which led to the stab in the back theory (itself reflecting limited rationality); the Germans’ strategic miscalculation with respect to the harshness  of the the Brest-Litovsk treaty with Russia, which led to the Allies' greater harshness at Versailles; both the reasoning for starting the war (leading to the termination of the Empires, which had seen the war as a means of expansion) and the Allies’ treaties, which led to the next war; and the naïve post-war idealism of both Lenin and Wilson. 

I would conclude that the Great War was a comedy of errors, except that few narratives are as tragic, and few have made me more pessimistic about the human condition.

Why Government Is Incompetent: Fausta on The Obamanable Health Care Plan

In Roman history Fausta was the wife of Emperor Constantine, the first Christian Emperor. Constantine had Fausta executed by putting her in an overheated bath and forcing her to stay there. My wife always says one of her greatest fears is being permanently locked in a steam room.

In any case, today's Fausta is an excellent blogger who makes an important point (h/t Larwyn):

>During his speech at a National Press Club luncheon, House Judiciary Chairman John Conyers (D-Mich.), questioned the point of lawmakers reading the health care bill.

“I love these members, they get up and say, ‘Read the bill,’” said Conyers.

“What good is reading the bill if it’s a thousand pages and you don’t have two days and two lawyers to find out what it means after you read the bill?”

When I worked in Albany for the ways and means committee in 1991 (I was a Democrat at that point) I noticed the same phenomenon. The members did not read the bills. Likewise, a perusal of Robert Caro's classic Powerbroker, which is about Robert Moses, describes how Moses repeatedly took advantage of this phenomenon to ram through laws that gave himself extraordinary powers that no one knew about until after the fact.

Rationality is a rare commodity. In the 1950s James March and Herbert Simon described managers as behaving in ways that are consistent with "bounded rationality". There are, they argued, cognitive limits on rationality. Earlier, Walter Lippmann argued that the public cannot possibly understand the political questions that it is asked to decide upon. Friedrich Hayek, the great Austrian economist, argued that because information is difficult to obtain, in the economy a simple signaling process is necessary. In a free economy that signal is price. No such signal exists in state dominated economies, which is why they are inefficient.

Supposedly, the political process is a matter of redistribution of wealth, who gets what, when and how, as Harold Lasswell put it. But a more important question is: who knows how to do it? The answer with respect to government is generally--"we don't know".

The process of political engagement is largely a smokescreen whereby special interests extract rents. This observation has been explored by economists such as Mancur Olson and George Stigler. The process of rent extraction by academic social democrats and their corporate clients has traditionally involved using the poor or working class as a ruse. De Jouvenal shows that this tactic goes back to the days of Septimius Severus and carried forward through the middle ages.

The health care plan is not a serious plan. Rather, it reflects the brokerage of corrupt special interests. How do I know this despite not having the slightest idea of what is in the plan, just like Mr. Conyers?

Progressivism and Time

A flaw in the thinking of "progressives" a.k.a. "liberals" a.k.a. "statists" is their perception of time. From whence this perception derives is unclear to me. It may be an artifact of the 16th and 17th centuries' belief that rationality will solve all metaphysical problems. Descartes, for instance, thought that he could prove the reality of the universe by logically proving the existence of God and deriving the validity of our perceptions from God's existence. The rejection of this kind of hyper-rationality led to an excessive swing in the opposite direction. In proving that we cannot know anything Hume showed the limits of pure reason but did not offer much in the way of practical understanding of how we learn and know things, which we obviously do.

The left, liberals and the academy are schizophrenic. One half of the split personality applies to epistemology, aesthetics and culture. In these areas "progressives" adopt a radically skeptical viewpoint, rejecting the importance of tradition, standards and culture. The ESR blog argues that this is due to Stalinist influence. However, this explanation does not explain the staying power of progressives' disdain for American culture more than a decade after the Soviet Union's fall and more than five decades after Stalin's death.

The other half of the split personality is that when it comes to public policy, the "progressives" adopt an aggressively rationalist stance, arguing that their managerial problem solving skills can solve all problems: from predicting the outcome in the war in Iraq; to running the New York City subway system; to understanding global warming; to understanding abortion; to understanding the optimal way Wal-Mart ought to run itself; to understanding how income taxation will influence capital formation. When it comes to culture, the left, liberals and the academy argue that nothing can matter and that everything is a matter of power, not reason. When it comes to public policy, the left, liberals and the academy argue that their reason is infallible.

Of course, the left's opinion that its reason is infallible is a delusion of grandeur. Hayek called this the left's "fatal conceit". In reality, most everything that the left has attempted to do has failed. Putting aside the mass murder and environmental destruction in the Soviet Union and China, even just limiting the discussion to their influence in the United States, virtually everything that liberals and the left have touched has been destroyed. New York is a shadow of its former self. The welfare system destroyed millions of lives. The health system is a pathetic joke. The education system graduates illiterates. The Federal Reserve Bank caused the depression of the 1930s, the stagflation of the 1970s and today's income inequality. The income taxation system became an assault on middle class mobility.

An important reason for liberalism's, the left's, and the academy's fatal conceit is its failure to integrate time into its thinking. Economists tend to use cross sectional or limited time series-based studies to derive conclusions that may depend on many decades' worth of data. Government budgets are based on annual cycles. Decisions made in one year are forgotten only one year later. Revenues can be raised in year one without contemplating the costs in future years. For example, public sector pension funds have tended to use overly aggressive assumptions because such assumptions reduce contributions in year one while others bear the costs in future years.

Liberalism, then, is based on short term thinking and that is a critical difference between those who advocate laissez faire , i.e., those who value individual rights, and advocates of state-based solutions who favor the collective over the individual in the economic realm. The costs of state-based solutions are borne over many decades, in the end destroying the social fiber, the economy, wealth and the community. However, the benefits are typically short run.

Why "progressives" are short-run thinkers is difficult to understand. It is likely that encouragement of short-term thinking has been integrated into university education, especially in the social sciences. Cost-benefit analysis favors near term benefits over long term costs. A linear or mechanistic view of time is computationally or mathematically rational, although in biological terms and in the long run it will destroy our economy and society. Linear or hyper-rationality may be at the root of progressives' inept public policy decisions. Why they insist on a hyper-skepticism with respect to culture and a linear or excessively short-term "rationality" with respect to public policy is not totally clear to me.