People From New York City

"Once individuals are acting to carry out a norm and cannot be fully checked, their natural norm of self-interest will come into play. The rules actually acted upon will therefore move away from any norm that might be acceptable on the basis of general principles."

"The creation of knowledge that constitutes an innovation is in turn dependent on the acquisition and application of existing knowledge; information is an input into the production of information. This background knowledge and the ability to use it are the most important elements of the social context of individually motivated innovation."

"For the voucher system to work, it would be necessary to have informed parents. One cannot be dogmatic without empirical evidence, but I would be surprised if the average parent has the time or patience or competence to digest the relevant information. Indeed, one wonders where the information is to come from and in what form it should exist. Do we use test scores, themselves affected by the selection processes of the students? Impressions of individual teachers or of the physical appearance of the school will tend to dominate."

"Child care has grown up under different circumstances than education and probably for a mixture of reasons, good and bad. There are many systems of child care, some private, some public. As compared with primary and secondary education, there is clearly less need for coordination. The sequencing of classes is much less important. It would appear that the ability of parents to monitor the conduct of the child care activity is much greater because the activity is much closer to everyday experience and knowledge. Most of the informational and structural arguments for the public supply of education are absent in the case of child care. Reputation and experience may suffice for adequate monitoring."

"Information, one of the fundamental determinants of production, laps over from one firm to another, yet the firm has so far seemed reasonably sharply defined in terms of legal ownership. It seems to me there must be increasing tensions between legal relations and fundamental economic determinants. Small symptoms are already appearing in the legal and economic spheres. There is continual difficulty in defining intellectual property. The United States courts, at least, have come up with some strange definitions of property."

"Unfortunately, the word 'learning' is a very general word. It isn't a very specific theory and we can have a lot of learning models, and it's unlikely that any one is going to track. When you talk about learning, you talk about the human mind adapting to conditions, and we haven't nailed that down very well. This is always an objection to the whole idea of bounded rationality. Not that it's wrong, but if it's right, it doesn't actually tell you what to do. Rationality is unique. That isn't really quite true, but at least under many circumstances it is. To say that we're not at the top of a hill gives you a lot of variety as to where you might be. So the problem with bounded rationality is not that it's wrong. On the contrary, I think it's very apt to be correct. It's just that its predictions are a lot more vague than those implied by rationality. At the moment, I don't know what to do about that."

"I think one of the things we learned from the physicists and also the theoretical biologists is the idea that when you're dealing with very complex systems you're going to get a large variety of behavior which can be interpreted as hill climbing, but hill climbing with a lot of modifications, hill climbing with big jumps occasionally. This is an elaboration of the idea of the learning model. The learning model story takes off from psychology, but the adaptive processes take off from biology and physics. They have the same story. One thing it does suggest in some sense is that we have to be more modest in what we claim."

"I am old-fashioned enough to retain David Hume’s view that one can never derive “ought” propositions from “is” propositions. The two issues, method and value, are distinct."

"We don’t have a laissez-faire system. The intervention of the federal government, as measured by expenditures, is growing. It is not a private system at all. Roughly 50 percent of health costs are paid for by the government, and state governments are spending more and more on health. It’s crowding out education. State budget-support for education, especially higher education, is crowded out by two things: health and prisons. Nobody is prepared for the idea of a laissez-faire system, and we never really had one."

"Even Ricardo's most famous accomplishment, the law of comparative advantage in foreign trade, is incomplete, though not wrong."

"The uncertainty of the future is inescapable, one must think about it and arrive at plans for action. A statement attributed to a number of thinkers is, "Prediction is very difficult, especially of the future." Postdiction, knowing what went on in the past, is also difficult. The past, however, is our basis for understanding the future."

"The slippery role of information as an economic good is of deep significance to economic behavior, especially in the relatively information-rich modern economy. It is an economic good in the traditional sense; it is valuable, and it is costly. But it has a peculiar algebra. Adding one ton of steel to another permits more to be done; repeating the same item of information does not add anything useful. On the other hand, supplying a ton of steel to another reduces the steel available to the supplier; supplying information to another does not reduce the information available to the supplier."

"As a general rule, the greater the uncertainty, the better to avoid large and irreversible commitments, to the extent that it is possible. When the famous 1930s gangster, Dutch Schultz, was dying, his incoherent last remarks were taken down by a stenographer. One of them was. "Don't make no bull moves." His words are a lesson for the kind of future that one might choose. Maintaining flexibility or keeping ones options open, is key in these matters."

"Gibbard's work was a bombshell. That was very exciting. I didn't know about Satterthwaite's work for a couple of years, but it was very much the same thing. I had taken the liberty of abstracting from manipulability in my thesis and I never went back to that issue. What's surprising is not really that there is an impossibility of non-manipulability, but that the issues should be essentially the same. That strikes one as a remarkable coincidence."

"The problem I have with utilitarianism is not that it is excessively rational, but that the epistemological foundations are weak. My problem is: What are those objects we are adding up? I have no objection to adding them up if there's something to add. But the one thing I retain from utilitarianism is that, basically, judgements are based on consequences. Certainly that's the sort of thing we do in the theory of the single individual under uncertainty; you make sure utility is defined only over the consequences. I view rights as arrangements which may help you in achieving a higher utility level."

"The tension between chaotic behavior and perfect foresight was observed. Start with an equilibrium dynamics of a standard type derived from the hypothesis that future prices are predicted perfectly. Suppose that the solution to the difference equations characterizing the solution exhibits chaotic behavior. Is it realistic to assume that the future, even though deterministic, is in fact predictable? Clearly, part of the lessons drawn by natural scientists, especially meteorologists, from nonlinear dynamics is precisely the opposite; chaotic behavior implies that small errors of observation in the starting position may lead to virtually total unpredictability after some period of time. This creates no difficulties of consistency when the predictor is not part of the system being predicted. But when the predictors are the economic agents being examined, there is a fundamental inconsistency. This epistemological antinomy is reinforced by the empirical observation that actual behavior of prices of assets such as securities could never reasonably have been predicted; if it had, there would have been much more buying or selling at earlier stages."

"Not only is it possible to devise complete models of the economy on hypotheses other than rationality, but in fact virtually every practical theory of macroeconomics is partly so based. The price- and wage- rigidity elements of Keynesian theory are hard to fit into a rational framework, though some valiant efforts have been made. … But if the Keynesian model is a natural target of criticism by the upholders of universal rationality, it must be added that monetarism is no better. I know of no serious derivation of the demand for money from a rational optimization. … The use of rationality in these arguments is ritualistic, not essential."

"The conflict of incentives and information is increasingly leading to a diffusion of responsibility for medical decisions. The simple picture of the physician making decisions for the patient has certainly become more complicated. Patients always had a role in choosing to seek medical advice and from whom. Their choices are becoming increasingly restricted as medical practice becomes more organized. The problems of cost control in an insured world are partly met by the increasing use of control of medical services through review by health maintenance organizations and insurance carriers."

"The implications for planning are ambiguous. On the one hand, the optimal allocation under increasing returns will not be obtained under free markets. In fact, as I have already remarked, the competitive equilibrium is not even viable, and the outcome will be some kind of imperfect competition. But optimal allocation under increasing returns is difficult. For one thing, the optimisation requires the use of integer programming, a procedure intrinsically more complex than linear programming, and impossible to carry out for large systems even with the most powerful computers. Even more serious are the data demands. The information needed is widely dispersed among the industries and cannot be effectively communicated. It is for these reasons that decentralised decision-making with some element of monopoly is likely to be more efficient."

"Any argument seeking to establish the presence of irrational economic behavior always meets a standard counterargument: if most agents are irrational, then a rational individual can make a lot of money; eventually, therefore, the rational individuals will take over all the wealth. Hence, rational behavior will be the effective norm. There are two rebuttals to the counterargument. (1) Not all arbitrage possibilities exist. For example, corporate profits, even though they may be down, are very distinctly positive in real terms after all necessary adjustments, including taxes. Yet there seems no way by which the average investor in corporate securities can get a positive real rate of return. (2) More important, if everyone else is “irrational,” it by no means follows that one can make money by being rational, at least in the short run. With discounting, even eventual success may not be worthwhile. Consider, for example, a firm that engages in research and development which depresses the current profit and loss statement. Irrational investors look only at this information, and therefore the price of the stock is below the expected value of future dividends based on the profitable outcomes of the research and development. In a perfectly working market with rational individuals, stock prices would gradually rise as the realization date approached, but prices in the actual market would be constant. A rational investor would understand the future value of the stocks, but he or she could not realize any part of this gain during the gestation period. Although the rational investor may get rewarded eventually if the stock is held long enough, he or she is losing liquidity during an intervening period which may be long. Hence, the demand for the stock even by the rational buyers will be depressed. As Keynes argued long ago, the value of a security depends in good measure on other people’s opinions."

"The Soviet Union and its satellite Socialist countries in Eastern Europe have typically avoided unemployment and business cycles, except as they are induced through their trade with the Western World. But on the other hand they are clearly inefficient and wasteful, at least relative to the West. As repeated statements by the socialist economists themselves make clear, the excessive concentration of economic decision-making is a prime cause of the inefficiency. There are recurring demands for "liberalization," even by the highest authorities (Yuri Andropov, the effective head of the Soviet Union, being the latest example), but they are responded to only mildly or not at all. Clearly, a really major step toward decentralization of economic power, to the plant managers or the workers themselves, is perceived as a threat to the system."

"I was early regarded as having unusual intellectual capacity. I was an omnivorous reader, and I added to that a desire to systematize my understanding. As a result, history, for example, was not merely a set of dates and colorful stories; I could understand it as a sequence in which one event flowed out of another. This sense of order crystallized during my high-school and college years into a predominant interest in mathematics and mathematical logic."

"In eras when authority or at least specific authorities have been questioned, there is more tendency to examine the roots of and the need for authority. The owl of Minerva flies not in the dusk but in the storm."

"It is this thinking which I think gives rise to the greatest tragedies of history, this sense of commitment to a past purpose which reinforces the original agreement precisely at a time when experience has shown that it must be reversed."

"The purpose of organizations is to exploit the fact that many (virtually all) decisions require the participation of many individuals for their effectiveness."

"Multiple discoveries are in fact very common in science and for much the same reason. Developments in related fields with different motivation help one to understand a difficult problem better. Since these developments are public knowledge, many scholars can take advantage of them. It is pleasant to the ego to be first or among the first with a new discovery. However, in this case at least, the evidence is clear that the development of general equilibrium theory would have gone on quite as it did without me."

"Uncertainty means that we do not have a complete description of the world which we fully believe to be true."

"Collective action is a means of power, a means by which individuals can more fully realize their individual values."

"Trust is an important lubricant of a social system. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people's word. Unfortunately this is not a commodity which can be bought very easily. If you have to buy it, you already have some doubts about what you have bought."

"As is by now well known, attempts to form social judgments by aggregating individual expressed preferences always lead to the possibility of paradox."

"Finding out the prices of a large range of commodities is itself a costly enterprise, and knowledge of this fact by price setters is itself enough to create incentives for inefficient market behavior. If one individual has more information about the quality of a good than the second, the first may exploit the situation, and the second, distrusting him, may not take advantage of what is in fact a desirable trade."

"Studying oneself is not the most comfortable of enterprises. One is caught between the desire to show oneself in the best possible light and the fear of claiming more than one’s due."

"The need for coordination has two basic causes: the various members (e.g., production units) are competing for a common pool of resources, financial and material; and different decisions complement or substitute for each other. For both reasons, the effectiveness of decisions made by one participant is influenced by the decisions of another. With limitations on the flow of information, the decisions themselves cannot be coordinated. That would require transferring all the information available, precisely what is to be avoided. It has been emphasized earlier that when information will be available, the individual should choose a decision function, a policy or strategy that determines what his actual decision should be for each possible signal he receives. Hence, ideally, in an organization there should be prior agreement on decision functions or strategies for all participants."

"The competitive system can be viewed as an information and decision structure. Initially, each agent in the economy has a very limited perspective. The household knows only its initial holdings of goods (including labor power) and the satisfactions it could derive from different combinations of goods acquired and consumed. The firm knows only the technological alternatives for transforming inputs into outputs. The “communication” takes the form of prices. If the correct (equilibrium) prices are announced, then the individual agents can determine their purchases and sales so as to maximize profits or satisfactions. The prices are then, according to the pure theory, the only communication that needs to be made in addition to the information held initially by the agents. This makes the market system appear to be very efficient indeed; not only does it achieve as good an allocation as an omniscient planner could, but it clearly minimizes the amount of communication needed."

"There are many other organizations beside the government and the firm. But all of them, whether political party or revolutionary movement, university or church, share the common characteristics of the need for collective action and the allocation of resources through nonmarket methods."

"If the markets for durable goods are peculiarly sensitive to price anticipations, while those for perishable goods are more sensitive to current prices, then there is a little more scope for explaining economic fluctuations."

"I disagree with the widely accepted proposition that econometric models should have expectations consistent with them. To the extent, it is argued, that the economic theory underlying the model involves anticipations, the anticipations that appear in the model as determining individual behavior should be equal to the forecasts made from the model. More generally, in fact, I would disagree with the weaker proposition that anticipations made by individuals should be necessarily dependent on broadly available general data about the economy and in particular about government actions."

"I have argued that forecasts will be based on more information than is contained in econometric models and in general on information differing from agent to agent. I also want to argue that they will not necessarily use all the information contained in an econometric model. In fact, the two propositions are intimately linked though they seem to move in opposite directions. We have to assume that information-processing ability is scarce. As I have already said, this is one of the main justifications for and explanations of a decentralized economy. But then it follows that an individual concentrates on acquiring the information most useful to him and will have to crowd out the information which is less useful. In particular, information that is broadly pertinent to the economy as a whole may have very little predictive power for the future of an individual."

"Ironically, the current conservative model explaining the supposed association of capitalism and democracy relates to the Marxist as a photographic negative to a positive. It too suggests that the political “superstructure” is determined by the “relations of production.” The conservative model contrasts the dispersion of power under capitalist democracy with its concentration under socialism. Political opposition requires resources. The multiplicity of capitalists implies that any dissenting voice can find some support. Under socialism, the argument goes, the controlling political faction can deny its opponents all resources and dismiss them from their employment. This theoretical argument presupposes a monolithic state. It is something of a chicken-and-egg proposition. If the democratic legal tradition is strong, there are many sources of power in a modern state. Adding economic control functions may only increase the diversity of interests within the state and therefore alternative sources of power. It is notoriously harder for the government to regulate its own agencies than private firms. Socialism may easily offer as much pluralism as capitalism. The overpowering force in all these arguments is the empirical evidence of the Soviet Union and the other Communist countries, and it is strong. But the contrary proposition, that capitalism is a positive safeguard for democracy, is hardly a reasonable inference from experience. The example of Nazi Germany shows that no amount of private enterprise prevents the rise of totalitarianism. Indeed, it is hard to see that capitalism formed a significant impediment. Nor is Nazi Germany unique; Fascist Italy, Franco’s Spain, and the recurrent Latin American dictatorships are illustrative counterexamples to the proposition that capitalism implies democracy."

"Social theories are also social facts. Whatever explanatory value the “Marxist” or “conservative” models may have, they surely cannot be regarded as established with any degree of firmness. Yet excessive confidence in one or the other may have serious consequences. If “conservatives” believe too strongly that any move to socialism undermines democracy, then they may indeed act in accordance with the “Marxist” model, and vice versa. (Robert Merton long ago alerted us to “self-confirming” and “self-denying” social theories; here we have a pair of rival theories which are “other-confirming.”)"

"To sum up, the basic values that motivated my preference for socialism over capitalism were (1) efficiency in making sure that all resources were used, (2) the avoidance of war and other political corruptions of the pursuit of profits, (3) the achievement of freedom from control by a small elite, (4) equality of income and power, and (5) encouragement of cooperative as opposed to competitive motives in the operation of society."

"The meaning of information is precisely a reduction in uncertainty. From the viewpoint of economics or decision theory, uncertainty is relevant because it concerns the consequences of decisions. An individual making a decision may be supposed to be choosing one among a set of feasible alternatives. In general, these alternatives are themselves plans extending in time, and he will want to choose the one that yields the most satisfying consequences. These may be profits in successive periods for a business firm, or they may be other satisfactions, such as consumption, power, bequests, or interesting challenges. It can be assumed that the individual compares the entire set of consequences deriving from each alternative in his decision set with those of the others and chooses the preferred one."

"I want to stress that rationality is not a property of the individual alone, although it is usually presented that way. Rather, it gathers not only its force but also its very meaning from the social context in which it is embedded."

"The comparative economic efficiency of capitalism and socialism remains one of the most controversial areas. The classical socialist argument is that the anarchy of production under capitalism leads to great wastage. An appeal to the virtues of the price system is, in fact, only a partial answer to this critique. The central argument, which implies the efficiency of a competitive economic system, presupposes that all relevant goods are available at prices that are the same for all participants and that supplies and demands of all goods balance. Now virtually all economic decisions have implications for supplies and demands on future markets. The concept of capital, the very root of the term “capitalism,” refers to the setting-aside of resources for use in future production and sale. Hence, goods to be produced in the future are effectively economic commodities today. For efficient resource allocation, the prices of future goods should be known today. But they are not. Markets for current goods exist and enable a certain coherence between supply and demand there. But very few such markets exist for delivery of goods in the future. Hence, plans made by different agents may be based on inconsistent assumptions about the future. Investment plans may be excessive or inadequate to meet future demands or to employ the future labor force."

"The incompleteness of property rights in general creates well-known problems in welfare economics, being in fact the basic component of externalities. In particular, markets for future commitments are relatively under-developed compared with those for the present or immediate future. Individuals have to supply for themselves expectations as to future developments in order to make decisions with consequences extending into the future, e.g., investments. These expectations, for example of prices or of supply availabilities, are not "property," but they influence the use of property and are taken into account in the present legal system. For example, an obligation to sell a product for the next few years at a given price is understood in the law to hold only if conditions do not change in a strongly unexpected way; this understanding does not require explicit statement."

"If markets were sufficiently complete, with all futures periods and all uncertain contingencies already provided for in the contracts, the concept of property would cease to be problematic. All decisions would have been made in advance, and there would be no further questions of transfers to treat as just or unjust. Because in fact many of these markets do not exist, there are direct non-market relations which affect individuals' levels of satisfaction. Voluntary transfers become possible, but not all conceivable transfers can be made. Hence, voluntary transfers become biassed in direction, and the possible injustice of the whole system of transfers must be recognized."

"Democracy is a form of government in which political decisions are ultimately governed by the bulk of the adult population, though, of course, usually indirectly through election of representatives. It is fair to say that political liberties, freedom of speech and of the press, are so closely inherent in meaningful democracy as to constitute part of the definition. But one can perfectly well imagine democracy without freedom of religion or in a society where every move is reported and internal passports are needed. Whether or not these restrictions are incompatible with the persistence of democracy is a contingent question, not a tautologous consequence of a definition."

"This is by no means a "formal" matter. Clearly, the intuition behind the continuity requirement is a small step in the direction of utilitarian ethics; even the worst-off member of the society might be made to suffer if there is enough benefit to others. The assumption of diminishing marginal utility implies with regard to usual policy alternatives that there are better ways of improving the lot of better-off members than by hurting the worst-off. But there is one striking case, of great practical importance, where our intuition is in favor of utilitarianism is some form as against any minimax rule. I refer to allocation over time. Typically, we expect future generations to be better off than we are. Should we save for them either directly or in the form of public investments? A maximin rule would surely say no. But if investment is productive, so that, in terms of goods, the next generation gains more than we lose, we usually feel that some investment is worthwhile even though the recipients will be better off than we are."

"What can be concluded? We cannot be sure that the principles of democracy and socialism are compatible until we can observe a viable society following both principles. But there is no convincing evidence or reasoning which would argue that a democratic-socialist movement is inherently self-contradictory. Nor need we fear that gradual moves in the direction of increasing government intervention will lead to an irreversible move to “serfdom.”"

"As indicated, I retain the view that the outcome should be an ordering. Presumably, the weakest possible outcome of a constitution would be a choice function, a mapping of each feasible set of alternatives into a chosen subset. Again, one cannot avoid some consistency relations among the choices from different feasible sets. Various conditions weaker than a full ordering have been proposed, but, in my judgement, they do not lead to interesting conclusions. Unless they are implausibly weak, these conditions do not lead to noticeably greater freedom in the selection of social choice procedures."