Pedro Albuquerque Sheds Light on U.S. & E.U. Economics and Our Current Political Climate

I met economics professor Pedro Albuquerque in a somewhat freaky manner. My family was reading the book Freakonomics and a section of the book made me want to write about incentives as they relate to economics. I did a Google search and found an interesting blog titled Incentives Matter. As I read some of the articles I felt like I'd discovered a kindred spirit, which made me want to contact this blog writer to get to know him better. To my astonishment he was actually here in Duluth, teaching economics at UMD. We soon had lunch at Pizza Luce which led to inviting he and his wife Sophie to our Philosophy Club. Eventually they moved to the south of France, but we've stayed in touch. Occasionally events in the news lead me to reach out to gain his perspective on things from outside the country. Since reality is mediated to us through only partially reliable media it is useful to have a network of collaborating or alternative perspectives. I've found Pedro's perspectives fresh and insightful.

EN: Briefly summarize your career and what you do.

Pedro Albuquerque: I was born in Brazil and I have a Ph.D. in Economics from the University of Wisconsin-Madison. I lived in Duluth while teaching at UMD's Labovitz School of Business and Economics and I'm now a professor at KEDGE Business School in the metropolitan region of Aix-Marseille in the south of France.

EN: You lived in the U.S. for a while and now live in France. Economically and politically, what is similar and what is different?

PA: I've lived in the U.S. from 1995 to 2010 and, retrospectively, I must say that those were great times, specially the years before 9/11. Our expectations about the future were much more optimistic then. Having lived for 15 years in the U.S. and for 8 years in France I can say that there are many similarities between these two societies, which have origins in their common revolutionary roots, after all the American Constitution and the French Declaration of the Rights of the Man and of the Citizen, having both benefited from the pen of Thomas Jefferson, are based on similar values, ideals and struggles. In this sense I don't think there are two other developed societies that have so much in common. But there are many differences naturally, most of them stemming from the contrasts between common law in the US and Roman civil law in Continental Europe, which lead to American corporate capitalism on one side and to European social market capitalism on the other side.

EN: What is the appeal of socialism for so many Americans? What is the track record of socialism in Europe?

PA: The US, despite its enormous historical achievements, has been until now unable to extend the benefits of its successes to the whole of its population. This is particularly true when compared to the more evident social successes of some Western European societies. One popular but disingenuous explanation is to attribute Western European relative successes to socialism, so the mentioned appeal. Reality is more complex however: socialist experiments in Europe have all failed badly, with the developmental disparities between Western and Eastern European societies being the best example of how negative was the impact of socialism in many of those. Some have argued, and I agree with them, that the success cases weren't due to socialism but to ordoliberalism, a modern version of social and economic liberalism that emphasizes institutional building, good governance, social protection and sensibly regulated market capitalism. Nordic societies would be examples of ordoliberal successes.

EN: What are the strengths and weaknesses of Capitalism?

PA: I believe that Joseph Schumpeter's work is still the most important in explaining the strengths of capitalism: it promotes creative destruction, a system of incentives where innovation is at the heart of entrepreneurship and its rewards. This has never existed before in history. The weaknesses come from the instability and conflicts that rise from this same creative destruction. Finding the right balance between innovative disruption and social peace is in my opinion the greatest challenge of modern societies, which becomes even more important as the pace of social, economic and technological transformation accelerates. I'd like to add that we should never forget that modern societies like the American or the French are still in the middle of the revolution of ideas that gave rise to the modern era.

EN: The divisions between right and left (conservatives and liberals) in the U.S. seem more extreme today.

PA: I like to think about what's happening today in the US as another backward step in the incomplete path of the American Revolution. This is not new in the relatively short American history, it has had enough of its Andrew Jackson versus Abraham Lincoln moments. Still, it's quite surprising to observe that the U.S., the clear hegemonic winner of the post-WWII period, is now at the front of the political destabilization process that has been taking over the world since 9/11. Very candidly, from a social scientist perspective, I wouldn't have ever predicted this historical outcome. I've always had enormous faith in the American humanistic and progressive fiber, and I'm still in awe at how badly it has been faltering recently.

EN: How is this playing out in Europe? Is the E.U. threatened? That is, will the E.U. unravel and what will be the end result?

PA: Europe has been very badly affected by those internal struggles in the U.S. given its prominent role in reconstruction and stabilization of the continent after WWII and the influence of American culture and business in the region. There are therefore only two possible outcomes for Europe, which has its own ghosts to deal with: it will bend back towards its most primitive political instincts and disintegrate into relatively irrelevant and isolated aging nations, see the recent example of Italy, or it will grow over the tutorship of the U.S. by finally taking responsibility for its own future as a still very influential federation of nations, accepting immigration as a social force instead of a social handicap. Despite some recent political accidents there are also some even more important positive surprises such as the election of Emmanuel Macron in France. It's very hard then to predict how this situation will unravel, we're clearly at a historical crossroad, but if the past serves as a guide I still remain mostly optimistic about the end result. Social change is the only historical constant and there is always sunshine after a storm.

* * * *
Related Link
http://pedrohalbuquerque.net

Incentives Matter

"Flight" by John Heino

Yesterday I was in that "poetry mood" and began selecting poems to read from various authors -- Rilke, Hesse, Stephen Spender, W.H.Auden -- and I got the notion to find a poem from Elizabeth Barrett Browning that I used to enjoy. On the way to the poem I got distracted by her fascinating biography which I stumbled upon while leisurely traipsing through the Poetry Foundation site, when suddenly this sentence sidetracked me:

Having begun to compose verses at the age of four, two years later she received from her father for "some lines on virtue penned with great care" a ten-shilling note enclosed in a letter addressed to "the Poet-Laureate of Hope End."

Hope End was the estate they lived on at the time. This experience incentivized her to produce more poetry, and gosh-darn-it she became pretty good at it, becoming a major literary figure in her time. So it brought to mind the role incentives played when I was in school (my father gave me a dime for every A in grade school) and in my other pursuits.

It also brought to mind this story, which only took a minute to find on Google, the story of how ship captains were incentivized to to right when delivering prisoners to Australia. Here's a short synopsis, though you can find a more detailed account by following the link below.

As is well known, for three centuries the sun never set on the British Empire, proof that "he who rules the seas rules the world." In the late 18th century the Brits, rather than overcrowding their prisons, began sending their criminals to a remote island, thereby populating Australia. Unfortunately, a lot of this human cargo died en route. Sometimes the ship's captains would withhold food so they could sell the unused grub for personal gain. Sometimes the overcrowding and poor conditions resulted in diseases that killed many of the men. On one occasion 37% of the prisoners died en route.

These kinds of things did not go unnoticed by the press. But how could the governing bodies produce better results? Lectures? Fines? Shaming?

Instead, a change in incentives was undertaken. According to Russell Roberts, in his essay titled Incentives Matter, "a different approach was tried. The government decided to pay the captains a bonus for each convict that walked off the boat in Australia alive."

Russell goes on to state, "I don't think the captains got any more compassionate. They were just as greedy and mean-spirited as before. But under the new regulations, they had an incentive to act as if they were compassionate. The change in incentives aligned the self-interest of the captains with the self-interest of the convicts. Convicts were suddenly more valuable alive than dead. The captains responded to the incentives."

Roberts applies the lesson to economics, but it applies equally well for all of us in various ways. Whether it's meeting deadlines, forming good habits in our children or accomplishing projects in the workplace, good leadership involves finding incentives that work. If we're not seeing the results we want, we may do well to re-examine the incentives.

* * * *
As for that poem by Elizabeth Barrett Browning, I did ultimately find it. Enjoy.

“Earth's crammed with heaven,
And every common bush afire with God,
But only he who sees takes off his shoes;
The rest sit round and pluck blackberries.”

* * * *
Meantime, life goes on all around you. Open your eyes.

Incentives Matter

Reading the book Freakonomics this past week inspired in me an interest in the theme of incentives. While researching this theme I came across a very cool blog called Incentives Matter. As I read some of the articles I felt like I'd discovered a kindred spirit. I wanted to contact this blog writer to get to know him better. To my astonishment, Pedro Albuquerque, the blog's creator, teaches at a university right here in my home town.

We made contact, suggested lunch, and followed through in a matter of days this past Tuesday. I learned that he was born and raised in Brazil, met his French wife in Switzerland, and speaks Portugese, Spanish, English and French. A really nice guy, and sharp as a tack.

What follows is an interview that emerged from this meeting.

Ten Minutes With Pedro Albuquerque

Ennyman: How did you become interested in economics as a career?
PA: My youth in Brazil was marked by the many economic problems that the country was experiencing during that period: frequent cycles of boom and bust, hyperinflation, black markets, chaotic public finances, debt moratorium, price controls, government's seizure of people's savings or properties, in other words, a whole plethora of events that would make a Lewis Carroll universe look like a very ordinary place.

I had always wondered about the causes of all that distress. It was only after I read two amazing books by Milton Friedman, Capitalism and Freedom and Free to Choose, and Adam Smith's The Wealth of Nations, that I realized how useful economics was as a tool to understand the world around me, and that I wanted to follow a career in economics.

Ennyman: Your blog is titled Incentives Matter. Once a person starts thinking about incentives they realize how it touches such a broad swath of disciplines. How did you personally get attracted to this theme?
PA: The idea that incentives matter permeates the entire science of economics and can be found for example in the books by Friedman and Smith that I cited before. Recently however economists have become much more aware of the relevance of incentives as a defining characteristic of economics as a science. Books like Freakonomics by Steve Levitt discuss the point very openly, and the Nobel Prize given in 2007 to University of Minnesota professor Hurwicz (unfortunately deceased last year) was a huge recognition of the explicit role of incentives in the field.

Economist Glen Whitman once said that if he had to summarize economics in two principles they would be (1) "incentives matter" and (2) "there's no such thing as a free lunch." He called these principles the "two things of economics." Trying to reduce a science to two principles is naturally an oversimplification, yet it's a very useful one, and I entirely agree with his two choices. Among these two principles, "incentives matter" seems to me to be the more uplifting, so that's why I chose it as the title of my blog.

Ennyman: From reading your blog, it's evident that you are following current events in Washington… What is your take on the new administration’s first days in office, as regards economics?
PA: The new administration encircled itself with some extremely competent economists, and that's a good thing. However, I think that history has shown us again and again that one thing is a government that has good economists, and another thing is a government that listens to those good economists.

The first weeks of the new administration frustrated my best expectations and left much to be desired on those grounds. The reality however is that it's too early to tell.

Ennyman: I'm often fond of saying, “When there is an autopsy without blame, then we will find out what killed the patient.” Due to the nature of power politics in D.C.,how will we ever find solutions when no one seems interested in an accurate diagnosis?
PA: This problem is addressed by a field of economics called public choice, and it cannot be easily solved, both analytically and in terms of policy design. The solution naturally passes through the improvement of the quality of our democratic institutions, so they become more immune to political background noise and more focused on policy substance. This is however easier said than done.

One of the most obvious solutions to this problem is to count more on markets and less on politics to solve social problems. Such a statement may not be fashionable right now, given the current political climate, however modern developments in public choice point in that direction. Besides that, there's much that can be done in terms of regulating political action.

For example, politicians love to talk about establishing limits to market forces; however the success of the American experiment is the direct result of an incredibly smart Constitution that instead of promoting limits to markets promoted above all limits to political power. We need more of the blessings that the American Constitution originally gave us, not less.

Ennyman: You stated the one of the biggest problems in politics is pride. Can you elaborate on this?
PA: Pride, up to a certain extent, is a positive human trait. It's however a trait that is not compatible with statesmanship, especially when it presents itself as vanity or lack of humility. The true statesman (or stateswoman) knows that he (or she) is a public server, and it should never be the other way around.

I've always admired the American people for having a very good understanding of this point. We should always remind ourselves of this important positive aspect of our political culture so we make sure that we never forget it.

Ennyman: Sometimes it is difficult to assess how serious issues really are because the media is so frequently beating the drum to support legislation for those in power. How serious is our current crisis?
PA: The crisis is serious, however it's vital that we keep in mind that the American economy is flexible and robust by design, and therefore it has the energy and the means to get out of this mess by itself. The government can help to accelerate the recovery by parsimoniously using all policy instruments available in the macroeconomic toolbox, and, above all, by respecting the two principles of economics cited before. Choosing to ignore the role of economic incentives and costs will not help the economy, on the contrary, will only extend and deepen the crisis.

Unfortunately the new administration, following on the steps of the previous one, has shown until now a disturbing lack of concern for matters of economic incentives and costs. Because of this, I'm seriously concerned that misguided actions by the government may end up extending and deepening the crisis, making it worse than what it should normally be. For example, the constant referencing by government authorities to the idea that economic disaster will ensue if they're not empowered with legislation and funds according to their terms has the real potential to worsen the crisis that they're supposedly trying to resolve.

Ennyman: You mentioned being impressed by President Reagan's impact on world affairs. What in particular do you find impressive about his influence?
PA: President Reagan statesmanship was central to the revival of the American economy and political influence in world affairs in the eighties. He accepted to make very costly political sacrifices in order to get the country out of the economic stagflation of the seventies. With hindsight we know that his bets paid off, however there was no way he could have known that when his government started.Not many politicians have the humility, the moral fiber and the sensibleness necessary to make the hard choices that he made. You have to able to take the heat to do it. Your pride will hurt really bad, and a vain person would never be able to withstand it. Reagan did it however with dignity and grace.