Elinor Ostrom is the first woman in history to win the Nobel Prize for economics. In my opinion, this is the news of the year. Ostrom’s work strikes at the heart of the human condition, and her conclusions challenge the way we think about governance, trust, and financial systems. She’s also a gifted writer.

The NYT cited Robert Shiller’s comment on the award:

“It is part of the merging of the social sciences,” Robert Shiller, an economist at Yale, said of Monday’s awards. “Economics has been too isolated and these awards today are a sign of the greater enlightenment going around. We were too stuck on efficient markets and it was derailing our thinking” ….

The committee, in effect, said that [current economic] theory was too simplistic and ignored the unstated relationships and behaviors that develop among companies that are competitors but find ways to resolve common problems. “Both scholars have greatly enhanced our understanding of non-market institutions” other than government, the committee said.

“Basically there is a common understanding that develops even among competitors when they are dealing with each other,” Mr. Shiller said, adding “when people make business contact, even competitors, they can’t anticipate everything, so an element of trust comes in” ….

In its announcement, the committee said Ms. Ostrom “has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories.”

As some of you may know, Ostrom’s work is the inspiration behind this blog (for example, see my comment at the end of this post) and my work on the Limited Liability Persona at Burton Group (for example, see the references to Ostrom in this report). So I find it remarkable and reassuring that her work is now being recognized on a global scale.

So, once a gain: Congratulations, Elinor!

The New York Times recently ran a piece called “How Did Economists Get it So Wrong?” The article is a brisk stroll through the intellectual heritage of economic theory in an effort to point out its developmental flaws. Here’s a snippet from the Times article that I think sums it up pretty well:

Yet [most economists] accepted the notion that investors and consumers are rational and that markets generally get it right.

Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.

Profound. And there are lots of overtones in these few sentences supporting important themes on this blog. (For example, the Times article reads like a case study of my post on “The Absurdity of Certainty.” And as I pointed out in a recent post, the notion of an autonomous rational mind is a convenient contrivance, not an objective reality.)

The article first takes aim at “the notion that investors and consumers are rational” actors. Any economic theory that presumes human rationality may describe the economic activity of Utopia, but certainly not of the society we live in.

The author also asserts that trusting financial market simply as a matter of its past performance is foolish complacency. Spot on! Flashy displays of wealth more likely signal wanton exploitation than honest dealings.

So the short of it is: you can’t trust economists or the market machinery they build.

Joseph Stiglitz recently published an article in Vanity Fair that discusses many of the themes of this blog (for example, see: Let’s Not Confuse Free Markets With Freedom, America on the Couch, and 2008: The Year the Free Market Died.) A Nobel-laureate economist, Stiglitz provides historical context in making his case that free-market capitalism isn’t inevitable for the unwashed masses. According to Stiglitz, American capitalism sustained a mortal blow in its bid to become the “kind of economic system [that] is likely to deliver the greatest benefit to the most people.” He then offers this chilling dose of reality:

In America, calling someone a socialist may be nothing more than a cheap shot. In much of the world, however, the battle between capitalism and socialism—or at least something that many Americans would label as socialism—still rages. While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come….

For a while, it seemed that the defeat of Communism meant the sure victory of capitalism, particularly in its American form. Francis Fukuyama went as far as to proclaim “the end of history,” defining democratic market capitalism as the final stage of social development, and declaring that all humanity was now heading in this direction. In truth, historians will mark the 20 years since 1989 as the short period of American triumphalism. With the collapse of great banks and financial houses, and the ensuing economic turmoil and chaotic attempts at rescue, that period is over. So, too, is the debate over “market fundamentalism,” the notion that unfettered markets, all by themselves, can ensure economic prosperity and growth. Today only the deluded would argue that markets are self-correcting or that we can rely on the self-interested behavior of market participants to guarantee that everything works honestly and properly.

Well put! Unfortunately, Stiglitz stops short of suggesting a viable alternative to  American free-market capitalism. Nevertheless, his analysis is welcome, as it reminds us of important problems a global neo-capitalist agenda must resolve.

My friends at Ping Identity announced last week a solution for enabling single sign-on (SSO) to a broad set of Google apps, taking advantage of Google’s new OpenID services. Ping’s product, PingConnect, actually uses a combination of standards, including SAML, OpenID, and OAuth to connect to other SaaS solutions, such as Salesforce.com. For a lot of people, there’s starting to be enough value here to justifiy getting and actually using an OpenID.

There’s some discussion among individuals close to various standards around how companies like Google and Ping Identity are interfering with the purity of these protocols. In my opinion, it’s great to see some of these standards being put to use in a pragmatic and productive way. (Granted, there’s a control play for the internet “identity hub” going on here, but I’ll have to take up in a follow-on post.)

My only advice to Ping is to henceforth refrain from using the word “Universal” — as in, “Universal Login for SaaS.”

In an earlier post, I highly recommended Robert A. Burton’s book, On Being Certain: Believing You Are Right Even When You’re Not. But the book is important enough that I always meant to write a follow-on post. This is that post.

The book’s main assertion is that biology, not self-will, determines a person’s certainty and beliefs. The difficulty is that our conscious minds aren’t adapted to perceiving the source of our sense of certainty. In the following passage, Burton draws on another book from Timothy Wilson to make this point:

In his book Strangers to Ourselves, Timothy Wilson, a professor of psychology at the university of Virginia, presents a superb overview of the reasons why the unconscious mind is inaccessible to self-analysis: “the bad news is that it is difficult to know ourselves because there is no direct access to the adaptive unconscious, no matter how hard we try…. Because our minds have evolved to operate largely outside of consciousness, it may not be possible to gain direct access to unconscious processing.” ….

If he’s correct, the impasse between the necessity for self-awareness and the limits of our self-assessment abilities can’t be overcome through more brute thought. In agreeing with Wilson, we are challenging the commonsense and folk psychology understanding of ourselves, including knowing the degree to which we are consciously responsible for our thoughts and actions. Indeed , Wilson opened his book with the salvo, “It usually seems that we consciously will our voluntary actions, but this is an illusion.” The important point for our discussion … is that any attempt at self-awareness must accept this limitation. (146)

I’ve had a few debates with managers, educators, and spiritual leaders over the limits of self-examination, so it was gratifying to come across this snippet:

A very difficult question facing interpreters of modern neurobiology is how to juggle the need for self-examination with the knowledge that an unspecified percentage of such assessments will be flawed, sometimes with serious consequences. No one seriously doubts Socrates’ maxim: The unexamined life isn’t worth living. … Yes, we should engage in ruthless self-reflection and harsh scrutiny, but we should simultaneously acknowledge that such introspection will, at best, only result in a partial view of our minds at work. Complete objectivity is not an option. (159)

Burton’s take-down of neo-atheism is classic. Would love to have written this:

[Richard] Dawkins both believes in his powers of introspection and self-assessment and that he is mentally capable of understanding why the world and we exist—the myth of the autonomous rational mind. … It is an extraordinary proposition to believe that an intellectual understanding of physical properties can reveal subjective metaphysical truths. … Dawkins conveniently illustrates the rationalist’s dilemma: How do you articulate a personal sense of purpose when you intellectually have concluded that the world is pointless? What is the purpose of pointing out pointlessness? What does it mean to find purpose in understanding purposelessness? (181-182)

Burton later goes on to say:

The science-religion controversy cannot go away; it is rooted in biology. If we were to ban all discussions of religion, burn all religious books, even strip all words related to religion and faith from the dictionary, we would not eliminate religious feelings. … We talk of religion, afterlife, soul, higher powers, muses, purpose, reason, objectivity, pointlessness, and randomness. We cannot help ourselves.
If, for most of us, science either is too complicated or cannot provide the heartfelt joy and meaning of religion, it is only natural that we look elsewhere. (188)

Burton offers the following suggestion on how to proceed, in view of our intellectual limitations:

To retreat from claims of absolute “knowing” and certainty, popular psychology needs to explore how mental sensations play a fundamental role in generating and shaping our thoughts. We can’t afford to continue with the outdated claims of a perfectly rational unconscious or knowing when we can trust gut feelings. We need to rethink the very nature of a thought, including the recognition of how various perceptual limitations are inevitable.

At the same time, if the goal of science is to gradually overcome deeply embedded superstition, it must be seen as a more attractive and comforting alternative, not as inflammatory exhortation and confrontation with a none-too-subtle whiff of condescension. (220-221)

Amen.

Free markets and free political systems have grown intertwined, but they remain very distinct ideologies. To call what happens on the trading floor “free” in the same way we refer to human liberty is an egregious overloading of the word “free.” As we consider how to reinvent free-market systems, it’s critical to distinguish between free markets and freedom. We can retain civil liberties as we construct a vastly different, more responsible financial system.

Let Greedom Ring

Greed is at the heart of free-market capitalism. Unlike in polite social settings, where showing one’s greed is highly inappropriate, greed is a prized and cultivated trait in an economic context. In economic theory, greed drives the market while constraining fraud. The combination of greed and freedom is allegedly all that’s needed to keep the market in check. Even former Federal Reserve Chairman Alan Greenspan espoused this view—until recently. Frank Partnoy puts it best in the updated afterword of his re-released book, “F.I.A.S.C.O. Blood in the Water on Wall Street”:

I thought Greenspan’s laissez-faire zealotry clouded his judgment…. Greenspan even boasted that there was no need for rules prohibiting fraud, because the markets inevitably would discover it. According to Greenspan, market competition alone, without any regulation,was sufficient, because no one would do business with someone who had a reputation for engaging in fraud. (Partnoy, 257)

It should be obvious to everyone now that competing self-interest isn’t enough to thwart fraudulent behavior or to keep failures from turning into catastrophes. Greed mixes with instinctual social behaviors to yield unconscionable consequences. “Herd mentality” causes periodic stampede conditions in the market, forming “bubbles” that can only normalize by bursting. Greed makes investors ignore warning signs for a mere 12% interest. Greed makes bedfellows of competitors. Greed interferes with mechanisms (such as reputation) for developing stable trust, creating instead an environment of blind trust.

By analogy, Greedom is a nightclub where—in a dimly lit, deafening, and bacchanalian environment—style wins out over substance.

Freedom and Trust

In contrast, modern democratic societies are founded on ideals of civil liberties and seeped in language of a “social contract.” The goal is to balance self-interest with societal interest. In modern democracies, freedom isn’t anarchy; nor is it mob rule. A free society is one in which trust can emerge because the governing authority systematically condemns exploitation.

Democratic systems are far from perfect. But they do a much better job than financial markets at cultivating social trust. Let’s all agree that decisions about our financial and civil freedoms shouldn’t be left to the derivatives traders or investment bankers. A true “free market system” needs to move away from the sophomoric idealism of greed toward a system of participation, transparency, and trust.

It turns out there’s something scarier to hear than “We’re from the government, and we’re here to help.” Obama announced yesterday a surgical bankruptcy for GM. I assume surgical bankruptcies will be completed will the precision of surgical air strikes? Heaven help the auto industry!

Watching this AIG bonus mess reminds me the movie “Groundhog Day”—partly because I keep reliving the same headlines over and over again—but mostly for that memorable line that Larry (the camera man) delivers to Rita (the producer) about Phil, the weatherman:

Did he actually refer to himself as “the talent”?

Admittedly, it takes a rare kind of talent to drive the world economy into recession; but it’s not the kind of talent any rational person wants to retain. AIG should have refused to pay the bonuses, and dared anyone with a contract to sue for it. Additionally, anyone who actually penned these bonus contracts should be dismissed—without severance.

Still, I wonder whether this whole “bonus-gate” is just a red herring to throw the media off the trail of graver issues that will now go unreported?

I happened to be listening to a segment from On The Media yesterday titled “The Net’s Mid-Life Crisis.” Having been accused of having similar crises, I was intrigued. It was entertaining to hear Richard Clarke talk about the ways in which Russia and China had infiltrated US Government networks. For example, he said:

Well, that’s exactly what happened two months ago. The people working in the Pentagon on the real unclassified Internet were downloading things and putting them on their thumb drives and then moving their thumb drives over to classified computers.

Well, guess what? The Russians figured that out. And the Russians came up with a virus that looked for Pentagon Internet addresses, and then looked for computers that had thumb drives on them, and downloaded a virus onto those thumb drives, and the virus then walked across the room and got into the top secret network of the Pentagon.

I’m pleased to report that the US Government now fixed that problem! According to Clarke, all USB slots on classified computers have been “cemented” to prevent soldiers from inserting thumb drives in classified computers. That’s the kind of pragmatic, idiot-proof design that only the US Military can think up.

On The Media did a great job of rounding up a group of people who really should know what to do about securing the Internet. Sadly, none of them had far-reaching and realistic proposals. Oh sure, the perennial favorites like “let’s build an entirely new Internet” and “let’s issue better, stronger IDs” and “let’s build more secure software” were among the suggestions. I’d like to defer to a Bruce Willis character to offer my response to these schemes (Since On The Media quoted a Bruce Willis character, I think I will too):

HARRY: And this is the best that you—that the government, the U.S. government could come up with? I mean, you’re NASA for crying out loud, you put a man on the moon, you’re geniuses! You’re the guys that’re thinking shit up! I’m sure you got a team of men sitting around somewhere right now just thinking shit up and somebody backing them up! You’re telling me you don’t have a backup plan, that these eight boy scouts right here [gestures to USAF pilots], that is the world’s hope, that’s what you’re telling me?

TRUMAN: Yeah.

Just when I thought the show might slide into a futile discussion on the merits of world peace, two amazing things happened. The first was a quote from Stefan Savage:

The question I like to ask people is, what are you going to do to the highway system to reduce crime. And when you put it that way, it sounds absolutely ridiculous, because while criminals do use the highway, no rational person is suggesting that if only we could change the transportation architecture that crime would go away.

That, my friends, is the awesome quote of the day. It’s a ray of hope that says people are beginning to understand that the problem of Internet security has little to do with bits and bites.

The punch line belongs to Clay Shirky (whose name is unfortunately misspelled in the transcripts). Clay phrases the problem this way: “How do two people who want to do business with each other come to trust each other?” From the transcript:

BROOKE GLADSTONE: The answer, says Sherkey, actually comes from a professor of political science named Robert Axelrod.

CLAY SHERKEY: And Axelrod’s answer was, only the shadow of the future. Right? I won’t rook you in a transaction today because you and I might do business again tomorrow. And so, successful regimes create the shadow of the future and then they can actually set up cooperating networks, even inside incredibly hostile environments.

If only everyone could come to see Internet security dilemmas in that light!

However, I’d like to add that Axelrod’s work is only a starting point—a portal into the discipline of what I now refer to as “social trust online.” Some of my “Laws of Relation” hark back to Axelrod. But Axelrod’s work on reciprocity isn’t sufficient for developing new pathways to trust on the Internet. In fact, filling in all the other applicable research on trust is the entire purpose of my contributions to this site.

Still, I’m very encouraged to see some of the thinkers in Internet security becoming much more comfortable with the social sciences, since the field has been dominated by computer science for so long.

I remember as a teenager picking up a rather challenging book I discovered in a box of my dad’s university materials: Escape from Freedom by Erich Fromm. The book’s ambitious attempt to analyze the psychology of an entire nation (namely, wartime Germany) made me wonder whether every nation couldn’t use a little time on the proverbial couch.

So as we struggle to understand the causes of the current recession, I think it’s time to put America on that couch and—treating the nation as a superorganism—construct the psychological profile of America. Unfortunately, I’m in no position to do that sort of analysis (and for that matter, it’s not clear anyone is). But in true American spirit, I’ll do it anyway.

Non-Americans find evidence of neurotic behaviors in American activity, from simple delusion to societal narcissism and collective obsessive-compulsive disorder (OCD). My unprofessional opinion is simply that we’re a nation in adolescence exhibiting adolescent behaviors. As President Obama put it, “we remain a young nation, but in the words of Scripture, the time has come to set aside childish things.” So what are the childish things that America needs to put away? In my view, it’s time to mature the game of American Capitalism.

The premise of American Capitalism, as it’s been played for the last century, is a zero-sum game based on rational choice theory. It is a game characterized by the baser social emotions such as greed, envy, schadenfreude, resentment, and triumphalism. It is a game in which trust is a sucker’s trait. Granted: compared to authoritarian regimes of the past, American Capitalism offers some evolutionary advantages. But since American Capitalism both ignores and interferes with social interactions for building trust, it is a game at odds with the sociality we depend on for survival. And in a declining economy, the game degenerates into a negative-sum game in which individuals save themselves by trampling on the backs of others.

The economic crisis forces a decisive moment on our young nation: should we escape the freedoms of capitalism and revert to authoritarian society, or can we find a way to mature the game of capitalism?

Reinventing American Capitalism offers nostalgic allure, because America is seeped in the lore of invention and experimentation. But in an uncertain economy, many will find reinventing the hallmarks of American society too risky and too tedious to bail us out of our predicament. So what will our post-adolescent society choose: “go with what you know” or pioneering a new capitalism?

For my part, I hope we revisit and reinvent the game of capitalism. Moving past zero-sum capitalism is theoretically possible; game theorists cite examples of positive-sum arrangements in every-day life. But so far none of these games have been field-tested in widespread economic use. So before we can shift a massive economy onto a new form of capitalism, we’ll first need to vet out viable strategies.

Fortunately, the Internet can work as a kind of super-collider that helps social scientists unravel the rudimentary components of trust. The Internet enables us to form diverse communities rapidly, introduce environmental variables, monitor behaviors, and investigate community outcomes. Through this kind of research, it may be possible to develop a kind of “trust protocol” that is applicable to a wide range of interactions from financial transactions to social networking. By understanding elements of trust, we may be able to construct a new kind of capitalism, one that avoids the faults and tragedies of youth.