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Most Russians are poorer now than under Communism in 1989

A few months ago, I had an article in the Mandarin arguing that the Commonwealth budget should contain distributional analysis. This is because the economic welfare of a community cannot be understood just through averages like income per capita. Clearly it makes a difference who gets what.

It’s hard to imagine something illustrating the point more powerfully than distributional data contained in a working paper on inequality in Russia from 1905-2016 (h/t Matt Bruenig). The paper is co-authored by Novokmet and Piketty of the Paris School of Economics and Zucman of Berkeley.

To analyse inequality in Russia 1905-2016, the paper follows “a common methodology that involves combining national accounts, surveys, and fiscal data in a consistent manner to produce ‘distributional national accounts’.”

Such analysis is not straightforward because taxation statistics and, in particular, survey data tend to understate the level of inequality. Surprisingly enough billionaire oligarchs are not in the habit of answering income and assets questionnaires or reporting their Swiss bank accounts to the taxation department

The paper contains lots of interesting data, but one chart stands out as shocking. It shows that the majority of Russians are poorer than they were under Communism in 1989:

russia

Look closely at that chart and you can see that cumulative income growth from 1989 to 2016 is negative until just beyond the fiftieth income percentile (at the 55th percentile according to the source data).

The story is slightly clearer in the annual real growth by percentile chart:

russia2.png

Extraordinary. After everything we’ve heard about the economic disaster zone of Soviet Communism, it delivered steady income growth for most the population, only for this to turn negative with the notoriously abrupt introduction of capitalism.

To be sure, it is only a slight majority who are absolutely worse off, but this is nonetheless shocking considering the income growth that would normally be expected over such a period. Compared to 1956-1989, annual income growth was worse for everyone up to the 93rd income percentile.

That most the population are worse off despite per capita income growth of around 40% underscores the limitations of averages as a measure of a community’s economic welfare.

It’s not hard to see where the income has gone:

russia top 1

russia top 10.png

 

Russia’s shocking upward redistribution is in large part a failure of policy-makers and advisers to consider distributional issues when building the nation’s capitalist institutions during the post-Communist transition.

In the wisdom of Western and domestic liberal economic advisers, a conscious decision was made to set aside equity considerations, even to the point of overlooking extreme corruption, in order to boost efficiency through rapid privatisation of the economy.

Branko Milanovic, former head research economist at the World Bank and renowned inequality scholar, describes the economic reasoning for this in his magisterial Global Inequality:

At the time, a key argument for the benefit of fast privatisation, even if unjust or corrupt, was that, from the point of view of efficiency, it does not really matter to whom assets are sold and at what prices. Surely, the argument went, there will be distributional consequences regarding who benefits from cheap assets (some people will become immensely rich, while many others will get nothing), but there will not be longer-term implications for economic efficiency. Why not? Because if assets are given practically for free to people who do not know what to do with them, those people will have an incentive to sell the assets quickly to “real” entrepreneurs who know how to manage them.  This argument was consistent with the Coase Theorem, which states that we can separate matters of economic efficiency from matters of distributional justice, essentially by relegating the latter to an area outside economic policy.

Moreover, even before the new tycoons sell the assets – that is, as soon as they have been gifted with them – they will have an incentive to push hard for the rule of law. This conclusion seemed self-evident. Even if privatisation was done in the most lawless and nontransparent fashion, the new millionaires would, like the robber barons in the United States, demand the rule of law and property rights in order to protect their newly acquired wealth.

Some of the smartest economists in the world were convinced that mass plundering of community resources by corrupt plutocrats was good, because it would promote efficiency and… the rule of law. The story is another cautionary tale about deriving policy from narrow theories about efficiency (see also Greece and Indonesia).

While incomes fell for most the population, life expectancy deteriorated also, plummeting nearly five years for men between 1990 and 2000, driven by factors such as cardiovascular disease, alcoholism and suicide. By examining differences in the pace of privatisation across Russian regions, analysis in the Lancet concludes that there is “strong evidence for the hypothesis that rapid privatisation contributed to raised working-age male mortality”.

None of this is to exonerate Soviet Russia, which was an economic basket case and dreadful on basic freedoms and human rights.

But it does draw into focus the scale of the social and economic disaster that is post-Communist Russia, and the critical imperative of considering distributional issues in economic analysis.

Australia should criminalise citizens promoting tobacco in developing countries

Many people around the world were disturbed when a video emerged of a two-year-old Indonesian smoking baby, but this notorious anecdote alludes to a systemic problem.

Growing rates of smoking are a public health crisis in many developing countries. In Indonesia the problem is severe, with the male smoking rate increasing by around 20 percentage points in 15 years, from 56.2 in 2000 to 76.2 in 2015 – now the highest rate in the world.

The growth in smoking is in part due to concerted advertising from the tobacco giants. Advertisements for tobacco are everywhere. In one town I’ve visited, they were on every second telegraph poll.

The ads target poor people and school children, deliberately setting up near schools. They are spruiking the myth that smoking is associated with a life of freedom and self-creation.

The tobacco companies give venders gifts such as refrigerators and microwaves based on how many ads they put up and how many boxes they sell.

What can we do about this global public health disaster?

One thing Australians can feel genuine pride in was our government’s decision in 2011 to take on the tobacco companies over plain packaging.

Legal threats are the tobacco companies’ tool of choice for bullying developing countries into doing what they want. These countries often do not have the financial or institutional strength to sustain costly legal disputes.

By setting a legal precedent against the tobacco companies, Australia contributed to a global health public good.

But we can do more.

I propose making it a criminal offence for an Australian to promote tobacco in a developing country.

According to 80,000 Hours, a research group on career impact based at Oxford University, the number one most harmful career is marketing or R&D for companies that exploit compulsive behaviours such as smoking. It singled out the promotion of smoking in developing countries as particularly destructive, given low levels of information about smoking’s harm within those countries.

When someone works in such a role, it means their talent and hard work is going towards killing people.

Australians should not be permitted to participate in this human destruction.

What good would the change do? First, it’s morally correct. Second, it will slightly reduce the employment pool for tobacco companies. If an Australian has such a job, they were probably chosen because they were the best person for the job, meaning their replacement will be slightly less effective, thereby saving lives. But third, and most important, it’s a signal to the rest of the world, and other countries may follow – as we saw with plain packaging.

Western Sydney Wonk: reboot

It’s been a long time – nearly a year – since posting on this blog. I put it aside to focus on pressing commitments relating to family, study and work.

For those who don’t know me, I am based in Jakarta but have spent much of the past year travelling back and forth from here to Sydney.

My background is in economic and social policy: including as an analyst in Commonwealth Treasury and Finance Departments, and as a Parliamentary staffer. I have degrees in sociology and economics, and am nearly finished a Masters in Economics. My main policy interests are in the area of poverty and inequality, particularly as it relates to welfare economics and benefit-cost analysis (my dissertation), governance practices (my public service history), politics (my staffer history) and health (a side interest relating to my family experience).

Part of what draws me back to Sydney is an Australia-based research component of my Masters, as well as some family issues that needed my attention.

I’m also working in Jakarta, and doing nearly full-time coursework.

So I’ve tried to avoid distractions.

Nevertheless, I did write a piece for the Mandarin arguing for distributional analysis in the budget papers. My take was picked up by Jessica Irvine in a good article for the Sydney Morning Herald. (In another Herald citation that month Jewel Topsfield described me as a “Twitter wag” – one for the business card.)

When I started the blog, I found it helpful for working through my ideas, engaging with others and practicing my writing. But a blog also takes up time and focus. If you write 3,000 words of decently drafted and referenced original material, the obvious question is why a personal blog rather than submit it for publication? Other the other hand, the benefits of a personal blog are that writers can have greater control, informality and spontaneity.

How to find the balance that gains most of the benefits while limiting the costs?

I’ve decided the answer to this is to try shorter, faster and less ironed out pieces. The objective is to get the ideas down, and open a discussion. Many of my favourite bloggers write in this style – John Quiggin springs to mind. Sure random thoughts on Quiggin’s mind while he eats his cereal or cuts his toenails are probably smarter than even our smartest thoughts, but I digress. It’s a good approach.

Destroying dreams: #Censusfail reveals the danger of penny-pinching

ImperialstarDestroyer480ppx (1).png

With #censusfail shaping up to be another case study in the false economy of cut-price outsourcing, it reminds us of the need to balance price considerations with quality and risk considerations.

Not everyone thinks like this.

Back as a Finance Department grad in 2009, I knew what my job was: a funding destroyer.

Ian Watt, the then Finance Secretary, publicly described the Finance role as “the destroyer of dreams”. Because, he said, “most those dreams are not worthy of public funding”.

Perhaps drawing on my childhood upbringing in austere Protestantism, I took the calling up with a righteous zeal, meticulously trawling over every costing line item to expose and challenge spending that had a sniff of being surplus to immediate need. It was an approach that won kudos and status as a Finance grad.

You can imagine the departmental culture. In fairness to Finance, their internal ethos develops as a kind of battlefield solidarity necessary to resist the continuous onslaught of rubbish that comes across their desk: bullshit thought-bubbles, cynical pork-barrelling, naked rent-seeking and shameless portfolio empire building. A classic of the genre came from John Howard, as he desperately tried to buy himself the 2007 election, throwing $250,000 at some bloke who wrote in asking for money to make a golden carriage for the Queen (no joke).

Agencies adapt to Finance’s punctilious penny-pinching by becoming even more crafty in their funding proposals, which Finance adapts to with even more vigorous cynicism and reflexive nay-saying. The resultant feedback loop leads to a subgame Nash equilibrium of distrust, in which excessive and even sneaky funding requests are countered by an agency mentality that consciously stylises itself with apocalyptic dream crusher associations sounding like they’re straight off a Megadeth album.

(When I say distrust, I mean at the margin. Australia is still much better than most of the world on public servant social norms.)

Anyway, I moved off to Treasury the next year and accordingly my strategic focus shifted from the thousands to the billions. Since this time,  I’ve grown increasingly conscious about the dangers of underfunding projects of high priority and high risk. Sometimes it’s wise to build slack into a project if the stakes are high enough. Alas Finance-style thinking sometimes fails to see the forests (social output, catastrophic risk mitigation) for the trees (saving a buck).

One policy risk with extreme stakes is the potential for the community to lose trust and confidence in public institutions, such as the Census. The Census is crucially important given its role informing policy-making. The accuracy of ABS statistics depends on the public trusting the ABS enough to provide honest answers.

But the importance of institutional trust may run far deeper than this. The thesis of renowned MIT macroeconomist Daron Acemoglu is that institutions – including informal institutions like trust – are the central driver of a society’s long-run economic growth.  In particular, a society’s political and economic establishments must be trusted and perceived as legitimate by the community for that society to function efficiently.

A loss of trust in government is remarkably persistent. A working paper from late last year by Yuyu Chen of Stanford found that Chinese families who were affected by the Great Chinese Famine still – half a century later –trust government substantially less than do other Chinese families. The distrust carried across generations. The paper’s methodology is still being discussed and debated among economists, but given the stakes involved, it would be wise to err on the side of caution when it comes to preserving trust in the mean time.

In a similar vein, the citizens of my current home – Indonesia – remain deeply sceptical about economic reform after mismanagement by the IMF during the 1997-98 crisis. “Neo-liberalism” is to this day regarded as a dirty word across walks of life here. We’ve also seen disenchantment in Greece after the troika continuously promulgated blatantly wrong forecasts overstating the benefits of austerity and economic reform.

As I discussed in my post on Indonesia and Greece, it’s all too easy for wonks to sneer at the irrational masses, exuding over-confidence in their own expertise while forgetting the critical imperative of maintaining perceptions of democratic legitimacy. Trust in experts is damaged when the experts turn out to be wrong, but especially when they’re wrong on policy changes that are rammed through without the community having a voice in the decision-making process. That’s a theme that applies to the Census changes, but I digress… Back to underfunding.

Given that a reputation takes a lifetime to build but a moment to destroy, experts should err heavily on the side of averting the risk of threats to public confidence. Building in excess capacity works as an insurance device against the unexpected. Nassim Taleb – who is 75% ranter now but formerly 50% ranter/50% genius – illustrates this intuition well:

Let me summarise my ideas of how Mother Nature deals with the Black Swan. First, she likes redundancies. Look at the human body. We have two eyes, two lungs, two kidneys, even two brains (with the possible exception of company executives) – and each has more capacity than is needed ordinarily. So redundancy equals insurance, and the apparent inefficiencies are associated with the costs of maintaining these spare parts and the energy needed to keep them around in spite of their idleness.

The exact opposite of redundancy is naive optimisation. The reason I tell people to avoid attending an (orthodox) economics class and argue that economics will fail us is the following: economics is largely based on notions of naive optimisation, mathematised (poorly) by Paul Samuelson – and these mathematics have contributed massively to the construction of an error-prone society. An economist would find it inefficient to carry two lungs and two kidneys – consider the costs involved in transporting these heavy items across the savannah. Such optimisation would, eventually, kill you, after the first accident, the first “outlier”. Also, consider that if we gave Mother Nature to economists, it would dispense with individual kidneys – since we do not need them all the time, it would be more “efficient” if we sold ours and used a central kidney on a time-share basis. You could also lend your eyes at night, since you do not need them to dream

Taleb overdoes the economist bashing (everyone bashing) but, as a description of some government budget guardians, the comment rings true.

The thing about the #censusfail is that it wasn’t even a Black Swan, it was quite predictable. You don’t need to have any deep Talebian scepticism about prediction; even a ‘naive’ analysis should have encouraged caution.

It’s easy to see how penny-pinching contributed to the #censusfail disaster.

  1. The ABS evidently lacked the funding for a proper public consultation and information campaign about sensitive changes. The changes were announced late in the five-year window, and the timing of the announcement suspiciously resembles a strategy of hoping the community wouldn’t notice. Given the inherently controversial nature of changing the parameters of government compulsion, the apparent lack of transparency and failure to engage the public in the decision-making process gave the appearance of pulling a swifty on the community. As such the public smelled a rat (even if there was no rat). In truth, the ABS would not have had much option if they couldn’t afford any serious public consultation and advertising.
  2. I suspect the ABS consciously avoided raising awareness about the shift from paper to online because they wanted to minimise printing costs.
  3. The website crashing on the one day it really needed to work, despite a predictable amount of traffic, suggests insufficient capacity to handle a small variation from expected load due to bare bones funding. [Update: apparently it failed to withstand some form of attack.]

Unfortunately, the ABS’s credibility is now in tatters. The fervent claims from the ABS about its robust data security become questionable after their newly established record of bungling critical IT projects. In a context of information asymmetry between government and citizen, it is rational to assume that if a government underfunds a publicly visible output, it is even more likely to underfund an unseen output, such as information security.

The ultimate responsibility for #censusfail does not lie with any public servant, but rather with the elected representatives within government. It’s the politicians who ultimately make funding decisions, and it’s the politicians who pressure economic agencies to identify savings. Nevertheless, it’s not hard to imagine how the Finance ethos interacts destructively with the current government’s ethos (cut public funding, except to the rich). They reinforce, rather than check, each other’s biases.

Spending even as much as $500 million more on the Census would correspond to only 0.0061% of Australia’s national income over the past five years (That’s a rough estimate – I tried to get precise GNI statistics but unfortunately the entire ABS site is still down…). Presumably that would have averted the disaster. It is value for money to allocate a small fraction of our income to data that is crucial for improving the quality of our national public policy. Unfortunately, the government must cut corners because it has failed to wisely allocate its spending and/or has ideological problems with increasing public revenue.

Let’s hope this is a lesson. Stop the false economy of penny pinching to the detriment of vital public institutions.

Brexit, betting markets and the pundit premium

Strike Brexit up as another failure of prediction markets. But empirical studies show that betting markets are, on average, good predictors. In this post, I will hypothesise a specific category of instances in which markets systemically fail as predictors, with reference to my own bets.

Over the past year, I’ve found my intuitions consistently running against mainstream pundit opinion. Rather than just rant on Twitter, I decided to test my views on the market, embracing contrarianism for fun and profit.

I agree with Nassim Taleb that the only way to identify a genuine belief is to have skin in the game. Otherwise, predictions might be strategic, an attempt to create momentum for a preferred candidate. Or they might be currying favour with bosses and very serious people (VSPs) by saying what they want to hear. Or they could be a cheap effort to look smart despite having no real knowledge or expertise. Finally, they might be nothing more than pure entertainment. Most punditry falls into the last two of these categories.

Over the past year, I have decided to bet on four events that have now passed:

  • Corbyn’s leadership win
  • Turnbull’s leadership win (against markets at the time)
  • Trump’s nomination
  • Brexit

All of these were against markets, most were against pundit consensus (except Turnbull), but all were correct. In addition, I consistently predicted a Hillary Clinton win by a far more modest margin than pundits and popular prediction models suggested early on. I would have bet on this, if there had have been a convenient way to bet on winning margins.

I have two outstanding bets:

  • Australian Labor Party election victory
  • Trump general election victory.

No matter what happens on the remaining bets, I will still have made a large profit. I made no other bets during this time. The only other formal bet I have ever made was a late bet in favour of Gillard in Rudd’s final leadership challenge. That lost, but it was a long-odds bet.

Prior to embracing skin in the game, I made two other big contrarian calls. I predicted that the Liberal Party would be competitive in the 2010 election if they replaced Turnbull with Abbott. This was because he would be best placed to mount a brutal cost of living scare campaign on carbon pricing. That opinion ran against the wisdom not only of betting markets but virtually all the press gallery and senior political insiders. It turned out bang on.

My second non-financial call was the absurdity of statements like “Labor can’t win for three elections/a decade” etc after the 2013 election loss. In less than three years, Labor is already competitive. It surprises me that otherwise intelligent people continue to fall for such short-term emotive reactions against historical evidence. Two weeks is a long time in politics. It only took Labor eight years to win after the Whitlam dismissal, which was a defeat vastly worse defeat of a vastly more reviled government than Rudd-Gillard-Rudd.

My intention is not to boast, but to show that my opinions here are not just idle words. They are my genuine beliefs and I have had success based on these beliefs.

The common denominator in my predictions (except for Turnbull’s latest win) is that they ran against the “respectable” thinking. They clashed with the “serious” people.

When folks come up and ask me the secret of my success, I answer “well, you see, I look at the polls”. Actually no one asks me this, but that’s a good line when they do.

Seriously, though, my method is to identify when pundit consensus and “serious opinion” contradict long-term poll results. If the markets also contract the polling, it suggests what I will call a “pundit premium” is at work.

My hypothesis is that prediction markets are distorted by interrelating factors:

  • a status quo bias against radical change
  • a “respectable” policy bias (or an anti-populist bias)
  • a “preferred outcome of elites” bias, and
  • a herd bias.

The pundit premium is due to perverse incentives facing investing agents. If an investment goes pear-shaped, there is always the herd defence: “but all the serious, expert people said the same – clearly it cannot be my fault!” But if a contrarian investment is off, there is no such recourse. You’re just a crank. The investment was outlandish and irresponsible. Your bank will fire you and your clients will drop you, shunning you at cocktail parties.

This creates a powerful incentive to follow the ‘respectable’ line. In effect, you pay a “pundit premium”, which buys insurance against reputational damage. This will distort market prices compared to true probability.

On only this specific category of instances is it advisable to go against the markets. These instances are usually rare, but they are becoming more common. This is because we have entered a period of populist revolt against elites.

All over the world, unexpected departures from VSP consensus are becoming run of the mill. Some of these departures are good, some bad, and some down-right ugly.

But for all the bad, there is at least a silver lining. It is twilight of the pundits.

Forget the pundits, budget papers show Coalition – not Labor – wrecked the budget

What’s fascinating about mainstream budget punditry is that it’s essentially a fact-free zone. This is ironic, because it is one area of public policy where data is straightforward and readily available.

What cannot be disputed is that under the Coalition the deficit has blown out from $30.1 billion to $40.0 billion. Net debt has increased from $184.0 billion to $285.8 billion, gross debt from $325.5 billion to $477.0 billion.

As the budget papers show, this cannot be blamed solely on the sluggish economy. The Coalition’s policy decisions sent the budget further into the red. By contrast, decisions in Labor’s last term actually reduced the deficit. By any objective criterion, it is the Coalition who should be under interrogation over the budget.

But rather than opening the budget papers, pundits take their cue from prevailing wisdoms and gut instincts, aka the vibe of it. The dominating vibe is the so-called ‘daddy’ versus ‘mummy’ party divide. As the ‘mummy’, Labor thrives at ‘soft’ things, such as health, education. As the ‘daddy’, the Coalition leads on ‘hard’ things (being firm with finances, protecting us from baddies, etc). By some inexplicable psychological inference, pundits assume the converse to be true as well. Labor people are warm and fuzzy, so they must be bad at money. This does not actually follow, of course, but it’s the vibe. One could unpack the ideologies behind this reasoning but that is not my goal here.

For the pundit, the vibe seems to be confirmed by businesses support for Coalition economic policy. Pundits think the economy = business, because both share a money vibe. But business people are neither public economists nor impartial observers. On average they are relatively wealthy, especially those who work on financial matters and who have access to journalists. They stand to win from Coalition policy, so they back it in. Moreover, those who call the shots in media companies are themselves upper income managers.

These structural biases mean that Labor faces an uphill battle on economics. Pundits presume Labor to be wrong, until proven right.

Just today in the Australian Nikki Savva casually declares that “Labor’s costings don’t add up”. On what basis? Has she seen the costings?  Has she undertaken costings herself?

Nope, no basis needed. The Coalition told her so. And it rings true because everyone knows Labor is terrible with money. This is stock-standard practice for what passes as economic “journalism” in Australia.

It gets better. The Australian’s official newspaper opinion column asserted :

It is hardly surprising a Coalition intent on exposing Labor’s spendthrift policies and habits would use the highest possible figure, based on the most generous opposition rhetoric and promises it could find. Perish the thought that politics might intrude on an election campaign. We all know the jousting at play here. But the onus is on Labor to say which promises it will honour, which cuts it will no longer oppose and which savings measures it may assist through the Senate.

This single paragraph illustrates the hilarious extent of the punditry’s double standard. The Treasurer made a specific claim that Labor has a $67 billion black hole. Within a day, more than $30 billion of errors were identified in his calculation. Humiliating. But the Australian is sympathetic to a $30 billion error when it is a political strategy against the dirty socialists. That’s a black hole they can get behind. Sometimes the only way to beat the terrorists is to fight dirty, you know.

Notwithstanding this gross error, the “onus” remains on Labor. It’s Labor’s responsibility to continue to disprove a made-up number. Such is the presumption of Labor’s economic guilt.

So much for the punditry. Let’s venture out of this parallel universe and into the real world for a moment. As I previously argued, there is a simple indicator of a government’s fiscal discipline. Sum the budget impact of a government’s policy decisions, over four years, as published in the budget papers. This has the advantage of removing the impact of economic conditions outside the government’s control, such as change in terms of trade.

The figures are telling:

updated budget 2

(See here for the underlying data.)

John Howard’s term from 2004 to 2007 was by far the worst, costing the budget a whopping $202.2 billion. This is consistent with research from the IMF, which identified him as the most profligate Australian Prime Minister in recent decades.

Policy decisions in Labor’s second term actually reduced deficits by $45.7 billion. The Abbott/Turnbull Coalition government has abandoned this rectitude, increasing deficits by $17.8 billion.

So much for the vibe.

The sum of four-year estimates is by no means a perfect indicator. In particular, it does not capture the long-term budget position. But it is a reasonable starting point for estimating how much governments contributed to the surpluses or deficits during their time in office. That is the focus of much of the public debate.

The presumption of budget guilt should clearly be on the Coalition.

Gamblers should have the freedom to choose constraints

The community should enable gamblers to set, in advance, hard limits on the amount they bet.

Walk into a NSW pub or club at any given time, on any given day, and you will witness tragedy. You will find people with bodies hunched into pokie machines, empty faces gazing zombie-look into a whirl of colour.

Some of the gamblers are in control, only having fun. But some are miserable addicts; pouring their family’s livelihood down the drain.

It is hard to understand how our society considers it acceptable to actively facilitate and profit off such pathological self-destruction. It hurts not only the addicts themselves, but their families as well.

Few in the community would support dealers profiting off heroin addicts. Why is the principle different for gambling?

Putting aside innocent families, it might be argued that gamblers should be allowed to destroy themselves due to a principle of self-determination.

This viewpoint is increasingly hard to reconcile with empirical research from psychology and economics.

Traditionally neo-classical economists have assumed that an individual generally behaves as a unified subject who rationally maximises consistent and stable preferences. That implies a faith in our moment-to-moment choices. The famed micro-theorist Gary Becker even developed a model of “rational addiction”.

But decades of empirical work has shown that in many domains our choices in fact do not follow a consistency that is traditionally considered a minimum threshold for ‘rationality’.

Rather we display “hyperbolic discounting” – that is, placing a disproportionate emphasis on immediate pleasure over future welfare. For example, someone who chooses to wait 365 weeks for $120 rather than 364 weeks for $100, might make the reverse decision if it’s a choice between next week and this week. There is something seductive about receiving a reward right now, which distorts our usual preferences for patience. Thus our own choices about time and money are internally inconsistent.

A related area of research has shown how choices change depending on whether they are made in “hot” or “cold” psychological states. For example, in an addict’s calm reflective moments, they may have a genuine determination to quit. Their ‘cool’ long-term-focused self wants to rein sovereign over their ‘hot’, impulsive self.

This is not just cheap talk. They demonstrate willingness to pay, investing time and money into therapy and rehabilitation. And yet… in a moment of weakness the same person will go and get smack.

One way economists are conceptualising this internal inconsistency is to assume multiple ‘selves’, pulling individuals in different directions (for example here).

This leaves an obvious question. Which ‘self’ should public policy take as the authority for purposes of maximising self-determination? The ‘cool’ self with its eye on long-term wellbeing, or the ‘hot’ absorbed in its immediate impulses? We have to choose.

I would argue we should empower our calmer, more considered selves.

Applying this to gambling would enable gamblers to impose, in advance, a cap on the amount they bet each year.

To achieve this, the government could issue cards to everyone in the community who wants to gamble. Each card-holder would be given the option of setting an annual limit. If they choose to do so, they can lower the limit at any time, but not increase it. Gambling organisations would only be permitted to accept bets from those with a card (although card holders can elect not to have a limit). All card holders would see their yearly spending total at the start of each gambling session.

Ideally, this policy would be funded through cost-recovery arrangements levied on the gambling industry. Alternatively – if we wanted to be more libertarian – it could be recovered through fees on those who elect to use the cap facility. That way it wouldn’t financially affect anyone except the individuals who make a choice to use the service.

Given that this policy expands an individual’s choice set, even a dogmatic individualist would have a tough time mounting a coherent argument against it.

Privileging the long-term self over the short-term self has obvious moral and practical benefits. Free market liberalism, however, does the opposite.

The free market liberal model worked pretty well for a long time. But as our societies become wealthier, and as technology is allowing us to satisfy whims 24/7, our major social problems are increasingly caused by too much consumption as much as too little consumption.

Think of the major emerging health challenges – diabetes, obesity, drug and alcohol addiction – these are all related to impulsive consumption of temptation goods. One of the major demographics in the USA is experiencing an unprecedented decline in longevity due mostly to these temptations.

Only an expanded model of self-determination can address the growing gulf between spontaneous behaviour and what individuals really want for themselves. In this environment, maybe it will be the government – rather than the market – that will play the key role in expanding individuals’ capacity to self-actualise, to be who they truly want to be.