Wishful thinking: too much, & too little

There have been several excellent tributes to the great Erik Olin Wright, which I especially urge non-Marxists to read as insights into what it means to be a Marxist today.

In a spirit of undue curmudgeonliness, however, there’s one point made by David Calnitsky I disagree with. He says:

 For Marxists and fellow travelers, the power of wishful thinking is more seductive than it is for others without such normative commitments.

I disagree. We Marxists have by now learned from that most effective of teachers, the school of hard knocks, that our hopes are often disappointed. Wishful thinking is just as common – maybe more so – in other parts of the political spectrum.

This is most obviously true for many Brexiters. In July 2016 David Davis wrote:

we can do deals with our trading partners, and we can do them quickly.  I would expect the new Prime Minister on September 9th to immediately trigger a large round of global trade deals with all our most favoured trade partners.   I would expect that the negotiation phase of most of them to be concluded within between 12 and 24 months.

And Liam Fox famously said in 2017 that a free trade agreement with the EU should be "one of the easiest in human history."

To which I invoke Diana Ross: I’m still waiting.

It’s not just Brexiters, though, who have been guilty of wishful thinking. So too are many centrists. The idea that “structural reforms” can boost economic growth, or that managerialism can increase organizational efficiency, or that the right policies can stabilize macroeconomies all are all, I fear, over-optimistic.

Perhaps social democrats are also guilty. Maybe they overstate the extent to which ending austerity will restore the economy to health, and understate the extent to which capitalist stagnation has deeper causes. And maybe they exaggerate the extent to which greater equality and capitalism are compatible*.

It's not only in politics, where talk is cheap, that we find wishful thinking. We see it also in investors. A nice experiment by Guy Mayraz has shown how.  He asked subjects to predict future moves in the price of wheat. Before doing so, he randomly divided them into two groups: "farmers" who would profit from a rising price, and "bakers" who would profit from a falling one. He found that farmers predicted higher prices than bakers. And they continued to do so even when they were given incentives for accurate predictions.

This is one experiment with plenty of external validity. Wishful thinking is probably one factor behind the disposition effect, the tendency for investors to hold onto losing stocks in the hope of breaking even. And it’s probably a factor behind bubbles: how much wishful thinking was there among Bitcoiners in 2017?

Wishful thinking then, is ubiquitous.

And here’s the thing. It is very often good for us. In Human Inference, one of the early books on cognitive biases, Richard Nisbett and Lee Ross wrote:

We probably would have few novelists, actors or scientists if all potential aspirants to these careers took action based on a normatively justifiable probability of success. We might also have few new products, new medical procedures, new political movements or new scientific theories.

Progress is founded upon wishful thinking. It might be that one reason for capitalist stagnation is that the tech crash of the early 00s and crisis of 2008 have depressed it.

Perhaps, therefore, our problem is that we have too much wishful thinking in politics and not enough in business.

* There’s a lot of “maybes” here. I’ll vote Labour in the next general election in the hope of being proven wrong, which of course might be another example of...

Comments

[Luis Enrique]

I do try to resist my centrist impulses which can veer into conservatism, but I see Corbyn supports merrily talking about taking the majority of the means of production under 'democratic ownership' and not worrying so much about Brexit job losses in e.g. car manufacturers because large private firms won't be so important once Labour are in power .... and, well I fail to resit my centrist impulses.

I just like to see some caution, some show of awareness how such things can end badly. The response that centrism/neoliberalism ended badly is not good enough, we want to improve things not find new ways to get things wrong.

[georgesdelatour]

In the case of Marx, there is an opposite kind of wishful thinking. It’s when reality fails to be as precondition-for-revolution awful as you want it to be.

In the first edition of Capital (1867), Marx quotes various statistics up to 1865 or 1866, but with one glaring exception: the figures for wages, which stop at 1850. In the 1873 edition, the statistics are all updated, but again with that one glaring exception: wages, where again Marx stops at 1850.

Marx’s problem was that, after 1850 wages were going up - exactly the opposite of what his theory predicted. Marx wasn’t honest about this. Rather than confront the fact that reality wasn’t conforming to his theory, and try and understand why that was, he suppressed the inconvenient data.

[Robert Mitchell]

My wishful thought is that economists talked about derivatives more. The experiment with farmers and bakers for example should include derivatives. Farmers and bakers in the real world lock in future prices, they don't have to guess as economists assume.

See https://www.farm-europe.eu/travaux/are-futures-the-future-for-farmers-2/

"These hedging and price discovery functions thus enable farmers to fix their prices for the future, reduce their risks, and better plan their production and investment decisions."

Economists ignore derivatives, but derivative contracts are often more important in pricing than physical supply and demand:

" in 2008 wheat prices increased by 46% between January and February, fell back almost completely by May, rose again by more than 20% in June and fell back again from August onwards. Likewise, the price of rice rose by a staggering 165% between April 2007 and April 2008. The magnitude of these price fluctuations is so high that it is likely that they were largely driven by speculation, rather than being the result merely of market factors."

The answer to private speculation on wheat prices is for public institutions to express derivative positions that put downward pressure on prices while providing both farmer and baker with locked-in future prices.

Why do economists hardly ever talk about derivatives? My guess is ignorance and groupthink.