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Economic choice: Prosperity or scarcity

April 21, 2014

Business Systems Laboratory 2nd International Symposium

SYSTEMS THINKING FOR A SUSTAINABLE ECONOMY

Advances in Economic and Managerial Theory and Practice

Universitas Mercatorum, Rome, Italy

Bslab.sesge.rome.2014@gmail.com

January 23-24, 2014

Technology is a Two Edged Sword: Generating New

Prosperity or Perpetuating Old Scarcity

 Professor Elior Kinarthy (emeritus)

Rio Hondo College, California

Contact: drelk@shaw.ca

ABSTRACT

This paper proposes a new field of commerce for our times. We are witnessing the emergence of a new organizational structure for traditional economics and finance theory, more in tune with uniting and advancing the economies of the world. Studies by psychologists and economists; Kahneman, Thaler, Sunstein and Krugman, and observations by theorist Dan Sullivan and myself point out to a marriage between social media (Facebook, Twitter, LinkedIn, etc.), and exponential technology (mobile apps with almost infinite storage capacity, wireless, biometric, psychometric, voice and thought recognition), giving birth to a new context for business and social activity. The proposed new context suggests the addition of 3 new framing factors:

1. Moore’s Law, describing a field of commerce immersed with exponential growth, doubling microchip power every other year (Moore, 1965, Sullivan, 2005).

2. Rules of behaviorism addressing the subtle psychological interplay between teams of players and regulators in the field of commerce.

3. Rules of classical conditioning that address the subtle emotional interplay between players and regulators in the field of commerce.

These three added framing variables are prime movers in the process of forecasting and assessing risk/benefit in business and commerce. This paper explores four derivative trends that have recently emerged in society as a result of these structural changes in economic thinking.

INTRODUCTION

This theoretical paper introduces a new model of economics for the 21st century: A human factor interacting with fast moving mobile technology enhanced by social media ensuring sustained business expansion on a global scale. The new phenomenon of social media is recognized inherently as positive Internet communication system engaging expanding businesses that together are creating applications (apps) beyond the clouds. The expectation that we can sustain such an incredible expending exponential growth in the field of commerce is fed by our ability to implement these structural changes and their derivatives in the economic framework of the world. Key researchers have recognized four discernible trends:

A) An attitude change in business relations from negative thinking to positive thinking and from a conceptual focus to behavioral focuses (Kahneman, 2011).

B) Rapid technological advances in “smart apps” improving everything, including human interaction and productivity (Moore, 1965, Sullivan, 2012).

C) A growing recognition for a need to restructure our regulatory system emphasizing simplicity, effectiveness and enforcement (Sunstein 2011).

D) The appearance of a “global economic village” (Krugman, 2010).

Social media is the global equalizer. We cannot continue to accelerate prosperity in a few places on earth while ignoring huge pockets of scarcity for billions of people around the globe. We cannot think scarcity and prosperity in one breath. We cannot stay negative accepting shortages and churning out austerity programs and expect to prosper. Not educating people to the financial and psychological impact on human relations of a septillion byte microchip may perpetuate scarcity (Sullivan, 2012). Sustained prosperity can only come from the legitimate use of smart apps that render cash purchases obsolete, labor costs in check, simple management functional and the production, manufacturing, distribution and sales of products and services streamlined. Scarcity can become a myth, but only under a smart new organizational structure for the economy.

Five individuals stand out in my review of the literature among many as researchers who inspired the launching of the new economics model called Behavioral Economics. Studies by psychologists and economists; Kahneman, Thaler, Sunstein and Krugman, and observations by theorist Dan Sullivan and myself point out to a distinct structural modification that is occurring in the traditional relationship between labor, capital, management, and natural resources that has guided economic decisions for 250 years since Adam Smith (1776). For example, one of the new features of behavioral economics is the use social media to gather and facilitate economic information not obtainable elsewhere. The purpose is to improve the assessment of economic trends and risks measured technically as scientific evaluation of outcome probabilities. The goal of the new economics model is to include all the people who want to participate in the economy, earn enough money and learn how use credit to be able to purchase products and services for an acceptable and sustainable standard of living.

The five researchers mentioned above share a mode of thinking about economic life unheard of in human history: Positive thinking is essential for productivity, social media can promote globalization of business through friendships, scientific studies can lower the risk of poor decision making, entrepreneurial leadership can be learned in school, optimism about the future is realistic, abundance is a psychological orientation, and taking into consideration human feelings must always be a part of any decision making process in economics and finance.

One of the five economic researchers this paper is based on is Dan Sullivan, author of 30 books on prosperity and the CEO of Strategic Coach, Inc. a company that specializes in helping entrepreneurs navigate this age of exponential growth of opportunity to make dreams come true. Another researcher is Daniel Kahneman, a professor of psychology at Princeton University, a Nobel price winner and the creator of Prospect Theory (a compilation of studies how humans think and make decisions under different risk levels, from gambling to investing). Dr. Kahneman is the author of Fast Thinking, Slow Thinking, a book that launched behavioral economics as a serious discipline. A third researcher mentioned in this paper is Richard Thaler, Professor of economics and behavioral science at the University of Chicago who co-authored a milestone book with Cass Sunstein From Harvard called Nudge: Improving Decisions About Health, Wealth and Happiness. A fourth researcher, Paul Krugman, a professor at the London school of economics, won the Nobel Memorial Prize in economic science for his global stimulus trade theory. And, our 5th giant thinker is Cass Sunstein, the Harvard law professor expert on economic regulation who co-authored Nudge: Improving Decisions About Health, Wealth and Happiness with Richard Thaler.

When I was a student of psychology at UCLA in 1966, one morning myProfessor raised his cup of aromatic coffee and asked the class, “Which is the ‘framing factor,’ the coffee or the cup?” Some yet-to-be-educated. Students, probably overwhelmed by the aroma, uttered “The coffee, Sir.”

Thus started my quest to help people distinguish between context and content. When I became a professor of psychology in 1976 I asked a student who missed her father whom she had not seen for ten years, “Can you have a relationship with your father without seeing the person?” At first she said no but was relieved that the answer was yes. The truth gave her new hope.

A framing factor is a rule and it is also a context, which can be a boundary, a law, a framework, a structure, a part of a relationship; the cup, not the coffee. A relationship is not what retailers and consumers do together, nor what fathers and daughters do or don’t do together. It’s the frame of the painting, not the painting itself. This distinction has to be perfectly understood and practiced by psychologists and economists before behavioral economics as a system can become an effective working context for partnerships and trade.

FOUR DERIVATIVE TRENDS IN ECONOMIC BEHAVIOR

The context of this presentation includes the seven structures that give the new economic model sustainability. The three framing factors are: Moore’s Law, Skinner’s Law and Pavlov’s Law. Moore’s Law describes how to function in a field of exponential commerce immersed with quadrillion terabytes apps, Skinner’s Law explains aversive and rewarding rules of behavior that govern interaction in a field of commerce immersed with compatible and incompatible perceptions, and, Pavlov’s Law introduces the rules of associative physiological and emotional conditioning that shape human emotive relations full of affinities and antagonisms. These rules address the myriad human affective interplays involved in making economic decisions in life.

The four derivatives are 21st century trends in the economy influenced by the three framing factors. The first derivative pertains to changes in attitude guided by the activation of Skinnerian/Pavlovian laws: A trend from negative thinking to positive thinking and from relying on rationality in making decisions to relying on observation (empirical validity) (Kahneman, 2011). The second derivative discusses the spread of “game changing” technological advances in “smart apps.” These Advances are improving human cooperation by processing vast amounts of data and enjoying the resulting productivity (Sullivan, 2012). The third derivative is the growing economic-political pressure to regulate the banking system in the United States (Sunstein, 2011). Possible solution is setting up an effective referee-like regulatory system like in competitive sport, an example of a complex system that is managed well. And finally, the fourth derivative, a formation of a “global village” stimulated by growing social media with positive results in banking and trade. An important trend towards interdependency and instant information exchange is the standardization of app symbols and designs and economic interdependency, instant information exchange and the acceptance of a new symbolic and conceptual language. Behavioral economics is creating a unity of context within the cybernetic diversity of cultures, what we might call the “Global economic village.”

DERIVATIVE ONE: Attitude Change in society: A trend from negative thinking and feeling to positive thinking and feeling and from relying on rationality to relying on observation (Kahneman, 2011).

The term attitude change in psychology is a sacrosanct concept. It is an umbrella concept that includes all verbal and nonverbal improvements in personality, habits, expectations, perceptions, behaviors and feelings.

The drive toward positive thinking started with the publication of Walden II, a book about an experimental commune where members learned to reward one another for positive behaviors for the sake of developing a successful community (Skinner, 1960). B. F. Skinner, a Harvard psychologist, turned the idea of mutually rewarding interplay (MRI) into a respectable social science theory called Operant Conditioning: Normal people select appealing verbal or nonverbal social behaviors as responses to positive internal or environmental signals or consequences.

Positive attitude is best formed in childhood. “The child is the father of the man” (Freud, 1905). Freud explained that continuous testing of environmental reactions to his/her various acts forms a child’s personality and expectations. The child is like today’s banker, both like to try forbidden behaviors. For example, psychologists can’t predict that a child won’t touch a hot stove twice before he learns his lesson and economists can’t predict that bankers won’t trigger another 2008 recession before they learn their lesson.

In Lessons From the Fall (Fortune, September 2013), referring to the lessons economists were suppose to learn how to stop greedy bankers from causing another painful recession, Stanley Bing writes, “The pain (from the recession) would teach us all some kind of lesson, the way a child learns not to touch a hot stove after he does it once or twice. So tell me. Are you going to stay away from that stove or not? I’m thinking not,” (page 164). Conditioning is not 100% effective for attitude change. The child hears no and yes and learns what is allowed and not allowed in his community – while making mistakes. Many experiments over the years have established the cardinal rule that operant conditioning is more powerful than genetic drive, motive, incentive, expectation, and spontaneous exploratory action. All economic exchanges are the results of conditionings that are formed and modified by overt, subtle and “black swan” (unknown) consequences. Repeated rewards of positive behaviors establish their form, frequency and strength and lead to attitude change – except when the subconscious mind decides otherwise.

Human feelings develop by classical conditioning (Pavlov, 1960). Thinking becomes associated with combinations of physiological emotions in daily life, hunger, satiation, anger, peace, fear, pain and pleasure to produce feelings. Various feelings develop in form, frequency and strength by operant conditioning, except when classical conditioning interferes. Conflict between operant and classical conditioning is the main cause of poor decision-making in the economy and the management of risk. Here is a common example: Twenty years earlier Jane Smith’s husband asked for a divorce. His wife happened to be wearing a purple necklace at that time. She felt hurt and rejected, even abandoned. Twenty years later, in a jewelry store in another country, happily married again, she reaches for a purple diamond necklace while enjoying the salesman lavishing praise on how great the necklace would look around her neck…suddenly she feels uncomfortable and leaves the store. Human beings cannot divorce themselves from unconscious emotional conditioning going back to the past. We cannot separate emotional thinking from feeling in the market place, although classical economics assumes that a good dose of rationality nullifies concern about feelings (Smith, 1776). Behavioral economics combines Smith’s ideas of the interplay between labor, management, capital and resources with Skinner and Pavlov’s ideas that feeling and behavior are an integral part of the process of making economic decisions.

The study how positive and negative feelings are formed by mental associations with physiological reactions started in 1904 with Ivan Pavlov, a professor of physiology at the University of Saint Petersburg, Russia. He won the Nobel price in Physiology for his discovery of Classical conditioning. Classical conditioning is a form of learning in which a natural stimulus, such as hunger, is paired with a neutral stimulus, a yam or sweet potato. In Africa, research shows that customers prefer yams rather than sirloin steak and in Texas it is the opposite. In Japan a large steak has to be cut into small pieces before they cook the steak or serve it. Pairing products and services with powerful positive reinforcers (pleasure) can make a retailer more successful and pairing products and services with negative reinforcers (pain) can make him less successful. Associations with sex, love, pleasure, sugar, wedding, healing, wealth, spirituality, happiness and life can build a great economy and associations with fear, deprivation, anger, scarcity, austerity, pain and death can retard business severely. Many commercial designers don’t understand it and lose customers. A few do understand how important associations are, for example, Nike shoes sell a lot of shoes by associating their products with images of successful and good-looking athletes, and they do not renew their contracts when they loose favor with the public.

The area of successful persuasive communication is complex and full of mistakes by advertisers making unhappy associations. Would you buy a product that you like but is presented in the commercial on TV by an announcer that you really dislike? I expect future commercials to be screened by sophisticated software applications (apps) that eliminate negative associations and make business associations more effective.

Daniel Kahneman studied fear aversion; how anxiety about outcomes can paralyze economic activity, how a negative attitude can compound the cognitive dissonance of assessors or estimators causing them to misjudge risk, cost estimates and expenditures. He blames fear and anxiety as the cause of insecurity and over-optimism. Sixty-five percent of small businesses in the United States go under in less than 5 years (Thinking, Fast and Slow, 2011). Government projects often take far longer to finish and cost far more than the original estimates. The solution to making poor choices is associating business with positive thinking and feelings during assessment and transaction. Having self-confidence when forecasting trends and evaluating opportunities contribute to perseverance and success. In loss aversion studies Kahneman discovered that ordinary people think negatively and act more to avoid loss than to achieve gain. This leads to uncritical acceptance of austerity measures. For example, when one thinks scarcity thoughts fear tends to dominate decision-making and the expectation of success diminishes.

People experience a cognitive dissonance about their decisions, they want and they don’t want to implement or buy something, sell something or invest in business (Festinger, 1957). The result is that they tend to diffuse their discomfort by an unconscious compensation process called Reaction Formation (Freud, 1905). The result is irrationalover-optimism and fervent overconfident behavior. This negative mental process may lead unknowingly to a form of “feel good” gambling causing many of the ills of society today. Reliance on fear expression, repression, suppression and other negative feelings and thoughts plagues many projects and companies still associated with the aftermath of the 2008 recession. That is whyonly 35% of small businesses succeed while government does not estimate correctly many of its own timing and resource allocations to accomplish its projects.

Kahneman (2011) has a solution to prevent economic disasters: don’t rush; perform a slow, methodical, measured, mature, reflective, examined, secure, almost Socratic thinking. His research, for which he received the Nobel price, discovered two modes of human cognition:

System 1: Fast, automatic, effortless, frequent, reliable (consistent but not valid), popular, emotional, immature, intuitive, heuristic, stereotypic, dogmatic and subconscious, tend to lead to short term “feeling good” decisions that don’t work in the long run.

System 2: Slow, effortful, infrequent, logical-observational, mature, calculating, valid (progressive), testable, statistical, reflective, conscious, analytical, tend to lead to making satisfying positive decisions that work in the long run.

Kahneman offers ”happiness” as one quality that our slow thinking process nurtures (Kahneman, 1990). While a professor of Psychology at Princeton University lecturing on Happiness, he was aware of Eudemonia, the forgotten Hellenistic philosophy of happiness. Eudemonia in ancient Greek meant Good Spirit. Eudemonism is the inherent ability to live well (attributed to Plato). Eudemonism reflects the behavior of a community that lives well (attributed to Aristotle). With this illustrious philosophical background it is no wonder that Eudemonia emerged from philosophy to psychology and entered economics. In psychology it became the foundation of work on self-actualization by researchers such as Erikson, Allport and Maslow. Kahneman, as a psychologist was able to take elements of positive psychology and translate them to behavioral economics.

Here are some of his psychological findings how feelings relate to business (Fast Thinking, Slow Thinking, Page 59-70): Write your contracts and express yourself with cognitive ease, as it brings good feelings without mental strain. Positive emotions have an evolutionary history. In a Remote Association Test (RAT) Kahaneman found that happy students were better able to perform the tasks in the test. In Frames and Reality (Page 363-374), in the “framing effect” study Kahneman shows the benefit of being positive, “The odd of surviving one month after surgery is 90%” is muchmore encouraging than saying, “The odd of dying is 10%.” Or “This food is 90% fat free” is more positive than saying “it contains 10% fat.” Or, in the “Default effect” study he showed that you could get more drivers to accept to donate their organs if it was automatic (default) when renewing their license.

There are many examples of the emerging positive language of behavioral economics. For example, in my recent lectures I replaced the word loss (with its negative connotation) with the word cost – implying trade. Behavioral economics presents System 2, as an investing system not a gamble, whereas using System 1 to make money is a gamble, Successful entrepreneurs are called “multipliers” (Sullivan, 2012). The stock market is a good place for positive thinkers to make money. The word unemployed has been replaced by the word employed, the word abundance has replaced scarcity thinking. Last year I began to apply the concept of positive language in my presentation at the University of Valencia. “Spain has 75% employment” rather than saying it in the negative way, “Spain has 25% unemployment. Investors using positive language tend to get more “hits” in the market. The genius of Steven Jobs was in choosing an apple as his corporate logo – a symbol linked with health and knowledge. ”To business that we love we rise bedtime, and go to it with delight.” (William Shakespeare).

 

DERIVATIVE TWO: A rapid spread of technology: Advances in “smart apps” are improving human interaction, information processing and productivity (Sullivan, 2005). Thirty years ago the following units of digital information were mostly theoretical, just beginning to be noticeable in digital programing literature. Today, storage capacity and speed of operations are fast approaching the Yottabyte level. Sullivan (2012) expects technology to be exponential from now on, doubling every two years, developing unparalleled communication paradigms:

 

Kilobyte (kB), thousand bytes

Megabytes (MB), million bytes

Gigabytes (GB), billion bytes

Terabytes (TB), trillion bytes

Petabytes (PB), quadrillion bytes

Exabytes (EB), quintillion bytes

Zettabytes (ZB), sextillion bytes

Yottabytes (YB), septillion bytes. Can you imagine this one has       1,000,000,000,000,000,000,000,000 bytes!

Thirty years ago Sales and services companies were doing well the old fashioned way and were not interested in taking the risk of being rated by outsiders as giving less than excellent service to their customers. In the present “do or die” competitive environment a happy customer is a returning customer. Companies today are experiencing the appearance of a super-fiercely competitive “game changing” technology. This requires CEOs to read advance reports and nurture excellence in their market niche or fail.

Established industries changed course and reluctantly hire a young CEO with a new idea how to rate their performance. The new CEO hires a 1000 marketing students from various schools to randomly shop and purchase items and then return them a few days late, get the refund, and file a simple evaluation of “customer service satisfaction.”

Today this CEO of CallupService is wealthy. Going out in the field to collect “real time” data was a clever use of criterion validity, one of the most reliable behavioral assessment tools used by psychologists to validate studies. Use your imagination and propel yourself thirty years into the future, CallupService’s CEO is now 60 and trained as “exponential entrepreneur multiplier,” a concept coined by Dan Sullivan (2005). The company is worth 150 billion and he has a sextillion byte “parent” application device that can instantly upload 100 apps containing multiple data. He clicks on the customer service app that instantly stores, analyzes, categorizes, distributes and graphs all in-coming information from the “customer service” departments of a million companies. The data comes ready with ten, low-risk and specific choice architecture (Thaler, 2011) recommendations for streamline service!

This rapid growth in the exponential power of “smart apps” is accelerating faster than the anticipated evolution of anything normal. Every decade there is a revolution in application performance exceeding the pace of reform in all areas of training, education, economics, politics, government and the legal system. Imagine driving a 1919 Ford model T on a dirt road and suddenly without training trying to drive an unfamiliar 2014 Ford Thunderbird on the German autobahn. This paper is a warning to the fast moving technology industry to keep up the training and strengthen the regulation (see the next section on regulation).

The Corning Glass Company presents a sample video of future integrated technology when planning, training and regulation work according to plan (video on YouTube). Watch a well-trained human family that has learned to use interactive Yottabyte apps without a glitch. Observe the well designed engineered system created by well-trained and supervised technicians who had set up a “state of the art” trouble free electronic panel without having to face obsolescence upon completion. Think of the millions of families enjoying home and business advanced applications that were not caught unprepared by the onslaught of “creative destruction,” the replacement of their familiar low-tech environment (Sullivan, 2005). Imagine being educated enough to enjoy instead of resist the process of replacement of primitive analog devices by digital devices and in the very near future by exponential matrix devices. The “invention of the wheel” changed history once for good; exponential technological evolution tends to repeatedly change history every 2 years at a higher dimensional level!

Dr. Joseph Schumpeter, an Austrian-American economist who taught at Harvard University during World War II described the process in his book “Capitalism, Socialism and Democracy,” how new economic systems replace old economic systems (Schumpeter, 1942). He considered the process as positive and inevitable in the long run, although he originally accepted the idea of Carl Marx who saw the process as negative. Marx perceived unregulated capitalist markets as negative because workers lost their jobs. He wrote about it in his book Das Capital (Marx, 1867). We can understand Carl Marx resentment of the process because in 19th century Europe the industrial revolution replaced primitive industries and left many people unemployed. Smith’s capitalism (1776) in his “Wealth of Nations” book did not make allowance for retraining the labor force.

The rapid change from transistor processors to exponential matrix applications is creating “ cognitive dissonance” and uncertainty in the minds of most people and that increases the risk of progress. The need for new regulation of economic activity is growing (Sullivan, 2005). Dan Sullivan echoes Dan Kahneman’s research suggestion that we can’t afford to lose sight of our focus on positive attitude and economic stability to assure global prosperity. One of the major mental states created by the tech revolution is cognitive dissonance, a phenomenon researched by psychologist Leon Festinger (1960) before the start of the tech revolution. Rapid change creates instability. For example, people who grow up in a middle or lower class where parents struggle to make ends meet find it difficult to adjust to the instant and astounding wealth that come with recent technological revolution. Many companies fail. Studies show that most instant lottery ticket winners fare even worse. Their stable middle class decision making skills about normal expenses are now affected by cognitive conflicts about their new life style. Many lose all the money they won. Their middle and lower class thinking resists change and tends to linger in the new high stake game they have entered into without preparation. One solution can be special education programs to develop a positive attitude toward money, wealth and business. My studies have shown that at least half of my former college students would have benefited from attitude change about money.

If one nurtures a positive attitude towards money as you have toward people you love or like to work with, you won’t falter. Organizing your value system psychologically by writing down your good experiences, goals and plans in order to manage better the approaching super complexity of living is a good idea. One can buy a program, a personal organizer app, and feed it data about your daily life, goals, aspirations, dreams, passion, and wealth and how to synthesize and simplify it all. Life is a winning game if you are trained well in technology without losing your humanity (Sullivan, 2012). In order to nurture the mental records of your winning episodes in life, you must concentrate on remembering (recording) your happy “wins” rather than your sad losses. Your personal app can compile for you daily, weekly or monthly positive feelings and victories. Achievements such as a great sale or a great buy, an anniversary celebration, business deals, a new friend in your life can nurture your happiness because it will make you smart (Sullivan, 2012). In an ideal world you could build or purchase the right application (app) that fits with your business plans without future problems.

A major idea how to retain pleasant human feelings in the midst of a technological search for the right program, recording, app or device came from the CEO of Apple, Steven Jobs. He developed and sold billions of personally appealing electronic devices. Most Apple devices today are still inspiring in design, color and function, but the electronic environment is getting cluttered with Calcutta kind devices that reflect disorganization. Many companies sell ugly computer boxes, uninspiring cell phones, negative answering machine services, long and nasty recordings such as, “You pressed the wrong number, wait for the tone, you waited too long, you are disconnected, and so on.”

A positive sign in the smart phone industry is the new Apple iPhone 5 with its Biometric app for fingerprint recognition. It is progress that opens the field of organic passwords wide open for competition, with the goal to invent a dream password. Fingerprints are nice but they cannot replace the ubiquitous password. Whoever comes up with a 101% secure password application will get your business. Let me predict the future of biometrics. It will be replaced because using body parts as a “password” can be compromised. What will replace it? May be Gene-matrix, a more powerful app that can be programmed to scan your genome instantly, but then again it is not 100% fail proof. Criminals with the right apps can access your DNA from hair in a barbershop to blood sample in a doctor’s office.

Predictably, the future belongs to psycho-matrix passwords, a science that goes back to McGill University in Canada. A cortico-matrix pattern of neurons firings was researched there in the 1950’s. Donald Hebb, professor of Neuropsychology demonstrated that specific thinking, feeling and calculating had created brain field pattern he named cell assemblies (Hebb, 1949). Neurons fire together in a pattern that can be detected and measured by a digital EEG application. Continued thinking of the same sentence or word creates Phase sequences, the sequential activation of sets of cell assemblies creating distinct patterns in the cortex that can be measured and interpreted by advanced EEG software. That may qualify as a 101% full proof cortical password because you have to stay calm to replicate it!

In summary, computer applications are at the crossroad, similar to the growth of cities in the 19th century. Some cities were planned but most just popped up next to trade routes, mines and rivers. In time, huge influxes of people created large urban slums like in Calcutta, India. Most cities grew similarly that way reaching a level of urban jungle, like the disorganized cells of a cancer tumor, spreading crime and misery. An uncontrolled proliferation of devices and applications could become an electronic jungle of misery, sooner than you could imagine. For example, I surveyed ten department stores to gather data for this paper and found out that each department was using a different mobile “pay machine.” The electronic nightmare has begun: Some machines were more secure than others, some had a many step process while the customer had to wait longer for verification, and others had a complex paying process that the customer couldn’t fathom. Some made errors and had to repeat the pay process. Some added an automatic tip! Some were costly, heavy, large, gray and ugly. Only one mobile application machine was sleek, light and blue doing an instant job of payment (Steven Jobs would have been delighted with that one). I found the same situation with answering machines, mobile cells phones and computers. Seems like the “electronic Calcutta” has been formed already – the jungle of electronic misery has begun. Of course, it would be delightful if you could say as a true libertarian paternalist (Thaler, 2011), “Wait for the market dynamics to wean out the poorly performing applications, and if it doesn’t you can always ask the government to do so.” That would be like trying to fix the slums of Calcutta!

 

3) DERIVATIVE THREE: Regulation: There is growing pressure in Washington, D.C. to improve the regulation of economic activities and finance (Sullivan, 2005, Sunstein, 2011): Cass Sunstein was a professor of law at the University of Chicago for 27 years. He is now a professor of law and behavioral economics at Harvard. As chief of information and regulatory affairs in the White House he developed a program to regulate various risks. Unfortunately, the risks that he appears to have chosen were 21st century’s external risks: Terrorism, climate change, occupational safety, infectious diseases, natural disasters. He added financial decision-making risks only as an afterthought. His main statement in that regard was that people are puzzled by their own decisions that come to haunt them (Sunstein, 2008). He appeared to offer no viable solutions on how to reduce economic risks. “Why do human beings make terrible decisions?” Sunstein asked in the book Nudge that he wrote with Richard Thaler. “We can’t see that our different perception of things are our own personal biases that lead to blunders in educational decisions, personal finance, health care, mortgage approval, credit cards purchases and happiness,” he suggested (Sunstein, 2008)

To his credit Sunstein popularized behavioral economic concepts in the Obama administration such as Libertarian paternalism, choice architecture, risk regulation, transparency in government, endowment effect and “human dignity.” He tried to simplify laws and regulations by eliminating and streamlining unneeded rules, procedures and paperwork. During his employment at the White House he integrated inter-agency consultation on regulation and reduced cost and waste. He established a system estimating the cost/benefit of the government regulation of economic segments. Some of it appears in www.regulation.com.

In my review of the limited literature on government economic regulations, I did not find a person or a group who addressed the direct cause of the 2008 recession: It appears that the conditions, rules and regulations of the banking industry that led to bankers in New York selling millions of un-collateral mortgages, then packaging them into mortgage security certificates (MSC) and selling them to China were not investigated. The unregulated behavior of mortgage brokers clearly triggered the 2008 recession!

Public analysis of the probable influences on brokers’ mortgage behavior in New York may or may not stimulate interest in government circles to better regulate the collateral laws in the banking industry in the future. The following are useful observations, cultural, economical and psychological that may have led to the 2008 recession:

1) The motivational tradition in the American culture to try to help people, especially minorities own their own home.

2) The lack of strong emphasis on ethical and responsible behaviors at all levels of American education, especially at the PhD level of traditional economic and financial curriculums.

3) The ineffective and complicated interagency regulatory system of government. The wide spread rational and permissive cultural assumption that if laws and rules are on the books the trend is that they will be followed.

4) The acceptance by the American culture of the false notion that conditioning is a form of brainwashing, a form of freedom deprivation that shouldn’t be practiced. The scientific fact that feelings and behaviors are governed by consequences is rejected (see the section on Behaviorism).

5) The practice of Libertarian paternalism (Thaler, 2011). The prevalent view in the US banking industry that the greed that leads to bank failure and the 2008 recession will be fix by the present government that doesn’t want to see unemployment rise.

6) Fierce competitive pressures have created a financial trend in US banking and business to reduce the requirement for collateral deposits to a minimum in order to expand liquidity, create business and jobs.

7) Extinction of conditioning (Skinner, 1960). Being aware of the bad economic consequences of issuing risky mortgages and packaging mortgage certificates with risky collateral, the bankers also knew from past experiences that there would be no negative consequences to their illegal and irresponsible behavior (extinction). They were rewarded by illegal cash but were not arrested (punished), did not lose their jobs (consequences) or had to return the money.

Unfortunately, Cass Sunstein, Harvard law professor and expert on economic regulation (co-authored Nudge: Improving Decisions About Health, Wealth and Happiness with Richard Thaler) did not seem to offer clear rules to offset risky banking practices during his 4 years as the U.S. chief of information and regulatory affairs. Generating exponential prosperity and avoiding perpetual recessions requires new rules to offset risky financial practices by governments and financial institutions. This theoretical paper has added the human factor and the effect of technology to Smith’s classical explanation of the relationship between labor, capital, management and resources. What is needed now is a new theoretical framework for regulating decision- making and risk management. I propose an idea for a theoretical behavioral regulatory system. My proposal can generate research hypotheses by PhD candidates in government, economics and psychology.

The research proposal: Design a regulatory system for banking and industry based on Maslow morality and self-actualization pyramid (see power-point slide) and the English regulatory system for Sports (see power-point slide).

Let’s examine these two established systems in psychology and sports: Maslow’s pyramid of personal growth toward integrity and responsibility and the English football league’s structure for referee training and accountability. Both models are excellent examples of well-supervised organizational structures. In sports, the regulatory system is comprise of media observers, customers, owners, managers, trainers, qualified judges, experienced regulators, trained referees, line men, field cameras, event planners, club associations, league membership, fee structure, endowments, competitions, trophies, finances, resulting in pride and enjoyment for everyone – a 100 billion dollar industry at work.

Let’s assume that the supervisory structures in Economics and Sports are similar. They both generate business activities; have a set number of players in the field and a set number of regulators. Both systems have associations, corporations, team managers, owners and governance of industry rules and by-laws. But, my comparison of what is common to these two important systems in society reveals a profound difference in effective supervision and accountability: The regulation of the competitive sport system in England is more effective than the regulation of the competitive banking system in the U.S.

Setting up an economic structure in the US to become just as well regulated as the European football pyramid is a daunting task, but worth trying: Let’s start with corporations. Companies (Clubs in a sport system) can be assigned into horizontal tracts in the pyramid: private, public, and quasi- governmental and governmental. Capital assets can be small, medium and large cap. Companies in each tract compete to get to the top of the pyramid in various categories such as having a perfect legal record for the year, having a clean (green) environmental score, work place safety grading, good ethics, responsible behavior, charitable contributions, employee satisfaction, employee safety, pay scale, management relations, efficiency level, local hiring, transparent book keeping, and so on. These companies can win “trophies,” secure government contracts, free publicity, tax breaks, etc. They can compete on achieving the best record for following the law, abiding by rules and regulations and moving from level one (base of the pyramid) to level 5 (top). As in the English football league system, companies (teams) can ascend or descend levels. A “winner” company can receive rewards in public recognition, free advertising, less regulations, and so on. Company “referees” will be trained, like in a football field game to judge each company on its merit based on the above criteria. This structural theory called the economic pyramid is open to review and discussion.

4) DERIVATIVE FOUR: The Global village trend: The world economy is an all-countries economic interdependence through free trade, with appropriate regulations (Krugman, 2008). Governments, UN agencies, international banking and exchange all line up with the right attitude, facilitated by mobile devices with high power apps that enable instant information exchange throughout the world. Global GPS, teleconferencing, standardization of designs, symbols and structures, cooperation by international agencies responsible for new high tech concepts and new language symbols facilitate the progress. What was called the global village idea 20 years ago might be called the global economic village today. Behavioral economics is creating a structural unity of context in the cybernetic jungle of cultural diversity

One person responsible for this enhanced global change is Paul Krugman, a Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University. He is also a Centenary Professor at the London School of Economics and in 2008 Krugman won the Nobel Memorial Prize in Economic Sciences for his contribution to the understanding of international trade. In his book, International Economics: Theory and Policy (co-authored with Maurice Obstfeld) he describes the components of 21st century international trade. He observed that trade restrictions are still with us but they are fading away by international agreements between countries (Krugman, 1996). 20th century political-economic holdbacks such as pervasive bureaucracy, government and corporate waste, over regulation (e.g., starting a business Africa), oligarchic and other monopolies, cultural kickbacks, corruption, restrictive trade, unfair tariff, fixed exchange rate, import-export restrictions and labor and out sourcing issues still exist but they are diminishing. More efficiently organized industries in different countries, digitalized international transportation, a new globalization attitude, multinational banks and corporations, and outsourcing are all having a major impact on the international trade system. Increasing trade between countries is crucial to the continuance of a growing global economy. Without international trade, nations would be limited to the goods and services produced within their own borders and the standard of living will fall across the globe.

Krugman is a social optimist. The past may look bad in comparison to today’s international cooperation, but the past also provided good ideas to be revived in the future. His model for international trade and finance predicts the revival and intensification of the forgotten rule number one of international economics; that every nation should be supported by its government and by the international community to develop “national specializations,” be it a few products, a service or a natural resource (Krugman, 1987). We have a historical legacy of national specializations reflected in our languages: Afghanistan makes beautiful “Afghans,” the French invented the fries, Brussels sprouts originated in a garden in Brussels, German frankfurters, Italian pizza, Swiss watches, Jaffa oranges and Silicon valley high tech products are all circulated in the global market. However, the story of path-dependent industrial concentration must be protected from monopolistic competition or even situations of oligopoly (Krugman, 1996). The wealth of a nation depends on being free to trade what it does best (Smith, 1667).

Paul Krugman coined the term economic geography, a concept that signifies earth as a terrain of unity and diversity. He started to collect and organize Earth Data from every region and country. Behavioral economics studies the geographic distribution of products, services, natural resources, capital, transportation, education and management skills in each country, and how this network of economic activities can be plugged into the global economic data bank. Furthermore, economic geography at large must study agriculture, the location, distribution and spatial organization of crops across the earth. Today the concept of geography is more related to behavioral economics and finance than to geography itself. It encompasses the use of powerful computer applications to collect, organize and analyze the data from many different sources such as location of trade schools, energy sources, water resources, areas of talent, perfect physical geographical areas for tourism and other industries, new industries, location of natural resources, factories, industries, banks, economic linkages lead to transportation hubs and international trade routes. Additional categories are areas of specific interests such as rural vs. urban, real estate, management sources, ethnic economies, urban economies, gendered economies and socioeconomic research centers studying how to organize harmoniously the diversity found on planet earth, the dream of the global economic village.

REFERENCES

Bing, S. (2013, September 16). Lessons from the fall. Fortune. (pp. 164), Canada.

Ferguson, N. (2013). The great Degeneration: How Institutions Decay and Economies Die. Penguin Press, Canada.

Festinger, L. (1957). A Theory of Cognitive Dissonance. Row and Paterson, Evanston, Illinois.

Hall, C. S. (1989). A Primer of Freudian Psychology. Octagon Books.

Hebb, D. (1949). The Organization of Behavior: A neuropsychological Theory. Wiley Publishing, New York.

Kahneman, D. (2011). Thinking, Fast and Slow. Double Day, Canada.

Krugman, P. & Obstfeld, M. (1987). International Economics: Theory and Policy. Addison Wesley, New York.

Moore, G. E. (1965). Cramming More Components onto Integrated Circuits.

Electronics Magazine. Schumpeter, J. A. (1942). Capitalism, Socialism and Democracy. Harper and Brothers, New York.

Sullivan, D. (2005). How the Best Get Better. The Strategic Coach, Inc.

Sunstein, C. (2007). Law and Happiness. University of Chicago Press.

Thaler, R. (1980). Toward a Positive Theory of Consumer Choice. Cornell University, Ithaca, NY.

Thaler, R. & Sunstein, C. (2008). Nudge: Improving Decisions About Health, Wealth and Happiness. Penguin Books, UK.

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