33. Prosperity Gospel vs. Austerity Gospel

A bit of a digression for this holiday season post...

Mike Konczal (of the blog Rortybomb), links toa pair of articles in The Atlantic on two different religious movements that involve questions of ethics, economics and debt:

The first is an article by Megan McArdle on Dave Ramsay, who preaches his gospel of living debt-free in evangelical churches and to the secular world as well:

"On a fine summer day at the end of August, I paid $220 for front-row seats on the floor of a minor-league hockey rink in Detroit, just to hear Ramsey talk for five hours. The ostensible topic: getting your financial life in order. Afterward, my fiancé, who grew up in the Bible Belt, called me to ask what I'd thought.

'I think I just attended my first prayer meeting,' I told him.

There was, of course, a great deal of talk about money, and what to do with it. But the format was more tent revival than accounting seminar, with the first 90 minutes or so mostly devoted to Ramsey’s personal story of ruin and redemption. We heard how, during the second half of the 1980s, a young Ramsey built up a multimillion-dollar real-estate empire—then lost it all as the bank got nervous and called his loans, ultimately forcing him and his wife into bankruptcy. How, searching for help in his hour of need, he turned to the Bible and discovered Proverbs 22:7: 'The rich rule over the poor, and the borrower is slave of the lender.' At that moment, he told an audience so hushed that we could hear the ice squeak, Ramsey decided to never borrow another dollar again."

The second is an article by Hanna Rosin on 'The Prosperity Gospel'

"That Sunday, Garay was preaching a variation on his usual theme, about how prosperity and abundance unerringly find true believers. 'It doesn’t matter what country you’re from, what degree you have, or what money you have in the bank,' Garay said. 'You don’t have to say, 'God, bless my business. Bless my bank account.' The blessings will come! The blessings are looking for you! God will take care of you. God will not let you be without a house!'

Pastor Garay, 48, is short and stocky, with thick black hair combed back. In his off hours, he looks like a contented tourist, in his printed Hawaiian shirts or bright guayaberas. But he preaches with a ferocity that taps into his youth as a cocaine dealer with a knife in his back pocket. 'Fight the attack of the devil on my finances! Fight him! We declare financial blessings! Financial miracles this week, NOW NOW NOW!' he preached that Sunday. 'More work! Better work! The best finances!' Gonzales shook and paced as the pastor spoke, eventually leaving his wife and three kids in the family section to join the single men toward the front, many of whom were jumping, raising their Bibles, and weeping. On the altar sat some anointing oils, alongside the keys to the Mercedes Benz."

Reading the two articles, I was struck by how the two different approaches picked up different elements from the commercial set of ethics that Jacobs described in Systems of Survival: Ramsay emphasizes thrift, and investing for productive purposes while the prosperity gospel emphasizes optimism and the promotion of comfort and convenience. Neither one really seems quite right on its own. Ramsay's approach would cutoff prudent borrowing to fund a business venture while the prosperity gospel seems to just encourage imprudent borrowing in the belief that God will provide one way or the other.

Anyway, it's some interesting reading.

12. Self-Interest (part 1)

Here’s a question which sounds straightforward but can be hard to nail down – what does it mean for someone to act in their ‘self interest’?


In trying to research the answer to this question, the best answers I found were these two (Danny Shahar, Alonzo Fyfe) similar blog posts on the topic.

Here, Danny explains the typical economists usage of the phrase 'self-interest',

"I am told that within the discipline of economics, what it means to say that a person "acted in her own self-interest" is that a person "acted according to her own interests." The idea here is that all action demonstrates preference, and that this necessarily means that the actor preferred the action that was taken to all other actions. So if I jump on a grenade in order to save my friends, what I have demonstrated is that I preferred to jump on the grenade over all other alternatives that I considered, and it's fair to say that I wanted to jump on the grenade; that out of all available alternatives, the one I consider the best is the one where I jump on the grenade so that my friends live. I'm down with that.

When I jump on the grenade because I want to save my friends, I take it to be uncontroversial that I do so according to my own interests. How could it be otherwise? And if what we mean by "self-interest" is simply that I act according to my own interests, then yes, my jumping on the grenade is self-interested."

Of course if you're like me, or most people I suspect, you don't associate the phrase 'self-interest' with jumping on a grenade to save the lives of your friends.

As Danny points out, there is a dramatic difference between the economic usage of the expression and the English language usage of the phrase, and this causes trouble.

On the one hand, the economic usage refers to self-interest meaning any interest that the self has, whereas in normal English, the phrase self-interest means taking an interest in oneself or taking an action where the object of that action is yourself.

Danny notes,

"So if my sister were sick, I might go get her some medicine. To say that my getting the medicine is "self-interested" would mean, to the lay person, that I get the medicine in order to promote some self-directed end. That is, I get the medicine because, perhaps, I am happier when my sister is not sick, or my sister is irritating when she's sick, or there's a cute pharmacist who will think I'm sweet for taking care of my sick sister. The lay-person, then, would call "non-self-interested" or "selfless" an interest with an object which does not directly involve the actor. So I act selflessly if the reason I go get the medicine is that I value my sister's health for its own sake, and am willing to take on the costs necessary to promote her health."

To the economist, however, all action is self-interested. Since every action you take was presumably taken for a reason, and that reason reflects your interest in taking that particular action.

Alonzo describes the two different meanings, as follows:

"(a) "Interests in self" [the typical 'laymans' usage of the term]

(b) "Interests of self" [the economic usage of the term]"

Sometimes people will muddy the waters further by referring to (a) as 'narrow' self-interest and (b) as 'enlightened' self-interest, but this isn't really helpful.

Alonzo describes the confusion caused by the two conflicting meanings as follows:

"I am going to assert that most people who hear or read the phrase, 'rational self-interest' immediately call to mind the narrower 'interests in the self' definition. To make matters worse, the 'rational self-interest' theorist often asserts this same definition. Then the listener/reader starts to raise all sorts of objections to this 'interests in the self' concept. In responding to this, the 'rational self-interest' theorist equivocates. He switches to the concept of 'interests of the self' to defend himself from objections to the 'interests in the self' concept, claiming that this is what he meant all along. Yet, when asked for a specific definition, the defender of rational self-interest goes right back to using the 'interests in the self' definition.

After which, the listener walks away mumbling to himself, 'those guys are nuts.'"

Danny makes a similar objection, and further notes that in the economist's conception of the term, the possibility of altruistic or selfless acts has been defined out of existence, which is not helpful since there are a wide range of actions that are routinely categorized by people as being 'selfless'.

He also notes that economists themselves, being English speakers before they were Economists, are prone to confusing the two meanings themselves.

There is some usefulness in the economic meaning of the term since it can remind us that just because people are in a group or organization of some sort, doesn't mean that they suddenly take on the motivations of the group for their actions, they are still 'self-interested' in the sense that they follow their own reasons in deciding what to do, but this is a pretty marginal usefulness compared to the much richer distinction made in the regular English usage in which self-interested acts are made with regard to the effect on the self, and selfless acts are made with regard to the effect on someone else.

So for this series of posts (and in general) I will attempt to use the phrase 'self-interested' solely in the English sense of meaning actions with regard to the effect on the self, i.e. not selfless. If I find the need to use the economic definition, I'll make it explicit what I am referring to.

In order to make this all a bit clearer, let's return to the example of the Prisoner's Dilemma.

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects) for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only one year in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

If we assume that the Prisoners are self-interested, meaning that they place no weight on what happens to the other Prisoner, then the payoffs are as follows (each pair of brackets represents the jail time of Prisoner 1 followed by that of Prisoner 2):

                                                      Prisoner 2
                                                   No Confession Confess
Prisoner 1   No Confession:      [1,1]                 [10,0]
                               Confess :      [0,10]                [5,5]

If both prisoners are purely self-interested and don't care about the other prisoner, then we will end up with both confessing and they both serve 5 years.

Now consider what happens if both Prisoners are purely selfless, in the sense that they care 100% about the other Prisoner, and care nothing about their own fate. Now the payoffs look like the following:

                                                      Prisoner 2
                                                   No Confession Confess
Prisoner 1   No Confession:      [1,1]                 [0,10]
                               Confess :      [10,0]                [5,5]


This time, both prisoners refuse to confess while hoping that the other prisoner will so that the other prisoner will get away with no sentence. Their actions prevent this, however and we end up with neither confessing and they both serve one year.

Finally, let's say that both prisoners apply a fairness rule which says that all people are valued equally so they equally weight their own potential jail time and the other prisoners potential jail time. Now the payoffs look like the following:

                                                      Prisoner 2
                                                   No Confession Confess
Prisoner 1   No Confession:      [1,1]                 [5,5]
                               Confess :      [5,5]                [5,5]

Here, the values in the brackets represent the average sentence given to the prisoners (since they weight each prisoner the same, a sentence of 10 years to one and 0 to the other, is equivalent to 5 each) and we can see that both prisoners have a clear motivation not to confess.

Oddly enough, if you change the rules a little so that if one prisoner confesses and the other doesn't, the jail time for the one who doesn't confess is 20 years, then you get the following:

                                                      Prisoner 2
                                                   No Confession Confess
Prisoner 1   No Confession:      [1,1]                 [10,10]
                               Confess :      [10,10]                [5,5]

Now this has become a coordination game where the two prisoners need to ensure that whether they confess or don't confess, the main thing is that they both pick the same option.

I'm not sure if that has any significance, I just thought it was kind of odd.

To sum up, I'll refer to self-interested or selfish actions as those which place weight in making the decision solely or primarily on the consequences for the self, with altruistic or selfless actions referring to those which take into account the consequences for others as well.

10. The Efficient Society (Part 4): Market Failure, Corporations and the State

Chapter 6 of The Efficient Society is all about market failure, and the main point is that although the situation is often framed as if the vast majority of markets work fine but occasionally there is a market failure, the truth is closer to the idea that almost all markets fail and it takes a lot of work to gradually construct more functioning markets.

For the most part the chapter is a pretty straight forward account of the various well known ways in which markets fail, generally similar to what Tom Slee covered in 'No One Makes You Shop at Wal-Mart' - externalities, assymetrical information, etc.. Wikipedia also has a good article on the topic of Market Failure which is worth reviewing if you want an overview.

What gets more interesting is chapter 7 where Heath talks about how corporations are primarily created and grow for the purpose of overcoming market failures of one form or another. Some of these failures occur for no other reason that markets take place in a certain time and space.

For example, why have an assembly line all owned by the same company rather than allow independent assemblers to come together in a market and offer their best price to, for example, take a partially assembled product and add one more piece to it before selling it on to the next assembler and so on.

The reason is that an assembly line actually consists of a series of very localized monopolies. Imagine if each person on the line was able to demand whatever price they wanted of the next person down the line before passing down the item being assembled. The next person on the line would have little choice but to pay an amount close to the final value of the product being assembled because where else are they going to get a partially assembled product to add their piece to?

Heath notes that this logic explains why corporations will often buy up suppliers or distributors in order to avoid being held captive by a local monopoly. And a similar reasoning explains why people with specialized knowledge are retained on a salaried basis rather than working on contract (because they have a monopoly on specific knowledge that the firm needs).

I remember my dad talking once about a company that decided to contract out some of the technical work they used to do in-house, because that was part of the business philosophy of 'getting lean' and not carrying more staff members than necessary. Of course, the factory quickly realized that in the relatively small town they were located in - there wasn't anybody else who could do the job of the people let go, and they were soon rehired for a much higher amount of money on a contract basis.

Heath notes that rather than relying on people to follow their self-interest, as is intended in a market, companies instead go to great lengths to build a sense of teamwork and get employees to put the companies interest ahead of their self-interest. They want their employees to cooperate to achieve company goals while at the same time competing for promotion within the company. The primary way companies secure the efforts of their workers is of course to pay them, but it quite clear that companies see significant value in getting workers to 'buy in' to the company rather than simply work for a paycheque.

The chapter concludes with a discussion of how market failure in the insurance industry for health care led to the growth of large health management organizations (HMOs) in the U.S. Companies providing the insurance didn't have the know-how to determine what was medically necessary and what wasn't, so the market ended up providing more and more services to customers since for each customer an additional service was a free benefit, but the increase to their premiums didn't show up until later after the insurer tallied up the cost of all the medical procedures done.

And, as in every classic prisoner's dilemma, any individual customer had no incentive to stop the rise in premiums by having less work done for themselves, since they would suffer the whole cost of not having the procedure, while the benefit of the lower premiums would be spread across all the plan members.

By combining the organization doing the medical procedures with the insurer that would eventually have to pay for them, the new integrated Health Management Organization could control costs and stop the increase in premiums.


The discussion of health care leads naturally into chapter 8 which talks about the role of government in solving market failures. Heath gives a couple of examples of Prisoners Dilemmas that the state often plays a role in solving:

1) Enforcing a switch to unleaded gas (ideally for a self-interested individual, they continue to buy the cheaper leaded gas, but everyone else switches to unleaded so they get the cheaper gas plus benefits of air that doesn't have lead in it - hence the prisoners dilemma).

2) Providing security services (better for me if my neighbours get together to do this and I reap the benefits of a safe neighbourhood without having to help out.

Heath notes that although corporations can fix some prisoner's dilemmas, they can't do much about those where the benefits from fixing the dilemma don't provide a monetary reward sufficient to pay the necessary employees and make a profit for a company. If moral suasion can't fix the dilemma, and money can't fix it, then the coercive power of the state is the only option left.

Heath notes that with respect to insurance, competition between companies takes place not on the basis of offering a lower price, but rather on the basis of denying coverage. Because companies insure only a subset of the population, the biggest driver of their profitability is ensuring that they don't provide insurance to people who are high risk. As a result, insurance markets tend to end up charging extremely high premiums to higher risk clients, they often leave a number of people entirely uninsured and there is a huge amount of overhead consumed by paperwork with respect to verifying and disputing claims.

In this environment, the efficiency gains from having a single insurer that needn't spend money on all the administration required for screening clients are large and outweigh the lost efficiency from having a monopoly provider. This is a major reason why governments are so heavily involved in providing insurance to their citizens.

A final point is that Heath comments on how GDP does not measure income but instead measures the value of transactions that take place through markets. Therefore, a country which organizes more of its transactions through the state rather than through a market may have a lower GDP than a country that uses more markets and less state intervention, but the difference in GDP reflects a difference in the structure of transactions, not a difference in actual income (as measured by goods and services provided).