Home   Editorial   About   
Its mechanisms stupid!

Hector McNeill1

Decision analysis has the advantage of requiring that participants specify the mechanisms of change in the form of a determinant model of quantified causes and effects.

Inability to model the mechanism is a sign that there is a lack of reliable information upon which to base decisions.

It is a pity that monetarists have not yet mastered this technique.

Its mechanisms stupid!

During one of Bill Clinton's campaigns, one of his strategists, James Carville, coined the phrase “The economy, stupid”, in 1992, as one of the messages campaign workers needed to concentrate on.

When I initiated my work on the real incomes approach in 1975, I remained unconvinced, and remain unconvinced, by Milton Friedman's monetary "theory". My sticking point was his complete inability to explain the mechanism of how increases in money volumes create inflation. His explanation was that "it happens in the long run". This, clearly, is not a mechanism and therefore, not an explanation. This lack of clarity should have been enough to cause perceptive policy-makers to question him more. They never did. The reality is that he did not know what the mechanism was because he was never able to explain it. If he had bothered to work it out he would have realized the rest of his "theory" was a fantasy2. It is remarkable that given the gravity of accepting monetarism as a central "theory" upon which to base macroeconomic management, that no one challenged Friedman on this specific and crucial point. In a competitive economy, just because more money is washing around the economy, why would competing economic units raise their prices only to lose market share? This never made any sense. However, it is an important point because it is exactly in the impact of money volume on constituent wellbeing that its efficacy as a rational macroeconomic policy, lies.

Decision analysis
Determinant models: have a defined input variable, or variables, that determine the output of a function describing the mechanism the model represents.

In the early 1960s, Ron Howard of the Stanford Research Institute, now emeritus at Stanford University, developed the discipline of decision analysis as an extension of operations research and mathematical logic, largely based on determinant models. Decision analysis has been applied to a vast array of corporate and national planning initiatives to review options for achieving a specific objective by reviewing computer-based simulations of alternatives generated by these models. In this discipline, a decision is defined as an irrevocable allocation of resources to a specific course of action. If the course of action needs to change then additional resources will be required. This is why decisions, and therefore, decision analysis are so important. It works effectivey when all mechanisms within the model are understood, are quantitatively coherent and make up the linked components of the model.

A key point

In applying this discipline over many years an interesting evolutionary process related to knowledge occurs. This is that as long as people cannot identify the mechanisms it is virtually impossible to understand or explain what will happen, for example, as a result of a policy decision. Once the mechanism linking a policy instrument to a policy target is known, and the likely human reactions to the outcomes understood, then policy impacts become more predictable and justifications easier to explain.

All learning on the job

I was introduced to this logic by Bruce Lusignan of Stanford University back in the late 1960s who applied this logic, not as a formal decision analysis discipline, but basically as a result of his transparent logical procedural habits. In a post-graduate systems engineering course, in which he coordinated 200 post-grad students at the Engineering School, we worked on the development of an earth resources observation system. We advanced the depth of our knowledge in collaborative subgroups each learning from one another and advancing the whole piece as a result of having identified related mechanisms or determinant models that made up the mosaic of solutions. We were all learning on the job because of the systems nature of the tasks required multidisciplinary collaborative input and which, at that point in our training, we had not participated in. On this basis we could quantify causes and effects. This was the most stimulating and challengeing universiy course I ever attended because I was able to contribute my own knowledge to the shaping of larger practical beneficial economic objective.

A further lesson

In the second year I was a teaching assistant to Lusignan on the same course, this time on marine resources. When it came to assigning grades at the end of the course, Lusignan called my attention to the fact I was assigning grades that were too high to certain individuals. When we analyzed why this was happening he pointed out that I was assigning higher grades to those who were more effective in convincing others of their ideas (rhetoric) but who had not worked their ideas though to identify the mechanisms to contribute to our final report. It was necessary to downgrade wind bags so as not to diminish the status and effective contribution of the course to effective training. So, the "Milton Friedmans" in the course ended up being marked down while several lower profile students, who had come up with excellent mechanisms, were marked up; after all, this was a systems engineering course with practical beneficial objectives.

An observation concerning egos

I should add that in the early weeks of the courses in each year there was a peak in drop outs involving a handfull of students. Most students, were preparing for PhDs and being at Stanford, which had a reputation for the quality of the students, this image had gone to the heads of a few of the participants. They behaved somewhat like Prima Donnas wishing to lead and dominate subgroup work. However, several dropped out of the course, within weeks, as a direct result of incidents when individuals who were not of their discipline, came up with more feasible solutions than they did. To make matters worse these improved proposals were accepted by the other subgoup members. This caused upset on the part of the individual whose proposal had been rejected. They became more defensive of their image and assumed intelligence than showing any interest in the gaining and advancing the state of group knowledge. The circumstances were a display of normal human reactions to embarassment but all such events can be avoided through a more open ane less presumptive approach to group efforts. Starting out with certainties invariably ends up with the exposure of doubts.

So there was and remains the problem of personal egos getting in the way of the quest for knowledge. Unfortunately this often has a significant role in the economist's selling of their wares because it often seems to be more about them as opposed to the logic, and hopefully mechanisms, they are describing. Friedman had some of these qualities which showed up on occasions when interviewers asked awkward questions, he would become very defensive and attempt to intimidate the interviewer by questioning their "qualifications" or "background".

Its mechanisms stupid!

Put bluntly, if you cannot specify the mechanism of the economic relations and effects you wish to communicate, in simple and transparent terms, it is advisable to wait and complete this particular detail. It is better to highlight where there are doubts than to hide them. It is unacceptable to not have a credible explanation for cause and effect in the context of advocating notions as a basis for managing the economy3. There has been too much experimentation with the lives and wellbeing of the constituency of the United Kingdom based on the whims of individual economists and politicians on ego trips. Yes, it is the economy stupid, but governments and central bankers need to do a far better job in understanding the mechanisms and, when they do, these should be articulated to the electorate in a simple and transparent manner.

1  Hector McNeill is director of SEEL-Systems Engineeing Economics Lab

2  A short explanation of the actual mechanism is to be found in the article, "The Quantity Theory of Inflation."

3  James Buchanan in a presentation a few years before he died in 2010, seemed to be mystified by the then current behaviour of economists in advising governments how to run the economy. He was also a Chicago graduate like Friedman, but he insisted that they had never been taught that it was their role to tell goverments how they should run the economy but rather to analyse and identify the likely outcomes of options; decisions lay with politicians.

All content on this site is subject to Copyright
All copyright is held by © Hector Wetherell McNeill (1975-2021) unless otherwise indicated