Average is Over: A Review

Economists are in the business of predicting events. They spend their days combing through data, looking for patterns that lead to models which ostensibly help us better predict which fiscal or monetary policy will create a desired outcome. But in the final analysis, the most consequential events are the hardest (read: impossible) to predict, as pointed out by Nassim Taleb. Economic predictions require us to make many assumptions of what is constant, what should be taken for granted, when reality knows no constants. In other words, the world is constantly reminding us that when it really counts, we cannot make those assumptions.

Even when we do take so many things for granted for the sake of proving a theory or model, we are left to deal with the fact that all economic analysis is based upon the individual decisions made by people, be they CEOs, bankers, customers, or single mothers. These people don’t always comply with the intellectual crutch of the assumption of rationalism. Their psychological makeup determines what they do and don’t do, and as any psychologist will tell you, explaining why people make decisions as they do is something immensely complex and not fully understood.

At root, this points to what I think is a tremendously damaging misperception of the world around us. It is a concept fundamentally misunderstood by leaders and voters alike: the difference between a complex and a complicated problem.

The difference is explained in the pages of the Harvard Business Review:

Practically speaking, the main difference between complicated and complex systems is that with the former, one can usually predict outcomes by knowing the starting conditions. In a complex system, the same starting conditions can produce different outcomes, depending on the interactions of the elements in the system.”

A complex problem is something like figuring out how to make your wife happy, while designing a lunar landing module is a complicated task.

Here are some other complex problems:

  1. Ending poverty in America.
  2. Educating a young person.
  3. Maximizing tax revenue.
  4. Preparing the U.S. military ready to meet the demands of future conflicts.
  5. Negotiating the details of an appropriations bill.
  6. Reducing health care costs.

It sounds like a laundry list of tasks that government is supposed to carry out, and particularly in the case of numbers 1, 3, and 6, problems that fall squarely in the purview of economists.Each one involves a multitude of value judgements, hard-to-define terms, and a massively complex set of consequences for each action we might take in attempting to solve those problems.

Tyler Cowen’s book Average is Over: Powering America Beyond the Age of The Great Stagnation badly mistakes complicated problems for complex ones. The first half of the book is a litany of assertions of what computers will soon do for us, all based on the author’s comparison of new technologies and their effect on the economy with “Freestyle” chess. Freestyle chess is a way of playing chess in which human players are allowed to consult multiple computer chess programs, decide which computer has the best move ultimately make the moves themselves. Cowen asserts that the world of work is quickly evolving in a way that favors people who are skilled in this man/computer way of analyzing and solving problems.

Hence, soon doctors will team up with advanced software to diagnose diseases, a computer program will help business leaders during high-stakes negotiations, and a phone app will even help someone decide who to marry.

Indeed the world of work is changing in the way Cowen asserts. Computer programs designed by traders are engaging in split-millisecond battles for financial supremacy in the stock market every day. Match.com uses algorithms to suggest which other user you should send a flirty private message to. It is impossible to argue that technologies already have and will continue to drastically change our world. But there are some things that computers will never be able to do, which will keep good leaders, people with strong interpersonal skills, and those with high levels of life experience in high demand.

Mr. Tyler Cowen

Case in point: Jack Van Riper, a Marine Corps General who became famous (thanks to Malcolm Gladwell) for his role in a $250 million Department of Defense simulated during a 2002 war game called “The Millennium Challenge.”

In the Millennium Challenge, the Blue Team (simulating the United States’s military capabilities) was probably given more intellectual assets and information technology than any military had ever been given in any war, real or simulated. They were equipped with a mind-blowing array of computer models, digital reconnaissance assets, and the standard overwhelming firepower of the United States arsenal.

In the words of Mr. Cowen, “Even the military is more about manipulating advanced technology than just aiming and shooting a gun, or stabbing with a bayonet.” It is clear Blue team was meant to study a new style of warfare based on a similar mentality.

The Red Team was a simulated rogue military commander from the Middle East who was bent on creating havoc in the region, with what resources you would imagine such a commander to have. Jack Van Riper was known for being the antithesis of what Blue team stood for — namely, the notion that with enough technology and computing power, the proverbial fog of war could be lifted and victory made virtually inevitable.

In short, Blue team was the military version of a team of freestyle chess players, but in a game that more closely resembled real life.

Van Riper conducted his team in a way that was spectacularly effective and that foreshadowed many of the vulnerabilities the U.S. military would face in Iraq and Afghanistan. When Blue cut Van Riper’s fiber optic cables and destroyed his microwave towers (his primary means of communications), they expected Red Team would have to use cell phones and satellite phones to communicate. Instead, Van Riper simply used to motorcycle couriers to communicate with his forces.

Then, when Red Team was given an ultimatum to surrender within 24 hours or face the consequences, Van Riper sent a fleet of small offshore boats to track Blue team’s naval vessels because he knew they were getting into position for an attack. He launched a preemptive strike with hundreds of cruise missiles, sinking 16 ships and killing 20,000 avatar servicemen. The Blue Team was so devastated on that first day that the ships had to be digitally “salvaged” so that the exercise could continue.

Diagnosing a disease or suggesting chess moves are two examples of complicated problems in which the employment of man-machine teams will be effective, even revolutionary. Those with experience in man-machine teams and other tech innovators will indeed get rich in the next 10 to 20 years, as Mr. Cowen asserts. But many of the problems that we face as people, as a nation, and as a (human) race are complex, and will require leaders with experience working with systems we don’t fully understand and the resultant unanticipated consequences — the fog of war, if you will.

Technology will indeed revolutionize nearly every aspect of our lives. But it won’t make complex problems into complicated ones, probably ever.

In the final analysis, economics as a field annoys me with all the predictions it tries to make. But that doesn’t prevent those predictions and the models they are derived from being ridiculously interesting. If anything, economists help us to see the world in a little bit different and more interesting light, even though it is nearly impossible for them to predict events that truly matter.

Cowen’s book illustrates this point brilliantly: after all that nonsense about computers telling people when its ok to kiss your date and when to walk away from a negotiation, I nearly put Cowen’s book down. I’m glad I didn’t, because the final few chapters of his book provide some great insights into how our education system must change to meet the demands of a more technologically oriented labor market and ways in which the new economic and social reality is likely to change our country in the next decade or so.

The education chapter reads like a Marco Rubio campaign speech, which delighted me. The power and ubiquity of nontraditional educational resources is something that we must harness in order to make education more affordable. Wrenching the higher education bureaucracy from its comfortable position of strength behind all-powerful accreditation institutions is paramount. Ideas like so-called “emporium courses”, allowing credit from Massive Online Open Courses (A.K.A. MOOCs), and a new emphasis on apprenticeships are a few of the ideas that Cowen hits on.

The final chapter paints a picture of our new economic that is at once bleak and exciting. Cowen predicts that as our new health care reality, as well as some advances in labor automation makes the marginal cost of hiring a new employee much higher, most Americans will simply have to make due with de facto rationed health care and lower rent prices. Consumer spending will be drastically cut back in a Mr. Money Mustache-esque way, as Americans realize they cannot afford to be as hugely wasteful as they have been over the past 60 years or so. Poorer Americans will migrate to lower-tax states like Texas as they choose a lighter tax burden over better government services. In essence, Americans will become more conservative.

Cowen argues that perhaps the greatest demographic change Americans will go through is this: Americans as a whole are aging, with 20% of the population estimated to reach 65 years or older by 2030. Along with this will come support for Medicare and Social Security, our two largest entitlements. Since older people are more likely to vote, it is unlikely that those programs will be reformed in a meaningful way. On this point I disagree; I think commonsense reforms can put those programs on better footing. Mr. Cowen also optimistically argues that rising healthcare costs and rationing will result in a greater focus on preventive health. I hope he is right.