Measurement Bias

One of the sillier correlations in statistics is that a strong relation exists between broken bones and consumption of ice cream.  It turns out that’s because both broken bones from sports accidents and eating ice cream peak in the summertime.  That’s taught to statistics students to sensitize them to hidden intervening variables (summer versus winter weather) that cloud relationships.  We assume so many things when we’re looking at numbers, and many of our assumptions are hidden even from us.  In science, for example, scientific method requires verification of results by reproducibility, and that creates an inherent reductionist view that rejects uniqueness for measurability and prefers calculable formulas’; i.e., it forms a measurement bias.  It’s impossible to verify things you can’t independently measure and calculate. Yet we proudly proclaim our individual and species uniqueness as a primary feature of our humanity, recognize the incalculable value of love and friendship and commonly accept the immeasurability of a sunrise.  So it’s interesting when an occasional slight lift of the curtain over our assumptions reveals what’s really going on in a scientific discipline.

The slight curtain lift over economics came last week amidst the rowdy debate over who should replace Ben Bernanke as chairman of the Federal Reserve.  A passing reference in an article supporting Larry Summers was made to “libertarian and economist Milt Friedman.” Aha!  We rarely think of the world view buried in the masses of economic data we face each day, but that remark encapsulates it.  A libertarian view in economics, like a reductionist view in physics or biology, so simplifies things.  The equations of economics are messy as they are, even though limited to market interactions between individual parties seeking to maximize only profit measured in dollars.  Excluding multiple motives like affection or altruism or even opting to reduce current profit in favor of a future generation enables a “rational man ” hypothesis, aka a man greedy and not concerned about the good of others. That makes equations workable.  In fact, it reduces economics simply to a set of equations expressing libertarian principles.  Milt Friedman can indeed feel right at home.  Unfortunately, it also leads inevitably to dominance of our thinking by short-term calculations of purely monetary profit for individuals.  And that is the bias from which our economy currently suffers.  We value short-term individual prosperity over long-term community prosperity.

In recent columns both Harold Meyerson and George Will are trapped by that economic bias into more or less blaming economic problems on democracy.  Meyerson recognizes the bias, while Will just blindly accepts it.  Will blames the bankruptcy of Detroit on the inordinate control of unions and public interest groups seeking resources for community interests.  It never strikes him that he is attacking the very liberty and democracy he is supposed so fervently to favor.  I suspect at the time of the Revolution he would have been a Tory and supporter of Lord North.  Lord North knew the colonists were just a bunch of crazy protesters working against their own economic interest.

Meyerson’s article, much the more interesting one, uses a recently published study to reveal a “structural bias against investment” in our current economy.  The study, by a joint effort from NYU, Harvard Business School and the National Bureau of Economic Research, demonstrates that privately owned firms invest on average 6.8 percent of their assets, while publicly held firms invest only 3.7 percent.  As a result, while in the 1980’s profits and investments were each about 9 percent of GDP, today profits amount to 12 percent while investment has shrunk to 4 percent.  Meyerson attributes this to CEO concerns about stock prices in publicly held firms creating a bias toward showing immediate profit over investment, i.e., the CEO’s are responding to democratic pressures.  But in fact, both CEOs and share holders are succumbing to there being only one measuring rod for company value, and that rod is skewed against long-term investment.  Meyerson recognizes this, and points out how that has worked against the interests of workers and consumers.

I’ve mentioned in a previous post that the saving grace of physics is that physicists and engineers do not accept the inexorable pull of gravity, but instead figure out how to build skyscrapers and rockets to the moon.  Meyerson points some of the ways we can also overcome our economic measurement bias, our “gravity”, to create once again a working economy.  He advocates the short term sheer necessity of having major investments in things like infrastructure and green technologies, like the program being pushed for by Obama, despite its effect on short-term share prices.  I note in passing that a few years ago, the National Institutes of Technology reported that there was so much availability of new materials and so much need for building renovation that with proper investments, materials engineering could be the fastest growing occupation over the next generation in this nation.  And businesses, workers and communities would prosper.  Longer term, Meyerson advocates unlinking CEO pay and bonuses from share value and inclusion of employee and community representatives on corporate boards. That would indeed bring the values of democracy, and not just Wall Street, to bear on determining what to do.  America was indeed built by crazy people determined to do good things despite their cost.  They pledged their lives, fortunes and sacred honor to do so.  It’s time we also readjusted our measuring rods to enable better things.