I've always been more of a Vampire Slayer man myself, but when duty calls.... The hunt for the lair of zombie lies takes us to Goerge Akerloff's early work introducing cognitive dissonance into economics.
Paul Krugman has been focusing increasing attention of late on so-called "zombie lies", ones that just keep coming back from the dead, no matter how many times they are killed. For example, from late last week:
Decade of the Living Dead
Barry Ritholtz expresses amazement at the way the Fannie-Freddie-CRA lie - the claim that gubmint bureaucrats forced all those poor bankers into making bad loans - not only persists, but seems to be growing in influence.
But this story is hardly unique. Ever since I began writing for the Times - and probably before, but I wasn't paying so much attention then - I've been struck over and over again by the unkillability of zombie lies....
The CRA aspect of this zombie lie leads directly back to Adam Kessler's lead article in the real-world economics review #54, "Cognitive dissonance, the Global Financial Crisis and the discipline of economics", which I wrote about in late October in my diary "Cognitive dissonance in free market economists". As you may recall, Kessler surveyed two groups of economists, one a random sample of members of the American Economics Association, the other [quoting from the abstract] "consisted of the signers of the notorious open letter circulated by the Cato Institute opposing President Obama's stimulus program," which he took to be representative of "an influential group of economists whom I call believers in laissez faire (BLF)."
One of the questions he asked about was the role of the CRA in the fiscal crisis, and he took the belief in this as evidence of cognitive dissonance, explaining, "I provide evidence which suggests that the BLF responded to this shock in a manner that can best be described as irrational, ill-considered and clearly erroneous. I consider the social-psychological concept cognitive dissonance as the best explanatory framework for understanding this response. Cognitive dissonance theory predicts that when real-world events "disconfirm" deeply-held beliefs this creates psychological discomfort in persons and they will respond by means of distortion and denial."
This is, in short, Kessler's explanation for zombie lies--at least among the hard-core believers in the economics profession. It doesn't answer Krugman's question in full, about why such zombie lies persist, not just among true believers, but among the wider political class. But it does provide a starting point, one worth taking a closer look at, particularly in terms of George Akerloff's original introduction of the idea of cognitive disonance into the economic literature, "The Economic Consequences of Cognitive Dissonance", by George A. Akerlof and William T. Dickens, written in 1982, which I also quoted from in my diary. (Not available online, but from the JSTOR database available in some libraries.)
Akerloff and Dickens looked at the example of workers in a hazardous industry under two conditions: First, without any safety equipment avaialble, then after such equipment becomes available. They find that workers tend to minimize the hazardous they face in the first instance, with the result that they generally fail to use the safety equipment once it becomes available--an objectively irrational course of action predicated on a false belief that at least afforded psychological comfort when no real comfort was available.
As similar dynamic seems at play with our zombie lies: They may have never been true, but at least they provided some psychological comfort, and therefore people cling to them, even when the danger that doing so posses should be utterly transparent. From the original 1982 article:
In the second period, cost-effective safety equipment becomes available. But, because by then workers in the hazardous industry believe the jobs to be safe, they will not purchase the equipment. Safety legislation is needed to restore Pareto optimality since the workers have an incorrect assessment of the marginal rate of substitution between safety equipment and money income.5
In this model, both labor markets and product markets are competitive. Also, workers begin with rational expectations. These workers know upon taking a job in the hazardous industry that they will experience cognitive dissonance and alter their estimated probabilities of accident. The purpose of building such a "complete information" model is not realism; we would not expect people to be aware of their future behavior.6 Rather, the purpose of this assumption is to show that even in a model where workers entering a hazardous job perfectly foresee their future psychological reactions to the unsafe conditions, there may be a welfare-improving role for safety legislation. Such a role is obvious in models without rational expectations in which governments have more information than private agents.
This, in turn, brings us back to David Cay Johnston's brilliant analysis "Reasons, Rule and Riots: Our Societal Panic" that I discussed in my earlier diary, "Where is our Solon?" Akerloff is describing an extremely simplified case, as is absolutely necessary when introducing and explaining a new concept. He is describing cognitive dissonance as a departure from normal expectations. But Johnston is describing the state of societal panic as a recurring phenomena in which normal expecations repeatedly and systematically fail:
Societal panics occur when the expectations and rules everyone has been accustomed to living under no longer work. They occur when some new force changes the rules of the game -- a force that may be easy to identify or invisible, but whose effects are far-reaching and unstoppable....
Because no one knows quite what to do when the old ways stop working, panic sets in, replacing reason. Crazy responses spread until an idea or a leader emerges, a new way to make sense of the change. The new leader is often the one who persuades people that it is better to live by new rules.
Humans have experienced societal panics time and time again. Sometimes they end in tragedy, sometimes in triumph. And those unexpected accidents of history often play a huge role in the outcome.
Akerloff provides us with a micro-level explanation of what is going on. Johnston provides us with a macro-level explanation, in which micro-level failures happen repeatedly and recursively, feeding on themselves and growing exponentially. Connecting the two levels of the process is a great challenge--as connecting micro- and macro- always is. But the greater challenge still is how to stop the process. Finding the zombies' lair is only the beginning of our problems.
And yet, it does help us to realize that panic is deeply implicated in what we are facing. We can kill the zombie lies, and they spring up again largely through the mechanism of unchecked panic. "Slow down and tell me how you think this works" may be an all-purpose response that can help slow down the reanimation process, and give us all time to start responding in a deliberate, rational, reality-based manner. It's not a magic bullet, just a hint about a bit of strategy we can employ to try to create a bit of an opening for the almost impossible task of restoring a small semblance of sanity.
But in the end, a much larger task awaits us. We don't just need to stop the panic, we need to establish a new foundation on which new rules, new moral norms, new expectations and new definitions of reasonable conduct may be grounded.
There is a great work that awaits us... if only we can keep our heads. And our brains.
