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This is why, for example, large numbers of Americans oppose the idea of an estate tax even though the current form of the tax, slated to return in 2011, is very unlikely to affect them or their estates. In narrowly self-interested terms, that view may be irrational, but most Americans are unwilling to frame national issues in terms of rich versus poor. There’s a great deal of hostility toward various government bailouts, but the idea of “undeserving” recipients is the key factor in those feelings. Resentment against Wall Street gamesters hasn’t spilled over much into resentment against the wealthy more generally. The bailout for General Motors’ labor unions wasn’t so popular either—again, obviously not because of any bias against the wealthy but because a basic sense of fairness was violated. As of November 2010, congressional Democrats are of a mixed mind as to whether the Bush tax cuts should expire for those whose annual income exceeds $250,000; that is in large part because their constituents bear no animus toward rich people, only toward undeservedly rich people.

envy is usually local. At least in the United States, most economic resentment is not directed toward billionaires or high-roller financiers—not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise. It’s directed at the husband of your wife’s sister, because the brand of beer he stocks costs $3 a case more than yours, and so on. That’s another reason why a lot of people aren’t so bothered by income or wealth inequality at the macro level. Most of us don’t compare ourselves to billionaires. Gore Vidal put it honestly: “Whenever a friend succeeds, a little something in me dies.”

Occasionally the cynic in me wonders why so many relatively well-off intellectuals lead the egalitarian charge against the privileges of the wealthy. One group has the status currency of money and the other has the status currency of intellect, so might they be competing for overall social regard? The high status of the wealthy in America, or for that matter the high status of celebrities, seems to bother our intellectual class most. That class composes a very small group, however, so the upshot is that growing income inequality won’t necessarily have major political implications at the macro level.

All that said, income inequality does matter—for both politics and the economy.

The numbers are clear: Income inequality has been rising in the United States, especially at the very top. The data show a big difference between two quite separate issues, namely income growth at the very top of the distribution and greater inequality throughout the distribution. The first trend is much more pronounced than the second, although the two are often confused.

When it comes to the first trend, the share of pre-tax income earned by the richest 1 percent of earners has increased from about 8 percent in 1974 to more than 18 percent in 2007. Furthermore, the richest 0.01 percent (the 15,000 or so richest families) had a share of less than 1 percent in 1974 but more than 6 percent of national income in 2007. As noted, those figures are from pre-tax income, so don’t look to the George W. Bush tax cuts to explain the pattern. Furthermore, these gains have been sustained and have evolved over many years, rather than coming in one or two small bursts between 1974 and today.1

At the same time, wage growth for the median earner has slowed since 1973. But that slower wage growth has afflicted large numbers of Americans, and it is conceptually distinct from the higher relative share of top income earners. For instance, if you take the 1979–2005 period, the average incomes of the bottom fifth of households increased only 6 percent while the incomes of the middle quintile rose by 21 percent. That’s a widening of the spread of incomes, but it’s not so drastic compared to the explosive gains at the very top.

The broader change in income distribution, the one occurring beneath the very top earners, can be deconstructed in a manner that makes nearly all of it look harmless. For instance, there is usually greater inequality of income among both older people and the more highly educated, if only because there is more time and more room for fortunes to vary. Since America is becoming both older and more highly educated, our measured income inequality will increase pretty much by demographic fiat. Economist Thomas Lemieux at the University of British Columbia estimates that these demographic effects explain three-quarters of the observed rise in income inequality for men, and even more for women.2

Attacking the problem from a different angle, other economists are challenging whether there is much growth in inequality at all below the super-rich. For instance, real incomes are measured using a common price index, yet poorer people are more likely to shop at discount outlets like Wal-Mart, which have seen big price drops over the past twenty years.3 Once we take this behavior into account, it is unclear whether the real income gaps between the poor and middle class have been widening much at all. Robert J. Gordon, an economist from Northwestern University who is hardly known as a right-wing apologist, wrote in a recent paper that “there was no increase of inequality after 1993 in the bottom 99 percent of the population”, and that whatever overall change there was “can be entirely explained by the behavior of income in the top 1 percent.”4

And so we come again to the gains of the top earners, clearly the big story told by the data. It’s worth noting that over this same period of time, inequality of work hours increased too. The top earners worked a lot more and most other Americans worked somewhat less. That’s another reason why high earners don’t occasion more resentment: Many people understand how hard they have to work to get there. It also seems that most of the income gains of the top earners were related to performance pay—bonuses, in other words—and not wildly out-of-whack yearly salaries.5

It is also the case that any society with a lot of “threshold earners” is likely to experience growing income inequality. A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on. Luck aside, that person’s income will never rise much above the threshold.

The funny thing is this: For years, many cultural critics in and of the United States have been telling us that Americans should behave more like threshold earners. We should be less harried, more interested in nurturing friendships, and more interested in the non-commercial sphere of life. That may well be good advice. Many studies suggest that above a certain level more money brings only marginal increments of happiness. What isn’t so widely advertised is that those same critics have basically been telling us, without realizing it, that we should be acting in such a manner as to increase measured income inequality. Not only is high inequality an inevitable concomitant of human diversity, but growing income inequality may be, too, if lots of us take the kind of advice that will make us happier.

Why is the top 1 percent doing so well?

Steven N. Kaplan and Joshua Rauh have recently provided a detailed estimation of particular American incomes.6 Their data do not comprise the entire U.S. population, but from partial financial records they find a very strong role for the financial sector in driving the trend toward income concentration at the top. For instance, for 2004, nonfinancial executives of publicly traded companies accounted for less than 6 percent of the top 0.01 percent income bracket. In that same year, the top 25 hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning more than $100 million a year was nine times higher than the public company executives earning that amount. The authors also relate that they shared their estimates with a former U.S. Secretary of the Treasury, one who also has a Wall Street background. He thought their estimates of earnings in the financial sector were, if anything, understated.

Many of the other high earners are also connected to finance. After Wall Street, Kaplan and Rauh identify the legal sector as a contributor to the growing spread in earnings at the top. Yet many high-earning lawyers are doing financial deals, so a lot of the income generated through legal activity is rooted in finance. Other lawyers are defending corporations against lawsuits, filing lawsuits or helping corporations deal with complex regulations. The returns to these activities are an artifact of the growing complexity of the law and government growth rather than a tale of markets per se. Finance aside, there isn’t much of a story of market failure here, even if we don’t find the results aesthetically appealing.

When it comes to professional athletes and celebrities, there isn’t much of a mystery as to what has happened. Tiger Woods earns much more, even adjusting for inflation, than Arnold Palmer ever did. J.K. Rowling, the first billionaire author, earns much more than did Charles Dickens. These high incomes come, on balance, from the greater reach of modern communications and marketing. Kids all over the world read about Harry Potter. There is more purchasing power to spend on children’s books and, indeed, on culture and celebrities more generally. For high-earning celebrities, hardly anyone finds these earnings so morally objectionable as to suggest that they be politically actionable. Cultural critics can complain that good schoolteachers earn too little, and they may be right, but that does not make celebrities into political targets. They’re too popular. It’s also pretty clear that most of them work hard to earn their money, by persuading fans to buy or otherwise support their product. Most of these individuals do not come from elite or extremely privileged backgrounds, either. They worked their way to the top, and even if Rowling is not an author for the ages, her books tapped into the spirit of their time in a special way. We may or may not wish to tax the wealthy, including wealthy celebrities, at higher rates, but there is no need to “cure” the structural causes of higher celebrity incomes.

to be sure, the high incomes in finance should give us all pause.

The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

if you bet against unlikely events, most of the time you will look smart and have the money to validate the appearance. Periodically, however, you will look very bad. Does that kind of pattern sound familiar? It happens in finance, too. Betting against a big decline in home prices is analogous to betting against the Wizards. Every now and then such a bet will blow up in your face, though in most years that trading activity will generate above-average profits and big bonuses for the traders and CEOs.

To this mix we can add the fact that many money managers are investing other people’s money. If you plan to stay with an investment bank for ten years or less, most of the people playing this investing strategy will make out very well most of the time. Everyone’s time horizon is a bit limited and you will bring in some nice years of extra returns and reap nice bonuses. And let’s say the whole thing does blow up in your face? What’s the worst that can happen? Your bosses fire you, but you will still have millions in the bank and that MBA from Harvard or Wharton. For the people actually investing the money, there’s barely any downside risk other than having to quit the party early. Furthermore, if everyone else made more or less the same mistake (very surprising major events, such as a busted housing market, affect virtually everybody), you’re hardly disgraced. You might even get rehired at another investment bank, or maybe a hedge fund, within months or even weeks.

Moreover, smart shareholders will acquiesce to or even encourage these gambles. They gain on the upside, while the downside, past the point of bankruptcy, is borne by the firm’s creditors. And will the bondholders object? Well, they might have a difficult time monitoring the internal trading operations of financial institutions. Of course, the firm’s trading book cannot be open to competitors, and that means it cannot be open to bondholders (or even most shareholders) either. So what, exactly, will they have in hand to object to?

Perhaps more important, government bailouts minimize the damage to creditors on the downside. Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis. The U.S. government guaranteed these loans, either explicitly or implicitly. Guaranteeing the debt also encourages equity holders to take more risk. While current bailouts have not in general maintained equity values, and while share prices have often fallen to near zero following the bust of a major bank, the bailouts still give the bank a lifeline. Instead of the bank being destroyed, sometimes those equity prices do climb back out of the hole. This is true of the major surviving banks in the United States, and even AIG is paying back its bailout. For better or worse, we’re handing out free options on recovery, and that encourages banks to take more risk in the first place.

there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. This is not good. “Going short on volatility” is a dangerous strategy from a social point of view. For one thing, in so-called normal times, the finance sector attracts a big chunk of the smartest, most hard-working and most talented individuals. That represents a huge human capital opportunity cost to society and the economy at large. But more immediate and more important, it means that banks take far too many risks and go way out on a limb, often in correlated fashion. When their bets turn sour, as they did in 2007–09, everyone else pays the price.

And it’s not just the taxpayer cost of the bailout that stings. The financial disruption ends up throwing a lot of people out of work down the economic food chain, often for long periods. Furthermore, the Federal Reserve System has recapitalized major U.S. banks by paying interest on bank reserves and by keeping an unusually high interest rate spread, which allows banks to borrow short from Treasury at near-zero rates and invest in other higher-yielding assets and earn back lots of money rather quickly. In essence, we’re allowing banks to earn their way back by arbitraging interest rate spreads against the U.S. government. This is rarely called a bailout and it doesn’t count as a normal budget item, but it is a bailout nonetheless. This type of implicit bailout brings high social costs by slowing down economic recovery (the interest rate spreads require tight monetary policy) and by redistributing income from the Treasury to the major banks.

the “going short on volatility” strategy increases income inequality. In normal years the financial sector is flush with cash and high earnings. In implosion years a lot of the losses are borne by other sectors of society. In other words, financial crisis begets income inequality. Despite being conceptually distinct phenomena, the political economy of income inequality is, in part, the political economy of finance. Simon Johnson tabulates the numbers nicely: From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.7

There’s a second reason why the financial sector abets income inequality: the “moving first” issue. Let’s say that some news hits the market and that traders interpret this news at different speeds. One trader figures out what the news means in a second, while the other traders require five seconds. Still other traders require an entire day or maybe even a month to figure things out. The early traders earn the extra money. They buy the proper assets early, at the lower prices, and reap most of the gains when the other, later traders pile on. Similarly, if you buy into a successful tech company in the early stages, you are “moving first” in a very effective manner, and you will capture most of the gains if that company hits it big.

The moving-first phenomenon sums to a “winner-take-all” market. Only some relatively small number of traders, sometimes just one trader, can be first. Those who are first will make far more than those who are fourth or fifth. This difference will persist, even if those who are fourth come pretty close to competing with those who are first. In this context, first is first and it doesn’t matter much whether those who come in fourth pile on a month, a minute or a fraction of a second later. Those who bought (or sold, as the case may be) first have captured and locked in most of the available gains. Since gains are concentrated among the early winners, and the closeness of the runner-ups doesn’t so much matter for income distribution, asset-market trading thus encourages the ongoing concentration of wealth. Many investors make lots of mistakes and lose their money, but each year brings a new bunch of projects that can turn the early investors and traders into very wealthy individuals.

These two features of the problem—“going short on volatility” and “getting there first”—are related. Let’s say that Goldman Sachs regularly secures a lot of the best and quickest trades, whether because of its quality analysis, inside connections or high-frequency trading apparatus (it has all three). It builds up a treasure chest of profits and continues to hire very sharp traders and to receive valuable information. Those profits allow it to make “short on volatility” bets faster than anyone else, because if it messes up, it still has a large enough buffer to pad losses. This increases the odds that Goldman will repeatedly pull in spectacular profits.

Still, every now and then Goldman will go bust, or would go bust if not for government bailouts. But the odds are in any given year that it won’t because of the advantages it and other big banks have. It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw. In any given year, this practice may seem tolerable—didn’t the bank earn the money fair and square by a series of fairly normal looking trades? Yet over time this situation will corrode productivity, because what the banks do bears almost no resemblance to a process of getting capital into the hands of those who can make most efficient use of it. And it leads to periodic financial explosions. That, in short, is the real problem of income inequality we face today. It’s what causes the inequality at the very top of the earning pyramid that has dangerous implications for the economy as a whole.

What about controlling bank risk-taking directly with tight government oversight? That is not practical. There are more ways for banks to take risks than even knowledgeable regulators can possibly control; it just isn’t that easy to oversee a balance sheet with hundreds of billions of dollars on it, especially when short-term positions are wound down before quarterly inspections. It’s also not clear how well regulators can identify risky assets. Some of the worst excesses of the financial crisis were grounded in mortgage-backed assets—a very traditional function of banks—not exotic derivatives trading strategies. Virtually any asset position can be used to bet long odds, one way or another. It is naive to think that underpaid, undertrained regulators can keep up with financial traders, especially when the latter stand to earn billions by circumventing the intent of regulations while remaining within the letter of the law.

For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.

Another root cause of growing inequality is that the modern world, by so limiting our downside risk, makes extreme risk-taking all too comfortable and easy. More risk-taking will mean more inequality, sooner or later, because winners always emerge from risk-taking. Yet bankers who take bad risks (provided those risks are legal) simply do not end up with bad outcomes in any absolute sense. They still have millions in the bank, lots of human capital and plenty of social status. We’re not going to bring back torture, trial by ordeal or debtors’ prisons, nor should we. Yet the threat of impoverishment and disgrace no longer looms the way it once did, so we no longer can constrain excess financial risk-taking. It’s too soft and cushy a world.

Why don’t we simply eliminate the safety net for clueless or unlucky risk-takers so that losses equal gains overall? That’s a good idea in principle, but it is hard to put into practice. Once a financial crisis arrives, politicians will seek to limit the damage, and that means they will bail out major financial institutions. Had we not passed TARP and related policies, the United States probably would have faced unemployment rates of 25 percent of higher, as in the Great Depression. The political consequences would not have been pretty. Bank bailouts may sound quite interventionist, and indeed they are, but in relative terms they probably were the most libertarian policy we had on tap. It meant big one-time expenses, but, for the most part, it kept government out of the real economy (the General Motors bailout aside).

We probably don’t have any solution to the hazards created by our financial sector, not because plutocrats are preventing our political system from adopting appropriate remedies, but because we don’t know what those remedies are. Yet neither is another crisis immediately upon us. The underlying dynamic favors excess risk-taking, but banks at the current moment fear the scrutiny of regulators and the public and so are playing it fairly safe. They are sitting on money rather than lending it out. The biggest risk today is how few parties will take risks, and, in part, the caution of banks is driving our current protracted economic slowdown. According to this view, the long run will bring another financial crisis once moods pick up and external scrutiny weakens, but that day of reckoning is still some ways off.

Is the overall picture a shame? Yes. Is it distorting resource distribution and productivity in the meantime? Yes. Will it again bring our economy to its knees? Probably. Maybe that’s simply the price of modern society. Income inequality will likely continue to rise and we will search in vain for the appropriate political remedies for our underlying problems.

In his final book, Power and Prosperity, the late Mancur Olson argued that the state was a “stationary bandit”. A stationary bandit is better than a “roving bandit”, because the latter has no interest in developing the economy, while the former does. But it may not be much better, because those who control the state will seek to extract the surplus over subsistence generated by those under their control.

In the contemporary west, there are three protections against undue exploitation by the stationary bandit: exit, voice (on the first two of these, see this on Albert Hirschman) and restraint. By “exit”, I mean the possibility of escaping from the control of a given jurisdiction, by emigration, capital flight or some form of market exchange. By “voice”, I mean a degree of control over, the state, most obviously by voting. By “restraint”, I mean independent courts, division of powers, federalism and entrenched rights.

defining what a democratic state, viewed precisely as such a constrained protective arrangement, is entitled to do.

There exists a strand in classical liberal or, in contemporary US parlance, libertarian thought which believes the answer is to define the role of the state so narrowly and the rights of individuals so broadly that many political choices (the income tax or universal health care, for example) would be ruled out a priori. In other words, it seeks to abolish much of politics through constitutional restraints. I view this as a hopeless strategy, both intellectually and politically. It is hopeless intellectually, because the values people hold are many and divergent and some of these values do not merely allow, but demand, government protection of weak, vulnerable or unfortunate people. Moreover, such values are not “wrong”. The reality is that people hold many, often incompatible, core values. Libertarians argue that the only relevant wrong is coercion by the state. Others disagree and are entitled to do so. It is hopeless politically, because democracy necessitates debate among widely divergent opinions. Trying to rule out a vast range of values from the political sphere by constitutional means will fail. Under enough pressure, the constitution itself will be changed, via amendment or reinterpretation.

So what ought the protective role of the state to include? Again, in such a discussion, classical liberals would argue for the “night-watchman” role. The government’s responsibilities are limited to protecting individuals from coercion, fraud and theft and to defending the country from foreign aggression. Yet once one has accepted the legitimacy of using coercion (taxation) to provide the goods listed above, there is no reason in principle why one should not accept it for the provision of other goods that cannot be provided as well, or at all, by non-political means.

Those other measures would include addressing a range of externalities (e.g. pollution), providing information and supplying insurance against otherwise uninsurable risks, such as unemployment, spousal abandonment and so forth. The subsidisation or public provision of childcare and education is a way to promote equality of opportunity. The subsidisation or public provision of health insurance is a way to preserve life, unquestionably one of the purposes of the state. Safety standards are a way to protect people against the carelessness or malevolence of others or (more controversially) themselves. All these, then, are legitimate protective measures. The more complex the society and economy, the greater the range of the protections that will be sought.

What, then, are the objections to such actions? The answers might be: the proposed measures are ineffective, compared with what would happen in the absence of state intervention; the measures are unaffordable and might lead to state bankruptcy; the measures encourage irresponsible behaviour; and, at the limit, the measures restrict individual autonomy to an unacceptable degree. These are all, we should note, questions of consequences.

The vote is more evenly distributed than wealth and income. Thus, one would expect the tenor of democratic policymaking to be redistributive and so, indeed, it is. Those with wealth and income to protect will then make political power expensive to acquire and encourage potential supporters to focus on common enemies (inside and outside the country) and on cultural values. The more unequal are incomes and wealth and the more determined are the “haves” to avoid being compelled to support the “have-nots”, the more politics will take on such characteristics.

In the 1970s, the view that democracy would collapse under the weight of its excessive promises seemed to me disturbingly true. I am no longer convinced of this: as Adam Smith said, “There is a great deal of ruin in a nation”. Moreover, the capacity for learning by democracies is greater than I had realised. The conservative movements of the 1980s were part of that learning. But they went too far in their confidence in market arrangements and their indifference to the social and political consequences of inequality. I would support state pensions, state-funded health insurance and state regulation of environmental and other externalities. I am happy to debate details. The ancient Athenians called someone who had a purely private life “idiotes”. This is, of course, the origin of our word “idiot”. Individual liberty does indeed matter. But it is not the only thing that matters. The market is a remarkable social institution. But it is far from perfect. Democratic politics can be destructive. But it is much better than the alternatives. Each of us has an obligation, as a citizen, to make politics work as well as he (or she) can and to embrace the debate over a wide range of difficult choices that this entails.

Just as a robust economic system is one that encourages early failures (the concepts of "fail small" and "fail fast"), the U.S. government should stop supporting dictatorial regimes for the sake of pseudostability and instead allow political noise to rise to the surface. Making an economy robust in the face of business swings requires allowing risk to be visible; the same is true in politics.

Both the recent financial crisis and the current political crisis in the Middle East are grounded in the rise of complexity, interdependence, and unpredictability. Policymakers in the United Kingdom and the United States have long promoted policies aimed at eliminating fluctuation -- no more booms and busts in the economy, no more "Iranian surprises" in foreign policy. These policies have almost always produced undesirable outcomes. For example, the U.S. banking system became very fragile following a succession of progressively larger bailouts and government interventions, particularly after the 1983 rescue of major banks (ironically, by the same Reagan administration that trumpeted free markets). In the United States, promoting these bad policies has been a bipartisan effort throughout. Republicans have been good at fragilizing large corporations through bailouts, and Democrats have been good at fragilizing the government. At the same time, the financial system as a whole exhibited little volatility; it kept getting weaker while providing policymakers with the illusion of stability, illustrated most notably when Ben Bernanke, who was then a member of the Board of Governors of the U.S. Federal Reserve, declared the era of "the great moderation" in 2004.

Washington stabilized the market with bailouts and by allowing certain companies to grow "too big to fail." Because policymakers believed it was better to do something than to do nothing, they felt obligated to heal the economy rather than wait and see if it healed on its own.

The foreign policy equivalent is to support the incumbent no matter what. And just as banks took wild risks thanks to Greenspan's implicit insurance policy, client governments such as Hosni Mubarak's in Egypt for years engaged in overt plunder thanks to similarly reliable U.S. support.

Those who seek to prevent volatility on the grounds that any and all bumps in the road must be avoided paradoxically increase the probability that a tail risk will cause a major explosion.

In the realm of economics, price controls are designed to constrain volatility on the grounds that stable prices are a good thing. But although these controls might work in some rare situations, the long-term effect of any such system is an eventual and extremely costly blowup whose cleanup costs can far exceed the benefits accrued. The risks of a dictatorship, no matter how seemingly stable, are no different, in the long run, from those of an artificially controlled price.

Such attempts to institutionally engineer the world come in two types: those that conform to the world as it is and those that attempt to reform the world. The nature of humans, quite reasonably, is to intervene in an effort to alter their world and the outcomes it produces. But government interventions are laden with unintended -- and unforeseen -- consequences, particularly in complex systems, so humans must work with nature by tolerating systems that absorb human imperfections rather than seek to change them.

What is needed is a system that can prevent the harm done to citizens by the dishonesty of business elites; the limited competence of forecasters, economists, and statisticians; and the imperfections of regulation, not one that aims to eliminate these flaws. Humans must try to resist the illusion of control: just as foreign policy should be intelligence-proof (it should minimize its reliance on the competence of information-gathering organizations and the predictions of "experts" in what are inherently unpredictable domains), the economy should be regulator-proof, given that some regulations simply make the system itself more fragile. Due to the complexity of markets, intricate regulations simply serve to generate fees for lawyers and profits for sophisticated derivatives traders who can build complicated financial products that skirt those regulations.

The life of a turkey before Thanksgiving is illustrative: the turkey is fed for 1,000 days and every day seems to confirm that the farmer cares for it -- until the last day, when confidence is maximal. The "turkey problem" occurs when a naive analysis of stability is derived from the absence of past variations. Likewise, confidence in stability was maximal at the onset of the financial crisis in 2007.

The turkey problem for humans is the result of mistaking one environment for another. Humans simultaneously inhabit two systems: the linear and the complex. The linear domain is characterized by its predictability and the low degree of interaction among its components, which allows the use of mathematical methods that make forecasts reliable. In complex systems, there is an absence of visible causal links between the elements, masking a high degree of interdependence and extremely low predictability. Nonlinear elements are also present, such as those commonly known, and generally misunderstood, as "tipping points." Imagine someone who keeps adding sand to a sand pile without any visible consequence, until suddenly the entire pile crumbles. It would be foolish to blame the collapse on the last grain of sand rather than the structure of the pile, but that is what people do consistently, and that is the policy error.

Engineering, architecture, astronomy, most of physics, and much of common science are linear domains. The complex domain is the realm of the social world, epidemics, and economics. Crucially, the linear domain delivers mild variations without large shocks, whereas the complex domain delivers massive jumps and gaps. Complex systems are misunderstood, mostly because humans' sophistication, obtained over the history of human knowledge in the linear domain, does not transfer properly to the complex domain. Humans can predict a solar eclipse and the trajectory of a space vessel, but not the stock market or Egyptian political events. All man-made complex systems have commonalities and even universalities. Sadly, deceptive calm (followed by Black Swan surprises) seems to be one of those properties.

The system is responsible, not the components. But after the financial crisis of 2007-8, many people thought that predicting the subprime meltdown would have helped. It would not have, since it was a symptom of the crisis, not its underlying cause. Likewise, Obama's blaming "bad intelligence" for his administration's failure to predict the crisis in Egypt is symptomatic of both the misunderstanding of complex systems and the bad policies involved.

Obama's mistake illustrates the illusion of local causal chains -- that is, confusing catalysts for causes and assuming that one can know which catalyst will produce which effect. The final episode of the upheaval in Egypt was unpredictable for all observers, especially those involved. As such, blaming the CIA is as foolish as funding it to forecast such events. Governments are wasting billions of dollars on attempting to predict events that are produced by interdependent systems and are therefore not statistically understandable at the individual level.

Political and economic "tail events" are unpredictable, and their probabilities are not scientifically measurable. No matter how many dollars are spent on research, predicting revolutions is not the same as counting cards; humans will never be able to turn politics into the tractable randomness of blackjack.

Most explanations being offered for the current turmoil in the Middle East follow the "catalysts as causes" confusion. The riots in Tunisia and Egypt were initially attributed to rising commodity prices, not to stifling and unpopular dictatorships. But Bahrain and Libya are countries with high gdps that can afford to import grain and other commodities. Again, the focus is wrong even if the logic is comforting. It is the system and its fragility, not events, that must be studied -- what physicists call "percolation theory," in which the properties of the terrain are studied rather than those of a single element of the terrain.

When dealing with a system that is inherently unpredictable, what should be done? Differentiating between two types of countries is useful. In the first, changes in government do not lead to meaningful differences in political outcomes (since political tensions are out in the open). In the second type, changes in government lead to both drastic and deeply unpredictable changes.

Humans fear randomness -- a healthy ancestral trait inherited from a different environment. Whereas in the past, which was a more linear world, this trait enhanced fitness and increased chances of survival, it can have the reverse effect in today's complex world, making volatility take the shape of nasty Black Swans hiding behind deceptive periods of "great moderation." This is not to say that any and all volatility should be embraced. Insurance should not be banned, for example.

But alongside the "catalysts as causes" confusion sit two mental biases: the illusion of control and the action bias (the illusion that doing something is always better than doing nothing). This leads to the desire to impose man-made solutions

Variation is information. When there is no variation, there is no information. This explains the CIA's failure to predict the Egyptian revolution and, a generation before, the Iranian Revolution -- in both cases, the revolutionaries themselves did not have a clear idea of their relative strength with respect to the regime they were hoping to topple. So rather than subsidize and praise as a "force for stability" every tin-pot potentate on the planet, the U.S. government should encourage countries to let information flow upward through the transparency that comes with political agitation. It should not fear fluctuations per se, since allowing them to be in the open, as Italy and Lebanon both show in different ways, creates the stability of small jumps.

As Seneca wrote in De clementia, "Repeated punishment, while it crushes the hatred of a few, stirs the hatred of all . . . just as trees that have been trimmed throw out again countless branches." The imposition of peace through repeated punishment lies at the heart of many seemingly intractable conflicts, including the Israeli-Palestinian stalemate. Furthermore, dealing with seemingly reliable high-level officials rather than the people themselves prevents any peace treaty signed from being robust. The Romans were wise enough to know that only a free man under Roman law could be trusted to engage in a contract; by extension, only a free people can be trusted to abide by a treaty. Treaties that are negotiated with the consent of a broad swath of the populations on both sides of a conflict tend to survive. Just as no central bank is powerful enough to dictate stability, no superpower can be powerful enough to guarantee solid peace alone.

As Jean-Jacques Rousseau put it, "A little bit of agitation gives motivation to the soul, and what really makes the species prosper is not peace so much as freedom." With freedom comes some unpredictable fluctuation. This is one of life's packages: there is no freedom without noise -- and no stability without volatility.∂

There are only two realistic outcomes here. One is that the carbon tax proposal is scrapped. With this speech it seems highly unlikely that Gillard will be the one doing any scrapping.  So it would probably be via an election or a change in leadership, such as if Kevin Rudd becomes captain of the Brisbane Broncos. The second possible outcome is that the carbon pricing is watered down so far that its enactment allows Labor to claim success while limiting any actual impact from the tax on the economy.  Of course, that would undercut its stated purpose -- to transform the economy.

A better strategy is the one proposed in The Climate Fix -- start with a very low carbon tax, one that is politically acceptable, and use the proceeds to invest in innovation. The carbon price would rise over time as the fruits of innovation make it politically acceptable to raise that price.  I expect that Australia will soon provide (yet aonpther) lesson in how not to try to put a price on carbon.

Arguing that governments can pick winners, Professor Chang urges us to reclaim economic planning, not as a token of centrally-planned communism, but rather as the simple reality behind our market economies today:

Capitalist economies are in large part planned. Governments in capitalist economies practice planning too, albeit on a more limited basis than under communist central planning. All of them finance a significant share of investment in R&D and infrastructure. Most of them plan a significant chunk of the economy through the planning of the activities of state-owned enterprises. Many capitalist governments plan the future shape of individual industrial sectors through sectoral industrial policy or even that of the national economy through indicative planning. More importantly, modern capitalist economies are made up of large, hierarchical corporations that plan their activities in great detail, even across national borders. Therefore, the question is not whether you plan or not. It is about planning the right things at the right levels.

Drawing a clear distinction between communist central planning and capitalist 'indicative' planning, Chang notes that the latter: ... involves the government ... setting some broad targets concerning key economic variables (e.g., investments in strategic industries, infrastructure development, exports) and working with, not against, the private sector to achieve them. Unlike under central planning, these targets are not legally binding; hence the adjective 'indicative'. However, the government will do its best to achieve them by mobilizing various carrots (e.g., subsidies, granting of monopoly rights) and sticks (e.g., regulations, influence through state-owned banks) at its disposal.

Chang observes that: France had great success in promoting investment and technological innovation through indicative planning in the 1950s and 60s, thereby overtaking the British economy as Europe's second industrial power. Other European countries, such as Finland, Norway and Austria, also successfully used indicative planning to upgrade their economies between the 1950s and the 1970s. The East Asian miracle economies of Japan, Korea and Taiwan used indicative planning too between the 1950s and 1980s. This is not to say that all indicative planning exercises have been successful; in India, for example, it has not. Nevertheless, the European and East Asian examples show that planning in certain forms is not incompatible with capitalism and may even promote capitalist development very well.

As we have argued before, the current crisis raging through Europe (in large part caused by free-market economics), forces us to reconsider our economic options. More than ever before, now is the time to rehabilitate indicative planning and industrial policy as key levers in our arsenal of policy tools.

In this New York Times’ article, “Teachers Wonder, Why the scorn?“, the writer notes the often scathing comments from counter-demonstrators – “Oh you pathetic teachers, read the online comments and placards of counterdemonstrators. You are glorified baby sitters who leave work at 3 p.m. You deserve minimum wage.” What had begun as an ostensibly ‘economic reform’ targeted at teachers’ unions has gradually transmogrified into a kind of “character attack” to this section of American society – teachers are people who wage violent protests (thanks to borrowed footage from the West Coast) and they are undeserving of their economic benefits, and indeed treat these privileges as ‘rights’. The ‘war’ is waged on multiple fronts, economic, political, social, psychological even — or at least one gets this sort of picture from reading these articles.

as Singaporeans with a uniquely Singaporean work ethic, we may perceive functioning ‘trade unions’ as those institutions in the so-called “West” where they amass lots of membership, then hold the government ‘hostage’ in order to negotiate higher wages and benefits. Think of trade unions in the Singaporean context, and I think of SIA pilots. And of LKY’s various firm and stern comments on those issues. Think of trade unions and I think of strikes in France, in South Korea, when I was younger, and of my mum saying, “How irresponsible!” before flipping the TV channel.

The reason why I think the teachers’ protests should not be seen solely as an issue about trade-unions, and evaluated myopically and naively in terms of whether trade unions are ‘good’ or ‘bad’ is because the protests feature in a larger political context with the billionaire Koch brothers at the helm, financing and directing much of what has transpired in recent weeks. Or at least according to certain articles which I present here.

In this NYT article entitled “Billionaire Brothers’ Money Plays Role in Wisconsin Dispute“, the writer noted that Koch Industries had been “one of the biggest contributors to the election campaign of Gov. Scott Walker of Wisconsin, a Republican who has championed the proposed cuts.” Further, the president of Americans for Prosperity, a nonprofit group financed by the Koch brothers, had reportedly addressed counter-demonstrators last Saturday saying that “the cuts were not only necessary, but they also represented the start of a much-needed nationwide move to slash public-sector union benefits.” and in his own words -“ ‘We are going to bring fiscal sanity back to this great nation’ ”. All this rhetoric would be more convincing to me if they weren’t funded by the same two billionaires who financially enabled Walker’s governorship.

I now refer you to a long piece by Jane Mayer for The New Yorker titled, “Covert Operations: The billionaire brothers who are waging a war against Obama“. According to her, “The Kochs are longtime libertarians who believe in drastically lower personal and corporate taxes, minimal social services for the needy, and much less oversight of industry—especially environmental regulation. These views dovetail with the brothers’ corporate interests.”

Their libertarian modus operandi involves great expenses in lobbying, in political contributions and in setting up think tanks. From 2006-2010, Koch Industries have led energy companies in political contributions; “[i]n the second quarter of 2010, David Koch was the biggest individual contributor to the Republican Governors Association, with a million-dollar donation.” More statistics, or at least those of the non-anonymous donation records, can be found on page 5 of Mayer’s piece.

Naturally, the Democrats also have their billionaire donors, most notably in the form of George Soros. Mayer writes that he has made ‘generous private contributions to various Democratic campaigns, including Obama’s.” Yet what distinguishes him from the Koch brothers here is, as Michael Vachon, his spokesman, argued, ‘that Soros’s giving is transparent, and that “none of his contributions are in the service of his own economic interests.” ‘ Of course, this must be taken with a healthy dose of salt, but I will note here that in Charles Ferguson’s documentary Inside Job, which was about the 2008 financial crisis, George Soros was one of those interviewed who was not portrayed negatively. (My review of it is here.)

Of the Koch brothers’ political investments, what interested me more was the US’ “first libertarian thinktank”, the Cato Institute. Mayer writes, ‘When President Obama, in a 2008 speech, described the science on global warming as “beyond dispute,” the Cato Institute took out a full-page ad in the Times to contradict him. Cato’s resident scholars have relentlessly criticized political attempts to stop global warming as expensive, ineffective, and unnecessary. Ed Crane, the Cato Institute’s founder and president, told [Mayer] that “global-warming theories give the government more control of the economy.” ‘

K Street refers to a major street in Washington, D.C. where major think tanks, lobbyists and advocacy groups are located.

with recent developments as the Citizens United case where corporations are now ‘persons’ and have no caps in political contributions, the Koch brothers are ever better-positioned to take down their perceived big, bad government and carry out their ideological agenda as sketched in Mayer’s piece

with much important news around the world jostling for our attention – earthquake in Japan, Middle East revolutions – the passing of an anti-union bill (which finally happened today, for better or for worse) in an American state is unlikely to make a headline able to compete with natural disasters and revolutions. Then, to quote Wisconsin Governor Scott Walker during that prank call conversation, “Sooner or later the media stops finding it [the teacher protests] interesting.”

What remains more puzzling for me is why the American public seems to buy into the Koch-funded libertarian rhetoric. Mayer writes, ‘ “Income inequality in America is greater than it has been since the nineteen-twenties, and since the seventies the tax rates of the wealthiest have fallen more than those of the middle class. Yet the brothers’ message has evidently resonated with voters: a recent poll found that fifty-five per cent of Americans agreed that Obama is a socialist.” I suppose that not knowing who is funding the political rhetoric makes it easier for the public to imbibe it.

So when I hear scientists say, “The data speak for themselves,” I cringe. Data never speak. And data generally and most often are politically and socially inflected. They have import for people’s lives. To ignore that is to ignore the social and cultural dimensions within which this science is taking place.

I do think that there is a process by which, for example, the connection between cigarette smoking and cancer for decades had a scientific consensus that this was an issue, then a social process begins, and then it becomes accepted.

The interesting thing with climate change, I find, is that positioning on climate change is strikingly predictable based on someone’s political leanings. One-third of Republicans and three-quarters of Democrats think that climate change is real. That to me speaks to the political, ideological and cultural dimensions of this debate.

It’s interesting because it wasn’t always so. In 1997 with the Kyoto treaty, with the development of regulations that would impact economic and political interests, sides started to be drawn. We’ve reached the stage today that climate change has become part of the culture wars, the same as health care, abortion, gun control and evolution.

There are many who distrust the peer-review process and distrust scientists. So that can be step one. I think a lot of people will be uncomfortable accepting a scientific conclusion if it necessarily leads to outcomes they find objectionable. People will be hesitant to accept the notion of climate change if that leads directly towards ideas that are at variance with values that they hold dear.

do you trust the scientific process? Do you trust scientists? The faith-and-reason debate has been around for centuries. I just read a book that I thought was prescient, “Anti-Intellectualism in American Life,” about this suspicion people have about intellectuals who are working on issues that are inaccessible, opaque to them, yielding conclusions that alter the way we structure our society, the way we live our lives.

There’s a certain helpless frustration people have: Who are these cultural elites, these intellectual elites who can make these conclusions in the ivory tower of academia or other scientific institutions and tell me how to live my life?

And we can’t leave out power. There are certain powerful interests out there that will not accept the conclusions this will yield to, therefore they will not accept the definition of the problem if they are not going to accept the solutions that follow it. I’m speaking of certain industry sectors that stand to lose in a carbon-constrained world.

Also, if you can’t define solutions on climate change and you’re asking me to accept it, you’re asking me to accept basically a pretty dismal reality that I refuse to accept. And many climate proponents fall into this when they give these horrific, apocalyptic predictions of cities under water and ice ages and things like that. That tends to get people to dig their heels in even harder.

Some people look at this as just a move for more government, more government bureaucracy. And I think importantly fear or resist the idea of world government. Carbon dioxide is part of the economy of every country on earth. This is a global cooperation challenge the likes of which we have never seen before.

Do you trust the message and do you trust the messenger? If I am inclined to resist the notion of global cooperation — which is a nice way to put what others may see as a one-world government — and if the scientific body that came to that conclusion represents that entity, I will be less inclined to believe it. People will accept a message from someone that they think shares their values and beliefs. And for a lot of people, environmentalists are not that kind of person. There’s a segment of the population that sees environmentalists as socialists, trying to control people’s lives.

In our society today, I think people have more faith in economic institutions than they do in scientific institutions. Scientists can talk until they are blue in the face about climate change. But if businesses are paying money to address this issue, then people will say: It must be true, because they wouldn’t be throwing their money away.

what I’m laying out is that this is very much a value- and culture-based debate. And to ignore that – you will never resolve it and you will end up in what I have described a logic schism, where the two sides talk about completely different things, completely different issues, demonizing the other, only looking for things that confirm their opinion. And we get nowhere.

However, a greater concern lies in the notion of climate change itself. Climate change is in essence one kind of nature-society relationship, in which humans influence the climate through greenhouse gas (particularly CO2) emissions, and the climate strikes back by heating up and going crazy at times. This can be further simplified into a battle between humans and CO2: reducing CO2 guards against climate change, and increasing it aggravates the consequences. This view is anchored in scientists’ recommendation that a ‘safe’ level of CO2 should be at 350 parts per million (ppm) instead of the current 390. Already, the need to reduce CO2 is understood, as is evident in the push for greener fuels, more efficient means of production, the proliferation of ‘green’ products and companies, and most recently, the Cancun talks.

So can there be anything wrong with reducing CO2? No, there isn’t, but singling out CO2 as the culprit of climate change or of the environmental problems we face prevents us from looking within. What do I mean? The enemy, CO2, is an ‘other’, an externality produced by our economic systems but never an inherent component of the systems. Thus, we can declare war on the gas or on climate change without taking a step back and questioning: is there anything wrong with the way we develop?  Take Singapore for example: the government pledged to reduce carbon emissions by 16% under ‘business as usual’ standards, which says nothing about how ‘business’ is going to be changed other than having less carbon emissions (in fact, it is questionable even that CO2 levels will decrease, as ‘business as usual’ standards project a steady increase emission of CO2 each year). With the development of green technologies, decrease in carbon emissions will mainly be brought about by increased energy efficiency and switch to alternative fuels (including the insidious nuclear energy).

Thus, the way we develop will hardly be changed. Nobody questions whether our neoliberal system of development, which relies heavily on consumption to drive economies, needs to be looked into. We assume that it is the right way to develop, and only tweak it for the amount of externalities produced. Whether or not we should be measuring development by the Gross Domestic Product (GDP) or if welfare is correlated to the amount of goods and services consumed is never considered. Even the UN-REDD (Reducing Emissions from Deforestation and Forest Degradation) scheme which aims to pay forest-rich countries for protecting their forests, ends up putting a price tag on them. The environment is being subsumed under the economy, when it should be that the economy is re-looked to take the environment into consideration.

when the world is celebrating after having held at bay the dangerous greenhouse gas, why would anyone bother rethinking about the economy? Yet we should, simply because there are alternative nature-society relationships and discourses about nature that are more or of equal importance as global warming. Annie Leonard’s informative videos on The Story of Stuff and specific products like electronics, bottled water and cosmetics shed light on the dangers of our ‘throw-away culture’ on the planet and poorer countries. What if the enemy was instead consumerism? Doing so would force countries (especially richer ones) to fundamentally question the nature of development, instead of just applying a quick technological fix. This is so much more difficult (and less economically viable), alongside other issues like environmental injustices – e.g. pollution or dumping of waste by Trans-National Corporations in poorer countries and removal of indigenous land rights. It is no wonder that we choose to disregard internal problems and focus instead on an external enemy; when CO2 is the culprit, the solution is too simple and detached from the communities that are affected by changes in their environment.

We need hence to allow for a greater politics of the environment. What I am proposing is not to diminish our action to reduce carbon emissions, for I do believe that it is part of the environmental problem that we are facing. What instead should be done is to reduce our fixation on CO2 as the main or only driver of climate change, and of climate change as the most pertinent nature-society issue we are facing. We should understand that there are many other ways of thinking about the environment; ‘developing’ countries, for example, tend to have a closer relationship with their environment – it is not something ‘out there’ but constantly interacted with for food, water, regulating services and cultural value. Their views and the impact of the socio-economic forces (often from TNCs and multi-lateral organizations like IMF) that shape the environment must also be taken into account, as do alternative meanings of sustainable development. Thus, even as we pat ourselves on the back for having achieved something significant at Cancun, our action should not and must not end there. Even if climate change hogs the headlines now, we must embrace more plurality in environmental discourse, for nature is not and never so simple as climate change alone. And hopefully sometime in the future, alongside a multi-lateral conference on climate change, the world can have one which rethinks the meaning of development.

4. Even a low carbon tax will make some goods cost a bit more, so it is important to help those who are most affected.Our carbon tax proposal is revenue neutral in the sense that we will lower other taxes in direct proportion to the impact, however modest, of a low carbon tax. We will do this with particular attention to those who may be most directly affected by a price on carbon.In addition, some portion of the revenue raised by a carbon tax will be returned to the public. But not all. It is important to invest in tomorrow’s energy technologies today and a carbon tax provides the mechanism for doing so.

In the real world, the effects of increasing carbon dioxide on human and ecological scales are well established, and they include a biogechemical effect on land ecosystems with subsequent effects on water and climate, as well as changes to the chemistry of the oceans. Is it possible that these effects are benign? Sure. Is it also possible that these effects have some negatives? Sure. These two factors alone would be sufficient for one to begin to ask questions about the worth of decarbonizing the global energy system. But greenhouse gas emissions also have a radiative effect that, in the real world, is thought to be a net warming, all else equal and over a global scale. However, if this effect were to be a net cooling, or even, no net effect at the global scale, it would not change my views about a need to consider decarbonizing the energy system one bit. There is an effect -- or effects to be more accurate -- and these effects could be negative.

The debate over climate change has many people on both sides of the issue wrapped up in discussing global average temperature trends. I understand this as it is an icon with great political symbolism. It has proved a convenient political battleground, but the reality is that it should matter little to the policy case for decarbonization. What matters is that there is a human effect on the climate system and it could be negative with respect to things people care about. That is enough to begin asking whether we want to think about accelerating decarbonization of the global economy.

it can be trained from very early in a child’s education. There’re ways that you can get quite young children to recognize what’s a good argument and what’s a bad argument. And as children grow older, it can be done in a more and more sophisticated form until by the time they’re undergraduates in universities they would be studying Plato’s dialogues for example and really looking at those tricky arguments and trying to figure out how to think. And this is important not just for the individual thinking about society, but it’s important for the way people talk to each other. In all too many public discussions people just throw out slogans and they throw out insults. And what democracy needs is listening. And respect. And so when people learn how to analyze an argument, then they look at what the other person’s saying differently. And they try to take it apart, and they think: “Well, do I share some of those views and where do I differ here?” and so on. And this really does produce a much more deliberative, respectful style of public interaction.

The second [quality] is what I call “the ability to think as a citizen of the whole world.” We’re all narrow and this is again something that we get from our animal heritage. Most non-human animals just think about the group. But, of course, in this world we need to think, first of all, our whole nation -- its many different groups, minority and majority. And then we need to think outside the nation, about how problems involving, let’s say, the environment or global economy and so on need cooperative resolution that brings together people from many different nations.

That’s complicated and it requires learning a lot of history, and it means learning not just to parrot some facts about history but to think critically about how to assess historical evidence. It means learning how to think about the global economy. And then I think particularly important in this era, it means learning something about the major world religions. Learning complicated, nonstereotypical accounts of those religions because there’s so much fear that’s circulating around in every country that’s based usually on just inadequate stereotypes of what Muslims are or whatever. So knowledge can at least begin to address that.

the third thing, which I think goes very closely with the other two, is what I call “the narrative imagination,” which is the ability to put yourself in the shoes of another person to have some understanding of how the world looks from that point of view. And to really have that kind of educated sympathy with the lives of others. Now again this is something we come into the world with. Psychologists have now found that babies less than a year old are able to take up the perspective of another person and do things, see things from that perspective. But it’s very narrow and usually people learn how to think about what their parents are thinking and maybe other family members but we need to extend that and develop it, and learn how the world looks from the point of view of minorities in our own culture, people outside our culture, and so on.

since we can’t go to all the places that we need to understand -- it’s accomplished by reading narratives, reading literature, drama, participating through the arts in the thought processes of another culture. So literature and the arts are the major ways we would develop and extend that capacity.

For many years, the leading model of development ... used by economists and international agencies measuring welfare was simply that for a country to develop means to increase [its] gross domestic product per capita. Now, in recent years, there has been a backlash to that because people feel that it just doesn’t ask enough about what goods are really doing for people, what can people really do and be.

so since 1990s the United Nations’ development program has produced annually what’s called a “Human Development Report” that looks at things like access to education, access to health care. In other words, a much richer menu of human chances and opportunities that people have. And at the theoretical end I’ve worked for about 20 years now with economist Amartya Sen, who won the Nobel Prize in 1998 for economics. And we’ve developed this as account of -- so for us what it is for a country to do better is to enhance the set of capabilities meaning substantial opportunities that people have to lead meaningful, fruitful lives. And then I go on to focus on a certain core group of those capabilities that I think ought to be protected by constitutional law in every country.

Life; health; bodily integrity; the development of senses, imagination, and thought; the development of practical reason; opportunities to have meaningful affiliations both friendly and political with other people; the ability to have emotional health -- not to be in other words dominated by overwhelming fear and so on; the ability to have a productive relationship with the environment and the world of nature; the ability to play and have leisure time, which is something that I think people don’t think enough about; and then, finally, control over one’s material and social environment, some measure of control. Now of course, each of these is very abstract, and I specify them further. Although I also think that each country needs to finally specify them with its own particular circumstances in view.

when kids learn in a classroom that just makes them sit in a chair, well, they can take in something in their heads, but it doesn’t make them competent at negotiating in the world. And so starting, at least, with Jean Jacques Rousseau in the 18th century, people thought: “Well, if we really want people to be independent citizens in a democracy that means that we can’t have whole classes of people who don’t know how to do anything, who are just simply sitting there waiting to be waited on in practical matters.” And so the idea that children should participate in their practical environment came out of the initial democratizing tendencies that went running through the 18th century.

even countries who absolutely do not want that kind of engaged citizenry see that for the success of business these abilities are pretty important. Both Singapore and China have conducted mass education reforms over the last five years because they realized that their business cultures don’t have enough imagination and they also don’t have enough critical thinking, because you can have awfully corrupt business culture if no one is willing to say the unpleasant word or make a criticism.

So they have striven to introduce more critical thinking and more imagination into their curricula. But, of course, for them, they want to cordon it off -- they want to do it in the science classroom, in the business classroom, but not in the politics classroom. Well, we’ll see -- can they do that? Can they segment it that way? I think democratic thinking is awfully hard to segment as current events in the Middle East are showing us. It does have the tendency to spread.

so maybe the people in Singapore and China will not like the end result of what they tried to do or maybe the reform will just fail, which is equally likely -- I mean the educational reform.

if you really don’t want democracy, this is not the education for you. It had its origins in the ancient Athenian democracy which was a very, very strong participatory democracy and it is most at home in really true democracy, where our whole goal is to get each and every person involved and to get them thinking about things. So, of course, if politicians have ambivalence about that goal they may well not want this kind of education.

when we bring up children in the family or in the school, we are always engineering. I mean, there is no values-free form of education in the world. Even an education that just teaches you a list of facts has values built into it. Namely, it gives a negative value to imagination and to the critical faculties and a very high value to a kind of rote, technical competence. So, you can't avoid shaping children.

ncreasingly the child should be in control and should become free. And that's what the critical thinking is all about -- it's about promoting freedom as the child goes on. So, the end product should be an adult who is really thinking for him- or herself about the direction of society. But you don't get freedom just by saying, "Oh, you are free." Progressive educators that simply stopped teaching found out very quickly that that didn't produce freedom. Even some of the very extreme forms of progressive school where children were just allowed to say every day what it was they wanted to learn, they found that didn't give the child the kind of mastery of self and of the world that you really need to be a free person.

Some European leaders, including Angela Merkel, may be backtracking fast on their commitment to nuclear power, but despite yesterday's escalation of the ongoing crisis in Fukushima, Japan, there appear to be no signs that India, China and other emerging economies will succumb to a similar backlash. For the emerging economies, overcoming poverty and insecurity of supply remain the overriding priorities of energy policy.

Much of this flow of cash was the product of the Three Power Source Development Laws, a sophisticated system of government subsidies created in 1974 by Kakuei Tanaka, the powerful prime minister who shaped Japan’s nuclear power landscape and used big public works projects to build postwar Japan’s most formidable political machine. The law required all Japanese power consumers to pay, as part of their utility bills, a tax that was funneled to communities with nuclear plants. Officials at the Ministry of Economy, Trade and Industry, which regulates the nuclear industry, and oversees the subsidies, refused to specify how much communities have come to rely on those subsidies. “This is money to promote the locality’s acceptance of a nuclear plant,” said Tatsumi Nakano of the ministry’s Agency for Natural Resources and Energy.

crowd sourced public policy

Group identification also plays a major role in how we make decisions — and that's another way facts can get filtered. Declining belief in climate science has been, for the most part in America, a conservative phenomenon. On the surface, that's curious: you could expect Republicans to be skeptical of economic solutions to climate change like a carbon tax, since higher taxes tend to be a Democratic policy, but scientific information ought to be non-partisan. Politicians never debate the physics of space travel after all, even if they argue fiercely over the costs and priorities associated with it. That, however, is the power of group thinking; for most conservative Americans, the very idea of climate science has been poisoned by ideologues who seek to advance their economic arguments by denying scientific fact. No additional data — new findings about CO2 feedback loops or better modeling of ice sheet loss — is likely to change their mind.

What's the answer for environmentalists? Change the message and frame the issue in a way that doesn't trigger unconscious opposition among so many Americans. That can be a simple as using the right labels: a recent study by researchers at the University of Michigan found that Republicans are less skeptical of "climate change" than "global warming," possibly because climate change sounds less specific. Possibly too because so broad a term includes the severe snowfalls of the past winter that can be a paradoxical result of a generally warmer world. Greens should also pin their message on subjects that are less controversial, like public health or national security. Instead of issuing dire warnings about an apocalyptic future — which seems to make many Americans stop listening — better to talk about the present generation's responsibility to the future, to bequeath their children and grandchildren a safer and healthy planet.

The bright side of all this irrationality is that it means human beings can act in ways that sometimes go against their immediate utility, sacrificing their own interests for the benefit of the group.

Our brains develop socially, not just selfishly, which means sustainable behavior — and salvation for the planet — may not be as difficult as it sometimes seem. We can motivate people to help stop climate change — it may just not be climate science that convinces them to act.

religion becomes its own secular catalyst, or, rather, secularization itself is the result of religion. This approach will mature in the most elaborate formulation of what Habermas calls the “linguistification of the sacred,” in volume two of The Theory of Communicative Action. There, basing himself on Durkheim and Mead, Habermas shows how ritual practices and religious worldviews release rational imperatives through the establishment of a communicative grammar that conditions how believers can and should interact with each other, and how they relate to the idea of a supreme being. Habermas writes: worldviews function as a kind of drive belt that transforms the basic religious consensus into the energy of social solidarity and passes it on to social institutions, thus giving them a moral authority. [. . .] Whereas ritual actions take place at a pregrammatical level, religious worldviews are connected with full-fledged communicative actions.

The thrust of Habermas’s argumentation in this section of The Theory of Communicative Action is to show that religion is the source of the normative binding power of ethical and moral commandments. Yet there is an ambiguity here. While the contents of worldviews may be sublimated into the normative, binding of social systems, it is not entirely clear that the structure, or the grammar, of religious worldviews is itself exhausted. Indeed, in “A Genealogical Analysis of the Cognitive Content of Morality,” Habermas resolves this ambiguity by claiming that the horizontal relationship among believers and the vertical relationship between each believer and God shape the structure of our moral relationship to our neighbour, but now under two corresponding aspects: that of solidarity and that of justice. Here, the grammar of one’s religious relationship to God and the corresponding community of believers are like the exoskeleton of a magnificent species, which, once the religious worldviews contained in them have desiccated under the impact of the forces of secularization, leave behind a casing to be used as a structuring shape for other contents.

Metaphysical thinking, which for Habermas has become untenable by the very logic of philosophical development, is characterized by three aspects: identity thinking, or the philosophy of origins that postulates the correspondence between being and thought; the doctrine of ideas, which becomes the foundation for idealism, which in turn postulates a tension between what is perceived and what can be conceptualized; and a concomitant strong concept of theory, where the bios theoretikos takes on a quasi-sacred character, and where philosophy becomes the path to salvation through dedication to a life of contemplation. By “postmetaphysical” Habermas means the new self-understanding of reason that we are able to obtain after the collapse of the Hegelian idealist system—the historicization of reason, or the de-substantivation that turns it into a procedural rationality, and, above all, its humbling. It is noteworthy that one of the main aspects of the new postmetaphysical constellation is that in the wake of the collapse of metaphysics, philosophy is forced to recognize that it must co-exist with religious practices and language: Philosophy, even in its postmetaphysical form, will be able neither to replace nor to repress religion as long as religious language is the bearer of semantic content that is inspiring and even indispensable, for this content eludes (for the time being?) the explanatory force of philosophical language and continues to resist translation into reasoning discourses.

metaphysical thinking either surrendered philosophy to religion or sought to eliminate religion altogether. In contrast, postmetaphysical thinking recognizes that philosophy can neither replace nor dismissively reject religion, for religion continues to articulate a language whose syntax and content elude philosophy, but from which philosophy continues to derive insights into the universal dimensions of human existence.

Habermas claims that even moral discourse cannot translate religious language without something being lost: “Secular languages which only eliminate the substance once intended leave irritations. When sin was converted to culpability, and the breaking of divine commands to an offence against human laws, something was lost.” Still, Habermas’s concern with religion is no longer solely philosophical, nor merely socio-theoretical, but has taken on political urgency. Indeed, he now asks whether modern rule of law and constitutional democracies can generate the motivational resources that nourish them and make them durable. In a series of essays, now gathered in Between Naturalism and Religion, as well as in his Europe: The Faltering Project, Habermas argues that as we have become members of a world society (Weltgesellschaft), we have also been forced to adopt a societal “post-secular self-consciousness.” By this term Habermas does not mean that secularization has come to an end, and even less that it has to be reversed. Instead, he now clarifies that secularization refers very specifically to the secularization of state power and to the general dissolution of metaphysical, overarching worldviews (among which religious views are to be counted). Additionally, as members of a world society that has, if not a fully operational, at least an incipient global public sphere, we have been forced to witness the endurance and vitality of religion. As members of this emergent global public sphere, we are also forced to recognize the plurality of forms of secularization. Secularization did not occur in one form, but in a variety of forms and according to different chronologies.

through a critical reading of Rawls, Habermas has begun to translate the postmetaphysical orientation of modern philosophy into a postsecular self-understanding of modern rule of law societies in such a way that religious citizens as well as secular citizens can co-exist, not just by force of a modus vivendi, but out of a sincere mutual respect. “Mutual recognition implies, among other things, that religious and secular citizens are willing to listen and to learn from each other in public debates. The political virtue of treating each other civilly is an expression of distinctive cognitive attitudes.” The cognitive attitudes Habermas is referring to here are the very cognitive competencies that are distinctive of modern, postconventional social agents. Habermas’s recent work on religion, then, is primarily concerned with rescuing for the modern liberal state those motivational and moral resources that it cannot generate or provide itself. At the same time, his recent work is concerned with foregrounding the kind of ethical and moral concerns, preoccupations, and values that can guide us between the Scylla of a society administered from above by the system imperatives of a global economy and political power and the Charybdis of a technological frenzy that places us on the slippery slope of a liberally sanctioned eugenics.

The kind of questions asked also marked the occasion as an academic one. Not “Won’t the economy implode if we do this?” or “Wouldn’t free expression rights be eroded if we went down that path?”, but “Would you be willing to follow your argument to its logical conclusion?” or “Doesn’t that amount to just making up the law as you go along?” These questions were continuations of a philosophical conversation that stretches back at least to the beginning of the republic; and while they were illustrated by real-world topics (the pardon power, habeas corpus, the electoral college), the focus was always on the theoretical puzzles of which those topics were disposable examples; they were never the main show.

Content industry analyses of the file sharing phenomenon tend to downplay key sources of income for musicians, the LSE report charges, most notably revenue from live concert performances.

Legal file sharing also grew by nine percent globally in 2009, along with an eight percent increase in performance rights revenue.

So what is emerging is an increasingly "ephemeral" global music culture based not upon the purchasing of discrete physical packages of music, but on the discovery and subsequent promotion of musicians through file sharing. The big winner in this model is not the digital music file seller, but the touring band, whose music is easily discoverable on the 'Net. As with so much of the rest of the emerging world economy, the shift is away from buying things and towards purchasing services—in this case tickets to concerts and related activities.