Planning for Unpredictability

Published @ gnovisjournal on November 22, 2011, edited on October 21, 2012.

How good are we at predicting the future?  Much of economics is about reducing risks, and you reduce risks by planning for the future. We invest in innovative infrastructure in preparation for the future.  We tune into Kramer and hire money managers to manage our future investments—hoping to get in before the rest of the world does.  We bet on future commodities in an effort to spread risk. We even superstitiously believe an octopus can tell us who’s going to win the World Cup!  It is clear that in assessing risk we are looking for a simple way to understand complexity.

And then natural disasters hit, or the housing bubble bursts, or the stock market plummets, (or the octopus dies) and we’re left confused in how we got it so wrong.

If there is one thing that is certain it is that we are incredibly uncertain in our predictions making it difficult, inefficient, and irresponsible to dump top-down strategies on the rest of the world.

As Douglass North in Institutions, Institutional Change and Economic Performance will tell us: institutions are a way for reducing uncertainty.  In an era of a ‘we vs. them’ worldview, things were simple, straightforward, certain—we made predictions based on ideological bents.  However, we have seen that the neoclassical paradigm was a huge misfit for other countries as it assumed zero transaction costs and rational behavior of individuals; it assumed that humanity was predictable using the self-interested individual as the unit of analysis.  Illuminating the crucial difference from one country to another, North emphasizes that a common set of rules will function differently in different societies given their specific histories and institutional frameworks.  He examines the adoption of the U.S. Constitution by several Latin American countries in the 19th century and finds that “although the rules are the same, the enforcement mechanisms, the way enforcement occurs, the norms of behavior, and the subjective models of the actors are not.  Hence, both the real incentive structures and the perceived consequences of policies will differ as well” (North, 101).

Structural changes such as natural disasters and war disrupt the institutional framework.  Chaotic events are typically unpredictable, as are the effects of an institutional breakdown.  The earthquake in Haiti illuminates what an effect unpredictable, cataclysmic forces coupled with a lack functioning government can have on a country.  Because the Haitians did not have formal laws delineating property rights, the informal, insecure property rights were uprooted after mass displacement.  

One development strategy for Haiti that Patricia Adams proposes, and I think North would agree with, is the need for a new government structure, “one credibly backed by the Haitian people.”  She recommends this “occur via a referendum, administered by Canada and the United States under United Nations auspices, in which the Haitian people are given a choice between their existing system of government and that of their island neighbour, Puerto Rico, which is a commonwealth under U.S. protection.”  Formal institutions such as a referendum will give the Haitian people sovereignty over their nation for the first time, giving the citizens the “means to make higher demands of their government.”

What Haiti needs now for development is a reestablishment of local identity.  What they need is for the U.S. to reverse the neo-liberal adjustments it has imposed over the last few decades, and perhaps come to adopt some new institutional frameworks that would provide a space for successful bottom-up opportunities.  These provisions would allow for a future that is within the hands of the  Haitian people–not subject to the predictions and prescriptions of the developed world.

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