Wikileaks' Precursor and Unsung Foe of Neoliberal Economics

A tribute to Daniel Ellsberg, whose analytical work exposed the Achilles’ Heal of toxic economics forty seven years before the Crash of 2008, and whose courageous leaking of the Pentagon Papers stunned the world by exposing thousands of documents revealing the US government’s lies about Vietnam.

This is not the first time thousands of classified documents have been ‘liberated’, revealing to a stunned public how their government waged a concerted and lengthy war of disinformation against them for the purposes of bending their will to the demands of persecuting a faraway, pointless war. A war on the altar of which the deceived people were being asked ritually to sacrifice their children, husbands, wives, friends.

This is not the first time that the establishment united in its condemnation of the brave ‘leaker’ who was ceremoniously berated for “putting the lives of service men and women at risk”. It is not even the first time that the bearer of awful truths has been persecuted, imprisoned and maligned.

In this sense, nothing much has changed with Wikileaks. Except of course that, in the era of the internet, Wikileaks manages to flood the world with immense documentation by a few keystrokes on a keyboard, and that the classified documents can be taken out of their well guarded vaults on a tiny USB stick. Volume and speed matters enormously but, at the same time, this generation, while gallantly fighting for the right to know, owes it to its precursors a debt of gratitude for paving the way for them at a time when leaking meant hard, physical labour (endless nights at the photocopier) which, in turn, meant that the ‘subversive’ insider had to take far greater risks.

The precursor to Wikileaks was, of course, none other than Harvard educated economist Daniel Ellsberg (b.1931). His tale is one of uncommon courage, intellectual honesty and, something that is perhaps less known, scientific brilliance with which, unbeknownst even to himself, he hit upon an analytical and empirical result which ought to have put the spanner in the works of neoliberal economics.

History will remember Ellsberg as the establishment figure, the Cold Warrior scientist and policy maker, whose conscience rose up against his own endeavours and performed a remarkable act of defiance; one that undermined profusely the moral and military case for continuing the Vietnam War. The case came to be known as the Pentagon Papers which Ellsberg leaked to the press and which revealed the truth about the fact that the Vietnam War was not only a chaotic, pointless unwinnable carnage but that, remarkably, the powers-that-be had known it to be so for years and yet continued to send young soldiers to Indochina to kill and get killed. What is, however, less known is that Ellsberg had a habit of surreptitiously undermining established falsities.

The subversive experiment

Ellsberg began his career as a RAND scientist who spent some time studying decision theory; the mathematical models whose aim is to establish the rules of rational choices in the face of uncertainty. RAND and the Pentagon cared about these models to the extent that they could furnish advice on how to plan nuclear attacks, on when to strike, on how to pre-empt an enemy etc. At that time, some of the best and brightest worked in or around RAND on these mathematical models, with John von Neumann being the natural leader of the pack.

The importance of these models cannot be understated. Their main party trick was mathematically to convert uncertain choices into clear cut ones. The original idea (due primarily to von Neumann, and later to Leo Savage) was simple: Take every possible option available to the decision maker (e.g. attack Moscow, deploy a nuclear submarine off Vladivostok, or even reduce the price of your product to undermine your competitors) and work out its expected value, once you consider all the relevant probabilities. Then, choose the option with the largest expected value.

Have you ever wondered where the financial engineers who, decades later, gave us the now fabled toxic derivatives got their confidence to calculate exotic numbers, like Value at Risk (VAR), which lulled the banks’ risk managers into idiotic acquiescence to the laughable (supposedly ‘riskless’) risks their golden boys and girls were taking? The answer is: In these very mathematical models that people like Savage and Ellsberg worked on in RAND and at other such Cold War research outfits in the 1950s. All these incredibly smart people believed strongly that their mathematical, expected value, approach was the way to go. All except one: Daniel Ellsberg who soon, from first principles, and out of sheer intellectual honesty, worked out the utter folly of the whole approach. To demonstrate this, he devised a brilliant experiment.

Suppose an urn contains 90 balls and you are told (a) that 30 are red and (b) that the remaining 60 balls are an unknown mix of black and yellow. (Importantly, you are not told how many of the 60 black or yellow balls are actually black or yellow. Indeed, they may all be yellow, all black or any combination of black and yellow.) One ball is going to be selected at random and you are given the following choice. Option I will give you $100 if a red ball is drawn and nothing if either a black or a yellow ball is drawn; Option II will give you $100 if a black ball and nothing if a red or a yellow ball is drawn. Here is a summary of the options:

If you choose Option I, and then

  • A red ball is drawn, you win $100
  • If either a black or a yellow ball is drawn, you win nothing

If you choose Option II, and then

  • A black ball is drawn, you win $100
  • If either a red or a yellow ball is drawn, you win nothing

Make a note of your choice and then consider another two options based on the same random draw from this urn (after the drawn balls have been replaced so that the urn contains the same balls as originally):

If you choose Option III, and then

  • Either a red or a yellow ball is drawn, you win $100
  • If a black ball is drawn, you win nothing

If you choose Option IV, and then

  • Either a black or a yellow ball is drawn, you win $100
  • If a red ball is drawn, you win nothing

Which option would you choose now?

The experiment, in which Ellsberg asked hundreds of intelligent people to make these two choices, revealed that most people select Options I and IV. Ellsberg then pointed out that these results cannot be squared with the mathematical approach (described above) favoured by his RAND colleagues. Why? Let’s see why:

Recall that the RAND mathematicians assumed that, when presented by uncertain options, the rational person will assign a specific numerical value to each and then choose the option with the largest such value. On this interpretation, when a person chooses Option I over Option II, she is revealing an expectation that there must be more red balls in the urn than black (since the number of yellow balls is inconsequential, given that she will win nothing if a yellow ball is drawn from the urn). However, when the same person prefers Option IV to Option III, she reveals exactly the opposite: That she thinks there are more black balls than red balls in the urn. (Why else would she give a higher valuation to Option IV than to Option III?) But this cannot be rational. There is, indeed, no way one can rationalise a belief that there are more red balls than black when choosing between Options I and II and, at the same time, think there are more black balls than red when choosing between Options I and II. After all, it is the same urn containing the same balls.

So, what is going on here? Ellsberg’s simple explanation is that people do not act as his RAND colleagues had expected. That they do not look at their various risky options, attach numerical expected values to each one separately, and then proceed to choose the one with the highest such value. Real people, thought Ellsberg, care about something that the RAND scientists neglected: We do not like ambiguity! To see what this means, recall how when choosing between Options I and II, if the person opts for I she knows the exact probability of winning $100: it is 1 in 3 (since she has been told unequivocally that 30 out of the 90 balls in the urn are red). By contrast, were she to choose Option II, the probability of winning would have been unknown to her (since the proportion of black balls is unknown). Now look again at Options III and IV. Again, when choosing Option IV, one knows the exact probability of winning: 2 in 3 (since 60 out of the 90 balls are not red). In contrast, the probability of winning $100 when choosing Option III is ambiguous (as the proportion of red and yellow balls is unknown). In other words, the choices of I and IV can be explained by an aversion to ambiguity and a preference for options which come with precise, objective, information about the probability of winning or losing. This kind of preference violates the RAND scientists’ logic but can by no means be dismissed as irrational.

This experiment, whose results Ellsberg published in 1961,[1] has come to be known as the Ellsberg Paradox. Its significance is that it reflects a deeper problem with the whole of neoliberal economics; the type of economics that, especially after the end of Bretton Woods, took over not only academia but also the financial sector and economic policy makers in government. Its basic tenet was, and remains, that uncertain choices can be treated as if they are safe ones, once risks have been factored in probabilistically! Riskless risk, in other words. Does this remind you of anything? Of the AAA ratings of the derivatives that blew up in 2008 perhaps?

Ellsberg, it seems to me, had issued an urgent warning that probability assessments inadequately capture the way that uncertainty enters into economic decision-making. Though he did not say so himself back in 1961, at the time of the article’s publication, the experiment above should have sounded alarm bells every time a mainstream, neoliberal model was proposed. Had Ellsberg’s scientific contribution not been ignored by the economics profession, the past thirty years or so might have been different. Alas, intellectual prowess and scientific results like that of Daniel Ellsberg can be safely ignored when the money trail points in a different direction.

The Great Leak

Possibly because of his deep involvement in RAND and the military-industrial complex’s web to which RAND was such an important part, Ellsberg became deeply enmeshed in US government policy viz. the nuclear arms race, the persecution of the Vietnam War, the stand-off with the Soviet Union during the Cuban crisis etc. Because of his unquestionable credentials as a RAND employee and a leading Cold Warrior, he had access to the so-called Pentagon Papers: a vast set of highly classified documents which proved beyond doubt that every US administration knew that the war was unlikely to be won and that casualties would be legion.

Shocked by what he read, Ellsberg started attending anti-Vietnam war meetings. In 1969, in one of these meetings, he encountered a soldier who was determined to go to prison as a stand against the persecution of a mindless war. Coming so close to a flesh-and-blood conscientious objector, a person ready to risk everything just in order to ‘do the right thing’, caused Ellsberg’s epiphany which prompted him to become the US government’s most famous dissident.

With the assistance of another RAND employ, he spent countless nights photocopying the documents one by one. After his attempts to interest legislators in their contents had failed, he leaked them to the New York Times and the Washington Post. The first explosive extracts were published in June 1971. Subsequently Ellsberg was fired from his job and was subjected to a court trial in 1973 under charges that would have him spend more than 110 years in gaol. However, his high profile case, rigorous defending by top attorneys, and some clear evidence of government subterfuge (including a covert campaign to vilify and even injure Ellsberg), eventually led to his acquittal. To this day, RAND and the American establishment have not forgiven him.

Epilogue

While embarrassing and shameful truths are gushing out of Wikileaks, and at a time when our ‘liberal’ states have issued what amounts to a fatwa against Julian Assange, it is important that this generation remembers the pioneers of this intertemporal struggle against misanthropic, industrial scale, obfuscation.


[1] See Daniel Ellsberg (1961) “Risk, Ambiguity, and the Savage Axioms”, Quarterly Journal of Economics, 75 (4): 643-669. Interestingly, and possibly unbeknownst to Ellsberg, his experimental result came close to John Maynard Keynes’ rejection of the notion that, in an uncertain world, rational people behave as if maximising some well defined function involving mathematical expectations.

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