Stumbling and Mumbling

Human nature & economic recovery

Norm alludes to the thesis that there is no such thing as human nature. Coincidentally, though, two recent papers suggest that a common nature might contain fewer features than generally thought.
First, Joe Henrich and colleagues show (pdf) that there is significant variation in behaviour across peoples. For example, whereas Americans are prone to the Mueller-Lyer illusion - which line is longer in my picture? - foragers in the Kalahari are not. Also, results of ultimatum game experiments differ hugely across tribes, with Americans making much higher offers than the Hadze in Tanzania or Tsimane in Bolivia.
In many ways (not all), he shows, our idea of what is “human nature” is in fact drawn from a very unrepresentative sample of “weird” (western, educated, industrialized, rich and democratic) people.
Secondly, this paper (pdf) by Roberta Dessi and Xiaojian Zhao contrasts North Americans to Japanese. North Americans value self-esteem and are prone to overconfidence, whereas the Japanese are much less so. To the Japanese, shame plays a bigger role than it does for North Americans.
But here’s the thing. These different attitudes can both be efficient, depending upon the type of economy one has.
This is because there are costs and benefits to overconfidence. The benefit is that overconfident people are more likely to engage in new ventures - to change jobs, start new businesses - because they exaggerate their chances of success. The cost is that such people under-invest in self-improvement: why bother with learning and practice when you‘re so smart and talented anyway, and when your so-called failures were just bad luck?
This implies that overconfidence will be a virtue in a dynamic economy, when there is high labour turnover and lots of changes of ownership of companies - because there‘ll then be lots of new ventures. It will, however, be a vice in more stable economies where incremental improvements are necessary.
And here’s a coincidence. Traditionally, the US has had more turnover - shorter-lived jobs and ownership - than Japan. Its tendency to overconfidence is therefore a benefit. By contrast, if there are jobs for life, shame is efficient - as the fear of looking bad stops people shirking and encourages them to self-improve on the job.
In this sense, the US and Japan have both been efficient equilibria - overconfidence works well in a dynamic economy; shame works better in a stable one.
It is, however, an open question as to whether the economy adapts to character or character to the economy, or both.
Here, though, lies a thought. Could this be a reason to hope that the US can escape Japan’s “lost decade(s)“ fate?
What I mean is that banking crises require economies to become dynamic. They require capital and labour to shift to new uses, and radical policy changes from government and corporate management. Could it be that the Japanese lack of overconfidence prevented this, whilst Americans’ overconfidence will facilitate it?

Fallible preferences & universities

Catherine Bennett bewails the notion that higher education will become “a market, whose expansion, we learn, will be dictated by student choice.”
Although Tim gives this short shrift, Ms Bennett - underneath the snobbery - has a point. There is something dangerous about letting customer preferences hold sway over universities.
There are three inter-related problems here:
1. We know that people are poor predictors of their future tastes, often because they fail to anticipate sufficient variation in them.
2. Young people especially change. What we want at 21 isn’t necessarily what we want at 17.
3. Education, if it is any good, changes who we are. It therefore should change our preferences.
All this was certainly true of me. When I arrived at Oxford, I planned to drop economics at the earliest opportunity, and to become a lawyer. Things changed. I don’t think I was atypical; are students’ career ambitions really the same at 21 as at 18?
This raises the question. What features would universities have to possess to recognize the fallibility of the preferences of their customers?
The answer is not, surely, that they merely serve the interests of their producers. I’d suggest three principles:
1. Flexibility. It should be easy for students to change subjects as their interests evolve. This argues for joint honours and modular courses.
2. A priority on teaching. Francis says this is a low priority at the moment. But it shouldn’t be. The job of universities, surely, should be to inspire their students, not merely to turn out the next generation of researchers.
3. A non-utilitarian perspective. Chris says:

The study of any subject at a higher level ought to give people both an enhanced sense of their own powers and a glimpse of dimensions of value and achievement other than enhanced consumption.

Paradoxically, there is, I think, a narrow economic justification for this. 20-year-olds cannot predict the specific skills they’ll need in the labour market in 10-20 years time. This is not just because they don‘t know what jobs they‘ll have then, but because they don‘t know how occupations will change. For this reason, there’s a huge danger that purely vocational skills will quickly date. Instead, the key is to teach them more general skills: how to interpret evidence; how to write, and so on. One good way to do this is to give them a rigorous education in anything; how else do you explain the economic success of Oxford classics graduates?
Now, I’m not going to pretend to be sufficiently expert here to say how much universities need to change. I’ll just point out this paper by Bruno Frey, which argues that, on current trends, universities might collapse anyway.

The X Factor & the Easterlin paradox

Watching the X Factor last night, the question occurred to me: does this help explain the Easterlin paradox?
Compare the pop music of your youth - the Stones, Bowie, the Smiths,  Nirvana, whatever - to the X Factor “product”. One is life-changing music you’d listen to endlessly. The other is something thrown into a Tesco trolley to be heard once or twice before the listener tires of it.  
This highlights a conflict between consumer surplus and GDP. Form the point of view of consumer surplus, it might well be better for one CD to be bought and heard ecstatically 100 times. But from the point of view of GDP, it’s better for 10 CDs to be bought and heard tolerably a couple of times.
In this sense, Simon Cowell is good for GDP - he’s getting CDs sold in Tescos which never happened in “our day” - but he’s bad for life satisfaction. Pop music is no longer the source of well-being it once was; the marketing effort is diverted towards the next Joe McElderberry and away from genuinely exciting acts.
What’s going on here is a process of monetizing consumer surplus. When this happens, GDP increases, but satisfaction falls. This is because consumer surplus doesn’t feature in GDP, but profits and units sold do.
Here are some other examples of the process: 
- Supermarkets want customers to use self-checkouts. Consumer surplus falls, but profits rise.
- Football clubs charge much more for tickets, thus transferring consumer surplus to revenue.
- Computer games no longer come with a printed manual, but rather with a pdf document we have to print ourselves.
- Banks want us to deal  with call centres rather than face-to-face humans.
- Low-cost airlines increase their profits by making the travelling experience as unpleasant as possible.
- Cheap clothing sells well, but partly because it falls apart so quickly and so needs replacing, whereas well-made clothing doesn’t: I have suits which are older than the Saturdays - and I can get into them, which is more than I can say for the Saturdays.
Through mechanisms such as these, GDP grows because consumer surplus falls. The Easterlin paradox is, then, no paradox at all. Economic growth happens precisely by reducing satisfaction. A successful business is not one in which a customer pays £10 and goes away ecstatic, but one in which he pays £20 and goes away just content enough to want to come back. A lot of corporate strategy consists in converting the former business into the latter.
There are, of course, offsetting mechanisms here. Technical progress increases consumer surplus: compare Sky+ to VCRs, or just think how much you get off the internet without paying. And, of course, the threat of competition sets a limit to how far consumer surplus can be monetized; the X Factor did not prevent the emergence of Lady Gaga. And  in some cases, what’s going on is not so much a rise in GDP as an increase in profits at the expense of wages, a by-product of which is falling consumer surplus.
The thing is, I’m not sure that these factors entirely offset the process I’ve described. Insofar as they don’t, growth occurs at the expense of happiness.
* The paradox might not actually exist (pdf). But this doesn’t affect my argument, which is merely that there are some aspects of economic growth that inherently reduce well-being. 

Christine Bleakley & labour market imperfection

The falling audience for ITV’s Daybreak highlights a failing in the labour market.
ITV hired Christine Bleakley and Adrian Chiles on multi-million pound salaries in the belief that they had the talent to attract viewers and advertising revenue. But it seems they don’t have such a talent.  Their popularity at the One Show was due not to their own skills, but to organizational factors: the fact that the One Show’s viewing figures have increased since they left corroborates this.
And here’s the thing. ITV’s error is a widespread one. Employers often mistake individual talent for organizational talent, and so pay huge salaries which are in fact unjustifiable. This is a form of the fundamental attribution error.
Here are some other examples of how "talent" (or lack thereof) exists in organizations rather than people:
1. Football coaches often go from idiot to genius or vice versa as they change team. Fabio Capello seemed a great manager for most of his career - until he arrived in England. Ian Holloway was a mediocrity at Leicester but a massive success at Blackpool, and so on.
2. Boris Groysberg has shown that when Wall Street star equity analysts change firm, their performance plummets. This shows that their success is due to organizational features: corporate culture, colleagues and so on.
3. Traders at investment banks owe their success not (just) to their individual skills, but to their employers’ assets: the ability to borrow cheaply and proprietary knowledge about order flows. This is why so few go off to trade on their own account.
4. This paper (pdf) shows that cardiac surgeons’ performance changes when they move hospital:

The quality of a surgeon's performance at a given hospital improves significantly with increases in his or her recent procedure volume at that hospital but does not significantly improve with increases in his or her volume at other hospitals. Our findings suggest that surgeon performance is not fully portable across hospitals.

The message, then, is simple. What looks like individual skill is often, in truth, an artefact of organizations.  However, because employers fail to appreciate this, they over-pay for “talent”. And this causes wage inequality to be greater than is rationally warranted.
This in turn has adverse effects. Some new research (pdf) shows that when workers know the distribution of pay within an organization, the worse-paid workers feel less job satisfaction, whilst the better-paid ones don’t feel happier. In this sense, wage inequality - or at knowledge of it - reduces utility.

Hicks & Gillett: ownership in question

The Hicks-Gillett saga shows that, despite the impression given by Jimmy Tarbuck and Stan Boardman, great comedy can come out of Merseyside. It also throws into question the standard view about the ownership of assets generally (I’d call it the neoliberal view if I were a pretentious git.)
This says that it is efficient for the ownership of an asset to go to the highest bidder. This is because the very act of bidding most for an asset suggests that a man knows best how to maximize its value. A free market in assets, then, ensures that assets go to those best able to manage them.
Hicks and Gillett’s mismanagement of Liverpool, however, shows that this story isn’t right all the time; highest bidders - as they were once - can make a horrible mess. Which raises the question: what is wrong with this standard story? Four things:
1. Over-confidence.  It’s well-known that bidders can overpay for assets - the winner‘s curse is a cliche. This is especially likely when those bidders are entrepreneurs who have been successful in other businesses. Such men are selected twice over for their overconfidence. Once, because the very act of becoming an entrepreneur in the first place betokens an overconfidence. And twice, because previous success further raises that confidence and breeds the belief that the ability to own baseball clubs or mobile phone shops gives one the ability to own a football club.
Ownership, then, doesn’t flow to the most competent potential owner, but to the most deluded.
2. Ownership does not confer genuine power. In the case of football clubs, real power - the ability to extract cash - lies with players, not owners; Alan Sugar called this the prune juice effect. Similarly, in banks shareholders lacked power to control excessive risk-taking.
3. The collective action problem. The people with the best knowledge or incentive to manage an asset might be a dispersed group; fans in the case of football clubs or employees in the case of other companies. Organizing such a group, however, can be prohibitively tricky.
4. Capital constraints. The standard view assumes that the people best able to maximize an asset’s value will be able to raise the cash to buy it. But this needn’t be true. Even the wealthy Red Knights were unable to put together a bid for their club, so it was always going to be impossible for Liverpool fans to do so, with one job between them. And of course, the point here extends way beyond football clubs.
These four difficulties undermine the standard argument for a free market in ownership - though how much so, and in which assets, is a matter for debate.
Herein, though, lies a curious thing. In a post-crisis economy, capital constraints are more salient than they have been for years, and there is more interest than before in cognitive biases such as overconfidence. You would imagine, therefore, that the question of how to determine efficient ownership would be more hotly debated than in the past. But this does not seem to be the case.
Which I guess only goes to show that arguments that call into question the legitimacy of capitalism don’t get the airing that they should. 

The weakening labour market

The BBC reports:

Across the UK the number of people employed increased by 178,000 in the three months to August, the ONS said.

Sounds good. A more detailed look at the data, however, suggests a bleaker picture.
First, of those 178,000, 43,000 are the newly self-employed. A sector that accounts for only 10% of employment accounted for 24.2% of employment growth. Now, if this is an increase in entrepreneurial spirit, fantastic. I suspect, however, that it is partly people re-labeling themselves as freelancers or consultants, or setting up tiny businesses that don’t pay as well as full-time jobs. Such people are frustrated  employees.
Secondly, a further 123,000 net new jobs are part-time. More than half of these new workers - 65,000 - are working part-time because they can’t find a full-time job.
Thirdly, the number of full-time employees fell by 17,000 between March-May and June-August.
None of this is a sign of a strong labour market - quite the opposite.
Worse still, things seem to have gotten worse just recently. If we compare the May-July data to the June-August data - which is not in today’s press release but readily available in the time series archive - the number of full-time employees fell by 52,000, the second biggest monthly fall since June 2009.
This is consistent with the rise in employment associated with Q2’s boomlet in GDP now going into reverse - a possibility corroborated by the rise in claimant count unemployment in the last two months and by the 30,000 fall in the number of vacancies between Q2 and Q3. It is also, however, consistent with the possibility that  actual employment never really increased that much and that the figures were flattered by a bit of luck in the sampling process.
Given all these signs of weakness, it shouldn’t be surprising that the wider measure of unemployment - which adds to the formal unemployed part-timers who’d like a full-time job and the economically inactive who want to work - rose in June-August. This now stands at 5.99 million, or 15% of the 16-64 year-old population.
Another thing. 44,000 of the 178,000 rise in employment was in the over-65 age group, even though these account for only 2.8% of all employment. This suggests there are growing numbers of people wanting to top up their pensions with work - which is hardly a sign of a prospering economy.

Green: interests vs preferences

It’s widely thought that workers’ preferences and interests might not coincide. But the same might be true of capitalists. That’s one possibility raised by the Green report (pdf) on government procurement.
He complains that “the Government is failing to leverage both its credit rating and its scale”. He wants the government to cut costs by paying its suppliers later and to increase its bargaining power by centralizing procurement. In other words, the government should behave like businesses do: “There is no reason why the thinking in the public sector needs to be different from the private sector.”
However, the savings government would make from this will come at the expense of companies’ cashflow and profit margins. Capitalists’ preferences - that government behave like business - are therefore possibly inconsistent with capitalists’ interests, that government help them maximize profits.
I say “possibly” because some of the pain of lower profit margins would be passed onto workers in the form of lower pay. It’s unlikely, though, that all of it would be.
It’s also possible that, as the government cuts spending, private spending will increase to offset the loss of profits. At a time when the banking system is Donald Ducked, however, believing in this requires one to believe in the magic money fairy.
Now, I’m in favour of cutting capitalists’ welfare state. But let’s be clear. This is what Sir Philip is advocating. And if the cuts are not offset by increased spending elsewhere - and they won’t be - they are bad for profits.

Single bloggers

Lots of people have had fun with these remarks from Andrew Marr. But there’s something that strikes me as very odd:

A lot of bloggers seem to be socially inadequate, pimpled, single, slightly seedy, bald, cauliflower-nosed, young men sitting in their mother's basements and ranting

It’s that use of “single” as a term of abuse.
The thing is, I’ve been single all my life and I’ve often thought that this was, if anything, an advantage in writing. This is simply because I’m single because I don’t fit in - where the hell would I find someone I had anything in common with?* - and this not fitting-inness gives me an orginalish perspective. My singleness and my post-ambition anti-managerialist Marxism are two sides of the same coin.
So, why does Marr think it a bad thing in a writer to be single? I’d suggest two hypotheses - which are perhaps related to the curious fact that Cabinet ministers are disproportionately married.
First, the job of the newspaper columnist is not to be original, but to echo the readers’ prejudices. This is much better done by someone who fits in, who is a simple, marriageable stereotype; Polly Toynbee and Simon Heffer are identical in this respect.
Secondly, the job of the columnist is to pitch it strong - to overlook ambiguous evidence and bounded knowledge, and to not express self-doubt. And the confidence that comes from being married - or at least from being marriagable - helps in this respect.
Which brings me to a piece in the Times by Rachel Sylvester. She tells us that Labour must restore its “lost reputation for economic competence.” What she doesn’t ask is: how can she possibly judge economic competence when she kicks off by using the meaningless phrase “neo-endogenous growth theory”? 
Such a mixture of ignorance and arrogance is, I’d suggest, more likely in a married person than a singleton. Which is why being single is so abhorrent to the self-appointed metropolitan elite. 
* It could be that my expectations are infinitely too high, as I’m looking for someone one-millionth as good as this.

Freedom, rationality & religion

Freedom makes us happy. When we can, we choose what makes us happy. Religious belief is irrational.
Most readers of this blog would, I guess, subscribe to these propositions. This new paper, however, challenges all three.
The authors studied the effects upon happiness of the repeal of laws against Sunday trading in US states, using states where there was no change in the law as a control group.  They found that such repeals reduced church attendance - which is only to be expected because some people chose to go shopping instead.
However, these repeals also led to a fall in self-reported happiness. “Pah, coincidence” you might think. But here’s a queer thing - the people whose happiness fell most happen to be the same people whose church attendance declined most - white women. This is not because they had to work Sundays instead.
This, the authors claim, helps explain what Betsey Stevenson and Justin Wolfers have called the paradox of declining female happiness.
It does, however, flatly contradict the ideas I began with.
1. If freedom enhances subjective well-being, you’d expect the repeal of Sunday trading laws to have increased happiness. It didn’t.
2. Some people, it seems, systematically make choices that make them unhappy - choosing to go shopping rather than to church. This corroborates work by Dan Haybron and Christopher Hsee (eg this pdf), suggesting that our choices can be systematically bad.
3. Religious belief is rational, in the sense that it makes us happy. The raw correlation between church attendance and happiness - which the above suggests might be at least in part a causal link - is striking. Averaged over the 1972-2004 period, 17.4% of Americans who never attend church say they are not happy, compared to only 8.9% of those who attend at least once a week.
This draws attention to an ambiguity in the nature of rationality. On the one hand we - at least economists - think that rationality consists in choosing that which maximizes our utility. By this criterion, religious belief seems rational. But on the other hand, rationality consists in having beliefs which are consistent with evidence. By this standard, the rationality of religion is less obvious.
Of course, there is no reason to suppose that religion is the only context in which there is a conflict between act-rationality and belief-rationality.

Expertise in politics

"You don't need to be a professor of economics to be a Treasury minister" says Alan Johnson. I agree. Expertise has no place in politics.
I say this not because I’m some pompous prat who thinks “judgment” matters, but for three reasons.
1. Politics - at least in opposition - is not about getting the right policy, but about getting the right position. Expertise can be positively harmful here.
For example, if Osborne’s cuts do lead to a “double dip”, Labour will win votes merely by having warned that he was cutting too fast; full-blown Ballsian opposition to the cuts probably won’t get any more votes, even though it would be proved to be the more correct position. Hotelling’s law applies here.
2. What matters in a politician is that he “connects” with the public. And here again, expertise is a handicap. It marks one out as a pointy-headed intellectual. Whilst the public are happy to be ruled by people much richer than them, they don’t want to be ruled by those much smarter.
It’s generally agreed that, in this context, Johnson is better than Balls. As Leigh says:

Alan Johnson's real job, in fact, is simply to make George Osborne look young, inexperienced and flustered

3. Politics is not about economics tutorials. Political journalists can’t or won’t understand anything more than a soundbite, so giving them a lengthy lecture about economics makes as much sense as reciting poetry to a pig. As someone once said, in politics, if you have to explain you’ve lost the debate.
Instead, the job of shadow chancellor is to come up with what Tanweer Ali calls “simple frames” - easily-understood narratives and soundbites. And as Paul says, Johnson might be better at doing this than Balls precisely because he is not trapped by any knowledge.
These points do not apply merely to Johnson. As Jonathan says, Miliband has applied the no-expertise principle quite widely: Yvette Cooper has no background in foreign affairs and Balls little interest so far in home affairs.
There is, however, a cost here. Excluding expertise from politics has a conservative bias, because radical critiques of hierarchical capitalism require in-depth understanding, and cannot be reduced to mere slogans (they often are, but those slogans don't work).
But then, the function of managerialist politics is precisely to uphold the existing order.