Stumbling and Mumbling

Neil Young, the moon and stock markets

In this fine profile of Neil Young, the great man says:

"When I was in my early twenties I started noticing that the times when we cut the wildest rock'n'roll, I'd go out of the studio and there would be a full moon. Then I noticed that it was waning when things fall apart. It's like musical weather. You can't deal with it." Since 1971, Neil Young has plotted the important events of his creative life — writing songs and recording them — by the lunar calendar. "If you're a writer, writing has to be No 1. That's one of the big rules," says Young, sounding more like the old block than a chip off it. "I never let a schedule drawn up by my manager or family members take precedence over a full moon.

Mr Young might be loony – literally – but he’s not as mad as you might think. This paper shows that phases of the moon can strongly affect stock market returns, because they influence investors’ attitudes to risk.

As another great song-writer, Dar Williams, recognized, the moon does more than tug at the seas and illumine the earth.

A disclaimer. You might think it’s blasphemy to mention Dar and Neil in the same breath as the stock market. You’d be right, if you only regard the stock market as a way of making money. But it’s not. It’s a place for studying human nature. Just like the songs of Dar and Neil.

Economics and freedom

What exactly is the link between economics and freedom? I’m prompted to ask by my gut reaction to the idea of banning drinking on trains and buses – that this is yet another numbskull New Labour assault on our freedoms.

Then I thought; is my instinctive revulsion the typical reaction of an economist? I suspect it is. There are good reasons why economists are more libertarian than others. It surely can be no coincidence that so many great economists, from Smith, Ricardo and Mill to (yes, Anthony) Hayek and Buchanan have been strong supporters of individual freedom. Even the statist Keynes was a social liberal by the standards of his time. (We’ll leave Pareto out of it, and discuss Marx some other time).

The most obvious reason for the link is that economics is the study of the gains from trading. This shows us that freedom to do what we want is not (just) valuable in itself, but also instrumentally valuable.

But there’s more to it than this. There are other reasons why economists are instinctively libertarian:

1. Public choice. Economists believe “public servants” are, like the rest of us, lazy and cowardly. So we don’t trust them to uphold laws in the way law-makers intend. If drinking is banned on trains, policemen and ticket-collectors won’t bother to confront a dozen lairy yobs who are intimidating passengers – that’ll be too much trouble. They'll pick on the weary commuter having a quiet can.

2. People are the best judges of their own actions. This view has of course been strongly challenged recently by behavioral economics – though I’ve yet to see a cognitive bias that the general public has but government doesn’t – but it’s still economists’ default view. So, when we see someone drinking, we don’t see someone about to become a violent menace. Instead, we see someone who can hold his drink, as most people (and all true Englishmen*) can.

3. Behaviourism. Economists believe behaviour matters, not character. We believe drunkenness – insofar as it troubles others – is a problem. But the disposition leading to drunkenness doesn’t trouble us. Economics is about finding ways to internalize externalities – not about peering into the human soul.

4. Limited ambition. Economics takes human nature as it is. When we think about how to improve society, we ask: what institutions (like the price mechanism) can harness human venality – greed and laziness – for beneficial purposes? We don’t wonder how to straighten the crooked timber of human nature.

It’s here, I suspect, that the big difference lies between us and New Labour’s managerialism. Economics recognizes that there are limits to what governments can do – let alone to what they should do. Managerialists don’t see such limits.

* This is true by definition - even of Oliver Reed.

Bad market reporting again

The Telegraph carries, inadvertently, a nice catalogue of errors in stock market reporting.

Error one is a US-centric view of market history. The Torygraph claims that the fall in the US market between 1929 and 1932 was “the greatest stock market collapse in history.”

As Tim Worstall rightly says, the St Petersburg market did worse in 1917. And this is not the only instance. This paper by Will Goetzman and Philippe Jorion points out that of 24 markets open in 1931, only seven continued to trade uninterrupted. The Hungarian and Czech markets shut permanently, and the suspension of the Japanese market between 1944 and 1949 was accompanied by a real loss of 95%.

Plenty of markets, then, did worse than the US in the Great Depression. This is no mere pedantry. Because the US market has been the world’s best performer over the long-run, investors who pay too much attention to it over-estimate long-term returns. Goetzmann and Jorion estimate that global markets in the 20^th century post annual real increases of just 0.8 per cent. Those that did better than this did so to compensate for the big risk of catastrophe.

The Torygraph’s second error comes in this piece, pointing out that October’s 5.2% drop in the FTSE 100 is the market’s “worst month of trading since before the Iraq war.”

What the piece doesn’t say is just how likely 5.2% monthly drops are. Bank of England figures suggest that, at the start of this month, investors thought there was a roughly 10% chance of such a move – and this probability was unusually low because implied volatility was unusually then.

“9 to 1 shot comes in” wouldn’t make the headlines on the racing pages. So why should it do so on the stock market pages?

A third error is giving credence to the waffle of self-appointed “experts”:

Analysts and fund managers in the City are relaxed. Most predict that this is merely a pause in the current bull market.

This tells us nothing. Shares are risky. They should therefore be expected to out-perform cash – that is, to rise. These experts tell us nothing that common sense couldn’t tell us. An interesting question is: is there any more predictability in the market than this? Neither the Torygraph nor the "experts" tell us.

A final error is another omission. There’s no proper analysis of this month’s fall at all. The question you should ask about any market drop is: does this reflect a genuine worsening in the outlook for profits and dividends? Or does it reflect an increase in the perceived riskiness of the market?

The difference is crucial. The former is a genuinely bad thing for investors. The latter, however, means that expected returns have risen, to compensate for the extra riskiness.

With market reporters unable to grasp this distinction, it’s no wonder that the dead trees urge people to buy stocks at the top of the market and sell at the bottom.

In praise of provincialism

Inspired by Rob Jubb, I’ve changed this blog’s tagline. I don’t just accept the charge of being a provincial oik, I celebrate it.

Being a provincial oik means rejecting what is distinctive about the metropolis – hierarchical centrist personality politics, and the meeja that’s obsessed with them. It means, as Voltaire’s Candide put it, cultivating one’s own garden, rather than building power, wealth and the esteem of imbeciles. We provincials prefer, in MacIntyre's words, the goods of excellence to the goods of effectiveness.

Thomas More’s Raphael was a provincial. He rejected calls to become a political advisor:

Privy Counsellors are either too wise to need, or too conceited to take advice from anyone else – though of course they’re always prepared to suck up to the king’s special favourites by agreeing with the silliest things they say…Suppose in such company you suggest a policy you’ve seen adopted elsewhere, or for which you can quote a historical precedent, what will happen? They’ll behave as though their professional reputations were at stake, and they’d look fools for the rest of their lives if they couldn’t raise some objection to your proposal (Utopia, p20 in Penguin edition)

Not much has changed in the last 500 years.

What’s more, the notion that the metropolitan elite are genuinely outward looking is just a sham. The stereotypical Londoner has been to India and “learnt so much about myself.”

As Drink-soaked Trot Douglas and To the Tooting Station both point out, the war in Iraq matters inside the Washington beltway or London meeja village only insofar as it affects Bush’s opinion poll ratings. The metropolitan elites don’t care about 25 million Iraqis in themselves.

Of course, many people do genuinely care about Iraqis – but you’re as likely to find these in provincial Manchester as in London.

Metropolitans are insular in another way. In London, to a greater degree than elsewhere, people choose their friends, colleagues and even neighbours. As a result, they end up surrounded by people who merely echo their own prejudices and obsessions. In this sense, metropolitans are more insular than provincials. G.K. Chesterton put this well:

The man who lives in a small community lives in a much larger world. He knows much more of the fierce varieties and uncompromising divergences of men. The reason is obvious. In a large community we can choose our companions. In a small community our companions are chosen for us…A big society exists in order to form cliques. A big society is a society for the promotion of narrowness. It is a machinery for the purpose of guarding the solitary and sensitive individual from all experience of bitter and bracing human compromises…It is quite proper than a British diplomat should seek the society of Japanese generals, if what he wants is Japanese generals. But if what he wants is people different from himself, he had much better stop at home and discuss religion with the housemaid. (The Essential G.K. Chesterton, p76-79.)

You’ll object here, rightly, that I’m romanticizing provincialism. Small towns are in practice often petty-minded and intolerant. But big cities aren’t tolerant – just indifferent. And they just put a thin disguise on their petty-mindedness.

What I’m saying is that I prefer the ideal of provincialism – and in particular the rejection of power politics - to the ideal of metropolitanism.

Is education a positional good?

Mick Hume rails against the idea of increasing “parent power” in schools:

All sides appear to share the underlying assumption that increased parental involvement in schools is an intrinsically good thing. The results, however, have been rubbish.

One important issue he omits here is: why do parents want a good education for their children? The answer isn’t obvious. There are two possibilities.

One is that parents want their children to develop into a well-educated cultured persons. The other is that they want them to “get on in life.”

The distinction matters. You can get on in life with a poor education, if everyone else’s is even worse; in the land of the blind…But the former requires genuinely good schooling.

If parents see education just as a positional good, they’ll be happy with a poor school, as long as it’s a relatively good one. Why should public policy pay any heed to this preference?

Worse still, this paper (pdf) suggests that over a third of people do regard education as a positional good.

Here’s my challenge. Say I were to claim the following: lots of middle class parents care only about the relative quality of their child’s education, not it’s absolute level – they’d prefer a bad school for their kids with every other school even worse to a good school with every other school just as good. What evidence could you provide to prove me wrong?

The perversion of egalitarianism II

A truly bizarre article in the Guardian by Dylan Evans (via Marcus). He says:

Thomas More, Tommaso Campanella, Francis Bacon and Karl Marx all painted pictures of a future in which there is a strong sense of community, in which work is fulfilling and leisure is used wisely and creatively. Now, at the dawn of the 21st century, this long tradition of idealism has all but vanished. We have no vision - just the paltry consolations of consumerism….We grow up in increasingly fragmented communities, hardly speaking to the people next door, and drive to work in our self-contained cars. We work in standardised offices and stop at the supermarket on our way home to buy production-line food which we eat without relish. There is no great misery, no hunger, and no war. But nor is there great passion or joy. Despite our historically unprecedented wealth, more people than ever before suffer from depression….it is time we devoted more thought to the questions that Plato, More and Marx placed at the heart their utopias; the question of how to make work more rewarding, leisure more abundant, and communities more friendly.

Great stuff. I like to think it’s the sort of thing I’d write in my purpler periods. But stuck amid it is this clunker:

It is this complacency, this lack of idealism, that is in part responsible for the repugnance with which Muslim extremists view western society.

Eh? Eh? Correct me if I'm wrong, but when Mohammed Atta steered that plane into the World Trade Center, he wasn't declaring the merits of workers' co-ops or a shorter working week.

And even if he were, it wouldn't matter. The case for a less consumerist, less alienated, society is strong just as it is. It’s got nothing whatsoever to do with the opinion of a few religious bigots. Just because people have got bombs doesn’t mean they have anything worth listening to. Why pretend otherwise?

Is Mr Evans committing the journalists’error of giving credence to strongly expressed views, even when they have no merit at all?* Is he the victim of some sort of totalizing vision, believing that everything must come back to Islamists? Or is this another example of the perversion of egalitarianism?

* The counterpart of this error is even worse - of ignoring good opinions simply because they are not backed by power.

The perversion of egalitarianism

Three items:

1. George Galloway’s support for Saddam Hussein and Bashar Assad.

2. Banks’ proposals to ban piggy banks because they are offensive to Muslims.

3. A court orders a law firm to re-employ a manager it was employing for two and a half days on a salary of £36,000 a year; the manager was supported in the case by the Equal Opportunities Commission.

These instances – and there are many like them – are linked. They are symptoms of the perversion of egalitarianism.

Those of us who consider ourselves egalitarians do so because we find it offensive that people can suffer disadvantage through no fault of their own. But the project of correcting these disadvantages has been perverted into support for dictators, the upholding of managers’ privileges, and making gestures to religious bigots.

Why has this happened? It’s tempting to dismiss these cases as examples of individual idiocy. But there are deeper forces perverting egalitarianism.

1. Egalitarians have faith in the power of the state to transform peoples’ lives. This faith can slip into a respect for power and then into an idolatry of it. This little story from Frank Johnson illustrates the “socialist” mindset that gives us Galloway’s power-worshipping:

Officially, when a taxi arrives, MPs are allowed to assert precedence over non-MPs. The only one I have ever seen do it was [Tam] Dalyell. He said something to me like, "MPs do come before."

Even when egalitarians have admirable aims, their power-worshipping can pervert these. Here’s Stuart Hodkinson on the Make Poverty History campaign:

The failure of MPH to achieve its political demands cannot be laid at the door of Oxfam, Geldof and company alone. By being too dependent on corridor-lobbying, celebrities and the media, by failing to give voice and ownership of the campaign to Southern social movements, by watering down the radical demands agreed upon by hundreds of grassroots movements, from both the South and North, at the World Social Forum, and by politically legitimising the G8 summit, the campaign was doomed from the start.

2. Even the democratic instincts of the Left needn’t be egalitarian. The groups that get organized and hence get power aren’t necessarily the most deprived. Indeed, the worst disadvantage often consists precisely in not having a voice or organization.

Equality is therefore most easily achieved by those whose need is least. Women in management positions can successfully redress perceived inequalities. The mentally ill, the starving Africans, the slaves shipped here illegally cannot.

3. We all are vulnerable to a halo effect, whereby we see people who are bad in one dimension as bad in all. The bad guys in films are not only uglier than the good guys, but worse shots too. This means the left sees all aspects of western civilization as repressive, whereas only some are. Hence the ridiculous idea that piggy banks are offensive.

These problems – some of you might add others – aren’t accidental features of the left. They’re too common for that.

But they raise a troubling question. Can a true egalitarian project ever succeed, or must it always be perverted by power-worshippers, irrationalists and special interests? A purely empirical answer would be unequivocal.

Evolution and irrationality

Owen points out this survey, showing that only 15% of Americans believe the theory of evolution. I don't think we European secularists should laugh at them. There's only a small difference between lay believers in evolution and creationists.
Put it this way. I couldn't persuade a reasonably open-minded person that evolution was true. I could tell a story, but when it came to producing hard evidence - dating fossil records and suchlike - I'd fail. I'd just have to point them towards experts.
My belief in evolution - and for that matter in most scientific ideas - rests, therefore, upon trust. The difference between me and the average lay creationist isn't that I'm more scientific and rational than him; I suspect many believers in intelligent design could run rings around me. It's that I trust scientists whereas he trusts priests. The basic foundation of our beliefs is the same: "I believe x because y, whom I trust, says so." Both of us rely on the heuristic of social proof.
This is the natural result of the division of labour. There just aren't enough hours in the day for us to verify (non-falsify?) every claim scientists make.
That said, there is a difference.  Scientists could prove their results to me (and to my hypothetical open-minded interlocutor) using methods we could mutally approve. Priests could not do this.
But how big is this difference? From the point of view of the priests and scientists themselves, it's enormous; they use completely different methods.
But from my point of view, the difference is smaller. I'm trusting that scientists do use "scientific" methods - that they don't fiddle their results, that peer review actually works, and so on. I'm using faith, just as religious people do.
This, I think, helps explain why so much science reporting is so bad. Journalists put their faith in scientists as other put their faith in priests - and invite their readers to do the same. Worse still, sometimes they shop around for the faith they  find most convenient.
The bottom line, then, is that we get many of our beliefs from socialization, faith and wishful thinking - not from rational "scientific" inspection of evidence.
In the case of science, this doesn't much matter in one sense; evolution is true (or not), whether or not anyone believes it.
In the case of political and moral views, though, it does matter. These determine the society we live in and the government we get. 
How worrying is this?

What can Bernanke achieve?

All good judges have welcomed Ben Bernanke's appointment as Fed chairman. It's a good time, then, to ask: just how much influence over the economy can he have?
The conventional view is that monetary policy affects aggregate demand, not aggregate supply. It therefore affects the size of economic fluctuations, but not long-run growth, as this is determined largely by technical progress and education, over which the Fed has little influence.
However, two papers published last year by Tamim Bayoumi and Siliva Sgherri challenge this. They show that monetary policy can affect supply, as well as demand.
The idea here is that the credibility of monetary policy affects inflation rigidities. When the private sector is uncertain about future demand and interest rates, inflation feeds on itself. If firms don't know what the future holds, they carry on doing what they've done in the past. But when monetary policy is more credible, this nominal inertia declines. Prices become more flexible. And the more flexible the price system, the healthier is the supply side of the economy.
This story has crucial implications:
1. The greater stability the US economy has enjoyed since the 1980s isn't due to good luck as James Stock and Mark Watson have claimed, but to better monetary policy.
2. It justifies why monetary policy-makers place so much emphasis upon the "art" of policy-making - that is, credibility and communication. These things can affect nominal rigidities. The scientistic approach to policy-making, with its focus upon rules, ignores this. 
3. The "classical dichotomy" - the belief that monetary policy affects only monetary variables in the long-run - is wrong. Monetary policy can have long-run effects on real growth.
4. If monetary policy can affect long-run growth, the welfare costs of bad policy are far higher than appreciated; Robert Lucas has argued (controversially but FWIW I think rightly) that cyclical fluctuations have trivial costs (pdf) compared to changes in trend growth.
Now, I have no view about the validity of all this. But if Bayoumi and Sgherri are right, Mr Bernanke is playing for higher stakes than economic orthodoxy would suggest.

Drink, crime and clergymen

On today's Thought for the Day, John Bell railed against the evils of drink:

What do you think would happen if it were discovered that 50% of the prison population in Britain had been helped on the road to crime because of one identifiable food additive which had an adverse effect on behaviour?...So why do beer glasses not have a sign which states: 'Alcohol may lead to criminal activity of a violent nature, dangerous driving and lasting damage to the liver.'?

Mr Bell might not be abusing drink, but he's abusing statistics. Let's rejig the numbers. On one estimate, there are 9 million problem drinkers in the UK, out of an adult population of 48 million. Let's assume that all the prisoners Mr Bell describes are drawn from this 9m.  This is reasonable. After all, if drink lands you in chokey, you've a drink problem.
Now, last week there were 77,774 people in prison. On Mr Bell's figures, 38,887 of these have a drink problem and 38,887 do not.
So, we can say that the proportion of problem drinkers in prison is 38,887 in 9 million. That's 4.3 per thousand. The proportion of non-problem drinkers is 38,887 in 39m, or 1 in a 1000.
Now, you can argue around these figures, but I reckon they're ball-park OK.
So, you could say problem drinkers are more four times more likely to end up in prison than non-problem drinkers. Or you could say that 996 in 1000 stay out of prison.
I don't think either figure justifies Mr Bell's complaints.
What's more, I suspect there are many behaviours more correlated with crime than heavy drinking; Theodore Dalrymple once claimed that all criminals were smokers. And what about tattoos?
I mention this not merely to be an anorak. We are approaching the 242nd birthday (on November 10) of the original statement of Bayes theorem; it's this pdf. It seems the statistical prowess of our clergymen has not improved in this time.