Stumbling and Mumbling

Martians in politics

The Economist's Bagehot highlights a paradox in the meeja's portrayal of Gordon Brown:

His Scottishness will reinforce the view that, even more than most politicians, Mr Brown is a sort of intellectual Martian. In fact, with his state-school education and up-by-the-bootstraps philosophy, he can arguably claim to have more in common with some of the semi-mythical denizens of Middle England than did suave, metropolitan Mr Blair.

Or, we might add, David Cameron, who has inherited £30 million and got his first job thanks to royal connections.
Which raises the question. Why is Brown so often seen as out of touch with ordinary people whilst Cameron and Blair (who was educated at Fettes where fees are £22,326 a year, equal to median annual earnings (pdf)) are regarded as in touch?
The problem here is not just an idiosyncratic problem with Brown. David Miliband is often described as a geek or swot, despite being one of the most personable men I've ever met. Nor even is it a Labour problem; David Willetts, who went to a direct grant school, is almost always regarded as an out-of-touch intellectual.
So, what's happening here?
One possibility is simply that anyone of above-average intellect will look like a freakish genius next to the average journalist; hey, I owe my livelihood to this trick.
Another is that the public schoolboy media (which includes some bloggers as well as the dead trees) think that intelligent state school people have even less right to be in politics than women.
Another is state school people genuinely are out of touch. To succeed from a modest-to-average background requires unusual drive and intellect. This alone will separate one from average people - which is why success might not be worth pursuing.

Businessmen in politics

Remember John Davies?
No, you probably don't. And that's the point. Sir Digby Jones is not the first director-general of the CBI to become a government minister. John Davies did it 27 years ago, becoming the first secretary of state for trade and industry.
And he made a right rickets of it.
He's not the only successful businessman to have had a poor political career. Archie Norman was chief executive at Asda, but a poor shadow minister.
So, success in business is no guarantee of success in politics. Why not? I can think of three possibilities:
1. What looks like success is in fact luck. Even within business, success doesn't always persist. As Warren Buffett said:

When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

2. Businessmen enjoy deference from subordinates and privacy from the media. They struggle without these.
3. Success in business often requires tacit knowledge, a gut feel for what works. This doesn't work in politics, where one needs to persuade people, to communicate.

What I really really want

This week's most significant event is, of course, the reunion of the Spice Girls, as it reminds us of an overlooked benefit of financial liberalization and technical progress.
The thing is, the massive success of the Spice Girls was largely unpredictable.  Who would have forecast that five girls of (generally speaking) average appearance and worse voices would sell so many records? They look and sound more like Pat Holland than Jolie Holland.
But then a lot of success in any venture is impossible to predict. Many best-selling authors - including J.K. Rowling - were rejected many times by publishers. Even successful entrepreneurs reject profitable inventions. Decca famously turned down the Beatles. When Arsene Wenger (pbuh) arrived at Highbury, people asked: "Arsene who?" And none of the three most successful Prime Ministers of the last century - Attlee, Churchill and Thatcher - were generally predicted to do so well.
Great success is, then, what Nassim Taleb calls a "black swan" - an extreme unpredictable event. The fact that Dr Taleb can get a best-seller from stating the bleedin' obvious corroborates his point recursively.
How many great-selling books, popular bands or successful companies have we not had because they've been turned down?
And this is where a benefit of easier finance and technical progress comes in.
When money is tight, financiers might be able to raise the money for one in a 100 proposals. That means there's a great chance good businesses will never get started. And if it costs a lot to print books or CDs and promote bands and authors, few will be signed up and many potentially successful ones will be rejected.
However, if finance is easier and the costs of printing and marketing are lower, fewer potential successes should be filtered out. In this way, technical progress and easier finance can promote economic growth.
They can also make the economy more of a meritocracy, in the sense of increasing the chances that ability - in the sense of shifting units if not in the sense of having high cultural value - will thrive.
However, I'm not sure that this is an unmixed blessing.

How to manage talent

The Times has a supplement advising bosses on how to manage talent. It doesn't give the most important advice of all - the best way to manage talent is to find ways to do without it.
The fact is that money flows to power. If your business is dependent upon talented performers, they've got you by the Davinas. They'll make money and you won't. This is why football clubs have for long been bad businesses. They suffer what Alan Sugar called the prune juice effect - money comes in and goes straight out to players.
The question of who has what power is, therefore, central to thinking about companies, as the marvellous Luigi Zingales discusses here (pdf). The question for bosses, then, is: how to increase their power (and hence profits) by reducing reliance on talent.
Ways in which this is done include:
1. TV. Find formats that work without stars. If you make the Paul Daniels Show (God forbid) you need Paul Daniels and he'll hold you to ransom. If you make Big Brother or the X Factor, you can exploit wannabees.
2. Film. Use CGI and special effects rather than rely on stars. Shrek won't demand $50 million for a sequel, join the scientologists, lose his looks or get drunk and insult jews. CGI's expensive, but reliable.
3. Media. Dumb down. Any idiot can root in Kate Moss's dustbin or write for CiF, so these journalists come cheap.  Genuinely talented writers with  specialist knowledge are more expensive (so I'm told.)
4.  Fund management. Use quant finance and trading rules, rather than "star" managers who use "judgment." Quant guys are usually (with exceptions) more fungible and less egotistic than stars.

People are fungible

If you want wise words about this latest Cabinet reshuffle, I offer you Donald Rumsfeld:

People are fungible. You can have them here or there.

This corrects the myth surrounding this, and all previous reshuffles - that it’s sufficient to have talented people in the right jobs trying their utmost.
Such a view mistakes a difficult job for an impossible one. If a job’s difficult, we want a skilled person to try hard at it. But ministerial jobs - insofar as they are aimed at changing society unequivocally for the better - are not difficult, but impossible. 
It’s just impossible for any central agency to gather enough information about a vast area - health, education, social security - to manage it well. The best a new minister can hope for is that he’s lucky enough to move on before management failures become clear.
The solution here is not to find the best brains, because even these are inadequate. Instead, it is to find the best mechanisms for doing without brains. As Alfred North Whitehead said:

Civilization advances by extending the number of important operations which we can perform without thinking of them.

This was, of course, Hayek’s great insight - that the value of markets is that they economize on knowledge and rationality.
This, though, is lost upon politicians and those who report upon them. They continually believe the crassest form of the fundamental attribution error, that political success requires no more than having good people in the right jobs.
How much evidence do we need before realizing that this is stupid?

Lowry beats shares

This picture by L.S. Lowry, bought for £300 in 1959 has sold for £602,400. That's an annualized return of 17.2%. That compares to a 13% total return (dividends reinvested, pre-tax) on shares, and retail price inflation of 6%.
This doesn't, however, mean that art is a better investment than shares. The problem isn't merely that art costs money to insure and store whereas shares don't; this is mitigated by the consumption value of art.
Instead, the problem is the survivorship bias. Paintings that increase in value enormously get lots of publicity. The hundreds of Lowry contemporaries that aren't so popular now just rot in attics. So news stories overstate the benefits of art as an investment.
The Mei-Moses index suggests that, over the long-term, art has slightly under-performed stocks. Figures gathered (pdf) by Kathryn Graddy suggest art has done even worse over the long-term. This suggests some of the predictions here are a little optimistic.
This doesn't mean art is a bad investment. These guys reckon it has some virtue as a portfolio diversifier - although I suspect this understates the liquidity risk involved in art: selling it in a recession is no fun.

The technology of human development

What makes a successful person? This new paper (pdf) by James Heckman provides a fascinating survey. Here's one remarkable point:

Ability gaps between individuals and across socioeconomic groups open up at early ages, both for cognitive and non-cognitive skills....Levels of child cognitive and non-cognitive skills are highly correlated with family background factors like parental education and maternal ability, which, when statistically controlled for, largely eliminate these gaps  (my emphasis.)

Note that this does not mean differences in ability are purely genetic. As Heckman says, the nature-nurture debate is obsolete. Genes and environment inter-act, as richer parents provide a better environment for child development.
Heckman infers from this that early interventions to help poorer children are a good idea - not least because skills feed on themselves. Polly Toynbee's support for Sure Start has therefore some justification.
But there's another issue raised here. If differences in family background largely determine differences in skills, doesn't this mean people's fate is sealed (insofar as skills matter) at a very early age? If so, doesn't it follow that meaningful equality of opportunity - an ideal our new Prime Minister claims to support - is impossible to achieve without equality of outcome?

Housework and wages

Here's one reason why women earn less than men - they do more housework. Mark Bryan estimates that, for married women, each hour of housework per week reduces wages by 0.16%.
As the average married woman does 12 and a half hours of housework (five more than single women), this implies a wage reduction of 2%.
This is controlling for the possibility that women with high earnings capacity tend to be more career-oriented and less inclined to do housework than other women.
The effect seems to exist independently of whether women have children or not, so it operates on top of the "child penalty (pdf)" in women's earnings.
Dr Bryan says:

Tiring activities like housework reduce the amount of effort available for market work, resulting in lower prductivity and wages.

Markets, the left and collectivism

Will Davies makes a very good point here and here:

The notion that the Left stands for cuddly togetherness, while the right stands for nasty selfishness makes no sense.

Spot on. I'd add that, if it's "cuddly togetherness" - community and collectivism - you want, you should favour free markets.
Hayek called the market a "catallaxy", a word meaning not only "exchange" but also "to admit into the community" - thus capturing the fact that markets can build fellow-feeling.
One reason for this is in the very nature of markets. Success in a genuine market (as distinct from rent-seeking exploitatitive hierarchies) requires one to ask: what can I do for others? That builds a regard for others. And markets allow minorities to integrate into society, by showing that they have valuable talents. It's a small step from there to being valued as people.
And as Deirdre McCloskey shows in here and in this book, markets can promote virtues the "left" has traditionally identified with collectivism - trust, faith, even love.
Indeed, even what seem to be the most ruthlessly individual markets of all - Chicago futures pits - can develop norms of reciprocity. In this book, Donald Mackenzie shows how Leo Melamed used these norms to encourage trading in new index futures in the early 80s.
So, markets can build community.
By contrast, the "left's" efforts to do so can easily spill into a nasty narrow-minded nationalist exclusivity: take (please do) Hodge or Byrne. Indeed, the "little platoons" of Womens' Institutes, boy scouts, and churches - self-governing collectivities - are at least as valued by the "right" as left".
So, Will's right. Collectivism (in its best sense) and community are not leftist values, still less anti-market ones.   

Soft girlies

The Fawcett Society celebrates the fact that the Wimbledon championship starting today will pay male and female champions equally.
Surreptitious Evil points to one flaw in this - people pay less to watch women's tennis. 
This new paper (pdf) by Marco Daniele Paserman adds another problem - that the women's game is just not as good as the men's, in the sense that women fall apart under pressure:

This paper uses data from nine tennis Grand Slam tournaments played between 2005 and 2007 to assess whether men and women respond differently to competitive pressure in a setting with large monetary rewards....The detailed point-by-point analysis reveals that, relative to men, women are substantially more likely to make unforced errors at crucial junctures of the match. Data on serve speed, on first serve percentages and on rally length suggest that women play a more conservative and less aggressive strategy as points become more important.