Stumbling and Mumbling

Andrew Glyn

I return from my Christmas holidays to learn the sad news that Andrew Glyn - the man who taught me more than anyone else - has died.
He taught not just by words, diagrams and equations but by example. And one of his lessons, I realize now, was about the relationship between intellect and political commitment.
I was a student of his in the mid-80s, whilst he was working for the NUM to show - correctly as it turned out - that Thatcher's plans for mass pit closures were economically irrational. His reward for this was to have his phone tapped by MI5. And it's typical of the man that his response to this was bemused humour, not paranoia or self-importance.
However, although this was a time when political passions were much stronger than now, Andrew never let this work colour his teaching. He never gave those of us who shared his views an easy ride, and was never less than generous to those who didn't share his views; his conservative and liberal students held him in as high regard as I did.
Socialism, to him was never an excuse for sloppy thinking. Andrew's first priority was intellectual rigour; socialism was a second priority
Or maybe third, after jazz. He once said: "the three greatest men who ever lived were Lenin, Trotsky and Charlie Parker, not necessarily in that order."
If his socialism was held lightly, so was his intellect. Although he was the cleverest man I ever met, he never used his intelligence to put others down, to show off, or to gratify his ego - indeed, he had less ego than almost anyone. His intellect served his students.
He was a teacher and socialist, in the best senses of both words. And - much more important - he was a great bloke. 
Other memories are in this Facebook group.

Parris blurts out the truth

This comment from Matthew Parris is very revealing:

I was telling my colleague Danny Finkelstein about my new theory that the free market doesn't work properly when the real customers are those who commission a product rather than those who use it. It is, for example, businesses, not the householder, that choose the courier service that makes you stay in all day in case it calls...“Ah,” said Danny, “this conundrum is well known to economists. They call it the Principal-Agent Problem. There are whole chapters in textbooks about it.”
I felt as proud as Molière's Bourgeois Gentleman, enchanted to discover from an expert that quite spontaneously he had been speaking something called “prose” all his life.

Now, recall Matthew's career. From 1976 to 79 he working in the Conservative Research Department, and was then an MP for seven years. So he spent 10 years in a party that was supposedly espousing free market ideas, and yet he never had a conversation, or overheard one, about one of the basic issues in market economics.
How can this be? We can ignore the possibility that Matthew's stupid; his writings show him to be one of the smartest men in the dead tree industry. So, could it be instead that his Tory colleagues were just never really interested in market economics, and only talked about "free markets" as an ideological cover for what was really just class hatred and union bashing?

Freedom vs happiness

Freedom doesn't make us happy.  This is not a new observation,  but this paper (pdf) by Dan Haybron gives us one of the best statements of the idea I've seen. He argues that humans are generally psychologically unable to make choices that make us happy. For example:
1. We're bad at forecasting our future tastes. In particular, we fail to foresee that we'll adapt to our new circumstances.
2. We have positive illusions. We think we're better than we are; we exaggerate our ability to control our environment; and we are too optimistic.
3. We value hard, quantifiable, things like money more than less quantifiable but important things  - which might explain why people prefer the drudgery of long hours in factories to rural life.
4. Because we're loss averse, and value what we have, we stay in situations where we're unhappy, like frogs who stay in water getting gently hotter until they boil to death.
There's more here (pdf) from Christopher Hsee.
Most economists acknowledge these tendencies, but suspect they are mere quirks, small and cheap deviations from rationality. But, asks Haybron, might they be wrong? Might these be more ubiquitous, and more damaging to our well-being, than economists suppose?  Why, he asks, should human psychology, which evolved to deal with hunter-gatherer conditions, be well-equipped to make us happy in liberal societies?
Perhaps, he says, humans might benefit from constraints upon choice.
It's important, I think, to be clear about the implications here. It doesn't follow from this that freedom is not important. Perhaps its value is intrinsic, not consequentialist. Still less does it follow that anyone is in a position to tell us which constraints would improve our well-being; it's an almighty leap from the thought "freedom doesn't increase happiness" to "I know what's best for people". And it leaves open the questions: why does subjective well-being matter?  Is this really what we should be striving for?
Perhaps the message is just that freedom and happiness are two different things.

Debt and character

Mark Vernon asks:

What does living in a debt culture mean at a more personal level? What is the impact on the sense of morality and self-worth of a society that is sinking into debt, where debt is institutional and systemic?

I'm not sure it means much at all, for three reasons:
1. Debt isn't that high. Britons owe £222.1bn in non-mortgage debt. Yes, this is roughly equivalent to three months post-tax income.  But it's less than a quarter of the money we have deposited in banks and building societies (table A4.1 here). And much - most - of this debt will have been taken on rationally; in the days when you could get six months interest free debt, it made perfect sense to max out your credit card to pay off a bit of the mortgage.
2. Debt is a sign of confidence in future prospects; people take it on, believing they'll be able to repay it - which most do: personal insolvencies have been falling recently.  Surely, such optimism is preferable to a climate of fear and uncertainty, in which folk are scared to borrow.
3. Debt is really rather mundane. It's just a form of transport - a way of moving  one's spending power from the future to the present. Interest is just what you pay the lorry driver for this transport. Why should such dull transactions be morally or socially significant?
And herein lies a puzzle. On the one hand, it seems - with hindsight - that one of Marx's errors was to over-estimate the extent to which a person's work determined their character. But it's a common trope amongst critics of capitalism - for example, Jeanette Winterson here, critiqued by Julie Burchill - that shopping and spending does influence character. But how can this be when we spend so much less time spending money than we do at work?

How to elect leaders

The interesting thing about Nick Clegg's victory in the Lib Dem election is that it was much closer than early betting suggested, implying that he fought a lacklustre campaign. But being a poor campaigner is surely is a huge drawback in a leader. Which raises the question: is there an alternative way of electing a leader, which gives greater weight to campaigning skill?
In theory, yes. The party could have two votes, one at the start of the campaign and one at the end - in the same way that many debates do, such as those run by Intelligence Squared. Then, the winner would be not the candidate with the most votes, but rather the one who gained the most votes between the two votes. This would identify the best campaigner.
Granted, there are some flaws with this:
1. Campaigning skill isn't the only desirable feature in a leader - personality, other abilities and maybe even ideas also matter.
2. Aspiring leaders would have less incentive to work hard for their party, as they know that initial support will mean little.
You might think these are fatal objections. They're not. For one thing, they could be accommodated by a more complex  voting arrangement, which gives weight  to both the final result and the change in the vote.
And for another thing, these objections are offset by another potential flaw in the system - the incentives it gives voters to misrepresent their initial preferences.
Had the Lib Dems used this system, Clegg's supporters would have had an incentive to vote for Huhne in the first ballot, intending to switch later, thus increasing the change in Clegg's vote.
But this restores the importance of non-campaigning skills and gives aspiring leaders an incentive to build early support in the party, thus solving our two problems.
I mention this not so much to advocate the system, but to show that there are more ways of choosing leaders than parties might think. Politicians under-rate the importance of the question: how should we choose?

Against "progressives"

After Cameron's call for a "progressive alliance", Paul asks whether the word "progressive" is worth fighting for? It is, in that I'll fight to avoid it. I'm with Dsquared, in hating the word.
Partly, this is a matter of logic. Calling a policy "progressive" assumes what must be proven - that the policy one advocates really does represent progress, rather than mere change.
And in one important sense, almost no policy is purely progressive - the sense being the Pareto-efficient one of making at least someone better off and no-one worse off. This matters, as in the absence of such a standard "progressive" merely means "tending towards ideals of which I approve." No doubt the BNP regards immigration bonds as "progressive."
Worse still, "progressive" implies gradualism, reformism. But reformism is often just cant. For example, if you seriously want to halve child poverty, you don't need to boast about making "progress" towards the aim. You should just spend the £4bn.  It's easy.
So why blather about being "progressive"? Could it be that this is just an excuse for endless meddling in society?

Mervyn's luck

Wasn't Gordon Brown amazingly farsighted? That's the unusual thought prompted by today's inflation numbers.
They show that CPI inflation is running at 2.1%, just 0.1 percentage points above its current target. However, RPIX inflation is 3.2%, 0.7 points above the old target. The gap between the two rates, at 1.1 points, is the highest for three years.
This means Gordon Brown's decision to change the inflation target back in 2003 has proved most fortunate for the Bank. With inflation only trivially above its target, the Bank can easily justify cutting base rates. However, had the Bank been lumbered with the old target, it would have a much harder job cutting rates without looking as if it were panicking.
But why is inflation so different on the two measures? Partly, it's because CPI excludes housing costs such as rent and house prices. Also, it's because of a formula effect. The CPI uses a geometric average whereas the RPI uses an arithmetic one. This means the CPI, in effect, gives less weight to prices which have risen a lot.
However, neither of these explain why the gap between RPIX and CPI has risen so much in the last few years. The reason for this lies in what National Statistics calls "other differences" (table 10 of this pdf), such as differences in weights and goods sampled. Two years ago, these added 0.3 percentage points to the CPI relative to the RPIX. Today, they are taking 0.4 percentage points off.
For example, the CPI gives a weight of 2.9% to audio-visual equipment, prices of which have dropped 13.5% in the last year according to its measure. The RPI gives this just a 0.8% weight, giving less deflationary pressure. The CPI reports that alcoholic drink prices have risen just 0.4% in the last 12 months. The RPI measure puts the rise at 2.5%. The RPI reckons clothing prices have dropped 1.7% in the last year. The CPI thinks they've fallen 4.8%. CPI says furniture prices have risen 2.4%; RPI says 4.3%. CPI says package holidays' price have risen 1.1%; RPI says 2.6%.
Now, I'm not saying there's anything fishy here. The notion of a "true" rate of inflation is an absurdity. All macroeconomic aggregates are theoretical constructs, not pictures of reality.
Instead, I'm just saying that Mervyn King - and the government - have been remarkably lucky, in that the change in the inflation target has made it much easier to justify cutting rates now.
At the time, King said (pdf) that it was possible to argue that the change in the target represented a "small increase" in the target.  Maybe it wasn't so  small, after all.

Rhydian: victim of game theory

The Welsh are whining about Rhydian's defeat in the X-Factor.  However, although his defeat was a travesty, it was the result of an efficient process, as this paper (pdf) explains.
Had the X Factor been a pure singing contest, Rhydian would have won by a mile; who couldn't love this? And that's the problem. The other contestants would have realized their inferiority straight from the first show, and would therefore have been less inclined to try to improve their singing. This would have made for boring shows.
However, making the shows into a partial popularity contest, by allowing public votes which aren't necessarily strongly related to singing ability, improved the show.  Lesser singers than Rhydian,  such as Leon, were incentivized to try harder. They figured: "Hey, I'm quite popular. If I put in some effort, I might win this." And Rhydian, seeing their effort and improvement, responded: "This isn't the walkover I expected. I've got to raise my game."
The upshot is better singing, and a better show, all round.
This has implications beyond Rhydian's defeat. It matters for the design of incentives generally, and for equality.
For example, imagine a firm seeking to promote someone from within. If there's one outstanding candidate, all other workers might figure: "there's no point me trying hard - he'll get the job." It might, therefore, be efficient for the company to limit the pay-off to being outstanding - say by introducing a little (only a little) randomness into the promotion, or having second and third prizes - as this would increase aggregate effort.
Winner-take-all tournaments can, then, be inefficient. 

The IQ red herring

These posts by Tim and Andrew raise a question: why are many defenders of free markets so interested in IQ?
Leftists would reply that there's an ideological motivation at work - the belief that inequalities of income are legitimate if they can be shown to result from natural differences in IQ.
But I can't believe that this is the reason, because this is a howling error.
First, the correlation between IQ and earnings is low. This review (pdf) of the literature estimated that a on standard deviation difference in cognitive skills is associated with only a 10% difference in wages.
Such a small effect surely accords with common sense. You only have to look at you boss to see that the link between IQ and success is weak. Even if we ignore rent-seeking, height, beauty, luck and incentive-enhancing preferences (pdf), lots of things make for high earnings: hard work, creativity, interpersonal skills. And these have little relationship with IQ.
But even if there were a tight correlation between IQ and earnings, this would do nothing at all to legitimate inequality.
Imagine a communist dictator were to allocate all jobs according to IQ scores at an early age. Earnings and IQ would then be perfectly correlated. But this society would be neither efficient nor just nor even legitimate.
The link between IQ and earnings therefore tells us nothing about the desirability of an economic system.
The reasons why right-libertarians are relaxed about inequality is that they believe either that it results from free transactions, or that it has beneficial consequences. The link between IQ and income - whatever it is - is irrelevant.
So why are so many people interested in it?

A terrifying thought

Will Hutton writes something really alarming:

I know at least one central banker who spent the summer reading JK Galbraith's Great Crash.

This is scary. Surely, any central banker worth his job should have been re-reading The Great Crash.