Stumbling and Mumbling

Yes, the market is efficient

In the FT, Robert Skidelsky takes yet another fact-free pop at the efficient market hypothesis.
The facts, however, tell a different story. Figures from Trustnet show that, over the last five years, only a minority of unit trusts in the UK all companies sector (91 of 254) have out-performed an index-tracker fund.
This means that the key prediction of the EMH is correct - it is incredibly hard to beat the market. Indeed, I suspect that many of those who did so either just got lucky, or took more risk; there’s a number of “special situations” funds among the best performers, and these tend to buy stocks carrying extra distress risk. Their out-performance is entirely consistent with the EMH, which says you can beat the market if you take extra risk.
This failure of fund managers, on average, to beat the market is not a necessary truth. In theory, unit trust managers could all out-perform the market, if they did so at the expense of pension funds who tend to be closet trackers, or overseas investors who lack local knowledge, or “naïve” retail investors.
But this doesn’t happen. On average, the guys who try all day to beat the market fail to do so.
Now, this doesn’t mean prices are always “right”. Maybe markets are riddled with inefficiencies, but fund managers’ herd mentality stops them spotting them. Or maybe fund managers over-diversify and so dilute their performance.
This matters. The implicit codicil in the claim “markets are inefficient” is “and someone knows better than the market.”
In the real world, though, that someone doesn’t exist - or at least, is very hard to identify in advance. The notion that an expert can do better than the market is, at best, highly improbable.
The problem is that, as Eric Falkenstein says in this fine piece, there are lots of people - brokers, talking heads and increasingly politicians - who have a vested interest in avoiding this fact.

Ownership, control & workers

Lord Myners has proposed, to some acclaim, that longer-term shareholders should have more voting rights. I’m not sure.
First, fund managers have no especial expertise in running companies - partly because any outsider is always at a huge disadvantage in knowing what is really going on inside firms.
Secondly, they don’t have much interest in doing so. The cheapest way for them to avoid the risk to their assets posed by badly managed firms is not to go to the effort and expense of turfing out the management, but to either sell such shares or diversify the risk. Personally - and I think I speak for many fund managers’ clients - I don’t want to see my funds (which are of course all index trackers) charge higher fees to cover the cost of them getting more involved in management.
Remember - pension funds only hold shares because they are a least-bad option in our world of imperfect markets. If markets were more complete, they would hold GDP or salary-related securities as these would be a better match for those of their liabilities which consist of future final salaries.
For these reasons, shareholders currently attach only a smallish value to voting rights. We can get a clue of this from Schroders, one of the few UK firms which still has voting and non-voting shares. The former are priced at a premium to non-voting shares of 15.9%.
So, why don’t we go more radical than Myners? Why not transfer voting and control rights from shareholders to workers. The case for doing so is straightforward. Workers are less diversified than shareholders, so they have more skin in the game of ensuring that companies are well-run. Because they are insiders, they can tell better than outsiders when a firm is doing well or not. And shared capitalism increases corporate efficiency, so why not push it further?
The counter-argument is also straightforward. If workers had power, they would enrich themselves by seizing current and future dividends. So shares would become worthless. The explicit voting premium is small only because non-voters can shelter behind voting shareholders.
All this raises the question. Is it possible for shareholders to write some sort of contract with workers - analogous to their contract with chief executives - which allow for the net present value of dividends to be maximized (more or less) whilst at the same time empowering workers to manage firms better?
If the answer is yes, then we have an opportunity to move towards a genuine stakeholder capitalism.
If it’s no, then Marxists have been right all along - there is an irreconcilable conflict of interest between workers and capitalists.
(A third possible argument is that workers actually gain from having shareholders appoint  skilful managers. I mention this only to exhaust the logical possibilities,  not because it is a credible  alternative.)

The state & inequality

To what extent can state intervention reduce inequality? The lesson of the New Labour government is that it can’t much; since 1997 inequality has either barely changed, or risen a little depending upon whether you take ONS or IFS data.
However, a new paper by Ian Gazeley and Andrew Newell shows that there was a period when poverty and inequality declined markedly. They estimate that between 1904 and 1937 the proportion of working households living in absolute poverty fell from 21.7% to under 3.6%, and wage inequality fell markedly.
Of course, poverty due to unemployment or old age remained acute. But the fact is that working poverty was pretty much eliminated before the establishment of the post-war welfare state and Keynesian full employment policies.
Gazeley and Newell attribute this to two causes. Households had fewer children, and real wages rose a lot, especially for the poor; the real wages of the bottom quintile rose 48% whilst mean wages rose 30% during this time, thanks in part to increased unionization and higher productivity.
Does this mean that significant reductions in inequality and poverty can occur without big government intervention?
Not necessarily. Higher wages and smaller families were both, in part, the result of the Great War. The distribution of condoms to soldiers to help stop VD had the effect of popularizing the use of contraception. And the fact that almost a million British and Irish died in the war created a shortage of labour that helped drive up wages.
History, then, suggests that state can be a force for equality, by massacring its subjects.

Gender & decision-making

What’s the difference between men and women? It’s this question that underpins Harriet Harman’s claim that a mixed-gender team makes “better decisions”. After all, if the only difference between the genders is that women have funny plumbing, it’s not obvious why a political leader’s gender should matter.
However, although a lot of the evidence (pdf) is ambiguous, economic researchers have discovered some gender differences in decision-making, for example:
1. Groups in which women are the majority are more likely to be generous (pdf) to outsiders. However, all-women groups are less generous than majority-women groups.
2. Women are less good at negotiating than men, especially in situations where benchmarks are opaque - such as in businesses with unclear salary structures.
3. Women perform worse under pressure than men. For example, women tennis players are more likely than men to make unforced errors at crucial stages of a match.
4. Men are more over-confident than women. For example, men trade shares more often than women, but earn lower returns.
5. Women are more risk averse than men - perhaps because of socialization rather than innate differences - though not more averse to ambiguity.
Do these differences justify Harman’s claim? In themselves, not at all. These differences are true only of average tendencies.  There are loads of women who are less risk-averse than men, for example. Charlotte is entirely right to say that it is silly collectivism to pretend otherwise.
Indeed, it could be that selection effects in politics are powerful than gender differences. For example, if political careers only appeal to people who are over-confident, the tendency for women to be less over-confident than men will be irrelevant in deciding who should be Labour leader, as women who aren’t over-confident won’t have entered politics in the first place.
There is, though, another way in which women leaders might improve decision making, even if they are identical to men in their cognitive skills or lack thereof. The very fact that women are different might help to reduce  groupthink - the tendency for  groups of decision-makers to become overly homogenous and so over-confident and insufficiently self-critical. Evidence for this lies in the fact that, sometimes (pdf), women board members can improve company performance.
What’s not so clear, though, is whether this effect is the result of their femininity or just their difference. If it’s the latter then there might be no more case for having a woman leader than having a black or gay one, as these too might reduce groupthink.

Markets and/or socialism?

John Rentoul highlights a curious claim by Neal Lawson:

The relationship between markets and socialism is not complimentary but contradictory.

Depending on your conception of democracy, this is both true and false.
It’s true if you regard democracy as Neal does - as a way in which we “express our preferences as society”, as distinct from the individual preferences expressed by markets.
There is, though, another conception of democracy. Democracy is a means of harnessing the dispersed wisdom of individuals, against the folly and arrogance of hierarchical rulers.
On this conception, markets are an expression of democracy. Markets can humiliate the powerful - as we saw in Dave Carroll’s campaign against United Airlines, the collapse of Fred Goodwin’s Stalinist managerialism, and in countless product failures.
I have two reasons to prefer the latter conception - which implies that markets and socialism are compatible:
1. It’s not obvious why collective preferences are in principle so admirable. What’s is the inherent virtue in having things decided by groups? Isn’t there instead much to be said for a large realm of private choice.
2. In practice, collective decision-making is often anti-egalitarian. It can give excessive weight to the rich and powerful or those with an over-inflated sense of entitlement. Collective provision of state education, for example, frequently favours wealthier families.
Of course, Neal is right to say that the democracy of the  market-place gives more votes to the rich than poor. But this isn’t a market failure. It is instead a state failure - the inability of the state to impose adequately redistributive taxes. And this itself is evidence that our "preferences as a society" - as filtered through existing pseudo-democratic institutions - militate against equality.
I suspect that any adequately socialist society would be one in which markets were used more intensively than they are now - not just because markets are a reasonably efficient way of allocating resources, but because they can embody egalitarian values.

Tory confusion on tax credits

The Tory right is, yet again, showing its ignorance of the income distribution and tax system. The Speccie’s leader says:

Mr Cameron has been criticised for telling Mr Marr that he would remove tax credits for households which earn more than £50,000 a year. This…would hit 130,000 families immediately and unsettle many more. It is a proposal that would undoubtedly hurt Middle Britain.
Considered in isolation, this would indeed be an objectionable and vindictive proposal.

The first flaw here is an albeit mild version of the middle England/Britain error - the notion that the well-off are just ordinary folk. In truth, a two parent household with two children and earnings of £50,000 a year is better off than almost two-thirds of the population. It has disposable income, before tax credits, of over £650 a week, whereas median incomes are £601 a week for two-children households (table 2.3 pf this pdf).
The second flaw is that the sums involved are small. Such a household gets £10.50 a week in child tax credits - the working tax credit is exhausted after weekly earnings hit £340 (table 1.6d of this big pdf). But this is only around 1.6% of after-tax income. The loss of such a sum might sting a little - but it is surely over-sensitive to call such a move “vindictive.”
This is not to say it’s wrong to oppose Cameron’s proposal. There is a reasonable objection to it - namely, that stopping families on £50,000 getting tax credits requires a rise in effective marginal tax rates.
If you imposed an abrupt cut-off at £50,000, you would impose a marginal tax rate of over 100%  at around that income level. If you withdrew tax credits more smoothly, you’d impose even higher withdrawal rates upon families earning less than £50k - and these already face deduction rates of over 75% if they earn less than £720 a week.
To fulfil his promise, then, Cameron must either hurt people on incomes less than £50,000 - which acquits the Speccie of my charge of committing the middle England error - or impose even greater disincentives to work, or even further complicate the tax credit system, or some mix of all three.
However, the Speccie ignores this difficulty in favour of blather. Which is, I fear, yet more evidence that that the Tory right is entirely ignorant of issues of income distribution and the tax credit system.