Stumbling and Mumbling

Miliband on immigration

Should Labour pursue the preferences of the working class, or their interests? Of course, if people were rational and well-informed, there wouldn’t be a distinction between the two. But as Marx and Kahneman have shown, in the presence of ideology/cognitive biases, the two do diverge.
I’m prompted to ask by Ed Miliband’s remarks on immigration.
The significant thing is that he has made any at all. In his acceptance speech, he said:

We didn’t listen enough to people’s concerns about immigration. We should have done more to protect people’s wages and conditions.

And in  his leadership speech, he said:

All of us heard it on the doorsteps about immigration. Like the man I met in my constituency who told me he had seen his mates' wages driven down by the consequences of migration.
If we don't understand why he would feel angry - and it wasn't about prejudice - then we are failing to serve those who we are in politics to represent.

But here’s my problem. Even if we concede that immigration has worsened the labour market conditions of the worst off, we must - surely - accept that it is only one factor of many doing so. The emergence of a reserve army (pdf) of labour in India and China, the technical change that allows jobs to be offshored, skill-biased (pdf) technical change and power-biased technical change all have the same effect - and probably more so.
But Miliband did not mention any of these. And yet any serious concern about the interests of workers would probably give them higher priority than immigration. Which suggests that Miliband - as you’d expect from a democratic politician - is more interested in people’s expressed preferences than in their objective interests.
But here’s the question. Does this matter? It does, if you think that immigration controls are sufficient to raise workers’ living standards.
Luckily, though, Miliband hasn’t (yet) explicitly embraced this imbecility. Instead, he called yesterday for “proper labour standards in our economy, including real protection for agency workers.”
The virtue of such a policy - vague as it is - is that it is cause-independent. You don‘t have to believe that immigration is bad for workers to support it, as it defends workers against pressures on wages and conditions, regardless of their source.
I’d like to think that Miliband is being very smart here, and is using (largely) mistaken and reactionary beliefs about immigration as a force for truer egalitarianism. But I fear this would be too optimistic a reading.

There's more...

A few years ago, Mike and Bernie Winters were playing the Glasgow Empire. Mike went on alone to do his schtick, and after a few minutes Bernie stuck his head through the curtain. “Aww shite” shouted an audience member, “There are two of the fuckers”.
Well, there’s two of this fucker too. In the top right, I’ve put some links to some of the stuff I do in my day job. I'll be updating this regularly. Yes, I’ve decided to stop flogging the dead horse that is my book.
My latest take:

Companies' financial surplus - the excess of retained profits over investment - is close to a record high…Firms are still hoarding cash, despite the improved economic outlook…The public finances will improve significantly if - and probably only if - the corporate surplus falls…
Firms were net savers long before the financial crisis hit us - which is one reason why the government ran a deficit before then. This was because, as Federal Reserve chairman Ben Bernanke said, there was a structural dearth of investment opportunities in the western world even in the "good" times. Nothing has significantly changed. If anything, the emergence of widespread spare capacity and the reduction in trend growth as a result of the recession might have reduced investment opportunities even further.
And herein lies the risk of real trouble. If the government cuts spending whilst firms are still unwilling to invest, aggregate demand could fall which in turn would reduce tax revenues, thus keeping the deficit high.

Cognitive biases and the Milibands

I fear that the Labour leadership election, and reactions thereto, are heavily influenced by some cognitive biases.
Some say that David lost despite being the more experienced of the two brothers. It might be truer to say that he lost because of his experience. Far from this giving him attractive skills, it merely gave him guilt by association.
The association here wasn’t just with New Labour, but with power structures. Some people hold it against David that he covered up allegations of torture. What they fail to ask, though, is whether this reflects on his character or rather upon the corrupting influence of power itself. My strong suspicion - having known David quite well at university - is the latter. Given the pressures from the US and the security services, I suspect that lots of decent people would have done what David did. His critics seem to me to be committing both guilt by association and the fundamental attribution error.
By contrast, Ed’s lesser experience was a positive advantage. It allowed him to distance himself from New Labour - in a way that Balls or David couldn’t - and to present himself as a blank canvas, onto which people could project their own hopes; I suspect this was also a factor in David Cameron’s winning the Tory leadership. People are seeing what they want to see (pdf) in Ed.
The fundamental attribution error, though, appears in a second context -it is raising hopes for what Ed might achieve. Polly Toynbee says:

Now he is free to write whatever he wants on the clean page he has created.

This is gibber. As the man said, “Men make their own history, but they do not make it as they please.” And the problem is that any Labour leader’s freedom is highly circumscribed: by the waning power of the media; by voters’ own cognitive biases as filtered by the Westminster village; and, of course, by what everyone’s favourite Miliband called “the logic of capital.”
Surely, the fate of the Labour party in the next few years owes more to circumstances - most notably whether the government’s deficit reduction strategy will work or not - than to Ed’s particular character.

Who should own schools?

Tim asks a question that is neither silly nor slapdown:

If customer mutuals are such a great idea…why are schools run by parents (acting, of course, in loco parentis for the ankle biters who are the real customers) such a bad idea?

Let’s consider the principles that should determine efficient ownership: I’m drawing heavily on Henry Hansmann’s The Ownership of Enterprise. The more relevant of these are:
1. Lock-in. Consumers don’t own fruit and veg stalls. But in American rural areas they often own utility companies. There’s a reason for this. With fruit and veg, a dissatisfied consumer can easily go to a different supplier. But a dissatisfied rural electricity customer cannot so easily shop around. They are locked into one supplier. Customer ownership stops this supplier ripping them off. It acts as a substitute for exit.
This suggests that the more students are locked into one school, the more they should own it.
2. Monitoring. Ownership should flow to those best able to control an asset. Here, the case for parental ownership is mixed. On the one hand, they can monitor outputs very well - the progress their child is making. This argues for them controlling the school. But on the other hand, they (despite what they might think) know little about the inputs into education - the mechanics of teaching. This argues against them getting ownership.
3. The dangers of predation. A good argument for mutual building societies is that bankers would otherwise be able to rip-off customers, by paying them low deposits and giving themselves high salaries. To the extent that there’s an analogous danger with schools, this argues for customer ownership. But is there? Dickens, Orwell and the Economist say yes. But most people’s experience of UK education, I suspect, suggests otherwise.
4. The costs of organizing. The harder it is to get hundreds of parents to agree upon how the school should be run, the weaker is the case for parental ownership.
One potential problem here is that parents will have different interests: some, say, will want the school to be strong in arts, others in science or sports. The more this is the case, the weaker the case for parental ownership.
5. Risk bearing.  Ownership should flow to those who bear the most risk. As it is students who suffer most from a bad school, this suggests a case for parental ownership.
These principles suggest that parental ownership is not obviously stupid. But they are also consistent with teacher-ownership, especially if this is associated with competition: principles (2) and (4) might argue for this, whilst competition helps satisfy principles (1), (3) and (5).
But whilst the case for teacher vs. parental ownership is mixed according to these principles, the case for state ownership doesn’t leap out from them - unless we put great weight upon (4). Which raises the question: what can justify state ownership being the dominant form?*
One possibility is that Tim’s assumption that parents act in loco parentis is mistaken, and that in fact there‘s a parent-child agency problem.
Another possibility is that the state has better knowledge than parents or teachers, and so is best placed to control schools, and is superior to parents at controlling teachers’ predatory impulses. 
Both of these arguments are, however, dubious - they are true in somes cases, and false in others. I suspect instead that schools are state-owned simply because the state has easier access to finance.
The trouble is, though, that if this is a decisive consideration, there is a case for state ownership of lots of things.
* I say “justification” because the explanation is probably mere path-dependency.

Against big think

Are financial markets efficient or not? What sort of capitalism best suits a post-crisis world? What should economists learn at university? Do we need a new paradigm to challenge neo-liberal market fundamentalism?
I couldn’t care less. These questions are all invitations to “big think”. But, for me, economics is not about grandiose ideas, but about detailed, empirical answers to smaller questions.
Take two examples.
1. When Vince Cable said that capitalism “kills competition where it can”, some claimed he was obviously right, and others that he was obviously wrong. But this is an empirical matter: is there a long-run trend towards a greater or lesser degree of monopoly? And the answer seems: neither. The powerful forces towards monopoly are more or less balanced out by powerful forces towards competition.
2. Will big cuts in the deficit jeopardise growth? This is not a question of whether Keynes was “right” or not. Instead, the question is: are the mechanisms through which deficit reductions (pdf) can stimulate economic growth likely to work here and now? My view, FWIW, is: probably not.
Now, my leftist readers might reply that this “small-think”, empiricism has a conservative bias.
Rubbish. The serious challenge to market fundamentalism comes not from airy-fairy theorizing - any fool can do that - but from empirical evidence showing that people are not wholly rational and selfish and that (some) markets do fail. And as I try to show sometimes, apparently low-level empirical studies can sometimes have very radical implications.
So, let’s forget big ideas. Look after the small ideas, and the big ones will take care of themselves.

Capitalism & investment

Via Tim, I see this (pdf) from the New Political Economy Network:

The economy suffers from a dearth of capital investment, as vast financial flows chase unproductive short-term profit. Our economy is anaemic because it lacks capital

If that word “as” is trying to make a causal connection, this passage is misguided.
For one thing, it’s dangerous for people who are relaxed about the deficit to make crowding out-style arguments. And for another, it’s not obvious that the chase of “unproductive short-term profit” has retarded capital spending.
One crude test here is to compare capital spending in the UK to that in Germany, the poster-boy for serious, long-term non-financial capitalism. If finance capitalism crowds out real investment, you’d expect capital spending to be lower in the UK than Germany.
But it hasn’t been. My chart, using OECD data, shows the share of non-dwellings investment in GDP. In the 00s - when finance was at its most exuberant - investment in real assets was actually higher in the UK than Germany.
This shouldn’t be too surprising. One reason why Germany has long had a large current account surplus is precisely that it can’t find domestic investment opportunities: the current account balance, remember, is the gap between savings and investment.
If a big financial sector crowds out real investment, this doesn’t leap out of the data.
My chart shows two other things. First, investment shares in both countries seem correlated, which suggests capital spending is determined by global factors.
Second, there’s a downward trend in investment. Partly, this is because the data are in current prices, and the relative prices of investment goods have fallen (though this merely raises the question of why the price-elasticity of investment is less than unity). But it might also draw attention to the possibility that there is, as Ben Bernanke famously said, a “dearth of investment opportunities" in the western world.
Quite why this should be - and whether it is a permanent or temporary feature - is an issue for another day. But it suggests that low investment is not a local aspect of a particular type of capitalism, but rather a problem for many western capitalisms.

Cable on competition

Typical. You wait years for a government minister to channel Marx, and when he does, he cites one of the few things Marx got wrong. Vince Cable says:

Capitalism takes no prisoners and kills competition where it can.

That “where it can” is doing a lot of work. There is no question that each individual capitalist tries to kill competition, by undercutting his rivals, offering a better product or - let’s face it - lobbying the government for special protection. Every businessman wants to be a monopolist - or at least, he should do.
However, it doesn’t follow that such efforts succeed. The empirical evidence suggests that Marx was wrong. There is no tendency for capital to become more concentrated. Studies show that firm growth is independent of size (or anything else!), and so the distribution of firm size doesn’t change much over time. The degree of competition or monopoly is roughly stable. Tesco or Wal-Mart might seem monopolistic, but they are less so than 19th century truck stores.
One macroeconomic piece of evidence for this is the share of profits in GDP. If capitalism tended to kill competition over time, you’d expect this share to rise over time. But it hasn’t. Aside from a fall in the 70s and recovery in the 80s, the profit share seems trendless.
One reason for this is that there are strong countervailing pressures against individual capitalists’ desire for monopoly.
Herein, though, lies a problem. The weakness of the banking system means that some of these pressures are weaker than normal. With banks unable or unwilling to lend, new businesses are less able to grow to compete against larger firms. And existing firms are less able to get the finance to expand into areas where incumbent firms enjoy super-normal profits.
Competition requires finance. But this is lacking.
And here, Cable is weak. He says:

Our agenda can be summed in seven words: make [banks] safe and make them lend

There is, of course, a contradiction between these two goals. And Mr Cable said nothing to show how he plans to overcome it. 

Poverty, altruism & communication

There are 1.4 billion people who live on less than $1.25 a day. Name one of them.
The fact that you can’t might be even more significant than generally supposed, as this new paper  shows (pdf).
The authors got subjects to play a simple dictator game, in which people were asked to split $10 between themselves and a partner. They found that when the dictator and the partner were not allowed to communicate with each other, dictators handed over an average of $1.53.
However, when subjects could communicate, things changed.
When the dictator was asked to provide an explanation to his partner for his decision, the average donation fell to 60 cents. But when his decision was preceded by a request from his partner, he gave an average of $2.40. And when there was two-way communication, donations were above $2.50.
Communication triggers increased altruism.
 This chimes in with a point made by Robert Cialdini in Influence. He tells the story of a woman trying to jump a queue to use a photocopier in a university library. The simple request to jump in elicited 60% compliance. Not bad. But the question “May I use the Xerox machine because I have to make some copies?” got a 93% compliance rate, even though no extra meaningful information was given. People, says Cialdini, like to have reasons for what they do. Even basic communication generates such reasons - a request gives us a reason to donate, but the opportunity to explain gives us a means of justifying our selfishness.
All of which brings me to where I started. The world’s poorest do not communicate with us, which causes us to give less to them than we otherwise would. By contrast, we are bombarded with messages from the well-off, which - on its own - tends to dispose us to be altruistic towards them.
In this sense, inequality perpetuates itself.

Financial advice & journalism

Charlie Beckett asks: “Why didn’t the financial media tell us that capitalism was about to implode?”
Simples. We didn’t do so for the same reason we haven’t found a cure for cancer or solved Arsenal’s goalkeeping problem. It’s not our job. The point of financial journalism is to explain the present, not to make forecasts.
Indeed, the very act of making forecasts - as distinct from discussing risks - is to misreport the world. It gives the impression that the future is knowable, when in fact it isn’t*.
Nor is it the job of financial journalism to give advice. This is simply because, to a very large extent, the advice people need doesn’t change from day-to-day or even year-to-year. I reckon four general principles get people most of the way:
1. Live within your means. The safest way to get rich is to save. How you invest your savings - cash, shares, gold, whatever - is a secondary consideration, unless you are really silly.
2. Minimize taxes and charges. Most people can save tax-efficiently through ISAs and pensions, and should do so. Also, don’t be tempted by high-charging funds - they are usually not worth it. And if you hold shares directly, don’t trade much.
3. Remember that high prices, on average, mean low expected returns. Don’t jump on bandwagons.
4. Remember G.L.S Shackle’s words: “knowledge of the future is a contradiction in terms.” Don’t pretend you can see what’s coming. And don’t pay others in the belief that they can do so. The essential fact about the financial world is risk (and/or uncertainty). The key question is: what risks are you prepared to take, and which aren’t you? This paper by John Cochrane discusses this well.
Following these principles usually entails that people should do very little from day to day with their money. Apart from when I sold my London flat in 2008, I haven’t made a significant change to my personal finances for years, other than to add to my various savings.
This means that the job of financial journalists cannot be to tell people what to do with their money - because, mostly, that answer is generally the same.
Instead, our job is to find something interesting and true to say. And this is difficult enough, because in finance, a lot of what‘s true is not interesting and a lot of what‘s interesting is not true.
* No doubt you can find examples of me breaking this principle. Even I, though, sometimes have to make concessions to popular demand.

BBC's standards slip

In last night’s QI, Stephen Fry offered us as fact George Taylor’s hemline theory - the claim that women’s skirts get shorter in good economic times.
However, new research (pdf) shows that this is not quite true.
Marjolein van Baardwijk and Philip Hans Franses of Erasmus School of Economics measured the hemlines of skirts appearing in French fashion magazines every month since 1921. And they found that there is a link between hemlines and the state of the US economy, as measured by NBER’s chronology of recessions.  But there’s a lag of three years: recessions lead to skirts to getting longer in three years’ time.
By contrast, skirt lengths have  no predictive ability for the state of the economy.
Of course, Taylor’s theory was based upon American’s hemlines, not French ones. But it is unlikely that there is a lag of three years from the former to the latter. If anything - with France having been the fashion capital of the world for many years - there’d be a lag from French hemlines to American ones, which is undermines Taylor‘s theory even more.
So, Mr Fry is plain wrong. Bankers have no reason - other than those shared by all men - to like short skirts, and no reason to fear the apparent lengthening of them.
I can only hope the show was recorded several months ago - before this research was published - because it would otherwise betoken an appalling lapse of standards from the BBC.
Victoria Coren would never have made such a mistake.