Stumbling and Mumbling

Does fear work?

Oliver Letwin has been doing some blue sky thinking.The Guardian reports him as saying that it is

only through "some real discipline and some fear" of job losses that excellence would be achieved in the public sector.

I'm not sure Letwin really believes this. If he did, he would be also advocating introducing fear into corporate boardrooms, because there is at least some evidence that fines work better than bonuses in stimulating good performance. Funnily enough, though, he seems silent on this. He seems to subscribe to the asymmetric theory of motivation: bosses are motivated by big money, but workers are motivated by fear.
Sadly, though, there are three reasons to doubt the latter half of this theory:
1. The Yerkes-Dodson effect. Yes, sometimes fear can inspire great achievements. But it can also cause stress and choking.
2. Even if fear does induce more effort, this effort might be misdirected, unless the institutional structure is very carefully designed. Fear of job loss might simply lead to more gaming of the system. For example, if teachers are sacked if their students perform poorly, the result might not be better teaching, but rather teaching to the test, the expulsion of bad students, or a focus on students of borderline ability, to the neglect of most of the class. As Daniel Pink wrote in Drive - one of those fashionable behavioural economics books that the Tory party is supposed to be interested in:

Instead of restraining negative behaviour, rewards and punishments can often set it loose - and give rise to cheating, addiction and dangerously myopic thinking.

3. Sacking bad workers can crowd out other motives - be they a sense of vocation or the gift exchange arising from the invisible handshake. Workers who see an under-performing colleague sacked are as likely to withdraw goodwill from management as they are to be spurred to work harder. And if, say, a good teacher working in a bad school fears for his job, he's likely to just jump ship, causing the bad school to get worse.
It's not just Gneezy and Rustichini's well-known paper (pdf) on Israeli kindergartens that shows how explicit penalties can crowd out pro-social motivations. A study of Norwegian hospitals found the same thing.
All of this is consistent with one big fact about productivity (pdf) in the private sector - that lots of productivity growth (maybe almost all) comes not from incumbent suppliers upping their game, but rather by the fact of entry and exit. If Letwin had focused just on this point, I'd have little problem. But bringing class war and bad psychology into it is just silly.   

Democracy vs libertarianism

Guido Fawkes is confusing me. He’s campaigning for the death penalty on the grounds that the public want it:

One of the problems with our modern unrepresentative democracy is that it is disconnected from the voters…There are a number of issues where the political class refuses to carry out the wishes of the people. All polls show that there is majority support for capital punishment.

Democratic stuff. And here’s my confusion. Guido has also long claimed to be a libertarian. But libertarianism and democracy conflict, simply because public opinion is on many issues very illiberal, for example:
- there’s overwhelming support (pdf) for immigration controls.
- When offered a list of values and asked (pdf) “Which two or three of the following would you most want a political party to reflect?”, only 20% said liberty/freedom compared to 50% saying fairness and 32% family values.
- The majority are against legalizing drugs. Only 3% want to legalize cocaine, for example.
- There’s strong support for control orders against people not found guilty of any offence. “For most people, national security trumps civil liberties” says YouGov.
The message seems clear. You cannot, comfortably, be both a libertarian and a democrat because a libertarian must believe that public opinion is wrong on many issues. The more intelligent libertarians recognize this.
This doesn’t necessarily mean Guido is wrong to call for the death penalty - though I happen to think he is. It’s just that, from a libertarian point of view,  it needs a justification separate from the will of the majority.
So, why then is Guido so keen on public opinion in this context when the public reject principles that any libertarian must accept? Could it be that he doesn’t have a coherent position at all, but is just a rabble-rousing populist?

Value: a paradox

Tim expresses consternation that the Guardian missed the neoclassical revolution, which tells us that “value” is purely subjective.
It’s tempting - and I think Tim invites this inference - to see this as a left-right issue.  Some leftists cleave to the labour theory of value, as a basis for the belief that workers are exploited, whilst the right is more sophisticated.
This, though, is pish. For one thing, both the fundamental Marxian theorem and Roemer’s property relations approach tell us that the concept of exploitation need not rest upon the labour theory of value.
Conversely, there’s one area where very many rightists - including lots of libertarians - do believe in objective value.
I refer to the stock market. It is still common to speak of the “value” of a share as being a measurable entity separate from its price, which is a function of more or less objective factors such as earnings and cash flows. Such thought flies in the face of the fact that the same marginal utility theory that neoclassicals use to price goods also applies to financial assets. As John Cochrane says at the start of Asset Pricing, asset prices should be determined by a process in which:

The marginal utility loss of consuming a little less today and buying a little more of the asset should equal the marginal utility gain of consuming a little more of the asset’s payoff in the future

This raises the question: why do so many people dismiss the notion of objective value in goods markets whilst believing in it in financial markets?
One possibility, of course, is a simple factual matter. Maybe marginal utility theory works better than objective value theory in explaining goods prices, whilst the opposite is true for financial assets.
Granted, the empirical performance (pdf) of consumption-based asset pricing theories seems poor (pdf) - though this might reflect the difficulties of testing it. But then, attempts to beat the market by valuing shares “objectively” also very often fail: Warren Buffett’s successful experiment has rarely been replicated. And what’s more, there’s some evidence that the labour theory of value actually works quite well (pdf). Empiricially speaking, the labour theory of value is one of the more successful theories in economics.
It’s not obvious, then, that mere empiricism justifies the inconsistent attitude to value in goods and asset markets. So what does?
One possibility is simple ignorant political partisanship. People who haven’t read any economics for forty years might think it sufficient to sneer at Marxists for ignoring the marginal revolution whilst being oblivious to the facts: that  marginal revolution also happened in asset pricing; that the labour theory of value isn’t necessary to Marx; and that it’s not a bad empirical theory anyhow.
Another possibility is the desire for certainty. A belief in objective value helps to distract people from the inconvenient fact that asset prices are very volatile. It offers an illusion of knowledge.
And illusory knowledge is often the basis of hostility to Marxism.

Monetizability

Monetizability is an ugly word, but you cannot understand many features of the economy without it.
It is, quite simply, the ability to turn a good or service into cash flow. And this, in turn depends upon the power to exclude - the power to deny customers a valuable product if they don’t pay, or the power to exclude potential rivals from one’s market.
Take, for example, the question of whether the Guardian should have a paywall, whether it can monetize its online content. This depends upon its power to exclude. If it has a sufficient monopoly over the supply of upper-class sanctimoniousness, then a paywall  makes sense, as it can force people to pay for this sanctimoniousness. But if there’s an alternative, free, supply of it - say, from blogs such as this - then a paywall won’t bring in much revenue as people will merely substitute towards that free supply.
Or take the question of whether ITV can monetize its ITV player. This too depends upon its power to exclude. If we can only see special webisodes of Corrie by paying, then the strategy might work. But if ITV tries to make us pay to see programmes it has already broadcast, it won’t; we’ll simply remember to use Sky+, or ITV2 or ITV+1 instead. ITV’s power to exclude is then weak, and so is its monetizability.
Shell, Centrica and Apple might not seem to have much in common. But they do. All have announced high profits recently. And the common factor is that their profitability is founded upon a power to exclude rivals - by high capital costs in the case of Shell and Centrica, and by a powerful brand in Apple’s case. The crisis of newspapers and the music industry, by contrast, originates from the fact that technical change has reduced their power to exclude and hence their monetizability.
And I suspect that a big factor behind the investment dearth is that firms appreciate that innovation is not monetizable. This might be because they’ve wised up to an old fact. Or it might be that changes in capital requirements, technology, globalization or social norms (“what, you expect me to, like, pay for stuff, dude?“) have reduced monetizability.
So far, so conventional.
But there’s more. Monetizability applies also to workers.
Put it this way. Imagine you could get 600 people to pay you just 20p per day - less than 3p per hour. Doesn’t seem a big ask, does it? But if you could do this, you’d earn more than the median wage.
So why do most people earn less? It could be that their marginal product is very low. But it could also be that they lack the power to monetize their services - that, as Marx said, workers bring nothing to the market but their own hide and expect nothing but a hiding.  As Stephen Margin famously pointed out, the origin of the factory system lay not so much in its technical superiority, but in the fact that it transferred power from workers to capitalists.
And this inequality of power, of monetizability, has increased in recent years, through (at least) three forces:
1. Globalization means capitalists are more able to exclude workers from a share of revenues: they have used competition from cheap Asian labour to drive wages down.
2. Technical change has reduced workers’ power to either withhold their services by shirking or to monetize them by little fiddles.
3. Bosses have increased their monetizability by an ideological con-trick. They’ve managed to persuade us that management is a rare and indispensable talent that can only be motivated by massive salaries.
4. Some strategically powerful people - traders at banks or  bosses in ordinary firms - have the power to ruin a firm, for example by selling off assets cheaply or by undertaking destructive ventures. This power to destroy a firm confers upon them the power to, in effect, demand huge salaries. It’s a form of protection racket.
My point here is simple. Crises in particular industries, the lack of investment and the growing power of capitalists over workers have a common origin - in changes in monetizability.

Another case for plan B

Yesterday’s GDP figures have led to calls for a relaxation of Osborne’s fiscal tightening. For me, though, another less-remarked development provides another case for doing so.
I refer to the fact that the government’s real borrowing costs have recently fallen to a record low. The average yield on index-linked gilts with a maturity of over five years is below 0.4%. When borrowing is so cheap, doesn’t it make sense to do more of it?
The counter-argument to this is that such a move would raise interest rates. But even if rates were to rise by one or two percentage points, they’d still be lower than they were in the 90s, when no-one worried about government debt.
The counter-argument here is that rates would rise by more than this. I doubt it, for three reasons:
1. History shows that gilt yields are just not that volatile. Of course, history is not always a guide to the future. But there is something paradoxical about people who normally extol the virtues of free markets being concerned about massive volatility suddenly arising in a market where it has not done so previously.
2. The UK’s fiscal position is reasonably healthy. Our debt-GDP ratio is now 61.9%. With long-term real borrowing costs of 0.4% and trend growth of 2.1% (if you believe the OBR) this implies that we’ll stabilize the debt-GDP ratio even if we have a primary budget deficit of 1% of GDP*. Yes, our deficit is higher than this now. But on current plans,  we’ll have a surplus by 2014-15, implying a fall in the debt-GDP ratio by then. This, surely, gives us some wiggle room to loosen policy.
3. Low gilt yields are not simply - or even perhaps mainly - due to the markets giving a vote of confidence in Osborne’s fiscal plan. They also reflect pessimism about global growth, a global savings glut and a shortage (pdf) of safe assets in the world. These factors would keep yields low, even if fiscal policy were relaxed a little.
These thoughts tempt me to side with Ed Balls.
But not with any enthusiasm. I fear that our problem is not merely that the economy is in a temporary, short-lived “cyclical” slowdown of the sort that can be ameliorated by a modest fiscal easing. Instead, a combination of the investment dearth - which, remember, preceded the crisis - and the effect of the crisis in reducing trend growth has left us with (semi-)permanent slow growth. As Duncan says, Balls plan “isn’t enough to deal with the serious issues we face.”
* Even if we assume lower trend growth and higher borrowing costs, a tiny surplus would suffice to stabilize the debt-GDP ratio.

Social democracy's blind spots

Matthew Taylor points to a “gap between what people say they want – greater fairness – and what policies they are wiling to sanction.” He gives examples of unpalatable policies: higher taxes on well-off pensioners; higher CGT; abolition of higher rate tax relief on pension contributions; and a wider property tax.
This, inadvertently, draws attention to two of the big flaws with social democracy.
First, there’s an omission of any reference to power. Matthew seems to think - like many social democrats since Keynes - that income can be redistributed without touching the basic power relations of capitalism, without challenging the power of capital.
This is questionable. It’s no accident that  the most successful era of social democracy - the 50s and 60s - just happened to be a time when capitalists’ power was curtailed not (just) by the power of the state but by socio-technical factors; Fordism happened to create a big demand for labour, whilst a lack of globalization meant that capitalists had no credible threat to leave. And as Lane Kenworthy points out in a post the whole left should read, any progressive politics requires a strong labour movement.
This poses the question: now that capital has the whip hand over labour, how far is tax-based redistribution feasible? Yes, Matthew’s call for higher property taxes are part of the solution - in a globalized economy land is the obvious thing to tax - but is this sufficient?
Could it be that equality requires more than tweaks to the tax system, but also an empowerment of workers relative to capital at the point of production - that is, worker ownership and democracy? One reason why I welcome Blue Labour, despite Glasman’s appalling comments on immigration, is its recognition of the need for a change (pdf) in the “balance of power within the firm“ and a “commitment…to forms of mutual and co-operative ownership.”
The second issue Matthew raises but doesn’t confront is: what should be the relationship between the left and public opinion? Labour’s answer has for years that it should be one of abject and supine submission. To it, public opinion is not something to be challenged or changed - and not by open debate - but rather a given, a datum, around which policies should be designed. And in fairness to Labour, now that a mass party simply doesn’t exist, it might not have many tools to radicalize opinion.
But the fact is that what John Quiggin says of the US applies equally to the UK; something must be done to shift the Overton window leftwards.
Until the left gets a grasp both of the need for a radical change in power relations, and of a means of shifting or overcoming public opinion, it is destined to fail.

Causality & murder

Anders Breivik was just a “lone psychopath” says Tim Stanley. To which we might reply - yeah, just like David Copeland, Timothy McVeigh, Jared Lee Loughner (arguably), Tony Lecomber and Robert Cottage were lone psychopaths. The ease of this retort lends weight to the notion that, perhaps, "right-wing" ideology did play some role in Breivik’s crimes.
The truth is, though, that I’m not sure it is at all possible to say, one way or the other.
The claim that there is some causality from Breivik’s beliefs to his crime rests upon a probabilistic notion of causality. Obviously, not all right-wingers are mass murderers. But then, not all smokers get cancer. In both cases, the claim is that being right-wing, or smoking, raises the odds of being violent or getting cancer.
Which brings us straight to the problem. Mass murder is extremely rare. Whilst this is excellent for humanity, it is awful for the social scientist - because any inference from tiny samples must contain a large standard error.
What’s more, even if we concede that there is a correlation between right wing ideology and murderous behaviour, the correlation needn’t go from ideology to terrorism. It might instead be the other way round. Maybe psychopaths, with their lack of empathy for others and paranoia, are disproportionately drawn towards some types of right-wing ideology.  Perhaps if right-wing ideology didn’t exist, Breivik would have been just an ideology-free mass killer.  But this is a counterfactual we cannot see.
Or maybe there’s some third factor. Maybe real or imagined social tensions breed both right-wing ideology and murderous tendencies, with no direct link from one to the other.
The data, then, just don’t permit robust inferences. Which means that we are thrown back onto our Bayesian priors. If you think right-wing ideology in unpleasant and violent, then you’ll think it played a role in Breivik’s crimes. And if you don’t, you won’t. In this sense, comment about Breivik tells us more about the commenter than Breivik. Which means there is a rather nice irony in Boris Johnson’s claim that Breivik was “essentially a narcissist and egomaniac.”

Is there a balanced budget multiplier?

Tim Worstall is bemused by Robert Shiller’s endorsement of the balanced budget multiplier. His bemusement is partly wrong, and partly right.
It’s wrong on the grounds that Tim presents. He says it‘s absurd that:

People spending peoples’ money in Friedman’s fourth manner (other peoples’ money on other people) will increase general wealth than people spending money in Friedman’s first manner (their own money on themselves).

This begs the question, in the proper sense of the phrase. Tim is assuming that the fourth manner and first manner are substitutes for each other. But to Keynesians, they are not. The precise point of the balanced budget multiplier is that it creates spending that wouldn’t otherwise occur. For them, Friedman’s fourth manner doesn’t come at the expense of his first manner at all. It is a free gift.
To see why, remember the basic textbooks.
Assume - and this is crucial - that we have unemployed resources. The government then raises both income tax and public spending. Consumer spending would not fall one-for-one as the tax rises, simply because the tax will also reduce our savings; a £10 tax rise might reduce our spending by only £8, with the other £2 being saving that doesn‘t now occur. This means that if the government spends all of the tax revenues, public spending will rise by more than personal spending falls. Aggregate demand will thus rise, putting some of those unemployed resources to work.
This is true as long as our propensity to save is positive.
So goes the basic textbook story. What could go wrong?
And here is where Tim might have a point - plenty.
- It could be that we don’t have truly unemployed resources at all. If the government can only hire men to dig holes and fill them in again by poaching workers away from the private sector, then we have crowding out, not a multiplier.
 - Maybe  the increased initial demand will lead to higher interest rates or a stronger exchange rate, either of which would tend to reduce subsequent aggregate demand.
Perhaps - and Tim would emphasize this more than me - higher taxes reduce labour supply and thus output.
- Higher taxes might cause people to increase their savings. They might think “if the government can try the balanced budget multiplier once, they‘ll try again, I‘ll save up in anticipation of  higher future taxes.” This is analogous to, but analytically separate from, Ricardian equivalence.
For these reasons, it’s quite sensible to be sceptical about the efficacy of a balanced budget rise in government spending. And in truth, governments very rarely use it as a tool of stabilization policy. Automatic stabilizers, unbalanced budget fiscal expansions, and monetary policy are all far more common than balanced budget stabilization.
For practical purposes, then, Tim might be right - albeit for the wrong reasons. But this is a merely empirical matter. It cannot be settled by snarking or by mere ideological statements.

Left & right, state & power

Charles Moore’s revelation - “the Left might actually be right” - raises a challenge for the left as well as the right.
Take the challenge for the right first. Moore suggests that the Left might have been right to regard free markets as a “set up” in which “the rich run a global system that allows them to accumulate capital and pay the lowest possible price for labour.”
Now “set up” is a crass simplification: capitalists do not have such sophisticated conspiratorial powers. But the rough point holds. “Market forces” are a domain in which power relations play out - and a combination of globalization and technical change in recent years has further enhanced the power of capital over labour. One of the great intellectual failures of classical liberalism has been the inability to see this, a failure to see that power exists in markets, as well as the state.
But there’s a challenge to the left as well. Moore rightly cites two examples of how money and power collaborate against  the interest of ordinary people: the way in which the response to the credit crunch and euro debt crisis entailed a bail out for bankers but austerity and redundancy for workers. But the thing about these episodes is that the state has been a key player in effecting this redistribution towards the rich.
The free market right and the statist left are, then, guilty of similar errors. Just as the right fails to see that “free markets” can be a means whereby capitalists exercise power over workers, so the statist left fails to see that the state can also be such a means. As Moore concludes:

One must always pray that conservatism will be saved, as has so often been the case in the past, by the stupidity of the Left. The Left’s blind faith in the state makes its remedies worse than useless.

The question for the left, then, is: what can be done to prevent capitalists from capturing the state? It is not good enough merely to win elections on a social democratic platform; New Labour merely reminded us of has the limits of this strategy. Instead, some forms of radical institutional change are needed to disempower both capital and the state.
It would, of course, be absurdly pretentious and hubristic of me to pretend to have answers here - though worker ownership and control (of which there are many types) must, surely, be part of the answer.  

Consistency

One thing that has often irked me is the criticism politicians get for making U-turns. What’s wrong with changing your mind if new information comes to light?
A new paper by Armin Falk and Florian Zimmermann of the University of Bonn sheds light on my puzzlement. People, they say, value consistency in themselves and in others as a way of signalling intellectual strength.
And this value is an intrinsic one. We don’t just like consistency because it is a means to better decision-making. We value it even if it gets in the way of rational decisions.
Falk and Zimmermann established this experimentally. They got subjects to estimate the number of peas in a bowl. Subjects were first asked to make an estimate. They were then told that the wisdom of crowds means that average estimates are often more accurate than individual estimates, and told what the average estimate was. Subjects were then invited to give a second estimate of the number of peas, being paid according to the accuracy of that estimate.
They found that subjects did not update their first estimates by very much in light of that new information. As a result, they ended up making more inaccurate estimates, on average, than people who had merely been given information about the average estimate and then invited to make an estimate without having made an earlier guess.
A desire for consistency, they conclude:

induces subjects to act consistently at the cost of neglecting valuable information and receiving lower payoffs…Early statements on a matter can make people ignore valuable information.

This is consistent (!) with a classic study (pdf) by Lee Ross and colleagues back in 1979. They found that when supporters and opponents of the death penalty were given the same evidence to consider - some it of supportive of the penalty and some not - their beliefs became more polarized. This contradicts Bayes’ theorem, but is consistent with people wanting to behave consistently, wanting to maintain their pre-established position.
There are three aspects of Falk and Zimmermann’s experiment that are especially significant:
1. There was no ambiguous information that might have been interpreted to corroborate subjects initial estimates. In the real world however - as in Ross’s experiment - there is often such noisy information. This means the desire for consistency will, in practice,often be reinforced by the confirmation bias, our tendency to interpret new data in a way that corroborates our priors.
2. The number of peas in a bowl is a simple factual matter. An opinion on it is therefore not constitutive of our identity in the way that our political opinions are. It should, therefore, be susceptible to change in the face of new evidence. That even such “neutral” opinions can be easily fixed means we should be especially pessimistic about the prospects for changing other opinions.
3. Subjects in this experiment had little concern with a reputation for consistency. Politicians, however, want to establish such a reputation. This will strengthen the desire for consistency.  
The message here is a depressing one - it’s that rational cool-headed political dialogue is very difficult, simply because once we have taken a position, evidence does not shake it.