Stumbling and Mumbling

"Values" and the crisis of social democracy

Phillip Collins in the Times (£) reminds me why I’m a Marxist rather than a social democrat. He mocks Ed Miliband’s claim that Britain has been run by people with the “wrong values” as being “the dying breath of vintage social democracy.”
What Philip doesn’t do, though, is show why Miliband is so wrong.
To do this, let’s concede his factual premise - that bosses have had the “wrong values”. How can this be so?
Miliband seems to suggest that it might be just bad luck.
Nonsense.
What he misses is that selection effects and incentives serve to generate the “wrong values” at the top. I mean this in four ways:
1. It tends to be the ambitious and charming to rise to the top, but these are disproportionately psychopaths.
2. Bosses and politicians are selected for their irrational overconfidence. This means that, when they get power, they are likely to over-rate their own ability and so undertake dangerous policies such as takeovers.
3. “Yes men” tend to get promoted more than nay-sayers and “trouble-makers”. This can contribute to groupthink in boardrooms in which bad decisions are not sufficiently scrutinized.
4. Even if these selection effects were not to work, and bosses had “good values”, competitive pressures would compel them to act badly. As Marx wrote:

Capital is reckless of the health or length of life of the labourer…But looking at things as a whole, all this does not, indeed, depend on the good or ill will of the individual capitalist. Free competition brings out the inherent laws of capitalist production, in the shape of external coercive laws having power over every individual capitalist.

Granted, Marx slightly overstated the case: it can sometimes be rational for bosses to offer good pay and conditions. But the general point holds (sometimes). The bank boss who didn’t hold dodgy mortgage securities or sell payment protection insurance policies would have seen his bank’s share price fall and been under threat of losing his job.
The problem, then, is not one of values but of mechanisms. Capitalism contains mechanisms which tend to produce the "wrong values". The challenge for social democrats is: can you provide alternative mechanisms that constrain this tendency?
Years ago, the answer was: yes, sort of. Strong trades unions acted as a countervailing power - for example by reining in bosses’ “greed.”
But in a world of weak unions, what have social democrats got? Nothing, I fear, but windy moralizing.
Another thing: It’s quite possible that politicians, quangocrats and top civil servants are also selected for overconfidence and “yes-men” characteristics. If so, this just deepens the mess that statist social democracy is in.

Libertarians in the ghetto

This post by Tom Papworth depresses me. He cites Robert Nozick’s famous Wilt Chamberlain parable to show that:

Egalitarianism is completely incompatible with freedom. The guardian of distributional justice must constantly intervene to thwart free exchange among individuals.

This is daft. Wilt Chamberlain was in fact taxed very heavily - top tax rates in the 60s were over 70% - and yet he continued playing. His fans weren’t “thwarted” from seeing him play at all. Tom’s claim that high taxes undermine incentives is, in this case, plain wrong.
Yes, Chamberlain’s fans would have been thwarted, had their desire been to see him make even more millions than he did. But it’s not obvious they did want this.
Tom is wrong in another sense. He says that egalitarians are mistakenly “fixated on money“:

What matters in society is one’s ability to satisfy one’s ends, not the amount of cash one has under the mattress. Therefore an equal society is surely one where everybody’s ends are equally satisfied. If Wilt and his fans are equally happy, society is equal even as Wilt amasses his millions. If Wilt and his fans are compelled to have the same amount of money, and as a result Wilt’s fans feel deprived of good basketball while Wilt gets to accompany the President to an important funeral, society is unequal even if Wilt and his fans have a similar bank balance.

This is wrong, and not just because progressive taxes did not deprive Wilt’s fans of good basketball. It’s also wrong because the monetary inequality that arises from such voluntary transactions can cause other ends to become unsatisfied.
For example, the rich might use their wealth to fund political causes, thus generating inequality of political power. Or they might misinterpret their good luck as some reward for their own virtue and so develop an excessive arrogance or sense of entitlement, thus threatening social cohesion. Or they might just spend their money on inherently scarce positional goods, which third parties - who otherwise have no view on Wilt Chamberlain - cannot then afford.
All of this, though, is a secondary issue. Egalitarians’ objection to inequality is not, principally, that it rewards the likes of Wilt Chamberlain or even Carlos Tevez. It’s that, instead, a lot of inequality arises from non-voluntary mechanisms such as exploitation or primitive accumulation (which is still going on today). Nozick himself saw this. He wrote:

One cannot [his emphasis] use the analysis and theory presented here to condemn any particular scheme of transfer payments, unless it is clear that no considerations of rectification of injustice could apply to justify it (Anarchy, State and Utopia p 231)

All of this brings me to my main gripe. If Tom had spoken to any egalitarian, or read Jerry Cohen, he would be aware of the sort of points I’ve made and would have tackled them. But he shows no sign of having done so. He’s just constructed some straw man (“the egalitarian”) and knocked him down with a 40-year-old story that actual, real egalitarians have long since answered (whether well or badly is another matter).
He is, then, just stuck in some intellectual ghetto talking to fellow believers.
But of course, it would be absurd to think that only “libertarians” are guilty of this. Lefties do it too; I don‘t have to name names, do I?
And this is why I say I’m depressed. What we’re left with is not a political discussion at all, but rather two mutually ignorant circle jerks. 

In defence of short-termism

Yesterday, Ed Miliband attacked “short-termist culture” and people who chase a fast buck. This is a mistake. There’s much to be said for short-termism.
The evidence that investment is being held back by short-termism comes from a recent paper (pdf) by Andrew Haldane and Richard Davies. They say:

Cash-flows 5 years ahead are discounted at rates more appropriate 8 or more years hence; 10 year ahead cash-flows are valued as if 16 or more years ahead; and cash-flows more than 30 years ahead are scarcely valued at all.

But I’m not sure this is irrational or even wrong. This is because Knightian uncertainty increases very sharply as we look further ahead.
Put yourself in the shoes of a CEO looking one or two years ahead. He’s got a fair idea of how Porter’s five forces (or another other framework for analyzing business prospects) will look. New products or powerful new rivals don’t usually emerge that quickly.
But if he looks 10-20 years ahead, he’ll not have a clue. We can’t predict how technology and market power will shift over such horizons.
This means that whilst we might have some idea about investment paybacks over one or two years, we can’t have such firm ideas over 10-20 years. In this context, short-termism is reasonable.
If we’d had long-term investment in manufacturing in the 80s, we’d have built lots of factories making fax machines and instant cameras.
And in the early 70s, British Rail’s long-term thinking caused it to patent a space ship. Its customers would probably have preferred a little more short-term investment in the 7.52 from Orpington.
I suspect that a lot of what looks like long-term investment is in fact short-termism that got lucky. When Bill Gates started Microsoft in the early 80s, it wasn’t because he was preparing for a boom in computer demand 15 years hence. It’s because he saw a little niche and lucked out as the niche grew.
What’s more, short-termism can protect us from two cognitive biases.
One is overconfidence. Given that the long-term future is unknowable, investment in long-term projects is often founded upon overconfidence about one’s predictions; this might be true for high speed rail. Short-termism offsets this.
The other bias is the planning fallacy. Complex projects take longer and cost more than expected. Had we had a little more short-termism, we’d not have wasted hundreds of millions on rejigging NHS IT systems or on building a tram system in Edinburgh.
The record, then, surely shows that governments shouldn’t encourage long-termism. Its own long-termism is bad enough.
This is all the more true if we ask: what can governments do to ensure that companies can earn long-term returns? The most effective thing they can do is to reduce the uncertainty firms face about future competitive threats. But this requires the government to protect vested interests - which is exactly what Mr Miliband pledged not to do. 

Jockeys, whips & market failure

The British Horseracing Authority has announced tougher new rules on jockeys’ use of the whip. This draws attention to an insufficiently appreciated failing of free markets.
What I mean is that using the whip is an example of an arms race. In the absence of rules against whipping, each jockey would whip his horse to go faster. The upshot would be no advantage to individual jockeys - only one of whom could win the race - but lots of discomfort to the gee-gees.  In other words, the rational pursuit of individual self-interest leads to an outcome that is, in aggregate, worse for everyone* - “smart for one, dumb for all“, as Robert H. Frank has said.
What’s more, this problem cannot be solved reliably merely by voluntary contracts. Jockeys cannot agree among themselves not to use the whip, simply because any individual jockey would have an incentive to defect and use the whip to increase his chances.
The only solution, then, is to have rules imposed from outside, as the BHA is doing.
But here’s the thing. There are, perhaps, lots of examples in economic behaviour of arms races.
1. In a workplace each individual has an incentive to work longer hours to win promotion. But if everyone does so, individuals’ chances of promotion don’t change. All that happens is that people work longer (pdf) than they‘d like.
2. One objection to  Catherine Hakim’s advice that women should make more of their erotic capital is that, if all women do this they will over-invest in surgery, clothes and cosmetics without improving their earnings. Men will benefit from there being fewer munters, but women will lose.
3. Education, arguably, has become an arms race. If loads of people have degrees, others need one merely to avoid the negative signal sent by not having one. And yet others will get a postgraduate degree to signal their superiority over first degree-holders. The upshot is over-spending on education and over-qualified workers.
4. Robert H. Frank has argued (pdf) that Americans’ over-indebtedness in the 00s arose from a kind of arms race. As people saw friends and neighbours spending more, they too spent more in order to keep up with the Jones’. The result was high debt and anxiety arising from a fear of “falling behind.”
In all these cases, rational self-interest can lead to a decline in aggregate well-being. Adam Smith’s invisible hand, then,  fails more often than is generally realized. In this sense, the BHA has reminded us of the limits of “neoliberalism”
* I’m ignoring here the possibility that race-goers gain utility from the increased speed of all horses.

Social democracy in hard times

I know a party conference isn’t the place for clear thinking about fundamental issues. But even so, Ed Balls’ speech contrives to miss the basic challenge facing policy-makers.
His five point “plan for growth“ consists mainly of temporary tax breaks and the pulling forward of public investment. This would be OK(ish) if our problem were merely a cyclical one of temporarily weak demand.
But it is not. We also face the problem that a combination of slower productivity growth and the investment dearth mean that might well face years of sluggish growth - and the “tough fiscal rules” Balls advocates would merely exacerbate this.
Balls, though, gives little hint of being aware of this. He seems to be in a pre-crisis mindset which imagines that economic growth can be achieved if only policy-makers do the right thing. But what if it can’t? What does a leftist economic policy then look like. As Hopi asked:

What is a progressive social democratic party actually for, if it is not able to spend more money than in the past?

I’d suggest four possibilities:
1. Given that investment opportunities are scarce, we must make the most of the few we have. This means investment mustn’t be held back by red tape or by a lack of finance; Adam Posen’s call (pdf) for a state bank is thus worth considering. But we shouldn’t be too optimistic about what these can achieve.
2. There’s a case for limiting top pay. The point here is not merely about fairness. One lesson of the collapse of the banks is that high pay doesn’t work. It doesn’t call forth “talent”, but rather destructive rent-seeking and risk-taking.
3. There’s also a case for more redistribution to the lower-paid and unemployed. It looks as if the main problem for coming years will be a lack of demand for labour more than a lack of supply. Worrying about blunting work incentives in this context is silly.
4. Workplace democracy. Again, another lesson of the banking crisis is that top-down organizations can fail badly; naturally, given his Brownian managerialism, Balls cannot see this. Managers should be seen not as superheroes capable of transforming organizations but rather as custodians and administrators, and be selected and paid accordingly. Note that I regard worker democracy as a means of increasing equality in part by curbing top pay.
What’s more, with public spending likely to be squeezed, it is vital that we make the most of every pound that’s spent. This requires that public sector workers have more control, as it is they more than managers pursuing vainglorious strategies who know the detailed nitty gritty of how cash is wasted.
Now, you might object here that I’m seeing my favourite hobby-horses here. Maybe. Please suggest alternatives. The key point, though, is that Labour must ask what social democracy looks like in hard times.
Not only did Balls not answer this question, he didn’t even ask it.

"Losing the economic argument"

Douglas Alexander says that Labour has been losing the economic argument. And the opinion polls (pdf), as described by Martin Kettle, bear him out. This is puzzling in two senses.
First, although Labour has (so far) lost the argument in terms of public opinion, it has not lost the argument intellectually. There was a powerful case for it to run deficits even in the mid-00s, and there is, of course, a strong argument against fiscal austerity now.
Secondly, support for austerity is not obviously founded in self-interest. The same polls that show support for the Tory position also show that  71% of voters worry that they will suffer directly from the cuts. And public service users aren’t the only losers. Savers are also losing; the counterpart of tight fiscal policy is a prolonged loose monetary policy which is keeping interest rates negative in real terms. When Danny Alexander boasts that the coalition has kept interest rates low, he is confessing to imposing losses upon  millions of older, wealthier voters.
So, why isn’t Labour doing better on this issue? I suspect there are five reasons.
1. Labour hasn’t tried very hard to defend its case - partly because it doesn’t know how to position itself with regard to its time in office.
2. The Coalition has a vivid metaphor  - that we have “maxed out our credit card.” Although this is economically illiterate, it is a clearer, simpler message than the alternative.
3. The Coalition has been able to exploit the illusion of “necessity”. They‘ve succeeded in presenting cuts as inevitable.
4. Bayesian conservatism. Very many losers from tight fiscal policy - the older, richer people who’d see their interest income rise if fiscal policy were looser and monetary policy tighter - are disposed to support the Tories anyway. (They re not alone in supporting policies against their self-interest; Hampstead lefties who favour higher taxes on the rich do the same.)
5. The guilt-by-association fallacy.  Labour’s economic case suffers from negative halo effects. It is closely associated with Gordon Brown, who is a deeply unpopular figure. And it is associated with wasteful public spending.  These negative associations detract support from what is a respectable intellectual case.
Whatever the cause, there’s a message here. It’s the same message we get from two apparently very different subjects - the inefficiency of tax systems and popular opposition to fixes for the euro area’s debt problem. What we see in all cases is that, in politics, rational self-interest does not always win.

Organizational stupidity

One of the great curiosities of the UK economy is that productivity has stagnated. Output per hour has fallen in the last four years and has grown by only 1.1% a year over the last 10 years.
This is curious because it seems to contradict the principle of learning by doing. I spend about 10 hours a week playing guitar, and I’ve gotten much better in the last four years. Why, then, have the 900 million-plus hours per week we devote to work not yielded productivity improvements?
Here’s a theory - which I’ll overstate for expositional reasons. It’s that companies are institutionally stupid. They are incapable of learning.
Three pieces of evidence are consistent with this:
- 90% of the growth in total factor productivity in UK manufacturing in the 1980s came from plants entering and exiting (pdf) the market, rather than from incumbents improving productivity.
- The statistical distribution of corporate deaths is very similar to that of species’ extinction. This, says Paul Ormerod, suggests (pdf) that “firms have very limited capacities to acquire knowledge about the true impact of their strategies.”
-  Alex Coad has found that corporate growth is largely random and unpredictable. This is consistent with the possibility that there is no “corporate intelligence“ that leads to growth (Or it could be that such intelligence is uncorrelated with observable variables - but why?)
But why don’t firms improve with practice in the way that individuals' musical or sporting performance improves? Here are four possible differences:
1. Within firms, there’s no mechanism for translating individuals’ learning, or incremental knowledge, into corporate knowledge. As Hayek said, hierarchies are terrible at using fragmentary, tacit, dispersed knowledge.
2. Job turnover means that job-specific human capital gets lost.
3. Bosses are selected for overconfidence. But overconfidence militates against learning.
4. In companies, the feedback that’s necessary for improvement gets warped by adverse incentives or ego involvement. If I play a phrase or chord badly, my ears tell me to practice it more. But if a company gets some adverse feedback - falling sales, say - no-one has an incentive or desire to say “I screwed up: I‘d better improve.” And formal efforts to generate feedback, such as performance reviews, often backfire.
What I’m saying is  what every methodological individualist knows: companies are not individuals writ large. The differences between them can mitigate against learning by doing.
And herein lies the cost of the banking crisis. Because productivity growth comes from entry and exit rather than firms’ learning on the job, anything that retards the entry process - such as a lack of finance - will retard aggregate productivity growth, and hence economic growth.
Another thing: What’s true of firms is probably true of other organizations such as government departments. Organizational stupidity might well contribute to Baumol’s cost disease.

Cognitive biases in football

Cognitive biases are everywhere - in stock markets, boardrooms (pdf), politics and even songs.It should, then, be no surprise that they also affect football punditry.
I'm thinking here of four biases:
1.Misperceiving randomness. There's always a chance that a team will suffer from bad luck: its opponents' finishing will be unusually brilliant; refs and linesmen will make bad decisions* against it; or usually good players will make bad errors. These random events will sometimes bunch together - that's the nature of randomness. If they come in one game, the team will get a hiding. If they come over a few successive games, it could suffer a losing streak.
But the pundits won't appreciate this. Instead, we'll hear about the club losing form, or being in crisis or decline. But in fact, what might have happened is just an "accident."
2. Hindsight bias. Results colour our attitude to teams' performance. If a team wins, we naturally think it played well and this can distract us from its shortcomings. For example, Manyoo's victory over Chelsea covered up the fact that they conceded 20 shots. Had things gone a little differently - better finishing by Chelsea or two of United's goals being ruled offside, this would have led the pundits to question the quality of their young defenders.As it is, they escape scrutiny from the media (though not, I suspect, Sir Alex).
3. The availability effect. Some aspects of the game are more noticeable, mentally available, than others, and so they attract an attention disproportionate to their importance.
The stupidest example of this is when retards criticise managers for not being more passionate on the touchline. But this is just the 2% of a managers' working week that is the most salient.
A more subtle form is that set pieces are more salient than many aspects of open play, such as the transition from possession to non-possession. This means that if a team is poor at defending set pieces, it'll get a reputation for bad defending even if its overall defence is good.You'd never guess from all the howling that,last season, Arsenal had the fourth-best defensive record in the league despite: having no goalkeeper for half the season; missing their best defender for most of it; not parking the bus in front of the goal;and being the victim of some appalling officiating.
4. Confirmation bias. Once people have an idea, they find evidence to corroborate it.So, having gotten the idea that Arsenal can't defend, they overweight evidence for this, an underweight evidence to the contrary. This is all the more likely to happen if it combines with point 1.
The counterpart of this bias is that people don't admit they were wrong.12 months ago, everyone said Arsenal needed to buy a new keeper. Wenger thought differently. And when Szczesny made that save against Udinese, did Wenger's critics recant and say that, maybe, they are wrong on other things as well? No.
Now, although fans and pundits commit these errors, coaches rarely do. As Arsene says, "We must not completely believe what people say when it goes well or badly." This isn't because they are better educated in statistics than their critics - though Arsene is - but rather because rationality often arises from practice, so those better practiced in football make fewer intellectual errors about it.This means that coaches don't over-react to good or bad streaks. They "take positives" from a defeat not (just) out of the self-serving bias but because there often are such positives. And they sometimes - though rarely in public - describe a winning performance as "disgraceful."
And yet, despite all this, fans and journalists continue to criticize coaches who have vastly more knowledge and expertise than they do. Which is, surely, an example of the Dunning-Kruger effect.
* I'm assuming refs' bad decisions are random. This is not obvious.

The final crisis of capitalism?

Are we seeing the final crisis (pdf) of capitalism? What I mean is that Marx envisaged that the end of capitalism would see four features, all of which are in place now.
1. The rate of profit would fall, reducing the motive to invest and producing slower growth and bigger recessions.
Although observed, past profit rates are high, companies’ reluctance to invest and the low valuations on shares suggest that bosses and shareholders anticipate very low future profit rates.
2. Low returns on real assets would lead to speculative bubbles and swindles and hence financial crises.
To some extent, the banking and euro area debt crises are the results of the dearth of real investment opportunities arising from the fall in (expected) profits. This lack of investment, combined with high Asian savings drove bond yields down. That led to the growth of mortgage securities, as banks tried to synthesize securities to meet demand for them, and encouraged governments to borrow. In this way, the seeds of the financial crises were sown by the fundamental crisis of real profitability.
3. Increased inequality would exacerbate economies’ propensity for crises, by creating a mass of people too poor to buy the goods which capitalism produced.
This has not quite happened. But, as IMF research has argued, inequality has had a very similar destabilizing effect. It led to the build-up of debt which contributed to the banking crisis.
4. By its end, capitalism would cease to be a means for developing the economy’s productive forces and become instead a barrier to their development. As Marx put it:

At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production…From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution.

This too fits capitalism today. Capitalists invest only if it is profitable to do so. When returns to investment were monetizable, this meant that capitalism was indeed a form for developing the productive forces. But returns have become less monetizable, and so capitalists are now less willing to invest. I mean this in several ways:
- Investment is no longer about building big factories and using capital-intensivity as a barrier to entry and hence form of monetizability; this is done in Asia rather than the west. Instead, investment here is more closely tied to innovation. But capitalists have always had trouble appropriating the returns to innovation, and so are - now they have wised up to this - are reluctant to undertake it.
- Some/many investments (such as in green technologies?) have higher social returns than private returns. But capitalists don’t invest merely because social returns are high.
- Technology and changing social norms mean that many capitalist investments in the media are no longer monetizable.
Insofar as there are potentially useful investments which are capitalists are not undertaking because they are not profitable, then capitalism is indeed a fetter on the development of productive forces.
Now, of course, the death of capitalism has been hailed many times before. But I suspect that this crisis differs from that of the 30s and 70s.
In the 30s, profits were depressed by weak aggregate demand, something which could be cured. In the 70s, they were depressed by labour militancy, and when this was killed, capitalists’ desire to invest was rekindled.
But the problem now is deeper than then. Capitalism has lost its underlying oomph; investment was low, remember, even before the recession. And this suggests that its vitality cannot be restored by policy measures, be they Keynesian (“boost demand”) or Thatcherite (“attack workers“).
Herein, though, lies the problem. Even if capitalism is dying - and I say if - there is no-one to kill it off; Marx’s prediction that the working class would become a powerful agent of change was wrong. And there is no well worked-out vision of an alternative.  Gramsci’s words fit the bill:

The old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.

How bonuses backfire

There’s growing evidence that high-powered financial incentives such as big bonuses can backfire. This can be because they crowd out intrinsic motivations (pdf) and creativity; or because they encourage free-riding; or because they lead to choking; or because people fear their work will be only imperfectly monitored and so won’t get a payoff even if they work hard.
There might, though, be another possible reason for bonuses to fail, as a new paper points out.
Bonuses, the researchers say, have an ambiguous effect. On the one hand, there’s the standard effect (subject to the above caveats) of inducing more effort. On the other hand, though, there’s an informational effect. If the boss knows more than workers about the job, a big bonus will be interpreted as a signal that the job is very difficult. And this can, the researchers show, have big effects in reducing effort, as workers figure that there’s no point busting a gut in a losing cause.
What I wonder, though, is how applicable this mechanism is to the real world. I suspect it might not be. One reason for this is that the criteria that trigger bonuses might not be tightly defined. Instead, bonuses might be just a loose form of profit-sharing, in which case their signal is diluted.
Another reason, though, lies in selection effects.
Although rational people might be deterred from taking on a job with a big bonus, overconfident ones might not be. They’ll figure: “This is a tough job, but I’ve got the skills to do it.” This gives us another way in which some firms might actually select for overconfidence.
Also, this paper draws the information asymmetry very sharply; principals have information, agents don’t. In practice, though, this might not always be the case. Agents might instead find ways of cooking the books in order to appear to hit their targets. In this way, bonuses might select for unethical workers; I don‘t know if this happened in the case of Kweku Adoboli, but he fits the story.
Whatever. The point here is simply that the notion that bonuses have unambiguously good incentive effects is, surely, plain wrong. Sometimes, they work and sometimes they don‘t. And this means that a common justification for inequality is greatly flawed.