Stumbling and Mumbling

Wages, fairness & productivity

Do higher wages motivate workers to work harder? A recent experiment conducted on Swiss newspaper distributors suggests the answer's yes, but only partially so:

Workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, while those who feel adequately paid or overpaid at the base wage do not change their performance.

This suggests that people are motivated not so much by the cold cash nexus as by feelings of reciprocal fairness*.

You might interpret this as an argument for a living wage (pdf): if it causes poorly-paid workers to raise their productivity, it might pay for itself. I'm not sure, for two reasons.

First, I'm not sure how great is the overlap between actual pay and the feeling of being unfairly paid. Anyone who's been in an investment bank at bonus time will know that there's a difference between the two. It could be that the just world illusion mitigates self-serving biases, causing some low-paid workers not to feel unjustly treated.At the last general election, 31% of people in the DE social class voted Tory.

Secondly, even if a living wage does raise productivity, it could still destroy jobs. If it causes a chambermaid to clean an extra room per shift, the living wage might merely allow hotels to employ fewer chambermaids.

Efficiency wage models, remember, are models of unemployment.  

* Of course, higher wages might be necessary to attract workers in the first place, but this is not the same as motivated them to work harder once they're in the job.

Mario Balotelli & primitive accumulation

Mario Balotelli's transfer to AC Milan highlights the Marxian critique of capitalism.

How can Man City get £19m for a player who is so obviously flawed? The answer's simple. It's because their great wealth means they did not need to sell him, and so could drive a hard bargain. The party in the strongest bargaining position gets most of the surplus from any trade.

As the old saying goes, "money begets money." Wealth - or what amounts to the same thing, cheap and easy access to capital - can be used to get the better end of deals. For example:

- Being cash-rich gives you the chance to profit from fire sales and desperate fund-raisings, as when Warren Buffett lent to Goldmans in 2008.

- Companies that are cash-rich or have a low cost of capital can use this to engage in roll-ups and multiple arbitrage and so profit from taking over businesses even if they do not manage them much better.

- Banks can "hoover up pennies" - make low-profit quasi-arbitrage trades - if their cost of capital is low enough. This is why they are so opposed to Volcker rules and the ending of "too big to fail" subsidies; they raise capital costs and thus render a lot of their activities unprofitable.

- If you have access to easy money, you can profit by lending this at high rates to desperate borrowers, or by selling low-value insurance (pet insurance, extended warranties etc) to the cash-poor.

All this should be trivial. Marxists, however, add to this list the capital-labour relationship. In most cases - top footballers being an exception - physical capital is scarce and labour abundant. And this means capital can extract most of the surplus generated from the trade between capital and labour. Sure, workers are better off working than not. But their poor bargaining position means they are not much so. And this begets exploitation. Exploitation, says John Roemer, is "the distributional consequence of an unjust inequality in the distribution of productive assets and resources."

That word "unjust" is doing some work. Buffett's trade with Goldmans was good for him and bad for them, but we wouldn't really call it exploitative because the inequality that begat it was not unjust.

So, is the inequality between worker and capitalist unjust? You can certainly tell just-so stories in which it isn't. But Marxists take a historical perspective. Marx devoted a large part of Capital vol I to describing "primitive accumulation", the process whereby capital came into the world as a result of theft, slavery and conquest: "capital comes dripping from head to foot, from every pore, with blood and dirt." This is, of course, no mere history: how did Russian oligarchs get rich?

An overlooked difference between Marxists and their opponents is that Marxists think this matters.

"History & brand"

In discussing the Tories lack of support (pdf) among ethnic minorities, Rachel Sylvester in the Times (£) quotes a Tory strategist: "This is nothing to do with class or ideology. It's to do with history and brand."

This poses the question: could it be that voting behaviour, like so much else, is shaped by history?

What makes me suspect so is that successful brands are the product not of marketing campaigns but of history. Products such as Cadbury's chocolate, Bird's custard and Colman's mustard took off in the 19th century because they were initially better than rival products, and this built a trust that lasted.

And herein lies the Tories' problem. Ethnic minorities remember that, in the 60s, Tories hated them: "If you want a nigger for a neighbour, vote Labour." And just as people support Man United - probably Britain's biggest brand - because Charlton, Best and Law played for them, so they shun the Tories because of (folk) memories of the 60s.

In this sense, perhaps the Tories' anti-immigration policy backfires. Whilst it might appeal to the interests of (some? many?) ethnic minorites who compete in the labour market against new immigrants, it also reminds us of when the Tories really were the nasty party.

This poses the question: can the Tories rebrand themselves? I doubt it.

Branding needs an empirical basis; marketers can't fool the public for long. As Jonathan Salem Baskin says:

Branding is based on an outdated and invalid desire to manipulate and control consumers' unconscious. It looks good and feels good to the people who produce it, but it has little to no effect on consumer behaviour...It is the conceit that marketers can convince them of things that aren't substantiated by fact or the reality of experience. (Branding only Works on Cattle p14, 17)

Because of this, many efforts at rebranding have failed: think of the Post Office calling itself Consgnia or HMV's efforts to sell electronic tat. Where rebranding has worked, it's been through luck (eg Burberry's appeal to urban youth in the 90s), or through good new products (such as Apple's shift from computers to iPods and phones, or Sony's entry into games consoles markets) or because the company has a longstanding appeal that only needs brushing up (eg Marks & Spencers passim). It's not clear that the Tories have any of these advantages.

Of course, the Tories' actual policy platform isn't hostile to ethnic minorites any more - it's difficult to see a policy reason why Indians should split 61-24 in favour of Labour over the Tories - but this is not sufficient. If a car is going downhill, it won't change direction if you only put it into a neutral gear.  

Perhaps, therefore, the Tories are victims of path-dependency. Maybe marketing men cannot fight against history.

Socialism, institutions & human nature

Owen Jones says: "As a socialist, I am compelled to have an optimistic view of humanity, to believe we are not all motivated by greed, selfishness or hate." I have problems with this.

First, the way Owen puts this, it looks like wishful thinking; his view of an objective fact (human nature) is motivated by political beliefs. This is surely irrational.Human nature is what it is, whether you're a socialist or not.

My bigger gripe, though, is that I'm not sure such idealism is necessary for socialism at all.

Put it this way. Owen is surely right to say that the Holocaust - and I'd add much else in history - shows the "almost infinite malleability of humanity": we are capable of great evil and great good.

The question, therefore, for socialists and everyone else is: through what mechanisms and institutions is behaviour shaped? Could socialistic institutions generate more good behaviour and less bad than capitalistic ones? There are (at least) three reasons to think so:

1. We know from the orthodox economics of crime and from Ben Friedman's historical research that people who are fearful, poor and insecure tend to behave worse than those who are not. This suggests that egalitarian institutions should reduce crime and violence, and perhaps intolerance generally.

2. Hierarchical companies have (built-in?) adverse selection mechanisms; their leaders are selected to be irrational, narcissists or psychopaths. And market forces might not select against companies run by such people.

Of course, the problem here is not capitalism but any hierarchy: Stalin's USSR and Fred Goodwin's RBS both demonstrate my point. It is for this reason that socialism must be non-hierarchical.

3.There's reasonable evidence that worker-managed firms are at least (pdf) as efficient as similar (pdf) capitalistic ones, perhaps because peer pressure helps boost productivity. This suggests that egalitarian institutions can restrain our selfish impulses to be lazy whilst others do the work.

In these respects, socialism - which is not the same as statism, mad libertarians please note - has the edge.

The big open question, however, concerns the role of markets. You could interpret these as a fantastic mechanism for converting selfish impulses into social benefits, as Smith did when he said "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

On the other hand, though, we know that the cash incentives used by markets can crowd out intrinsic motives and creativity so that selfishness is economically inefficient.

My point here is not to cheer for socialism, or to make sweeping generalizations. Instead, it is merely to suggest that socialism - for me anyway! - is not about hippy-dippy all-you-need-is love idealism, nor about emoting about "unfair" capitalism. Instead, it is question about the interplay of institutions and behaviour.

Cripps' message

Boris Johnson's reference to the "hair shirt, Stafford Cripps agenda" raises more mischief than perhaps he realises.

This is because Cripps' austerity - even more than the 1980s tightening is an example of expansionary fiscal contraction.

Cripps' fiscal policy was certainly tight. His 1948 Budget, for example, called for "an exceptionally large Budget surplus*." The primary budget balance - which was in deficit of 12.4% of GDP in 1945 - was in a surplus of 3.9% in 1947 when he became Chancellor, and he increased this to over 9% of GDP by 1950.This is a bigger tightening than Osborne is planning; the OBR envisages the primary deficit falling from 5% of GDP in 2011-12 to 1.8% in 2015-16.

However, this tightening - which was achieved mostly by a rise in the share of taxes in GDP - was accompanied by an economic boom. Between 1947 and 1951, GDP grew by 3.5% a year, investment by 5.6%, exports by 11.1% and industrial production by 5.8% a year, whilst the unemployment rate stayed below 1.5%.

Such growth was, of course, facilitated by the massive backlog of investment opportunities which was opened up by the war - including the need to rebuild houses.

And herein lies Johnson's mischief-making. This episode draws our attention to two points.

First, the failure of Osborne's fiscal policy shows not merely that he is a lousy economist, but a poor historian too. A good historian would have asked: under what conditions has fiscal austerity been accompanied by good economic growth in the past? Whether he looked at the early 80s or the post-war period, he would have seen the same thing - that the circumstances in which austerity works are very different from those that exist now.

Secondly, strong growth during the post-war reconstruction period has caused commentators for years to exaggerate the "natural" vigour of capitalism. Between 1948 and 1973, real GDP per head grew by 2.5% a year. But this was exceptional. Since then, it has grown just 1.8% a year, and in the 118 years before 1948 it grew just 1% a year.

In this sense, those who talk about modest growth being the "new normal" are lacking historical perspective. A sluggish economy is in fact the old normal. 

* The motive for this was to reduce inflation, rather than to repay debt as an aim in itself.

Remember animal spirits?

There's one reaction to the UK's lack of meaningful economic recovery that is surprisingly absent.

To see it, remember that a big reason for our slow growth is a lack of capital spending; the volume of business investment, though up from its 2009 low-point, is still 11.6% below its 2007Q4 peak.

But why is capital spending so weak? There are lots of possibilities: the slowdown in technical progress has created a dearth of investment opportunities; fears that banks will restrict future credit lines are causing firms to hoard cash; falling real wages are encouraging labour-capital substitution; and spare capacity and weak demand mean there's little need to expand.

I don't want to reject any of these. But there's another possibility, raised in a new paper by Charles Lee and Salman Arif - that investment and the recovery are held back by depressed animal spirits.

They point out that business investment is well correlated with investors' sentiment towards shares. My chart shows that a similar thing is true in the UK. We can measure sentiment by the ratio of Aim stocks to the FTSE 100; Aim shares tend to be smaller, less well-known and more speculative than bigger shares, and so high prices for them are a sign of high spirits. You can see that this ratio has tended to predict business investment, with a lag - the lag being because it takes time for investment decisions to translate into actual spending.

Of course, a correlation between investor sentiment and capital spending might exist simply because rational expectations of the future determine both. If so, then current weak sentiment and weak investment are a sign of weak future growth.

But Lee and Arif's work suggests this might not be so. They estimate that, in most advanced countries, high investment leads to weaker GDP growth and falling profits. That's exactly the opposite of what you'd expect if sentiment and investment were rationally determined.

This leaves us with another possibility - that it is irrational animal spirits that drive sentiment and capital spending. And herein lies the point that is not widely made. It's that the economy is being depressed in part by company bosses being irrationally pessimistic. We're paying the price for stupidity in boardrooms.

Such a reaction should appeal to both Keynesians - who coined the phrase "animal spirits"? - and to government supporters wanting to deflect blame from Osborne.

And yet it is rarely heard.I suspect one reason for this lies in the power of managerialist ideology. Whilst the ruling class are quick to attribute irrationality to ordinary people, they are blind to the possibility that irrationality can also be found at the top of hierarchies.

Costly discrimination

It's long been said that discrimination entails a waste of talent as able people are prevented from making full use of their skills. A new paper (pdf) tries to quantify this by looking at the effects of the decline in racial and gender discrimination in the US since the 60s. It says:

Changes in occupational barriers facing blacks and women can explain 15 to 20 percent of aggregate wage growth between 1960 and 2008. Furthermore, essentially all of the gain is driven by the movement of women into high-skilled occupations.

Discrimination, then, has significant macroeconomic effects.

This matters, not just because there (might?) still be discrimination against women and ethnic minorities, but because gender and racial discrimination isn't the only souce of a misallocation of talent. The authors say:

We suspect that barriers facing children from less affluent families and regions have worsened in the last few decades. If so, this could explain both the adverse trends in aggregate productivity and the fortunes of less-skilled Americans over the last decades.

Not just Americans, of course.Class barriers are high in the UK too.

And there are other forms of misallocation of talent, such as poor careers advice at school and university, and the systematically bad hiring practices that favour yes-men, the irrational or known mediocrities over unknown potential stars.

Perhaps, therefore, human resources policies have more significant macroeconomic effects than generally supposed.

The state as risk manager

Here are three related things:

1. The government is not implementing the Dilnot report, even though uncertainty about the likelihood and cost of needing care in old age makes it impossible for people to plan their finances sensibly.

2. There's widespread hostility to welfare benefits. A TUC survey (pdf) found that 42% of people think them too high, whilst only 18% think them too low. This suggests there's little demand for insurance against unemployment risk, despite the fact that this risk is high, even in decent economic times.

3. Although a plurality of voters (pdf) thinks fiscal austerity is bad for the economy, only 42% think the spending cuts are too deep and a majority think they are necessary. This suggests the public's appetite for counter-cyclical fiscal policy is smaller than that of many (most?) mainstream macroeconomists.

There's a common theme here. All point to government and/or voters having little desire that the state help provide insurance against big risks that the private sector does not insure us against. This is despite the fact that the correction of market failure is a legitimate function of government - though of course left and right differ on the extent of such failure.

Why is there so little demand? There are three possibilities:

1. People are risk-tolerant, so that - as Robert Lucas suggested (pdf) - the welfare costs of aggregate fluctuations are trivial.In the trade-off between risk and incentives, people prefer a position nearer the latter.

I'm not sure about this. Low stock market participation, and demand for poor-value insurance products such as PPI, extended warranties and (I suspect) pet insurance suggests people are risk-averse in some domains.

2.The government (not just in the UK) doesn't understand that the role of the state is to solve problems of collective action, to do what the private sector cannot do. Politicians prefer to patronize the (poor) obese and waffle about vision and destiny than take genuinely hard choices to improve people's security and well-being.

3. Popular thinking about risk is horribly contaminated by cognitive biases. Wishful thinking stops us appreciating the danger of redundancy or dementia, sheer ignorance causes folk to over-estimate the generosity of welfare benefits, and that damned "good housekeeping" metaphor stops them thinking seriously about macroeconomic policy.

Unless reason (1) is the sole factor - which is improbable - the point here is depressing. There are powerful obstacles to the state being used for what it should be for - a means of pooling risks in the face of market failure. Which, in an odd sense, vindicates the anti-statist position that for every market  failure, there's also a government failure.

Inequality's effects

Paul Krugman and Joe Stiglitz have been debating the role inequality has played in contributing to the US's weak recovery. As chance would have it, three new papers suggest that Stiglitz is right to worry about its effects.

First, Roland Benabou and Jean Tirole model how competition for "talent" can damage companies and the economy, by diverting workers' efforts from important but hard-to-measure jobs and over-incentivizing the easily measured aspects of performance:

Highly competitive labor markets make it difficult for employers to strike the proper balance between the bene…fits and costs of high-powered incentives. The result is a  “bonus culture” that takes over the workplace, generating distorted decisions and signi…cant efficiency losses, particularly in the long run.

It takes no imagination to apply this to banks and CEOs' pay generally.

Secondly, some laboratory experiments with asset markets have found that short-term bonuses can contribute to larger and longer price bubbles. This is consistent with the theory that big bonuses (and hence inequality) contributed to the crash by inflating the bubble in mortgage derivatives.

Thirdly, Eckhard Hein suggests that the high-powered incentives that contributed to rising inequality:

[have] imposed short-termism on management. This meant a decrease in management’s “animal spirits” with respect to real investment in capital stock and long-run growth of the firm, and an increase in the preference for financial investment, generating high profits in the short run.

These three mechanisms are very different from the underconsumptionist theory of which Krugman is, I suspect rightly, sceptical. But inequality doesn't just affect economic performance through macroeconomic channels. It does so through microeconomic firm-specific ones, and through "cultural" mechanisms, such as, in Benabou and Tirole's model, eroding non-monitorable work ethics.  

In suggesting this, however, I don't want to suggest that rising inequality matters only for its effects upon economic performance. Even if its effects were benign - which is darned hard to show - leftists would still have social and ethical objections to it.

Dreamers vs sceptics

Commenters on a previous post say I'm spreading defeatism. Britmouse says I'm a professional sceptic. This raises a queer paradox. As a Marxist and extremist, shouldn't I be the utopian dreamer whilst centrists are the pragmatic realists?

No. In fact, the opposite is the case. My Marxism and my scepticism are the same thing. I fear that capitalism is inconsistent with full employment, except under conditions that don't now exist, and capitalist ideology excludes from the Overton window radical policies such as a seriously redistributive tax and benefit system, a genuine jobs guarantee or worker ownership. As a result, prospects for improving workers' living standards are limited.

Of course, this is not to say they are non-existent; a sensible fiscal policy would do some good. My suspicion, though, is that there are tight constraints on what centre-left politics can achieve.

This, though, seems to be precisely what the non-Marxist left reject.I fear there's a danger that they are exaggerating the benefits of Ballsian fiscal policy, corporate tax compliance, a living wage or job subsidies.

In this sense, it's the centre-left who are the utopian dreamers, and we Marxists who are the realists.

This shouldn't be surprising. Political activists, and especially career politicians, are selected for the optimism bias; you don't go to all those dull meetings unless you think (conventional) politics can achieve a lot.

And it's not just mainstream politicians who are the dreamers whilst I'm the sceptic. Stock-pickers who think they can beat the market and CEOs who think they can successfully control ther fate of huge organizations are just like centre-left politicians, exaggerating what they can achieve in the face of powerful and complex market forces.

Now, I might be doing the soft left a disservice here. Perhaps there's a glass half-full/half empty issue, with me stressing the emptiness and the soft left the fullness. But if this is so, I wish they'd be more candid about the fact that poverty, unemployment and inequality (of power as well as wealth) will remain even after they have enacted their favoured policies.

As it is, the question "what can politics achieve in a capitalist economy?" is rarely posed, let alone answered, by the centre-left. And until it is, they are likely to remain Isobel Crawley-type figures - perhaps doing a little good, but not challenging basic socio-economic inequalities, and leaving poverty and their own privilege largely unchanged.