Stumbling and Mumbling

Kirsty Soames & self-fulfilling fear

Yet again, Corrie has reminded us of an interesting idea in the social sciences - that of self-fulfilling fear. Kirsty's jealous paranoia that Tyrone would cheat on her drove him into Fiz's welcoming clutches, and so her fear, which was initially ungrounded, proved correct.

How common is this self-fulfilling fear? It can certainly happen at an individual level. If a man freezes with terror when confronted with danger, his fears might well be prove to realized whereas they wouldn't be if he kept a clear head.

It can happen at a social level too. Oliver Burkeman describes some examples, such as airports' counterproductive obsession with security. Stereotype threat predicts that people we view with fear - outsiders, "hoodies" and so on - might come to behave in a more threatening way. And Jon Elster quotes Nisbett and Cohen's description of violence in honour cultures:

The knowledge that the other person may be armed and may begin acting violently may lead to preemptive first strikes. Once conflicts escalate, a man may be more apt to take a first strike as a matter of self-protection before he himself gets shot. At a cultural level, the occurrence of hundreds of these violent self-fulfilling prophecies creates a milieu where the threat of violence keeps individuals vigilant.

In economics, there are two big ways in which self-fulfilling fear occurs.

One is liquidity panics. If traders fear that an asset will become illiquid, they'll not buy it, thus creating the illiquidity they feared. This contributed (pdf) to the financial crisis.    

Secondly, corporate investment decisions are driven in (large) part by animal spirits; the notion that bosses are rational is an ideological fiction used to justify a claim to power and wealth. And if enough bosses fear recession, they'll cut spending and so bring about what they feared. This is in part what FDR had in mind when he said "the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance."

I suspect, though, that both of these are cases where fear exacerbates downturns rather than acts as a pure exogenous cause; there's usually some reason for traders to fear a loss of liquidity or bosses a downturn.

However, there (at least) two mechanisms acting against self-fulfilling fear, causing it to go into reverse.

One lies in the concept of trust cycles. If everyone is distrustful and fearful of each other, the man who can successfully signal his trustworthiness gains a big competitive advantage; he can borrow cheaper or win new business. As others emulate his success, so trustworthiness spreads and fear declines.

Secondly, when bosses and investors become fearful, they often become overly so. This means that low share prices and weak capital spending lead to rising prices and better economic activity, which helps to reverse their pessimism.

In these ways, self-fulfilling fear leads to cyclical behaviour rather than a permanent slough of despond. 

I say all this for two reasons. One is to demonstrate Elster's point that the social sciences are about mechanisms. Some mechanisms cause beliefs to be self-fulfulling, but others act against this tendency. The job of the social sciences is to understand such mechanisms, not to make prophecies.

Secondly, this weakens the link between being rational and being right. Kirsty's belief that Tyrone was cheating on her was initially irrational, but it turned out to be correct. In a similar way, traders who short an asset and make money might not be rational, but merely the first to panic. Wealth is not evidence of rationality.

Doubts about wage-led growth

In his Ralph Miliband lecture, Len McCluskey said unions "first job is to organise workers and secure a better deal for them at work." However, I'm not sure this is anything like sufficient to provide the alternative to our current crisis-ridden capitalism.

Let's assume - heroically - that unions do find the strength to push for higher wages. Would this boost the economy?

History suggests it could. In the 50s and 60s, a degree of wage militancy was compatible with full employment and decent economic growth. But I doubt that those circumstances apply today, for two big reasons.

First, high wages are quite consistent with full employment and high investment as long as those wages are returned to capitalists in the form of higher consumer spending. If this happens, capitalists will tolerate a squeeze on profit margins because they will anticipate that low margins will be accompanied by high sales volumes, and thus a decent return on capital.

But I'm not sure that higher wages would be returned in this way. For one thing, they might leach overseas in the form of spending on imports. And for another, if households use their extra incomes to pay off debt or student loans, then consumer spending won't rise as much as wages rise. That'll be a net loss to capital, and hence cause a fall in profit rates.

It's no accident that the post-war settlement was sustainable as long as the household savings ratio stayed low, but eventually fell apart in the 1970s as savings propensities increased.

Secondly, capitalists increased their investment significantly in the 1950s and 60s, thus contributing to high aggregate demand and full employment, even though profit rates were declining; investment rose 5.3% a year between 1948 and 1973. But there were two reasons for this, both of which are obviously absent now:

- The 1930s slump and the war created, in R.C.O Matthews words, "a very substantial arrears of investment opportunities." Today, by contrast, there's a dearth of such opportunities.

- In the 50s and 60s, most people thought governments had the will and know-how to maintain aggregate demand at a high level. They agreed with Tony Crosland's claim in the The Future of Socialism that "Demand has proved to be malleable, and in a broadly predictable manner, by fiscal policy." This reduced the fear of downturns, thus increasing the motive to invest. Again, though, this factor is absent now.

I fear, therefore, that McCluskey's call for greater workers' power will not give us wage-led growth.

This, however, is not to dismiss his lecture. He rightly quotes Ralph Miliband approvingly: "All concepts of politics, of whatever kind, are about conflict──how to contain it, or abolish it.” If class conflict cannot much improve workers 'living standards, the alternative is abolish such conflict. Sadly, however, this form of "one nation" politics is not yet a practical option.

Incentives & creativity

"Incentives matter" is a cliche. But is it true? One new paper suggests not. German researchers got subjects to find words from a set of letters - a task requiring some creativity and inventiveness - and found that their ability to do so was barely affected at all by whether they were paid a flat fee, by results or by giving a prize to the better solvers. They concluded:

Neither on the aggregate nor on the individual level do we find effects of incentives on performance.

This is consistent with a claim made by Daniel Pink - that financial incentives can actually be bad for creativity:

For more right-brained undertakings - those that demand flexible problem-solving, inventiveness or conceptual understanding - contingent rewards can be dangerous. Rewarded subjects often have a harder time seeing the periphery and crafting original solutions. (Drive, p 46)

Research by Theresa Amabile, summarised here (pdf), corroborates this.

All this, though, runs into a question. Tim Harford and Robert Allen say that the industrial revolution - the burst of creativity that most transformed human life - occured in Britain because of incentives; high wages gave inventors an incentive to look for labour-saving machines. How can we reconcile this with the laboratory evidence that incentives don't spur creativity? I suspect there are two ways.

One is that attention (pdf) is a scarce resource, and incentives act to draw our attention to problems. So, for example, England's high wages in the 18th century drew attention towards the question of how to save labour costs, in a way that didn't happen in lower-wage nations.

Secondly, there's a selection effect. Incentives might not motivate a given group of people to be creative, but they might change the composition of that group, by - at the margin - attracting some able people to the task*.

My point here is that there's a big difference between believing that incentives matter and actually designing an effective incentive scheme. Instead, incentives matter through elusive, long-term and hard-to-manage channels, and are often unintended consequences. After all, nobody actually consciously designed the structure of incentives that gave us the industrial revolution.

* I'm not sure how strong this is. Do many potentially great musicians or artists really give up their creative careers because they believe there's not much money in them? Or is it only the would-be second-raters who do so?

Ideology as cognitive bias

In this paper (pdf), Jon Wisman makes an important point:

Once control of the state was in principle democratized by the ballot box, the fortunes of the elite came to depend solely upon controlling ideology.

This reminds me of Steven Lukes' "third dimension" of power; rulers can exercise power not only by direct action or by keeping some things off the agenda, but by shaping ideology so that the oppressed come to regard their oppression as legitimate and unquestionable.

But how do the elite achieve this trick? Sometimes, the left verges towards conspiracy theory here, by believing that our rulers have the organizational skill to hoodwink people through the mass media.

This, though, needn't be the case. There are numerous cognitive biases which dispose people towards "neoliberal ideology."

1. The optimism bias leads people to over-estimate their future earnings, which biases them against wanting higher (pdf) taxes on top incomes.

2. The self-serving bias leads people to exaggerate the extent to which they are responsible for their own success, and thus biases them to believe that they "deserve" their incomes and hence resist paying tax.

3.These two biases also depress demand for unemployment insurance, as folk believe (until they get the heave-ho) that if they work hard they'll keep their jobs.

4. The just world illusion causes people to rationalize injustice, for example by blaming the victim.  

5. The status quo bias causes us to prefer the devil we know, thus biasing people against radical change (not that this is on offer!)

6. The fundamental attribution error causes people to over-rate the importance of human agency relative to environmental factors, and so believe that huge pay for bosses is justifed.

7.The same error can also stop people recognizing that - via a mix of priming, stereotype threat and the Pygmalion effect - inequalities of outcome generate inequalities in behaviour. We might therefore attribute income inequality to differences in intelligence or industry, when in truth those differences are the result of inequality in income and power, not the cause.

Now, I don't say this to either deny a role for hoodwinking or to claim that "neoliberal ideology" is all bull. Instead, I do so merely to suggest that the ideology that benefits the elite is supported, in part, by cognitive biases. 

Marxism & freedom

There's a point implicit in a recent post of mine that should be elaborated. It's that Marxism and freedom are not only compatible - contrary to what the small sample of historical experience suggests - but that freedom actually requires Marxism.

I say this in part because there's a strong libertarian strand within Marxism. Jon Elster, one of Marx's best interpreters, has written that Marx "condemned capitalism mainly because it frustrated human development and self-actualization."

For Marx, the ideal society was one in which "the free development of each is the condition for the free development of all." This is a society that not only abolishes wage slavery, but which is hostile to, among other things, gender essentialism and transphobia.

Also, we must remember that there's a sharp distinction between the Marxist and non-Marxist left. Marxism is not about lifestyle politics. It doesn't think that a priority of government should be to tell workers what to eat or how much to save. Indeed, because Marxists believe that bosses are exploiters, they are sceptical of managerialists' claims to know what's good for us - because such claims to superior knowledge are an ideological cover for a claim to power.

Nor - unlike soft leftists such as Murphy and Toynbee - do Marxists think that Britain is a family with the wrong members in control, and all would be well if only people of courage, intellect and integrity were in government. (The fact that this has so rarely happened doesn't seem to trouble the soft left).

Instead, the Marxist view of the state - as a "committee for managing the common affairs of the whole bourgeoisie" - is much closer to James Buchanan's public choice theory than it is to the soft left's notion of the state as a tool for improving the lot of workers.

So much for the compatibility between Marxism and freedom. Why do I say the latter needs the former?

It's because right libertarians have something in common with soft leftists such as Toynbee, in that they seem to think it sufficient for good government that people merely come round to their way of thinking. Marxists, however, know that this is not sufficient. They see that big illiberal government arises from capitalism.

One reason is that a lot of the motives for restricting freedom arise from capitalism. If you're on the right, you can interpret demands for living wages and employment regulations as a way in which workers demand protection from excessive exploitation. If you're on the left, you can regard illiberal impulses such as hostility to immigrants, transsexuals or the disabled as the product of an ideology that is generated by capitalism.

A second reason is that, in a market economy, the state is like everything else, there to be bought. The upshot is that, as I've said, crony capitalism is the only feasible capitalism.

For these reasons, freedom requires not just that people wise up, but that the basic power relations which generate unfreedom be abolished. As Marx wrote:

When, in the course of development, class distinctions have disappeared, and all production has been concentrated in the hands of a vast association of the whole nation, the public power will lose its political character.

You might object that this is improbable. True. But this doesn't invalidate Marxism, but merely tells us that real freedom is improbable.

The markets paradox

A new paper (pdf) by Nick Bloom and colleagues shows that there is "substantial dispersion" in the quality of management across US manufacturing establishments, which confirms earlier research. This raises a paradox.

The very fact that many poorly-run firms stay in business shows that market forces do not strongly and swiftly select against inefficiency.

Bloom's is not the only evidence we have here. Alex Coad's survey of corporate growth around the world found that firm growth is a "fundamentally random process" which is largely unrelated to past productivity or financial performance. Geroski and Gregg found that it was almost impossible to predict from past performance which firms got into difficulty in the 1990s recession. "Market selection criteria may be rather myopic" they concluded. And Bjorn-Christopher Witte has shown that market forces can sometimes actually select in favour of stupidity; they favoured irrational trend-followers in the tech bubble and risk-seeking banks in the mid-00s, for example.

All this suggests that markets do not select in favour of efficient firms nor against poorly-run ones as rigorously as free market fanatics would have us believe.

Which brings me to the paradox. Despite all this, it seems clear that freeish markets are responsible for large chunks of productivity growth (pdf) - though the best natural experiment we have on this (the division of Korea) tells us that lots of emphasis (pdf) should be placed upon the "ish".

How, then, is it possible that market selection works so imperfectly and yet markets are key to prosperity?

There are (at least) two possibilities. One is that central planning of whole economies or of companies is so terribly inefficient (beyond a certain point) that even imperfect markets are a big improvement.

The other is that markets are not merely a technology but also a culture. As Gregory Clark and Deirdre McCloskey have argued, markets encourage - over time - the cultivation of "bourgeois virtues" such as hard work and prudence which themselves encourage growth. This helps explain why shock therapies of immediate transitions to market economies have had indifferent results.

Suzanne Moore & the nature of politics

My immediate reaction to that piece by Suzanne Moore and the reaction to it was the depressing confirmation that I just don't understand women. On reflection, though, what's also causing me consternation is a difference in the conception of what politics is, or should be, about.

From one perspective, being respectful to transsexuals is a matter of basic courtesy, not a political issue.

Herein, though, lie two different conceptions of politics, both of which rest on different ways of interpreting the slogan "the personal is political."

In one conception, all aspects of personal behaviour become political. Rudeness to transsexuals thus automatically becomes a political matter, just as does behaviour such as how much we save and what we eat.

In another conception, though, the slogan draws our attention to the fact that personal behaviour is shaped by political forces, by power relations.

There are (at least) two aspects here which Marxism draws our attention to.

First, the division of labour creates fixed social roles which do not necessarily fit our humanity well. Communism, by contrast, would overcome this alienation:

As soon as the distribution of labour comes into being, each man has a particular, exclusive sphere of activity, which is forced upon him and from which he cannot escape. He is a hunter, a fisherman, a herdsman, or a critical critic, and must remain so if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic. (The German Ideology)

Though Marx is talking about economic roles, here, his point generalizes easily to gender roles - especially as social science has shown that gender identities are partly socially constructed.

From this perspective, hostility to transsexuals is politically reactionary, in as much as it represents an internalization of the alienation imposed upon us by pre-communist social structures, and a failure to embrace the communist ideal of more flexible social roles.

Secondly, the ideology created by inequality - and exacerbated by capitalist crisis - leads people to behave meanly to others. The just world illusion leads to a blaming the victim effect the out-group homogeneity bias facilitates "divide and rule" tactics by the ruling class, and so on. In this sense, nastiness towards transsexuals, like hostility to the disabled or immigrants, is a product of capitalist ideology.

It would, of course, be idle utopianism to believe that radical social change would eliminate all nastiness. My point is just that politics (for Marxists such as me at least) is about power relations and the basic structure of society. What's depressing about "Mooregate" is that this point is easily forgotten.

Don't pay MPs more

The news that MPs think they deserve a £20,000pa pay rise is neither surprising nor relevant. Not surprising, because we all think we're underpaid. And not relevant, because pay does not and should not depend upon desert. Instead, the question is: if we paid MPs more, would we get better governance? I'm not sure.

There are three ways in which higher pay can improve labour supply. And whilst they might apply to some politicians sometimes, I'm not sure they apply to MPs now.

1. "Higher pay would attract better candidates." Richard Murphy says that doctors, headteachers and other professionals have to take a big pay cut if they want to become an MP, and this deters talented people.

There are three problems with this. First, as Paul says, the job of being an MP doesn't require huge skill. You need to be a genius to obey the whips' orders. Secondly, do we really want good doctors and headteachers leaving their jobs to become humdrum backbenchers? Can't they do more good in their current jobs? Thirdly, there's a danger that paying MPs more will crowd out the intrinsic motive of "public service." Do we really want MPs who are only motivated by cold hard cash?

2. "Higher pay would make MPs work harder, as the pain of losing their job would be greater."

But there are few cases of MPs not trying as hard as possible to hold their seats now - not least because of non-monetary motives to be an MP. The exceptions to this hardly support the case for higher MPs pay; would political life really be better if Louise Mensch had remained MP for Corby? And even if MPs did work harder, it's not clear this would be a good thing. I suspect that, in recent years, we've needed less legislative activism and more scrutiny of legislation. Would higher pay really have elicited this?

3. "Higher pay generates good will, and so buys off fraudulent behaviour."

Generally speaking, this is an under-rated reason for high pay. But I'm not sure it's relevant now. I suspect that British MPs are, by global standards, relatively honest already; fiddling a few grand in housing expenses is low-level stuff. And cross-country comparisons suggest little negative correlation between politicians' pay and honesty; MPs are paid more (pdf) in Ireland and Italy than in the Nordic countries, for example.

So much for my hypotheses. What of the historical evidence? My chart shows MPs pay (pdf) relative to average earnings. This shows that their present pay - at 2.7x average earnings - is in line with the historic average. Except for a brief period when MPs' pay was introduced in 1911, the best time financially to be an MP was the 1960s. But were we really well-governed then? Given that MPs included Maudling, Stonehouse and Driberg then, it's not at all obvious.

Irrationality & the benefits debate

Alex Andreou says the debate about benefit cuts has been so bad that it represents the "End of Reason." Many good judges agree. But what is the source of the irrationality?

Let's start from Hopi's point that the distinction between shirkers and strivers is a "false divide." He's right. Official figures show that, in Q3, 871,000 people lost their jobs. That's 3% of all employees. This is not so much thanks to the recession as to the fact that even in normal times, job destruction is high; over 50,000 jobs were destroyed each week between 1997 and 2005.

This means there's a significant risk that "strivers" will become benefit claimants themselves. So why are so many hostile to claimants? People who pay home contents insurance don't regard insurance claimants as scroungers (though some are!).And if, say, Aviva were to announce that it will cut its payouts to insurance claimants, its customers would be aggrieved. So what's different about the insurance system that is the welfare state?

In theory, the hostility could be rational. If people are risk-tolerant, they might judge that the adverse effects (in good economic times) of unemployment benefits on work incentives outweigh the gains from better risk-pooling.

But this runs into several problems. High demand for poor-value insurance products such as PPI and extended warranties, and low stock market participation, suggest that people aren't risk-tolerant and so should favour higher unemployment protection. The benefit cuts apply to tax credits as well as out-of-work benefits and so have ambiguous effects upon work incentives. And OECD data show that the UK's out-of-work - even including child and housing benefit - are quite mean by international standards, suggesting that work incentives here are already quite sharp.

This leaves us with other possibilities. One is that people have a powerful instinctive norm of reciprocity, and so want to punish "scroungers" who violate that norm, even if doing so hurts themselves. Perhaps, then, we tolerate low welfare benefits - even though they offer us less protection - as a price worth paying to enforce this social norm.

But this runs into the problem that, at a time of mass unemployment, the idea that people should look for work is actually harmful to "strivers". In this context, the norm of reciprocity is an atavistic anachronism.

Perhaps, though, something even less rational is happening. Maybe hostility to benefit claimants is founded upon a mix of ignorance about the true levels of benefits, and cognitive biases, such as the optimism and self-serving biases, which lead people to under-estimate their chance of losing their job, and so undervalue the worth of out-of-work benefits.

Perhaps, then, Alex is right, and support for benefit cuts is irrational. What he doesn't say, though, is that this raises (more) doubts about the value of democracy. From the point of view of winning votes, a reasonable (though in my view mistaken) concern to improve work incentives has as much weight as sheer ignorance and irrationality.

It's sometimes said that "democracy is two wolves and a sheep deciding what to have for dinner." What we have here, though, is sheep thinking they are wolves.

In praise of cowardice

Tim Harford's new year's resolution is to be less loss-averse. Oliver Burkemann bemoans our irrational security-obsessed culture. And Luke Johnson writes that "too much risk aversion means a life of disappointment and lost chances." All this aversion to risk aversion makes me wonder: isn't there something to be said for cowardice?

History is often told as a story of feats of derring-do by great men. But society is shaped by the deeds of everyone, not just a few. Which suggests that cowardice might have played a role. Here are five effects, three positive, and two negative:

1.It reduced wars and theft; as Judge Peter Bowers said, it takes courage to be a thief. In this sense, cowardice has contributed to more secure property rights, which in turn has encouraged investment and economic growth. As Tim Besley shows (pdf), peace dividends can be large. It's no accident that the UK's industrial revolution began after a decline in violence, or that societies which value martial virtues - from hunter-gatherers through medieval Japan to North Korea - tend to stay poor.

2.The (irrational) fear of the sack can raise productivity and depress wage demands, thus reducing the Nairu. One unjustly neglected reason for full employment in the 50s and 60s was that workers remembered the depression of the 1930s and so were more quiescent than their objective bargaining position would justify. But as this cowardice declined - as workers who remembered the 30s retired and were replaced by braver younger ones - so full employment and low inflation proved to be unsustainable.

3. Cowardice reduces population growth; faint heart never won fair lady or - let's be blunt - raped her. And there's reasonable (pdf) evidence that, at least in poor societies, lower population growth (pdf) is conducive to faster per capita GDP growth.

So much for the positive effects of cowardice. Here are two adverse ones:

1.As Luke says, it reduces entrepreneurship and self-employment. Now, this is not a wholly bad thing. As Rick has pointed out, self-employment is often associated with weak economies, in part because entrepreneurs are often under- or poorly-employed. However, this is one of those areas where tails matter; a small minority of entrepreneurs can transform industries. The more cowardice there is, the fewer of these there'll be.

2.Cowardice reduces immigration. It takes guts to up sticks and move to an unfamiliar country. If everyone had been a coward, the US would not have been settled by Europeans - and unlike many lefties, I think the US is (net) a Good Thing. And migration can benefit both host and supplier countries.          

Quantifying the net effect of all this is, I suspect, impossible: cowardice is about what didn't happen rather than what did, and it's very hard to distinguish between rational risk-aversion and irrational aversion. But I suspect that the role cowardice has played in history - and still plays today - isn't wholly bad.