Stumbling and Mumbling

Respect

Popbitch says that when Jay Z enters a room in his flat, workers are expected to walk to the nearest corner and face the wall until he leaves. Norman Lebrecht reports that customs officials at JFK airport destroyed a flautist's collection of flutes. Corey Robin notes that the University of Chicago bans workers from the lifts of its administration building. And Chris Bertram has documented ways in which American bosses tyrannize and humilate workers.

These examples give context to Noah's call for more equality of respect:   

I want to move back toward a society where the hard work of an unskilled laborer is considered worthwhile in social interactions, regardless of how many dollars it brings home. I want to move back toward a society where being a good parent or a friendly neighbor earns as much respect as making a hundred million dollars on Wall Street.
In other words, I want our "democracy" back. We need to redistribute respect.

I agree. However, I fear that Noah is under-estimating the extent to which inequality of respect is endogenous. It arises out of the forces that generate and sustain inequalities of power and wealth. I'm thinking of inter-related mechanisms here:

 - One way in which CEOs justify their power is by claiming the status of heroes, of brave, risk-taking leaders rather than rent-seeking apparatchiks. They therefore claim (and get) excessive respect.

 - The successful underestimate the extent to which they owe their wealth to luck rather than skill, which leads them to demand more respect than is their due, and to disrespect others. Jay Z's attitude might be different if he recognized that there are many rappers like him, and he just got lucky.

 - The just world effect means we want to believe that inequalities are fair.One way we do this is by believing that the poor deserve their fate because of their moral failings and so deserve to be disrespected.

 - One big way in which capitalists have raised their profits and power is by deskilling. Jobs are increasingly routinized and monitored so that workers no longer have the autonomy or craft skills which were traditionally sources of (self-) respect.

 - There's a totalitarian element to managerialism and neoliberalism. In elevating the pursuit of what Alasdair MacIntyre calls the goods of effectiveness (wealth and power) over those of excellence (skill at particular practices), they invite us to disrespect those who do pursue the latter goods - the competent workman or good neighbour.

To the extent that these mechanisms exist, I fear Noah is being a little naive. We cannot redistribute respect unless we remove sources of material inequality.

Lucky Osborne

Whilst I was away, the Times named George Osborne as its Briton of the year because he's "set the terms of political debate." This corroborates my prior belief that political reputations depend heavily upon luck.

To see what I mean, imagine that we hadn't seen productivity stagnate in recent years and that instead GDP per worker since the 2010 election had grown at the same 2.1% annual rate that it had grown by in the previous 30 years.

In this scenario, if output had grown by the same rate that it actually has since 2010, there would now be 1.85 million fewer people in work than there actually are, and employment would be 869,000 lower than it was when Osborne became Chancellor. If half those 1.85m were measured as unemployed, there'd now be 3.3 million unemployed - a record level.

This alternative world wouldn't be all bad: it would be one in which productivity growth had raised real wages and so there'd be no cost of living crisis. Nevertheless, it would be catastrophic for Osborne (though given the psychological cost of joblessness, this would be the least of our concerns.) His prediction that the private sector would create enough jobs to offset public sector cuts would be proved false, and the anti-austerians predictions of three million-plus unemployed would be correct.There'd be no "partial vindication" of Osborne. He'd be obviously wrong.

However, the fact that he has escaped this fate is pure luck. The causes of the productivity stagnation are obscure, but nobody believes Osborne's conscious policy decisions loom large among them. Neither Osborne's supporters nor detractors think he is responsible for flatlining productivity. And they are right.

In this sense, insofar as Osborne still has any sort of political reputation, it is thanks to the good luck of stagnant productivity.

In saying this, I don't mean that Osborne is uniquely blessed. I suspect that Thatcher's high reputation on the right is due in part to luck. And for years New Labour had the good fortune of a mostly benign global economic environment. Instead, my point is merely that in politics - as in life generally - luck plays an enormous role. Curiously, the rich and powerful, and their lackeys in the press, underplay this fact.

Profits & investment

Tim interprets Thomas Piketty's theory (pdf) that wealth concentration is rising because returns on capital are high as evidence against Marxism, as this predicts a tendency for the rate of profit to fall.

I fear he's being a little hasty here.

For one thing, Marx only saw a tendency for profits to fall, and cited numerous "counteracting factors" which could reverse this tendency. And for another, his idea of a falling profit rate was really just a rehash of the idea of the "stationary state" which pretty much all the classical economists had - that a time would come when diminishing returns overcame technical progress and caused growth to cease.

Let's though ignore that. There's a question here: if returns on capital are so high, how come companies are buying back shares rather than investing, and that so many are talking about secular stagnation? 

My chart highlights the issue. I've measured the US profit rate as non-financial pre-tax profits expressed as a percentage of the previous quarter's non-financial corporate assets, taken from the Fed's financial accounts. This shows that the profit rate trended down from the 50s to the early 80s, but has risen since, albeit punctuated by the tech crash and financial crisis*.

This is consistent with the trend in the income share of the top 1%, which also fell from the 50s to late 70s and has risen since**.

However, the turnaround in profit rates hasn't been accompanied by a rise in capital spending. The share of non-residential investment in GDP is lower now than it was in most of the late 70s and early 80s, when profit rates were lower. Higher profits, then, aren't providing much motive to invest.

One solution to this puzzle is that there's a discontinuity between past investments and future ones, or - if you prefer - between existing assets and growth options. Whereas past investments have been profitable, future ones are not expected to be so. The cliche's true - past returns really are no guide to future ones.

This is possible because investments are inherently lumpy and heterogenous. The fact that investments in iPads or Coca-Cola bottling plants have been profitable tells us nothing about the likely profitability of new future ventures.

This explanation strikes me as wholly reasonable. But it poses a serious problem for conventional neoclassical thinking. It means capital can't be aggregated and that the idea of a smooth, easily differentiable marginal product of capital is hooey - as some Cambridge economists pointed out (for different reasons) years ago***.

And this is why I say Tim is being hasty. If returns on capital are high, it's a problem not just for Marxism, but for neoclassical economics too.

* I'm using US data as there's more comparable longer-term data than there is for the UK. I suspect the trends in the latter would be pretty similar.

** Exactly what the link is is another matter. It could be that better management has raised profit rates and shareholders have rewarded top bosses for doing so. Or it could be that socio-economic change has raised profit rates and bosses have seized the proceeds of this for themselves. I shall leave the reader to guess which explanation I favour.  

*** I know - if capital can't be aggregated the notion of an aggregate profit rate, as shown in my chart, becomes, ahem, problematic. I don't think this undermines my general point. 

Ownership in question

Frances Coppola's account of Lloyds' high-powered incentives to staff for mis-selling products raises two general issues. To see them, read her description alongside allegations that RBS forced some of its business borrowers to close in order to acquire cheap assets.

Both these episodes are evidence against the Friedmanite hypothesis that businesses act in the public interest by maximizing profits. Better still, they show two of the circumstances in which Friedman's theory goes wrong.

One is if firms have significant market power. Had RBS's customers had alternative sources of finance, they could simply have borrowed from others, thus escaping RBS's clutches.

Another is when there's asymmetric information; Lloyds would not have been able to mis-sell products if customers had been well-informed about their shortcomings.

It would be a stretch - the commission of the journalist's fallacy! - to claim that these examples show that Friedman was entirely wrong. Instead, they suggest that he is right only in circumstances where corporate power is constrained.

The second issue is that these latest examples of banks' malpractice occurred whilst they were in public ownership. Which raises a paradox. When banks were privately owned, they mis-served the public interest by making huge losses and triggering a financial crisis, but when they were nationalized, they mis-served the public by being too zealous in the pursuit of profit. This is the exact opposite of the conventional wisdom, which says that privately-owned businesses maximize profits, whilst nationalized ones often have other objectives.

There's a simple reason for half this paradox. The banks were nationalized with the intention of restoring them to profitability quickly; in this sense, RBS and Lloyds were doing just what the government wanted. The government's attitude to banks has been that of a leveraged buy-out fund, using debt to invest in distressed firms with the intention of returning them to the stock market at a profit.

Nevetheless, this poses a more general question: what function does ownership serve? The financial crisis showed us that private ownership failed to prevent inept CEOs from making big losses. But Lloyds and RBS's behaviour shows that public ownership is not sufficient to make businesses act in the public interest either. This suggests that - for some businesses at least, neither form of ownership is, in itself, adequate.

However, the question of which forms of ownership are best for which businesses seems to be one which is, to a large extent, off the political agenda - which is yet another example of how mainstream political debate is narrower than it should be.   

Universities as bullies

Nicola Dandridge's attempt to defend (2'14" in) gender segregation at some universities' debates has met with rightful derision on Twitter.  Nobody, though, seems to appreciate just how disgusting it is.

Let's first dispose of her claim that gender segregation is "not alien to our culture". This is true but irrelevant. There is, as Stephen says, good and bad gender segregation. There's scientific evidence that single-sex schools can encourage girls to become more competitive and to pursue traditionally masculine disciplines - because in mixed schools, girls are primed to conform to sexist stereotypes. This form of gender segregation can promote gender equality by enhancing girls' life-chances.

There is, however, no such scientific, egalitarian motive for segregating the audience at debates. Doing so is just kowtowing to bigotry.This distinction is massive, and obvious.

This, though, raises a puzzle. Sure, some bigots want gender segregation at universities. But people make all sorts of requests of universities; they want them to pay their employees more; they want to stop privatizing their services; they don't want them to co-operate with gun-runners; and they want to enjoy what Ms Dandridge and I got - an education without a mountain of debt. But when students make these requests - in the lively way in which intelligent youngsters do - the response from universities is violence, suspensions and legal suppression.

This poses the question: why do universities meet unreasonable requests with supine acquiesence, and reasonable ones with force?

The answer Ms Dandridge would like us to believe is that the denial of a religiously-motivated request is a breach of human rights. This is self-serving crap. If a teenager sincerely believed that tuition fees were a blasphemy against his sky-fairy, would Ms Dandridge let him enter university for nothing?

Calling a dickhead idea "religious" does not give it legitimacy. And universities - which should be dedicated to rational inquiry - should not be privileging some unscientific ideas over others.

There is, though, two other differences between the demands of the religious bigot and those of the legitimate protestor. One is that the latter threatens the power and wealth of universty bosses, whilst the former threatens only the status of female students. Guess which one university bosses care most about?

The other is that the bigots' demands are backed with the (slight?) threat of real violence whilst protestors, lively as they are, don't threaten real harm.

In this sense, we should be grateful to Ms Dandridge. When universities cave into the threat of violence whilst using violence against the weak, they remind us that our managerialist rulers are basically bullies. And bullies respect not reason, but force.

Gift vouchers, & mispredicting markets

Tim Harford draws our attention to the limitations of conventional economics. He says that gift vouchers are "awful currencies" and that economists can only scratch their heads at why people prefer to give and receive them rather than cash.

Strictly speaking, he's right. Vouchers are clearly inferior to cash in that they often expire before being used and can only be spent in a very limited number of shops.

But despite this, vouchers are hugely popular. In Scroogenomics - the standard work on the economics of Christmas - Joel Waldfogel points out that they are often near the top of lists of what people want for Christmas.

There are two reasons for this.

One is that vouchers carry social meanings which cash gifts don't. As Tim says, giving cash is "grubby and unimaginative." At best, it signals less thoughtfulness and effort than vouchers. At worst, it's simply crass; whilst cash gifts are acceptable from, say, grandparents to teenagers, they are frowned upon between folk of similar ages. Tim says economists are perplexed by this. But the fault is wholly theirs. Interactions between people often carry meanings beyond mere exchange. To pretend that gifts are simply optimizing acts of rational asocial individuals is the sort of autism that discredits orthodox economics.

Secondly, vouchers make sense once we depart from the paradigm of complete rationality and recognize behavioural economics. Vouchers appeal to mental accounting. A gift of cash tempts us to spend the money on everyday items, whereas a voucher invites us to get something we really want. Of course, the voucher is as fungible as cash in the sense that it frees up money for us to spend on dull things. But not all of us see it that way.

In this sense, the anomic rational maximizing paradigm of economics makes a massive predictive error. It predicts that a market shouldn't exist when in fact it does. This is not the only such error that paradigm makes. It predicts that the market for active fund managers should at least be small, but it's not - perhaps because the optimism bias and overconfidence cause people to over-estimate the potential for fund managers to add value.

On the other hand, though, the paradigm also predicts the existence of some markets which don't in fact exist - and not because they are illegal. For example, there's less (pdf) international trade than the Heckscher-Ohlin model predicts, and fewer important state-contingent markets than there should be. These absences might be explained by behavioural factors such as the home bias, path dependency (if markets haven't existed yesterday, they'll not exist today), or optimism bias; we under-estimate risks and hence the need for insurance against them.   

My point here is simple. It's a cliche that mainstream economics makes serious predictive errors. What's not so appreciated, though, is that one set of such errors is that it fails to predict which markets should exist, and which shouldn't.

The income squeeze

"Have ordinary families become detached from the proceeds of economic growth?" asks Duncan.

The answer, of course, is yes. My chart compares real (equivalized) disposable median incomes to GDP. I think this is the best comparison, as this shows the money in the pocket of the typical "ordinary family". This shows that from 1977 - when these data began to 1995 - household incomes kept pace with GDP. Since then, though, they've fallen behind. Between 2004-05 and 2011-12, median real incomes fell by 4.7% whilst GDP rose 7.5%.

There are some explanations for this - from right and left - which won't do, for example:

 - "The top 1% have grabbed a bigger share of the pie". They have. But their share grew between 1977 and the mid-00s, and this was consistent with median incomes keeping pace with GDP.

 - "Profits have grown at the expense of wages". They haven't. Since 2005, the share of profits in GDP has fallen.

 - "Rising employers' NICs has reduced wages." It's true that the incidence of employers' NICs does fall on wages. But as James says, this is only part of the story. Since 2005, employers' NICs as a share of GDP rose from 7.3 to 9.6%. This isn't big enough to explain the 12.2 percentage point gap between median incomes and GDP growth.

 - "The tax burden has risen." But ONS data show that median income recipients are paying a smaller share of their income in tax than in 2005.

Instead, I'd stress the role of the productivity slowdown. Quite simply, lower productivity has meant lower real wages for those in work. With productivity falling, GDP growth has created jobs rather than higher incomes for ordinary workers.

This poses a problem for the left. We want to increase the bargaining power of "ordinary families", simply because incomes are a function of bargaining power . Doing so, though, runs into two problems, even if we ignore the Marxian point that the state has been captured by capitalists.

The first is that one way in which median incomes kept pace with GDP historically is that "insiders" - incumbent workers - had market power relative to "outsiders" (the unemployed). In the 80s and 90s, incomes for workers rose nicely as productivity rose, but unemployment was high (except during the unsustainable Lawson boom). I'm not sure anyone on the left really wants a return to this.

Secondly, there's another process hurting medianish earners - job polarization, the fact that middling jobs are declining as a share of total employment to the detriment of median earners. Helping middle incomes requires a fight against this technical change, which is tricky.

I don't have much answer here. I fear that a mere economic upswing alone mightn't be sufficient to help workers simply because history suggests that the biggest beneficiaries of the early phase of recovery is profits, not wages. Instead, I agree with Duncan that we need a "progressive supply side policy" - what I've called supply-side socialism. But this isn't on the agenda.

Growth, levels & frames

On Radio 4's Broadcasting House yesterday, Bonnie Greer said that the UK's living standards are the "lowest since 1870." This is, of course, absurd pish: she's confusing the level with the rate of change. However, this confusion isn't confined to her. Two things tell us that people put great weight upon changes in incomes rather than levels.

One is that China's Global Times said recently that the UK is “no longer any kind of big country" and is only “suitable for tourism and overseas study”. In fairness to it, Cameron's visit to China did seem like a supplicant pleading with a rich man. But this misses the fact that the UK is massively better off than China. UK GDP per person is, according to the IMF, four times that of China. It's us that's should be lecturing them, not vice versa.

Secondly, everyone seems to agree that we have a cost of living crisis, on the basis that the real income of the median (pdf) non-retired household is 6.5% below its 2006-07 level. However, those same incomes are 18.6% higher in real terms than they were in 1998-99. And yet then was a time of high optimism - the tech bubble - whilst now is one of anxiety.

Rates of change of income thus have a big impact upon public mood. China's big growth - from a low level - breeds optimism and arrogance. Our decline from a high level gives talk of a crisis. All this vindicates Adam Smith:

The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining, melancholy.

What's going on here is a reference effect. When we ask "how well off am I?" we tend to compare our incomes to those of recent years. By this metric, most Chinese are doing well and most Brits not - even though a look at levels of income says the opposite.

This helps explain the Easterlin paradox. If our well-being depends upon the change in incomes rather than levels, then the same rate of GDP growth will give us the same level of well-being, regardless of the level of income.

However, I'm not sure there's a necessary, logical reason for this. My real income is barely half what it was 20 years ago and yet I feel comfortably off. One reason for this is that I was never stupid enough to confuse the size of my pay cheque with the size of my talent, so I saved a lot - and compound interest (and house price inflation!) is a powerful force. For me, my income of a few years ago is not the reference point. Instead, it's: "how much do I need to be comfortable?"

This, I think, helps explain a paradox - that at the same time as many are talking about a cost of living crisis and secular stagnation, others are speaking of abundance and the desert of plenty. There's less contradiction here than you might think. If your reference point is your income a few years ago, you might well think there's a crisis. But if it's the amount you need to be comfortable, then if you're  an older person who's had years of top-quartile earnings, abundance is near.

In this sense, talk of abundance and crisis coexist not merely because of differences in class and generation - important though these are - but because of differences in how we frame our incomes.

"Attracting better candidates"

One of the worst aspects of the proposal to give MPs a big pay rise is that it revives a very dubious argument - that higher pay will attract better candidates. I say this is dubious because it rests upon (at least) three questionable premises.

The first is that skill is transferable, so that "good" GPs, headteachers or businessmen will make good MPs. This isn't clear empirically: Glenda Jackson, Archie Norman and Louise Mensch, to name three that come to mind, had successful careers before they entered parliament but were not obviously better MPs than others.

MPs are not unusual here. It's common for football managers or TV presenters to go from stars to mediocrities (or vice versa) when they change jobs. The same is often true for equity analysts, company managers and heart surgeons. If skill isn't portable even within careers, it's not likely to be portable across careers. To paraphrase Arrigo Sacchi, if you want a good jockey, don't hire a good horse.

One reason for this is that what makes success isn't skill alone but organizational capital - having square pegs in square holes. Another reason is that what looks like skill is sometimes just dumb luck.

The idea that "good people" can move across jobs rests upon a nasty form of elitism which believes that distinguished men with first class minds and innate ability can apply themselves to any problem. This ignores the fact that skill is often context-dependent, if it exists at all.

The second assumption is that there's no motive (pdf) crowding out - that stronger financial incentives won't reduce the non-financial incentives to enter politics. But they could, in two ways, as this paper (pdf) shows:   

 - Public-spirited people might be less likely to become MPs, because thery don't want the stigma of being seen to be greedy.

 - People who enter politics for the money are likely to do other things for money too, such as take bribes from lobbyists.

Thirdly, there's the assumption that politics requires high ability. This too is dubious. "Ability" has a downside: it can lead to overconfidence, complacency and a lack of empathy. A humble awareness of the ingenuity gap - the gulf between the complexity of the world and the inherent boundedness of human rationality - might lead to better government than the ambition of men of "ability."

These assumptions of course, are not confined to politics. They are part of the ideology which helps sustain the wealth, power and self-love of our the managerialist parasites who rule us in business as well as politics.

Tories, Apartheid & rationality

The death of Nelson Mandela has prompted several lefties to point out that, on apartheid, the Tories were on the wrong side of history  - and indeed morality. Why was this?

First, let's sharpen the question. Although the apartheid issue was typically framed as one of equality and justice, it was also a matter of freedom; black South Africans - and many whites - were horribly unfree. We might laugh at Thomas Hazlett calling apartheid socialism with a racist face, but if you're the sort of silly libertarian who equates socialism with statism, it's not so daft. This poses the question: why were Tories so vocal in demanding freedom for Russians, and so quiet about demanding it for Black South Africans?

When Thatcher died, the Economist called her a "freedom fighter". It didn't have South Africa in mind.

You might think there's a simple reason for this: Tories were racist. Whilst this might be true for the more extreme sympathizers with apartheid, I can't believe it's true for all Tories. And the issue here is not simply that a few actually sympathized with apartheid. Very many more Tories were quiet on the issue. I took an interest in the anti-apartheid movement in the 80s, and it certainly wasn't overcrowded with Tories.   

Another possible explanation is that Tories were never really much interested in freedom. What they supported was capitalism - in its basest sense of a system which makes profits for a few by the exploiting the many. And South Africa had capitalism, Russia did not.

I suspect, though, that there are two other explanations.

One is a form of homophily. To a certain type of person in the 70s and 80s, white South Africa was a very congenial place, if you ignored a few things. And we naturally tend to take our political views from people we feel sympathy with.

The other is simply "my enemy's enemy is my friend". The apartheid regime presented itself as a fighter of communism. And in the simple manichean world of the cold war, this was enough for it to get the sympathy and support of the right; the same, of course, was true for Pinochet.

But here's the thing. These motives were - of course - not confined to Tories in the 70s and 80s. All of us, to some degree, have an element of tribalism in our political views; given bounded rationality and knowledge, it can't be otherwise. And "my enemy's enemy" is - as Nick Cohen will tell you - one motive behind the sympathy some (a few?) leftists have for reactionary Islamism.

In this sense, whilst many Tories were wrong on apartheid, the reasons for that error were not confined to them. The Tories' embarrassment about South Africa should warn us all that our political opinions can be formed in some non-rational ways.