Stumbling and Mumbling

Equality: the Ron Atkinson effect

Igor Toronyi-Lalic points out that the proportion of workers in the City who are from ethnic minorities is five times that in the arts, and says:

The evil scumbags who work in the City appear to be doing a better job at being modern and liberal than the state-subsidised art world.

Why? One reason, as Simon says, is a selection effect; Indians tend to study numerate subjects, which disposes them to enter finance rather than the arts.

But there's another reason - the Ron Atkinson effect. In the 70s, pro football was overwhelmingly white. Then BFR selected the "three degrees" - Batson, Regis and Cunningham - which paved the way for an influx of black players into top sides.

BFR did not do this because he had advanced, liberal opinions; we later learned that he didn't. He did it because players of the calibre of Regis and Cunningham were so good they improved his team greatly.W hen racism met the desire to win games, racism lost.

This illustrates a point made by Gary Becker back in 1957. He pointed out that competition was the enemy of discrimination and monopoly its friend. A company that refused to hire blacks or women even if they were good workers would lose out to firms that did hire them. And subsequent research has proved him right. For example, studies have found that when US banks became exposed to more competition in the 80s and 90s, gender (pdf) and racial (pdf) pay gaps narrowed.

This helps explain the difference between the arts and banking. Granted, banks as an industry are massively (pdf) subsidized. But within the bubble there's competition between banks. And in many banking jobs, there's a clear measure of performance; does the guy make money or not? Competition and the ease of measuring performance combine to make banks want to hire the best person they can, regardless of colour.

By contrast, there's less competition between arts groups and less clarity of measuring performance*. This gives arts companies more room to prefer the second-rate white guy - a breed of whom the world has never had a shortage - over the better black.

Now, you might think all I've said here is standard pro-market stuff. But there's an implication for the left. We don't achieve equality merely by having politically correct liberals in positions of power (especially if such"liberals" are merely self-righteous hypocritical little pricks). We achieve it by having the right institutions and mechanisms. Structure matters more than agency.

* I'm talking matters of degree here; it is possible for duffers with political skills to do OK in banking, but it's probably tougher.

Libertarians & Marxism

Bryan Caplan says:

The view that money has a major effect on happiness is ideologically convenient for me.  But it goes against first-hand experience, the wisdom of the ages, and the rightly interpreted empirical evidence.  So to hell with ideological convenience.

I find this admirable, but puzzling. A libertarian surely doesn't need a view on which goods (other than freedom) makes us happy. All he needs is a framework in which people are free to pursue whatever ends we want - whether those ends be money or whatever. As Robert Nozick wrote:

Utopia will consist of utopias, of many different and divergent communities in which people lead different kinds of lives under different institutions.

I fear, though, that there's a reason why libertarians might find it convenient to think that money makes us happy. It's because actually-existing capitalism does not give us Nozick's Utopia, which means there's a tension between supporting liberty and supporting capitalism. If, however, you think that money gives us happiness, then this tension weakens.

Here's what I mean. Capitalism has totalitarian tendencies, in the sense that it squeezes out (other) utopias. For example:

 - Most of don't have outside options; we can't live off our savings or inheritances or on our smallholding. We are therefore compelled by circumstance to enter into capitalist relations to earn our living. This curtails our freedom to pursue other lifestyles, such as a love of arts and music or caring for others.

 - Capitalism requires a big and cheap labour supply. It is therefore antagonistic to policies which might give us real freedom to opt out of the labour force, such as a basic income.

 - Capitalist employment relations can be oppressive and alienating.

 - As Richard Sennett has suggested, flexible capitalism can undermine stable communities.

 - Capitalism contains a deskilling process not only in the workplace, but also in leisure skills; commodification tends to crowd out traditional skills such as music and cookery.

 - Capitalism prioritizes the goods of effectiveness (money and power) over those of excellence. This creates a society of "trampling, crushing, elbowing, and treading on each other's heels", which many of us would prefer not to live in.

These tendencies are awkward for a right-libertarian wanting to defend actually-existing capitalism. So, what can he do? One line of attack is to say - with much justification  - that capitalism has provided more freedom (both formal and substantial) for more people than any hitherto-existing form of society. But this runs into the Marxian objection that a post-capitalist society could do even better.

This leaves Bryan's instinctive answer. If you believe that money makes us happy, then you can argue that, in depriving us of alternative lifestyles but delivering the physical goods, capitalism isn't really imposing much of a loss upon us, because it's giving us what makes us happy, what we'd choose anyway.

There is, though, a third option here. It's to recognize that capitalism and real freedom aren't wholly compatible, and to look for economic institutions - of which a basic income is one - which better promote freedom. Libertarianism and Marxism have much in common.

On happiness inequality

Do we need policies to reduce inequality, or should we simply allow economic growth to do so? This is the question posed by a recent paper by Andrew Clark and colleagues. They find that, in the UK and elsewhere, economic growth reduces inequality of happiness.

This isn't simply because it reduces the amount of abject misery. Growth also reduces the number of people who say they are very happy. This might be because wealth increases our options and hence the opportunity cost of our preferred choice. For example, work isn't too bad if it gets you out of a joyless slum, but it can be a misery if it keeps you off the golf course or guitar.

This finding is awkward for the left. If we believe that what matters most is people's well-being, it suggests that the most important inequality should be addressed not by redistribution by simply by promoting growth.

So, what answers might the left have to this? I can think of three:

1. Policies to promote growth require redistribution, to the extent that wealth inequalities are an obstacle to growth. This is the thinking behind wage-led growth and the asset redistribution ideas of Sam Bowles.

2. If people adapt their desires to their circumstances, or if other cognitives biases reconcile them to inequality, they might be content with injustice, but this would not necessarily legitimate the system: we would consider slavery wrong even if all slaves were content. As Amartya Sen said:

Consider a very deprived person who is poor, exploited, overworked, and ill, but who has been made satisfied with his lot by social conditioning (through,say, religion, or political propaganda, or cultural pressure).Can we possibly believe that he is doing well just because he is happy and satisfied? (The Standard of Living (pdf), p12)

3. Inequality can matter for non-welfarist reasons - for example to the extent that it undermines equality of respect or the democratic system.

Personally, I think these are good answers. But Clark's paper should force leftists to think more about why inequality matters. 

How not to write about stock markets

Ha-Joon Chang's claim that stock markets are "heading for trouble" depresses me. I had hoped that stock market punditry had moved beyond some guy's opinion.

What I mean is that a sensible view on the prospects for markets can take one of two forms - and I confess to being ambivalent between them.

The first one is that markets are complex emergent processes which are inherently impossible to predict. On this view, we just can't say where they're heading. All we can do is have a vague idea of expected returns and the standard deviation around them.

In this context, Chang misses the point here:

No one is offering a new narrative justifying the new bubbles because, well, there isn't any plausible story.

Such narratives are not only impossible - we can't foresee the future - but pernicious, because they give a false sense of security. All you need to justify the current level of share prices is a basic  bit of economic theory - that risky assets must offer higher expected returns than safe ones, so equities should be expected to rise. Granted, this theory is questionable. But Chang doesn't question it.

The second line of attack is to look for evidence of predictability in returns. My favourite indicator here is foreign buying of US equities*. When this is high, it's a sign that global investors are irrationally exuberant and so shares are heading for a fall. Last year, though, foreigners were net sellers, which points to good returns this year.

Again, though, Chang presents no evidence here. In fact, he ducks a chance to present some. He says:

Share prices are high mainly because of the huge amount of money sloshing around thanks to quantitative easing.

However, the Fed is only likely to withdraw QE if the economic outlook improves, which poses the question: could it be that the stock market will gain more from better growth than it loses from less loose monetary policy? I've suggested that the answer is: yes. Please, show me evidence I might be wrong - because Chang doesn't.

Now, I don't say this to say stock markets will definitely rise - as if anyone gives a toss about my opinion. In fact, I guarantee that they'll fall some time.

Instead, my point is that discussions of the market should be scientific: is there evidence of predictability or not? What they should not be is just some guy's judgement. This is especially true because we know that such judgments are prone to countless cognitive biases. I fear that one here is wishful thinking. The left wants to believe that finance will get its comeuppance, and the wish generates the belief. But we can, and should, try to do better than this.    

* The regression equation in my chart is: annual change in All-share index = 20.72 - 0.188 x foreign buying of US equities, $bn in the previous 12 months. R-squared = 45% since Jan 1996, standard error = 12pp. And no, this is not just in-sample fitting.

Moralizing inequality

I complained yesterday about the non-Marxist left's tendency to commit the fundamental attribution error - the habit of over-emphasizing individuals' traits and under-emphasizing situational forces. We saw another example of this habit at the weekend, when Crystal Palace fans reacted to Wayne Rooney's new £300,000 per week contract with chants of "you fat greedy bastard."

Sadly, Mr Rooney did not respond in the manner of one of his celebrated predecessors. But he should have, because the chant is wrong. Mr Rooney is not getting £300,000 a week because he is unusually greedy: in the improbable event of being offered such money, who among us would turn it down? He is getting it because he is unusually powerful - a power which is not entirely due merely to his exceptional skill.

Palace fans, then, are committing the fundamental attribution error - they are blaming Rooney's salary upon his personal character rather than upon his situation.

Although Palace fans are - with the odd exception - not famous for their powers of thought, this error is a common one: "greedy bankers" is a cliche, "overly powerful bankers", whilst true, is not.  

It is also a pernicious error. It functions to moralize inequality; the rich are rich because they are greedy whilst the poor are poor because they are lazy.

What this effaces is the fact that inequalities in capitalism* are instead the result of inequalities of power - a power which rests in part upon ideology. Moralizing inequality tends to blind us to this fact. It creates the illusion that capitalism would be acceptable if only those at the top were better people, when in fact the faults in capitalism are structural and not due to the flaws of passing individuals.

Granted, there might well be differences in character between rich and poor. But these might be not the cause of inequality, but the result of it. As someone once wrote:

The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were perhaps, very much alike

Who said that? Adam Smith, that's who. Palace fans, and other moralizers about inequality aren't therefore merely anti-Marxist, but anti-Smithian as well.  

* I mean actually-existing capitalism, not the utopia that exists only in the minds of sillier libertarians.

Bonnie Tyler syndrome

Trouble in Venezuela has led to some rightists sneering at Owen Jones for supporting the socialist government. Such partisan point-scoring, however, hides an interesting question: what is the origin of Owen's mistake, assuming it to have been one?

The thing is that he is certainly not the first leftie to have put his hopes into a regime that turned out to be disappointing. We've seen the same thing in Beethoven's support for Napoleon; the Webbs' admiration of the Soviet Union; 1960s students chanting "Ho, Ho Ho Chi Minh; "radicals" wearing Che Guevara T-shirts; and Polly Toynbee's lust for Gordon the Viking. We might call this the Bonnie Tyler syndrome: holding out for a hero, a superman to sweep me off my feet, a white knight upon a fiery steed.

Several cognitive biases contribute to this urge for heroic leaders. One is simple wishful thinking. We want to think socialist government can succeed, and the wish is father to the belief. Another is "my enemy's enemy is my friend" syndrome: opponents of the US imperialism can easily find supporters in the western left.

These two biases are, of course, not confined to the left. Wishful thinking is ubiquitous, and "my enemy's enemy" led Tories to support or at least be silent about apartheid.

But there's another bias at work here. The thing is that centralized power tends to be misused, as Lord Acton famously pointed out. In supporting men from Napoleon to Chavez lefties have overweighted the ability of some exceptional individuals to resist the corrupting influence of unequal power relations*. This is a particular form of the fundamental attribution error, the tendency to overweight the role of individual agency and underweight situational factors.   

Marx's writings - as opposed to some of his followers! - provide an antidote to this. Successful socialism, he thought, requires a particular level of development, one in which it was technically feasible for workers to control the economy themselves:

New superior relations of production never replace older ones before the material conditions for their existence have matured within the framework of the old society.

Unless this condition is met, a revolution will be too premature to succeed:

Development of productive forces...is an absolutely necessary practical premise [for communism] because without it want is merely made general, and with destitution the struggle for necessities and all the old filthy business would necessarily be reproduced.

In this context, the urge for political heroes is anti-Marxist, because it is a search for great men rather than the right socio-technical conditions. Owen's mistake, then, isn't that he's a leftist, but that he is not a Marxist.

* I'm thinking here not just of moral but also intellectual corruption - the tendency of authoritarian structures to cause those in power to live (pdf) in "purely imaginary worlds."

The "middle class", & Marxism

Is Marx more relevant than ever before? This is the question posed by talk of the falling middle class and poorly-paid self-employed.

I ask not (just!) because I'm seeing what I want to see, but because such talk seems to vindicate - with a lag of 166 years! - something Marx and Engels wrote:

The lower strata of the middle class...all these sink gradually into the proletariat, partly because their diminutive capital does not suffice for the scale on which Modern Industry is carried on, and is swamped in the competition with the large capitalists, partly because their specialised skill is rendered worthless by new methods of production. Thus the proletariat is recruited from all classes of the population.

There are several processes at work here:

 - Globalization is raising house prices in London and Oxford out of the range of the middle class, and also worsening their pay and job prospects by offshoring legal and accountancy jobs.

 - An increased supply of graduates is holding down pay in middle class jobs: when many people want to become journalists or academics, wages fall.

 - Winner take all markets mean that "superstar" lawyers can earn a fortune, but at the expense of others.

 - Managerialism is empowering bosses - "large capitalists" - by demoralizing and deskilling (pdf) professionals.

 - The use of IT, automation or just routine algorithms has led to a loss of professional judgment. Nicholas Carr has described how this has afflicted airline pilots, but a similar story could be told of banks' risk management.

This poses the question: in what sense can we speak of the "middle class"? From a Marxist point of view, class is not about whether you drink Pinot Grigio and watch films with subtitles, but about power. And the person on a "middle class" salary who faces an insecure future and domineering boss lacks power. He is, objectively, working class.

However, there's a big difference between being objectively working class and recognizing that you are. As Adam Przeworski wrote:

Classes are not a datum prior to the history of concrete struggles. Social reality is not given directly through our senses. As Marx said, and as Gramsci was fond of repeating, it is in the realm of ideology that people become conscious of social relations.

I fear, however, that ideology will prevent the "middle class" from identifying solidaristically with other members of the working class.

When irrationality pays

Does it pay to be reasonable and rational? I ask because the ONS points out that twice as many 16-24 year-olds express no interest in politics than do over 65s.

Such a position is quite reasonable. Many political issues are complicated - and complex. The cost of learning about them might well therefore exceed the benefit of doing so: no individual has much influence upon political outcomes and it is moot whether political activism in itself makes us happy or not. For this reason, scholars have long thought that a lack of interest in politics is rational (pdf).

However, this rational ignorance has cost young people dearly. It's no accident that the government has protected pensioners from its austerity policies* but has inflicted them upon youngsters by, for example, closing EMA in England and raising tuition fees - it's because pensioners are more likely to vote than youngsters.

This gives us a paradox. Rational (or at least reasonable) beliefs - such as disengagement from politics - might hinder the advancement of our interests, whilst irrationality might promote them. This is what the renaissance writer cited by Ed Smith meant when he wrote of the fortunati "who violate all dictates of reason and prudence, and yet they never fail."

I suspect this applies in several contexts, for example:

 - An irrationally excessive estimate of the costs of an action can discipline us to avoid it. The recovering alcoholic who thinks "another drink will kill me" has a mistaken belief, but one which promotes his interest in staying sober.

 - People who are irrationally overconfidence send out more competence cues and so are more likely to win promotion than others.

 - An aggressive or unstable temperament can give you a strong bargaining position which enables you to win concessions. This helped keep Colonel Gaddafi in power for decades, and seems to be working in North Korea too: nobody messes with the pub psycho.

 - Fund managers who take excessively high risks can win at the expense of their more rationally cautious competitors.

You might object that these examples show that the agents aren't really irrational at all, as the irrational belief gets them what they want. This would be true if the belief were chosen with that intention, but I suspect this is only rarely the case. More likely, these are examples of people being irrational but right.

My point here is not that we should (or shouldn't) cultivate irrational views. It's that social mechanisms - of which markets are one - don't necessarily select against irrationality and can sometimes select for it. Which is why irrationality is so widespread.

* You might object that older people have suffered from low interest rates. But as these are set by the unelected Bank of England, I think my point holds.

The macroeconomic challenge

In discussing macroeconomics' Faustian bargain, Simon asks:

By putting all our macroeconomic model building eggs in one microfounded basket, have we significantly slowed down the pace at which macroeconomists can say something helpful about the rapidly changing real world?

Let me deepen this question by pointing to five newish facts about the "real world" which any good, useful macro theory should be compatible with.

1. The unemployed are significantly less happy than those in work. This doesn't merely provide the justification for an interest in macroeconomics. It also casts grave doubt upon RBC-style theories which unemployment is voluntary. Sure, at the margin, some people might choose to be unemployed. But the fact that most unemployed are unhappy suggests that most unemployment is involuntary.

2. Price and wage stickiness is over-rated. One Bank of England study has found that:

Nearly half of firms changed their prices within three months of an increase in costs or a fall in demand

This suggests that price stickiness isn't universal. And whilst pre-recession evidence pointed to some wage stickiness, more recent evidence has cast doubt upon this. Models in which stickiness plays a central feature might not, therefore, be well-grounded empirically.

3. The failure of a handful of organizations can have massive macroeconomic consequences. The great recession originated in the collapse of a few banks. This tells us that we need models in which micro failures generate macro ones, of the sort Xavier Gabaix has proposed.

4. Supply shocks do happen. It's improbable that all productivity fluctuations are due merely to labour hoarding in the face of demand shocks. One way in which they might happen has been described by Gabaix - the failure of a few big firms shows up in macro data as a fall in productivity.

5. Interactions between agents can magnify fluctuations. We know there are expenditure cascades, which occur because consumers copy other consumers. And it's likely that animal spirits can spread in much the same way as diseases do (pdf) - because optimism and pessimism are infectious. We can talk ourselves poorer.

These facts are a challenge to both RBC and New Keynesian models. But they have something in common. They stress the heterogeneity of agents: some unemployed respond to benefit changes but most don't; some prices are sticky but others aren't; some firms are big enough to have macro effects, others aren't. This, I fear, means that the problem with conventional macro isn't so much its microfoundations per se as the assumption that these microfoundations must consist in representative agents.

Now, you'll object that any model that tries to embed these five facts will very quickly become very complex. But that's my point - the economy is a very complex system and any theory that doesn't see this is very dubious. It could be that the best way to understand it - if at all - lies in agent-based models rather than conventional DSGE ones.

However, such models are - for now - beyond the understanding of most economics students (and me!). Which poses the question: what should students be taught?

The benefits of English

Rick says that the spread of English as a, well, lingua franca might not benefit native English speakers. I agree, in the context he's writing. But in a wider sense, the spread is surely to our advantage.

What I mean is: why do non-US investors hold $5.7 trillion of low-returning US Treasuries? From a narrow economic perspective, the answer's not obvious. The country runs consistent external deficits (though there might be a good reason for this) and the CBO reckons public debt is on an "unsustainable" trajectory. This makes the country seem a poor safe haven.

However, the US has a massive advantage over other nations.The dominance of the American language is accompanied by a cultural hegemony; US TV shows, films and popular music are vastly more popular globally than their French or German counterparts. As a result, foreigners see the US as being more familiar than other countries. This in turn means that whilst US assets carry risk, they are seen as carrying less uncertainty or ambiguity. And because investors really do hate uncertainty, this relative lack of ambiguity means the US can borrow more cheaply than its economic fundamentals would warrant.The US owes some of its "exorbitant privilege" to the popularity of Baywatch.

But there's more. Deirdre McCloskey has estimated that around a quarter (pdf) of US GDP is talk: think of lawyers, salesmen, journalists and managers among others. The proportion is so large because communication facilitates trade, entrepreneurship and the division of labour. It's difficult to buy and sell without talking - at least if the products are complicated. The division of labour requires coordination between individuals, which requires communication. And you learn about profitable opportunities through listening and reading.

You might object that we don't need a common language to achieve these, because we can use translators. Not so. Three things suggest a lingua franca helps:

 - Trade is much higher between countries if they have a common language - 1.8 times as high according to one estimate (pdf).

 - Countries with linguistic heterogeneity, other things equal, tend to have less successful football teams. This suggests that a common language can promote learning and productivity; the "language of football" is not enough.

 - Some firms have begun to reverse offshoring. One reason for this might be that language barriers - and the associated cultural differences - can hamper effective management.

In these senses a common language is probably a great economic benefit. Whether it is a cultural boon is, however, another matter. If language shapes thought, then the loss of languages might mean the loss of useful ways of thinking. And then there's the matter of whether you side with Douglas Adams' view that the Babel fish caused bloody wars, or with Stephen Pinker's that cosmopolitanism has contributed (pdf) to declining violence.