Stumbling and Mumbling

Rooney, Finney, power & skill

Sir Tom Finney - widely regarded as the best English footballer of all time - earned £20 a week, or around £1000 in today's wages. Wayne Rooney is about to get a a pay deal worth £300,000 a week. Why the difference?

A useful framework for thinking about this is the Nash bargaining solution*.

Let's say that the joint surplus to both Manyoo and Rooney from Rooney's playing for Manyoo is A - (c + p), where c is the club's payoff if a contract is not agreed and p is the player's payoff if there's no agreement.

It can then be shown that Rooney's payoff will be:

p + b(A - (c + p))

where b is Rooney's bargaining power; this is a coefficient between 1 and 0, where 1 means he has all the power and Manyoo has none, and 0 means Manyoo has all the power.

This tells us that Rooney's wage depends upon three things:

 - his payoff if there's no agreement, p.

 - the size of the pie to be split, A.

 - his bargaining power, b.

Given the amount of money in the game, A is big. Similarly, Rooney's payoff if contract talks break down, p, is also big; he plays for Chelsea instead. And his bargaining power is also strong because Manyoo's is weak; if they let him go, the fans will be angry and the club will be signalling a lack of ambition and hence find it difficult to attract the new players they'll need in the summer. In the extreme but not implausible case of Rooney having all the bargaining power, he can extract all of the surplus from his playing for Manyoo for himself, leaving the club with nothing.

Now, contrast this to Sir Tom's position:

 - A was low, because there was less money around; there were no big TV revenues in his day.

 - p was low, because the maximum wage of £20 per week meant his outside options paid no better than Preston did.

 - b was low. When Sir Tom was offered big money by Palermo in 1952, his employers refused to let him go, and he acquiesced in this. How far this was because of the club's actual power and how far because of Sir Tom's placid nature and loyalty to the town needn't detain us here.

Now, here's the thing. The player's skill enters into our equation only indirectly - as one factor determining A; Manyoo gains more from employing a skilful player than it does from employing a clogger. But how much of the total surplus the skilful player can extract for himself depends upon the other factors determining A, outside payoffs c and p, and bargaining power.

These coefficients favour Rooney but did not favour Sir Tom. They depend upon institutional factors (whether there's a maximum wage or not); cultural ones (deference towards football club owners, willingness of fans to pay to see a game); temporary stength (such as Manyoo's desperation now); or individual character (a person's timidity or narcissism).

The message of all this should be obvious to anyone who isn't blinded by ideology. It's that incomes don't depend merely upon an individual's skill. Instead, they depend upon the power to extract a share of the surplus, or rent, which arises from job matches. As Robert Solow says (pdf):

Rents are pervasive...It is too nonchalant to presume that all market incomes reflect true productivity.

* I'm following ch 5 of Sam Bowles Microeconomics.

The power of the rich

Tom Perkins' demand that the rich get more votes has provoked ire on Twitter. His critics, however, miss a point - that it wouldn't make very much difference if they did.

I say this partly because of the nature of first-past-the-post systems. The rich tend to live in wealthy areas which vote right-wing anyway. Perkins' scheme would thus create even bigger majorities in Tory or Republican seats.

But there's a bigger reason. It's that the rich don't need more votes in order to have disproportionate political influence. They already do, thanks to their control over "business confidence"; our tendency to defer to the rich and successful; the managerialist mindset which serves to justify the parasitism of the wealthy; cognitive biases which reconcile people to even unjust inequalities; and our tendency to be excessively generous to people merely by virtue of the fact they communicate with us.

You might wonder here: if the rich have so much power, why don't they exploit it even more?

Simple. It's because there are two constraints upon the power of the rich, which would exist regardless of how many votes they had.

One is efficiency. You don't have to believe in theories about the inefficiency of existing inequalities to see that, beyond some point, inequality would be harmful for the rich. For example, if workers are so badly paid that they are unhealthy or unmotivated, the rich would suffer as output and profits fall. Similarly, the lack of a welfare state would cause greater volatility and lower labour supply.

The other is simply the threat of a political backlash. Louis XVI and Nicholas II did not benefit for long from high inequality.

A successful parasite needs a healthy host. The smarter parasites know this.

In light of all this, why are so many so outraged by Perkins' comments? It's becauser he's challenging the principle of formal equality, as expressed in "one person, one vote." Formal equality, however, is very different from substantial equality. 

Love & class

Simon May in the FT says that romantic love helps to fulfill "the ambition to subvert traditional relations of class, power and more recently gender."

Traditionally, he's been right. From Cinderella to Rosie M Banks, a staple of fiction has been how love can conquer class divides.

But no more. Love now helps reinforce the class divide. As Jeremy Greenwood and colleagues point out, the rise of assortative mating - the rich marrying the rich - has been a significant cause of increased inequality.

Assortative mating can also perpetuate inequality through the generations - partly because the child of rich parents is more likely to marry someone rich, but also because being born into a family with two wealthy, educated parents might increase one's chances of doing well in life, because educated mothers make for educated children.

However, assortative mating hasn't increased because of a conspiracy among the rich. Instead, I suspect, one big cause has been job polarization. In the 60s and 70s, men commonly married secretaries or someone from the typing pool. Today, these opportunities have vanished with the decline of secretaries and typing pools. In this sense, assortative mating has increased because it's the only game in town - a fact reinforced by the increased economic status of women since the 60s.

This helps explain another trend since the 70s - for marriage rates, here (pdf) and in the US, to decline. As Sam Pizzigati says, "social interactions across income levels have become considerably rarer" - which reduces one's chances of meeting "the one."

I say all this for two reasons. First, what we have here is an example of Marx's dictum: "The mode of production of material life conditions the general process of social, political and intellectual life." As the mode of production changed to eliminate secretaries and typing pools, so cross-class marriages have declined, and with them marriage rates overall.

Secondly, class divisions can perpetuate themselves not only by generating ideologies which sustain inequality, but also by generating practices such as assortative mating which themselves contribute to inequality.

When good ideas turn bad

The big bonuses paid at Barclays and Lloyds pose a question: do some once-good ideas outlive their usefulness?

What I mean is that years ago, there was a good reason why merchant banks and stockbrokers paid bonuses. It was because revenues were volatile, as they depended upon stock market conditions and merger activity. Bonuses were a way of ensuring that costs were flexible enough to respond to this volatility. Nobody seriously thought they were a means of incentivizing staff; this was accomplished by the fact that ordinary staff worked a few feet away from well-informed business owners - partners - and so were subject to good oversight.

These days, though, bonuses no longer play that useful stabilizing role. Quite the opposite. Insofar as they incentivize risk-seeking, they can be a source of instability*.

Bonuses, though, aren't the only example of good ideas gone bad. Here are some other contenders:

 - Union bashing might have made sense when we were in a profit-led regime, when bosses needed higher profit margins to induce them to invest. But it is counter-productive in wage-led regimes, when a shift from profits to wages would raise aggregate demand and hence profit rates.

 - The protestant work ethic is a good idea in times of full employment, when output is constrained by labour shortages. But it's a source of misery and frustration at times such as now when jobs are scarce.

 - German hostility to inflation and printing money was useful in the 60s, 70s and 80s, as anti-inflationary credibility and low inflation expectations might have helped improve the unemployment-inflation trade-off. But it is now a menace (pdf), to the extent that it is an obstacle to lasting solutions to the euro crisis.

 - Hierarchical workplace organization makes sense when information is costly and when workers are mere drones. But it might be less (pdf) appropriate when information is freer and when the firm needs creative employees.

 - Taxing income and profits is reasonable in a pre-globalization era when capital and labour can't move. But if they are footloose, it makes more sense to tax immobile things, such as land.

Ideas such as these are not the same as John Quiggin's "zombie ideas". He meant bad ideas that stayed alive despite being killed by reason, whereas I'm thinking of good(ish) ideas that turn bad because they outlive the  institutional frameworks which made them good.

It is, of course, understandable that such persistence should occur. Beliefs are path-dependent partly for bad reasons - Bayesian conservatism - but also for good; Burke wasn't wholly wrong when he said that there is wisdom in the ages which we should be loath to reject. This, though, means there can be a mismatch between beliefs and the facts which would justify them.

* Cynics please note: I am not so old that I'm saying that bonuses were good when I got them but are bad now others are getting them.

Policy, & the aspirations gap

Helping people into work can do more harm than good. This is the message of a new paper by Andrew Oswald and Richard Dorsett.

They studied the Employment Retention and Advancement programme introduced by the DWP in 2003. This offered extra training and temporary financial incentives to work longer hours to some randomly-chosen single parents but not to others. It was therefore a rare example of an RCT in economic policy.

But here's the thing. Oswald and Dorsett find that although this intervention raised the earnings of those in the ERA programe, it also led to "substantially lower well-being", even five years later. They conclude:

From a well-being perspective, randomly assigning in-work benefits appears to have hurt rather than helped.

The reason for this, they suggest, is that the temporary extra cash paid to participants raised their reference income and so increased aspirations, and the subsquent gap between high aspirations and actual incomes increased their financial worries and decreased happiness.

We should read this in the context of Andrew Clark's recent finding, that people do not adapt to poverty, because their aspirations don't fall sufficiently to match their low incomes. In raising aspirations, the ERA was therefore scratching an open wound.    

One inference from this could be that the best way to help the poor is not through temporary micro incentives but through macro policy - job creation and permanent redistribution.

But there might be a wider message. Given politicians' tendency to over-promise and under-deliver, perhaps almost all policies reduce well-being by creeating an aspirations gap. Personally, I think this would be too big an inference - because nobody seriously believes politicians' promises. But it is perhaps a warning that even quite benign policies might inadvertently prove to be harmful. 

How to succeed

"Tiger mom" Amy Chua reckons success - defined in the sense of the goods of effectiveness such as power, wealth and fame rather than virtues or excellence - depends upon three things: a superiority complex, insecurity and impulse control. Maybe. But here's an alternative recipe for worldly success:

1. Don't be nice. Guido Heineck has estimated (pdf) that, other things equal, the 25% of men who score highest for agreeableness earn 7% less than the least agreeable quartile of men.

2. Be irrationally overconfident. People who have excessive confidence send out more competence cues than others - they talk louder and have more assertive body language - and others mistake these cues for actual competence.The overconfident are thus more likely to get hired and promoted.

3. Be a narcissist. One study has found:

More narcissistic CEOs who have been with their firm longer receive more total direct compensation (salary, bonus, and stock options), have more money in their total shareholdings, and have larger discrepancies between their own (higher) compensation and the other members of their team.

This is despite the fact that narcissistic bosses do no better a job on average than others - and might even be positively dangerous.

It takes a huge sense of entitlement to believe one deserves to earn 10 or 100 times the average salary. Narcissists, who believe this, are thus more likely to negotiate for outsized rewards.

4. Be a psychopath. Psychopaths - or at least mildly psychopathic types - seem to be over-represented in boardrooms, perhaps because charm, fearlessness and a lack of empathy or moral code are useful for career success. Manfred Kets de Vries says:

Their innate charm, their deceitfulness, their need for “thrills and regressions,” can turn into a very heady, effective package...They fit perfectly in modern, fast-moving organizations, which are ideal places for SOBs to flourish, as political skills, rather than competence, are the keys to the top.

I say all this as a counterweight to Deirdre McCloskey's claim that a market economy fosters virtues such as trustworthiness and sympathy. Maybe so. But we don't live a purely market world. Instead, we have large islands of Stalinism within a market sea. And the characteristics required to prosper within Stalinism are, well, Stalin's ones.

Ambition vs comparative advantage

Is there a trade-off between ambition and comparative advantage, implying one between mobility and efficiency?

I ask because I'm trying to resist calls from the office for me to appear in some videos, on the grounds that this is not where my comparative advantage lies; I'm not as telegenic as some of my colleagues. However, if I were the ambitious type eager to climb the greasy pole by pleasing management, I would accede to such requests even though my investment in them would be suboptimal from the organization's point of view.

In this sense, there's a trade-off between ambition and efficiency. Efficiency requires that round pegs go in round holes - that people do what their comparative advantage requires. But ambition might lead them to do other things. Esther McVey's ambition to become a politician rather than a perfectly good TV presenter, for example, has not noticeably improved the nation's well-being.

There are many other examples. The Peter principle says folk are promoted to their level of incompetence. The Dilbert principle says incompetents become bosses. In football, it's common for good coaches to become managers, often with mediocre effects. In several firms, the (mis)use of key performance indicators can encourage employees to become all-rounders, rather than specialize in what they're best at.  

There are two conditions necessary for this trade-off to occur.

First, that pay is attached to jobs, rather than to quality matches between skills and jobs. If you can earn more as a second-rate manager than a first-rate coder, you might prefer to become a boss.

Secondly - as Joao Ricardo Faria stresses in a nice paper (pdf), hirers must have imperfect information. This not only causes them to make bad hires, but - worse still - might cause biased hires. For example, if they appoint people who give off "competence cues", they'll tend to recruit the irrationally overconfident. Or if they prefer to hire people in their own image - say because they are easier to monitor - underlings will have an incentive to emulate the skills of existing managers, to the detriment of comparative advantage. Or risk-averse bosses might simply prefer the known mediocrity to the potential superstar.

Equally, there are (at least) two circumstances in which the ambition-efficiency trade-off will most manifest itself.

One if is there's a lack of competitive pressures. Gary Becker famously pointed out that uncompetitive markets allow bosses to discriminate against blacks or Jews. But equally, they allow bosses to hire favourites, or simply fail to drive out of the industry firms who put square pegs into round holes.

The other is if there's a lack of technical progress. As Faria points out, rapid technical change helps to identify good performers, as these understand and adapt better to new conditions.

Now, I don't say all this to suggest all this is a knockdown argument against hierarchical capitalism; there is a great deal of ruin in any nation, and it's not clear how widespread the trade-off is. I merely want to note that there is, potentially at least, a conflict between two principles of neoclassical economics - that people respond to incentives, and that people should specialize in what they are relatively least bad at. These two principles are consistent only under particular institutional conditions.

Who benefits from benefits?

In the "debate" about welfare benefits, there's one point which is underweighted but so obvious that I'm embarrassed to mention it - that some form of welfare is beneficial not just to its recipients, but to capitalists.

Rightists like to point out - correctly - that the burden of taxes doesn't necessarily fall upon those who nominally pay it: corporation tax, for example, is paid by workers and not just capitalists.

But just as there's tax incidence, so there is benefit incidence; the benefits of benefits don't flow merely to their nominal recipients.

Housing benefit, for example, helps to sustain high rents and so could well be renamed landlords benefit.

Similarly, unemployment benefit helps capitalists in several ways.

One arises simply from the circular flow of income. Because "scroungers" spend their benefits, they are in effect a state subsidy to Lidl and pound shops.

You might object that this subsidy is paid out of others' taxes, which depress demand. This isn't wholly true. Those taxes don't just reduce others' spending, but their savings too. For this reason, welfare benefits are a form of balanced budget multiplier, which helps to support demand.

In this sense, there is a Malthusian case for welfare benefits. I refer not to the Malthus of the Essay on Population, but the Malthus who feared that economies would suffer from deficient demand and so said: "It is necessary that a country with great powers of production should possess a body of consumers who are not themselves engaged in production."(He was thinking of aristocrats rather than White Dee, but the economics are much the same.)

For this reason, benefits are a form of automatic stabilizer; insofar as benefit spending rises in recessions, they help reduce economic volatility. This is especially important if monetary policy lacks reliable efficacy because we're near the zero bound, or if fiscal policy can't be used counter-cyclically, say because governments can't see recessions coming.

It might be no accident that in the era of a big welfare state, economic volatility has been lower than it was in the 19th C, when we had a minimal welfare state: for example, the standard deviation of annual GDP growth was 2.5pp between 1831 and 1914, compared to 1.9pp since 1946.

Insofar as businesses require certainty if they are to invest, welfare states help to give it them.

To see some other benefits of benefits, imagine we didn't have them. We'd then have higher crime, and even starvation, neither of which are in capitalists' interests. But we'd also see: more violent opposition to redundancy plans; less geographical mobility because people would want to stay close to family and friends who could support them in hard times; and people being loath to move into potentially good but insecure jobs. In all these ways, we'd see less labour mobility. You can therefore regard a welfare state as a subsidy to the creative destruction which is necessary for higher productivity.

Now, in saying all this I don't mean to say that all welfare states are in capitalists' interests: these advantages of a welfare state must be traded off against the costs of higher taxes and - if benefits are high - a reduced labour supply. It's just that some type of welfare states - even ones which give "handouts" to "scroungers" might be in capitalists' interests.

This helps explain something. The most vocal opposition to "generous" welfare benefits comes not from the voices of capital, but from pub bores and comedy villain Mick McManus-types. The CBI - which normally yaps a lot - is relatively quiet. There's a reason for this.  

"Politics" as wrestling

Last night, as on most Thursday nights, my Twitter timeline was full of tweets about something called Question Time. Which raised the question: do people pay too much attention to politics?

What I mean is that if folk were seriously interested in how the public realm should be governed you'd expect them to be also interested in social science and philosophy. But interest in these is weak relative to that in "politics". For example:

 - Books on such subjects sell relatively poorly; Why Nations Fail, despite an endorsement from the Prime Minister, is selling less than Health, Safety & Environment Test for Operatives & Specialists. And even good introductions to political philosphy don't reach the general reader.

 - There are no good regular social science programmes on TV - though there are on radio.

 - Social science blogs attract only a couple of thousand views per day from UK readers. And I've found that my domestic traffic tends to spike when I write more partisan pieces.

 - If someone were to use the basic language of social science and philosophy ("Bayesian", "Rawlsian", etc), on a programme like Question Time they'd be greeted with incomprehension. Ed Balls acquired a reputation as a pointy head for using the phrase "endogenous growth theory".

Interest in politics, then, seems much more widespread than interest in the social sciences. There is, I fear, a simple reason for this. People watch programmes like Question Time or the Big Benefits Row for much the same reason they'll watch the Liverpool-Arsenal game tomorrow - because they are tribal conflicts. Except that there'll be some skill on show tomorrow.

This in turn explains why such programmes feature the likes of Galloway, Starkey and other diseased effluvia rather than sociology professors. People watch them not to be informed or educated, but to have their egotistical prejudices massaged or to get a cheap sense of angry moral superiority. This is why the answers that are so often correct in politics - "I don't know" and "it doesn't much matter" - are so rarely heard. Insofar as they do "learn" anything from such shows, they do so through a process of asymmetric Bayesianism, overweighting comments supportive of their prejudices (pdf) and disregarding ones which challenge them.

Question Time has much in common with the wrestling we used to watch in the 70s, with Katie Hopkins playing the Mick McManus role and lefties acting like the nans who'd hit him with their handbags.

This wouldn't be so bad if there were a distinction between post-serious "wrestling politics" and proper politics, based upon rational inquiry about evidence and values. But when policies are devised with a view to headlines and focus groups, this distinction risks being blurred. The problem with British democracy isn't so much the politicians as the voters.

What did tax cuts do?

I'm disappointed to see Tim Worstall falling for an old canard. He points out that the share of income tax paid by the top 1% has risen hugely since 1979-80 and infers: "Looks like lowering rates can indeed increase tax collected."

Post hoc ergo propter hoc, dear boy.

It's quite possible that the share of tax paid by the top 1% rose since the 1980s not because of Laffer curve-type incentive effects, but because some other processes have increased the share of incomes going to the richest 1%.

One of these was that high-paid jobs expanded because the financial sector grew faster the the rest of the economy: since 1990*, business services and finance has grown by 129% in real terms whilst overall GDP has risen 61%.

Another is that "superstar (pdf) effects" have increased in importance, such that top bosses, entertainers, lawyers and sportsmen can earn more now than they did in the 80s.

These processes might have been independent of the cut in top taxes by Nigella's dad in 1988. I say this because the share of incomes going to the top 1% seems to have grown faster between the mid-90s and mid-00s than it did in the few years immediately after Lawson's cut. Sure, incentive effects might work with a long lag - but the data are also consistent with the tax cut being independent of the things generating rising top incomes.

What's more, if higher top taxes did have incentive effects, they might have incentivized not genuine wealth creation, but rather rent-seeking activities which increased the share of the top 1% at the expense of others. Such activities include corporate downsizing, offshoring, lobbying and the introduction of power-biased technologies.

There's one big piece of evidence to suggest that what's happened since the mid-80s is an increased share for the top 1% rather than genuine wealth creation. It's that aggregate economic performance hasn't improved since the Lawson tax cut. I pointed out the other day that trend growth in GDP per capita hasn't changed since then. And I'd add that labour productivity has actually fallen. Since 1988Q2, GDP per hour has rise by 1.8% per year, compared to 2.5% per year between 1971 (when ONS data began) and 1988Q2.

Of course, you might argue that economic performance would have been worse, in the absence of the cut in top taxes. But it would be unwise for rightists to do so; it would imply that other Thatcher reforms either depressed growth or failed to improve it.

I say all this not to argue against top tax cuts, but merely to point out that you need much better evidence than a rise in the share of tax paid by the top 1% to justify them.

* Chosen because that's when ONS data begins.