What we don't see

Daniel Hannan recently tweeted:

Around 80% of us say we support the lockdown. But, looking around me, I’d say that no more than 20% are still observing it rigorously. Is this a case of what economists call “revealed preference” - or do people want everyone else to apply stricter rules than they do themselves?

It might well be neither. Instead, it’s an example of the sampling bias. The people we see are, by definition, those who are outdoors and thus who are disproportionately likely to be breaching the lockdown. What Mr Hannan isn’t seeing are the countless thousands of us staying indoors and observing the lockdown. He’s failing to appreciate that what he sees is a biased sample of what there is.

In fairness to him, this is a common error, as experiments by Benjamin Enke have demonstrated. Here are a few other disparate examples of a similar mistake.

Benefit fraud. People greatly over-estimate the extent of this. A survey by the TUC a few years ago found that “people think that 27 per cent of the welfare budget is claimed fraudulently, while the government's own figure is 0.7 per cent.” One reason they do this is that they can see fraudsters whereas they don’t see the millions trapped indoors by disability or depression.

Opportunity cost. As Frederic Bastiat pointed out, we see the shopkeeper spending money to replace his broken window but don’t see that he would have spent money elsewhere had his window not been broken. We thus wrongly infer that some activities – be it breaking windows or going to war – boost economic activity when in fact they often don’t.

The unseen counterfactual. Because we don’t see the road not taken, we don’t benefit from the Jim Bowen effect: “here’s what you could have won.” We don’t therefore blame governments sufficiently for policies which impoverish us relative to a plausible counterfactual – such as austerity or Brexit.

Social transmission bias. In a recent paper David Hirshleifer describes how people’s savings and investment decisions are distorted by the biased signals they get from others. Because people are more likely to discuss their successes than their failures, they talk more about low-return but high-risk strategies that happened to get lucky. This leads listeners to believe that stock-picking works better than tracker funds and that speculative shares pay off better than defensive ones when in fact (pdf) they generally don’t.

Survivorship bias. The shares that are listed on the stock market are by definition those that have not gone bust. They are therefore a biased sample of all stocks. Because investors don’t fully appreciate this bias, they under-estimate the chances of corporate failure, especially over the long-run, and so over-estimate their chances of picking good stocks. In fact, as Hendrik Bessembinder shows, most stocks actually lose money over their lifetime, and stock market rises are due to great performance by a tiny minority of shares.

Biased news. As the ancient saying goes, “’dog bites man’ is not a story but ‘man bites dog’ is”. What we see reported on the TV are, therefore, unusual events. But by definition these do not describe reality. It’s partly for this reason that the fear of crime has not fallen as much as actual crime has. Also, in reporting salient events, the news understates slow-moving but world-changing trends – be it the decline in global poverty, stagnation in productivity or long-term decline in government borrowing costs. In this sense, the news – even if presented wholly honestly – distorts our perceptions of reality.

Immigration. People see what they think to be an adverse effect of immigration: “some immigrants arrived a few years ago and I’ve lost my job since.” What they don’t see, however, are the many mechanisms which counteract this apparent effect.

And herein lies the point. The social sciences are, as Jon Elster said, fundamentally a collection of mechanisms. But many of these are unseen. It is the role of social science to expose these mechanisms, and to show us that what we see is not all there is. As Marx said: "If there were no difference between essence and appearance, there would be no need for science." Or as Marvin Gaye, another great social thinker, famously put it: “believe half of what you see and none of what you hear.” Mr Hannan could learn something from him.

Comments

[D]

Also lots of people break rules they support. Either because they don't live up to the standards they'd like to, or because they see that imperfect rules are necessary and don't see it as wrong to break them where there's no harm to doing so.

[MJW]

Could this line of reasoning extend to 'envy politics' where people support punitive wealth extraction measures against those who they perceive to be "the rich"? I'm thinking where critics implicitly present that wealth as some sort of Scrooge McDuck style moneybin rather than investments in assets. "The rich" may indeed have many material personal possessions which are paraded in the gossip pages, but that doesn't mean the vast majority of their wealth isn't actually productively engaged.

[d]

@MJW

I reckon the idea of envy politics mostly a caricature of the left that's convenient to the right. But so far as it's true, yes.

[Paulc156]

@MJW
"The rich" may indeed have many material personal possessions which are paraded in the gossip pages, but that doesn't mean the vast majority of their wealth isn't actually productively engaged...."

Actually the 'vast majority' of wealth in the UK (and US) is found in land and private property, so not productively engaged, but extractive.
That's quite apart from the tens of trillions of dollars worth of wealth
sequestered in tax havens.

[Em_mikhail]

Chris, this one of the best econ blog posts I have ever seen. Thanks for that. Really appreciated.

Mikhail

[Scurra]

What Mikhail said; this is a lovely concise summary of a difficult issue.

It's so very hard to see things that are invisible (which is why "Stay Alert" is such a stupid slogan, of course, but that's not relevant) and it's amazing what turns out to be invisible.
One of the classic Father Brown mystery stories by Chesterton revolved around the "invisibility" of the postman; this crisis is teaching a lot of us about the "invisibility" of the cleaners and the carers. It may be interesting to see if this leads to anything positive, although given that the bankers returned to "invisibility" after 2008, I don't hold out much hope of that.

[GrueBleen]

"most stocks actually lose money over their lifetime"

If this is true, then how come Warren Buffett is still the world's third richest man ? US$80.8Billion as Forbes counts it.

[Lurking truth]

Your points are valid but you down your biases in your examples.

For instance there are hidden costs to things like immigration in terms of degrading community and trust which are not immediately obvious. But these are impossiible to quantify

[georgesdelatour]

Hannan has noticed a change in people’s behaviour over time. He can’t know the level of lockdown compliance purely from personal observation, but he can still notice the trend towards less compliance.

This new study from UCL finds that compliance is less than 50% for 18-29 year olds, and just 60% for 30-59 year olds. So it seems Hannan has understated the extent of non-compliance.

https://b6bdcb03-332c-4ff9-8b9d-28f9c957493a.filesusr.com/ugd/3d9db5_1806a0f44fc145bfae64ab7567413bff.pdf

[Paulc156]

@GrueBleen
Warren Buffet's stock picking abilities and the fact that most stocks 'lose money over their life time' are not two mutually exclusive truths. Both can be correct...obviously.

[Jim]

"Actually the 'vast majority' of wealth in the UK (and US) is found in land and private property, so not productively engaged, but extractive."

Is that true, particularly of the higher wealth classes? It may be true that the majority of the overall wealth level in a given society is land/property based, but that because hundreds of millions of people own their own house (and maybe one other as a BTL). But such people are not the 'rich'. If one were to assess the wealth of anyone with (say) over £10m in assets, what proportion would be held as pure property/land, and what proportion as business assets or financial ones?

If one looks at the billionaire class, most of their wealth is derived from the companies they founded. Bezos, Zuckerburg, Gates et al are wealthy because of what they created, not because they own billions of acres of land.

[GrueBleen]

@Paulc156

Clearly. But what I want to know is how reproducible is the Buffett success. On the one hand, it could simply be that Buffett is very skilled at turning investments around: selling some that were maybe about to 'lose money' and buying others that are about to rise in a continuous turnover.

However, my recall is that Buffett was a long term share owner, not a more or less rapid turnaround investor. Though he may have had to become one over time.

And maybe he was just lucky to buy and own shares - often from companies in early startup mode - over a time period in which a great many became very profitable. Then again, how's that working out now ?

[Paulc156]

@Jim
It can be argued that Bezos, Zuckerburg, Gates et al are wealthy because of their
proficiency at extracting unearned rents from the rest of us. The wealthy take advantage of monopolies (Zuckerburg) and subsidies (Bezos would have gone bust if he had to collect sales tax), asymmetric information, network effects, regulatory capture (Bezos again though all the super wealthy to be fair), artificial scarcities created by patents (Gates), licenses or trademarks, bailouts, protectionism, financialization.
It's been estimated that three quarters of the super wealthy's wealth can be put down to economic rents. And as Buffet himself admitted...somethings not quite right when he pays a lower rate of tax than his secretary.

[MJW]

@Paulc15c

Plenty of businesses engage in anti-competitive practices, the bigger they are, the more power they can put behind this behaviour. But I still find your rent extraction thesis underwhelming as an explanation for the wealth of their founders. The greater explanation is that they used technology to build an initial competitive advantage and then constantly evolved their products and business models to make it hard for their many current and past rivals to catch up. If they stop evolving and reinventing themselves they will decline.

[Paulc156]

@MJW
They may well have used their ingenuity to begin with but the story of capitalism is one of monopolisation. Once a business has attained an initial advantage, if that advantage is a sizeable one it can through exploitation of patent and copyright protections (Gates BIG time along with big pharma) and regulatory capture (eg. multi billion dollar lobbying in the US and political donations) and ironically the institution of regulations (to stunt the threat of competition from upstarts) create a virtual tollbooth.

For global rentiers see:

https://promarket.org/2017/10/30/un-study-warns-growing-economic-concentration-leads-rentier-capitalism/

For UK see:
https://journals.sagepub.com/eprint/kzfehjeg9gp5divhrwkt/fullarticlesharecontainer

And entrepreneurs OR Fatcats?
http://www.populareconomics.org/are-billionaires-fat-cats-or-deserving-entrepreneurs/

[Ian]

Re: people think that 27 per cent of the welfare budget is claimed fraudulently, while the government's own figure is 0.7 per cent.

This might be telling us something else - benefits exist for lots of different groups - children, old, in work, out of work, disability, housing etc and many are available online which opens the system up to organised crime. 0.7 percent is low for a system this complex with so many areas of vulnerability.

This might be telling us that the political will to realistically assess benefit fraud does not exist.

[John Smith]

You have listed really very important aspects ... Everything is very accurately noticed, I agree with you 100%.

[georgesdelatour]

To return to Chris’s starting point about lockdown compliance, Scott Alexander has a post about the situation in the USA. It’s here:

https://slatestarcodex.com/2020/05/18/coronalinks-5-18-20-when-all-you-have-is-a-hammer-everything-starts-looking-like-a-dance/

The CDC has used anonymised cellphone data to measure the percentage of people leaving home over time. The graph shows a shallow trend of people increasingly tending to stay at home. The trend pre-dates lockdown, continues after lockdown, but shows no change at all at the moment of lockdown. According to this data, most Americans are behaving as if they had no more than Swedish measures in place. They’re adjusting their behaviour in response to the Coronavirus, but not in response to government instructions.

I’d be interested if other readers can see anything wrong with this cellphone data evidence. Supposedly 96% of Americans own a cellphone. The one large group who don’t are, I guess, pre-teen children. And they’re not going to school.

[georgesdelatour]

@Paulc156

As I’m sure you know, current World’s Richest Man Jeff Bezos now owns the Washington Post. Former World’s Richest Man Carlos Slim was the largest single shareholder in the New York Times until a couple of years ago. Both titles are perceived as left wing in US terms. This means they’re big on SJW talking points, calling everyone white supremacist, transphobic etc. They’re not so big on outright advocacy of Communism.

So why do the super-wealthy like Bezos actively cultivate this strand of leftism? Why do they find it so useful? I suspect they see it as squid ink. Get everyone riled up over intersectionality, stoke up ethnic animus and division, and people will have no bandwidth left to discuss antitrust legislation.

[Jim]

"It can be argued that Bezos, Zuckerburg, Gates et al are wealthy because of their
proficiency at extracting unearned rents from the rest of us."

I fail to see how providing a free service (Facebook) is extracting rents. Its certainly not extracting anything from me, I don't use it. Similarly I fail to see how providing a service that is more useful and cheaper (Amazon) than the alternative (traditional retail) is extracting any rent from me when I use it to send my niece a birthday present. How does me paying more in time and money to buy and post her present to her mean I'm better off?

[georgesdelatour]

@Jim

There’s an important distinction. With Amazon you’re the customer. With Facebook you’re the product.

[Paulc156]

@Jim
It's pretty straightforward. Facebook and Amazon are both platform monopolists. Amazon probably would never have turned a profit without having been granted the privileged position of exemption from sales taxes in the US.

In any case a monopolist is able to earn more than would otherwise be required in order to provide a service or product. That excess is rent. That excess is all the greater because these companies aren't just monopolistic but they spend significant sums and expend great energy in rigging the rules so that they retain market leadership whilst depriving the state of taxation even though it was often state discoveries that spawned the industries (e.g.computer networking, internet) or the companies that go the rentier route (eg. Apple)

@georgesdelatour
Fair points on soft left liberals.
Similarly when Obama ran for and was elected President it galvanised the view that America needed to solve it's issues on race and when H. Clinton ran it focused the big debate on sexual equality...just so long as no one bothers to scrutinise the rigged system that perpetuates the economic and social injustices the occasional Obama can be tolerated.

[Jim]

"It's pretty straightforward. Facebook and Amazon are both platform monopolists."

Well duh. Thats like saying Tesco is a platform monopolist because you can't buy Sainsbury's products in Tesco's shops. Of course their platforms are monopolies, they own them. The question is are they the only platform doing what they do and somehow managing to exclude any competition? Which of course they aren't, there's other social networks, and plenty of other online retailers.

And even if Amazon was a monopolist, its goods and services are still cheaper and more practical than the off-line alternative (traditional retail). So as the consumer colour me unimpressed by your lurid tales of 'excess profits' when the existence of Amazon saves me massive amounts of time and money.

[Paulc156]

@Jim
The fact that you deem a price 'cheap' so unconcerning is irrelevant. You only look at one side of an equation and unsurprisingly come up with a half baked conclusion.

Most of Mark Zuckerberg’s income is just rent collected off the millions of picture and video posts that we give away daily for free. Yes we have fun doing it. But we also have no alternative after all, everybody is on Facebook these days.

Basically Zuckerbrrg runs an on-line ad agency, one that along with Google takes most of the worlds on line ad income.

The standard definition of a rentier: Someone who uses their control over something that already exists in order to increase their own wealth.

The feudal lord of medieval times did that by building a tollgate along a road and making everybody who passed by pay. Today’s tech giants are doing basically the same thing, but on the 'digital highway'. Using technology funded by taxpayers, they build tollgates between people’s free content and all the while pay almost no tax on their earnings.

Do they create anything? Sure they employ armies of programmers to write algorithms to make users click on their adds more frequently so helping tp make their platforms ever bigger.

As for Amazon they have over run the book trade to such an extent that they have recently engaged in independent book shop philanthropy! Donating funds to be distributed to needy booksellers. They seem to think its a problem even if you don't! Go figure. But hey they're cheap so who should care?

Still, if you want to reinvent the meaning of the term economic rent to suit your preferences don't let me keep you.

[Jim]

"The standard definition of a rentier: Someone who uses their control over something that already exists in order to increase their own wealth."

So Facebook existed before Zuckerberg created it (the Winkelvoss twins notwithstanding)? How can he be extracting rents from something he created? I suppose in your world Apple are extracting rents by creating products that billions of people want, and supplying it at a price they can afford? By your definition all business profit is rents. I mean my plumber is very good, and his hourly rate reflects that. Is he rent seeking as well? After all he could work for minimum wage and do exactly the same job.

"They seem to think its a problem even if you don't! Go figure. But hey they're cheap so who should care?"

So its better that the consumer has to pay more for books, so that inefficient retailers can continue to exist? If Amazon wish to spend some of their profits on supporting high street booksellers thats their problem. As a consumer I want the cheapest and best selection of books possible, which Amazon gives me at the click of button, delivered to my door. You seem to think that I should have to drive to a bookstore, and spend more money buying exactly the same item, and this will be somehow 'better' for me.

"Do they create anything?"

Of course create something! Do you think a system like FB just appeared out of nothing and runs itself? I mean FB provide a free service for goodness sake. How much more do you expect a business to do? Pay you to use their service? Yes,they use your data, if you don't like it, stop following the crowd and get rid of FB. No-one's forcing you to use the dratted thing.

[Paulc156]

@Jim.
"So Facebook existed before Zuckerberg created it..."

Well Duh! The digital highway already existed. And it was largely paid for by public funds.
And look at the ramifications of the power of the monopolist.
Facebook conveniently allows political ads to state blatant lies on its platform in the name of freedom of speech and is exempt from the threat of libel action that all its print based competition is subject to. So no need for legal eagles required by newspapers and journals to clear the stuff before it's published. Another pesky cost avoided. Such are the special privileges that flow to the modern day highwaymen...

Listening to your defence of predatory pricing ala Amazon you would think the robber barons of old had never existed.
Surely Rockefeller, Carnegie et al would have preferred your own attitude to the one one they actually met.

Sure Amazon could run at a loss for years driving it's competitors out of business so you could buy books a bit cheaper(for now)...all on the back of its political clout which saw it exempted from Sales taxes in the US that its neanderthal competitors simply had to pay.

Dean Baker and Evan Butcher did a rough calculation showing that if Amazon had always been required to collect sales taxes, it would have collected a total of $20.4 billion in sales taxes from its founding in 1994 through 2015, which is more than twice its lifetime profits (to 2018) of around $9.1 billion. It was only able to send your 'inefficient booksellers' packing due to its unique talent in avoiding taxes!
And the radical tax avoidance that these companies pursue (almost all their profits are declared in tax havens) on the back of that political clout I mentioned is itself a part of the rentier songbook.
Good day.