Chris Dillow's Blog, page 138

Economics, good and bad

Attacks on mainstream economics such as this by Aditya Chakrabortty leave me hopelessly conflicted.

On the one hand, I sympathise:

 - Some mainstream economists certainly do try and use economic theory to defend elites - as in Greg Mankiw's defence (pdf) of the 1%.

 - It could be that a belief in rational markets is performative, and did help to contribute to the bubble in credit derivatives. This is one message of Shleifer and Mendel's chasing noise (pdf) paper.

 - Any economics course that doesn't teach its students some history of the discipline or some behavioural economics is both a lousy education and a poor preparation to be a practicing economist. One of my old bosses in investment banking used to say that the most depressing phrase in the English language was "I'm a trained economist" - the point being that economists should be educated, not trained.

But on the other hand:

 - As Andrew points out, the fact that most economists failed to predict the crash is actually a vindication of mainstream economics, which says that such things should be unpredictable. I'd add that forecasting isn't part of proper economics at all, so a forecasting error tells us nothing about the merits or not of economics.

 - Some of Aditya's claims, such as trying to blame Black-Scholes, are wrong: it might have been to blame for the 1987 crash, less so the 2008 one.

 - The fact that the recovery from recession was so weak for so long actually vindicates mainstream Keynesianism - which, as Simon says, is "at the heart of any undergraduate macro course."

 - The crisis was a failure not (just) of markets but of organizations. This can be usefully analysed with mainstream principal-agent theory.

Above all, though, I fear that Aditya is missing a bigger point. The division that matters is not so much between heterodox and mainstream economics, but between good economics and bad. I'll give just two examples of what I mean.

First, good economics tests itself against the facts. What makes Mankiw's defence of the 1% so risible is that it ducks out of the empirical question of whether neoclassical explanations for rising inequality are actually empirically valid. Just because something could be consistent with a theory does not mean that it is.

Secondly, good economics asks: which model (or better, which mechanism or which theory) fits the problem at hand? For example, if your question is "should I invest in this high-charging actively managed fund?" you must at least take the efficient market hypothesis as your starting point. But if you're asking "are markets prone to bubbles?" you might not. As Noah says, the EMH is a great guide for investors, but not so much for policy-makers.

It's in this sense that I don't like pieces like Aditya's. Ordinary everyday economics - of the sort that's useful for real people - isn't about bigthink and meta-theorizing, but about careful consideration of the facts.

"Crooks and knaves"

Alex Massie is right to say that most people believe "we’re governed by crooks and knaves and fools." He doesn't, however, stress sufficiently that most people are wrong.

First, such an opinion lacks perspective. There's no evidence that UK MPs are especially corrupt by international standards, or even by historical ones; I doubt our parliamentarians are gadding around town with gangsters as Boothby and Driberg did with the Kray twins. And the "expenses scandal" probably tells us more about the power of peer effects than it does about massive corruption. Only the most sanctimonious little pricks could really get angry about it.

Secondly, this view ascribes too much agency to MPs. Just as Marx claimed that the logic of their situation required capitalists to act badly whatever their own morality, so too do situational pressures bear upon MPs. I mean this in at least three ways:

 - MPs must - at least sometimes - do what the public want. Some of their nastiest actions, such as the harrassing of immigrants and attacks on welfare recipients, are supported by the - albeit ill-informed - public. As Bill Stone once said, "There's plenty of cunts in t'country, and they deserve some representation."

 - Politicians naturally kow-tow to big business simply because the latter offer jobs, and can therefore extract favours.

 - Ministers are vulnerable to pressure from inside interests. They have the police and security services constantly yapping in their ears. And guess what, coppers and spooks rarely want to expand our freedoms.

In these senses, the belief that MPs are crooks and knaves disguises a nastier truth - that social structures condition them to behave so.

Indeed, one could argue that, insofar as politicians do have agency, the problem isn't that they are knaves, but that they are not knavish enough. In my (very limited) personal experience, MPs seem like nice people. But the thing about agreeable people is that they can agree with the wrong folk; this, I fear, was the tragedy (in the original sense) of David Miliband. My fear is not so much that politicians lie, but that they might actually believe what they say.

What's more, politics is not always a nice business. Getting your way in the face of opposition sometimes requires more than the exercise of sweet reason - in fact, in often does, given the latter's impotence. It needs the use of underhand methods too. Under the "nice" JFK, the Civil Rights Bill was going nowhere. It was only when the less decent LBJ took over and used what Robert Caro calls "savage, vicious" methods that blacks achieved legal equality.

There's a place for knaves in politics.

A place for amateurs

Prompted by Sunny's retirement, Stephen Tall claims that the amateur blogger is more or less dead. Not while I'm alive, he ain't.

Yes, I consider myself an amateur, in the sense that whilst I'm paid to write, I'm certainly not paid to blog, and I try to keep the day job and the blog separate.

An amateur - as anyone with a smattering of Latin knows - is someone motivated by love, not by money. There's a great line in a Josh Ritter song - "I'm singing for the love of it, have mercy on the man who sings to be adored" - which sums up my motive for blogging. I know Samuel Johnson said that "none but a blockhead ever wrote except for money", but he was a twat.

And amateurism has a lot to offer. Stephen says that "if you want your blog to get noticed now, best to develop a niche." But the thing is that the MSM has left a lot of big niches. Sunny's right that "there is just too much opinion out there". But a lot of voices doesn't mean we get a diversity of ideas.

There's an awful lot which the mainstream ignores. Perhaps the main question I ask before blogging is: "what needs saying that isn't said elsewhere?" And I'm rarely stumped for an answer. The mainstream tends to ignore things such as anti-managerialism, the ubiquity of ideology/cognitive biases and the vast quantity of new and interesting economic research. Yes, there's too much opinion, too much manufactured outrage, too much narcissism and too much obsessing about the Westminster village. But there's a shortage of different perspectives. 

In trying to provide different ones - albeit those which are entirely within established intellectual traditions - I'm sometimes accused of trollemic. This is not an accusation but a compliment. The lazy consensus - which extends across both left and right in some important ways - should be challenged. The reactions to my posts which most depresses me is when people agree: what I'm striving for is the reaction, "I'd hadn't thought of it that way."

It is, I fear, only amateur blogging which permits me to do this. The MSM needs to attract eyeballs, and the way to do this is to echo readers' prejudices. Being freed from the need to attract an audience, I can say what I want, or more precisely, what I think needs saying.

Blogging also gives me freedom over style. The essence of blogging (this post excepted!) is linkage. A good blog therefore drives traffic away from its site, which is of course the opposite ideal of the MSM.

It's unfortunate that "amateur" has connotations of sloppiness. Professional journalism also has its flaws and amateurism can be a counterweight to these.

In these sense, there is a big place for amateur bloggers - which I hope to continue to occupy, whether you want me to or not.

Another thing: I'm mystified by people who claim not to have time to blog. Blogging takes only around an hour a day of my time, and much of that is time I'd spend thinking about the things I blog anyway.

In defence of Russell Brand

Russell Brand's hostility towards the current political system has been widely criticized. And I agree that his New Statesman piece is narcissistic, unscientific and long-winded - although in this he is hardly distinguishable from most other dead-tree columnists.But neverthless, he has a point.

First, let's dispose of the silly accusation of apathy. Apathy towards politicians is not the same as apathy towards politics. I never eat at KFC or McDonalds. But it doesn't follow that I'm apathetic about food. It's just that KFC and McDonalds are unrepresentative of my idea of what good food should be. Similarly, the main political parties don't represent my idea of what good politics should be. I'm a social libertarian market socialist. Who can I vote for?

Mr Brand has a point - albeit perhaps a little exaggerated - in complaining that existing politics is "nothing more than a bureaucratic means for furthering the augmentation and advantages of economic elites." There are, at least, four reasons for this:

 - Politicians have political power and want money. Big business has money and wants political power. Econ 101 says that trade will happen. We'll therefore get crony capitalism. This is exacerbated by the fact that capitalists' control over jobs gives it a powerful lever to extract favours from governments, as Ineos seems to have done.

 - The main political parties share the ideology - yes it is an ideology - of business, that organizations should be controlled from the top-down and that inequalities of power are a good thing.

 - Capitalism generates ideologies which help to sustain inequality, and our political parties accept these ideologies. In this sense, Russell's call for a "spiritual revolution" isn't wholly silly.

 - Politics and ideology combine to keep some good ideas - such as anti-managerialism or a basic income - off the agenda. 

The question is: what to do about this? Mr Brand says that voting for the least-bad option "seems like a tacit act of compliance". He has a point. The most grudging vote can be interpreted as a mandate for policies we despise; this is why I was loath for vote for authoritarian boss-worshipping New Labour. Against this, Jamie Bartlett replies that "If you don't vote, then politicians are less likely to listen." But I'm not sure. If there's a big mass of potential voters to win, politicians will, eventually, have an incentive to appeal to them. Abstention is, surely, at least a reasonable option.

But there is something else we can do. We can use what platforms we have to articulate our dissatisfaction. In our anti-rational celebrity culture, Mr Brand has a bigger platform than most of us. Sure, in doing so he's open to accusations of hypocrisy. But this reflects the bind that leftists are in; if we're poor we're accused of the politics of envy but if we're rich we're accused of hypocrisy.

Of course, such articulations are, in themselves, just a drop in the ocean. Which brings us to another acute observation by Mr Brand: "The Agricultural Revolution took thousands of years, the Industrial Revolution took hundreds of years, the Technological Revolution took tens." If it happens at all, the transition to socialism could take as long. In his small way, Mr Brand has made a contribution to this transition.    

Economics as science

Much as I enjoyed Unlearning Economics' riposte to Chris Auld, I fear such meta-critiques of mainstream economics miss a trick - the extent to which good "normal science" in economics can be the ally of challenges to neoclassical economics.

Let's take one recent example. Experimental work by Matteo Ploner shows how people's investment choices are shaped by peer pressure. Now, the standard criticism of experiments in economics is that they lack external validity. But this mightn't be the case here. Ploner's work corroborates detailed empirical work by Per Ostberg and Hans Hvide which has found that workers' share buying is influenced by their co-workers.

This strengthens the challenge to the rational markets hypothesis. Sure, Robert Shiller showed years ago that shares are more volatile (pdf) than the "fundamentals". But this, in itself, doesn't establish that markets are irrational. As Davidf Meenagh has shown (pdf), small and reasonable (but mistaken) changes in the probabilities attached to booms and busts can also generate what looks like excess volatility. What these papers do, though, is challenge Meenagh's reply. They give us a strong reason to believe that excess volatility is a sign of irrational markets. Bubbles can happen if some peoples' buying leads other to buy, and Hvide and Ploner have shown that such behaviour is widespread.

Sure, their work doesn't suffice to show that irrational bubbles can happen. To do this, we need to show that the "smart money" does not short-sell aggressively when (aggregate) stock markets seem over-priced. And Bernard Dumas and colleagues have done just this, by using the sort of general equilibrium modelling favoured by the mainstream.

What we have here, then, is an example of how a challenge to neoclassical economics is buttressed by good empirical work; Ploner and Hvide provide microfoundations for the idea that markets can be irrational. They do so not by big-think theorizing about the nature of rationality, but by ordinary empiricism - looking at the data and running experiments. And their work is, I think, reasonably typical of what many economists actually do.

In this sense - and I think I could produce other examples - leftist critics of neoclassical economics are under-estimating the extent to which economic science can support their case. There's nothing so radical as empiricism.

The rhetoric of inequality

Yesterday afternoon the BBC gave us - inadvertently of course - a wonderful example of how ideology helps sustain class divisions.

On The Media Show, David Liddiment said his commissioning of Who Wants to Be A Millionaire? was a "huge risk." His interview was immediately followed by news that 800 people could lose their jobs if the Grangemouth petrochemical plant shuts down. This shows how whilst bosses talk about taking risk, it is workers who actually bear it.

To ram this point home, Mr Liddiment said that the danger he faced was of a "huge rollocking" - ahh, diddums - or "maybe" losing his job.

I'll concede that bosses' job tenure is often quite short. But this is no evidence they take risk. For one thing, their big salaries are (or should be regarded as) in part a risk premium. For another, they often walk into other jobs; management might not be a transferable skill but rent-seeking is. And, of course, they often leave with big payoffs. And this is not to mention the physical risks; factory workers are in far more danger of death or injury than TV executives - which is powerful refutation of the just world hypothesis.

Why, then, do bosses they present themselves as risk-takers? A paper by Olivier Fournout helps explain. He shows how the image of the boss has much in common with that of movie heroes. They are men of will-power, skill and resolve - often mavericks - who are on missions for the greater good.

Talk of "leadership" serves a similar function. It is self-aggrandizing rhetoric which flatters mere functionaries; if you pay people to do as you tell them, you're a boss, not a leader.

What's not so clear is why they do this. One motive, I suspect, is simply to satisfy a narcissistic self-image.

Whatever the motive, the effects are doubly dangerous.

One is that bosses who see themselves as heroic leaders and risk-takers are likely to take big risks (pdf) with their companies, which can end catastrophically.

The other is that such rhetoric serves to legitimate inequalities of income and power. After all, heroes deserve big rewards don't they?

The true tragedy here, of course, is not that bosses do this; we all like to big ourselves up. It's that they get away with it. How often does the media describe bosses as "business leaders"? And how rarely does it describe workers as "risk-takers"?

Shares in people

Arian Foster, a running back for the Houston Texans, wants to sell shares in himself so investors can buy a portion of his future earnings. This prompts the question: why isn't there more of a market in shares in people? (No, Bowie bonds aren't quite the same thing.)

In theory, this is a trade which should benefit both parties. It would allow young people to raise money to see them through university or give them a deposit for a house. And older people could buy a stake in future income growth; the stock market, remember, does not give us this. Shares in people would also help protect equity investors from distribution risk - the danger of a shift in incomes from profits to wages.

So, why do these potentially mutually benefical trades not happen? Several answers seem to me inadequate:

"The young person would just take the money and run, or at least have less incentive to work hard."  But it must be possible to contract for this problem. The Saul Goodmans surely have the wit to write a contract which steers the middle course between letting the young person leg it and committing them to slavery.

"Individuals' incomes are too risky to value accurately." In truth, though, the same is true (pdf) of corporate earnings. And the intelligent solution in both cases should be the same: to pool such idiosyncratic risk by diversifying across individuals. Such bundles of securities would give us the macro securities, for example in occupational incomes, proposed by Robert Shiller.

"All markets are prone to bubbles." But so what? If oldsters pay too much for a stake in youngsters' future incomes, this would help correct the intergenerational injustice which many believe exists in other areas. 

In truth, though, there is one big investor who has for years held shares in people - the state. You can think of a big chunk of the welfare state as taking an equity stake in people; yes,libertarians have a point in claiming it violates self-ownership. It invests in us as start-ups - by spending on our health and education - and in exchange we hand over dividends (taxes) when we're earning. You can interpret the Help to Buy scheme as an extention of this; the government is making a risky investment to help young people acquire an asset.

It's often said - sometimes by me! - that the state is less innovative than markets and the private sector. However, in this context of facilitating some mutually beneficial intergenerational transfers, perhaps the state does better than the market.

Intellectuals in politics

What should be the attitude of rational intelligent people towards politics? This ancient question has been revived by a row between Jonathan Portes and Stewart Jackson.

My point here is not that Mr Jackson made a mistake. So what if he did? Twitter is a medium for snap judgments, and reasonable people will forgive folk for mistakes on it. However, Mr Jackson didn't fess up to his error, and - aided by Douglas Carswell - resorted to abuse.

This episode demonstrates several biases. There's ego-involvement; having misread the data (we've all done it), Mr Jackson saw the need to stand by his error. There's tribalism; Mr Jackson's allies support him, even though he's wrong. There's wilful ignorance, in Mr Carswell's advice to "just ignore" Jonathan. And there's an epic sense of privileged white male victimhood in the belief that folk like Jonathan "determine parameters of debate."

All this reinforces my scepticism about Jonathan's work on immigration. Introducing facts into the immigration debate is like teaching a pig to sing; it wastes your time and annoys the pig.

It also shows that politics is about power, not truth; Mr Carswell's question, "who read[s] his blogs?" is a revealing one.

In this sense, intellectuals like Jonathan (and Simon) who get involved in politics are victims of a culture clash. Their opinion that the truth matters is an example of deformation professionelle - the mistaken belief that the perspective of one's own profession has general relevance.

So, what should be the attitude of intellectuals to politics? There are three possibilities, and I oscillate between them:

 - Think of politics as a laboratory for studying behaviour. Physicists have the Large Hadron Collider; we have parliament. And just as physicists don't get angry when particles prove elusive, not should we get angry when politicians display cognitive biases. It's the nature of the beast.

 - Shift the Overton window. Jonathan's work showing that free migration is a reasonable position won't convince many people overnight. But shifting that window is a decades-long job. Civilization advances one funeral at a time.

 - Follow Epicurus's advice, and just ignore it. The problem is that whilst this is perfectly feasible for we comfortably wealthy types, it is not so possible for the worst-off - for insurance recipients (let's avoid the loaded language of "benefit claimants") or migrants. Someone must speak for them. In doing so, Jonathan is one of the few heroes of our time.

A clarification: this post is not about immigration. A reasonable person could argue that although migration has small net economic benefits, it carries non-economic social and cultural risks.

Another thing: This episode also reveals the appalling way in which political language is misused. Carswell claims to be a libertarian. But if you're opposed to free migration, you are not - by definition - a libertarian. 

The capitalist state

In bemoaning the coalition's lack of evidence-based policy, Simon Wren-Lewis inadvertently draws our attention to a difference between centrists and Marxists.

We Marxists are not surprised that policy-making should be uninformed by reason, simply because the function of the state is not so much to act as a Platonic philosopher-king disinterestedly aiming to maximize a social welfare function, but rather to advance the interests of capital.

Seen from this perspective, some of the failings Simon describes become more understandable. For example, the renunciation of Keynesianism is intended to ensure that capitalists retain power over the economy by ensuring that employment depends upon their "confidence" rather than upon the state. As Kalecki said, "The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence." And welfare cuts, plus the unemployment created by austerity, are intended to boost the supply of cheap labour, thus holding wage costs down.

This, though, poses the question: is the coalition really acting as the intelligent steward of capitalist interests? There are some reasons to suspect not:

 - If we're in a "wage-led" regime, then the adverse effect upon consumer spending of low wages offsets the positive effect upon capital spending of decent profit margins. If so, then - depending upon the relative size of these effects - the coalition might be depressing profit rates. This is because its possible that a low output-capital ratio (relative to some counterfactual) is offsetting the high profit share.

 - Whilst anti-immigration policy is popular - and thus helps to legitimate the capitalist state - it acts against capitalists' interests by restricting labour supply.

 - Growing inequality (in the sense of the share of income going to the very wealthy) might eventually trigger a backlash which jeopardizes the interests of the rich. There's little sign of this yet, but history suggests things can change quickly.

 - Many of the wealthy are losing directly from the coalition's policies. "Fiscal conservatism and monetary activism" has caused years of negative real interest rates, to the pain of many richer savers.

In these senses, it could be that this government is - in effect - unThatcherite, insofar as it is not promoting the interests of the rich as well as she did.

Herein, though, lies a rather embarrassing question for us Marxists. If we concede that this is the case, what does it tell us? Does it tell us the coalition is so stupid that it's not acting even in capitalists' interests, let alone the public's? Or does it instead tell us that the (cruder) Marxian conceptions of the state are mistaken, and that the state doesn't always promote capitalists' interests? I walk away muttering about the relative autonomy of the state.

Limits of managerialism

I said yesterday that managerialism is a belief system of limited applicability. The fiasco of #askbg neatly illustrates my point.

The problem here is that the managerialist mindset and social media don't mix, for two inter-related reasons. One is that social media are egalitarian whereas managerialism is hierarchic; there's not much deference on Twitter, and it might be no accident that, AFAIK, very few chief executives are on it. The other is that you can't control social media; nobody can predict what'll go viral, and all bloggers and tweeters know they can't tell what posts will be widely circulated and what won't*.

This culture clash means that managerialism's encounters with Twitter can end in abject failure. BG are in the same position as the hapless HMV exec who asked "How do I shut down Twitter?".

I suspect that when organizational PR works in Twitter, it does so obliquely, and (partly) unintentionally. For example, one of the best bits of PR the police do - and they need good PR -  are Oakham Police's tweets. But these work because they humanize the police, and are not the product of faceless PR.

But here's the thing. The domain of obliquity - in which top-down direct control is inapplicable - is much wider than just social media. John Kay has produced many examples of how companies succeed not by aiming directly to maximize profits, but by concentrating instead upon good products. I'd point to other evidence of the limits of managerialism:

 - A large chunk of productivity growth comes not from managers raising firms' efficiency, but from market selection (pdf) causing productive firms to enter the market and less productive ones to leave.

 - Alex Coad's survey has concluded that corporate growth is "largely a random process." And Paul Ormerod has shown (pdf) that firms' death rates look a lot like species' extinction rates - which suggests that catastrophic failure is largely unpredictable. All this suggests that, as Ormerod says, "executives overestimate the control they have over the fate of their organizations."

Herein, though, lies a paradox. I write all this in the spirit of a leftist, who wants to argue that inequalities of power are economically and socially corrosive and that bosses don't deserve their big pay. However, whilst I would like to reduce the domain of managerialism, other leftists want to expand it, by increasing the role of the state relative to markets. We hear a lot - some of it justified - about economic imperialism, but shouldn't we worry more about managerialist imperialism?

* Up to a point. In my experience, my most popular posts tend to be either more obviously politically partisan ones, or those I put relatively little thought into.