Chris Dillow's Blog, page 139

Managerialism & the culture war

Is the class war also a culture war? I ask because of this by Stefan Collini:

Underlying so many aspects of [higher education] policies...is the fallacy of uniformly measurable performance. The logic of punitive quantification is to reduce all activity to a common managerial metric. The activities of thinking and understanding are inherently resistant to being adequately characterised in this way. This is part of the explanation for the pervasive sense of malaise, stress and disenchantment within British universities...The true use-value of scholarly labour can seem to have been squeezed out; only the exchange-value of the commodities produced, as measured by the metrics, remains.

What he's driving at here is a conflict between two cultures, between what Alasdair MacIntyre called the goods of excellence and those of effectiveness. The former are goods which are internal to a particular practice, such as mastery of a craft or vocation, or great scholarship - goods which can only be conferred by other practitioners. The latter are money, wealth and fame - external goods which are conferred by outsiders. Managerialism is the attempt to supplant the former with the latter.

It's not just in universities that this is happening. Theodore Dalrymple has complained that a similar thing is happening in medicine. It's long been a theme on the left - from The Ragged Trousered Philanthropists through Harry Braverman to Richard Sennett - that bosses try to degrade craft skills in the cause of profit. It's a cliche in the  music business that bands want to make art whilst record bosses want "product" that'll sell. In my business, there's a bigger market for quack macroeconomics than there is for good economic science.

And this conflict extends far up the income scale; it seems to have contributed to Neil Woodford leaving Invesco Perpetual.

There is a grain of justification for the imposition of managerialist values. Without them, we might get a futile perfectionism in which nothing gets finished; Leonardo da Vinci might have benefited from a bit of management. And the pursuit of excellence can be a mask for self-indulgence or even idleness; several Oxford academics in the mid-20th century preserved their reputation for brilliance by dint of not publishing much.

Nevertheless, there is, as Stefan says, a tendency to push the managerialist value system too far.

If we're being kind, this is an example of deformation professionelle - the tendency of any profession to exaggerate the general applicability of its own peculiar value system. This can be aggravated by a selection effect; managers recruit people in their own image, which causes managerialism's "punitive quantification" to spread.

If we're being less kind, we could call this a form of totalitarianism - the attemtpt to impose a single value system or ideology upon society, to the exclusion of alternative cultures.

The intergenerational question

Just how badly off are today's young people? There's recently been a spate of pieces decrying their lot.

Such complaints have much truth: university tuition fees and how house prices are big burdens on young folk that my generation - the pushing 50s - didn't face. And, of course, it's no fun being young in recession; almost one-fifth of 18-24 year-olds are unemployed, and graduating in a downturn can have long-term adverse effects.

But is it fair to say today's generation is, on average, worse off than mine? I'm not sure, for two reasons.

First, in the long-term, even quite modest GDP growth has big effects. If the economy grows by 1.5% a year (less than its long-term average), then the average 50-year-old in 25 years' time - that is, today's 25 year-old - will be 45% better off than the average 50-year-old today. Barring an improbable disaster, today's young people will on average be better off than my generation on average.

Sure, the skewness around the average might change; if we become even more of a "winner take all" economy, the fruits of growth will go to only a minority. But if this happens - and I've no idea how to forecast long-term changes in the distribution of incomes - it is a problem of within-generation inequality, not of between-generation inequality.   

Secondly, there's technical change. Think of what today's 25-year-olds have that I didn't when I was 25: the internet with its free access to music and (let's be honest) porn; e-readers that give you classic books for free; MP3 players that mean you don't have to cart cassettes around for your Walkman; mobile phones that weigh less than housebricks; TVs with more than four channels; better video games. And so on. In these regards, an average 25-year-old is better off than the richest 25-year-old was in 1988. 

And, because he's younger, today's typical 25-year-old can look forward to more fruits of technical change than I can.

I don't say all this to patronize youngsters and claim they have no complaints. They do.

Instead, I do so to draw attention to a paradox - that whilst some people are complaining (rightly) about hard times, others are speaking of a "rapid growth of material superabundance." These are two sides of the same coin. The story of long-term economic growth is a story of changing relative prices. Prices of many services, drink and housing have risen over time - in part because of government policy - but prices of many goods have plummeted: an iPod was infinitely expensive in 1988. If we look at the former, today's young people are struggling. If we look at the latter, they're blessed.

I'm not at all sure how these balance out. Would I rather be a 25 year-old today than a 25-year-old in 1988? I just don't know. 

Enemies of freedom

"Where are today's Voltaires?" asks James Bloodworth, claiming that "there is no question that we are becoming, as a society, more intolerant of dissent." Why is there this lack of support for freedom? I'd suggest several possible reasons:

1. We've lost liberal optimism. It used to be claimed that freedom was necessary because, in a competitive marketplace of ideas, truth would defeat falsehood. This proposition is now, reasonably, considered dubious.

2. Egocentricity. We live in an age of ego. This means we feel entitled to claim protection from "offense", and consider ourselves sufficiently self-important to legislate for what lesser people can see or do.

3. A fear of disorder. Yes, Hayek had a big point when he said that liberty generated spontaneous order. But it doesn't always look like this. Liberty also gives us bad taste and threats to what Richard Sennett called our "purified identities". As a result, we see offence even where none exists.    

4. An inability to get a sense of proportion. Voltaire advised people not to fret about bad publications because "The man of taste will read only what is good." This is my attitude to press freedom; we should have it because the press is sufficiently unimportant to be ignored. Many, though, disgree with me, attributing to the gutter press and lads mags a significance they don't really have. (I suspect this is a consequence of cultural theory's  tendency to invest the trivial wih importance).

5. Cognitive biases. As Hayek pointed out, the (apparent) gains from freedom will always seem obvious, whilst the potential losses are not so evident. The salience heuristic will thus cause us to over-estimate the benefits of restrictions. This bias is bolstered by overconfidence, groupthink and the illusion of knowledge.

6. Lack of power. Freedom has few constituents. Security agencies have more power than civil libertarians; companies want to suppress whistleblowers and potential rivals - hence the support for regulation and tough intellectual property laws; regulators and lobbyists want more power and prominence. And so on. The only interest groups calling for freedom are those - like the press - who want freedom only for themslves.

My point here is a simple but depressing one. Freedom has many enemies. Friends of liberty must thus fight not just against most vested interests, but also against the culture of our age. Small wonder we have so few Voltaires.

Why not a basic income?

On Twitter, LeftOutside asked why a basic income is popular on the internet, but lacks support in the real world.

The answer isn't that a BI is unworkable. Econometric evidence suggest it isn't, and it has been tried in a few places, with mixed-to-favourable results. At worst, this is sufficient to merit further investigation.

Nor is this a left-right issue. Rightists (including Hayekians) can support a low BI, leftists a higher one.

Here, then, are some reasons why I suspect a BI is less popular than it should be.

1. A selection effect.A BI is, perhaps paradoxically, a policy of pessimism. It's based in part upon the idea that governments lack the ability to distinguish between people of high and low needs or between strivers and scroungers - except at high cost - and so should adopt the low-information policy of giving everyone the same. However, politicians are self-selected for having faith in the power of government. They therefore believe - more than the rest of us - that governments can do better than a BI.

2. The power of reciprocity.People hate the idea that others are taking advantage of them - more than they hate the financial loss this causes: this is why "rip off" utility companies are so unpopular. A BI, however, violates the norm of reciprocity by offering skivers something for nothing. Personally, I think this is reasonable in a world of massive excess supply of labour. But others don't.

3.Status quo bias. All welfare systems (including zero welfare) have costs; this is because trade-offs are unavoidable. The question is: which costs would we rather incur? And there's a strong urge for folk to prefer the costs they have than unknown ones. So we tolerate a system with high marginal withdrawal rates, heavy administrative costs, and payment delays that inflict real misery rather than one with other costs.  

4. A vicious circle. Because a BI is outside the Overton window, politicians and journalists who want to echo public opinion don't advocate it, and nor do men of "judgment." The upshot is that the idea stays outside the Overton window. 

For me, all this means that BI is like land value tax or open borders. It's an idea whose merits far exceed its popularity.

Osborne the Ballsian

Rick says that George Osborne's promise of an "absolute" budget surplus in the next parliament is unlikely to be achieved without considerable pain and tax increases.

As a check on this, we can think about financial balances. Simple accounting identities tell us that the government can run a surplus if and only if the rest of the economy - that is, the domestic private sector and the overseas sector - runs a deficit.

There are, roughly speaking, two ways in which this might happen - a good way and a bad.

The good way could happen through a combination of two things:

 - An export boom. This would mean that foreigners run a financial deficit, or - to put it the same way - the UK has a current account surplus. This would improve the public finances as export-generated jobs pulled in more taxes.

 - An investment boom. Historically, government surpluses have come during capital spending booms, such as in the late 80s and 90s. A housing boom would have a similar effect.

In these ways, a budget surplus is endogenous - or, to put in in sillier terms, "cyclical".

The bad way would be if the government actively aimed at a surplus. In cutting spending, it would depress domestic demand and imports - thus moving towards a current account surplus. And in depressing incomes, savings would tend to fall, thus putting the domestic sector into deficit.

In the good case, we have a budget surplus at a high level of income; in the bad case, at a lower level.

Rick claims that the good case is improbable. FWIW - given the futility of economic forecasts - I agree. But that's not my point. Instead, the question is: why did Osborne not distinguish between the two cases?

The irrational possibility is that he's fallen victim of that cognitive bias to which all politicians are prone, the illusion of control; he's exaggerating the influence he has over the public finances.

But there is a less irrational possibility. What Osborne is doing here is acting upon a principle of macroeconomic policy that was widely accepted in the 90s and 00s. This is that "credibility" gives policy-makers more power to stimulate the economy. For example, if a central bank has anti-inflationary credibility, a looser monetary policy would lead to real output growth rather than higher inflation expectations and rising prices. And a government which has the confidence of bond markets can borrow more cheaply and so - if necessary - act in a Keynesian fashion. As someone said in 1997:

Governments which pursue, and are judged by the markets to be pursuing, sound monetary and fiscal policies, can attract inflows of investment capital at higher speed, in greater volume and at a lower cost...they can use discretionary monetary, or indeed fiscal, policy to deal with macroeconomic shocks which need to be accommodated in the short term.

Osborne's unconditional promise to run a surplus can thus be seen as an attempt to shore up credibility and hence give himself more room to pursue discretionary policy if needed.

Now, you might reply that this is unnecessary; low long-term real interest rates show that bond markets aren't worried by government borrowing anyway. But Osborne isn't sure - perhaps for good reasons - that this will remain the case. As the old jibe has it, a conservative believes all markets are efficient except the bond market, whilst a Keynesian believes all markets are inefficient except the bond market.

But who was that guy I quoted? It was Ed Balls. Perhaps the difference between him and Osborne isn't so much one of principle as of empirics. 

Shiller vs Fama?

My knee-jerk reaction to Robert Shiller and Eugene Fama getting the Nobel was that it's an example of them being honoured for flatly disagreeing. This reaction is partly true: Fama's thinking is sceptical of the possibility of price bubbles, whilst Shiller's shows that they can happen. But in another sense, their work is actually compatible, because they are talking about different things.

Fama's work is primarily about individual stocks. He has shown that, generally, prices quickly embody all available information so that investors cannot out-perform the market except by taking on more systematic risk. This risk might be market risk (beta), or the sort of cyclical risk that is often associated with small and value stocks - hence the "three factor" model discussed here (pdf). Back in 1970, Fama concluded (pdf):

For the purposes of most investors the efficient markets model seems a good first (and second) approximation to reality.

I'd caveat this; there's some evidence that momentum and defensive stocks do better than they should. Generally, though, Fama is right.

One piece of evidence for this is the performance of equity neutral hedge funds: according to HFR, these have returned 1.1% a year in the last five years - no better than a risk-free rate. A second piece comes from UK all companies . In the last five years, most of these have under-performed the better tracker funds. 

Market efficiency is like Newtonian physics. It's not exactly right, but you'll not often go disastrously wrong if you act as if it is.

Shiller's work, by contrast, has focussed more upon the aggregate market. In one famous early paper, for example, he showed that the S&P 500 was far more volatile (pdf) than could be explained by dividends. This implies that - over longish periods at least - aggregate prices might be predictable by the dividend-price ratio (or other things (pdf)).

Whilst this is consistent with the possibility that investors are irrational - contrary to the spirit of Fama's work - it is not proof of irrationality. As David Meenagh has shown in the UK, such excess volatility might be due to investors attaching varying but reasonable probabilities to future scenarios (booms, slumps etc) which might occur but in fact do not.

But here's the thing. Micro efficiency in Fama's sense is quite compatible with excess aggregate volatility in Shiller's. Shiller himself (pdf) has suggested just this.

Why the difference? One big reason lies in how information gets embedded into prices. Imagine you think an individual stock is over-priced. In many cases (not all - the tech bubble being an exception) you can short-sell the stock reasonably easily, as you can diversify the risk of doing so by going long of a comparable stock; this is the idea behind pairs trading. But what if you think the aggregate market is over-priced? It's risky to short-sell it; remember Keynes' famous saying that markets can stay irrational longer than you can stay solvent? And there's less chance of being able to spread this risk by going long of other markets, simply because global stock markets are correlated.

With short-selling of aggregate markets more difficult than of individual stocks, it's likely that aggregate markets will be (occasionally) more over-priced than individual stocks.

In this sense, Shiller and Fama aren't so far apart.

Some paradoxes of democracy

Nick Cohen raises some deep paradoxes about our modern political culture. He notes, rightly, that public opinion is wrong on many points, and says:

Everyone from money-grubbing TV executives to seedy politicians hit their critics with a dictionary of ready-made insults when you try to take these cognitive biases on. You are "an elitist" and a "snob" who lives in an "ivory tower". You "don't get it," and think you "know better" than the common people.

The first paradox here is that as the academic evidence for the prevalence of cognitive biases has risen, so too has faith in public opinion.

The pre-Kahneman and Tversky world was one in which the "elite" was often dismissive of public opinion. Although Henry Ford might not have said "If I had asked people what they wanted, they would have said faster horses", the sentiment was widespread. Attitudes to pop music in the 1950s and 60s were often snobbish and dismissive. In the 70s, serious academics spoke of a crisis of democracy. Even George Orwell wrote of the "debauchery of taste". And the jibe at Jim Swanton - that he was too grand to ride in the same car as his chauffeur - could have applied to many others.

Today, though, such attitudes are rare. We are all democrats now - even though the evidence that the public is often wrong is now stronger than it was in the mid-20th century.

Which raises the second paradox. As equality of taste and opinion has increased since the 1960s and 1970s, so too has inequality of wealth and power. Faith in the opinion of the public doesn't extend to wanting to give them real power in the workplace. And whilst media executives and politicans affect to have the same opinions as ordinary people, they don't want the same incomes.

This brings me to paradox three. The decline in the elite's self-confidence is curiously partial. Whilst it doesn't believe that it has superior opinion than the public, it does believe that it has superior ability to manage and control large organizations. It's not obvious that this asymmetric confidence is grounded in evidence.

Abundance & revolution

Frances Coppola asks: what would an economy look like if or when it combines the superabundance described by John and the ageing population described by Rick?

First, a note of scepticism. The first industrial revolution didn't create lasting mass unemployment, so why should the next? And Keynes' forecast (pdf) that rising productivity would lead to mass leisure was also slightly off-beam.

One reason for this is that as we get richer, our aspirations rise and so demand rises to create jobs; the reason why Ed Miliband can talk of a cost of living crisis without looking a fool is that we compare our standard of living to 2007's, not 1907's. Another reason is that rising productivity affects relative prices, not just absolute ones. It cuts the cost of goods relative to services. Some things, then, would remain expensive; a century ago, upper-middle class people typically had several servants. And let's not talk about housing costs.

Let's though, put this aside. What Frances is getting at, I suspect, is that in a wealthy economy, very many skilled people would be able to retire early. Such an economy would face the problem not (just) of what to do with redundant unskilled labout, but how to retain affluent skilled people.

Here, we can - coarsely speaking - think of two types of people.

Type I are those motivated by status concerns: bankers who want a bigger bonus than their colleagues, bosses who want more people to control. These will keep working/rent-seeking however absolutely rich they are.

Type II are motivated by intrinsic goals such as self-actualization. These would want to give up unfulfilling work once they can afford to.

There is already a tension between these types. Many professionals of around my age and younger downsize, step off partnership-path careers, leave to work for charities, become part-time consultants or singing teachers and so on. In a more abundant economy, many more would do so.

This would pose a problem for status-mongers, who need skilled colleagues and underlings. One solution to this tension would be for them to cede power to the type II types, so they could achieve more personal development - or alternatively, for them to go out of business to be replaced by more egalitarian workplaces. Gradually, capitalist-type firms, with hierarchy, profit motive and alienated labour, would give way to communistic organizations with equality and less alienated labour, through interstitial transformation. "Self-realization through creative work is the essence of Marx's communism" wrote Elster.

Marx thought a socialist revolution would happen only after capitalism had massively raised productive potential: "No social order is ever destroyed before all the productive forces for which it is sufficient have been developed." Or as Cohen put it: "What makes a successful revolution possible is sufficiently developed productive forces."

Central to this story is that there are workers who are necessary to the productive process but whose needs are not met by that process. Revolutions are made not by the most wretched people, but by those who have the power and motive to effect change. If Marx is right, it is success that will kill capitalism, not failure.

Inequality: the ugly truth

Should there be a campaign for equality for ugly people? I ask because a new paper has found that, in Italy, discrimination against ugly women might be even greater than racial discrimination. This is not an isolated finding. The wage gap between good-looking and ugly people (table 4 of this pdf) is comparable to that between men and women.

This poses the question: why do we find discrimination on grounds of looks acceptable, when discrimination on grounds of gender, sexual orientation and race are abhorrent? Why don't ugly people campaign for equality? A march for "rights for munters" would at least be one in which SWP members would blend in well. There are some obvious possible answers. But the thing is, they apply to other victims of inequality too, for example:

"Nobody wants to self-identify as ugly." True. But many people don't self-identify as gay, or feminist or even perhaps working class.

"Ugliness isn't a binary feature, but rather an imprecisely defined range of a spectrum." True again. But so is class, sexual orientation (many men are gay for Olivier Giroud) and race (I once worked with a bloke for 18 months before realizing he was black.)

"Discrimination against mingers is inevitable, because it's human nature to shun ugliness and favour beauty." Maybe, but an appeal to nature was for years used to justify racial and sexual discrimination; it was no less a man than David Hume who wrote (pdf) that "I am apt to suspect the negroes to be naturally inferior to the whites." The purpose of being human is to try and overcome brute nature; that's why we invented central heating.

"Discrimination against uglies might be efficient, as ugly people tend to be less productive; they do less well as school and are more likely to commit crime (pdf)." Again, though, this isn't good enough. Statistical discrimination is inadmissible against women -  imagine if an employer refused to hire 20-something women because "they'd probably get pregnant" - so why should it be permissible against uglies? And anyway, statistical discrimination isn't the whole story; there also seems to be pure taste discrimination too.

So, we're left with a puzzle: why is discrimination against ugly folk (or for that matter the mentally unwell) acceptable  when other discriminations aren't?

Simple. It's because of something Corey says. People get equality not because of airy-fairy ideals of fairness, but because they organize and fight for it. And these fights cause public attitudes to inequalities to change - eventually. Ugly people suffer discrimination for the same reasons blacks, gays, workers and women once did, and still do - because they aren't organized or powerful enough to resist it.   

Low skills: why worry?

Robert Peston says that the OECD's report on the low level of young English adults' numeracy and literacy skills has "worrying implications about the long-term potential of the British economy."  This skates over an awkward fact - that, in international data, it's difficult to find a strong link between human capital and economic growth.

As Bryan Caplan says, most coefficients of the impact of education on GDP are "very low." He's not the only sceptic. So is Alison Wolf. So is Torge Middendorf, who says the link between human capital and GDP is "fragile". And a survey by Krueger and Lindahl's found (pdf) that:

Education was statistically significantly and positively associated with subsequent growth only for the countries with the lowest level of education...
For countries with a high level of education growth was typically inversely related to the level of education.

Why might this be? One possibility is measurement error; measures of national educational attainment are unreliable, and in  richer countries, there just isn't much cross-country variation in long-run growth. But there are other possibilities:

1. Signalling. My education has made me richer. But it's done so by getting me well-paid jobs at others' expense. This hasn't obviously raised national income. As Bryan says, there's a rat-race element to education.

2. Institutions matter more. Years ago, P.J O'Rourke wrote: 

Why do some places prosper and thrive while others just suck? It's not a matter of brains. No part of the earth (with the possible exception of Brentwood) is dumber than Beverly Hills, and the residents are wading in gravy. In Russia, meanwhile, where chess is a spectator sport, they're boiling stones for soup.

Why, then, is Beverly Hills richer than Russia? It's because the US has had insitutions favourable to growth - freeish markets and a nodding acquaintance with the rule of law - whilst Russia hasn't.

3.Mismatch. More education can lead to over-education, to graduates being baristas.

4. Deterring investment. A large pool of workers with basic skills would bid down wages of low-skilled jobs - which is why the CBI is so keen on improving literacy and numeracy. But low wages might deter firms from investing in labour-saving equipment and techniques, which might reduce long-run growth.

Now, I don't say all this to advocate less education, but simply to question the instinctive belief that relatively low skills will consign the UK economy to weak growth; it's probably other things that'll do that.

Instead, we should perhaps worry for another reason - that learning is a good thing in itself, regardless of its economic impact. But such a view is far outside the Overton window.