Chris Dillow's Blog, page 144

Gender, competition & boardrooms

Stuart Wheeler's claim that women are not competitive enough to get into company boardrooms has led to accusations of sexism. Such moralistic bleating, however, distracts us from some interesting issues. The first is: what's the link between competitiveness and success...

Two nations

There's one aspect of yesterday's labour market data that hasn't had the attention it deserves - namely, the big long-run change in the occuaptional structure of the labour market. The figures show that in the last 10 years, the number...

On intergenerational mobility

Luke Johnson in the FT is scathing about the sons of rich men:

The children of self-made parents almost never possess the same level of ambition or capacity for enterprise. Consequently family fortunes tend to wither

They are, he says, "an unimpressive lot...spoilt and deficient in energy or experience of the real world."

This appeals to my prejudice. But it doesn't appeal to the tiny rational part of my brain. Sure, some heirs can screw themselves up. But many others don't. For example, the Koch brothers, Kerry Packer and Rupert Murdoch all inherited their businesses from their fathers and thrived. And very many of the most successful entrepreneurs came from pretty wealthy families: Bill Gates' dad was a successful lawyer and Larry Page, Eric Schmidt and Sergey Brin's fathers were all professors. James Dyson and Richard Branson's families were at least well-off enough to send their sons to private schools. I suspect Larry Ellison and Alan Sugar are atypical in succeeding from the wrong side of the tracks.

There are at least two reasons for this.

One is that entrepreneurship doesn't merely require a particular character. It also requires money. As Michal Kalecki wrote: "The most important prerequistite for becoming an entrepreneur is the ownership of capital." It's much easier for rich kids to get the first step in business than poor ones.

Secondly, in some cases, having rich parents can actually be a spur to get rich oneself. If you've been brought up in luxury, you'll come to expect a lavish lifestyle -  which needs funding. By contrast, many of us from poorer backgrounds have lower expectations; I lost all my ambition in my 30s when I realized I would never have to sleep under a bridge. And, of course, having a rich dad can make a son want to outdo him, or at least impress him; in contrast, the fact that I've not seen the inside of Gartree gives me one over my pater.

So much for hypothesizing. What of the facts? IFS economists have estimated (pdf) that the correlation between fathers' and sons' income in the UK is 0.4-0.6 - much the same as in the US (pdf). This is sufficiently below one to be consistent with Luke's claim that some sons of the rich are no-marks. But it's sufficiently far above zero to corroborate my view.

However, if we multiply these correlations, they fall markedly. They imply that the correlation between our income and our great-great-grandchildrens' is just 0.06 - as near as dammit zero. "Rags to rags in three generations" is an exaggeration, but it contains some truth, as Greg Clark has pointed out (pdf). Eventually, the waves wash everything away.

The end of liberal optimism

There's one worrying aspect of Tweeters' abuse of high-profile women that hasn't had the attention it should get - that it further undermines what we might call the liberal optimists' case for free speech.

I'm referring to the idea that free speech will enable us to progress towards the "truth". "Wrong opinions and practices gradually yield to fact and argument: but facts and arguments, to produce any effect on the mind, must be brought before it" wrote Mill. Free speech, wrote Rawls, "is necessary if political affairs are to be conducted in a rational fashion."

Such a view seems fanciful. This is not just because free speech gives us rape and bomb threats from those trying to silence women. The free press delivers not so much a healthy diversity of views but a mix of managerialist centrism, imbecilic linkbait and herp and derp. Not that the fault is all on the sell-side. Readers seek out whatever tosh corrobates their prejudice and self-regard, and even when they do encounter balanced reporting, they apply asymmetric Bayesianism and so entrench (pdf) their prejudice.  

The idea that free speech will give us intellectual progress seems, then, optimistic. Rawls might be right - it might be necessary for rational debate. But it sure ain't sufficient.

You might object here that freedom has given us social progress; attitudes to women, ethnic minorities and gays are much better now than they were in the 50s and 60s. But I'm not sure this represents a victory for free speech rather than the dying out of old attitudes and the replacement by newer ones; to paraphrase Max Planck, civilization advances one funeral at a time. Indeed, it might even represent the opposite of freedom - a triumph of a new form of conformism which (partially) represses racism, homophobia and misogyny.

However, just because the optimistic liberal case for free speech is weak, it does not follow at all that there's a case for restricting such speech. The pessimistic case for freedom remains.

By this, I mean the idea that it's impossible in practice to cut out sick speech whilst not repressing healthy forms - and as my Top Blogging sidebar shows, there are plenty of these. Several people have rightly pointed out that a "report abuse" button on Twitter will soon become a "report opinions I don't like" button. And this principle generalizes. Powers to restrict egregiously abusive speech will be used to restrict others'  freedom. I’d give the Devil benefit of law, for my own safety’s sake.

But then, as a privileged white man, I would say that, wouldn't I?

Discriminating against schools

In whining about a "Fuck off back to Eton" slogan, Jake Wallis Simons says:

Whichever way you look at it, discriminating against people because of where they went to school is wrong. Even if they went to Eton.

I wouldn't have said this if I were he. Put it this way. Why is discrimination wrong? Most of us would say it's because it penalizes people for something they cannot control. Discrimination violates the principle described by John Roemer (pdf):

Inequalities of outcome [are] indefensible, ethically speaking, when and only when they are due to differential circumstances. Inequalities due to differential effort are acceptable.

But of course, in this sense it is people who went to state school who suffer discrimination whilst the privately-educated benefit from it. As the Sutton Trust has shown, top professions (and journalism are dominated by the small minority of people who were privately educated. 

One reason for this is that employers prefer the privately educated; even controlling for degree class, subject and university, privately-educated men earn almost 5% more (pdf) than state-schooled ones*. A bigger reason, though, is that the privately-educated get better exam results and thus better access to the better universities.

Now, this might be because privately-educated people are just smarter than state-schooled ones and so would do well whatever school they attended. But if this were the case, the billions that parents spend on private schooling would be wasted. This is unlikely. What's more likely that private schools give people better education. Which should be surprising, given that the better ones spend so much more: at over £32,000pa, Eton's fees are five times the average per-pupil spending on state secondary schools.

This poses the question: what would non-discrimination, in the Roemerian sense, look like?

One possibility is that spending on state schools would rise to equal that on private schools, thus removing one "differential circumstance.". This would require massive increases: can you imagine inner-city comprehensives having Olympic-standard rowing lakes?

A cheaper alternative would be a version of Texas's top 10% rule, in which exam results and university admissions are equalized across schools, so that, say, only the top x% of students at each school get an A grade.

Now, I don't think Mr Wallis Simons wants either of these - and, perhaps, nor should he**. So, what can he mean when he says that it's wrong to discriminate against people because of the school they attended?

One possibility is that he and I are talking about two different things. He's talking about discrimination as something an individual consciously does against another person, whereas I'm talking about discrimination as an impersonal emergent process; parents who buy private education don't intend to hurt state-school people, but that is the unintended aggregate outcome of their actions. However, it's not at all clear why the one is morally abominable and the other not.

Which leaves another possibility - that his is merely the voice of a sense of entitlement so bloated that it feels offended by mere posturing and yet ignores the blight upon millions of people's life chances.

* This might not be sheer taste discrimination. Public schoolboys might sort into higher-paying jobs, or they might have "soft skills" (this might or might not be a euphemism) which employers value.

Marxism vs social democracy

One oddity of this blog is that it is often better-regarded by righties than by lefties. One reason for this, I suspect, is that we Marxists are as sceptical about social democracy as rightists, albeit in different ways. It might be worth outlining the differences between Marxists and the non-Marxist left; I'm writing here of the differences as they apply today, rather than of historical ones, and this list might be idiosyncratic and incomplete.

Perhaps the biggest difference concerns the role of the state. Social democrats seem to think leftist objectives can be achieved to at least some degree if only Labour could win control of the state and show the courage of its convictions. Marxists are more sceptical. We think the state is captured by capitalist interests either directly, through cronyism, or indirectly because governments must maintain business "confidence". We also fear that, even without these constraints, governments can do less to improve the condition of working people partly because some economic problems - such as how to increase trend growth - are intractable, and partly because the state has inherently repressive features; when we see blacks and immigrants being harrassed, we see the state acting in character.

In similar vein, whereas social democrats are apt to see social change as being implementable by government, we Marxists conceive of it differently, as the complex outcome of interactions between technology and social norms.

Other significant differences are:

 - Social democrats take voters' preferences for granted, and see politics as a marketing exercise, trying to appeal to these preferences. Marxists, by contrast, ask how such preferences are formed, and fear they are biased to be supportive of capitalism.

 - Social democrats - at least until they discovered an interest in predistribution - have tended to shy away from the "hidden abode of production", believing that social democratic objectives can be achieved by macroeconomic policy, regulation and the tax and benefit system whilst leaving capitalist relations of production intact. Marxists doubt this, believing (pdf) that capitalism, even if softened by social democracy, is unjust, oppressive and exploitative.

 - Social democrats are sympathetic to managerialism. The belief that the state can be run beneficially by the man in Whitehall is a natural accompaniment to the belief that companies can be run by bosses. However, we Marxists see managers' claim to expertise as being an ideological front, a justification for inequalities of wealth and power. 

 - Social democrats often regard their opponents simply as moral or intellectual defectives. Marxists don't.

 - Social democrats, more than Marxists, follow the day-to-day agenda of politics, as set by the media and political class. Marxists, by contrast, are interested in what isn't on the agenda, questions such as: Is top-down management really the best way of organzing firms? Can there be full employment and if so how? Is there a case for basic income?

 - Social democrats tend to blame our current woes upon austerity and the banking crisis. Marxists fear these are symptoms of a deeper malaise within global capitalism.

In these senses, thinking of politics in left-right terms is misleading; Marxism is not simply an "extreme" form of leftism, but rather is in many ways qualitatively different.

There's something else to note here. Although Marxists are sometimes seen as spittle-flecked fanatics (an impression some don't break their backs to reject), the actual temper of Marxists - or at least this one - is of cool-headed scepticism.

Society & markets

Tim suggests that CoE-supported credit unions might not be so able to undercut Wonga. This raises an important point which Conservatives such as Jesse Norman have made - that markets are embedded in society.

Imagine two polar opposite societies. In one, individuals are isolated and anonymous. In the other, they are part of a dense social network of friends, family and colleagues.

In the latter, credit unions and Roscas have a great chance of success. The very fact that lenders already know potential borrowers mean there is no extra cost of screening loan applicants; friends and family can vouch for lenders and guarantee their loans; and borrowers are less likely to renege on a loan if it means betraying frinds and acquaintances and the social ostracism that'll result. By contrast, in an atomistic society, they do not have these advantages and so payday lenders, with their economies of scale, are more likely to thrive.

In truth, you don't have to imagine this at all. It's how microfinance works. Here's Banerjee and Duflo:

Microfinance institutions (MFIs) rely on their ability to keep a close check on the customer, but they do so in part by involving other borrowers who happen to know the customer. The typical MFI contract involves loans to a group of borrowers who are liable for each others' loans and hence have a reason to try and make sure that the others repay. Some organizations expect the borrowers to know each other when they come to borrow, whereas others bring them together by making them come to weekly meetings. The very act of meeting together every week helps clinets know each other better and become more willing to help out a group member. (Poor Economics p166-7)

This is of course by no means the only example in which social structures shape markets. It's trivially true that our peers affect our career choices, and they might even affect fund managers' performance by facilitating insider dealing. But there are many other examples:

 - Low-trust societies are likely to see big markets in security firms and CCTV cameras, but thinner markets in goods and services where asymmetric information is important.

 - Societies with healthy social networks might have lower unemployment rates, because friendship networks help job-finding and so reduce frictional unemployment.

 - Social norms affect the size of markets. Gambling, for example, was a backstreet industry when it was frowned upon, but has become big business since the norm against gambling has weakened.

 - The decline of workers' solidarity and trades unions has led to a more active market in managers, and to higher CEO pay, but also to the decline of working men's clubs.  

All this said, it doesn't necessarily follow that "society" comes before markets. It can be, as Marx said, that both are influenced by technology. For example, the arrival of labour-saving household devices allowed women to enter the labour force, which has shaped labour and product markets in several ways. And it's also the case that markets shape society; a society in which everything is for sale will have different social norms from one where markets are restricted.

And herein lies a danger. The neoliberal priority of individuals over community networks can be performative; it doesn't just describe the world, but shapes it too.  Having given us a society of isolated individuals, neoliberalism also gives Wonga more chance of out-competing credit unions.  

Minimizing misery

The ONS's latest survey of well-being raises a question put in a recent paper by Orsolya Lelkes: should government policy aim at maximizing happiness, or rather at minimizing misery?

She argues for the latter. A good reason for this is that whilst happiness is in large part an idiosyncratic thing, unhappiness is more closely correlated with social conditions, most notably unemployment. For example, today's figures show that the unemployed are almost four times as likely to have low well-being as those in work.

Such a view should be close to consensus. It's consistent with the Rawlsian position that we should maximize the position of worst-off groups. And it's consistent with our concern to protect human rights and prevent crime; crime and rights violations inflict great misery, which is to be avoided.

We might add that liberals of all sorts should prefer minimizing misery to maximizing happiness. It's better that governments focus upon a few social evils than act as a nanny busybodying itself with every detail of our everyday lives; even if libertarian paternalism isn't an oxymoron, it can very quickly lose its libertarianism.

Of course, it would be daft to think governments can eliminate misery - I'm not sure they can or should do much to reduce divorce for example. But there are some things a government concerned to minimize misery would give a higher priority to:-

- Full employment.

- A greater concern with improving poor mental health (pdf).

- Better healthcare generally. Today's figures show that those in bad health are often very unhappy - more so even than the disabled.

- Poverty reduction. This follows from simple diminishing returns; giving £1 to the very poor does more to increase happiness than giving £1 to the rich.

- Racial integration. Black people are almost twice as likely to be very unhappy as whites; Chinese and Indians, though, are less likely to be unahppy.

Curmudgeons might reply at this point that governments should stick to their traditional task of trying to promote prosperity.

But is there a conflict between minimizing misery and raising GDP growth? I'm not sure. For one thing, it could be that long-run growth is much less malleable by conventional policies than thought. And for another, happier people are more productive, more likely to trust others and - being more optimistic - more likely to look for work if they don't have it. In these senses, it could be that policies that aim to minimize misery end up, obliquely, raising GDP.

Whether such policies are feasible under managerialist capitalism is, however, another matter. 

Overconfidence in politics

One of the best-attested cognitive biases - which has effects in boardrooms (pdf) and stock markets - is overconfidence. A new paper (pdf) by Pietro Ortoleva and Erik Snowberg shows that it also has political effects.

They estimated the overconfidence of almost 3000 American voters by asking them what the latest unemployment and inflation rates were, and getting them to say how confident they were of these numbers. They then found that overconfidence on this measure was strongly correlated with ideological extremism, especially on the right. What's more, such overconfidence and extremism were both correlated with the propensity to vote.

In this sense, the shrill partisanship of American politics is rooted in a cognitive bias.

But here's the puzzle. There should in theory be a negative correlation between confidence and extremism; note the tagline of my blog. People should think: "most people don't hold my views; it's possible therefore that they know something I don't". But this view is the minority one. Why?

One reason lies in the asymmetric Bayesianism proposed by Glaeser and Sunstein; we are more sceptical about information that disconfirms our priors than that which corroborates them.

Another reason, say Ortleva and Snowberg, is that "it is very di�cult to persuade overcon�dent citizens that their prior is incorrect as they will tend to attribute contradictory information to others' biases." (I might be guilty of this!).

I'd add that these mechanisms are supported by two others.

One is that politicians are themselves overconfident; you wouldn't enter a career as precarious as politics if you weren't. Leaders thus tend to buttress their followers' confidence (at least in public).

Secondly, in politics, the cost of being wrong might be large for society, but it is small for the individual. Those equity investor who thinks a £5 share is worth £10 will, sometimes, learn the hard way not to be so overconfident.But political partisans don't bear a personal cost for being wrong.

At risk of being epically self-unaware, this corroborates one of my priors - that overconfidence, far from being selected against, can actually be magnified by politics.

Bosses, power & ideology

Fraser Nelson attempts to defend the 1%. I have problems with this. He writes:

If a banker could be found to make RBS so successful that it could be sold at a £20 billion profit for the taxpayer, would they be begrudged, say, a £20 million pay-packet?

This begs the question, in the proper sense of the phrase. In practice, it is impossible to find such a banker. The belief to the contrary reflects several cognitive biases and ideological positions, such as:

 - An underweighting of Hayek's scepticism about the possibility of managing complex organizations in which knowledge is inherently dispersed:

 - An ignorance of the role of organizational capital. Boris Groysberg has shown (pdf) that managerial "talent" is not portable. What determines the success of a hire is not the individual's skill, but rather the match between his skill and experience and the organization's needs.

 - An underweighting of environmental factors, one of which is luck. For example, the best hope of RBS's share price rising is that not so much that good management turns the company around but rather that investors become more risk-tolerant and the risk of a financial crisis recedes, so that its share price rises. This point widens. The market can occasionally sustain poorly-run companies, at leat for long enough for their CEOs to take out millions.

In this sense, demand for managers - and hence their pay - is inflated by the fundamental attribution error and pot hoc ergo propter hoc fallacy which combine to create a faith in "strong leaders" who can transform organizations. And as padeophile priests know, if people have faith in you, you can get away with anything. Bosses can therefore extort millions for mediocre or even disastrous performance.

Fraser's question-begging continues:

Had Fred Goodwin’s mania at RBS been spotted earlier and he had been paid £2 million to go quietly, it would have been money well spent.

But it wasn't spotted. And there's a reason why it wasn't. Management skill is not like sporting or musical skill; it cannot be observed directly by outsiders. We have therefore a problem of asymmetric information. This too gives bosses power, especially as it is combined with the aforementioned biases. And money flows to power.

The market for managers, therefore, is one that's rigged by ideology and information failure. 

But does this matter? After all, the market sometimes rewards mediocre musicians or writers so why should we worry if it rewards bad bosses?

One reason is that bosses don't just get money but power, as politicians and the media defer to them. Another reason is that faith in leaders has an enervating effect. If we're looking to leaders (in business or politics), we are apt to lose the ability to take control of our own affairs; this is the converse of Tocqueville's point, that the virtue of democracy is that it "spreads throughout the body social a restless activity, superabundant force, and energy never found elsewhere."

Now, you might think I'm making leftist points here. I'm not sure. For one thing, New Labour was cringeingly deferential towards bosses. And for another, many rightists should, in principle, support what I say. Hayekians should be sceptical of central organization; no rightist should support market failures; and boss culture militates against good Thatcherite virtues of self-reliance. Why then, should the right be so supportive of bosses? It surely can't be because they simply want to defend inequality, can it?

Another thing: I wish Fraser wouldn't repeat that silly trope about to the top 1% paying so much income tax. If inequality is high enough, the rich can pay a disproportionate amount of tax even if the tax system is regressive.