Chris Dillow's Blog, page 145

The transition to socialism

It's a sign of our strange times that not only is the Bank of England more radical than many on the left but also the Archbishop of Canterbury shows more sign of thinking about how to abolish capitalism than many on the left.

His promise to try to compete Wonga out of existence can be seen as part of what Erik Olin Wright calls (pdf) an "interstitial transformation" - the creation of non-capitalist forms of organization in the interstices of capitalism which, if they can expand, could eventually marginalize capitalism itself. So, for example, credit unions and Roscas might eventually grow at the expense of banks (especially if the latter's state subsidy is withdrawn); farmers' markets and even allotments nibble away at supermarkets; the internet is undermining the media and music industries.And so on. These are examples of everyday decommodification.

You might object that this such yogurt-knitting self-indulgence is no immediate threat to capitalism. This ignores two things. First, existing leftist strategies of sanctimonious posturing, talking amongst themselves and hoping for a government with "political will" is no threat to capitalism either. Secondly, small changes can beget bigger ones, for example:

 - If the capitalist media were to go out of business, one source of pro-capitalist ideology would disappear.

 - If people can organize themselves into credit unions and other forms of community activism, it would unleash an energy and appetite for self-determination that could challenge capitalism in other areas. If people can organize some of their affairs collectively, why should they be content to let bosses organize them in others?

 - The growth of non-capitalistic organizations would help shift the Overton window, by demonstrating that alternatives to capitalism are feasible.

But it's not just self-organization that can help here. So too might reasonably modest government policies. For example, some reasonably small tweaks could change universal credit into a citizens' basic income. This would give people the real freedom to choose to work or not. In response to that, firms would have to offer less exploitative conditions, and perhaps even ownership stakes in an attempt to retain workers. That's a stepping stone to socialism.

Or increasing public sector workers' control over their workplace - say by putting services out to tenders from coops - would increase the amount of self-organization and hence set the ball rolling towards socialism.

Now, these are only a few examples. More imaginative and knowledgeable folk than me could no doubt think of others. My point here is that lefties should consider the interplay between policies, institutions, norms and culture. It's possible that some small changes in policies and institutions can eventually have big effects, to the extent that they encourage the growth of anti-capitalistic norms.

The transition from feudalism to capitalism did not generally happen because peasants protested in the streets, nor because they found a government with the "political will" to overthrow feudalism. It happened because a sequence of smallish individual actions - often without consciousness of their full effects - meant that, eventually, people found better things to do than obey feudal lords. Perhaps the transition from capitalism will occur in a similar way.  

"Unsustainable" economic activity

Allister Heath wants more "good" GDP growth:

Good growth is sustainable in the strict sense of the world: it is the kind of activity that would continue in the absence of subsidies and if the cost of money rose again to properly reflect the supply and demand of funds, long-term output expansion, expected inflation and other risks.

This, though, under-rates the benefits of "unsustainable" economic activity. I'm not just thinking of the trivial fact that a temporary income is better than none, but of other mechanisms:

 - Temporary booms can leave positive legacies, as Daniel Gross has pointed out; they can leave us with a useful infrastructure of railways, broadband connections and (sometimes) housing that we wouldn't otherwise have.

 - Even "bad" businesses can be useful learning experiences, which equip entrepreneurs to go onto success. Thomas Edison said: "I have not failed. I've just found 10,000 ways that won't work."

 - Apparently "bad" businesses might become good ones, if there are learning by doing effects. "Fake it till you make it" isn't a great business strategy, but it's a possible one.

 - Temporary spells of employment can improve workers' skills and working habits and so make them productive later, thus avoiding hysteresis effects whereby the temporarily unemployed can become permanently deskilled.

But there's another issue here. How can we distinguish between "artificial" economic activity created by loose monetary policy and that arising from over-optimism, bad business plans or plain bad luck? In normal times there is a massive amount of creative destruction; on one estimate (pdf), the UK economy created and destroyed around 50,000 jobs each week between 1997 and 2007. How can we tell how many of the 50,000 jobs created are "sustainable"?   

You might think we can't, until after they've disappeared: as Warren Buffett said, it's only when the tide goes out that you can see who's been swimming naked. But even this won't do. In their study of the 1990-91 recession Paul Gregg and Paul Geroski point out that there was little correlation between firms' pre-recessionary efficiency and their vulnerability to recession. There is, they say, a "large random component" affecting who gets hurt in a recession. The best way to ensure that firms are efficient is to ensure vigorous competition, not to hit them with occasional recessions.

Worrying about "sustainable" or "unsustainable" economic activity is, therefore, pointless. We can't distinguish the two, and it doesn't matter.

I say all this to raise a paradox. Mr Heath is generally seen as a man of the right, whilst I'm a Marxist. But it's Mr Heath who looks like a Guardianista fretting about "good" and "bad" activity whilst the Marxist is reminding him of the virtues of tumultuous market activity.

This is, of course, not simply a matter of his and my idiosyncracies. If you're looking for people who believe in old-style central planning, you'll find them among CEOs who think they can manage sprawling multinationals from a head office, and among fund managers who think - contrary to most facts - that they can spot good investments better than the market. We Marxists, however, have learned from our mistakes and are interested in ways of decentralizing economic activity. A belief in central planning these days is to be found in boardrooms and in fund managers' offices  more than on the thoughtful left.

In defence of high house prices

Graeme Leach of the Institute of Directors says the government's Help to Buy scheme is "very dangerous". Viewed from most perspectives, he's right. It's surely a bad idea for the state to help overpriced assets become even more overpriced.

From one perspective, however, it does make sense. High house prices help to increase the supply of labour.

Let's look at this from a Keynesian perspective. In 1930, Keynes forecast (pdf) that by 2030 real incomes per capita would be four to eight times their 1930 level. A point may soon be reached, he said, when our absolute needs are satisfied, "in the sense that we prefer to devote our further energies to non-economic purposes." He thought the working week would drop to just 15 hours.

This forecast has been half right: real incomes are now 4.5 times 1930's level. But it has been half wrong; the average working week is twice Keynes's forecast. Why?

One reason, of several, is that housing costs have risen. In 1930, these comprised just 9.5% of consumer spending. Today, they comprise 25.8%*. Our absolute need to live somewhere is keeping our noses to the grindstone.

Let's put this another way. Imagine we had a massive housebuilding boom which reduced house prices and rental costs to reasonable levels. It would then be possible for people of above-average earning ability to downshift or even completely retire after a few years. This would be especially true to the extent that, for some important goods such as music, we are close to a post-scarcity society. 

The complaint that Anne McIntosh recently made about GPs - that they are scarce because many women work part-time - would be one that would be repeated across the economy. Skill shortages would bid up wages and squeeze profits.

What's more, there'd be an adverse selection effect. If we could afford to downshift in our 30s or 40s, who would choose not to do so? It'd be the narcissists (pdf) and psychopaths who gain satisfaction from occupying positions of economic power. Sure, these already are already (pdf) disproportionately prominent in boardrooms: I suspect one contributor to the banking crisis was that less money-motivated types left the industry having earned enough. But imagine how much worse things would be if their more balanced colleagues left the business.

In a sense, I agree with David Boyle:

People are less free when they have to pay half their income in housing costs or more, less in control of their lives and much less able to follow the career and life path that thrills them most...
I don't want my children eking out a living in indentured servitude to their landlord, in a job they loathe but need just to pay the rent.

However - and here Marxists disagree with liberals - the purpose of capitalist economic activity is not to increase our real freedom, but to increase profits. High and stable** house prices, insofar as they facilitate indentured servitude, achieve just this.

* I'm comparing table 24 of Feinstein's Statistical Tables of National Income, Expenditure and Output of the U. K.: 1855 - 1965 to table E1 of this pdf.

** That word "stable" matters. Rising house prices can depress the labour supply by permitting some people to retire on their capital gains. 

Identity & punishment

Can experimental economics shed light upon the Trayvon Martin case? I ask because of a recent paper by Jeffrey Butler and colleagues.

They got people to play a simple dictator game, in which one subject was given some money to divide between himself and a partner. Third parties were invited to watch and to choose to punish the dictator if he made what they thought was an unfair division.

They found that, on average, observers chose to punish unfair offers even when they had to pay for doing so. This is a routine finding; we have a taste for fairness and are willing to pay for that taste.

But here's the thing. Observers were then split into two groups, depending on whether they drew a blue or red chip from a bag. They then found that observers were keener to punish unfair decisions by dicators from the "other" group. Whereas observers were willing to pay 33 cents to fine a dictator €1 if he was in their group and made an unfair offer to a group member, they paid 47 cents if the dictator was in the other group and treated one of the observers' group unfairly. That's a 40% difference.

We are, then, much more willing to punish members of the "out-group" for an offence than we are to punish members of our own group. You can easily imagine an evolutionary reason for this; moral norms evolved to protect the group, especially from predation by outsiders.

This is where the Martin case enters. Blacks and liberals regard Zimmerman (perhaps wrongly, but no matter) as one of the out-group and are therefore keener to punish him than those who regard him as one of "them". There is of course nothing new in this. It's consistent with a vast range of behaviour, from the horrible to the trivial:

 - Demagogues who want to commit genocide first take steps to establish their victims as an out-group, and a threatening one at that.

 - In the deep south, blacks were lynched for things that wouldn't have been crimes at all had a white person done them.

 - The attempt to distinguish between strivers and skivers is a means of legitimating welfare cuts not just because it tries to paint skivers as undeserving, but because it paints them as an out-group, who can be punished harshly.

 - One reason why MPs' expenses created such a furore - when such behaviour had been going on for ages - was that they had grown distant from the public, who thus regarded them as outsiders and so were keener to punish them.

All this is consistent with the idea that social capital has a dark side (pdf) - a desire to hurt outsiders. As Charles says: "Social solidarity, tradition and community (all good) can end up being defensive and fearful of 'otherness' (bad)."

But there's second message. Professor Butler created social divisions in the weakest and most trivial way possible - by simply drawing chips. If divisions formed in this way can be sufficiently strong to generate significant differences in willingness to punish, isn't it likely that real-life social and ethnic divisions can be easily deepened by ideology, rhetoric and other cues? And mightn't such divisions have some terrible effects?

Peter Barlow: a study in behavioural finance

It's my convinced belief that there's more good economics in Corrie than there is in "serious" current affairs TV. Peter Barlow's impending loss of his bookie's shop reinforces this view.

His behaviour demonstrates three findings in behavioural economics.

1. When he started to lose money, Peter took reckless risks in an attempt to break even. This is an example of prospect theory at work - the tendency for people to gamble in an effort to recoup their losses.As Kahneman and Tversky wrote in their classic paper (pdf): "a person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise."

2. Faced with the prospect of paying out on a 58-1 accumulator, Peter failed to lay off the bet. This is an example of ignoring tail risk - the small chance of big losses.

3. One reason he ignored such a probability was that he wanted Rob to lose: "Not only did I want to beat him, I wanted to beat him with one hand tied behind my back." His judgment of probability was coloured by motivated reasoning.

However, Peter's mistakes are not isolated ones. They are quite common in the financial world:

 - "Breakevenitis" is one reason for the disposition effect - the failure to ditch losing investments. This lack of selling pressure is one reason why the negative leg of momentum investing has so often paid off; it causes prices of losing stocks to be too high, with the result that they drift down later.

 - The ignorance of tail risk - the small danger of default, of of liquidity drying up or of counterparties failing to pay - was one factor (pdf) behind banks' failures in 2008. 

 - Libertarians who bought bitcoins above $100, gold bugs who bought gold above $1400 and the various inflationistas who are looking silly now are all sitting on losses caused by motivated reasoning - a wish that the world will conform to their political beliefs. Some neat experiments by Guy Mayraz have shown how easy it is for investment opinions to be shaped by wishful thinking.

Now, here's the thing. Peter has little education and a dubious grasp on his rationality; Rob calls him "a dry drunk who could spin out of control any second" and The World's Most Perfect Woman says he's driven by "macho pride."  And yet allegedly sophisticated "skilled" professional investors make the same mistakes he does.

Evil Tories?

Sunny Hundal has caused a stir by calling right-wingers "evil." For me, this raises a distinction between the Marxist and non-Marxist left: whereas the non-Marxist left often claim a moral superiority over the right - see Comment is Free, passim, if you can bear to - Marxists do not.

For us, the problem isn't that Tories are bad, or liars or stupid. Sure, some are - but a glance at Simon Danczuk, Liam Byrne or Siobhan McDonagh will remind us that Tories hardly have a monopoly here. Instead, for Marxists, immorality is an attribute not so much of individual agents but of the capitalist system itself.

Take, for example, exploitation and bad pay. These, said Marx, don't happen because individual capitalists are evil or greedy, but because competition forces working conditions down:

Capital is reckless of the health or length of life of the labourer, unless under compulsion from society…But looking at things as a whole, all this does not, indeed, depend on the good or ill will of the individual capitalist. Free competition brings out the inherent laws of capitalist production, in the shape of external coercive laws having power over every individual capitalist.(Capital vol I ch 10 pt 5)

From this perspective, the problem with Tories isn't that they lack a moral code, but rather the opposite - they put too much weight upon morality, and fail to see that this agency is circumscribed by capitalism itself. Take two examples.

 - Jesse Norman wants bosses to be public spirited rather than pure profit maximizers. But this ignores the fact that the firm that pays lots of taxes and decent wages will suffer a competitive disadvantage against those that don't. Depending upon how finely the wheels of competition grind, this might not be possible. It also ignores the fact that the neoliberal ideology that sustains capitalism is performative; it instils in bosses a moral norm against paying taxes or decent wages.

 - Tories want the unemployed to look for work, to have a work ethic. But this ignores the fact that, in a world of chronic excess supply of labour, workshyness is a rational response. "Bad ethics" of low expectations and helplessness are an effect, not a cause. What Banerjee and Duflo wrote of the global poor is true, mutatis mutandis, of the UK's poor:

In the same way that the poor may save less than the middle class because they know that their savings will not be enough to reach a consumption goal they are really looking forward to, they may not invest as much (not only money but also emotions and intellectual energy) in their businesses because they already know that they can't make a real difference (Poor Economics, p224)

You might object here that Tories are "evil" in that austerity is doing real damage. True. But this omits two points. First, they are not pursuing austerity because they want to hurt people, but because they believe it will do good; this is an intellectual error, not a moral failing.

Secondly, austerity is not the only - or even main - cause of our woes. Capitalism was ailing well before Osborne became Chancellor. In this sense, talk of "evil" Tories does capitalism a favour, by deflecting attention away from its systemic shortcomings.

On not seeing luck

It's often said that people misperceive skill and luck, for example by saying that a team is on form when it has merely had a run of good fortune. A new experiment at the Autonomous University of Barcelona shows that this error is even worse than we thought.

Jordi Brandts and colleagues got a group of students to predict a sequence of five coin tosses, and then selected the best and the worst predictor. They then asked other subjects to bet on whether the best and worst predictor could predict another five coin tosses. The subjects were told that they would bet on the worst predictor from the first round, unless they paid to switch to the best predictor.

82% of subjects paid to make the switch.

But of course, there is no such thing as an ability to predict the toss of a coin. Most subjects, then, saw skill where there was only luck. And, what's more, they were willing to spend good money to back this daft opinion.

These people weren't just idiots plucked from the street. They were fourth year finance undergraduates at one of the best universities in Spain.

Now, a common complaint about laboratory economic experiments is that they lack external validity; what's true of small stakes experiments with students might not apply to the real world. But I'm not sure this concern applies in this case.

For one thing, this result corroborates Powdthavee and Riyanto's work, which has found subjects in Thailand and Singapore willing to pay for the non-existent ability to "predict" the toss of a coin.

And for another thing, there is a vast industry which owes its existence to people believing there is skill where there is (for the most part) only luck. I refer of course to the fund management industry. There's good evidence that actively managed funds generally do badly; for example, in the last five years most UK all company unit trusts have a decent tracker fund. Despite this, investors spend billions on fees for such managers. This is consistent with the experimental evidence showing that people see skill where none actually exists.

Now, you might object here that if people lose money by buying stupid they'll eventually wise up. Such a view relies upon a silly Econ 101 misunderstanding of how markets work. We know from the work of people such as Andrei Shleifer (pdf), Bernard Dumas and Bjorn-Christopher Witte that financial markets do not necessarily select against the stupid and in favour of the smart. And we also know - from the long history of quack medicines (pdf) in the US - that the demand for bad products can be inelastic with respect to failure.

Profits, norms and power

Jesse Norman says companies have a duty not just to obey the law but to follow an ethic of good stewardship. Andrew Lilico and Stephen Pollard disagree. Implicit in this debate is something that should be made explicit - the role of corporate power.

Lilico and Pollard are following the tradition of Milton Friedman, who argued that "the social responsibility of business is to increase its profits."

This principle is an expression of the first theorem of welfare economics - which in turn derives from Adam Smith's invisible hand - which says that rational self-interest will lead to socially optimum outcomes.

However, this is only the case under a particular condition - that companies' economic and political power is limited. Take three examples:

 - Pollution. If we have a Pigovian tax which makes companies pay the social cost of pollution, then a firm will only pollute if the benefits to it of doing so exceed the social cost of the pollution. In this situation, its profit-maximizing strategy will be welfare-enhancing; the value of the goods it produces exceeds the total social cost of them. If however, firms have the political power to ensure that externalities are not priced, then their pursuit of profit would clash with aggregate welfare.

 - Onerous trades. If one party to a bargain is very weak, the other can demand terms which are oppressive, and which third parties might consider unfair. 

 - Taxes. If firms are footloose and workers are not, the burden of taxes will be shifted from firms to workers because firms have the power to avoid them. This might happen through explicit accounting ruses, or through the more subtle route of tax incidence.

Now, here's the thing. When Friedman advocated profit-maximization as a socially optimal strategy, he did so at a time when firms faced countervailing power. In a pre-globalized era of strong unions, they couldn't easily maximize profits by paying lousy wages or offering degrading conditions, and they couldn't so easily dodge taxes. With their power limited, it was at least possible that profit-maximization did increase aggregate welfare. Friedman acknowledged this when he said that firms should "[comform] to the basic rules of the society, both those embodied in law and those embodied in ethical custom."

But things have changed. Firms' bargaining power is now so great that there can be a tension between profit-maximizing and welfare. Maximizing profits now entails ducking taxes, paying wages which are regarded by many as unfair, and producing unpriced externalities such as risk pollution (pdf).This is exacerbated by the fact that "ethical custom", as perceived by capitalists and their apologists, tolerates such behaviour.

There are several possible responses to this:

 - To ignore the role of power . Doing so, I suspect is an example of how beliefs, such as Friedman's, can persist after the conditions in which they were reasonable have disappeared.

- To think that power can be restrained by social norms, as Jesse does.It's a good conservative position, to think that free markets are welfare-enhancing if they operate within a particular moral code.

 - To think legislation is necessary to rein in firms. This is the statist social democratic view.

There is, though, a fourth view - the Marxian one. This says that the tension between profit maximization and welfare hasn't increased simply because of a failure of law and morals, but because of a genuine shift in the balance of class power. Firms now have power and one thing we know about power is that it'll be used. Unless this changes, hopes of reconciling profit maximization with well-being might well prove mistaken. 

Cutting waste

There's something we've not heard very much of recently - the government's hopes to cut "wasteful" public spending. There's a reason for this. The Tories don't want to cut waste. Nor, for that matter, does Labour. I mean this in (at least) four different senses:

 - The war on drugs costs a fortune in police time and in incarcerating drug dealers, but its benefits are elusive.

 - The war in Afghanistan cost billions and might not have achieved proportionate benefits.

 - It cost £1.6bn to police our borders last year - more than was lost to benefit fraud (pdf) - and given diminshing returns, it would probably cost much more to police them effectively. But there are no big economic benefits from restricting immigration.

 - The DWP spent (pdf) £7.4bn on administration last year, and lost another £2.1bn in fraud and error. In the long-run, a large chunk of this cost could be saved by the simplification involved in a citizens basic income.

However, neither party seems keen on acknowledging this waste nor - aside from surrendering in Afghanistan - doing anything about it.

You might object that this is because these aren't forms of waste at all, but rather simply the costs of giving voters what they want. This would be true if these voters wanted these policies for their intrinsic qualities. But do they?

Take, for example, immigration controls. If people want these because they simply have a taste for exluding migrants, then fine. (Well, not at all fine but that's another story.) But what if they want them because they believe immigration is bad for the economy? If this is the case, then we could relax border controls and "save the tax-payer money" with no ill effect.

I suspect that if voters were asked: "do you think we should spend more on border controls than we do on benefit fraud without getting any macroeconomic benefit?" support for them might diminish.

Or take the admin costs of the DWP. These aren't waste if you think a complex benefits system is a good thing in itself, but they are waste if you think the purpose of the benefits system is to provide a basic minimum income for all.

My point here is a simple one. Governments cannot reduce "waste" merely by increasing efficiency. Even in the private sector, remember, efficiency increases not so much by individual firms becoming more efficient, but by firms entering (pdf) and exiting (pdf) the market. If governmental efficiency is to increase, it will have to be through a similar mechanism - the government exiting from some functions and rethinking how it provides others.

Oh yes: From a Keynesian point of view, of course, even "wasteful" public spending has a role in boosting aggregate demand. I'm ignoring this, and assuming that productive public spending is better than unproductive.

The problem of workshyness

Imagine the following scenario. A man is hopelessly in love with Alison King. Every lonely night he watches repeats of Corrie, pining for his dream woman. A friend then says to him: "why are you wasting you life wanting the impossible? Why not settle for a lesser woman? You'll be happier than you are now."

Most of us would think the friend is giving good advice.

What's true for dating is also true for jobs: Dale Mortensen and Chris Pissarides got a Nobel prize for pointing out that the two markets are very similar. In both cases, we have two sides looking for a good match. If it's rational for someone to settle for less than their (perceived) perfect match in the dating market, it should therefore be reasonable for someone to settle for less than their dream job. And, in fact, millions of us do so. People who can't get hired by Goldman Sachs settle for J.P. Morgan; people who can't get a job at the FT settle for the Telegraph (or I suppose vice versa).

So far, so utterly trivial. But here's the thing. There is, across the western world, an excess supply of labour. Some would-be workers cannot get a match at all. So, if it's rational for everyone else to settle for less than they'd like, shouldn't it also be rational for the least attractive potential workers to settle for not getting a job at all? Just as our friend says: "don't chase Alison King; you're only making yourself miserable wanting what you can't have", shouldn't we also tell the least productive workers: "don't make yourself miserable wanting a job that isn't there"?

However, not only is this advice rarely given, it's rarely taken. Andrew Clark has shown that people typically do not adapt to being unemployed. ONS data corroborate this. They've asked people to rate their life satisfaction on a scale from zero to 10. Amongst those in work, only 20% gave a score of six or less. But 45% of the unemployed did.

In this sense, we do have a problem with workshyness - there's not enough of it.

Why not? One reason, I suspect, is that the unemployed have internalized moral norms about the desirability of work. But this norm, which has long been questioned, is out of date in a world of mass unemployment. It is the kind of morality which brings you down and can never lift you up.

Herein lies a reason why many Marxists have traditionally been hostile to bourgeois morality. First, because it contains big element of hypocrisy: the good advice not to hanker after what you can't have suddenly stops applying to the very low-skilled unemployed. Second, because moralistic attacks on the unemployed for not wanting to work serve an ideological function: they deflect blame for unemployment away from where it should lie - in the inherent failings of capitalism - and shift it onto the victims. 

But let's be clear. Anyone who seriously wanted to improve the well-being of the nation would stop prating about "changing the culture" to encourage people to seek work, and do the precise opposite.