Chris Dillow's Blog, page 167

Keynesianism, left & right

Nick Cohen raises a point that has long puzzled me. He says:

As a rule you will find that the great questions of an age create divisions within the left and within the right rather than between the left and the right. In every instance, that is, except one.

The exception, he says, lies in attitudes to fiscal austerity; the right are pretty universally for it and the left pretty universally against.

I say this is puzzling because it's not obvious that there should be a strong logical connection between one's political opinions and attitudes to Keynesianism, for four reasons:

- The question of the size of fiscal multipliers is a (hard-to-measure) technical one, not a matter of political opinion. If a multiplier is 1.5 rather than 0.5, it is so whether you're a leftie or rightie.

- It's not obvious that material short-term class interests explain why Tories are opposed to Keynesianism. Fiscal expansion can be good for profits and well as jobs. And insofar as such expansion helps raise real interest rates, it's good for the retirees who form much of the Tories' electoral base.

- You can support Keynesianism without supporting big government. This was Keynes' own position. As Mark Thoma has said, "there is no necessary connection between the size of government and Keynesian stabilization policy."

- For most of the 50s and 60s, the right did subscribe to Keynesianism. It was Milton Friedman, not Richard Nixon, who said "we are all Keynesians now."

Why, then, should attitudes to Keynesianism now be split on left-right lines?

I don't think it's got much to do with attitudes to inflation. Early Keynesians were at least as hostile to inflation as monetarists were in the 70s and 80s. The authors of the 1944 white paper, Employment Policy (pdf), for example, wanted "a firm determination to keep stability in the general level of prices."

Instead, I suspect there are three possibilities. One was suggested by Kalecki - that a pro-capitalist government must reject Keynesianism, despite its short-run benefit to capitalism. in order to ensure that power over the economy remained with capitalists rather than the state over the long-run.

A second possibility lies in public choice; the right fear that Keynesianism does lead to big government, because governments find it easier to raise public spending in good times than cut it in bad.

A third possibility is that the right have become more dogmatic believers in free markets than Keynes was. Keynes thought markets were micro efficient but macro inefficient:

When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

However, today's rightists cannot admit even this one failing of the free market.

I'm not sure which of these explanations, if any, is right. But whatever the explanation is, it'll have to be very powerful to explain why the left-right distinction is so closely connected to the pro- and anti-Keynesian distinction.

Weakness & left denialism

The problem with our political culture is not merely one of institutions and politicians, but of the public's mental weakness. Two developments make me say this.

One is the punishment of Matthew Woods, Azhar Ahmed and Barry Thew for making "offensive" statements. The fact that people faint like Victorian spinsters when their sensibilities are "offended" and demand legal protection is, as Septicisle , "a sad indictment of what a petty, pathetic bunch many of us appear to have become." The proper response to such incidents is not to call for repression, but to become strong enough to resist being "offended".

The second development is the revelation that so many people knew Jimmy Savile was a predatory hebephile without doing anything about it.I'm thinking here not just of his managers and colleagues at the BBC and hospitals, but of some of his accusers. Forget that guff about him being a powerful celebrity; for at least the last 25 years of his life he was a creepy has-been.

What we have here are two examples of widespread mental weakness - an inability to stand up against injustice and a susceptibility to "offence."

This has unpleasant political effects. It leads to statist tyranny as the public demand that the state protect them from "offence" and from paedophiles without asking themselves how they can protect themselves.

Herein, however, lies a blind spot among political commentators. Because they take public opinion as a given, they fail to consider the possibility that failings in our political system reflect a weak public character. In this, they forget the words of Socrates:

In each of us there are the same principles and habits which there are in the State; and that from the individual they pass into the State?—how else can they come there?

The left is especially guilty here of failing to see the public's shortcomings. Deborah Orr claims that the coalition "has slender claim to democratic legitimacy." Richard Murphy says: "Governments across Europe are having to give up powers to the EU and must impose austerity on demand.This is democracy?" Both are wrong; Greek and British voters rejected anti-austerity leftist parties. And both are wrong for the same reason. They are shifting the blame onto democracy for what are in fact the failings of the people. They don't see that democracy and justice (let alone democracy and freedom) conflict.

Democracy - even in its present imperfect form - is a mirror onto the face of the public. And if you look in a mirror and see an ugly face, you should not blame the mirror.

Mechanisms vindicated

The IMF's admission (p41 of this pdf) that "the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession" is being interpreted as a victory for Keynesianism, because it means that fiscal austerity is doing more damage than the IMF originally estimated.

However, I suspect it is also a vindication for thinking of economics as a bunch of mechanisms rather than as formal models.

To see what I mean, let's concede that the pre-recession evidence pointed to lowish or even negative (pdf) fiscal mulipliers. Mechanism-based thinking would ask: what mechanisms could generate such a result? Answers would include:

- Fiscal tightening can be offset by lower interest rates.

- Cuts in the government wage bill reduce workers' bargaining power and hence expected profit margins, which can encourage capital spending.

- Lower government spending leads to anticipations of lower taxes, which might encourage increase household and corporate borrowing and spending.

This automatically draws our attention to reasons to doubt that low mulipliers would exist now. Monetary policy is less effective now we are at the zero bound; and an inability or reluctance to borrow limits how far private spending can rise to fill the space left by public spending.

We'd therefore expect to see higher multipliers now, not because Keynesians are always right and Austerians are always wrong, but because the mechanisms generating low multipliers happen not to be powerful here and now.

My approach - actually Andrew Glyn's and Jon Elster's: I steal from the best - contrasts with the idea that economics should be like physics. It is sceptical of whether there are deep parameters that yield eternal true predictions. Granted, there might be a few stylized facts and rules of thumb - my favourite being cubic power laws - but important as these are they are often not sufficient basis for policy or investment action.   

If economists can learn anything from physicists, it is not the latter's pursuit of simple models that try to explain everything, but rather the mountain of unglamorous gruntwork they put into gathering data.

Overton windows & cognitive bias

Imagine some Tory were to say something like this:

We need a change in sexual morality. If women were to refuse to sleep with men who didn't want to work or were poorly educated, incentives to work and learn would be sharper and the country would therefore be richer.

I suspect such remarks would invite scorn and ridicule. But they are consistent with economic theory and some empirical evidence, and with a long history of women taking Lysistratic nonaction.

Now contrast those remarks to something Cameron said yesterday. He opened his speech by claiming that he entered office facing the challenge "to make an insolvent nation solvent again."

If we understand "insolvency" literally - as an inability to pay debts - this is imbecilic gibber. There was no question in 2010 of the government being unable to pay its debt. Even if we give him the benefit of the doubt and interpret him as meaning that debt was on an unsustainable path, it's probably wrong. Labour's last Budget envisaged the primary deficit falling to 0.7% of GDP in 2014-15 - sufficient to stabilize the debt GDP ratio if real interest rates are below trend growth rates, which they probably are now. If financial markets had feared government insolvency or debt unsustainability, index-linked gilt yields in 2010 would not have been below one per cent.

This brings me to a paradox. Cameron's silly remarks have not provoked the contempt which our hypothetical Tory's would have done. Why not?

Partly, it's because political reporting, for the most part, is too deferential to bother testing the factual accuracy of Prime Minister's remarks.

But I suspect what's going on here is an example of the Overton window at work. This is because of a form of the representativeness heuristic. Cameron can get away with wibble about insolvency because a big deficit is popularly associated with debt trouble which in turn is associated with insolvency. But people forget that the associations are weak - especially for governments able to print their own money.

By contrast, our hypothetical Tory cannot get away with his remarks because economic growth is not associated with social norms but with things that look more like they might have something to do with what businesses do - orthodox economic policy, the confidence fairy and so on.

My point here is that the Overton window, conjoined with cognitive biases, serves to legitimate silly remarks whilst excluding more intelligent ones. And it's not just leftist ideas that suffer from this debasement of political discourse.

Sex & growth

In a brilliant essay John Quiggin asks:

Supposing a Keynesian utopia [of a short working week] is feasible, will we want it? Or will we prefer to keep chasing after money to buy more and better things?

A new paper by economists at the University of Western Australia suggest that the answer to this question lies in sex. They describe a model in which men undertake conspicuous consumption in order to attract women, and to fund this consumption they work long hours or set up businesses:

The male signalling behaviour necessary to attract potential mates underpins modern levels of economic growth. As females prefer males who conspicuously consume, an increasing proportion of males engage in innovation, labour and other productive activities in order to engage in conspicuous consumption. These activities contribute to technological progress and economic growth.

This echoes a paper (pdf) by Jill Sundie and colleagues which demonstrates experimentally that men looking for casual sex really do spend more on conspicuous consumption, and that women looking for a fling are more attracted (ceteris paribus) to men who buy Porsche Boxsters than Honda Civics. They say:

Just as peacocks have evolved to flaunt their wasteful tails before potential mates, men might similarly woo with wasteful expenditures to charm potential mates.

Perhaps, therefore, men work longer than necessary in part simply because they want to shag around.

This suggests that economic growth will be n-shaped with respect to sex. Where there are strong taboos against non-marital sex, the motive for conspicuous consumption will be weak - because it'll not get you sex anyway - and so labour supply and innovation and growth will be weak. But where women give it up for anyone, there'll be no need for men to spend to impress, so growth will also be weak. It's middling degrees of sexual promiscuity that are best for growth.

History is consistent with this. Max Weber relates how, in traditionalist societies, it was very hard to get men to work more than the bare minimum - though he had very different ideas as to how this habit was overcome! And economic growth in such societies tends to be negligible.

By contrast, growth in the west was fastest in the 1950s and 60s when traditional sexual morality weakened, and  - as Mad Men shows us - economically successful men could shag around.

Whether the slowdown in growth since then is related to an increased availablity of sex for men and hence a decline in the need for conspicuous consumption is a matter of which I have no knowledge.

In defence of idleness

In defending benefit cuts, George Osborne said yesterday:

Where is the fairness, we ask, for the shift-worker, leaving home in the dark hours of the early morning, who looks up at the closed blinds of their next door neighbour sleeping off a life on benefits?

It's a fair question. I'll try and answer it.

First, let's note that in any welfare system there's a trade-off between risk-bearing and incentives. A system which gives a low income to those out of work increases work incentives, but it does so at the cost of imposing large falls in income upon those who lose their jobs.And many people do so; in Q2, for example, 750,000 people moved out (pdf) of employment. We can therefore turn Osborne's question around: where is the fairness in imposing big losses upon those unfortunate enough to lose their jobs?

The choice here is not between fairness and unfairness, but between different types of fairness.

And Osborne's choice is questionable. He's appealing to the norm of reciprocity, the idea that it's wrong for some people to get something for nothing. This made sense for the 90%+ of human history in which men lived near subsistence and work needed to be done . Freeloaders then were a threat to the survival of the community.

But this is no longer the world we live in. Our instictive aversion to freeloaders was an evolutionary response to pre-industrial times. But it is a maladaption in our present environment, an atavistic anachronism. There is now - and there is likely to remain - a shortage of jobs. In this world, the fact that some (few?) people don't want to work should be welcomed, as it increases the chances of getting work for those who want it. This is a good thing because involuntary unemployment is a big source of unhappiness.

What's more, many of the few low-wage jobs that are available are of private benefit but little or even negative social value. Incentivizing people to work in call centres cold-calling people to sell them PPI compensation is not an obviously Pareto-efficient policy.

In this context, we can think of the tax and benefit system as being like an auction (pdf) in which people bid for the scarce right to work; taxes are the price we pay to buy that right.

Sure, some people have a greater taste for work than others. And it's natural to complain when others don't share out tastes: I think it deplorable that folk support Spurs and don't love Jolie Holland. But it is often a category error to think differences in tastes are a matter of morality.

Indeed, we should remember that there's a long tradition in European thought - dating back at least as far as ancient Greece but evident in Smith and Mill - which sees work as dehumanizing as leisure as necessary for culture. As Bertrand Russell wrote:

A great deal of harm is being done in the modern world by belief in the virtuousness of work.

Another thing: Marxists will point out that the desire for big incentives to work has nothing to do with morality and fairness and everything to do with the need to ensure that capitalists have a big supply of cheap and pliable labour. They are, of course, correct.

Control: Osborne's missing word

One of the great questions in economics is: who in an economy is best placed to bear risks? Osborne seems to think the answer is: workers. He's asking employees to give up their rights of unfair dismissal and redundancy in exchange for between £2000 and £50,000 of shares in their employer. This plan, he thinks, is "particularly suited to new businesses starting up; and small and medium sized firms."

Such companies, however, are risky. UK data show that, even in good times, around 10% of firms close (pdf) each year. And the risk is even greater for new firms. Alex Coad has estimated from US data that over 20% of new establishments (not quite the same as firms but close enough) die in their first year.

Workers who take up Osborne's offer - or who are forced to do so by employers - thus face a high risk not only of losing their jobs, but of seeing their shares become worthless too. This violates the first rule of investing: don't put all your eggs in one basket.

You might object that the loss of their shares is no problem, because it's the loss of something workers' don't have now.You'd be wrong. In giving up redundancy and dismissal rights, workers in stricken firms not only lose redundancy pay but also the right to a notice period during which they can look for work elsewhere.

So, what is the case for worker ownership?

One is that it can spur workers to work harder - maybe not hard enough to ensure that all firms survive, but sufficiently so to raise aggregate productivity.

The other argument is that ownership is necessary - but not sufficient - for control. And workers' control is a good way of reining in overconfident or rent-seeking bosses, and of mobilizing fragmentary and dispersed knowledge of complex organizations, All good Tories, having read Hayek, should appreciate that centralized planning is a bad idea.

Herein, however, lies a curious omission in Osborne's speech.Although he talked of "new rights of ownership" he did not mention that ownership should entail control. As bank shareholders will tell you, ownership without control is just a way of ensuring you'll be ripped off. Anyone would think Osborne wants workers to suffer a similar fate.

Efficiency vs sanctity

In opposing a mansion tax, David Cameron reminds me of Corrie's Tommy Duckworth. And I don't just mean that both are hapless oafs whose efforts at getting out of debt have backfired.

Instead, take a common argument against a mansion tax - that it would hurt asset-rich, cash-poor widows living in big houses.

To an economist, this is not a bug but a feature. In forcing (very few, but let that pass) widows out of big houses, a mansion tax would encourage a more efficient use of scarce housing by freeing up big houses for bigger families. To non-economists, this seems heartless.

What we have here is a clash between efficiency and sanctity. Efficiency requires the widow to sling her hook. But sanctity says people should be able to live in places where they have happy memories. Cameron seems to have chosen sanctity over efficiency.

Which brings me to Tommy Duckworth. His qualms about Tina acting as a surrogate mother for Gary and Issy are of the same form. Just as homes are more than economic assets, so too is Tina's womb.

Objections to immigration take the same form. Whereas economic efficiency argues for freer migration, sanctity doesn't. Countries, like wombs and houses, have value beyond their narrowly functional economic uses.

There are other examples. Opposition to prostitution and legalizing drugs and to having markets in transplant organs (pdf) are all based on the idea that some things are too valuable to be traded away.

The point here is that efficiency is not an incontestable value. It collides with others, the belief in the sanctity of some goods.

Economists tend to have a tin ear here - they just don't hear the arguments against efficiency.

Which raises a question. How might we argue for efficiency over sanctity. I'd suggest three lines:

1. In many cases, the clash between efficiency and sanctity is also one between liberty and sanctity. This is true for immigration and trade in organs and surrogacy, though not the mansion tax example.

2. The cost of having some sacrosanct assets which are beyond trade often falls upon third parties. For example, banning a surrogacy market would deprive Gary and Issy of their chance to have children; keeping widows in big houses deprives families of the chance to live in them. In this sense, the desire for sanctity is a cheap preference - it's borne by others. It should therefore be discounted.

3. Who decides what assets are sanctified? Consider this argument:

OK, let's assume that high taxes on top incomes are inefficient, in that they deter productive activity. This doesn't mean we should oppose them. Allowing people to have huge incomes is repugnant in itself, as it elevates individualistic selfishness, and undermines social solidarity. Equality is sacrosanct. It shouldn't be traded away for efficiency.

Very few people take this line. But why not? Why are wombs or homes or countries sacrosanct and not tradeable against efficiency, whereas equality is? Who decides what's sacrosanct and what's not, and on what grounds? Could it be that sanctity thus serves a reactionary function?

 I don't say all this to take sides. I do so merely to show that values are contestable, but that a debate about them is possible.     

One Nation: some scepticism

Ed Miliband's call for "one nation" has excited the usual suspects, but we should be sceptical of its feasibility.

First, some history. Disraeli coined the idea of one nation in 1845, a time of the Chartist uprising and when memories of the French revolution were still vivid. "One nation" Toryism was motivated by a desire to fend off such a revolution. As Disraeli said in the Free Trade Hall speech cited by Miliband, he saw the purpose of the Tory party as being to maintain the constitution and prevent revolution. He thought the way to do this was to have a benevolent hierarchy - responsible capitalism - in which workers can improve their well-being with the parameters of existing power relations. Bourgeois socialism, said Marx and Engels. is "desirous of redressing social grievances in order to secure the continued existence of bourgeois society."

"One nation Toryism" was an attempt to accommodate working class power. It's no accident therefore that it has gained influence when workers were powerful or militant (the 1840s and post-1945 years) and lost influence when capital regained the whip hand.

With workers now quiescent, the social pressure towards one nationism is missing.

This matters because there are at least four psychological mechanisms which bias today's rich against benevolence:

1. A (mistaken) belief that they owe their success to merit.As Michael Young wrote:

If meritocrats believe, as more and more of them are encouraged to, that their advancement comes from their own merits, they can feel they deserve whatever they can get.

Lord Grantham, who owes his fortune to the luck of inheritance, might feel a sense of noblesse oblige. But bankers don't.

2. The just world effect. People have always had ways of convincing themselves that inequalities are in fact justifiable, that they deserve their fortune and the poor deserve theirs; "He made them high and lowly and ordered their estate." But in Disraeli's time this was accompanied by a Christian compassion which is weaker today. 

3.The abundance effect. Mere proximity to cold hard cash encourages selfishness. It's no accident that, historically, noblesse oblige has been associated more with those whose wealth is in land than with cash-holding merchants and bankers 

4.Financial motives (pdf) can crowd (pdf) out pro-social ones.The rich and powerful - who, by definition, face stronger extrinsic motivations might therefore have weaker senses of obligation.

These four mechanisms are consistent with Jason Marsh's claims that the rich are less likely to be empathatic or compassionate than others.

All this suggests that there is neither the social nor cultural basis for the sympathy between the classes which Disraeli thought necessary for One Nation. And given the power of companies over the state, we should be sceptical of how far One Nation be can created by legislation alone.

If you want One Nation, you need a more powerful working class. The rich and powerful might not be motivated much by benevolence - but they are by fear.

Why was Hobsbawm wrong?

Great historian, shameful politics. This is the standard reaction to Eric Hobsbawm's death. Both Jonathan and the Heresiarch deplore this exchange with Michael Ignatieff:

Ignatieff: What that comes down to is saying that had the radiant tomorrow actually been created [in the USSR], the loss of fifteen, twenty million people might have been justified?
Hobsbawm: Yes.

His thinking here is plainly utilitarian - that it's acceptable to trade off the lives of a few millions so that hundreds of millions can (ex hypothesi) enjoy greater happiness.  

But what exactly is wrong with Hobsbawm's reply?

The obvious retort is the deontological one, that there are some things we simply shouldn't do to people, even if they are necessary to create a radiant tomorrow.

But many of Hobsbawm's critics cannot use this reply, because they themselves are utilitarians. Those who defend the invasion of Iraq on the grounds that civilian deaths were a price worth paying for the removal of a dictator, or who defend the use of A-bombs against Japan because they shortened the war are using the same calculus as Hobsbawm - weighing some lives against others' future well-being. The difference between them and him is one of accounting, not politics or morality.

Another reply is that it was impossible that Communism would ever have created a radiant tomorrow, so there was simply no possibility that the 20m deaths could ever have been justified.

This reply, however, looks like the hindsight bias. It's only now that the Hayek-Mises critique of central planning seems correct; nobody much believed it when Sputnik was launched.To those of us reared on Popper's critique of Marxism, there is something paradoxical about Communism's critics claiming that its collapse was inevitable.

Instead, I suggest two utilitarian reasons why Hobsbawm was wrong:

One is that happiness is more or less stationary. Neither higher aggregate incomes nor freedom (real or formal) greatly increase it. If this is the case (and it is an if), then even if Communism had created a bright new dawn, then the welfare gains would not have been sufficient to justify 20m deaths.

The problem with this argument is that, if we push it far, then it renders lots of political activity redundant.Whether this is a problem for politics or for happiness research is another matter.

Secondly - and this is the answer I favour - the Communists were guilty of overconfidence. 20m deaths is a high price. To believe that any political project is worth such a price is to exaggerate both its feasibility and its payoffs; perhaps the removal of a clear and present evil such as Nazism is the only exception here. Such exaggeration isn't just factually wrong after the fact, but was irrational at the time.

My point here is one expressed by the tagline of this blog - that what is wrong in politics is not so much extremism as fanaticism.