Chris Dillow's Blog, page 43

On guilt by association

When is guilt by association not a fallacy? I ask because of two things I���ve seen recently.

The first is Daniel Hannan���s fear that we���re heading for ���absolutely the most harmful outcome imaginable��� of Brexit, ���namely leaving the Single Market while keeping the Customs Union.��� He tries to blame everybody but himself for this, to which Jonn Elledge replies: ���it is not enough to blame your opponents for the world���s failure to live up to your fantasies.���

The second example is David Goodhart���s claim that the treatment of Windrushers is an outrage. To this, Jonathan Portes accuses him of ���astonishing hypocrisy��� as Goodhart was ���one of the most vocal cheerleaders for the "hostile environment" from the beginning, knowing full well what it would mean.���

In both cases, their opponents accuse Hannan and Goodhart of a form of guilt by association. Hannan���s support for Brexit, his opponents say, associates him with the fiasco we have, whilst Goodhart���s anti-immigrationism, it is alleged, implicates him in the Windrush scandal; Goodhart denies this by saying he���s not responsible for bad implementation.

Let���s take an obvious example of the guilt by association fallacy: ���how can you be a vegetarian? Hitler was a vegetarian!��� This has exactly the same structure as: ���how can you support Brexit when it is also supported by little Englanders and racists and will be implemented by buffoons?��� Or: ���how can you support the hostile environment policy when it���s supported by racists and implemented by [insert derogatory adjective here]?���

So, if my first example is an obvious fallacy, why aren���t by second and third examples?

The answer is that sometimes association has information value. When it does, guilt by association is not a fallacy.

���Hitler was a vegetarian��� tells us nothing about the merits or demerits of vegetarianism. However, the fact that a policy is supported by racists and will be implemented by people who fall well short of angelhood does have information value: it alerts us to the type of policy we���ll get.

In saying this, I���m not using hindsight. Just before the referendum I wrote:

Some of you have a vision of a Britain outside the EU that is a free, liberal, socialistic country. These are ideals with which I have sympathy. But we are kidding ourselves if we think a vote for Leave will be a move towards such a society. Instead, it���ll be a mandate for Farage and the inward-looking, reactionary mean-spirited philistinism he embodies.

And later in 2016 I said of immigration targets that:

if you give power to the state it���ll be misused, because the actually-existing state is a stupid bully. Just as ���anti-terror��� laws have been used to harass journalists and peaceful protestors, so immigration controls will hurt decent people. And for the same reason - because they are the softest targets.

If someone of my limited cognitive skills could see this, I���d expect others to do so.

Critics of Hannan and Goodhart, therefore, are right. The fact that their causes are associated with bad people was a strong clue that they were indeed bad ideas.

Many of you, I guess, will be with me so far.

But here���s the thing. You can make exactly the same criticism of me. I support much of Labour���s economic policy, especially anti-austerity and backing for coops. To this, some will ask: how can I do so, given that such policies are also supported by anti-Semites, big staters and various cranks and fanatics?

My answer is that these are a much smaller fraction of Labour supporters than were (say) little Englanders and neo-racists of Brexit, and so the information value of crankish support for such policies is low. But I���m not 100% confident in this answer.

Job Guarantee: Marxist or Keynesian?

For decades there has been a debate about the differences and similarities between Marx and Keynes. The question of whether we should introduce a job guarantee highlights this debate: is it a means of supporting capitalism, or a challenge to it?

A job guarantee is the offer by the government of a job at a living wage to anybody that wants one. This would, in effect, eliminate involuntary unemployment. Pavlina Tcherneva has a nice paper (pdf) describing the details. Other advocates of it are Randy Wray (pdf)  and colleagues, FitzRoy and Jin (pdf), Paul, Darity and Hamilton and Wisman and Pacitti.

The case for such a policy seems obvious. Although official unemployment seems low, there are a further 2.1 million people out of the labour force who want to work. This means there are almost 3.5 million unemployed ��� 8.5% of the working age population. And for some groups ��� the young, unskilled, some ethnic minorities, the disabled or unwell ��� the jobless rate is far higher.

This matters because unemployment is a massive cause of misery. It is associated   unhappiness, suicide, and lower wages (pdf) and worse job prospects even for those who return to work: Danny Blanchflower and David Bell summarize (pdf) its many ill-effects. As Jeff Spross says:

A job is not merely a delivery mechanism for income that can be replaced by an alternative source. It���s a fundamental way that people assert their dignity, stake their claim in society, and understand their mutual obligations to one another. There���s pretty clear evidence that losing this social identity matters as much as the loss of financial security. 

What���s more, there seems an obvious Keynesian* case for a JG. It would act as an automatic stabilizer, boosting aggregate demand in bad times but shrinking in good. By offering companies the prospect of high and stable demand, it should encourage capital spending.

It could then encourage a form of wage-led (pdf) growth. The JG would act as a floor for both wages and working conditions. In knowing that they couldn���t drive these down, employers would have to raise productivity and try to economize on labour by investing in new technology. In this sense, a JG could do in the 21st century what strong unions and full employment did in the 1950s and 60s.

What, then, could possibly be said against the idea?

There are big practical problems. Do local governments really have the management expertise to identify necessary work and manage those projects? And there���s a danger that under right-wing governments a JG will become not a way to offer dignity to the unemployed but rather a form of workfare. It���s partly for this reason that I agree with Steve that a JG must be accompanied by a citizens��� income.

There are, however, other issues here. Which is why I say a JG might be a Marxian policy rather than a Keynesian one.

Simon describes one:

Suppose we start with an economy with stable inflation, implying unemployment was at the NAIRU, and introduce JG. As this puts upward pressure on inflation because the costs of losing a job are reduced. the only way of keeping inflation stable is to deflate demand, which of course would reduce output.

Of course, you might claim ��� reasonably I think ��� that the NAIRU is low. And you could well argue that in bringing people into work a JG would improve skills and so help reduce the NAIRU in the longer run. But would the NAIRU then really be 0%? I suspect not, and that there���ll be some point at which Simon���s point holds.

When it does, a JG will crowd out capitalistic employment.

To some, such as Kate Aronoff, this is a feature not a bug. ���What feeds a profit margin and what makes for a good society don���t often overlap��� she says:

From coastal remediation to oral history projects to avant-garde theatre [as the WPA used ��� CD], there���s plenty of valuable and low-carbon work to be done that simply isn���t valued by the private sector. It���s hard to imagine any company, for instance, being able to make a profit off of building playgrounds or keeping elderly people company to help ward off loneliness, which has been linked in several studies to premature death. 

This is one sense in which a JG challenges capitalism. It poses the question: what is economic value? Does it consist only in profitable activity, or instead in non-market work in reducing loneliness, and shoring up society and the environment?  

There is, of course, another sense in which the JG opposes capitalism. As Jeff says, echoing Kalecki:

With full employment, the capitalists lose their leverage to depress workers��� wages and must give up more profits. But, more than that, when it comes to running endeavours that are ostensibly ���theirs,��� the capitalists are forced to bargain with and bend to the will of workers ���below��� them. Their position as the demigods of the economy���granting employment when they are appeased, and taking it away when they are angered���is undone.

How will capitalists respond to this? The benign possibility is that they do so by improving working conditions and thereby productivity: we���ve good evidence that more cooperative forms of capitalism are more efficient. The less benign possibility is that they simply close up or stop investing, as they fear that lower profit margins will do more damage to profit rates than higher aggregate demand does good. History warns us that both responses are possible: in the 50s and 60s we saw the former, but in the 70s the latter.

And then there���s a third challenge to capitalism. A worthwhile JG will fit jobs to workers��� needs: it���ll design them around people���s needs to care for family members and will provide jobs suitable for those with health problems. This is the opposite of much of what the capitalist state has tried to do, which has been to change people to suit the needs of capitalists ��� to, in William Beveridge���s words ���make and keep men fit for service.���

What we have there, then, are two different conceptions of a JG. On the one hand, it might be a policy which helps capitalism function better. But on the other, it might be a form of transitional demand ��� a policy which whilst fulfilling human needs is one that cannot actually be sustainably adopted by capitalism and is instead a stepping stone towards socialism.

I���m honestly not sure which it is.

* Yes, I know a JG has been more associated with MMT than with Keynesianism. I'm using "Keynesian" in the sense of policies designed to support capitalism by increasing employment. I'll leave the differences between Keynesians and MMTers for another time.

On Britain's intellectual decline

The commemorations of Marx���s 200th birthday have done at least one thing: they���ve reminded me of Britain���s abject intellectual decline.

Listen, for example, to this debate about Marx (34 min in); Paul Mason���s interlocutor couldn���t tell the difference between Marx and a bucket of fish.

Contrast this with a few decades ago. Then, if you wanted a critical assessment of Marx, you might reasonably have asked Leszek Kolakowski, Samuel Hollander or Isaiah Berlin ��� men who, agree with them or not, knew what they were talking about. Today, his most high-profile critics are ignorant gobshites.

This, however, is but one example of the intellectual decline of public life. For me, the BBC���s recent series, Civilisations, contrasted horribly with Clark���s version. Most programmes seemed to be random observations with no narrative flow ��� and directors who lacked the courage to have the camera linger on the art as Clark���s did.

In the same vein, compare Jacob Bronowski���s The Ascent of Man to, say, Brian Cox.

More strikingly, can you image the BBC devoting 50 minutes to two old white men discussing Wittgenstein, as it did in 1976?

This is mirrored in our politics. On both front benches today there are pitifully few people one could call intellectuals (as distinct from intelligent): Jesse Norman and Barry Gardiner are the only ones I can think of immediately. The 60s and 70s, however, gave us Crosland, Foot, Jenkins and Crossman among others. And although Thatcher was considered no great intellectual in her time, she peppered her speeches with references to Hayek, Friedman or Popper. Can you imagine Theresa May citing similar men? Are there even any?

I know, I know, I know. You might think this is a very selective reading of history: there have always been lots of buffoons in politics (some Scottish miners on the Labour side and landed oafs on the Tory) and lots of crap on TV. Nor of course is the BBC an intellectual desert: any organization employing Jim al-Khalili and Helen Castor is doing something right. But I suspect there is at least a grain of truth here, even before mentioning the obvious dumbing down of the Today programme. (I���ll leave others to say whether this applies to other fields such as literature, music and other arts.)

This poses the question. Assuming I���m roughly right, why might this be?

It could be a legacy issue. Back in the 80s, academia was demoralized and in decline. Several good judges told me that if I got a PhD I would be unemployable in the UK. I wouldn���t have been a great academic, but I���m confident that many people who might have been got the same advice and went into finance, the law or other jobs.

And those who did become academics have faced another problem. The effect of the Research Assessment Exercises (and I suspect the intention) was to force academics to publish unreadable and unreplicated papers rather than to think or to engage with the public. (I gather that their successor, the REF, is a little different but its long-term effect is yet to be evident).  

The upshot of these developments has been a loss of public intellectuals. Just look at the people who appeared on Bryan Magee���s Men of Ideas: are there even equivalents today?

Perhaps, though, there���s something else ��� the rise of consumer culture. There was a time when politicians and the BBC considered what was best for the country ��� which of course wasn���t wholly incompatible with their self-interest. ���The man in Whitehall [and Broadcasting House] knows best.��� Long debates about philosophy might not have been what the public wanted, but BBC bosses thought they were good for us. Equally, whilst Thatcher and Attlee disagreed about almost everything they had at least one thing in common ��� a loathing of referenda. They thought political decisions should be taken by the people paid to do so. And because such decisions were tricky, they required people of intellect.

Today, though, that ethos has been replaced by the idea that the customer is king and that giving punters what they want is all that matters. If political and TV programming decisions are determined by opinion polls and focus groups ��� and failing that by some image of a narrow-minded voting and viewing public with no attention spans��� there���ll be no room for the high-minded. Debate will be replaced by an exchange of sound-bites.

Now, this shift isn���t wholly wrong: there are times when we should indeed trust the public. But I wonder: in abandoning the ���Man in Whitehall knows best��� attitude, might we have lost something, especially when it has coincided with other social trends.

Progress in economics

I���m getting cheesed off with the economic culture war. One peeve I have with it is that economists do so many things that it���s easy to find examples of both bad work and good. Rather than speak in generalities, I���d prefer critics and defenders to focus more upon specific aspects of economics.

As an example of what I mean, I���ll take a bit of financial economics, as this might highlight what���s both good and bad in economics.

For years, we���ve had a mainstream theory here. The efficient market hypothesis says that all information is embedded into share prices and so you cannot beat the market without taking extra risk. And the capital asset pricing model tells us that the risk that matters is a share���s covariance with the market (or beta); idiosyncratic risk doesn���t matter.

Now, there is a distinction between these theories. From the off, the EMH arose from an empirical observation, that share prices seemed (pdf) random and the market was hard to beat*. Way back in 1953 Maurice Kendall pointed out the former (pdf). And in his excellent book Fischer Black and the Revolutionary Idea of Finance Perry Mehrling points out that Black had good evidence in 1967 that mutual funds under-performed the market. Even men who otherwise disagreed with the EMH shared this view. Benjamin Graham, for example, wrote (pdf) in 1972 that ���the majority of the investment funds, with all their experienced personnel, have not performed so well as the general market.���

The CAPM, however, was less rooted in evidence and more a theory of equilibrium prices: in Bill Sharpe���s** paper (pdf) introducing the theory, there is pretty much no empirical evidence.

And in fact, there never has been any. Eugene Fama, the high priest of the EMH, has said that it ���has never been an empirical success���.  Others have been less kind. Eben Otuteye and Mohammad Siddiquee say it has been ���60 years of wasted effort". Economists have long known that beta isn���t the only determinant of returns, believing that size and value also matter ��� hence the so-called three factor model.

In fact, economists claim to have discovered countless ���anomalies��� ��� exceptions to both the CAPM and EMH. Many of these, however, are fragile: Campbell Harvey has said they are "likely false". And many others have diminished since they were pointed out ��� at least in the US and UK if not elsewhere ��� which is sort of consistent with a weaker version of the EMH: money-making opportunities don't last for long.

There seem to me, however, to be two pretty robust anomalies.

One is the tendency for low-beta stocks do better than they should and high beta ones worse. This was first pointed out by Fischer Black, Michael Jensen and Myron Scholes in 1972 but has since been corroborated by lots of other evidence (pdf). The other is that stocks which have done well in the past tend on average to subsequently out-perform. This has been found not just in shares but in other assets too. In my day job, I have constructed very simple defensive and momentum portfolios in real time. Both have for years beaten the market.  

There are, I think, some general messages to take from all this.

One is that the distinction between mainstream and heterodox doesn���t mean much. The first evidence against the ���mainstream��� CAPM came from ���mainstream��� economists.

Secondly, bad theories such as the CAPM are beaten not by competing theories but by facts. Of course, behavioural finance is an alternative to the CAPM. But what gives it credence is not the plausibility of its assumptions but the existence of some facts that are easier to square with behavioural finance than the CAPM. The momentum effect, for example, might well be due in part to investors��� tendency to under-react to news.

Thirdly, all this is a counter-example to what Jason Smith says. He claims that of both heterodox and mainstream economics that ���neither appear to value empirical data. Neither appear to make accurate forecasts.��� But this is not true in this case. There���s a vast library of research on empirical asset pricing, some of which ��� momentum and low-beta ��� survives the replicability crisis. And we do have some (so far!) successfully accurate forecasts, that momentum and low-beta stocks generally out-perform.  

Fourthly, my story is of a retreat from a single unified theory. Empirical evidence has undermined an elegant parsimonious theory (the CAPM) and left us with a few hard facts and a few mechanisms to explain them, such as constraints upon short-sales and leverage, and the presence of at least some cognitively-constrained investors. I think there���s been progress, but it���s away from grand theory and towards messy reality. Maybe this is ��� or will be ��� true of other parts of economics.

* I���m speaking here of the EMH as applied to individual stock prices rather than the overall level of share prices. It���s quite possible, as Paul Samuelson said, that stock markets are ���micro efficient but macro inefficient.���

* Sharpe was only one of several fathers of the CAPM.

The problem with power poses

Millions of people will have looked at the newspaper front pages this morning and wondered: why is Sajid Javid looking like an utter tool? The answer sheds light upon the nature of academic research and people���s attitudes to it.

The reason for his absurd stance can be found in a paper (pdf) by Amy Cuddy and colleagues. They claim that by using ���expansive postures��� a person can ���embody power and instantly become more powerful���:

By simply changing physical posture, an individual prepares his or her mental and physiological systems to endure difficult and stressful situations, and perhaps to actually improve confidence and performance in situations such as interviewing for jobs, speaking in public, disagreeing with a boss, or taking potentially profitable risks.

There���s just one big problem with this. It���s that what scant evidence there ever was for such a claim has not been corroborated by later studies. What we have here, then, is yet more evidence for the replicability crisis.

The mistake that Javid and other Tories has made is to be too credulous about academic research. For me, a single scientific paper should be the start of an inquiry rather than a basis for immediate action. When we see an interesting claim such as Cuddy���s we must ask (at least) two questions: what other evidence do we have for it? And: what mechanisms might produce such an effect?

Power poses fail these tests. Possessing power is not merely a matter of what happens in your own head. It���s about how others see you. When we see someone adopting an expansive posture (such as manspreading) do we really think: this is an admirable person worthy of our deference?

No. This alone should have alerted Tories to a lack of external validity in that paper.

Then we have the second question: what���s the mechanism? Maybe it���s possible that spreading one���s legs like that releases testosterone. To most observers, however, it merely reminds them of Prince Regent in Blackadder. That is no way to win respect. And in fact in England at least we have a long tradition of laughing at people who think they can aspire to power by striking unconventional poses. As Bertie Wooster says in The Code of the Woosters:

The trouble with you, Spode, is that just because you have succeeded in inducing a handful of half-wits to disfigure the London scene by going about in black shorts, you think you���re someone. You hear them shouting ���Heil, Spode!��� and you imagine it is the Voice of the People. That is where you make your bloomer. What the Voice of the People is saying is: ���Look at that frightful ass Spode swanking about in footer bags! Did you ever in your puff see such a perfect perisher?���

In not being aware of any of this, Tories such as Javid have demonstrated a tin ear for our cultural referents. They���ve done so, I fear, in part because of wishful thinking. The prospect of becoming ���instantly more powerful��� merely by standing in a particular way is a tempting one. And politicians ��� like other people ��� have always been quick to believe what they want to believe.

In truth, though, in acting on a belief for which there is no evidence, Tories have merely made themselves look stupid. This, of course, is not just true of power posing.

On forecasting failures

Economists take a lot of stick for their inability to foresee crises and recessions. But I wonder: wouldn���t it be fairer to chastise politicians for their lack of foresight?

Two current events make me ask.

One is the scandal about Windrushers being deported.  This injustice was not just foreseeable but foreseen. Ministers were warned of it two years ago. It should be no surprise that a ���hostile environment��� and crude targets would hit law-abiding British citizens. As I said in 2016:

Just as ���anti-terror��� laws have been used to harass journalists and peaceful protestors, so immigration controls will hurt decent people. And for the same reason - because they are the softest targets.

The second is that confusion about the fate of the Irish border is holding up Brexit negotiations. Again, this should be no surprise: we were warned of the problem at the time of the referendum.

And yet in both cases, some ministers and commentators seem surprised. They remind me of the hotel guest who complained of the poor view to whom Basil Fawlty replied:

May I ask what you expected to see out of a Torquay hotel bedroom? Sydney Opera House perhaps, or the Hanging Gardens of Babylon, herds of wildebeest sweeping majestically?

 

In this context we should ask: what can people reasonably be expected to foresee and what not?

It might be that recessions are inherently unforecastable because they are emergent phenomena which arise from micro-level shocks which are sometimes amplified by network effects. Similarly crises result from falls in asset values. But the same ���often negligible��� (Keynes��� words) knowledge of the future that causes asset values to be precarious also stops us from predicting such falls.

Maybe, therefore, crises and recessions are not reliably forecastable.

But the political events I���m considering are not like these. Everybody should know that targets can be misused. And anybody who had thought about knew that a hard Brexit meant a physical border between Northern Ireland and the Republic.

This is not of course to say that all political problems are foreseeable and all economic ones not. All I���m asking is for us to consider in which contexts it is possible to have foresight and in which it isn���t. Only by answering this can people be properly held to account for not foreseeing events. Only if you have a theory of what is knowable and what isn���t can you fairly blame people for not knowing something.

Commitment & analysis

Is political campaigning compatible with the detached analysis required of journalism? I ask because of something David Aaronovitch tweeted about Owen Jones:

He is a tireless political activist in a partisan cause seeking very specific outcomes. Nothing wrong with that, but it doesn't sit at all with analysis. There's no distancing possible. Or contrary information.

This might be true. The danger in Owen���s campaigning is that he meets too many people who agree with him which reduces his self-doubt: they say you should never meet your heroes but you should never meet your admirers either.

On the other hand, though, doing so means he meets people outside the Westminster Bubble, and folk on the doorstep and on the streets who tell him he���s wrong.

I can���t say which mechanism dominates.

What���s more, we���ve no reason to suppose that centrists are any more detached and self-critical than active partisans. As my blog���s tagline says, there���s a difference between extremists and fanatics: it���s possible to be a fanatical centrist and a non-fanatical extremist.

The newspaper columnist who associates with like minds at work and at home is perhaps as prone to groupthink as Owen is. Associating with liberal centre-leftists and liberal centre-rightists does not expose you to a good range of opinion: ���we are all different, they are all the same��� is one of the more egregious cognitive biases. This might be why many centrists were shocked by Brexit and the rise of Corbynism.

What���s more, we all tend to cleave to our opinions once we have expressed them: the danger of doing this was one cease why I ceased to be a sell-side economist. Ego-involvement afflicts us all, left, right and centre.

It takes discipline and mental strength to question one���s own opinions and seek discomfirming evidence. I don���t see a good reason why these abilities are more likely to be found in the centre of the political spectrum than on the left.

In fact, perhaps the opposite.

We must always ask: if my ideas are so good, why are they unpopular?

We leftists have two replies to this.

One lies in economic conditions. Capitalist stagnation has made people more illiberal and intolerant. I fear that centrist commentators aren���t sufficiently awake to this. They don���t sufficiently appreciate that economic realities have changed since the 1990s, and this justifies policies which are very different from Blairism. One virtue of Marxism is that it forces us to look at the economic base. You change people���s minds by changing their living conditions. Centrists don���t seem to me to get this.

Secondly, we have a theory of ideology. Many leftists tend to blame the media. I think they exaggerate: the fact that people supported injustice before the emergence of the mass media suggests another mechanism is at work. That mechanism is ideology: capitalism emergently produces beliefs which sustain the system. Whilst many centrists rightly applaud and use the work of Daniel Kahneman, they fail to appreciate sufficiently that it can be seen in part as supportive of a Marxian theory of ideology.

One of the big challenges we face is how to combat this. I fear that wagging the finger and telling folk they���re wrong isn���t sufficient.

There���s something else. We leftists no longer see the transition to socialism as being achieved by protest or storming the Winter Palace. Instead, we regard it as a matter of interstitial transformation (pdf), or accelerationism ��� of helping to encourage and expand non-capitalistic forms of organization. For me, socialism is about empowering people in real senses. This is why many of us see Brexit as a genuine dilemma: the voice of the people, even if mistaken, counts for something. This is miles away from the technocratic top-down policies which centrists have often favoured.

I hope that this suffices as a sketch to suggest that political commitment and analysis are compatible. Of course, this isn���t to say that they always are in practice. But the notion of dispassionate centrists facing unreflective leftists is surely simplistic.

I know you���ll reply that my notions of leftism are idiosyncratic. But are they? Or is it just that they seem so because these ideas aren���t often heard in the mainstream media?

* I know. Centrists such as Larry Summers (who re-coined the phrase secular stagnation) and technocrats at the IMF, among other places, have written tons about stagnation and inequality. But this hasn���t percolated through to newspaper columnists.

The media closed shop

I suspect that Owen Jones gets even more abuse when he���s right than when he���s wrong. So it has been with his claim that national newspapers and broadcasters are ���full of people who made it because of connections and/or personal background rather than merit.���

This is true. As he points out, there���s lots (pdf) of evidence (pdf) that columnists and top journalists are disproportionately from posh backgrounds. Of course, some of these have merit. But the fact is that background does matter.

Owen gives some reasons for this: the decline of local newspapers as a stepping stone for talented journalists from poor backgrounds; the reliance on internships which are (mostly) only accessible to those from rich families; and the sheer expense of living in London.

I want to add something, though. It���s that there are strong economic mechanisms whereby even well-meaning senior journalists might prefer to hire people from posh backgrounds.

They need people they can trust ��� to file reports on time, spell names right and avoid libel actions; they do not want to have to rewrite copy moments before deadline. And who are they most likely to trust? It���s people they know ��� not necessarily family and friends (though as Owen says that happens), but those who have been working as interns. That���s one bias to posh applicants. Failing that, they���ll hire those like themselves: we���re more inclined to trust people who look and sound like us (affinity fraudsters trade on this). Again, this creates a bias to the posh.

Now, there���s nothing unique to the media here. Like hires like in any occupation, simply because it���s a way of mitigating the principal-agent problem.

It���s for this reason that the fact that MI5 used to vet BBC employees matters even today. The men who were selected as ���sound��� in the 70s and 80s hired the senior people who work there today. And they are likely to have had a bias towards people like themselves - ���sound��� people. Path dependence thus generates a bias against subversives even if overt vetting has ended.

There���s something else ��� overconfidence. People from posh backgrounds are more likely to be confident and overconfident than those from poorer ones (the correlation isn���t one, but it���s greater than zero). We all know that overconfident people are more likely to be hired because hirers mistake overconfidence for actual ability.

And this might be perfectly sensible, as Jung Hoon Lee and Shyam Venkatesan point out in a new paper. Overconfident people, they say, are more likely to work hard because they believe doing so will pay off. And these are the sort of people you want. The posh boy who thinks he can become editor (not least because posh boys do) might well work hard in junior jobs in order to get there. As Arsene Wenger said, ���if you do not believe you can do it then you have no chance at all.���

On the other hand, whereas some poor kids do have a hunger for success, others lose motivation when they realize they can pay the bills (I know: I���m one). This creates a double selection against such people: they might not get hired in the first place, and even if they do they might stop climbing the greasy pole. Posh people will then be disproportionately in top jobs because those from poorer backgrounds have dropped out: this is perhaps even more true in finance and law than in the media. And because like hires like, so this pattern perpetuates itself.

My point here is that journalism looks like a closed shop not just because bad people hire their mates, but because rational people make rational decisions. This is consistent with the fact that even ���liberal��� employers such as the Guardian and the art world are biased towards posh white people.

All this is to mostly agree with Owen. Journalism (of the sort he���s discussing) is disproportionately populated by posh people, and this massively distorts political debate. I fear, however, that it is very difficult to change this. Perhaps our best hope is simply that the mainstream media continues to decline.

Good bad theories

In 1945 George Orwell wrote an essay on good bad books ��� ���the kind of book that has no literary pretensions but which remains readable when more serious productions have perished.��� He gave as examples the Sherlock Holmes stories. Uncle Tom���s Cabin and Dracula. These are in contrast to bad good books, works of alleged literary merit which aren���t much cop: Orwell cited George Meredith but you can add other examples. We might add to this that there are good good books (Dostoyevsky) and bad bad ones (Dan Brown?)

I suspect that the same distinctions apply to economic theories.

A good bad theory is one that lacks solid microfoundations but which works (roughly) in an ad hoc way. This might be true of the better type of structural economic model and of those lead indicators which predict but don���t explain, such as the tendency for inverted yield curves to predict recessions.

A bad good theory is one that doesn���t necessarily have predictive power but whose failure actually helps to illuminate the real world, often by alerting us to the fact that particular assumptions behind the theory do not in fact hold. In this category I���d put the Miller-Modigliani theorem, the Coase theorem (hat tip Derida derider), the Mehra and Prescott equity premium puzzle (pdf) and the CAPM (pdf).  

Then we have good good theories ��� ones that work in practice as well as theory. The bog-standard supply and demand framework, transactions cost economics and theories of irreversible investment are all in this set, among others.

Bringing up the rear we have bad bad theories ��� ones that are wrong in practice but which, unlike bad good theories don���t much help us understand why. Marginal productivity theory (at least for higher-paid workers) belongs in this category. So too does the money multiplier, the LM (pdf) curve, and at least the simpler DSGE models (pdf).

Of course, you might disagree with my examples. And I���ve certainly left a lot out here. Where does Hecksher-Ohlin-Samuelson international trade theory fit? Or representative agent models (bad bad or bad good, I suspect) Or Marx���s tendency for the rate of profit to fall? Or emergence? Etc, etc, etc.

Even so, I suspect this schema might be more illuminating than the standard mainstream vs heterodox one. Debates about this too often consist of: ���the mainstream���s rubbish���: ���you���re attacking a straw man���: ���no he isn���t.��� Can we move on?

Facts vs hand-waving in economics

On Twitter this morning Jason Smith asked a good question. Is this, he asked, an ���anonymous blog comment from a simpleton? ... Or analysis from a prominent financial economics professor?���:

A company has $100 in cash, and $100 profitable factory. It has two shares outstanding, each worth $100. The company uses the cash to buy back one share. Now it has one share outstanding, worth $100, and assets of one factory. The shareholders are no wealthier. They used to have $200 in stock. Now they have $100 in stock and $100 in cash. It���s a wash.

It could be from the professor, because this is a clear statement of the famous Miller-Modigliani theorem, that a firm���s value is independent of its capital structure.

Equally, though, it could be from a simpleton because we have abundant evidence from around the world that share buy-backs do in fact raise share prices (pdf). Cliff Asness has explained why:

First, repurchases might signal that management believes that shares are undervalued���Second, because interest payments are tax deductible, debt financed repurchases can be viewed as good news due to the resulting lower tax burden. Third, investors may feel as though it is better for management to return excess cash to shareholders, rather than chasing less economic ���pet��� projects. This kind of agency cost is often characterized as ���empire building,��� and avoiding it has long been viewed as one of the benefits of returning cash to shareholders.

In other words, the assumptions behind the Miller-Modigliani theorem do not hold: these include no taxes, no agency problem and full information.  

This is not to criticize them. I���ve always read their   not as saying ���capital structure doesn���t matter���, but rather: ���when you see a share price change in response to a change in capital structure, it���s because (at least one) explicitly-stated assumptions do not hold.���

There���s one of these assumptions I want to focus on. It���s that shareholders know as much about the firm as management. If this were the case, buy-backs or dividend cuts would not have any signalling merit. But of course they do: we were reminded of this this morning, when Debenhams share price fell after its dividend cut (though it has since recovered*).

Now, the assumption of full information ��� not just in this instance but in others ��� is sometimes justified as a necessary simplification. For me, this won���t do. Bounded knowledge is not some contingent accident we can assume away. It is the human condition**. Assuming that men are gods is no basis for analysing real human behaviour, which is what economics should be.

And this brings me to my beef with comment that Jason cites (and the many more in that vein). Economics, for me, is not about armchair theorizing. It should begin with the facts, and especially the big ones. The facts are that share buy-backs do usually matter, so thought experiments that say otherwise are wrong from the off. Similarly, the fact that wage inflation has been low for years (pdf) is much more significant than any theorizing about Phillips curves. And to take another example, the fact that most fund managers don't beat the market (pdf) in the long-run counts for vastly more than theorizing about the pros and cons of the efficient markets hypothesis. (Feel free to add other examples.)

For me, economics should above all be an empirical discipline. The extent to which it is ��� especially in the way undergraduates are taught ��� is a debate I���ll leave to others.

* As of this writing.

** Hayek was explicit about this, which is a big reason why he was not a mainstream neoclassical economist.