Chris Dillow's Blog, page 88

Old blaggers & secular stagnation

There���s a link between the Hatton Garden blag and one of the big issues of our time ��� secular stagnation.

The blaggers were all old men. Having learned the trade of robbing in the 70s, they stuck with it even though technical change has made their trade more difficult:

a decade or two ago, there was not the ANPR [automatic number plate recognition] or CCTV coverage there is now, and they would have had a better chance of getting away with it.

Most of us, though, are like the Hatton Garden gang. We���re one-trick ponies. Footballers and soldiers struggle to adapt when their careers are over just as cons find it difficult to go straight. Even those of us who do change careers ��� such as me when I moved from banking to journalism - do usually do so by redirecting our skills rather than learning new ones from scratch. You can���t teach an old dog new tricks.  

Human capital is a putty-clay technology: it might be malleable in our youth, but it���s more fixed when we���re older. Our skills, like many things, are path-dependent.

It���s not just people of whom this is true. It���s also true for companies. They too are stuck with the ���core competences��� they inherited from the past. As Jovanovic and Rousseau say, they have specific vintages of organizational capital. In fact, this might be even more true of firms than individuals: some key workers or managers have vested interests in doing things the old familiar and easy ways, and corporate groupthink breeds the ���not invented here��� syndrome.  

This traps them into particular technologies, which means that they find it hard to adopt new ones.  IBM, for example, was the dominant computer company in the 1970s, but it didn���t succeed in developing successful operating systems: that took a new company ��� Microsoft. Microsoft then didn���t develop a great search engine ��� but a new company, Google, did. And Google didn���t develop social media, but new companies Twitter and Facebook did.

The more ���disruptive��� new technologies are, the more likely it is to be that they���ll be implemented by new companies rather than incumbents: as David Audretsch has shown, this has been the case in recent years.  

It���s this that gives us creative destruction: if incumbents could easily adopt new technologies they���d survive and thrive during technical change. Sometimes, though, they don���t ��� and in fact, as Ormerod and Rosewell have shown, firms are often unable to foresee their demise.

All this helps explain three of the big questions of our time, which are tied up with secular stagnation:

 - Why are firms not investing much despite talk about the potential of robots and AI? One reason could be that they lack core competences in the new technologies. Worse still, they fear that future new firms, using even cheaper technology and greater skill, will undercut them.

 - Why are firms holding so much cash? One reason (of many) is that they know that they don���t know much about future technologies, but hope to acquire new small firms that do.

 - Why are share prices so low despite techno-optimism? One reason is that future technologies will be embodied by firms that don���t yet exist, whilst today���s incumbents might be the victims of disruptive change. Jovanovic and Greenwood have argued that one reason for low share prices in the 70s was that investors anticipated the stock market revolution. Even if you���d had perfect foresight of technical change in the 70s, you couldn���t have bought shares in Microsoft, Google, Apple or Amazon but you would have shied away from existing firms then for fear that they'd give way.  

Perhaps, therefore, today���s big firms have much in common with the Hatton Garden blaggers. They are sad old men used to ripping people off who find themselves trapped on the wrong side of technical change.

Capitalism vs markets

One thing that irritates me is the tendency of many on the right to conflate capitalism and markets.

They are, in fact, two different things: capitalism is a system of ownership; markets a method of exchange. Although the two have sometimes gone together, this need not be so. Crony capitalism in which a few monopolies or cartels run much of the economy gives us capitalism without markets. And market socialism would give us markets without capitalism*.

I say this because Danny Finkelstein in the Times today makes exactly this error. He writes:

David Bowie ��� undoubtedly one of the artistic geniuses of the past 50 years ��� was the great product and great producer of consumer capitalism���He was subversive because capitalism is subversive, overturning the status quo, restless, and profoundly democratic.

I disagree.  It is markets that are subversive; capitalists would much rather keep the status quo and the profits rolling in.

Danny says that Bowie ���was possible because in a consumer capitalist society nobody can ultimately stop anybody doing anything.��� But surely the word ���capitalist��� is superfluous in that sentence?

Put it this way. A market socialist society might, I suspect, have given us Bowie: it certainly would have if it were well-functioning. But a non-market capitalist society might not, precisely because he was so damned strange and unpredictable. Would the early Bowie have succeeded on the X Factor? Would a tightly managerialist-hierarchical capitalist record company tolerate an artist moving from folk to prog rock to glam rock to soul and to electronica within a few years? Or would it have insisted that he be more like David Cassidy? Would it have retained an artist who went 11 years without delivering a number one single?

It���s possible that Bowie thrived because record companies in the 70s weren���t rigidly capitalistic but instead tolerated diversity and disruption.

But did he thrive? In the mid-70s, he was close to bankruptcy. He only became wealthy after setting up his own management company. This tells us a lot. People don���t become rich by merely by being creative. They get rich from ownership rights: in was only when Bowie claimed these that he prospered. In this sense, capitalism is a means of exploitation.

The conflation of capitalism with markets irritates me because I suspect it is a means whereby the right smuggles in support for inequality. Many of the virtues it claims for capitalism are in fact the virtues of markets, and in conflating the two the right thus gives the impression that the case for capitalism is stronger than it in fact is.

I don���t say all this to attack Danny: he���s one of my favourite columnists. I object to his mistake because it is a common one (though not ubiquitous: Tim Worstall has avoided it).

However, what I object to just as much is that a lot of the left have allowed the right to get away with this. It too has failed to distinguish sufficiently between capitalism and markets, and has spent too much time attacking markets** when in fact it is capitalism they should have been attacking.

 * I wholly recommend Chartier and Johnson���s Markets Not Capitalism (pdf) in this context.

** In saying this I don't of course mean to suggest that actually-existing markets are anywhere near perfect. 

Innovation & well-being

Diane Coyle and Emily Skarbeck point out that innovation doesn���t seem to show up in GDP or productivity data. As Diane has written, ���the way GDP is measured makes it impossible to capture fully the effect of innovation.���

One reason for this, says Diane, is that GDP data don���t capture ���the explosion in variety��� of goods and services available to us. Eric Beinhocker has given a nice long-run image of this. The biggest difference between New Yorkers and primitive tribes, he says, isn���t the ���mere 400-fold difference��� in their incomes, but rather the 100 million-fold difference in the number of products available to them.

This, though, deepens the puzzle. Not only does innovation not appear in the GDP statistics, it doesn���t appear in subjective well-being statistics either. The OECD has reported (pdf) that the UK ���experienced no consistent change��� in life satisfaction between the mid-70s and late 00s, and the ONS estimates (pdf) no change since then either.

This is weird. For one thing, in The People, Selina Todd points out that there was a time when rising real wages did increase happiness:

In 1949 Mass Observation interviewed 2040 people across England about their income and spending patterns. The investigators discovered widespread satisfaction, especially among manual workers and their families: " a third say that they have no particular wants beyond those that they can afford."

And for another thing, common sense tells us that if our real incomes are flat, the explosion in variety which innovation provides should increase our well-being simply by allowing us to improve the match between our tastes and what we can buy.

So why doesn���t it? Here are two theories.

First, there���s a big difference between piecemeal innovation which produces more of the same, and innovation which increases variety.  ���More of the same��� gives us increases in real incomes in a steady environment: think of the stereotypical mid-20th century worker who enjoyed rising real wages whilst working for the same firm his whole life. Increases in variety, however, entail creative destruction: think of smartphones destroying Nokia, Spotify the music business, Uber taxis and so on. Whilst providing benefits for consumers, this generates uncertainty for workers. And many (pdf) people hate uncertainty.

A second reason has been pointed out by Katherine Guthrie and Jan Sokolowsky. Quite simply, as variety increases, so too does opportunity cost: we can���t afford both the new phone and the PS4, or if we���re holidaying in the Maldives, we can���t be in Dubai. Variety brings with it regret. This is consistent with something found by Sheila Iyengar, that increases in choice can be demotivating (pdf).

I don���t say this to deprecate increased variety. Quite the opposite. Intuitively, it seems to me that variety must be a great good. What made the Soviet Union so drab and joyless was not so much the material poverty of the people as the lack of variety of goods. And one reason we are mourning* the death of David Bowie is that he, more perhaps than any other pop musician, gave us innovation and variety.

Perhaps instead there���s another inference here ��� that not only is GDP an inadequate measure of a healthy economy, but so too in some respects are measures of subjective well-being.

 * Mourning is the right word, arseholes.

Not connecting

The BBC reports that interest rates on savings have fallen to a record low. It omits to say that this is to a large extent the direct result of Tory policy. This is simply because, for a given inflation target, more fiscal austerity means lower interest rates. What we���re seeing is just George Osborne delivering his promise to be a fiscal conservative and monetary activist.

However, nobody seems to be making this connection. Quite the opposite: the biggest losers from low interest rates ��� older richer people ��� are those most likely to support the Tories.

This is not the only way in which voters aren���t drawing the dots, however. Most people agree with Osborne that we face a high risk of a financial crisis this year. However, this is precisely the environment in which fiscal policy should be loose ��� to cushion us from the fall-out from such a crisis. And yet Tory austerity is more popular than Labour���s more sensible approach: in one poll, 41% of voters say the Tories are the best party to handle economy compared to only 18% of them saying Labour is.

What we have in these two cases is a failure to make connections. This is not an isolated problem. As David Leiser and Zeev Kril show, it���s a key feature of how laypeople misunderstand economics.  ���People are remarkably poor at combining causal links into a system��� they say. 

This inability to make connections is by no means confined to fiscal policy. We see it in other contexts too, for example:

 - People support nationalization and price and immigration controls in part because they fail to see that these can have unintended consequences and that free markets can sometimes produce benign outcomes without state direction. The invisible hand is well-named: people can't see it.

 - Employers favour overconfident but incompetent candidates ��� and investors fall for charlatanic fund managers - because they fail to ask: what���s the connection between competence cues and actual performance?

 - All the reporting about last week���s fall in stock markets paid very little attention to the question that really matters: is there any connection between this and future market returns?

Rather than think through causal chains, says Mr Leiser, people use what he calls the ���good begets good heuristic (pdf)���. They believe that good things lead to good things and bad to bad.  This helps account for the popularity of minimum wage laws: higher wages are a good thing, so folk under-rate their adverse (pdf) effects. It also helps explain Osborne���s popularity: people think that a good thing (promising to reduce government debt) has good effects (reducing economic risk) and so underweight the importance of the paradox of thrift.

All this bears upon one of the week���s big issues: is the BBC biased? In part, it corroborates Owen Jones��� claim that the left over-rates the importance of the media: people form mistaken ideas because of cognitive biases unrelated to media propaganda.

Nevertheless, it might also suggest that political reporting is ��� at the moment ��� inherently biased. If you report only politicians��� words and actions and neglect connections between these and the real world, you will create a good impression of those who send out competence cues and who exploit the good begets good heuristic and a bad one of those who are poor at the presentation game but who understand better the connections between policy and the real world. Perhaps, therefore, the  BBC is biased even if it doesn���t intend to be.

The paradox of plenty

Tyler Cowen is asked a good question: are there any goods someone on a median income can afford which are the very best of their kind? The answer, as Tyler shows, is plenty ��� including some important ones such as books and recorded music. To this we might add that even where the very best goods are unaffordable, the median income earner can afford pretty decent ones, such as cars, TVs and sound systems.

Which poses the question: if someone on a median income can afford such a luxurious cornucopia, what can���t he buy?

The obvious answer, in the UK, is a decent house. The average house costs over ��208,000, equivalent to 7.5 times median annual earnings. Given that the best schools tend to be in the most expensive areas, this means that our median earner can���t afford the best education for his kids either.

However, I suspect that most of the best things that the median income-earner can���t buy are non-material goods.

One is financial security. 49% of people, and most 35-44 year-olds live in households with less than ��5000 of net financial wealth (pdf). They are only a pay cheque or two away from trouble.

Another is status. Our wages are related to our sense of worth ��� which is one reason why most people would prefer (pdf) a lower but above-average income to a higher but below-average one. A median income, by definition doesn���t provide much status.

You might reply that this problem would be solved if we could shake off envy. Not entirely. Status is one mechanism whereby income leads to political power:  as Adam Smith said, ���we frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous*.��� Partly for this reason, therefore, a median income doesn���t buy a proportionate share of political power. As Martin Gilens and Benjamin Page say (pdf):

economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence.

Pablo Jimenez shows that a similar thing is true in other countries.

Another thing our median earner can���t buy is workplace autonomy: she is more likely to be the victim of workplace coercion than the beneficiary of it. And even if she isn���t, she probably lacks the satisfying work which the better-paid sometimes enjoy.  And she is tied to work for years, because she lacks the savings to retire early. Warren Buffett might dance to work every day, but most people on ��25,000 a year do not.

Now, none of this is to deny that things have improved; workers today enjoy better conditions and shorter hours than their 19th century ancestors. But it seems to me that what median earners lack are the goods which are higher up the hierarchy of needs.

Which brings me to a paradox. The people who should be most concerned by this should be those who most value real freedom and self-actualization ��� that is, those who claim to be libertarians. And yet it is these who seem keen to celebrate capitalism���s material success whilst overlooking its inabilities (so far?) to provide higher, non-material goods for all. As I���ve said, most ���libertarians��� are hypocrites and it is we Marxists who are the true lovers of freedom.

 * Theory of Moral Sentiments, I.III.29

On counter-advocacy

A few years ago, I served on a jury. When the prosecution finished its case, I thought, ���this evidence is pathetically weak: I must acquit the guy.��� Then the accused took the stand.  His testimony was so wildly implausible that I inferred that he was guilty. This taught me a lesson ��� that people can be not just lousy advocates for their own positions, but actually counter-productive ones.

This has always partly the case. ���Never believe anything until it has been officially denied��� is a quote attributed variously to Otto von Bismarck, Claud Cockburn and Yes, Minister. But it seems to me to be more true now than ever before.

I said yesterday that Blairites undermined their own case by wibbling about ���electability���. But it���s not just they who are counter-advocates. So are right-libertarians: you���d never guess from their hypocritical shilling for the rich that there is in fact a good argument for free markets. Feminists��� narcissistic obsession with trivia seems to me to subtract from the case for gender equality. Drivel about the ���nation���s credit card��� makes me marvel that any sentient being can be a Conservative. And the aggressive sexism and terrorist apologists on the far left remind me of Marx���s saying: ���All I know is that I am not a Marxist.���

One reason why things have come to this sad pass is that a lot of writing is not even trying to be an exercise in persuasion. Sometimes instead it is the revelation of character ��� the character often being that of a thundering twat. At other times it is mere preaching to the choir, which, as Cass Sunstein has pointed out, leads to group polarization in which each sect becomes even more convinced of its own self-righteousness.

All of this is to endorse Robin Hanson:

There just is no ���debate���; there are just different sides who separately market their points of view. Just as in ordinary marketing, where firms usually pitch their products without mentioning competing products, intellectuals marketing of points of view also usually ignore competing points of view.

To which I can only add: not just "intellectuals".

We can, however, lean against this tendency by a process of imaginative reconstruction. If I want to know the case for Blairism or Conservatism or free markets, I don���t merely read Blairites, Conservatives or free marketeers. Instead, I ask: if I were they, what sort of arguments would I use? I tried to do this yesterday, and here and here too.

 Proper political debate has, to a large extent, vanished. But perhaps we can reconstruct it.

What's the point of Labour's right?

Richard Murphy asks a good question: what���s the point of Labour���s right-wing?

Let���s face it: Corbyn did not become Labour leader because he���s a political genius ��� he���s not ��� but because his rivals were offering so pitifully little; apart from Liz Kendall���s talk of empowerment, they were bereft of ideas. Jolyon has a point when he says that candidates shouldn���t have fully-formed ideas and that leaders should develop policy later. But Burnham and Cooper didn���t seem even to be asking good questions ��� of the sort which Jolyon himself poses.  Jonathan Todd is right: ���something must have gone awry with centrist thinking for Corbynism to be ascendant.���

As Brendan O���Neill has said, Corbyn���s opponents have been offering only ���technocratic, principle-free blather about electability.��� This wouldn���t be so bad if they actually knew how to get elected, but the loss of two general elections and their abject showing in the Labour leadership contest suggests that the anti-Corbynites don���t even know this. The problem isn���t that they are technocrats: it���s that they are bad technocrats.  They use the word ���electable��� not as a way of describing how to be actually elected, but as the whine of over-entitled narcissists upset that Corbyintes have taken away their toys.

The problem, here, however, is an old one: Gordon Brown spent years plotting to be prime minister, only for us to discover that he didn���t know what to do when he got there. And given that so many Labour MPs��� path to the Cabinet consisted in impressing a mentor rather than in developing outside support or independent thought, it���s small wonder that they should have lost contact with those outside the Westminster Bubble, or even with the ability to think for themselves.  

Herein, though, lies something I find regrettable. There are many ideas in politics which aren���t heard as much as I���d like,such as free market pessimism. Left Hayekianism or small-state Keynesianism.  Centre-leftism is one such. If I were them, I���d be arguing for some of the following:

 - ���Make work pay���. Shift taxes from labour to land and inheritances, and defend tax credits as a better way of topping up low pay than minimum wages.

 - Openness. Leaving the EU, or controlling immigration, are no solutions at all, but simply mean-spirited little Englanderism.

 - Empowerment. It���s possible��� with careful institutional design - that giving people more choice (pdf) in public services will improve outcomes.

 - Public sector investment. As Simon says, you can combine this with ���fiscal responsibility��� in the sense of wanting governments to run a balance on the current budget.

 - Improve productivity. UK productivity lags well behind that of other countries. Policies to tackle this might include investment in early years education and freer migration (pdf).

Personally, I don���t think these policies are sufficient. But they are coherent, useful and substantive. There could, and should, be more to anti-Corbynism than mere whining about "electability".

Irving Berlin on taxes

The New York Times reports on how some of the US's richest men are dodging taxes. Compare this to the response of Irving Berlin when his lawyer offered him a tax shelter:

I want to pay taxes. I love this country.

He even wrote a song expressing this sentiment.

He said: ���I owe all my success to my adopted country.��� Had he stayed in Russia, he might well have died in a pogrom or the civil war. And even if he had lived, he certainly wouldn't have heard the jazz and ragtime music in his youth that inspired him to become a songwriter.

He embodied - knowingly so - a point made by Herbert Simon, that we westerners owe our fortunes not so much to our own efforts but to the good luck of living in societies which enable us to prosper - which have peace, the rule of law and material and intellectual resources:

When we compare average incomes in rich nations with those in Third World countries, we find enormous differences that are surely not due simply to differences in motivations to earn. Laziness is not a principal cause of poverty. A more plausible explanation for the differences, in fact the explanation that is universally put forward, is that much greater resources per capita are available to some countries than to others. These differences are not simply a matter of acres of land or tons of coal or iron ore, but, more important, differences in social capital that takes primarily the form of stored knowledge...
When we compare the poorest with the richest nations, it is hard to conclude that social capital can produce less than about 90 percent of income in wealthy societies...On moral grounds, then, we could argue for a flat income tax of 90 percent to return that wealth to its real owners.

Now, songwriting is pretty much as individualistic an activity as one can find; But even songwriters require a conducive environment such as musical traditions on which to draw and a marketplace for their work. Berlin knew this: 1930s Siberia had no equivalent of Tin Pan Alley or Hollywood.

If even songwriters owe their wealth to social capital, how much more true is this of hedge fund managers.They would be nothing without wealthy investors or large liquid financial markets: how many billionaire fund managers are there in Burkina Faso?

Which poses the question: why, then, don't hedge fund managers have the same attitude to paying tax as Irving Berlin? It could be that they are more motivated than he was by personal greed. But there might be another reason - unlike him, they believe their wealth is the product of their own "talent" and so they are entitled to it. Some might call this neoliberal ideology - the idea that we are the architects of our own fate. Others of us prefer to call it an example of one of the disfiguring diseases of our time - narcissism.

Perhaps there's another explanation, though. Maybe hedge fund billionaires are greater geniuses than Irving Berlin who have contributed more to human happiness. But how likely is this?

 

 

Stalin's trick

"If only one man dies of hunger, that is a tragedy. If millions die, that���s only statistics." With these words, Joe Stalin showed an understanding of one of the tricks of wielding power; you must ensure that the effects of your policies are seen only as abstractions rather than as the suffering of real people. It's a trick our rulers are pulling off now.

I say this because, as Simon points out, the government's cuts to spending on flood defences might well have had a massive human cost insofar as they have exacerbated the floods. And yet Osborne has gotten away with presenting austerity as being prudent and responsible. He's pulled off this trick because cuts are seen as mere statistical abstractions, rather than policies with real effects. As Steve Richards says:

public spending cuts are welcomed in general, but when anyone bothers to pay attention to the specifics, alarm bells ring.

But it's not just in flood defences that the Tories perform this trick. Frances describes how benefit sanctions are causing terrible hardship. But again, the Tories aren't called out sufficiently on this by the MSM, as welfare policy is presented in abstract terms as a clampdown on often-mythical scroungers.

It's not just politicians that use Stalin's trick of replacing human reality with abstract statistics. Bosses do the same thing. In their wonderful Managing Britannia, Robert Protherough and John Pick describe how modern management:

deals largely in symbols and abstractions...[with] little direct contact with the organization's workers, with the production of its goods or services, or with its customers.

This explains why bosses' pay has continued to rise despite a long-term stagnation in both labour productivity and shareholder returns, and why Lin Homer has been given a damehood despite her serial mismanagement: it's because managers are no longer judged by real effects.

So, how can bosses and politicians pull off Stalin's trick?

One way is simply that people don't make connections.As David Leiser and Zeev Kril have written:

People are remarkably poor at combining causal links into a system [and] are ill-equipped to cope with the aggregate effects of the individual decisions of many people...Thinking in terms of how an interlocking system of causal links produces an emergent outcome does not come naturally to laypeople.

Journalists, with their silo mentality, rarely help them. Political reporters rarely stray outside the Westminster Bubble and so the Chancellor's "prudence" can be discussed without reference to its human effects.

A second help comes from the inequality of voice. Victims of benefit sanctions have little chance to speak for themselves, and few speak for them: Kate Belgrave being a great exception. But on the other hand, our celebrity-obsessed, billionaire-owned media act as a megaphone for the wealthy, with the result that even the mildest proposed tax rises provoke a frenzy of narcissistic whingeing whilst any challenges to the country's greatest criminal conspiracy are met with whines about "banker-bashing".

I've said it before, and I'll repeat it. The Cold War did not defeat Stalinism. Quite the opposite. The Stalinists won, and are ruling us.

Beyond social mobility

Philip Collins in the Times today gives us, albeit inadvertently, a nice insight into why Blairites have become irrelevant.

He calls for increased social mobility whilst also saying:

These days when the economy is hollowing out with posh jobs at the top and grim jobs at the bottom, the prospect of social mobility recalls Gore Vidal's aphorism: "It is not enough to succeed. Others must fail."

There's terrible cognitive dissonance here. This passage draws our attention to why increased social mobility is nothing like enough.

First, Philip fails to note that you have to go a long way to the top to find "posh jobs." As Rick has said, being posh ain't what it used to be. The fact that doctors have been so pissed off as to threaten to strike, and teachers and academics are stressed and depressed, tells us that even good jobs aren't so rewarding these days. The youngster from a poor home who "succeeds" against huge odds will face high debt, unaffordable housing and stressful and unrewarding work. If "dulce et decorum est pro patria mori" was the Old Lie; social mobility is the new one.

Secondly, the fact that the economy is hollowing out makes social mobility even more difficult: it's hard to climb a ladder if some rungs are missing.

Thirdly, even if the race for the handful of decent jobs were a fair one millions would fail, often through no fault of their own - perhaps because they inherited low ability. Why should they be condemned to grim jobs or worse?

A simple thought experiment will tell us that social mobility is nothing like sufficient. Imagine a dictator were to imprison his people, but offer guard jobs to those who passed exams, and well-paid sinecures to those who did especially well. We'd have social mobility - even meritocracy and equality of opportunity. But we wouldn't have justice, freedom or a good society. They all require that the prisons be torn down.

So it is with the labour market. What we need are better jobs and incomes throughout the economy. This requires an attack upon managerialism and more worker control; expansionary macro policy to increase demand for labour; the encouragement of new technologies and investment; and a job guarantee and basic income to increase workers' bargaining power and real freedoms. Blairites offer none of these. They fail to make the connection between the new, grimmer labour market outlook and the need for new policies. Yes, they were once the modernizers - and in some respects rightly so. Sadly, though, nothing dates worse than modernity.