Chris Dillow's Blog, page 89

Marx's theory of the state: a test

A few days ago, I endorsed Marx's claim that the state is "a committee for managing the common affairs of the whole bourgeoisie." There is, however, evidence against this. The government's promise to hold a referendum on EU membership and its postponement of a decision on Heathrow's expansion both add unnecessary uncertainty to business decisions. Immigration controls are hurting firms. And one could easily argue that, in depressing demand, fiscal austerity has depressed profits.

How, then, can one maintain that the state manages the affairs of the whole bourgeoisie?

One answer is whilst some individual policies might not serve the bourgeoisie, the basic structure of the state does, as, for example, Gary Chartier has argued (ch 3 of this pdf). For example, the state protects forms of property rights such as patents and limited liability that serve capitalists well. It implicitly subsidizes banks by promising to bail them out. It sustains demand through the welfare state and procurement policies. And state education socializes people to become "good" workers.

Perhaps, therefore, the relationship between the state and capitalists is like that between brothers. They might bicker and get on each others' nerves. But they are fundamentally on the same side. This is more or less Miliband's theory of the relative autonomy of the state.

This, though, poses the question: what might possibly falsify the Marxian theory of the state?

In The Fiscal Crisis of the State, James O'Connor argued that the capitalist state served two functions: accumulation, or helping capitalists' profits; and legitimation, or policies that buy social harmony and so create the political stability businesses require. However, pretty much any policy can be claimed to fulfill one of these functions. For example, a generous welfare state creates legitimacy whilst a mean one creates sharp work incentives. Or a loose fiscal policy supports profits by generating high demand, whilst a tight one helps capitalists by weakening workers' bargaining power. From this perspective, the Marxist theory of the state becomes non-falsifiable. Fanatics can believe it, whatever the evidence.

But perhaps there is a test. The theory does make a falsifiable prediction - that where there is a choice between promoting human flourishing and the interests of capital, the state will opt for the latter.

And in (at least) two senses, the British state does this. First, it subsidizes financialization rather than good financial innovation. Secondly, its refusal to adopt a high basic income that would allow workers to opt out of degrading work shows that it prefers to ensure that capitalists get a big supply of labour than that people get real freedom.

If we were to see meaningful and sustained change on these two fronts, the Marxist theory of the state would be falsified. As things stand, however, the theory is both falsifiable and largely true.

Intelligence & violence

Two of the stranger trends of recent decades have been the Flynn effect (the tendency for IQ to rise over time) and the decline of violence: yes, including terrorism*. A new paper (pdf) by Eugenio Proto and colleagues suggests that these two trends might be related.

They show that in repeated prisoners' dilemma games, people with higher IQs are more likely to cooperate with each other and less likely to defect, with the result that they end up with higher pay-offs.

This is not because they have an innate tendency to cooperate more: in the early rounds of the games, there was no difference in the strategies chosen by low or high-IQ subjects. Nor was it because IQ is correlated with other personality: conscientiousness, they found, had no effect upon whether subjects cooperated or defected.

Instead, it seems that high-IQ subjects learned quicker that reciprocation and cooperation were the best strategies. They were more likely to play tit-for-tat and less likely to always defect; this might or might not be related to the tendency for high-IQ people to have lower time discount rates.

It's easy to see a possible link here with the decline of violence. Violence is a non-cooperative strategy and so would decline as IQ rises.

This might be reinforced by another mechanism - peer effects. As violence declines, it becomes aberrant rather than normal and so carries a stigma, which disincentivizes violence**.

This might also explain why there tends to be more violence in poor areas. It's not just because the poor have less to lose from criminal acts, but because the poor tend to have lower intelligence; this is not (just?) because low intelligence causes poverty, but because poverty reduces (pdf) intelligence***.

I don't offer this as the only, or even best, reason for the decline of violence; it's probably just one of many. And I certainly don't want to join those rather rum coves who think that IQ is enormously important. Instead, I say it for another reason. Perhaps this reminds us that social change happens unintentionally and even without our knowing it at the time. To paraphrase a noted purveyor of violence, progress is what happens when you are busy making other plans.

* Despite Diego Costa's efforts, scenes like these are rarer today.

** This first struck me at the 1999 Arsenal-Manyoo semi-final. After the match, a few people ran onto the pitch to fight. The response of most other fans was to laugh derisively at them as their bald pates glistened under the floodlights and their haymaker punches missed by miles.

*** I'm thinking here of low-level street scraps; it is not (pdf) the case that poverty causes terrorism.

Costs of under-confidence

In the day job, I partially endorse Daniel Kahneman's claim that overconfidence can be a damaging cognitive bias.

However, as Niels Bohr said, the opposite of a great truth is another great truth. The other night, I was reminded that under-confidence also has costs. In our pub quiz one of my team-mates suggested several answers but with little confidence, causing our captain to choose other answers. However, she was right every time and our captain wrong. The upshot was that we slumped to an abject defeat to the bottom team in the league. Had Linda been more confident, we'd have won.

The point generalizes. The old saying, "faint heart never won fair lady" reminds us of the cost of under-confidence.

In Human Inference, Richard Nisbet and Lee Ross wrote:

We probably would have few novelists, actors or scientists if all potential aspirants to these careers took action based on a normatively justifiable probability of success. We might also have few new products, new medical procedures, new political movements or new scientific theories.

They might have added that we would have even fewer if people had been under-confident. Rick's right that overconfidence can generate too much self-employment. But under-confidence gives us too little*.

This reminds me that one of the under-rated skills in life is the ability to know one's skill. This might well be one of the keys to success of Berkshire Hathaway. Charlie Munger has said of himself and Warren Buffett that: "We know the edge of our competency better than most.��� There are two elements to this. One is knowing what you don't know - not being overconfident. The other is knowing what you do know - in Buffett and Munger's case, that it's a good idea to bet against beta, especially when you have (pdf) a low cost of capital.

This is perhaps especially clear in sport. In most sports, one often has a choice between a risky option and a safe one and the wrong choice has costs. The overconfident batsman tries risky shots too much and loses his wicket; the overconfident footballer tries the risky pass and loses possession. But the under-confident batsman plays too defensively and the under-confident footballer passes sideways too much - as Manyoo fans might have noticed this season.

It's in this context that Mesut Ozil stands out. One of his great abilities is to keep the ball even in attacking areas: he's completed 87.9% of passes in the Premier League this season, a ratio usually associated with defensive players who play safer balls; Wayne Rooney's ratio, for example, is only 81.4%. A big reason for this is that he knows his skill - when to play safe and when to play the attacking ball. As Arsene says, he's "like a musician who always plays the right note, and at the right moment."

What matters is that one's confidence be properly calibrated - neither too high, not too low. Very few of us achieve this.

* I'm not sure the distinction between self-employment, innovation and entrepreneurship is a sharp one. Spotting that a town could use another tea shop is a sort of innovation.

Workplace coercion

The other day, I tweeted that there's an "overlap between right-libertarians and shills for the rich." Bang on cue, Tim objects to the use of the word "Dickensian" to describe working conditions at Sports Direct.

Such pendantry causes Tim to miss the key point - that what's going on at Sports Direct is Dickensian in the sense that workers are suffering at the hands of domineering bosses. For example:

All warehouse workers are kept onsite at the end of each shift in order to undergo a compulsory search by Sports Direct security staff, with the experience of the Guardian reporters suggesting this typically adds another hour and 15 minutes to the working week ��� which is unpaid.

For most workers, I suspect, this sort of thing is far more intrusive and - importantly - demeaning than anything they suffer in their dealings with the state. These are acts of coercion of the sort that should outrage anyone who cares about liberty. Which poses the question: why are people like Tim who profess to be classical liberals apparently so indifferent to such workplace tyranny?

The question deepens because Friedrich Hayek, perhaps the greatest of classical liberals, was aware of the problem:

There are, undeniably, occasions when the condition of employment creates opportunity for true coercion. In periods of acute unemployment the threat of dismissal may be used to enforce actions other than those originally contracted for. And in conditions such as those in a mining town the manager may well exercise an entirely arbitrary and capricious tyranny over a man to whom he has taken a dislike. (The Constitution of Liberty, p136-7).

Hayek went on to claim that these conditions would "be rare exceptions in a prosperous competitive society". That might have been reasonable when he was writing: in 1960 the unemployment rate was only 1.6 per cent. But it is not true in today's slacker labour market where monopsony - Hayek's "mining town" - is less rare. As Chris Bertram has pointed out, workplace tyranny is widespread.

Why, then, do some rightists refuse to see this? One possibility is that they mistake the map for the terrain. They believe the labour market functions as the textbooks claim rather than see it as it is - a place where many people have lousy options and so are at risk of arbitrary and capricious tyranny. Their blindspot here is the same as some economists have when they try to deny the existence of involuntary unemployment.

Another possibility is that they believe that the cure is worse than the disease - that attempts to prevent bad employment practices would tie up even good bosses in red tape and so restrict growth and employment. But it need not be so. A basic income that allowed workers to reject bad jobs and a jobs guarantee that gave them other options would free people from tyrannical bosses without the need for burdensome regulation.

There is,though, a third possibility - that some right-libertarians and classical liberals care only about freedom for bosses, and not freedom for all. As I've said, it is we Marxists who are the true libertarians.

The Utopia paradox

Laurie Penny says we need more utopian thinking. For me, this raises a fascinating paradox.

To see it, put yourself in the shoes of a worker in the 1840s - say a Chartist - who is transported to today. You'll see that workers have most of the political rights you agitated for; that real wages are almost ten times as high as you had; that working hours are shorter and more pleasant; housing is far better, with running water and electricity; people are living longer*; that we have a large welfare state; better education; and more opportunities. You would probably think of this as a Utopia.

And yet I suspect you'd be surprised that working people aren't as happy as you might have hoped. In particular, one feature of Utopia is missing**. In Utopias, be they either the sybaritic land of Cockaigne or More's more austere Utopia, people are satisfied with what they have, so much so that in More's Utopia money and exchange are unnecessary because "there is such plenty of everything". It is obvious that we have not reached this point.

Our time-traveller from the 1840s might well, I suspect, be surprised that the improvement in real living conditions has far exceeded the improvement in subjective well-being. Why?

One reason is that higher incomes raise well-being only at lowish levels. Aldo Rustichini and Eugenio Proto point out that, beyond a GDP per head of around $20,000, there's no link between incomes and happiness - and the UK reached this point 40 years ago, or perhaps earlier.

But my point here isn't just about income. It's not just incomes that have risen in recent decades, but real freedoms, especially for women. As Laurie says:

The kind of independence many women my age can enjoy would have been almost unimaginable half a century ago.

However, as Betsey Stevenson and Justin Wolfers have pointed out, these increases in freedom have coincided with declines (pdf) in female happiness. What we have here is a sort of mega-Easterlin paradox; big objective moves towards Utopia haven't translated into equivalent gains in happiness.

This could be because happiness is inherently bounded; the human condition is one in which people adapt to both good and bad fortune, as expressed by Hank Williams: "we're still a-living, so everything's OK."

But there might be something else, pointed out by Katherine Guthrie and Jan Sokolowsky. This is that as our options or real freedoms increase, so do opportunity costs. The upshot is that we don't enjoy ourselves so much because we are aware of what we could be doing instead. The man who's resting on his yacht regrets being away from the golf course; the woman with the well-paid job regrets not spending time with her children.

This might suggest that Utopias can't make us happy. For most of us - though not More!*** - any Utopia must mean more freedom. But with freedom comes regret.

You might reply to this that Utopias are worth contemplating - and striving for - for other reasons. Even if they don't make us happy, they give us freedom and justice, which are intrinsic goods themselves. Whilst I sympathize with this reply, it runs into a problem pointed out by Marc Fleurbaey - that most people do seek to maximize happiness.

Perhaps, though, there is another solution to the Utopia paradox. If we could live much longer lives, the regret that accompanies real freedom would diminish simply because we'd have enough time to do whatever we want. Perhaps, therefore, the only wellbeing-enhancing Utopias are ones in which our lifespans are greatly prolonged. Even this, however, might (pdf) have its drawbacks.

 * The death rate for men in their early 40s is now 1.7 per 1000 compared to 15  in the early 1840s.

** A.L. Morton's The English Utopia is a great read on this.

*** In More's Utopia there are "no wine-taverns, no ale-houses, no brothels, no opportunities for seduction." I'd rather take my chances in the real world.

Ideologue? Moi?

When I claimed on Twitter this morning that Blair is an out-of-date ideologue, I was met with the snark: "but you're a Marxist, nerr nerr." This misses the point, in two different ways.

First, we all have ideologies, in the sense of belief systems - even technocrats and centrists. What makes you an ideologue is not so much what you believe as the strength which which you believe it. There's a big difference between being an extremist and being a fanatic. The compact OED defines an ideologue as:

A person who follows a system of ideas and principles in a strict and inflexible way.

By this definition it is not we erratic Marxists who are ideologues so much as those who are fanatically centrist. Indeed, my Marxism arises in part out of scepticism - a suspicion that centrists over-estimate the payoffs to small tweaks to capitalism.

Secondly - and I might have mentioned this before - there are many ways in which Marxism is relevant today. To offer just five:

 - Secular stagnation might be due to a fall (pdf) in the rate of profit and/or to the possibility that decentralized capitalists under-invest for fear of future competition.

 - Crony capitalism - whereby the state stifles the free market and gives favours to big business - exemplifies Marx's claim that the state is not a neutral actor but rather "a committee for managing the common affairs of the whole bourgeoisie.

 - Research into cognitive biases has vindicated Marxists' claim that inequalities persist in part because capitalism fosters beliefs (pdf) which legitimate (pdf) inequality.

 - Inequality exists not (just) because of differences in marginal product, but because of differences in power: bosses have it; workers (with some exceptions) don't.

 - The failure of managerialism to raise aggregate productivity, allied to evidence for the effectiveness of cognitive diversity and for the efficiency of coops poses the question: could it be that top-down management is not a means of increasing efficiency, but a process whereby bosses can extract rents for themselves? This is a Marxian question. 

My point here is not that Marx was right about everything. He wasn't: in particular, he was wrong to believe that workers would become a revolutionary agent. And it should go without saying that my Marxism is about as far from Stalinism as you'll get: it's the Stalinists in boardrooms who are the object of my ire.

Instead, what I'm doing is trying to reject both overconfidence - remember the title of my blog? - and a simple-minded tribalism which splits us all into "goodies" ("centrists") and "baddies". Sadly, however, overconfidence and tribalism are dominant features of politics now.

Using models

Gene Callahan makes a good point. Economic models, he says, are things you should use, not believe. I'd like to amplify this.

For me, economics is primarily a practical discipline. It is not about pompous armchair handwaving, but a practical guide to better decision-making in the the real world: policy-making and institutional design are subsets of this. However, the real world is a complex place. And the solution to complexity is often to satisfice - to pick decision-rules, or models, that are good enough. As someone once said, what matters is what works.

Take, for example, the efficient market hypothesis. Strictly speaking, this is not true: for me, the strongest evidence against it isn't windy theorizing about the Grossman-Stiglitz paradox but the empirical fact that momentum stocks beat the market. But it is useful. Sure, the investor who acts as if it were true would miss out on momentum profits (and on the out-performance of defensive stocks), but he'd avoid countless big mistakes such as paying high fees to mediocre fund managers; trading too much; overpaying for new flotations or "growth" stocks; and so on.

The EMH might not be true, but it's good enough for practical purposes*.

In fact, in a complex world, there is a positive danger in seeking the truth. Gene gives the example of LTCM whose trading rules were true until they suddenly weren't. There are other examples. Goldman Sach's David Viniar's famous bleat that "We were seeing things that were 25-standard deviation moves, several days in a row" expressed the fact that his risk management models were true for a particular dataset but false when that dataset changed.

This highlights an important and overlooked trade-off - between optimization and resilience. A model that gives us a true answer in some states of the world can give us fatally wrong ones when those states change: this is what happened to banks' risk management models in 2007-08. A model that was good enough - such as "shit happens" - might have served banks better** than ones that were "true" in the sense of perfectly fitting a small data sample.

My point here should be a trivial one. We should ask two questions of any model. One is: is it good enough? The other is: what's the worst that can happen if we trust it? As some guy once said, it's better to be roughly right than precisely wrong.

* especially if accompanied by the "sell in May, buy on Halloween" rule.

** I mean better in the sense of aiding their survival and banks' shareholders. They might not have been better in the sense of maximizing bankers' pay - which is of course the only purpose banks have.

Capitalism, socialism & innovation

John McDonnell's "socialism with an iPad" speech has triggered an exchange between Zoe Williams and Alberto Mingardi about whether socialism or capitalism best fosters innovation. I fear this focuses too much upon values and forgets Deng Xiaoping's saying: "It doesn't matter whether a cat is white or black, as long as it catches mice."

My problem is that capitalism, as it currently exists, might not be producing as much innovation as we'd like. I say so for five reasons:

1.William Nordhaus has shown that, on average, the payoffs to innovation have been small: Apple is an exception in being able to make big profits from it. This suggests that innovation has come despite the profit motive, not because of it. This might be because, as Zoe says, entrepreneurs have non-financial motivations. Or it might be because they were overconfident about prospective returns.

Whatever the reason, there's a danger that today's capitalists have wised up to Nordhaus's finding and so cut innovation - perhaps because Joseph Schumpeter's prophecy in which the entrepreneur is replaced by "the perfectly bureaucratized giant" is being fulfilled. This might be happening in big pharma, for example. The fact that western economic growth has slowed since the 1970s is consistent with this.

2. What creates an entrepreneur is not character but capital. Blanchflower and Oswald have found (pdf):

Childhood personality measurements and psychological test scores are of almost no help in predicting who runs their own business later in life. It is access to start-up capital that matters.

Inegalitarian capitalism and a dysfunctional financial system, however, might be stifling easy access to capital for some potential entrepreneurs.

3. Intellectual property laws might do more to protect capitalist incumbents than maximize innovation. Boldrin and Levine say:

The evidence is clear that the patent system taken as a whole does not does not play an important role in spurring innovation...its primary effect is to encourage large but stagnant incumbent firms to block innovation and inhibit competition.

Free marketeers might see this as an example of the state blocking innovation. We Marxists see it as evidence of how capitalists capture the state, to the detriment of wider society.

4. Some innovations suffer from a collective action problem: they are more valuable if they are widespread. This is the case for many financial innovations, as the value of assets depends in part upon the existence of liquid markets in them - which might help explain why Shiller's proposals for financial democracy have never caught on. Again, there might therefore be a role for the state - for example, by using QE to stimulate demand for  macro markets.

5. Creativity is about making connections. As Steven Johnson has written:

We are often better served by connecting ideas than we are by protecting them....But the truth is, when one looks at innovation in nature and culture, environments that build walls around good ideas tend to be less innovative in the long run than more open-ended environments. (Where good ideas come from, p22)

I fear, however, that hierarchical capitalism builds silos that stifle connections. Being chained to a desk doesn't just kill the human spirit; it kills innovation too.

What I'm trying to do here is agree with both Alberto and Zoe. I agree with Alberto that innovation is best done when it is bottom-up and market-tested to satisfy people's needs. But I sympathize with Zoe when she claims that capitalism does not necessarily maximize innovation, and there is a role for an intelligent state. In fact, one role for the state is to promote more widespread markets. Whether such a state can exist within the confines of a hierarchical capitalist economy is, however, doubtful.

On legacy ideas

���I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less." So says John Cryan, the new CEO of Deutsche. This has prompted Merryn Somerset Webb to claim that bonuses "can have an almost infinite number of negative effects" to which Brooke Masters replies that a well-designed bonus system can do some good.

I side with Merryn here. A well-designed bonus system is like a fully-fit Arsenal squad - a theoretical possibility rarely observed in the real world. More likely, bonuses encourage bubbles and short-termism - what John Kay calls "I'll be gone, you'll be gone" thinking - and crowd out intrinsic motivations (pdf).

This debate, however, misses an important point. AFAIK, there wan't an investment bank which paid zero bonuses, saw its staff slacking and so decided to introduce a bonus system.Instead, the original intention behind bonuses was completely different.

Before Big Bang, stockbrokers and merchant banks were mostly owned by partners. They didn't need to pay bonuses to incentivize staff simply because they worked alongside them and so could oversee them directly: I'm old enough to have worked in one, and some of the partners were quite scary.

Instead, they paid bonuses because revenues were volatile, being dependent upon share prices or M&A activity. Such volatility would have meant either big risks to the partners or to employees as bad years led to mass sackings. Bonuses were paid not to motivate employees but to stabilize the business.

In this sense, bankers' bonuses are a legacy of a different era; the idea that they are necessary to motivate staff is a justification tacked onto a system which came into being for different and better reasons.

This is by no means the only example in economics of a legacy idea - an idea or institution that that made sense once but no longer does so. Here are some others:

- Taxing profits or income is less sensible in a globalized world where these can easily shift - or be made to appear to shift! - overseas. Taxing land, which can't move, would be better.

- Corporate hierarchies made sense in capital-intensive firms with lots of unskilled labour. They might be less sensible in firms where human capital is more important and physical capital less so.

- Bashing trades unions might have been a good idea (at least from capitalists' perspective) when squeezed profit margins in the 1970s and 80s were deterring investment. But it doesn't make sense when the barriers to investment lie elsewhere, when wage-led growth (pdf) is feasible, or when the alternative to unions is tighter regulation.

- High-charging actively managed funds were tolerable many years ago, but are less so now that we know that most of them, on average over the long-run, under-perform the market.

Edmund Burke urged us to be conservative because existing institutions and ideas embodied the wisdom of the ages which could be greater than our own bounded rationality.However, as Niels Bohr once said, the opposite of a great truth is also true. And sometimes, ideas continue to exist even after the circumstances that gave them validity have disappeared.

Syria: overconfidence & tribalism

Almost everyone seems to have an opinion about whether (pdf) or not to bomb ISIL*. Are they really all experts on the complexities of Syrian military and political affairs?

Maybe not. There's another possibility: overconfidence. We tend to exaggerate our knowledge and under-estimate uncertainty. Daniel Kahneman has called this the most damaging of cognitive biases. It seems pervasive in economics, so why shouldn't it also be found in military affairs? Dominic Johnson writes:

There is...one thing that is predictable about war: overconfidence. Even if the outcome of war cannot be known in advance, the historical record shows a remarkable empirical regularity in that politicians, military leaders, and the public on both sides tend to believe they will win, with astounding repetitiveness. Nations around the world and over the centuries have repeatedly underestimated their enemies, overestimated their own capabilities, and exaggerated their ability to control what are inherently unpredictable events.

In today's Times, Matthew Parris echoes this, claiming that those who expect the Free Syrian Army to mop up ISIL after bombing "haven't the foggiest" about its actual composition.

For me, this creates a presumption - a Bayesian prior - in favour of non-intervention. Simple heuristics (pdf) can be good solutions to complexity. "Don't take part in wars in the middle east" is one of these: one could argue that this heuristic would have served us well in Iraq and Libya**. This practical position is amplified by a moral one. As Alex says, we in the UK won't be the biggest losers if things go wrong - and one must tread carefully when imposing burdens on others.

It is also a case for having a free vote on the issue. Cognitive diversity can be a good way of coping with complexity. I prefer Labour's disunity to SNP's uniformity.

I should, of course, caveat this. This presumption against bombing could be overturned if we had a strong enough signal that bombing would work - for example, if there were a clear and present danger of ISIL conquering a city which could be prevented by attacks upon specific targets. And Hopi was right months ago - that non-intervention also has costs.

All of this is to agree with Freddy Gray: if you look at Corbyn's actual words, his policy seems reasonable.

Herein, though, lies a paradox. For me, the argument against military action is, structurally, the same as the argument for free markets - that interventions in complex systems of which we have limited knowledge can have unintended consequences. From this perspective, we'd expect an overlap between attitudes to military intervention and free markets, with free marketeers opposing bombing and economic statists favouring it. However, except for a few consistent libertarians (I'm thinking of the likes of Bryan Caplan) and a few Labour pro-bombers, this is not what we see.

I fear this might be due to an even more pernicious bias than overconfidence - tribalism. Nick Cohen alleges that Corbyn isn't so much anti-war as anti-west, and Matthew Parris says of the pro-interventionists: "The point is to join our allies in a fight. Never mind on which side, so long as we're all in it together."

This mix of bounded knowledge, overconfidence and tribalism makes me fear that whatever decision we take about Syria has a very high chance of being wrong.

* Strictly speaking, this sentence is an example of selection bias.

** I say this tentatively because we don't know the counterfactuals.