Tuesday, October 14, 2014

Quick Thoughts on Norms, Institutions, and Inequality

Something that has been really bothering me since starting my MBA is the extent to which the actual operations of business are run by norms and institutions rather than by economics. Specifically, we seem to have a serious hangover of agrarian norms and institutions that cause serious damage when applied to a market based society. Instead of studying for auditing like I should be I am going to try to use my lunch hour to use this concept to tie together a few disparate blog posts that I believe are tied together by this concept.

Yesterday, Paul Krugman wrote:
Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.
It isn't clear to me why righteousness is so one sided, on what ethical or moral basis does the debtor bear more blame then the creditor? Going back to biblical times wasn't usury considered sinful and the lender not the debtor the one morally suspect?

Linked to this question we get Mark Thoma's column today regarding the best way to fight rising inequality. In it he writes that "This debate brings up an important question: what is the best way to fight economic inequality? I think most people would agree that the best approach is to provide good jobs to working class households, and to make sure workers receive their fair share of the value of the output they produce." And further down he adds "And if workers have not received the income they deserve – their contribution to the value of the output they produce – as has been the case for the last several decades, then progressive taxation and redistribution returns income to its “rightful” owners. It’s the fair and right thing to do," with some excellent analysis and suggestions in between.

What is tying these concepts together, I think is mentioned in a post by Steve Roth at Angry Bear commenting on Piketty and some remarks by Bill Gates. Steve makes some excellent points on the need to distinguish wealth from capital, however the part I am interested in is his point that:

Important: that stock of real assets is not just the “fixed capital” tallied (because it can be measured) in the national accounts; that’s actually a small part. Knowledge, skills, and abilities (think: education, training, health), business/organizational systems (this is huge), and similar unmeasurables constitute the bulk of real capital — the stuff that allows us to produce in the future. Most of that stock is not specifically claimed, but it is that whole body of real capital that the market it trying to value properly via pricing of claims — basically, holding up its collective thumb and squinting.
To me, this is the crux of the problem regarding widening inequality. How do we as a society assign claims on capital in the form of "knowledge, skills, and abilities, business/organizational systems, and similar unmeasurables"?

In my MBA program we focus a great deal on the stakeholder perspective of the firm. This is all well and good, this is pushing back against the norms portion of those agrarian attitudes that I mentioned or that Krugman is describing as the sense of righteousness about debt. This is probably far too little to have a measurable impact on its own, though shifting norms is a necessary first step for social change.

The deeper problem here is institutional, in our society providers of fixed capital generally have a stronger claim to those "unmeasurables that constitute the bulk of real capital." They receive this claim through a series of institutional features. The first is the relative ease with which providers of fixed capital can combine together in unions of capital, commonly called corporations. This provides them with far greater bargaining power regarding the bulk of capital in our society than other stakeholders with an equal, or greater than, interest and role in the production of the unmeasurables which constitute our capital.

[Lunch hour is over and I am posting this incomplete as I do not know when I will have time to continue this. Hopefully there will be a part two in a semi-reasonable timeframe.]

Saturday, September 20, 2014

How Much of Our Current Political Insanity Can Be Attributed to Early Childhood Brain Damage?

Kevin Drum had a recent blog post on how incarceration rates are down among younger people and up in older populations and the links between this and lead.

This led me to thinking about how a lot of the problems of the last 30 years are commonly attributed to many of the same characteristics that are often associated with criminality such as selfishness and a short term orientation. Since behavior is highly associated with social context, it stands to reason that these traits would be expressed differently in people with higher socioeconomic status then the low status people that are often incarcerated for crimes.

If this association does exist it would help to explain how our society shifted away from the more communal values of the 1950s and 60s when business and government were both moving towards a more inclusive vision that engaged diverse stakeholders* to the time since the 1980s when ideas such as shareholder capitalism began to take hold and dominate public discourse. Today the upper reaches of business and government are dominated by people who are in the age groups that are being associated with higher crime and incarceration rates. If there is an association between lead and criminality in people of low socioeconomic status it would hold to reason that there is a similar influence on people of higher status, perhaps helping to explain some of the extremely short term thinking that has become common on issues like the environment and inequality among people of high status.

*limited of course by holdovers of earlier inegalitarian social relationships and the prejudices of the time, but these were times of progress rather than regress

Monday, June 30, 2014

This Week in the Supreme Court: Protecting the Powerful Against the Weak

Just wanted to say that I think the Hobby Lobby decision is atrocious. The institutionalization of the corporate form is all about separating the corporation itself from those that finance it in return for the protection of limited liability. Further eroding the separation of ownership from direct control of the corporation is terrible on its own terms. Furthermore, it further reinforces the claims of owners relative to other stakeholders in a corporation. This is an appalling decision the further erodes the rational for giving corporations limited liability. If they are going to have full control over the assets their liability should be unlimited as well. There is no reason for the government to give the most powerful people in society something for nothing. Especially something that gives these powerful individuals even more power relative to ordinary Americans.

Saturday, June 14, 2014

Didn't Weber Already Cover this Ground Adequately?

Just a little annoyed at the Washington Post presenting the linking of religion and economic growth as some new thing. Weber covered this over 100 years ago. While great writing and excellent for spurring thinking on how sociology, economics, and political economy all influence each other the underlying thesis didn't hold up to careful analysis. While this is an important topic in survey courses and something any generally educated person should know I don't really see how there is much of anything new worth saying on the topic.

Sunday, May 11, 2014

Individualism and Racism

I'm a bit late to this, but reading about Sotomayor's dissent in the Supreme Court's recent case regarding affirmative action has gotten me to thinking about how racist the right wing version of individualism is.

Something that always strikes me in public discussion of race is how the right wing so often proposes policies that would have disparate impacts on individuals of different races, such as cutting funding for inner cities, or to hearken back a few decades, the midnight raids to make sure people receiving AFDC didn't have a man cohabiting with them.  In some cases these policies and denials of racist motivations are undoubtedly dissembling by people who are really racists, like Cliven Bundy, who are rather more common than those on the right are willing to admit. However, I feel that more often the policies being made are based on a deep commitment to a rather extreme form of individualism. And it is this doctrine, rather than any particular animus towards other races, that is extremely racist.*

The strong reaction to accusations of racism by the right wing, and their insistence it is the left that is racist for recognizing race matters, results from the threat that the continued persistence of racism poses to their beliefs in individualism and meritocracy. After all, if race and the previous distribution of wealth didn't matter in outcomes why is the distribution of wealth, income, and status so uneven between racial groups? In writing about these issues conservatives are forced to navigate between a Scylla of denying individualism to admit that group matters in American life and a Charybdis of making blatantly racist remarks that are a direct consequence of their individualist philosophy.

We see two basic strategies used by conservatives to cope. One strategy is to say that American culture uniquely frees the individual from group concerns, only in American culture can individuals really act as individuals. Other cultures are in some way bad and hold individuals back. If anyone actually thinks about it these kinds of arguments are obviously self-refuting, the arguer has already acknowledged that culture matters which means that more than individual merit and effort matters for results in life. This should lead to thinking about American culture a bit and realizing that there are a rather large number of factors outside the individual that matter in life. Obviously this step is not often taken, though subgroups of conservatives, like the paleo-conservatives over at The American Conservative,** show that there is room for conservative philosophy to abandon unrealistic assumptions about individualism to use a more accurate and nuanced conceptualization of the human condition.

The second method relies on various strains of "academic" racism, such as The Bell Curve.*** The common thread in these rationalizations is that they seek to preserve the myth of the individual and meritocracy by arguing that other races in general are inferior on some significant measure of ability. These beliefs help protect a belief in individualism and meritocracy by claiming that while a lack of ability leads to statistically lower achievement, individuals of high ability from these groups are just as likely to succeed as individuals from other more advantaged groups. This explanation obviously cuts rather closer to the racial animus conception of racism and gets shouted down rapidly, but it is less problematic for ideological individualism than the cultural explanations.

The hard work of refuting these claims is well beyond the scope of this post, though famous studies which compare how likely someone with a distinctly black name is to be called back for a job relative to someone with a white name are sufficiently well known that I only need mention their existence. What I am hoping to make clear, however, is that in discussions of race, conservatives and liberals are often talking past one another. When conservatives are talking of individualism, liberals hear racism, and when liberals talk about race, conservatives hear attacks on individualism.

This isn't to say, however, that there is some sort of moral equivalence to both sides. The continued persistence of racism and its well established sociological components really are arguments against strong versions of individualism and meritocracy. Liberals should do more to attack this philosophy directly, it is the root source of much of the institutional racism in American society. The facts simply don't agree with the philosophy and we should be more direct with saying this, rather than tiptoeing around it because individualism and meritocracy have positive connotations in American society. Incorrect is incorrect, whether or not we moralize the incorrect belief.

* In applying the label racist to someone I feel this is a distinction without a difference. But if the intent is to debate the issue and win arguments in the general public sphere I think it is important to distinguish between simple racial animus and ideas with racist consequences.

** Not meant as saying I've never read anything that isn't somewhat racist over there, but it is not the kind of racism I am writing about here that originates in a strong philosophical commitment to ideological individualism.

*** See this post at Noahpinion for some recent discussion of academic racism, particularly follow the link to Gelman.  The only thing I really have to add is that if someone really wanted to look into this there should be the possibility of looking at genetically distinct subpopulations that are sociologically similar, such as variation between groups of African Americans which are genetically distinct. This may easily have been done, but what I have been exposed to on the topic is normally looking at sociologically distinct groups, whether black/white or groups like Ashkenazi Jews, which seems a rather backward way of investigating the relative weight of genetic and sociological factors.

Sunday, April 27, 2014

Power Disparities in the Workplace: The Indignity of Background Checks

My current job is switching me from a contract to a permanent position, part of this involves a thorough background check. Every time I go through one of these I am struck by how undignified the whole process is and how many employees have to go through this even though it has little bearing on their actual jobs. My particular case doesn't fit this, my position in the accounting department would present a number of opportunities to an unscrupulous individual.

However, reading over the fine print of the documents shows that they are not simply seeking targeted, job relevant information. Instead, the checks are very open ended and seek to gather as much information as possible. This is what I find disturbing, its a huge invasion of privacy. Yet, it seems that few privacy advocates seem inclined to take on this issue, all I ever hear about is attempts to curtail the governments information gathering, or in rare cases companies gathering information through the web, and never serious attempts to limit companies' ability to get potential employees to piss in a cup.

This dynamic represents one of the more obvious signs of the inequality between capital and labor in our economy. If we were all equal autonomous actors freely exchanging our labor for income then surely we would demand a large premium for this intrusion into our lives. Yet, coordination* among employers has rendered this individual negotiation impossible, mandatory background checks are a requirement of employment just about everywhere. Strangely enough, where they do begin to decline in frequency (but never really disappear) is at much higher levels in the economy where companies are even more vulnerable to a bad actor.

While this kind of dynamic doesn't impact me personal, beyond the indignity of it all, these practices do serve to keep labor down by creating a pool of individuals who find it difficult to compete on an equal footing for work due to having infractions that will show up on a criminal background or credit check. It would be far more equitable if employers were required to defend their background checks to only screen for items that would be directly job relevant, like drug abuse for a pharmaceutical company, theft or other property crimes for an accounting position, or serious violent crimes for any position. Yet, we see close to no pressure to force companies to restrict this practice, and certainly no pressure from individual level market participants who have no power to press their claims against employers who have an overwhelming advantage in forcing potential employees to acquiesce this invasive and undignified sacrifice of privacy.

Friday, April 18, 2014

Are Markets Better Described as Robust than Efficient?

Something that I think all of us with private sector jobs experience in our day to day lives is just how incompetent a large number of private businesses are. These may be our customers, suppliers, or another division. Yet, somehow, these businesses thrive despite not really having a good grasp of basic administrative procedures, financing, or sometimes even customer service.

Despite this, we often write and speak of private sector actors as if they are brilliant and efficient individually, despite the experiences of our everyday lives.* We simply assume as a result of mere market success that a business or individual has ability and competence. This isn't surprising, the just world hypothesis is a powerful cognitive bias which leads us to believe that the system as a whole must be more just than what our individual experiences would lead us to conclude. However, there is no property of the market system which should lead to this belief.

What's more notable is how little this impacts how we think about the market system as a whole. After all, given an immortal, perfectly rational, and omniscient central planner even the worst designed communist system would work beautifully. What's remarkable about the market system is that it should lead to ever increasing levels of productivity and efficiency even if the individual actors are all completely incompetent. Competition and creative destruction should lead businesses to be ever better even if they only differ due to random variation alone.

Yet, somehow this doesn't seem to impact how we think and write about markets and how they reward people much at all. Instead we often read in the popular press views about how market success means that an individual or business possesses unusual ability or competence despite the dearth of well established causal links between market success and any particular ability or trait. Creative destruction works as more of an evolutionary system, simple selection will lead to new forms to suit the environment they're in without the need for any conscious planning.**

An example may help illustrate this. The need for a common computing platform caused the market to require that a single operating system would predominate. In the early years of innovation in the personal computer market a wide variety of operating systems developed, all with a business plan that was more or less plausible. It was inevitable, however, that only one of these would dominate the industry due to the structure of the market. Someone was going to make billions, and did, but the need for a common platform meant that this would have happened whether or not any of the competing platforms exhibited even the barest level of competence. In addition, once established the need for interoperability mean that structural factors dominate any actual characteristics of the competition.***

This makes me think that markets might be better described as robust rather than efficient. The incredible thing about markets is that even if all the individual actors are morons the systemic factors will still lead to good outcomes, unlike other forms of human organization. But somehow this doesn't break into popular discussions of markets at all, much less into discussions about how our market system is distributing the fruits of our labors. I'm not sufficiently well versed in economic literature to know whether or not someone has done work on this, but I'm very curious if anyone has tried.