Historical Myths

I am sceptical about the assertions made in this column by Casey Mulligan generally, but I came across an inaccurate historical statement that is a particular pet peeve of mine.

Professor Deaton explains how “the emperors of China, worried about threats to their power from merchants, banned oceangoing voyages in 1430."

This is inaccurate and completely mangles the impact of merchants and sea power in Imperial China. First of all, we need only look at Wikipedia to see that oceangoing voyages were banned prior to Zheng He's voyages by the founder of the Ming dynasty, the Hongwu emperor. This ban obviously wasn't a huge barrier and Chinese ships continued to dominate international trade in the period after 1430.

Second of all, merchants had at worst mixed effects on the emperors power, and probably increased it. Active emperors, such as the Yongle emperor, saw their power increased by these expeditions and tended to support them (the Hongwu emperor opposed them for rather idiosyncratic reasons, it wasn't the only policy he would bequeath on his successors that would weaken the Empire).

The major reason for the ban resulted from the Emperor's need for continued support from the scholar-gentry. Concessions to the scholar gentry largely reflected a decline in the Emperor's power not an increase in it. Ocean going voyages, such as Zheng He's, represented an increase in the power of the eunuchs within the Imperial bureaucracy and thus an increase in centralized power and the influence of the Emperor. Restrictions on ocean trade resulted from disputes within the Imperial bureaucracy and a win for the decentralized, local power of the scholar gentry against the government.

In order to be complete I should mention that another major reason for the restrictions on ocean going trade was a desire for the government to supply its northern and western garrisons. There was a belief (not necessarily incorrect) that merchants would be unwilling to engage in the relatively less profitable trade to these areas without a combination of restrictions and incentives to get merchants to trade there. This alternative was embarked on because the Ming government had a very laissez faire attitude towards internal commerce (this did not extend in any way to international commerce). The government was unwilling to raise taxes sufficiently to cover the cost of supplying these garrisons directly so instead resorted to a kludge to get the private sector to fulfill needs that would otherwise go unmet (it strongly resembles a lot of public-private partnerships that the US uses, our health care policy being a great example).

This was driven by a perception by Chinese officials that the north and west represented the greatest threats to the empire and not the overseas frontier. It also should be added this perception was entirely accurate, the empire would be extinguished by the Manchu to the north. The Manchu in turn learned this lessen and continued land centric policies to protect themselves. Eventually, of course, the maritime focus of Europe would prove more dynamic but you can't get that far if horse nomads come and kill all the rich merchants.

Ok, I went a bit deeper into the particulars of the situation than I probably needed to. But the perpetuation of this historical myths are a pet peeve. Conservatives are always telling these mostly made up tales of how the government is opposed to private wealth. This is rarely the case, most of the time governments are aided by and support commercial expansion. It is non-governmental elites that generally oppose the entrance of new power centers and cut off commercial expansion. They are often able to use the government to do this but this is a result of threats of non-cooperation or outright opposition that causes government officials to cave against their better judgements. If you actually read about the governments and the disputes occurring within them the most common case is that they regard commercial expansion and merchants as sources of power and not a threat. It is other factions that regard the rise of the commercial classes with distrust because they (accurately) see the rise of the commercial class as presenting the government with a way to free itself from their dominance. But this isn't a story that most Conservatives like, so instead we hear a constant mangling of a rather more complicated history to present a story of governments opposing markets, even if in most cases governments supported and extended them.

Meritocracy? Make me laugh.

I loved Delong's comments on Piketty's "Capitalism in the 21st Century."  Read the whole thing.

Full passage I lifted the title from:

Third, meritocracy? Make me laugh. In my view meritocracy does not produce inequality. Rather, true equality of opportunity produces relatively small income differentials because there is always somebody almost as good eager to bid for your high-paid job. Inequality emerges either (i) when this generation's human capital is last generation's wealth, or (ii) when other non-meritocratic factors are creating jobs that are the equivalent of covering yourself with glue, standing outside at a corner in Canary Wharf, and watching the money stick to you as it blows by.

It's surprising to me that these observations aren't more obvious to people. But there is a lot of wealth (and egos) with a strong interest in obfuscating this.

[Update: I would propose a partial solution. Allow companies to free themselves from ownership eliminating most safe investments and forcing holders of wealth to fulfill a socially useful function of investing in risky startups and financing capital investment through bonds. In the long term this would take most capital out of the hands of individuals and put it in organizations while making capital relatively cheap for new start ups. Unlikely, I admit.]

Wealth Creation and Competition

Being fatigued from moving does not good blogging make.

What I was trying to get at in my earlier post is why is it that the right figures some people should be compensated based on the wealth they create while others should be compensated based on supply and demand? A great deal of inequality is being driven by norms which dictate which frame should be applied to which workers. If one frame or the other were used universally a great deal of inequality would disappear.

Income Inequality and the Question of What Creates Value

For all that they talk about free markets you'd think that the right wing would have a good grasp of how they work and their implications. However, almost everything I read from the right wing seems to imagine an agrarian economy in the early phases of marketization.

Today's example comes from Kevin Williamson at the National Review. He asserts that:

Incomes are going up at the top and stagnating or declining at the middle and lower end of the spectrum, but — and this is critical to understanding our challenge — the high incomes at the top do not cause the lower incomes at the bottom, nor vice versa. There is no such thing as “national income” or “income distribution.” There is no bucket labeled income the contents of which are ladled out by the government or by the statistical aggregation we call “the economy.” If people at the top made less money, that would not free up money for everybody else.

This is fair enough as an assertion, I'm not convinced but it's plausible. However, he contradicts this view just a paragraph down. Contrast:

The integration of global markets means that returns to successful entrepreneurship, managerial excellence (real or perceived), sought-after skills, etc., are very high and growing. Imagine the case of the CEO of a business worth $1 million: If through administrative skill or innovation* he adds 50 percent to the value to the business, he has created $500,000 in new wealth. Now consider the case of the CEO of a business worth $400 billion, as ExxonMobil is. If a CEO through administrative skill or innovation adds a mere 0.5 percent to the value of the enterprise, he has created $2 billion in new wealth. Scale matters: To be the third-largest car dealer in Muleshoe, Texas, is one thing; to be the third-largest car dealer in Houston is another; to be the third-largest car dealer in Texas or the United States still another, and to be the third-largest one in the world quite another thing. 

With:

Nutella creates jobs in high-wage and low-wage countries alike, and it even manufactures in high-wage countries such as Canada and Germany, in part to be close to its final customers. But if you work in the back office of a bank, it does not much matter where you are — your product doesn’t spoil, doesn’t require shipping, and doesn’t have to be physically in hand to be consumed. If you work in a job like that, you are now in much more direct competition with a very large market full of relatively low-wage overseas competitors than were Americans during the short-lived golden age that persisted from the end of World War II to the turn of the century.

Did you notice how he shifted from value creation and scale for high wage workers to competition for low skill workers? Why are the two groups being treated differently? Why does scale justify high incomes for the wealthy but not for the not wealthy? Wouldn't it be just as possible for a firm to award all of its employees based on the value they create, adjust for the organization's scale, and not just those at the top?

The Problem is Ideology Not Interest Groups

David Brooks has a column today on how we need to strengthen executive authority. He draws this conclusion from a Francis Fukuyama article which argues that the checks and balances in US government have made the country ungovernable given current conditions.

I don't have much to say on Fukuyama's contribution, but I think the Brooks column is terrible. Small changes within the existing political framework to lessen interest groups' influence have a recent history of backfiring. Ending earmarks was supposed to allow legislators to see the bright light of reason and pass clean bills, instead it has allowed them to wallow in a fantasy world where the darkness of ideological purity has eclipsed reason's sun entirely. There is no reason to believe that the Executive is any more able to act purely than the legislative, simply more possibility of ideology blinding them to even the few rays of reason's light that used to filter through attached to interest group's grubby dollar bills.*

Interest groups were always a manageable problem, most of our great legislation was passed with compromises to industry which were relatively minor compared to the advantages of the bill. Far more tragic is that these bills can't pass at all.

The real problem is that much of our political class has been swept away into a sea of ideology which distances them from any connection to the real world. This ideological insanity is focused on the welfare state. There is simply no reasoning with people who believe that the welfare state creates dependency, who ignore our assets to argue that current liabilities are unmanageable, and that have been arguing since Goldwater that Social Security won't be around for our kids.

There is no evidence for these beliefs and it makes it impossible to compromise with since it positions the issues as a zero sum game. One side believes that strengthening the welfare state will strengthen us as a country, the other the opposite.

It's like trying to argue defense policy when the other side believes the biggest threat to our security is Skynet and the rise of the machines. How can you argue defense policy with someone that believes that mechanization is the greatest threat and that our military should go back to black powder to forestall this otherwise inevitable catastrophe? There is no compromise possible here, giving in to this insanity simply weakens us and anything we do to strengthen ourselves will be denounced as making the rise of the machines closer and more inevitable.

The dynamic created makes it impossible to acknowledge even legitimate concerns. The ideologically pure can gain credibility by pointing out flaws in existing programs. Those trying to defend those programs then lose credibility when they either propose reforms, which are denounced in turn for inevitable compromises and flaws, or defend the flawed programs. Since the ideologically pure never have to propose a positive vision, all they really want to do is tear things down, it is easy for them to raise their credibility with the public while the side that actually has to make policy inevitably loses it. Since we only have two programs that really work fairly well, Social Security (excepting SSDI which is an outdated mess) and Medicare A and B (C and D need significant reform), a strong credibility gap is inevitable.

But until the anti-welfare state ideology is put down we can't have real reform. We need a debate over what to do with unemployment insurance, the medical system, retirement planning (Social Security is inadequate and 401ks a complete failure),  anti-poverty programs (welfare reform turned out to be strongly pro-cyclical, though AFDC was terrible, and food stamps aren't really designed for the role they've taken as our primary anti-poverty assistance and fill this role poorly), disability insurance, and a host of other programs. But right now we can't have these discussions. One side gains political capital by attacking them, but then drones on about dependency which shuts off any adult-level conversation. Democrats can't acknowledge the very real flaws because once they do they make an opening to attack the programs. And they can't propose any reforms because that creates another opening.

So Brooks is way off target. What we need is for pundits like him to acknowledge the destructiveness, insanity, and detachment from reality of an ideology that proposes ideas like dependency and the makers and takers line. As long as these ideas remain powerful and current our country will continue to be a mess. This is a cultural war and men like Brooks are its soldiers. It will be won or we will decline based on their efforts and the use of the platform they were given.

So far things aren't looking good.

* I may be pushing the metaphor a bit far.

Signing Up for Obamacare was Fast and Easy

Just completed my application for health insurance. It was fast and easy. Didn't run into any lag or other problems. I ran into two very small user interface problems. First, when I tried to copy and paste my previous employer's phone number into the employer phone number box it cut off a digit. Easily fixed by manual input. Second, at the end of the application it gives a message that I will need to pay the first month's premium for the policy to go into effect and that the insurer will contact me for this. Below this my information is summarized and below that is a big green button that says PAY FOR HEALTH PLAN. This button does nothing, probably because of the information given above it. Not a problem, but rather silly.

Not sure how the back end of the site is running, I'll update when I get information from Humana.*

Where the National Review Obligingly Decides to Sound Like the Bad Businessperson I Mentioned in Yesterday's Post

I had been waiting some time to write about how the Republican Party increasingly sounds like the party of bad business. The article I hooked the post on was somewhat tangential, today, however, the National Review has excellent timing in sounding exactly like the fool I was wanting to write about in a post on the minimum wage.

A number of academic studies purport to show that a higher minimum wage has little or no effect on unemployment. That may be true in certain narrow short-term circumstances; for it to be broadly true in the long run, the facts of supply and demand would have to be other than what they are. In fact, a higher minimum wage is a barrier to employment for the young, the lightly skilled, and those who are not currently in the work force but wish to be, a wish that can be desperate indeed for those who have long been unemployed.

Here's a classic bad management approach. Real studies show something other than what I want so instead I'm going to assert my opinion and call it fact. Case closed.

The scary thing is that I've come across this now and then in the real world. People really do think this way. Obviously, real labor markets do not function this way. Wages are set with a combination of bargaining power and the value of the product of labor.* Raising the minimum wage will shift the distribution of income increasing investment opportunities for producers of goods purchased by low wage workers. This in turn will increase investment in these communities, spur entrepreneurship to meet demand that is now backed by currency,** and create net jobs for this sector. Individual firms may find it harder to deal with the higher wages but the systemic effect will be a net increase.

An even more incredibly stupid assertion follow a few paragraphs down.

There is a way to increase wages while increasing overall employment, and that is to raise the demand for labor. Unfortunately for the planners and schemers in Washington, doing so requires more than simply passing a law. Higher demand for labor is the result of a growing and productive economy, which requires substantial capital investment, innovation, entrepreneurship, and — worst of all from the White House’s perspective — time. If Toyota should decide to add another factory to its U.S. operations, it will not be built overnight.

 When I read this I had the immediate image of a fat, cigar chomping guy sitting in a smoky country club paying cards. Well it's unfortunate that you have to starve but you see fixing things take time, you see.

This is bullshit. Capacity utilization is still well below historical capacity utilization and well below peak. (http://www.federalreserve.gov/releases/g17/current/) The industrial plant necessary for new jobs is already there sitting idle. What we lack is people with money to buy the goods this plant could produce, this just sounds more absurd and out of touch from a magazine that opposed the auto bailout and should be well aware of how many plants were shuttered just a few years ago. What does the National Review think happened to all these shut down plants? Did they get up and walk to Canada?

Then there's the standard blather about education etc. with a bunch of sniping at the Democrats over their opposition to policies without great track records. Go ahead and read the whole thing, it's worth a laugh if nothing else.

What really stand out to me, however, is that this sounds really out of touch with how modern companies do business. While there are far too many poorly run businesses that still treat labor as an expense to be aggressively cut, growing, successful business are realizing that their workforce is an asset to be invested in. A nudge, like a minimum wage increase, that will force recalcitrant business owners to review their wage practices and to really grapple with costs like turnover and efficiency gains from long term employees will probably increase the competitiveness of American businesses.

Other companies realize the systemic nature of these changes. Walmart is a great example.*** While they receive a great deal of deserved scorn for their anti-union stance they are on record as supporting a national minimum wage increase. Interestingly, they are also on record as opposing minimum wage increases at the municipal and state levels.

This isn't as contradictory as it seems to the bad business thinkers over at National Review. Walmart stores have very large catchment areas, they would be strongly negatively impacted relative to retailers located in a lower wage areas or those with smaller catchment areas which do not have to compete across jurisdictions with different minimum wage regulations. However, with a national minimum wage increase these discrepancies causing localized disadvantages won't exist. Everyone will be on an even playing field. And with its unmatched supply chain efficiency Walmart can probably generate an even greater cost advantage in a higher wage environment.

Of course, systems thinking is impossible for those with the strongly individualistic bent of the writers and editors at the National Review. However, it is the norm in large, efficient business like Walmart. This is why companies like Walmart are crushing the small and medium business owners that make up the most ideological committed portion of the right wing, people that thrive in big organizations must think and act on this level to survive while most of the managers and owners at these organizations remain committed to the idea that it is individual merit that matters and act on this assumption, both in their business decisions and in how they treat their employees. With predictable results.

Angry Bear on Food Stamps and Dependency

Since dependency is the false belief that causes more damage to the American polity than anything else I can think of (with the possible exception of climate change, but the negative effects of a belief in dependency are a threat here and now while climate change is a future threat), I feel the need to link to another Angry Bear post commenting on a paper examining the impact of food stamps on health and use of government programs later in life. Like other research on the subject, it confirms that receipt of government benefits increases self-sufficiency later in life. As I've stated many times, the actual research points in the opposite direction that hacks like Paul Ryan claim. False ideological claims, like the dependency hypothesis, are doing untold damage to our Republic.

Anrgy Bear on Cooperatives

Since I just wrote about something similar, I thought it worth linking to an Angry Bear post on cooperatives. I haven't had time to watch the video but it provides a bit more information on their importance (including Mondragon).

The only thing I have to add is that I am skeptical how much room there is for the growth of cooperatives given the extreme levels of wage inequality in the US. As I stated, I believe a system that alters manager's incentives so that they use profits to achieve the same goal would gain more traction given current economic realities. I admit, however, that worker cooperatives have more intuitive appeal and would more directly address extreme levels of executive compensation which my thoughts do not.

Republicans are Increasingly Becoming the Party of Bad Business

The New York Times today had an article on how many big businesses are planning for future carbon pricing and are even embracing this change. As they say this represents "a striking departure from conservative orthodoxy and a reflection of growing divisions between the Republican Party and its business supporters."

I believe this trend represents a deeper, partially generational, shift in business culture. The old culture, which remains the culture of many in senior management, was the highly individualistic, greedy, heroic type of businessperson featured in films such as Wall Street or as the hero of Ayn Rand novels. Modern business culture, by contrast, is highly collectivist in nature, group projects, participatory management, and systems thinking are modern best practices. In an article by Deming, for instance, he claimed that over 90% of faults are caused by the system and are management's responsibility.

However, while America's best performing companies embrace these new concepts, and have profits to show for it, old styles of thinking are far more common. Surveys indicate that the vast majority of businesses are badly managed, only the largest international firms are majority well managed. Surveys of investment decisions indicate that around 30% use gut feeling for investment decisions and another large proportion use primitive methods like pay back periods.

These types of attitudes match up perfectly with a lot of what I hear from the right. On a number of issues, like climate change referenced in the NY Times article, we hear of skepticism of modern science which matches well with the skepticism we see in many (mostly smaller) businesses of modern statistical methods and the focus on process. The right wing is constantly talking about individual initiative and attributing success or failure to individual traits, this is also perfectly congruent with the divide in best business practices between the modern systems approach and the old methods which relied strongly on individual performance reviews and attributing success/failure to individual traits while ignoring process.

 In short, the ideological right increasingly looks like the terrible business manager who never wrapped his head around the modern focus on the customer, emphasis on value creation, statistical methods,** or systems focus. Instead, they want to somehow bring back the days when business was done with a handshake, personal relations mattered more than credentials,*** and hard work**** led to profit.  They see this as how the competitive, free market is supposed to work. They haven't come to terms with the fact that the reason they are struggling is that today they face real competition and are feeling the true sting of the free market, the old system they thrived in was one of privilege and security.

This results in the stereotypical right winger being rather like a bad manager. They have no idea how to build a system that adds value, all they know how to do is to try to cut wages, bid low, or pressure suppliers to drive down costs. The idea of value chain focus, participatory management, flat organizations, and a systems focus is anathema to how they run business and how they see government. They just don't get it. Furthermore, these people are angry and frustrated. They are the small and mid sized businesses that used to be sheltered from competition with the big guys. Now the big players are moving into even the smallest towns bringing these folks directly into competition with the market forces they pay lip service to buy never felt until now.

The rift between these small and medium business owners and large corporations is becoming increasingly stark. To succeed against international competition big business long ago adopted more inclusive and collectivist methods. This is leading to a growing cultural rift between the traditional supporters of the Republican Party and the new business elite who thinks very differently. It will be interesting to see how it plays out, but it is shocking to me how different the values and teachings of business school diverge from current right wing ideology.*****

Shareholders are Non-Value Added

I never thought studying for an MBA would turn me into a socialist but that's exactly what it has done. I'm impressed with how most fields of business focus on the customer and on treating employees as an asset, and even more by the focus on the system, rather than individuals, as the source of a company's problems. Deming's 14 points in particular strike me as a good way to run anything.

However, as one of my professors has said regularly most companies are badly managed (and some research has backed up his statements) and we will be spending most of our careers pointing out common sense. Most owners and managers remain bound up in cognitive biases, fundamental attribution error appears to be particularly rife in business types.*

Yet, our system has developed a broad set of institutions that serves to increase the power of owners and managers at the expense of other stakeholders. Companies should be focused on their primary stakeholders, employees and customers, but instead they are beholden to their owners who are continuously draining off funds that could be more productively put to use by the company or distributed to the employees who contributed to the company's success and have a far more direct stake in a company's mission than its owners do. The one field taught in my MBA program that diverges from the focus on customer and employees is finance, which explicitly endorses the purpose of the firm as maximizing the current value of the firm's stock.

This results in the most important institutions in our society, private corporations, having a goal that is often at odds with the health and wealth of society as a whole. Companies focused on their customers and employees will have interests that line up very naturally with those of society as a whole, this is far less likely with owners. The malaise effecting America, and much of the rest of the world, has at least some of its origins in the fact that the conflict between owners objectives and companies' missions was decided in favor of the owners; with predictable impacts on corporate success and on income inequality.

Reforming this doesn't seem overly difficult, though it is in direct conflict with the increase in shareholder power which has been occurring since the 1980s as a result of the Friedman doctrine.** All that is really necessary is to change the rules governing corporations so that firms can purchase themselves through stock buybacks. As it stands, buybacks do nothing but concentrate ownership, but there is no good reason the stock should become inactive. A cultural change is also necessary, we are biased in believing companies should be owned, but there is no real need for a company to be owned by anyone.

Rules for composing corporate boards of unowned companies would have to be drafted, but this should be easy enough since their primary stakeholders, customers and employees, are readily identifiable. Boards composed this way would result in companies that have their interests aligned with society as a whole, and incidentally matching up with modern business best practices of having a focus on the customer and on their own personnel. This would also resolve the conflict between stockholders and other stakeholders how it should have been resolved decades ago, in favor of the other stakeholders.

None of this is to say that capital should be shut out. Capital does add value, where I find it problematic is in mature companies where the stock price has become disassociated from any need to raise further capital. Where capital plays a role is in financing start ups and long term projects. The life cycle I imagine is one where venture capitalists and other investors primarily play a role in the early phases of corporate growth. As a company matures it returns the initial investment to stockholders through the form of share buybacks, eventually getting a 51% stake and freeing itself from outside ownership. Provided this becomes an explicit corporate goal it should be easily achieved.

While this is a utopian pipe dream, it's unlikely for cultural and not institutional reasons. For whatever reason Americans have powerful beliefs about ownership and don't seem to be able to shake out of these beliefs even when performance is lackluster. Institutionally, we know that finances tend to shift powerfully in response to even small relative incentives. To achieve corporate independence on a national scale all that would be necessary would be a fairly small tax advantage to encourage firms to compensate their investors through share buy backs rather than through dividends and other means. Most investors are fairly neutral in the form their returns take so provided they don't object on cultural and ideological grounds (which is likely) it shouldn't be difficult for firms to free themselves of the tyranny of ownership.

Unfortunately, other than a very small movement in favor of employee owned firms*** I haven't heard much on this subject. However, like Deming, I believe that systems matter and that systems are responsible for the majority of faults in any organization. Treating the world economic system as this kind of organization I believe that 3rd party ownership is one of the fatal flaws at the heart of many of our social problems. Ending this problem wouldn't be difficult but it would take a revolution in how we think about our economic system. Perhaps momentum will build, this is perfectly congruent with everything I have been reading outside of finance texts with modern business thinking.

[Lest it need be added, while I think freeing firms from ownership is clearly socialistic I see even more problems with state ownership than I do with ownership by investors. Organizations function best when they are independent, while this is a socialist program the state has no role other than in changing institutions to allow for this. I'm going on a tangent but I am very frustrated at how often socialism is confused with the state when the state has nothing to do with socialism in theory or often in practice.]

Anti-Union Propaganda

Lawyers, Guns, and Money posts a scan of anti-union propaganda given at a Macy's orientation. Now, I think there are pros and cons to to unionization but I have very strong feelings about an employer's role in influencing employees' decision whether or not to unionize due to the employers position of power.* This kind of propaganda should be illegal due to the implicit coercion implicit in the employer-employee relationship. That this is common in low wage jobs is an indictment of the American economic system.

After all, in a free society employees should be best able to look after their own interests, right?

*In case this needs to be explained. With the extremely common at will employment contract that I am sure a business like Macy's uses employee turnover is a normal part of doing business and an employee's decision to leave has little to no impact on the employer. However, for the worker being fired becoming unemployed can be a life changing event that upsets long term plans and potentially destroys an individual's life. If you can't see the coercion implicit in the unequal exchange that is a labor contract you're hopelessly blind to how power and force act in the real world.

Is there Anything on the Right Worth Reading Nowadays?

I'm a firm believer in the importance of hearing the views of all sides and constantly challenging one's own views. This helps to sharpen thinking as well as providing a greater understanding and sympathy for people that one disagrees with.

However, I'm finding it increasingly difficult to find anything from the American right worth reading. I like the American Conservative, but they're hardly mainstream. Everything else I've tried reading from the right strikes me as mostly nonsense. Most articles seem to take the dependency theory as established fact, assume business owners, rather than employees and systems, as the economic drivers of society, rely on lazy anti-urban comparisons, often make crazy assertions about the applicability of military power, and deny the reality of settled issues like the cost advantages of public health systems. If they ever advanced evidence in support of these positions it would be one thing, but if I go over to Red State or the National Review it is just assumed that readers KNOW that the welfare state leads to dependency. The closest to an argument that is ever advanced is through single country historical experience, such as Casey Mulligan's The Great Recession (comments on why this book is implausible well handled at Noahpinion).

About the only issue that gets any traction with me is worry about debts and deficits, but even here I am far less than convinced because while the potentials problems of debt are notable I haven't seen an argument offered which addresses the opportunity cost of dealing with the debt nor why it is not preferable to cut the debt through tax increases rather than spending cuts despite the evidence that tax cuts do less economic damage in most situations (and the situations where spending cuts are better are nothing like current conditions).

So, I've expressed why I have trouble reading conservative blogs or other news sources. They make assertions about the world that are testable but that don't stand up to testing yet stick with these assertions. Is there anything out there that I should be reading which doesn't start being wrong at the level of starting assumptions? I'd like to read something from the other side but unless the assumptions are plausible I don't really see the point.

A Bit More Evidence Against the Dependency Thesis

Since this is a topic that's rather important to me I thought I'd post a link to a blog post from Economix examining the question about whether welfare programs erode the work ethic and increase dependency. As with any other evidence based approach to this topic, the answer is that they don't.

A few specific programs are mentioned. Regarding the EITC: "She noted that studies of the impact of the earned-income tax credit revealed a far stronger effect encouraging low-income parents to enter employment in the first place than its phaseout (the decline in benefit levels as earnings increase past a certain point) has in reducing work effort."

Of course, things would be even better if we didn't phase out the program, but according to those opposed to welfare this would break the budget, or something.

Another particularly important pro-work program is the child care subsidies from TANF:

Temporary Assistance for Needy Families (known as TANF) toward subsidized child care contributed to significant increases in the labor-force participation of single mothers between 1996 and 2000.
Unfortunately, in 2012, federal TANF money used for child care, including direct spending and transfers to the Child Care and Development Block Grant, reached their lowest level since 1998.
Recent cross-national research shows that women’s labor-force participation has increased more rapidly in recent years in countries with generous child care and other family-friendly policies than in the United States.

 Another big cliff often mentioned as a reason to oppose welfare regards Medicaid.

It is sometimes argued that the means-tested health benefits provided by Medicaid tempt workers to avoid or drop out of paid employment.
But analysis of a recent policy experiment in Oregon, where benefits were extended to a randomly selected group of low-income individuals, showed no statistically significant impact on their employment.

I encourage you to read the whole piece. As I've written before, if you want to examine the impact of welfare policies you need to realize that these policies will have both work increasing and work decreasing effects. These effects will vary based on an individual's characteristics. The net effect depends on the distribution of these traits in society. All of the evidence points to the idea that all but the worst designed welfare policies are net work encouraging, even if they do make some slackers into even bigger slackers. But these individuals are the least likely to be those who would make significant contributions to society under any policy regime, forcing a natural slacker to work results in nothing but a lazy, good for nothing worker who will quit as soon as their minimum needs are met. Welfare programs that reduce barriers to hard work, like child care, medical care, nutrition, and basic income (to reduce stress and to give people a feeling that their income gets them somewhere, any manager knows who important morale is to hard work and there is no reason to believe this doesn't apply at the population level) lead to greater work effort by the highest quality marginal workers who are both more productive workers and more numerous than the slackers that reduce work effort in response to welfare.

Yet, American right wingers are basically at war with the welfare state making baseless assertions about its impact on society. Furthermore, they reduce the effectiveness of welfare programs to elicit less work, the worst offender is Social Security disability which has the unrealistic and counter-productive requirement for virtually no paid labor. Other historical culprits were restrictions on AFDC which had strong negative impacts on the family, particularly black families, by their moralizing regulations which sought to enforce standards regarding breadwinner-homemaker families but instead encouraged single parents and co-habitation as well as reducing work efforts by single mothers (TANF solves the work effort of single mothers but continues to do a poor job supporting families, though it is better than AFDC particularly when combined with EITC).

Why is it that these folks remain mired in moralistic tales about the effects of state support when all the evidence contradicts them? How long can people hold on to these lies?

Capitalism vs. Free Markets

Naked Capitalism has a great post up on some of the problems with the maximizing shareholder value theory of corporate governance. Put simply, maximizing shareholder value is an academic theory that went mainstream. In practice it has proven to be a terrible paradigm for corporate governance but powerful interests insist on keeping it this way despite shareholders having nothing but a residual legal claim.

To build on this, I think that concepts like maximizing shareholder value are at the root of what is wrong with our social system. It creates bad incentives and decays the culture and morals. I've been reflecting on these issues quite a bit since starting my MBA program; something I noticed very quickly is that compared to my previous studies there is little effort being made to question the root assumptions or to consider what impact these assumptions are having on behavior.

To start with, maximizing shareholder value is one of the more obvious giveaways of the authoritarian ideology at the root of our supposedly free market right wing. There is no good objective reason why maximizing shareholder value should be a priority of corporations in a free market, other stakeholders, especially employees but also customers and suppliers, have much more powerful and pressing interests in the good governance of corporations. Shareholders often have interests at odds with other stakeholders in a corporation yet those that claim to be in favor of free markets uphold norms that favor these modern absentee landlords over stakeholders with a far greater stake and stronger incentives to make a business run well and profitably. Unless a business anticipates a near term need to raise greater equity financing there is no reason to put shareholders anywhere but last among the various stakeholders, yet our system favors the capitalists over the rest. This leads to an upward distribution of wealth and makes our corporations less competitive than earlier doctrines of corporate governance which emphasized shareholders less.

Another issue is that it gives managers interests and incentives that are often at odds with the wellbeing of the members composing the organization they manage. In just about any other organization the members that compose that organization are regarded as effectively being that organization, yet, with the maximizing shareholder value theory of corporate governance the actual employees that make up the organization are often rated no higher than the plant and equipment the corporation owns. Since we do know that how organizations are conceived of and how members relate to each other is important for organizational functioning it should be obvious that this doesn't maximize organizational effectiveness. The idea that an organization can be "owned" distinctly from the members composing it should seem a bit odd to us, especially since the ownership adds no value beyond the ability to occasionally raise capital. That it doesn't is an indictment on our culture.

These two issues are enough for a quick post. This is a subject I'll probably have more to right about later. Something that I didn't expect to happen when I started a business program was that it would make me think more about whether or not capitalism is actually a useful concept. Seeing the number of unexamined assumptions in my business classes is making me think that it just might be something useful. There is certainly something distinct about an ideology that places owners above workers despite this relationship being inefficient and corrosive to good organizational behavior. Free markets certainly don't demand these relationships. That they exist argues in favor of a distinct capitalist ideology with essentially authoritarian roots that undermines free market institutions in the interests of siphoning wealth and political power towards the top. This needs more thinking on my part but I'm coming around to the idea that there is something to the Marxist notion of capitalism, provided that the Smithian idea of the free market is retained as the proper comparison point to diagnose the evils of capitalism rather than some sort of fantastical socialist utopia.

Assumptions Must Be Grounded to Get Accurate Results

Not Quite Noahpinion has a great post on what's wrong with economics aside from rational expectations. There are two points made that I'd like to elaborate on a bit.

5. There is no interdependence among individuals or firms other than what is channeled through the market.  Everything else is a matter of simply adding up: me plus you plus her plus Microsoft plus the local taco truck.  We live in isolated worlds, only connecting through the effects of our choices on the prices others face in the market.  This assumption denies all the other ways we affect one another; it is very eighteenth century.  In all other social sciences it has disappeared, but in economics it rules.  Yet non-market interconnections matter mightily at all levels.  There are discourses in asset markets, for instance: different narratives that compete and draw or lose strength from the choices made by market participants and the reasons they give for them.  Consumption choices are profoundly affected by the consumption of others—this is what consumption norms are about.  The list of interactions, of what makes us members of a society and not just isolated individuals, is as long as you care to make it.  Technically, the result is indeterminacy---multiple equilibria and path dependence—as well as the inability to interpret collective outcomes normatively (“social optima”).  Also, such models quickly become intractable.

 This is a major point that frustrates me with economics. In political science there is a lot of open derision about this point, though these assumptions can be useful for specific purposes and continue to be used by certain narrow approaches (most notably, public choice approaches). As Peter Dorman says, it's an 18th century idea that has long been superseded by further research. It's not just wrong, we know its wrong. Yet, economists still use it and don't seem to acknowledge this.

When choosing your starting assumptions (assumptions must be made for any real analysis), it's essential to choose those assumptions based on your best read of the available evidence. Since the study of human psychology is outside the realm of economics they should be drawing their behavioral assumptions from other disciplines, like psychology and neuro-biology. This is happening to a certain extant but what needs to happen is that the assumption of individual, autonomous units is ejected wholesale as it has been done in other disciplines.

6. Rational decision-making takes the form of maximizing utility.  Utility maximization is a representation of rational decision-making in a world in which only outcomes count and all outcomes are commensurable.  This is another eighteenth century touch, this time at the level of individual psychology.  Today almost no one believes this except economists.  It is not a matter of whether people are rational, by the way, but what the meaning and role of rationality is.  It is not irrational to care about processes as well as outcomes, or to recognize that some outcomes do not trade off against others to produce only a net result.  (This is what it means to be torn.)  The utilitarian framework is a big problem in a lot of applied micro areas; it is less clear what damage it does in macro.  I suspect it plays a role in wage-setting and perhaps price setting in contexts where long-term supplier-customer relationships are established.  We have a few models from the likes of George Akerlof that begin to get at these mechanisms, but their utilitarian scaffolding remains a constraint.

 Another area where economists are badly out of date. People care about more than outcomes and people do more than maximize. How you get there can be as important as where you're going. Another well established point often ignored by economists. Other social sciences embraced this notion decades ago, economists should catch up (and some are doing so).

Things Economists Write that Make Me Doubt Economics as Practised is a Science

I was reading a post on Mainly Macro which really brought out some of the assumptions that economists have that raise doubts about whether what they're doing is really a science. I will quote the problematic passages (most critical text in bold):

For those who are not economists, let’s be clear what the microfoundations project in macro is all about. The idea is that a macro model should be built up from a formal analysis of the behaviour of individual agents in a consistent way. There may be just a single representative agent, or increasingly heterogeneous agents. So a typical journal paper in macro nowadays will involve lots of optimisation by individual agents as a way of deriving aggregate relationships.

And later on:

The trouble with this approach, as New Classical economists demonstrated, was that the theoretical rationale behind equations often turned out to be inadequate and inconsistent. The Lucas critique is the most widely quoted example where this happens. So the microfoundations project said let’s do the theory properly and rigorously, so we do not make these kind of errors. In fact, let’s make theoretical (‘internal’) consistency the overriding aim, such that anything which fails on these grounds is rejected. There were two practical costs of this approach. First, doing this was hard, so for a time many real world complexities had to be set aside (like the importance of banks in rationing credit, for example, or the reluctance of firms to cut nominal wages). This led to a second cost, which was that less notice was taken of how each aggregate macro relationship tracked the data (‘external’ consistency). To use a jargon phrase that sums it up quite well: internal rather than external consistency became the test of admissibility for these models. 

Now let's review the scientific method:

I. The scientific method has four steps

1. Observation and description of a phenomenon or group of phenomena.
2. Formulation of an hypothesis to explain the phenomena. In physics, the hypothesis often takes the form of a causal mechanism or a mathematical relation.
3. Use of the hypothesis to predict the existence of other phenomena, or to predict quantitatively the results of new observations.
4. Performance of experimental tests of the predictions by several independent experimenters and properly performed experiments.

If the experiments bear out the hypothesis it may come to be regarded as a theory or law of nature (more on the concepts of hypothesis, model, theory and law below). If the experiments do not bear out the hypothesis, it must be rejected or modified. What is key in the description of the scientific method just given is the predictive power (the ability to get more out of the theory than you put in; see Barrow, 1991) of the hypothesis or theory, as tested by experiment. It is often said in science that theories can never be proved, only disproved. There is always the possibility that a new observation or a new experiment will conflict with a long-standing theory.

Do you notice the discrepancy?  In the formal scientific method external validity is the be all and end all of the scientific method. Internal validity is only the scientific in the sense that Marxism is "scientific socialism." Internal validity is the mark of pseudo-science, it's a large part of what marks the dividing line between the two. It's nice when theories are internally consistent but most often they are not in the early stages. Internal validity gets added as a natural part of the research project (think developments in the theory of evolution); trying to force internal validity is a mistake that will rapidly push a theory away from science and into the realm of pseudo-science. Let it happen naturally as more observations come in and more parts of the theory are tested more rigorously.

As a side note, I do have to express my dissatisfaction with the emphasis on experiments, no one disputes that astronomy is a science and experiments are very rarely possible. Testable predictions and observations are the true benchmark, in astrophysics if I predict a black hole will show up in certain conditions and further observations do indeed confirm that black holes do show up in those conditions I've successfully made a testable hypothesis and confirmed it without experimentation, if it doesn't show up than I have evidence against my hypothesis. Same thing with economics.

There's No Evidence of Increasing Dependency! Why Don't People Get This?!?!?!

Sorry for the long blogging silence, I was trying to juggle long hours with a full time course load while planning a wedding and looking for a house. I've now cut back so should have some time for blogging again.

I was reading a post by Rod Dreher on the Republican Party and the shutdown. He posted a summary of findings from a report on the Republican Party base. A shocking number of the bullet points had to do with something that there is no evidence for (link to the full report):

I wrote a rather lengthy page on dependency a while back. I'm not aware of any empirical evidence of this phenomenon or any strong theoretical argument for it. Yet, dependency is mentioned in three of the bullet points for right wing motivations.

It's insane. Increasing dependency is a fantasy. Opposing dependency gets you fantasy policies that can't achieve anything because it's not a problem that shows up in the data. Government benefits aren't tied to any real increases in dependency (you can make a theoretical argument for Social Security and those over 65, but employment by those over 65 is increasing not decreasing so this isn't a very strong argument).

What it appears to be is a rationalization. These folks are having trouble grappling with the social and demographic changes of the last 50 years. Rather than attributing these changes to the market and to other uncontrollable factors they seek to attribute the changes to the policy responses that seek to deal with them.

This makes it very difficult to deal with these people. They are caught up in reverse causation, the more you do to mitigate the impacts of these social pressures the more opposed they will become to any further efforts to mitigate them sense they see the response as the cause (they need to learn sequencing). Let these changes go unaddressed and the resulting problems will get them even more riled up. If they ever get their way they will also just get angry, unmitigated these problems will get vastly worse and they'll double down on their ineffectual actions.

The sad fact is that there is little that can be done but ignore these folks and seek to isolate them. They don't understand the wider social forces impacting their lives and feel powerless to act against them. They aren't, but since they are not comfortable with the policy tools or coordination necessary to deal with the problems they've identified there isn't any meaningful way to engage with them. They mistake solutions for the causes of the problems and they are focused on attacking the solution because they mistake it for the cause. It's just hopeless.

It also reminds me of the deep problem of democratic theory. How can someone opposed to democratic ideals and norms be properly represented in a democratic polity? If you don't represent them you violate the principle of representation, if you do represent them they violate the very ideals and norms you are trying to protect by representing them.

Living in Detroit Makes Me Think All Greater Metro Areas Should Be Amalgamated

Reading this brief post by Robert Reich on Detroit led me to have the knee jerk reaction that all cities she be amalgamated into their greater metropolitan areas. The damage caused by wealth segregation in these areas is potentially enormous, as Detroit so clearly shows. Something that has really struck me since moving here is the plethora of tiny, tiny municipalities that exist. Some of them so small that a good football kicker could probably punt across their entire city limits (I'm barely exaggerating).

While the inequality issues are enormous, there is also the issue of huge inefficiency of it. How many city halls does one metro area need? How much could we reduce the government footprint if all these small towns were amalgamated? While too great of centralization can be a problem there's really no defense for cities of less than 10,000 that don't have a visible break from the central city they are so obviously a part of.

Obviously there are too many entrenched interests and Detroit is too weak of a central hub for this issue to be resolved in the near term but I can at least complain about how completely crazy the situation is. Amalgamate the metro area and Detroit's problems would basically be solved. Not overnight, of course, but the right incentives and necessary resources would be available to make a long term solution just about inevitable.

Living Wage vs. Helping People Live

W.W. at the Democracy in America writes a blog entry on living wage laws (I've noticed that there is an awful lot more ignorant wingnutty comments over the past year or so, though early posters are generally still good. This has been making me less desirous of spending time there, however).

The progressive impulse to make employers rather than the government ensure workers a decent standard of living seems to me to be based in these sorts of considerations. Yet I cannot see how forcing Walmart, or employers generally, to guarantee minimum incomes helps. There is, no doubt, a great deal of dignity in work, and there is also a certain indignity in receiving government transfers. Hiding transfers inside paychecks is therefore an excellent strategy for rewarding work while getting people what they need in a way that makes them feel good about it. That's a great reason to support wage subsidies. However, forcing employers to directly bear the economic burden of the subsidy is mostly just a strategy for reducing the supply of paychecks, which would benefit neither the dignity nor economic security of the American worker.

On the whole I agree with W.W. but with a couple of important caveats.

First of all, for market wages to really be market wages power considerations have to be eliminated.* In the early days of our economy the relative small size of employers and the relative strength of municipalities could achieve this. Later in our history, unions achieved much the same thing. Today, however, we have atomistic individuals trying to bargain with large, centralized corporations. This is an easy recipe for exploitation of the weaker individual party by the organized, stronger party.

In the American situation this has tended to lead to liberals being forced to support statist intervention, without other intermediate bodies to push back against corporate power we are left with the state. Hardly ideal, often too broad in application, and always slow the reality is its the only tool left to provide a countervailing force against more powerful firms. A regeneration of unions would, of course, provide an alternative but for whatever reason too many people see unions as a market distortion rather than a necessary countervailing force to firms that would lead to more efficient outcomes.

A second caveat is that, as Adam Smith observed about Scottish Highlanders,** there are groups who do not depend upon wages for survival that will drive wages below what their natural clearing rate would be. Groups such as teenagers and the elderly who can depend respectively on either their parents or old-age pensions often choose to work for below market wages for reasons peculiar to these sub-groups. These marginal workers tend to drive wages below what would be demanded by workers if these groups were not present.*** [Update: To clarify, most labor markets are composed of individuals whose primary income come from markets. At the very low end of the wage spectrum, however, individuals dependent on markets for their incomes are competing with individuals whose primary income is non-market, whether household production like the Scottish highlanders or based on family ties or social guarantees like teenagers or the elderly. Imagine if you had to compete in your job with someone who worked simply to buy video games and had their house, food, and other living expenses taken care of for them. Would you like to be involved in that competitive wage negotiation?]

With these two caveats in mind, however, I do agree that insofar as state power is being used to address these inequities it is better to do so through general taxation than it is through employer mandates. After all, there are a lot of negative externalities to having lots of poverty ridden people in the population and we all benefit from addressing their poverty. Subsidies would also serve to address the problem of people working for pocket money rather than a roof over their head and food in their bellies.****

However, I think the idea of a fair price has a lot more gut appeal than does the idea of a guaranteed minimum income or other policy interventions that could turn the residents of our trailer parks into bourgeois.***** So I don't see W.W.'s or my favored interventions gaining much traction, especially when the necessary taxation for these policies is taken into account. A better policy lever to pull would be interventions like universal healthcare and other universal insurance schemes to get benefits off employer's books. After that our businesses will be in a much better position to pay for the likely inevitable higher minimum wage laws.

*Economists have a terrible tendency to handwave away power. While I'm aware they deal with it tangentially through issues like transaction costs and in some studies bargaining, power plays a deeply influential role in our economic interactions and economists really need to come to terms with this if they want to be scientific and based on observation rather than philosophical and based on abstract reasoning.

**I think it was Scots. Though for some reason my memory is also thinking his example had something to do with the Caucuses and Russians. I'm probably conflating two different books, but I know Smith mentioned this phenomenon and am simply too lazy to look up the exact reference.

***Without the presence of a pool of workers not dependent on their wages for survival workers would naturally tend to bid up wages over time as their not making ends meet and the pressures force their productivity to decline. With a pool of workers not being driven to distraction by poor living conditions, however, wages can remain artificially low and the employees with inadequate living conditions can be called lazy rather than miserable.

****On the whole I do think the evidence also shows that people work harder for their pocket money than they do for the bread in their bellies. Someone working to eat will generally want to stop working once they have enough to live off of, having so few prospects to earn real resources there is little incentive to work past this point. Provide them with enough resources to get by, however, and people find that there are actually goals they can work towards rather than immediate needs they have to satisfy. Social advancement is an infinite treadmill but the human stomach can only fit so much.

*****While it is a respectable intellectual standpoint to not like the bourgeois I think there is a powerful state interest in encouraging people to think and act like the bourgeois.

Why Do Economists Hate Consumption?

I'll admit upfront that this is an off the cuff remark I haven't thought through. I was reading Tyler Cowen's piece in the New York Times on wealth taxation. This passage struck me:

Historically, economists — including me — have generally favored taxes on consumption, on the grounds that they would do the least damage to long-term savings, investment and economic growth. Yet in some eyes, rising wealth will become a tempting target for short-term political gain. And note that while most Republicans currently oppose consumption taxes, they may dislike the relevant alternative, namely wealth taxes, even more.

Now, it is of course true that savings = investment as an accounting identity. However, the link between savings and productivity growth is far more complicated.

The reason for this, of course, is that investment can mean many things. It can mean investment in productivity enhancing equipment which is what savings proponents seem to think of and which increases overall welfare. Or it can mean setting aside ever more of our earnings to simply inflate real estate prices by flipping houses to each other. Both these things are under the umbrella of savings and investment but only one of these things is welfare enhancing.

Frankly, the emphasis on investment has always seemed to me to be influenced by a misreading of history combined with a combination of availability bias and ingroup bias. The misreading of history comes from the tendency to see the rise of capitalism in the textile mills and other machine oriented industries while ignoring that studies over the past several decades show that these large industrial enterprises don't even come close to explaining the rates of growth experienced in these years. Also ignored is the fact that the early modern world had an abundance of wealth tied up in land and industries that had been invested heavily in throughout history, like mining. Ignored is the shift in consumption patterns away from simple foodstuffs and towards tradable goods, throughout Europe people were expressing a preference for commodities like sugar and coffee and devoting more of their labor to acquire these goods and substituting market goods for household labor more generally.

Availability and ingroup biases come in two forms. First, classical economists after Smith focused too much on industrial enterprises. It is easy to see the changes being made by factories and steel plants, it is harder to notice the increased velocity of commerce that involves the little people making small purchases not produced by large industrial enterprises. While this perspective has largely been corrected in more recent economic history, the fact that large scale aggregate evidence was mostly unavailable to classical economists amounts to something of an original sin that has carried over into modern economics. The stories told, if not the evidence, continues to overemphasize the contributions of the industrialist over the butcher, the baker, and the candle-stick maker* despite the fact that the increased level of trade amongst these small time professionals probably contributed more to the rise of capitalism and the early period of remarkable growth than did the industrialist.

Ingroup biases resulted from the kind of people these earlier economists, and most modern economists, associated with. Early universities did not recruit broadly, the people these thinkers came into contact with were the up and coming investors in large enterprises. Their notion of business shows the influence of these titans of industry rather than the small time entrepreneur who was the real engine of growth but whose kids were lucky to get much formal schooling at all, much less reach university. This leads to a story told by the people that had more interest in justifying their success than they did describing the efforts of the millions of souls who made the far larger contribution to modern prosperity than they did.

There's more to the story of course, like the increased durability of machinery in this period. But the more I read economic history the more convinced I become that the largest piece of the puzzle is that wealth became more mobile, it had to be put to work. Before the modern period wealth was tied up in land, mines, and grain stores. After a number of changes it became essential to put this money to work, try to sit on your previously safe assets and your fate was to fade into irrelevance.

Which brings me back to the wealth tax. Wealth in the United States is incredibly skewed. While much of it is invested in machinery and other productivity enhancing investments another portion is invested in relatively non-productive assets such as land, commodities, and certain forms of intellectual property. Since not all forms of wealth are equal it seems to me at least plausible that a wealth tax could be growth enhancing.

My thoughts on this rest on a simple fact. The point of the economy is ultimately consumption, any investment pays off because someone wants to buy what was produced by that investment. To the extent the investment was simply being made for security, whether something as primitive as putting grain in a grainery or as complex as a financial derivative, an investment can potentially make us all poorer by taking assets out of active circulation. Ultimately, a properly structured wealth tax may make us all richer by reducing incentives to plow wealth into non-productive assets like land or gold and instead into growth enhancing machinery or human capital. The key thing is circulation, capitalism is about wealth flowing rather than staying static in a musty vault or wild expanse of private forest. This is basically what I see as the story of capitalism, a transition from static wealth and security to a consumption driven economy where investments are made simply to keep up with demand. The more wealth is redistributed in the form of income and economic activity the better off we all are. If it instead stagnates in idle luxury, or is siphoned off to those that won't use it to consume in the form of returns on real estate, consumer, or student loans the worse off we become.

This is, of course, more complicated than what could be achieved by a simple wealth tax. But I think the supply side driven economic perspective is basically wrong. Growth was driven by people trying to keep up with the increased consumption of the masses, mostly by the masses producing for each other. As a side effect this made a few people very wealthy, this form of income inequality is a natural side effect of the system and neither good nor bad. But to the extant that society changes to protect these lucky few we all become worse off, their wealth lies mostly idle and there is less need to invest in productivity since those that consume have less wealth to spend. What we need is wealth to change hands more often and for people to consume more, policy should bias income to earnings rather than savings. Unfortunately, I don't see this happening.

[Frankly, this piece needs some cleaning up, but I'll sit on it for another month if I don't hit publish now. Too busy lately.]

* I'm being a little too cute here but couldn't resist. To the extent that these professions were artisans they were probably actually losers from the rise of capitalism and the industrial revolution. The real emphasis should be on the multitude of small shops that sprung up using simple machinery and specialization of labor like Adam Smith's pin shop. This is the real story of economic growth, the small shop with cheap equipment that doesn't require a lot of savings or investment to set up. Just a small windfall for an artisan and the desire to expand operations. A dirty secret of entrepreneurship is that it isn't the result of careful husbanding of resources, more commonly it's a lucky break, like an inheritance gained earlier than expected, and a bit of local capital scrounged up rather than long term husbanding of resources. The notion of long term savings being tied to economic success strikes me as more of a medieval story fitted to medieval ethics and economic conditions than a capitalist one. The conflation of medieval attitudes towards investment with the radically different incentives provided by capitalism that seems so common in our culture is something that never ceases to amaze me. Capitalists are grasshoppers, not ants. Ants are the medieval artisans and landowners that got bought up and dispossessed by the faster and more aggressive capitalist grasshopper innovators.

Sexism and Sacredness [Part 2]

[After a long delay I finally found some time]

So, here's what gets me about the whole sacredness angle. Supposedly the loud protestations about gender roles and the importance of family is supposed to somehow lead to stronger, more stable families. Haidt, somewhat obliquely, seems to suggest that these norms achieve this by activating our group impulses which should supposedly help to form the kind of nested groups to make a healthy, functioning Durkheimian society.

The problem is that I see little evidence of this. Even the most basic units, families, seem weaker in the more Conservative areas where these supposedly groupish values are expressed so strongly.

While I can't make a concrete case for this without doing substantial research I can throw out some suggestive data.
 

http://www.pewsocialtrends.org/2009/10/15/marriages-and-divorce-a-50-state-tour/

The first are these maps of divorce rates and age of first marriage. There is obviously a lot more going on here than just political attitudes, however it is immediately notable that the areas where groupish conservative ideas dominate are not markedly more superior on these measures than states where the opposite attitudes dominate. While it's hardly definitive I'd say this is certainly suggestive that conservative attitudes aren't very successful at increasing the stability of family units.

http://www.mckinleyirvin.com/blog/divorce/32-shocking-divorce-statistics/

While probably not the most reliable site, and I'll mention some data that provides nuance to the above,  there are a number of notable statistics that cast doubt on the socially stabilizing force of conservative attitudes.

First of all, increasing age at first marriage shows a strong negative correlation with divorce.

Age	Women	Men
Under 20 years old	27.6 percent	11.7 percent
20 to 24 years old	36.6 percent	38.8 percent
25 to 29 years old	16.4 percent	22.3 percent
30 to 34 years old	8.5 percent	11.6 percent
35 to 39 years old	5.1 percent	6.5 percent

It is difficult to square this pattern with an insistence on abstinence until marriage and other aspects of traditional family and gender roles. It also supports the notion that blue states generally have lower divorce rates than red. Further it mentions that atheists have lower divorce rates than many other religious groups.*

In the end, I just don't see evidence for the argument that moral intuitions on the sanctity, loyalty, and authority are leading to a conservatism that reinforces group bonds. Families seem weaker in the areas of the country that most strongly identify with these values. Meanwhile in areas where these values are less vocally expressed the disruption of the past 50 years seems to be rapidly healing with new patterns in marriage and family life emerging and proving stable. While I don't disagree with Haidt that people display the moral traits he writes about I don't see the evidence that they continue to play the functional role he claims for them within the United States.

The problem is that the content of these sacred beliefs and the groups from which cues of authority are taken matter very much. Unfortunately, American conservatism has always been highly identified with business elites and the free market has been the most powerfully atomizing force ever encountered by human society. It's impossible for conservatism to promote groupish tendencies and to create the kind of stable, Durkheimian society written about by Haidt when it holds as sacred principles that lead to atomization rather than community and when its authority figures are those that have succeeded within the atomistic competition of the market rather than those whose position is rooted in deep ties to place and community and moral bonds instead. Heated talk about values does nothing but conceal the fact that America's business leadership has no idea how to build social institutions that would reinforce communities rather than tear them apart. The central blindness is that owing their power and position to the market forces they cannot face squarely the fact that it is market institutions that are the root cause of the atomization of our society leading to the failure of these moral beliefs to fulfill their social role. More on this later, I plan one more post on the subject of marriage and family life to tied up loose ends.



* This is contradicted by a later survey by the same group. I mention it just to add complexity to the argument, in both surveys the sample sizes look far too small to break out the sample into sub-groups as they do. The sample size is certainly sufficient to answer some questions but not to pick up divorce rates among small groups like atheists. Also, the later survey has a strong conservative skew that doesn't match with overall population data. Fun stats that reveal a complicated picture but not ones too be taken too seriously.

I'm Siding With Our Corporate Overolords on Pharmaceuticals, For Once

I was surprised to find myself siding with corporations and the Supreme Court on their recent decision on generic drugs.

Specifically, the NY Times states that:

The four dissenting moderate liberals argued persuasively that the company could, in fact, comply with state law without changing the drug’s label or ingredients. It could continue to sell the drug and pay compensation for any harm it caused as a cost of doing business, or it could remove the drug from the market.

Let us be clear about something. Every pharmaceutical is dangerous. I remember reading an academic article on how a very large number of deaths in the Spanish Flu were due to aspirin overdoses. The advantages of making these dangerous chemicals available at low prices through generics vastly outweighs the ease of liability suits of keeping them branded and thus accountable. Given very slim margins in the generics industry it would be highly likely that branded drugs would dominate to a far greater extent if generics companies had complete liability.

However, the FDA does seem to get this. The end of the Times article makes this clear:

For a more permanent solution, the F.D.A. told the high court it was considering a rule that would allow generic manufacturers, like brand-name manufacturers, to change their labeling in some circumstances. That could once again make them liable — and rightly so — for harm and allow consumers to sue them if they failed to warn of dangers.

 This is a first step towards what is necessary. Generics exist in a peculiar space, they are copying compounds proven to work by others. Except where the harm is caused by inactive ingredients or the flaws in the manufacturing process it is very difficult to see how they have individual liability for their products.

Where we should be going towards is holding the industry as a whole liable for these problems. Why should Mutual be held accountable when if the patient had instead taken a drug manufactured by Mylan, Sandoz, or Ranbaxy the result would have been the same? It simply isn't a case of individual responsibility, the responsibility accrues to the industry as a class. Mutual did nothing it could be individually held accountable for, regulation and liability is shared by all participants functioning under the same set of rules. This is simply another example of where the American impulse to individualize issues simply doesn't work with how the industry actually functions.

Mechanization and Jobs in the Industrial Revolution

Very quick post, but I happen to disagree a bit with Krugman's gloss of history in his recent column (though it doesn't detract from his point about modern times).

Specifically:

Mechanization eventually — that is, after a couple of generations — led to a broad rise in British living standards. But it’s far from clear whether typical workers reaped any benefits during the early stages of the Industrial Revolution; many workers were clearly hurt. And often the workers hurt most were those who had, with effort, acquired valuable skills — only to find those skills suddenly devalued

I don't disagree with Krugman regarding skilled workers, it actually took a very a long time for skilled workers to regain their previous standing, but the early stages of the industrial revolution rather clearly benefited average workers. People flocked to cities from the poverty stricken countryside. However, this additional competition from unskilled and semi-skilled workers gutted the early-modern middle class of skilled workers. It was eventually replaced by a middle class of non-manual knowledge workers but this took a rather long time.

Of course modern technological change isn't having a similar impact of raising the income of the lower classes like the industrial revolution did. But I do think it is important to point out that the story of the rise of the middle class isn't really all that accurate for describing the industrial revolution, that came later. The early industrial revolution had its largest impact on raising the standards of the lower classes, which is the exact opposite of what we are seeing today.

In the end, however, I don't really see rising inequality as being about technological change. Instead, I see it as being about the political and economic power of modern economic elites.* I don't see any particular elements of technological change that should drive this, instead I see political entities ceding decision making to elites; who predictably do what elites do.

* The power wielded by corporations and employers more generally is a form of political and social power, in addition to economic, even though it is not formally a part of government; a big problem I see in many analyses is the failure to recognize informal forms of power even when it plays a greater role in our daily lives than formal institutions do. Most of us will face far more coercion and petty bureaucracy from our employers than we will ever face from our government; and with far less say and even less means of recourse.

Sexism and Sacredness [Part 1]

I just finished reading Haidt's The Righteous Mind. It was an excellent book and I intend to do a series of posts drawing on the book to explore moral issues. I found myself agreeing with on a great many points. In particular I liked his emphasis on mankind's groupishness, something that I have always thought was fundamentally obvious but that too often seems ignored in our culture.

However, while I don't disagree that the moral foundations can lead to the formation and strengthening of groups I had a nagging feeling throughout the book that he was paying insufficient attention to how sacralizing the wrong things can tear groups apart and limit the groupishness that he claims loyalty/betrayal, authority/subversion, and sanctity/degradation all serve to promote.

While I had planned to take up this subject much later, Erick Erickson happened to say something stupid on TV and then dig himself into an incredibly deep pit by trying to extricate himself with a lengthy paean to sexism.

Erickson's "contribution" perfectly illustrates why I'm sceptical that the current political ideology of the right does in fact contribute to the groupishness that Haidt claims the moral foundations of Conservatives generally contributes to. This is not to argue that the strand of Conservative thought advocated for by Burke does not achieve this, only that the current incarnation in the United States fails to do so.

Erickson's argument basically boils down to men should be off contributing to society while women should be in the home raising children that can later contribute to society.  He seems to believe that he needs little proof that this is the natural order aside from common prejudice and his own anecdotal life experiences. By acknowledging that women can in fact work outside the home, when they have to, he also engages in the annoying habit of trying to signal he's not sexist and unreasonable because he uses soft, reasonable language while condemning their choices as less than ideal. Lets dig into the details.

First, the title. The Truth May Hurt but is Not Mean. This is a loathsome attitude I see all the time on the right. It appears to tap into Haidt's authority foundation, because I'm telling you something tough to hear I'm like a parent telling their kids to eat their vegetables. My beliefs are good for you because they're tough to follow, don't question further or subvert my authority by calling me mean.

 Next we move on to a sanctity argument:

Ladies, if you want to work that’s fine. If your position in life makes it advantageous for you to be the primary bread winner, that’s fine. But your individual circumstances and mine should not hide the fact that there is an ideal and optimal family arrangement whether we in our own lives can meet it.

So, this is basically saying that women should always choose to marry someone that is more financially successful than themselves. While a woman's individual position may make it advantageous for them to be the breadwinner for their household this can never conform to the ideal and optimal family arrangement which is with the male as primary breadwinner. This is either incoherent or it reveals the very sexist belief that some man, some where, is always more successful at being a breadwinner than any individual woman. I don't think Erickson would admit to this belief if pressed but this statement is obviously incoherent without this belief since otherwise some woman, some where would have an ideal and optimal family arrangement different from Erickson's favored arrangement. Of course, as a sacred belief there is no need for it to be coherent but we are forced to acknowledge that for Erickson sexism is a sacred issue and one that trumps actually forming stable, secure families.

Contrarian Articles We'd See if Contratrian Meant Something Other than Liberal Bashing

Paul Krugman makes the rather valid point regarding an article by Michael Kinsley that, "I’m not really sure, but in these cases I suspect it has a lot to do with the famed TNR/Slate premium on being “counterintuitive”, which in practice meant skewering supposed liberal pieties."

I'd like to go a bit beyond this and suggest that if this were something more than liberal bashing we'd see a number of articles targeting Conservative pieties as well. I have some suggestions:

"Government Transfers Undermine the Culture of Dependency"

"Raising Taxes can Raise Growth"

"Using Welfare Rules to Enforce Traditional Sexual Mores Destroyed the Black Family"

"Competition Increases Costs and Effectively Reduces Choice in Health Care Markets"

"Owning a Gun Makes you More Likely to be a Victim of Gun Crime"

"Abstinence Only Education Makes Unwed Pregnancy More Likely"

"Employees are the True Drivers of Growth, Not Employers. And Have Been Since the Industrial Revolution."

[I plan to add to this list tomorrow night, just for fun. Please suggest more in comments]


Some of these have evidence behind them, some of them are simply things I suspect are true. A few of them have even been published.

However, I do think it is true that counter-intuitive news stories are something that are primarily used to undermine liberal policies, particularly those policies that benefit those not so well off. It is rarely used to undermine the Conservative worldview, particularly those parts of the Conservative worldview that are broadly shared across the elite.

It's interesting how rhetoric takes particular forms based on political orientation. Though perhaps it is just framed this way because it tells into a rather common narrative about how elite wisdom is superior to the intuitive beliefs of the hoi-polloi.

What is the Right vs. the Left?

I've been sitting on this for awhile, this train of thought was initiated by reading over the comments in a rather old Economist blog post on a completely different topic, but I figure it's a topic worth posting about. However, I do think a bit of throat clearing is in order. I don't really believe that individual's political beliefs can be located along a line. But I do believe there are constant threads of political belief that tie together the aristocratic and democratic factions of Aristotle with modern Republicans and Democrats.

Specifically, it's the belief that some individuals are better endowed than others with controlling the ship of state vs. the belief that the important thing is that everyone that a decision involves should have a say (or as the disability community puts it, "nothing about us without us," which I see as the essence of left wing politics). I realize that doesn't form anything resembling a line, I believe this is an essential element in each side talking past each other. But I do think this can reasonably be used to compare Aristotle's, or Thucydides', democratic vs oligarchic party, with the optimates vs populares of the Roman Republic, with the Mensheviks vs Bolsheviks, or with the modern Republican and Democratic parties.

Something that needs to be noted is that this is about political orientation, it has nothing to do with people's economic beliefs; that's an entirely distinct way to group ideas that doesn't work with a right vs. left analysis.* Once this is accepted the classification works well enough to describe regimes, though it will upset those who use a more muddied conception of left vs. right to do things like classify the Soviet Union as left-wing (it was a radical regime, but it was far more elitist than Aristotle's oligarchic party which makes it really weird to put it on the left wing of the political spectrum, obviously where it is on the economic spectrum is irrelevant to its political classification).

It also needs to be noted that this does not necessarily make regimes more democratic. Many more left oriented regimes, particularly in ancient Greece and with Caesar's populares but also many Latin American regimes, resulted in dictatorships. Some of these eventually shifted right, remember Augustus started on the side of the optimates, others however simply collapsed after the death of a popular dictator who never formed an elite to facilitate the rightward shift. Generally stated, however, the political orientation is that of elitists vs. populists, in a modern context identifying characteristics are things like wanting to limit the franchise to people who are good citizens or embedded in their communities vs. those that think everyone should have a voice, even if they are downtrodden and despicable.



*I realize using right vs. left to communicate economic ideas is common even among well educated people. However, it results in nonsense like saying they're so far right that they're left. This just doesn't work, the Bolsheviks, for instance, compare with the Nazi regime because both had political beliefs regarding the need for an elite to dominate society, to an extent that could be called extremely far right. Both were radical parties and both implemented many similar economic policies, though to protect radically different social segments. But ultimately they were both rather similar in their political orientation as classified by Aristotle, even if radically different in many other ways of classifying societies.