The Economics Platform

I’m listening to old NPR Planet Money episodes and they have this whole sequence about what “economists agree on” and what their “fake presidential candidate” would run on. And wouldn’t you know it? It’s basically the Sane Left-Libertarian Party platform. Legalize marijuana. Cut the corporate income tax. Cut mortgage interest deduction. Cut income taxes entirely, replace it with a consumption tax. Add a carbon tax to make up the rest. Thats just the obvious stuff.

Particularly interesting is episode 406, where they bring in the political consultants, who tell them they don’t have a hope in hell, because nobody votes for anything sensible. I’m paraphrasing, but not by much. Listen to it, it’s an entire government internship worth of idealism-busting.

Of course, in this country you only need to turn on any news channel to achieve that effect.

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Inevitable Aggregation

    Suppose that [“a mythical visitor from Mars”] approaches the Earth from space, equipped with a telescope that revels social structures. The firms reveal themselves, say, as solid green areas with faint interior contours marking out divisions and departments. Market transactions show as red lines connecting firms, forming a network in the spaces between them. Within firms (and perhaps even between them) the approaching visitor also sees pale blue lines, the lines of authority connecting bosses with various levels of workers. As our visitors looked more carefully at the scene beneath, it might see one of the green masses divide, as a firm divested itself of one of its divisions. Or it might see one green object gobble up another. At this distance, the departing golden parachutes would probably not be visible.

No matter whether our visitor approached the United States or the Soviet Union, urban China or the European Community, the greater part of the space below it would be within green areas, for almost all of the inhabitants would be employees, hence inside the firm boundaries. Organizations would be the dominant feature of the landscape. A message sent back home, describing the scene, would speak of “large green areas interconnected by red lines.” It would not likely speak of “a network of red lines connecting green spots.”

Herbert Simon in 1991 via In Soviet Union, Optimization Problem Solves You .

I would like someone to actually do this, please. An infographic on the sizes of major companies normalized by national (should it be global for MNCs?) GDP and their relationships to one another with thicknesses corresponding to volume of trade. I don’t think my graphic design skills are quite up to the task, although it’s mostly just that it would take simply ages. Maybe just in one sector, for just the US and China? Say, technology and communications companies? There will be inevitable spillover that we can depict with lines leading nowhere.

Political Economy is Depressing

I don’t want to turn the overall tone of this blog more conservative, especially as I’m detecting a slow but certain leftward trend in my political views, but I’m afraid this is going to be another conservative post. This is not, however, an anti-Occupy-Wall-Street post, just an anti-Marxism one.

Partly due to Occupy Wall Street, I was reading some Marxist theory-distilled, condensed, simplified, etc, but in book form, and it seems to cover the basics- and it’s really startling to see how so many of the arguments have remained essentially unchanged. Post-scarcity economics has always been a contradiction in terms but at least it is something that can be considered in a science-fictional setting; however, a similar optimism about the abundance of the industrial age and the bounty of the coming era seems to me to be woven into much of Marxist theory.

The basic idea that wealth becomes ever more concentrated and that this is the inevitable product of the system and so on is something that I have a certain amount of sympathy with, but on the other hand, the clear failure of Marx‘s theory that wages will always be pushed down to subsistence levels and that productivity gains will always be captured by capital and not labour do not seem to be sufficiently impressed in the minds of those who continue to call themselves Marxists. Even more, the simple fact that Marx’s theory of human nature- human nature having always been the largest and most obvious impediment to the success of practically every alternative to plain old capitalism that has ever been suggested or implemented- was wrong doesn’t seem to be fazing anyone in the slightest. Clearly, though, the less-than-necessarily-pliant selfishness of man is a fact that most people grow up to accept (I have always thought this rather than a decreasing sympathy for unfortunates was at the core of that old joke: “if you’re not a socialist before 20, you have no heart; if you are a socialist after 20, you have no head.”)

This, then, is why the “why don’t these people have any actual demands?” question is worth asking, all rhetoric about pushing “the idea” and “maintaining unity” and “not allowing ourselves to be boxed in” aside. (I feel fairly comfortable calling it rhetoric because after all the focus on rhetoric is precisely what “momentum” and “the idea” are all about.) I can accept their premises in the narrowest sense: inequality is widening, and this is bad. I can’t accept their details because the details vary with every telling*, and I can’t accept their solutions because there aren’t any**. Capitalism-as-she-is-practised may well be a system nobody wants, but neither an alternative workable system nor a feasible transition to it (the bigger hurdle, in my opinion) seem to be on offer.

PS: This isn’t to say there’s nowhere to go from here, of course. The system could use more than a few tweaks, and a fair bit of re-shaping. It’s not going to change it’s essential incentive-based structure, that’s all.

PS2: And, of course, burning books is bad.

* I mean, of course crony capitalism is bad, of course banks shouldn’t be given bailouts and then turn around and hand their executives huge bonuses, of course we should avoid moral hazards and try for a more stable, better balanced financial system- but yet again, these aren’t details, those are practically tautologies!

**Some solutions that have been proposed by some people, like a well-targeted debt jubilee, I actually think make sense. (I will, however, wager a small sum of money that no broad-based debt jubilee will happen in the United States for the next 5 years.) The same goes for a reasonable tax increase, although I have a better sense for the numbers than to suggest that it can be restricted to the top 1% and still be sufficient to reduce the deficit.

Ooh, and here’s an inkling of the sort of crap I’m talking about.

A Prediction on Greece

The powerful European Central Bank [ E C B ] i...

Image by UggBoy♥UggGirl

I’ll just make it here, for the record: no matter what happens in the Greece/EU situation- whether the ECB keep feeding them short-term, expensive money, whether the Germans suddenly decide that the Greeks are just dandy folks and give them all the money they need at the low interest rates they need, whether the Greeks decide that they shouldn’t cheat on their taxes and they should totally work really hard and cut their public sector in half and sell off government assets and pay back all the money they owe as soon as possible, whether they default without pulling out of the Euro, whether they pull out and do some sort of restructuring or soft default, whether they pull out and cut themselves off from the world- no matter which of various unlikely, utopian or too-horrible-to-comprehend scenarios take place, there are going to be tremendous opportunities for arbitrage somewhere in the system.

Yes, some of these might only be feasible on a small scale, some only on a large scale, some if you know the right people in various Greek/EU organizations, many in ways that legitimate global financial entities cannot employ, but they’ll be there.

(Inspired in part by this.)

One Argument Against Capitalism

Interfluidity on Tyler Cowen’s The Great Stagnation:

Many activities that generate apparent revenue are detached from reliable judgments of value. Using revenue as a measure of production requires, at a minimum, that discriminating, budget-constrained actors determine that whatever is “paid-for” offers real-economic value superior or at least comparable to activities that could be inspired by alternative expenditures of the funds.

Cowen is appropriately general with this critique. Expenditures by government may not meet this “market test” because political actors may direct expenditures for reasons other than inspiring high-value economic activity, or because, for informational or organizational reasons, government may be unable to discern relative value. But the private sector is not immune. In spheres such as health care and education, the benefits of private sector as well as public sector expenditures are difficult to evaluate relative to alternative uses of resources. Cowen reminds us that health care and education are widely viewed as “growth” sectors, but to the degree we collectively overpay for them, “revenue” overstates economic value. A substantial portion of these expenditures should probably be accounted for as transfers and excluded from measures of aggregate production. But of course, we have no means of estimating the size of the appropriate haircut.

I’d add another important industry to government, health care, and education: financial services. Like with health care and education, we simply are unable to evaluate the degree to which payments to financial service providers represent wise use of resources and to what degree they represent transfers to financial industry stakeholders. Inherent informational problems associated with investment quality, combined with the temptation by service providers to exploit these difficulties to extract transfers, renders financial sector revenue highly suspect as a marker of value. Also, financial services are intimately involved in the other problematic sectors: One thing that binds government, health-care, and education is that all are financed in roundabout and sometimes opaque ways that soften near-term budget constraints and that shift costs and risks, both across time and onto people other than the purchasing decisionmaker. The means by which government, health-care, and education are financed help keep them vulnerable to agency and information problems.

I think of government, education, health care, and finance collectively as the “information asymmetry industry”, and I find it terrifying that many people presume that they are the future growth industries for the United States. Dani Rodrik has pointed out that tradable goods are special, in terms of engendering development in often corrupt emerging markets. Cowen offers an astute explantion: tradables that compete in international markets are usually low-information-asymmetry goods. Apparent value (revenue from trade) and real value are likely to be closely aligned and hard to fake. I worry that specialization in the information asymmetry industry could be an antidevelopment strategy for developed countries.

Conversely, Cowen points out that many new technologies generate value without generating commensurate revenue. It is clear that we would collectively pay a lot more for recorded music or news, for example, because we did in the past (and it’s more likely that our reduced payments have more to do with technology and industry changes than with changes in our preferences). Cowen suggests that many of the current era’s technologies are like this, which is nice from a certain perspective (yay! free stuff!) but can cause a kind of sclerosis in an economy that nourishes itself via flows of monetary exchange.

I think that Cowen is right on both counts. And note that these two factors, in and of themselves, go some way towards explaining “The Great Stagnation”, even before we get to the headline argument about a slowdown in technological change. I’m not referring to an argument Cowen addresses (but cannot entirely dispose of) that there is no great stagnation at all, once we account for measurement error. Instead, I wonder whether, rather than a paucity of new technologies, we might be experiencing a breakdown of an older gizmo that economists refer to as “markets”. As our economy tilts away from sectors in which value (however defined) and financial revenue are reliably cojoined, our primary means of orienting our behavior towards valuable activity, individually and collectively, become less and less effective. We simply don’t know what we ought to do. So we err. If the quality of economic decisionmaking is poorer than it was in past, that has consequences for welfare.

Truly frightening, and not only because it might mean that I have to re-examine a great deal of my philosophy.

Debt is Weakness

Tyler Cowen raises an interesting point:

At some sufficiently high debt-gdp ratio, it becomes a foreign policy issue and a big one. Postwar UK had a high debt to gdp ratio, and to this day it is a fine place, but that debt meant the end of England as a world power, for better or worse. The U.S. for instance used financial issues to push England around and they basically had to give up on their overseas commitments. A very high debt ratio here would mean the end of the U.S. as a global world power, again even if gdp does OK. A global power needs the option of spending a lot more, quickly, without asking for anyone’s permission. Your mileage on a U.S. retreat from the global policeman role will vary, but it’s the elephant in the room which hardly anyone is talking about.

I don’t know if I really agree with the chain of reasoning, but it’s worth considering. I have been thinking about whether the effect is utility-enhancing or detracting from the POV of humanity in general for a while now. In some senses, having no “global policeman” seems to be a good thing, and at least when you phrase it that way, it certainly appeals to my anarchic tendencies. On the other hand, if you had to have a global policeman-not because it’s necessary, perhaps simply because that is the stable equilibrium- who would you really prefer? China? I sincerely hope not.

Hollywood and “Creative Professionals”

I want to think aloud for a bit, and maybe by the time I’m done I will have said something coherent and even something illuminating. Blogs are meant for experiments like this, after all.

So. Fact 1: people who make movies are pretty much by definition creative professionals*. This implies but does not necessitate that a good number of characters in movies are the sort of people who wish to pursue some sort of creative career. In any case, their proportion is considerably exaggerated.

Fact 2: one almost universal lesson/moral in many of these movies is that one should always ” follow your dreams”, even if they seem impractical.

Fact 3: most creative professions are, if anything, over-served (I think there’s a more precise term for this). From a basic econ101 point of view, this should depress wages automatically. Adding to this the fact that many of these professions are just intrinsically less valued by society, at least in terms of how much it is willing to support the average professional, leads to people being paid much less than they would get for a similar amount of work in an alternate, more “conventional” profession.

Fact 4: also consider that many of these professions have very unequal payouts. Charlie Stross had a great post where he showed that the median salary of a writer was a ridiculously low figure by western standards, even though the average is a fair bit (still not that much, though) higher, because a very, very small minority of writers make oodles of money. The same applies to actors, artists, etc. Naturally, the media in general tends to greatly play up the successes and play down the vast hordes who never make it- and no, the starving artist trope is hardly proof against this.

Fact 5: while fact 3 should ordinarily deter those without an “unstoppable” drive from making a career out of these fields, facts 1,2 and 4 considerably alter the situation, mostly by distorting reality- 1 by subtly implying that to be a real character in your own life, you must be some sort of creative person, 2 by suggesting that your life is incomplete if you do not go on to “make the most of your talent”, and 3 by strongly misrepresenting your chances of ever being successful in a material sense by making a career out of what should really stay a hobby. This leads to what is basically mis-informed consent and manufactured preferences, and you know how the rest of this goes.

Proffered conclusion: Hollywood may be ruining your emo teenager’s life.

*As you may have noted, I’m using this phrase in a slightly skewed sense here, not just the literal meaning of the two words strung together. It is not an original usage, so I think I’m safe with it. I think programming is a creative profession, for instance, like much of engineering, but this analysis is far more relevant to the miniature furniture builder or paper sculptor who quits his accounting job than to an engineer.

Those Crazy Europeans

So, all the EU countries have finally come together and decided to establish what is essentially a failed-government bailout fund of nine hundred and fifty seven billion dollars. The Wall Street Journal article contains the following sentence:

Since it became clear that Greece would not be able to meet its financial obligations and fears spread that other indebted nations like Spain, Portugal and Ireland would have similar troubles, Europe has responded fitfully.

In an article that seems otherwise supportive of the move, with only a little bit at the end about how the problems that caused this are still very much present, and everyone is basically hoping Greece et al learn to control themselves real quick, did they actually mean fitfully, meaning in an irregular or unsteady manner? Or did they mean to write fittingly , which means appropriately? Anyway, it is interesting that both interpretations would fit.

(Sorry, I couldn’t resist.)

PS: Tyler Cowen has some thoughts on Europe, here.

Quote of the Week: Totally Expected Consequences

Why do boys love sweets so much?  When 6-year old Joey uses his allowance to buy a Clark Bar, this raises demand for sugar.  Brazil is a major exporter of sugar so this raises wages for sugarcane farmworkers in Brazil, diverting Brazilian youth away from their next-best employment as footballers.  Because Brazil is dominant in international soccer, this levels the playing field and makes soccer more exciting internationally thereby raising the demand for soccer balls.  Most soccer balls are made in China where labor and resources in China are now diverted to the production of soccer balls away from other uses.  Hannah Montana CD’s are also produced in China and the resulting drop in supply makes it too expensive for Joey’s sister Clara to buy *The Best of Both Worlds* and Joey gets a kick out of that.

Margarine Revelation

This is funny even for those who don’t normally read Marginal Revolution, right?

PS: It’s a spoof, y’all. Or a “Halloween costume”, as he calls it. 🙂