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February 2014 posts

More Cheating Scandals

By Jonathan B. Wight

From Tyler Cowen we hear of the latest cheating scandal in science.  The journal Nature reports that two major publishers (Springer and IEEE) have withdrawn more than 120 previously published scientific papers that were found to have been computer generated “gibberish.” 

Wordle

A computer program takes text and charts and randomly writes new papers that apparently can be published without too much trouble in supposedly peer-reviewed journals.  So much for feedback loops.

 Big phrases strung together can be amusing.  Below is the winning entry in the “Very Best of Bad Writing” prize. 

"Indeed dialectical critical realism may be seen under the aspect of Foucauldian strategic reversal--of the unholy trinity of Parmenidean/Platonic/Aristotelean provenance; of the Cartesian-Lockean-Humean-Kantian paradigm, of foundationalisms (in practice, fideistic foundationalisms) and irrationalisms (in practice, capricious exercises of the will-to-power or some other ideologically and/or psycho-somatically buried source) new and old alike; of the primordial failing of western philosophy, ontological monovalence…. [sentence lumbers on on for another 70 words].

This winning entry was in a book written by a human, not a computer.  But it’s sure hard to tell.


Capitalism for the Masses – Part IV

By Jonathan B. Wight

My previous post focused on Warren Buffet’s humble interpretation of his own good fortune. A related article appeared today in TPM, “Five Tycoons Who Want To Close The Wealth Gap.”

Their reasons for desiring to close the wealth gap are varied, but a common point is that capitalism must be good for the masses or it won’t be viable politically in the long run.

Hence Ron Unz, a Republican who made his millions in Silicon Valley, is working to raise the minimum wage in California to $12/hour by 2016.  The quid pro quo is that he would eliminate other subsidies:

"[E]very full-time worker would be earning almost exactly $25,000 and every full-time worker couple $50,000. Under normal family circumstances, those income levels are sufficiently above the poverty threshold that households would lose their eligibility for a substantial fraction of the various social welfare payments they currently receive, including earned-income tax credit checks, food stamps and housing subsidies."

Other millionaires favor raising the minimum wage even higher.  “Wider prosperity” is a worthy goal, without which the justification for capitalism is one large bit weaker. 

There is strong feeling in some quarters that the market itself will naturally produce wider prosperity and equality without any intervention by government.  For example, in the rush to industrialize, the demand for skilled labor exceeded supply, leading to a rise in inequality between skilled and unskilled workers.  Over time, we would predict the higher returns to education would lead more poor people to invest in education, and eventually the supply of skilled labors would increase, the supply of unskilled would decrease, and inequality in wages would be reduced by the working of markets.

This is a lovely story, but does not capture the path-dependent nature of opportunity and choice.  I know four very smart people who never made it to college.  College always seemed out of reach given the exigencies of their own circumstances.  Call this price “illusion.”  No parent, uncle, brother had been to college; they found it hard to “see” themselves in that environment, especially if they had to borrow vast sums and the ultimate jobs were outside their history of experience.  The financial markets did not seize on their needs for information and cash-in to help them, so four very bright people never made it up the economic ladder.

Rather, the narrowing of inequality in the United States from 1930 to 1970 was to a large degree the result of government actions:  the breakup of monopolies using the Sherman Anti-Trust Act after 1880, the progressive income tax (16th amend. -  1913), Social Security (1930s), the minimum wage (1938), the GI Bill (1940s), Johnson’s Great Society and the Voting Rights Act (1960s).  And today I would add the Affordable Health Care Act (2010) that allows the middle class to pool into exchange markets without being part of a large formal work place. 

These myriad of economic programs can all be criticized for inefficiencies and one longs today for Milton Friedman’s relatively simple negative income tax as an alternative to all of them. 

Nevertheless, the basic point remains the same: capitalism cannot work only for the 1 percent.  “Let them eat cake” went out of style in 1789. 

[Yes, I know Marie Antoinette never said this, and Rousseau likely made it up.  Still, it captures a useful sentiment.]


Capitalism for the Masses – Part III

By Jonathan B. Wight

Previous posts on this subject have focused on meaning and inequality.  Warren Buffet addresses both through his humanity and his generosity.  While he is sometimes treated as a buffoon, to me he is a sage.  Only a wise man could so candidly recognize the sources of his external successes and his internal joys:

My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the U.S. were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.)

My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I've worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate's distribution of long straws is wildly capricious.

 The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. 

Humility, grace, and kindness. 


Capitalism for the Masses – Part II

Capitalism for the Masses – Part II

By Jonathan B. Wight

My previous post argues that capitalism should be celebrated for much more than satisfying the urge for profit-maximization.  But whatever story we tell about capitalism I think it is one that has to resonate with the positive experiences of the masses, not the elites.  That story is getting easier to tell on a global scale, where many hundreds of millions are being lifted out of abject poverty.  But it is harder to tell that tale in the United States, where inequality has been growing rapidly while real wages are stagnanting.

After 1973 a great divergence appeared, in which average worker productivity grew by 80 percent but average compensation grew by half that amount.  The figures are more striking when considering the median male worker, whose compensation remains essentially unchanged at its 1973 level.   

Workers (on average) are much more productive but markets are not rewarding that productivity. That has produced record profits.  According to Adam Smith, profits are “always highest in the countries which are going fastest to ruin” (Chapter: [I.xi.p], 162). The sign of a healthy economy to Smith—and to us—should be rising real wages, not rising profits. 

What to do?  We should be vigilant against the profit-maximizing types who would carve up the market into nice monopolies or near monopolies (think Comcast-Time-Warner?). 

Brook’s article goes on to say that Arthur Brooks would also like conservatives to declare a truce on the social safety net.  I agree.  Having a net (including the ability to buy health insurance on an exchange), may free up many people to start their own businesses.  In addition, basic fairness (and long run political sustainability) would suggest that a rich country cannot flourish if the gains to the market do not adhere to the masses:

No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged (Smith, WN, I.viii.36 [96]).


Capitalism for the Masses – Part I

By Jonathan B. Wight

David Brooks in today’s New York Times reports on the shift in the American Enterprise Institute’s take on capitalism.  The AEI’s president, Arthur Brooks (no relation), is touting the human transformational aspects of capitalism.   That is, how people acquire meaning from discovering and pursuing their dreams and aims in life. 

This is long overdue. 

Wealth maximization is not to be sneezed at—!—because, as Paul Heyne was fond of pointing out, money is the tool by which we carry out our aims, including our ones for benevolence and justice as well as the self.  We cannot say why someone buys or sells, since we do not know their motives, many of which could be noble.

But life is also more than shopping: “To found a great empire for the sole purpose of raising up a people of customers, may at first sight, appear a project fit only for a nation of shopkeepers” (Adam Smith, Wealth of Nations).

The motivation for entrepreneurship is complex.  To portray it simply as profit-maximizing diminishes and degrades the noble pursuits that often go with it—creating beauty, being the first, being the best, and serving others.  An organic grocer in my hometown started on this path thirty years ago, long before this movement was captured by corporate bigwigs and long before this could be seen as a “profit-maximizing” career move.  The founders were moved by their commitments and ideals. 

Profit is necessary for sustainability, but it is not always the most important motivation for entrepreneurship.  In teaching about capitalism we should abandon the caricatures of Adam Smith (that greed is good) and the caricatures of standard micro theory (that profit is the only motivation) to present a more complete and enriching view of the possibilities of competitive markets.


Mehmet Cangul on an upside to a reduction in employment

Mark D. White

Mehmet bookMuch has been written recently regarding Obamacare's predicted effect on employment and, even more recently, on the CBO's report on the effect of increasing the minimum wage on same—see, for instance, Ross Douthat's latest column, "When Work Disappears." 

As it happens, I was fortunate enough to see an advance copy of Mehmet Cangul's upcoming book Toward a Future Beyond Employment, in which he argues that there can be an upside to a gradual reduction in employment, but that society needs be re-evaluate its ideas about work, consumption, and leisure in order for that to happen. (I have an older piece at Psychology Today along the same lines, so I was drawn to Mehmet's arguments.)

I asked Mehmet if he would write a short piece for Economics and Ethics addressing the recent Obamacare controversy, and he graciously agreed. Below is what he wrote:

-----

The recent Congressional Budget Office Report, revealing Obamacare would cause more than 2 million job losses, has caused much stir. Republicans have been quick to point out that they were right all along about Obamacare’s cost on jobs and business. But the White House defended the result, arguing that much of the job loss will come from people choosing not to work and instead focus on their “dreams.” Their reasoning is that healthcare subsidies for the lower ladder of the income scale would enable workers to “escape” jobs that they would otherwise stay in only to keep their healthcare coverage. Some on the right have been quick to ridicule this argument about expanded choice, framing it as a last-ditch political effort to make the best of an embarrassing revelation.

However, we should take a pause from politics and ask this intuitive question: does it make sense that people would continue to work at jobs they would rather quit just so they can have affordable healthcare? This is in fact a severe distortion that prevents the full realization of what the American economy has already inherently achieved, more choice.

This is one of the core ideas of the book I wrote, Toward a Future Beyond Employment, that will be published by Palgrave this April. My main argument is that the Western economies that have been able to incorporate their technological progress structurally to their economic production should be able to afford more free time for their workers. Due to certain economic inefficiencies and cultural biases, however, the system is not able to fully internalize this opportunity. If Obamacare will give workers more choice, and ultimately more time, this should be welcomed, not attacked on the basis of a dogmatic cling to political correctness about job loss.

Some have argued that a declining work force would pose problems for economic production as jobs would increasingly be harder to fill. However, the trend of technology and automation points otherwise. The more sophisticated and nuanced automation becomes, the faster we will converge toward a paradigm where the demand for human labor will become either irrelevant or severely reduced (in terms of both laborers and hours) even in areas where we would never imagine robots could toil on our behalf. Just as the technological shift of manufacturing eliminated jobs in physical production, a parallel structural shift is taking place in non-tangible jobs such as administration. Increasingly more sophisticated software technology is rendering mental labor less relevant as well.

Does this mean more people will be idle without a purpose? This is a caricature. In truth, it only means that society will have to translate the time savings from this labor elimination toward alternatives that give individuals more choice and creative satisfaction while certain industries and their potential for traditional job generation face a natural decline. The economy is no longer one of industrial and material production, but instead operates on the basis of the production of ideas and concepts. More time away from declining traditional work structures should naturally enable more people to contribute to the production of ideas on an individualized basis.

In my book I argue that this is the next stage of economic advancement that Western economies face, and will result in higher welfare based on people having more time to use as they wish. Public policy that accommodates this evolution by expanding choice should therefore be encouraged. While Obamacare will continue to be debated on multiple grounds, its impact on jobs has to be considered more thoughtfully beyond headline numbers and short-term political gain.


Self-Deceit: Alive and Well

By Jonathan Wight

 “[S]elf-deceit, this fatal weakness of mankind, is the source of half the disorders of human life.”  (Adam Smith, The Theory of Moral Sentiments, Liberty Fund, p. 158).

 Self-delusion can be good in some endeavors.  If I overestimate my own athletic prowess, this gives me confidence that—at the margin—might help my performance.  From an evolutionary perspective it might make sense. 

 Yet it has its downsides. A famous Pentacostal Preacher recently died while handling his poisonous snakes in church.  He refused medical attention, believing that a true believer could not be hurt.  

A dear friend of mine also recently died from handling his poisonous viper.  In his case, he knew well what his fate would be if bit.  It was not self-deceit, but the attraction to the slithering darlings, that kept him coming back.

As for more self-deceit, a friend of mine in graduate school believed that the correct mix of fruits and vegetables would act as a natural contraceptive.  So he had lots of unprotected sex with his wife. Five pregnancies later….  he was still insisting his system worked! Self-deception

We want to believe what we want to believe.  Steve Jobs resisted surgery for his pancreatic cancer, instead trying herbal remedies, allowing time for the cancer to spread. 

We do stupid things out of self-deception.  Adam Smith not only took the behavioral economic view that humans easily engaged in self-deceit, he went further and argued that self-deceit was desirable.

In the case of the invisible hand, self-deceit is necessary so that entrepreneurs believe that having wealth and status will make them happy. Wealth is thought to make someone happy because it allows you to buy more of the artful conveniences of life.  But as Smith explains at length in TMS, it is an illusion. 

But the illusion serves a purpose:  “It is this deception which rouses and keeps in continual motion the industry of mankind” (p. 183). 


The Rotten Fruit of Moral Waivers

By Jonathan Wight

 The Associated Press reports yesterday that the number of service personnel being kicked out for unethical behavior has “soared.”  More precisely, it increased from 5,600 in 2007 to 11,000 in 2013. 

 Why should this be a surprise?  It was widely reported in 2007 that the Army was facing a desperate shortage of candidates to fill its ranks in wartime and hence it let in a lot of unethical people.  It isn’t the fault of the Army leaders, whose dedication to purpose in a difficult time should be heralded.  The blame lies with Congress and the former President for misleading the country as to what is possible with limited resources. 

 Contrary to popular myth, we do not have a “volunteer” Army, since that suggests people work for free.  Instead, we have a market-based Army, in which the pecuniary and non-pecuniary rewards for service are the enticements for people to enlist.  But the market does not clear, nor does the Army want it to!  Rather, the plan is to offer a sufficiently attractive incentive so that there is a surplus of potential candidates, from which the Army (and other services) can pick the cream of the crop in terms of education, motivation, and character. 

Army

 The problem is, during wartime the perceived costs of service increase (including hard deployments and higher potential for death or injury).  This shifts the supply to the left at the same time that demand is shifting to the right.  The result is that the previous combination of wage and benefits is no longer sufficient to create a surplus of well-qualified candidates.  The result is this, as reported way back in 2007:

 “So the Army has found itself recklessly expanding the granting of ‘moral waivers,’ which let people convicted of serious misdemeanors and even some felonies enlist in its ranks.” 

--“Moral Waivers and the Military” New York Times, February 20, 2007.)

 In the best of all worlds we as a society would have stepped up and said, “If we want to maintain a market system of recruiting in time of war, we need to raise the wages to maintain the quality.”

 But the Bush Administration had consistently low-balled the cost of the Iraq war.  Forcing the Army to take questionable recruits, instead of raising the wage, was one more manifestation of this.  We are seeing the fruits of this policy today in the surge of felonies and other crimes in the military. 

 All of this is one more reason to celebrate the examples of those recruits who perform admirably despite the worsening peer conditions. 


Ferrari Capitalism

By Jonathan B. Wight

Via Krugman we learn that Mankiw comes to the defense of the beleaguered mega-millionaires in finance, who have been getting a bad press: 

“Those who work in banking, venture capital and other financial firms are in charge of allocating the economy’s investment resources…. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to the task.”

 It is very true that investment bankers and venture capitalists play a vital part of our dynamic adjustment to a changing world.  They should be amply rewarded for the risks they actually incur with their own money.  

In 1979 the share of income going to the top 0.1 percent of individuals was 2.83%, of which financial professionals garnered 0.34%.  By 2005 the share of income going to the top 0.1 percent had risen to 7.34%, of which financial professionals garnered 1.45%--an increase of more than 300%.  Hence, the share of income in the top 0.1 percent going to financial professionals rose from 12% to 20%. 

But Mankiw’s version of events implies that the extra income going to the financial sector over the past thirty years was somehow the result of greater productivity.  Of course, it likely was not.  It was likely a redistribution of the gains of economic activity. After 1980 a lot of smart people figured out how to rig the financial system so that the rewards of risk-taking were privatized while the added risks were socialized (through bailouts of financial companies “too big to fail”).  The major investment banks put their own people in the Treasury and other agencies.  

Between 1950 and 1980 the U.S. had a “Plain Chevy” financial system that was solid, safe, and reliable: it got you where you needed to go without any big accidents or breakdowns. Financial markets were heavily regulated to prevent risk from spreading uncontrollably.  Financial reserves Chevy and low leverage gave financial managers the incentive to use care.  The economy grew faster during the 1950s and 1960s, evidence that our economy was not being held back by capital allocation.

After 1980 we succumbed to the notion that “greed was good,” and that avarice would lead financial markets to regulate themselves.  The result was a “Ferrari” financial system filled with fast products, faster computers, and greater risks.  The economy itself did not grow noticeably faster because of these slick innovations. 

Ferrari 

Of course, not all else is being held constant so it is difficult to say how fast the economy would have grown without these financial changes.  But the initial presumption that innovation always leads to productivity growth needs to be questioned. 

A better highway system can get more people to work faster and lead to overall productivity growth.  But allowing  people to race Ferraris on those highways can lead to pile-ups and innocent people hurt, as happened in the great crash of 2008. 

To my mind the increase in rewards to financial professionals over the period 1979 to 2005 can hardly be justified by economic performance, at least not at the aggregate level.   We rewarded financial professionals for shifting risk onto the public sector, something Adam Smith strongly discouraged through his plan for financial regulations in The Wealth of Nations


A Real Welfare Queen

By Jonathan B. Wight

The cynicism of rich toward government lasts only as long as it takes to cash the check. That was exemplified in the 2008 bailout, in which AIG traders immediately tried to pay themselves a $160 million bonus after losing $62 billion that year and getting a government bailout.

The Queen of England, it turns out, is also on her last million pennies.

Her take from the Treasury is 38 million pounds per year. That's not much when you factor in all her castles and other expenses. Her personal net worth is 500 million pounds, yet she applied for public welfare assistance to pay for heat for the castle. She was turned down.

At least the Queen works hard for her public subsidy. Can the same be said for those who receive the near monopoly from the sugar quota? The ethanol subsidy? And too many others to count?  

A big government quickly becomes a rigged government, a Robin-Hood in reverse: "“It is the industry which is carried on for the benefit of the rich and the powerful that is principally encouraged by our mercantile system. That which is carried on for the benefit of the poor and the indigent is too often either neglected or oppressed.”

--Adam Smith, The Wealth of Nations, Liberty Fund, p. 416).