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April 2014 posts

The Market Speaks

By Jonathan B. Wight

The market speaks, or in this case, screams

CarMax swiftly announced it was pulling its sponsorship of the LA Clippers because of the alleged egregious comments by its owner, Donald Sterling.  Players turned their shirts inside to hide the team name. Nba players

The exodus was soon followed by Lumber Liquidators, Kia Motors, Red Bull, and others. The NBA commissioner, seeing the waterfall of bad press and financial mayhem, quickly imposed a lifetime ban on Sterling and began pushing to force the sale of the team.

There was a collective sigh of relief—our moral sentiments assuaged that a big jerk got his due and that no amount of money could buy the respect of players and fans. 

The market worked in one sense to achieve this end but also seemed to run a bit roughshod over Sterling’s property rights.  Can the monopoly NBA force Sterling to sell his franchise?  Certainly one can see why the Clippers would be worth a lot more sold than to remain in Sterling’s hands.  But should that be Sterling’s decision?  I have no idea what the NBA owners' contracts stipulate, but it is fascinating and sad to watch this play unfold, derived from so much unnecessary pain inflicted by Sterling. 

UPDATE:  There have been problems posting comments to this site.  Jonas Feit has this comment:

On, "The Market Speaks," I would add that Mr Sterling's property rights are likely well protected by the courts and his legal team, which, if past incidents are any measure, is large. It's the HOA situation in other clothes; anyone not desirous of being bound by the customs (and the morality clauses) of organizations needn't voluntarily join them. If such behavior is verboten and this is known and understood, allowing Mr Sterling to remain would violate the property rights of his fellow owners at least as much as forcing him out would violate his.

Excellent point. JBW

Plantation Economics

By Jonathan B. Wight

The L.A. Clippers’ owner Donald Sterling is in the hot seat for allegedly being a jerk.  In recorded comments a man presumed to be Sterling asks his mixed-race girlfriend to remove any pictures from her website of black people.  Presumably it is degrading to have his main squeeze hanging out with the wrong type. “Don't bring black people [to my games],” he added.  Mount vernon

Kareem Abdul-Jabbar, the all-time leading scorer in the NBA, labeled these remarks “the exact epitome of what the plantation mentality is about.”  The plantation owner wants to use blacks for profit-making and for sex, but sees them as inferior and not owed common dignity.

Along these lines, I am reading George Washington’s biography by Ron Chernow, Washington: A Life (2011).  So far it is fascinating, casting aside the sterilized history to present a real person, warts and all.   (Photo of Mount Vernon, which had over 300 slaves.)

There is abundant evidence that Washington, as one of the richest plantation owners in Virginia, treated his slaves better than most, and freed all of them under his control after the death of Martha.

But I was intrigued to read about his loyal manservant slave, William “Billy” Lee (1750-1828) who fought alongside him in the Revolutionary War.  Perhaps unlike Donald Sterling, Washington clearly had genuine affection and respect for Lee, whom he freed on his death (the only one freed at that time). Yet the decorum of slavery called upon this brave man to endure the hardship of Valley Forge and the dangers of numerous battles without the honor of serving at his own pleasure. That is tremendously sad.  Lee died an alcoholic. 

Sterling’s brush with allegations of racism is not new, and he settled a lawsuit in 2009 for $2.76 million for allegedly discriminating in apartment rentals.  Jabar notes that:

"What bothers me about this whole Donald Sterling affair isn’t just his racism. I’m bothered that everyone acts as if it’s a huge surprise," Abdul-Jabbar continued. "Now there’s all this dramatic and very public rending of clothing about whether they should keep their expensive Clippers season tickets. Really? All this other stuff I listed above has been going on for years and this ridiculous conversation with his girlfriend is what puts you over the edge?"

What is to be learned from this?  First, that prejudice is alive and well.  It is not simply white-on-black, it is multi-on-multi.  It is religion-on-religion, it is culture-on-culture.  People who are different face hurdles in being accepted, in being honored, in being listened to. 

The best way to overcome prejudice is to create opportunities for genuine interaction, in which moral sentiments come into play. Walking a mile in another’s shoes is a cliché, but it may actually work. 

Critique of Michael Lewis’ Flash Boys

By Jonathan B. Wight

Michael Lewis’ new book, Flash Boys: A Wall Street Revolt, is making a lot of noise, almost as much as Thomas Piketty’s in terms of the idea that capitalism is rigged against the masses.  Only the connected insiders get ahead in these stories.  POKER

In Lewis’ view, High Frequency Trading (HFT) is a scheme to filch money out the hands of investors using speedy computers to buy and sell milliseconds ahead of others.  In this view there is no economic value created, only rent-seeking by the well-connected.  A brave Canadian named Brad Katsuyama, seeks to right this wrong by opening the new IEX Exchange, which protects the small guy by erecting speed barriers.

There is much gut-level acceptance of these ideas, originating as they do in the moral sentiments of Adam Smith who likewise worried that the mercantilism of his day was a rigged system. 

But what if Lewis is missing the big picture, in two senses: first, what if HFT, bad as it might be, is actually an improvement over much larger and more rampant stealing in the system it replaced? That would make it morally superior, wouldn’t it?

Second, what if HFT actually does create economic value through the provision of market liquidity?  If so, then the fractional amount earned (less than 1/10th of 1% per trade value) is a justified service fee. 

These points are made by Justin Litle, a financial market editor, market trader, and experienced gambler in Vegas.  He offers this insight:

In a more reasonable world, Lewis could have taken another year or two before rolling out this book. In addition to interviewing his "hero," Katsuyama, he could have interviewed a bunch of floor traders and market makers. He could have investigated the long history of liquidity provision, balancing out its pluses and minuses. He could have examined the transition from floor trader to black box as a form of 21st century change. He could have compared the profit spreads of HFT firms to the old i-bank divisions. He could have concluded that yes, HFT has some "wild west" about it, and there is some unsavory stuff going on, but we need to recognize that a core value function is being provided here, and that the industry needs to be cleaned up and polished, not written off as "rigged!"


By Jonathan B. Wight

A sadist is someone one gets pleasure from inflicting pain.  Krugman draws upon the word sadomonetarists to describe the behavior of central bankers in Sweden who hiked interest rates even though unemployment was high and inflation low and falling.  In Krugman’s view, bankers want to be seen as Very Serious People (VSP) who are willing to inflict pain on others to achieve a higher social goal.

One can think of a boot-camp instructor, who must break down recruits and have them experience pain before they can be rebuilt as a Marine.  Drill-sergeant

Colleges (like my own) do the same thing, insisting that students study a full semester abroad speaking a strange language and engrossed in a novel culture.  The point of a semester immersion is that it probably takes six weeks for the novelty and euphoria of being in a new culture to fade, being replaced by depression and loneliness.  Out of the crisis of homesickness, it is believed, students will develop their own inner resources that will make them stronger and more self-confident. Pain is the necessary component of personal growth, and is built into many academic and virtue-ethics programs.

Likely many central bankers also feel that pain is a necessary part of economic growth.  Any gains without pain are … immoral!  Stolen delights!  Krugman notes that the basis for sadomonetarism is based on the moral sentiments or feelings:

And when I say that the dislike for low rates is visceral, I mean just that. While sadomonetarists may offer what sound like coherent analytical rationales for their policy views, they don’t change their policy views in response to changing conditions — they just invent new rationales. This strongly suggests that what we’re looking at here is a gut feeling rather than a thought-out position.

Since central bankers tend to be isolated from the masses, one technique for changing their moral imaginations would be to immerse them for a semester in a depressed area suffering from the effects of high interest rates and high unemployment.  Such field training would engage their emotions every bit as much as their intellects.  Short of that, if VSP live in gated communities, read only the WSJ, and converse with other VSP, they have little chance of salting their sentiments with compassion.

Sports Bubble

By Jonathan B. Wight

The issue of collegiate sports unions recently arose on these pages.  My colleague Saranna Thornton at Hampden-Sydney College has today written an insightful take-down of college athletic spending. Here is an extensive quote:

Between 2004 and 2011, private four-year colleges increased their tuitions by 20 percent, increased instructional spending per student by 5 percent and increased their spending per student-athlete by 54 percent [adjusted for inflation].

Public four-year colleges increased tuition by 10 percent, increased instructional spending per student by 1 percent, and increased spending per athlete by 22 percent.

Even community colleges are playing the game — increasing tuition by 11 percent, cutting educational spending by 8 percent per student, and increasing spending per athlete by 38 percent.

People seeking to justify the athletic largess claim that sports spending is self-financed. But that’s not true. Of the NCAA’s 1,066 members, just 23 athletics departments generated a surplus in 2012. With rare exceptions, athletics championships don’t generate increases in college applications or alumni giving to academic programs. Football

Bravo, Saranna!  It should be noted that Saranna is an economist and also a college sports coach.  She learned the value of teamwork and discipline from competing in swimming, track, and rugby.  That has not blinded her to the stark reality of American colleges’ bizarre spending priorities.

We should also analyze why colleges are doing this.  I think the answer stares us in the face:  We live in a society that is addicted to competitive sports. Most newspapers have pullout sections devoted to sports, and those same papers have little international or investigative coverage. It is a national pastime addiction. Garrison Keiller notes that Americans are not Christians or Jews, we worship at the alter of sports (Prairie Home Companion, April 19, 2014).

All the good virtues that can be learned from sports likely can be learned in club play or varsity teams with few if any scholarship players. 

[Image by: http://www.npr.org/2011/10/05/141047227/the-luxurious-revenue-college-sports-model]

Buddhist Capitalism and Adam Smith

By Jonathan B. Wight

Arthur C. Brooks, the new president of the American Enterprise Institute, is shaking things up in a very desirable way.

He’s taking on crony capitalism, and using the Dalai Lama to do it. Dalai lama

In today’s New York Times Brooks argues that the moral justification for capitalism is not profits or efficiency:

“Advocates of free enterprise must remember that the system’s moral core is neither profits nor efficiency. It is creating opportunity for individuals who need it the most.”

Sounds like this is right out of Adam Smith’s Wealth of Nations.  He goes on to echo The Theory of Moral Sentiments:

“Without abandoning principles, we need practical policies based on moral empathy.”

Needless to say, I support the move towards understanding the moral worth of capitalism in a broader way, and particularly in the 21st century seeing moral imagination as a guide for business development.

Those Lazy Greeks?

By Jonathan B. Wight

A student recently pointed me toward this article from the BBC that addresses the work hours and productivity of Greek workers.

The familiar story is that the Greeks are in a financial mess because they overspend and live beyond their means.  Are they also lazy?

The data is mixed.  In terms of hours, the Greeks work much harder than their German critics:  2,017 hours per year compared to a scant 1,408 hours in the Deutschland.  That’s 43% more hours at the grindstone each year in Greece. Greek farmer

Part of the reason is that the Greeks tend to be more entrepreneurial, owning their own small business as farmers or shopkeepers.  No one works harder than someone who pays himself or herself last.  Moreover, the Greeks have a higher share of full-time workers compared to part time workers. Compared to the Greeks, Germans take a month more per year of holidays, sick leave, and maternity leave. 

So at one level the story of Greek profligacy is wrong.  But at another level the data is mixed.  The Greeks work long hours but they are not very productive during those hours worked—in fact, they rank #24th in Europe in terms of labor productivity.  The causes of labor productivity are complex and beyond any simple narrative.  It has to do with physical, human, social, ethical, and spiritual capital.  Included here would be attitudes toward competition and striving on the job. 

Many of us have experienced shopkeepers more interested in their own cell phones than in their customers’ needs.  Hey—life has to be in balance—and one certainly can’t stress out over a few irate customers.  And hey, I need my coffee and cigarette break and 15 minutes can stretch into 30 minutes if I’m in a good conversation with a colleague. 

I don’t know if that is part of the story.  But the stereotype of Mediterranean laziness needs to be reconsidered.

[Thanks to Thomas Jativa for the link.]

The Fat and Happy Life of a Horse

By Jonathan B. Wight

An op-ed by Liam Neeson in yesterday’s New York Times caught my eye.  New York’s new mayor, Bill de Blasio, has pledged to eradicate the scourge of horse-drawn carriages in Central Park.

Huh?  Those quaint plodding covered carts that are so romantic for tourists?  Central_park_horse_carriage

Ah!  I get it.  It must be the pollution and traffic back-ups caused by these vehicles.  Right?  Wrong.  It has nothing to do with negative externalities.  The mayor’s beef (so to speak) with horse drawn carriages is that they are “inhumane.”

I know nothing about horses but I know a bit of economics.  I know the industry would collapse on its own tomorrow if the paying public got the slightest whiff that the cute horses pulling them around the park were sweatshop workers.  A rich customer likes to think well of themselves, and certainly doesn’t want to think of themselves as slave drivers. The point of a carriage ride is not to get somewhere, the point is to enjoy the ride.  This includes smelling some poop and perspiration and petting the mane and hearing the puff of air out the nostrils. 

The industry is already regulated, with horses working about six hours a day.  Further, horses “cannot work in excessive cold or heat, and must also be furloughed for five weeks a year on a pasture in the country.” 

Sweet!  That’s a longer vacation than most human workers get.  According to the U.S. Department of Labor, workers with 5 years of service receive on average two weeks of vacation per year. 

I am in agreement with Jeremy Bentham that the pains of our fellow creatures on earth should be included in any utilitarian calculus.  Unlike Bentham I am also willing to state there are certain basic animal rights—what they are we can debate.  Do horses have a “right” to work?  Neeson noted that “horses are at their happiest and healthiest when working.”

We owned a sheltie dog and what we did to that dog was criminal:  we never let it work.  It pined to herd sheep. Although we had a large yard for it to run and we took it on long walks, what it really wanted to do was collect and manage, and it would be happiest doing that in the snow. We deprived it of that work and its life was (I think) less satisfying because of it. 

The lesson: we have a duty to fellow creatures (exactly what that is we can debate).  But that duty surely extends to giving dignity and meaning to the life of work.

Raising a Moral Child

By Jonathan B. Wight

The New York Times has a fascinating story by Adam Grant on “Raising a Moral Child.”  

[Full disclosure: I have never raised a child.  But I have been a child, so I have some familiarity with the topic.]

 The discussion of what kind of incentives work on children is fascinating, particularly the warning to not use tangible rewards if you want the child to develop an internal moral compass. 

American parents stress achievement, and thus raise children who might be less compassionate compared to the rest of the world, whose parents by contrast stress kindness and empathy.  Having grown up most of my early years overseas, I can verify that there is something substantially different about the natural generosity and openness of people around the world, particularly very very poor people with whom I have spent time. 

Are we so busy gearing our kids up for competition that we fail to develop their natural sociability?  I love living in a high achieving society with all the benefits that brings.  But we should be aware that there may be a psychological price to pay for that that is difficult to understand or to change.