It’s not entirely obvious that inequality is increasing

It’s a standard trope of our times that inequality is increasing beyond all reasonable levels. And it’s also true that this isn’t really quite true. Inequality within the rich countries has been increasing in recent decades, this is true. But global inequality has been falling. And now from Branko Milanovic (one of the major scholars on this subject) we get that chart above, and this:

…the noted convergence of countries’ inequality levels (see the graph, indicating that countries with higher inequality before 1980 had smaller increases or even declines in inequality since)?

He’s actually arguing about something else which is why the quote is so truncated. But this is interesting, don’t you think? While there has been rising inequality in some to many countries in recent decades those with the highest original inequality have seen, in some cases at least, falls. And that convergence does mean that the world is, at the country level, becoming equally unequal.

The standard trope of that increasing inequality has more than a few problems with it therefore: not just that decreasing global inequality but also this convergence of inequality. and that’s before we even get into things like trying to measure inequality of consumption, adjusted for price levels, at which point we’d be very hard pressed indeed to claim that there’s been any rise in inequality in the UK at all.

Economic Nonsense: 37. Government must act to redress trade deficits

No, not really.  People used to think so.  To some extent this is a hangover from mercantilist attitudes when people thought you needed a surplus of exports over imports so you could accumulate wealth.  In its primitive form of bullionism, people thought you had to sell more than you bought in order to build up piles of precious metals.  

When the UK had fixed exchange rates the balance of trade was regarded as vitally important.  Each month when the Department of Trade (as was) published the figures, people would fret about rising imports or reduced exports.  The “trade gap” would sometimes feature as the lead item on the evening news bulletins.  The significance was that if the imbalance were sustained over a period of time, the pressures on the currency would rise to the point where the pound might have to be devalued to a new fixed rate.  This was regarded as a humiliation, and made imports more expensive, increasing the cost of living.

Once the pound was allowed to float against other currencies, however, the issue lost significance.  If imports exceed exports over a period, the pound drifts down in value, making exports cheaper to sell and imports cheaper to buy, thus closing the gap.  Trade deficits are only a problem for countries with fixed rates of exchange.  And even here, while devaluation can redress them, other countries might also devalue, leading to “currency wars” as each tries to give itself a trade advantage.

Floating currencies solve the problem.  If a country is uncompetitive, buying more than it sells, its currency will go down, enabling it to sell more and buy less.  One of the problems with countries such as Greece has been that within the eurozone, they were not able to devalue or to drift down.  The value of the euro was not within Greece’s control.  Had they left the single currency and restored the drachma, a steep devaluation would have addressed their debts and their competitiveness.  

Erm, this one is interesting

So Prof. Tim Besley of the London School of Economics, former All Souls Prize Fellow, ex-member of the Bank of England’s Monetary Policy Committee, the UK’s third most respected economist, and all-round impressive smart guy, has a new paper with Marta Reynal-Querol at the Universtat Pompeu Fabra in Barcelona.

I mention these credentials to emphasise how respected and mainstream these guys are before I mention the finding of their paper, entitled “The Logic of Hereditary Rule: Theory and Evidence” (pdf, seems to be quite an early working paper), which is that hereditary rule/monarchy outperforms democracy but only when the hereditary ruler is subject to few constraints on their power.

Hereditary leadership has been an important feature of the political landscape throughout history. This paper argues that it can play a role in improving economic performance when it improves intertemporal incentives. We use a sample of leaders between 1848 and 2004 to show that economic growth is higher in polities with hereditary leaders but only when executive constraints are weak.

This finding is mirrored in policy outcomes which affect growth. There is also evidence that dynasties end when the economic performance of leaders is poor suggesting that hereditary rule is tolerated only where there are policy benefits. Finally, we focus on the case of monarchy where we find, using the gender of first-born children as instrument for monarchic succession, that monarchs increase growth.

That is: hereditary monarchs with lots of legal power choose better policy than other systems do, including democracies, non-hereditary dictators, and weak hereditary monarchs, and this is reflected in higher growth.

The size of the coefficient suggests that, in a country with weak executive constraints, going from a non-hereditary leader to an hereditary leader, increases the annual average economic growth of the country by 1.03 percentage points per year.

That’s a really really big difference.

Of course, they’re not saying they actually favour hereditary monarchy!

Although we have tried to understand the logic of hereditary rule, we do not regard the findings of the paper as supporting the institutions of hereditary rule. There are many arguments against, going back at least to Paine (1776), about the inherent injustice in such systems. Moreover, the fact that many polities around the world have put an end to hereditary rule and establish strong executive constraints is no accident since this is arguably a much more robust way to control leaders than relying on the chance that succession incentives will safe-guard the public interest.

It depends what you want government to do. If it’s just there to guarantee a basic framework for society then as long as it worked, some sort of non-democratic system might be OK. Our having a stake in the electoral process hardly guarantees good governance (perhaps the opposite).

But lots of people value democracy not just because they think it gives us good policy: being part of a community; as an expression of human equality; an important type of positive freedom. These pragmatic arguments for and against different governance systems are not going to fully convince those types (and that’s fair enough).

Of course the bigger issue is that the paper could easily be proved wrong in the review process, that’s the point of interesting conjectures in working papers. And there’s a whole lot of other literature out there, some of which goes against Besley and Reyna-Querol’s work. But I tend to think that monarchy vs democracy is an empirical question. Whatever makes us freer, happier, richer is best.

We’re rather confused about these anti-discrimination laws

No, not about the idea that people shouldn’t discriminate except where it is rational to do so. If that’s the way that people want to be then so be it. Rather, we’re confused about the fact that people keep calling for laws on this basis.

Note that this nothing at all to do with things like Jim Crow: that was a series of laws to force people to discriminate. Or, if you prefer, it’s everything to do with Jim Crow: for as Gary Becker pointed out the reason for those laws was the thought that in the absence of them then people would not discriminate in the manner that the racists thought everyone should. Showing that left alone people might well be able to rub along quite happily, even if not perfectly.

But we go a bit further than that in these cases of gay wedding cake refuseniks and the like. There’s at least two possible reactions to that sort of discrimination. The first is obviously the law. But we’re rather large believers in the idea that markets (and yes, social pressure and reaction is a market in this sense) are rather more powerful. To refuse to serve a potential customer because of race, gender, sexuality or any other such irrelevance is of course to be displaying a socially (in this society, the one we’re in, in general) undesirable prejudice. And the question then becomes, well, what should be done about it?

Well, if it actually is a socially not desired prejudice being declared then we’d expect there to be some social and or economic consequences of it being expressed. People not using that supplier for example even if without any direct boycott being organised. That supplier going bankrupt as a result of not gaining custom perhaps.

Let us be serious for a moment: any pub which displayed the notorious no dogs…(insert prejudices of choice here) sign would be out of business within weeks. It’s therefore not obvious that we actually need a law stopping people from posting such signs.

Another way of looking at the same point is that a society where it’s possible to gain majority support for laws banning such signs is fairly obviously a society in which social and business pressures would stop people from displaying that sort of prejudice anyway. So we’re left really rather wondering what is the point of the laws in the first place.

Economic Nonsense: 36. It is important to ensure that the finest minds are directing the economy

This commits the Platonist fallacy of supposing that the problem is to find the wisest, noblest rulers.  The assumption behind it is that we will come out best if only the right people end up in charge.  In “The Open Society and its Enemies,” Karl Popper exposes the fallacy.  The problem is that that whatever method we choose to select our rulers, those rulers can easily be corrupted in office.  The temptations of power are all too obvious.

If we did manage to have the finest minds in charge of the economy, the odds are high that they would direct it to serve ends they approved of, rather than the ends that ordinary people would freely choose if they had the opportunity.  

But there is a deeper fallacy.  It is that any minds, no matter how fine, can have sufficient information and act quickly enough to direct the economy.  The economy is changing from micro-second to micro-second as choices are made, decisions reached and actions taken.  These all input into the flow of information conveyed by prices and deals.  The economy is not like a vehicle that can be controlled by accelerators, brakes and steering wheel.  It is more like a living organism in its complexity and its ability to adapt to changing circumstances.  The odds are that if the finest minds were to direct the economy, they would direct it badly. 

Popper’s answer was not to ask, “How can we choose or train the best rulers,” but to ask instead, “How can we so organize political institutions that bad or incompetent rulers can be prevented from doing too much damage?”  His answer was that you need a means of rejecting the bad, rather than selecting the good.  In the economic sphere this happens without the direction of the finest minds.  Products that do not cut it with consumers are counted out, along with the firms that market them.  Capital is redeployed to the newer, smarter people who can satisfy customers.  It is a continuous process by which the less competent is weeded out in favour of the more competent.

If we did have the finest minds trying to direct the economy, the chances are that they would contrive to stop this happening, or at the very least, interfere with it in ways that made it less effective.