A Capitalist Carol, Stave 2

…It was the living face of Adam Smith. He knew it from that irritating Institute that bore the name. It seemed to emerge, ethereally, from his wallet, and hover before him, a ghostly wig upon its ghostly forehead. But then, as Splurge looked fixedly at this phenomenon, it was a banknote again.

To say that he was not startled, or that his blood was not conscious of a terrible self-doubt to which it had been a stranger from infancy, would be untrue. And though he never took out his own wallet much, it seemed perfectly restored to normality. So he said “Bah! Humbug!” and closed the door with a bang that echoed through the whole lavish apartment.

Lounge, billiards room, private cinema, ensuite bedroom and dressing room. All as they should be. Nobody under the Chippendale sofa or behind the Picassos. An indulgent blaze in the grate. Yet the image of Adam Smith preyed on his mind.

“Humbug!” said Splurge, mentally attributing the apparition to the surfeit of over-ripe Stilton and over-rich port that he had enjoyed at lunch in Claridges. His colour changed, though, when without a pause, the apparition came through the heavy door, and passed into the room before his eyes.

Its body was transparent; so that Splurge, observing him, and looking through his waistcoat, could see the two buttons on his coat behind.

Though he looked the phantom through and through, and saw it standing before him; though he felt the chilling influence of its death-cold economic logic; he was still incredulous. “What do you want from me?”

“Less,” said the spectre. “Much less. Less spending and less bureaucracy. For I created the wealth that you are now squandering.” It raised a cry and rattled the heavy chain that it was carrying.

“You don’t believe in me,” observed the Ghost.

“I don’t,” said Splurge. “Your stony old economics was completely dispelled by the Keynesian revolution.”

“You must,” replied the spirit. “These heavy chains are not mine, but yours. Every politician is doomed to limp through history, loaded down by the weight of the national debt and the burden of regulation that he forged in life. And your chains will be heavier than anyone’s.” It shook the chains and wrung its shadowy hands.

Splurge fell upon his knees, and clasped his hands before his face. “Adam,” said Splurge imploringly. “Speak comfort to me.”

“You will be haunted,” resumed the ghost, “by three spirits.” Expect the first tonight, as the bell tolls One.”

The spirit beckoned Splurge to the window. The air was filled with phantoms – many of them, he could see, former ministers from his own party – wailing under the weight of their own spending promises.

But being, from the emotion he had undergone, or the high-spending fatigues of the day, in much need of repose, he fell asleep upon the instant.

Mariana Mazzucato, is there no beginning to her knowledge of economics?

It is, of course, becoming increasingly irritating to see Mariana Mazzucato being lauded for her stunning finding that the only reason we have nice things is because of government. Especially when one considers that this finding came from a research program funded by government. Biting the hand that feeds is really very terrible economics after all.

The latest irritant is this, in her acceptance speech for an award:

The point is not to belittle the work of Jobs and his team, which was both essential and transformational. But we must be more balanced in the historiography of Apple and its founders, where not a word is mentioned of the collective effort behind Silicon Valley. The question is this: who benefits from such a narrow description of the wealth-creation process in the hi-tech sector today?

If policymakers want to get serious about tackling inequality, they need to rethink not only areas such as the wealth tax that Thomas Piketty is calling for but the received wisdom on how to generate value and wealth creation in the first place. When we have a narrow theory of who creates value and wealth, we allow a greater share of that value to be captured by a small group of actors who call themselves wealth creators. This is our current predicament and the reason why progressive parties on both sides of the Atlantic are struggling to provide a clear story of what has gone wrong in recent decades and what to do about it.


She seems entirely unaware of the basic paper on this subject. Those “wealth creators”, those “entrepreneurs”, how much do they get from their innovations?

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

The answer is a little under 3% of the total value created by the innovations. Almost all of the rest ends up as consumer surplus being enjoyed by the great unwashed citizenry out there. Which is great, as it should be perhaps, the aim and point of this whole having an economy game is to make the average Smith and Jones as rich as they can possibly be without bursting with the pleasure of it all.

The complaint is that Professor Mazzucato seems to be entirely ignorant of all of this. Sure, Steve Jobs ended up with a pile of money that Scrooge McDuck would blush to surf down. But we don’t actually care because Jobs ended up with a trivial amount of the value created. It is quite seriously being said that another 10% of the people in a developing country with a smartphone adds 0.5% to GDP growth (and no, not 0.5% of extant growth, an entire 0.5% of GDP more) in said developing economy. Whether Jobs ended up with $5 or $50 billion for sparking that amount of value creation is an entire irrelevance compared to that value creation.

And no, we don’t insist that Jobs “earned it”, nor “deserved it”. It’s a purely utilitarian calculation. If someone who innovates (for Mazzucato would insist Apple and Jobs did not “invent”) something that adds entire percentage points of growth to the developing economies of the world then gets to have hot and cold running private jets for the rest of his life, well, that’s just fine. Because we think that would be a pretty good incentive for the next person who is going to make the poor of the world richer to buckle down and get on with it.

The first point of economics is that incentives matter. So it would appear that there is no beginning to Professor Mazzucato’s understanding of the subject.

Challenging Shapiro on involuntary unemployment

A particularly famous efficiency-wages model was the one devised by Shapiro & Stiglitz (1984) - a ‘shirking’ model. The main assumption is that there is imperfect, asymmetric information and that workers have a choice to work or ‘shirk’ (exert little or no effort) and that there is a probability that employers catch them and that they don’t catch them. From this simple assumption, Shapiro & Stiglitz conclude that the wage-rate paid in the market will be an efficiency-wage that is higher than the market-clearing wage. The model predicts that there will necessarily be involuntary unemployment in equilibrium which supposedly acts as a ‘worker discipline device’ since it discourages workers from shirking because their being fired would mean that there is a possibility that they may not find another job. For those who are interested in a graphical representation, the graph below depicts the Aggregate Labour Demand (ALD) curve, the Aggregate Labour Supply curve (ALS – which also presumes a competitive labour supply), the Non-Shirking Condition (NSC) and the Efficiency Wage (EW) at equilibrium.

Several of the underlying assumptions can be challenged, however. For example, since the state of technology enters the Aggregate Labour Demand relation and the state of technology is not static but it actually improves over time, when we take a dynamic view of the Shapiro-Stiglitz model, we find that the positive technology shocks consistently shift the ALD curve outward.

Furthermore, Shapiro & Stiglitz make a simplifying assumption that the worker believes the likelihood of finding another job (if fired) is equivalent to the proportion of unemployed people – this simplification means that, at the limit of full employment, the Non-Shirking Condition (NSC) cannot intersect with the Aggregate Labour Supply (ALS) – this means that full employment is a theoretical impossibility. In reality, however, people have individualised estimates with respect to how likely they are to get another job if they are fired (based, for example, on their estimation of their own ability, how well their skills match to vacancies and other variables) – this more realistic assumption makes full employment possible.

Remember, how the Aggregate Labour Demand curve experienced constant positive technology shocks over time? Well, this subsequently means that there would be full employment since the NSC and the ALD would intersect at or beyond the ALS curve as time progressed. However, the outcome of full employment here presumes static population growth. In reality, the population changes over time (generally, the ALS might shift right over time to signify an increase in the population over time) and, because of this, the conclusion of the model becomes ambiguous.

Simplified models yield nice conclusions whilst more complex models yield ambiguous results. With Shapiro & Stiglitz’s initially realistic assumption, one may have thought that involuntary unemployment was going to be an inevitable labour market outcome even in a competitive labour market. However, when relaxing the accompanying unrealistic assumptions, it’s not so straightforward.shapir(ho ho ho)

A Capitalist Carol, Stave 1

Capitalism was dead: to begin with. There is no doubt whatever about that. Its utter demise was reported by the BBC coverage of the financial crash, registered by the Occupy Movement, and solemnised on the steps of Downing Street by Ed Splurge himself, a copy of the General Theory and a thirty-seven-point public spending plan in his hand. Capitalism was as dead as a doornail.

How could it be otherwise? Splurge knew capitalism well; they had been adversaries as long as anyone could remember. Splurge’s party had been harping on about the instability of capitalism for seventy years, though nobody else seemed aware of it – certainly not capitalism, which annoyingly went on and on, producing economic growth and prosperity. Even China and India got in on the act, lifting billions out of poverty by entering the global trading network. But Splurge knew that one day, capitalism’s inherent contradictions would strangle it; and at last, inexplicably to his Keynesian advisers but joyously for all that, the day had come.

Oh! But he was a generous hand at the subsidies, Splurge! Soft and proliferous as rabbits, open to any entreaty, always ready to dispense a trifle here, a trifle there, from the public finances. Splurge found it blissfully easy to be generous with other people’s money. And today, the usual band of supplicants – farmers of crops and wind, builders of pointless railways, teachers and doctors – was swelled by new crowds: of bankers, mortgage lenders and insurers, all pleading to him for bail-outs. Before the day was out, he would have nationalized all the latter, with a smile.

“We will need many more public servants,” Splurge told his Downing Street staff, to warm applause. But his press officer, in letting himself out to spread this news, had let two other people in. They were a thin couple, with briefcases and small reading-glasses, who announced that they represented the Office for Budget Responsibility.

“At this stage in the economic cycle,” said one, picking up a pen, it is more than usually desirable that governments should make some provision to balance their books. Many thousands are living on public subsidies. Hundreds of thousands are struggling to pay their taxes. What spending cuts shall I put you down for?”

“Nothing!” Splurge replied. “Are there no presses at the Royal Mint?” he asked. “Are there no work-creation schemes?”

“Plenty of presses,” said one of the representatives, “and running hot as always.” “And countless work-creation schemes,” said the other, “each struggling to create any work at all.”

“Oh! I was afraid, from what you said at first, that something had occurred to stop expansionary policy in its useful course,” said Splurge. “I’m very glad to hear it is still going.”

Seeing clearly that it would be useless to pursue their point, the OBR representatives withdrew. Splurge resumed his labours, signing cheques and issuing public procurement orders with an improved energy. He must have been doing it for hours.

And then, “God save you, uncle!” cried a familiar voice. It was Splurge’s nephew, fresh from his class on Austrian Economics. “Recession to you is but a time for paying bills without money, or at least for borrowing it from the next generation. My classmates and I do not know how we will get by, with all the money that your generation has stolen from us!”

“Bah! Humbug!” said Splurge. “Good afternoon, nephew!”

“I am sorry, with all my heart, to find you so resolute. Like everyone else in the country, I try to keep my books balanced. What is prudence in the conduct of every private family can scarce be folly in that of a great nation!”

“Good afternoon!”

His nephew left the room, without an angry word, but with a look of disappointment about him. The clerk in the outer office involuntarily applauded Splurge’s resolution.

“And you, and your fellow public servants, I suppose, in these difficult times you will be wanting me to raise your pay? Increase your index-linked pensions? Bring in paternity leave? Extend your paid holidays? Recruit more assistants? And cut interest rates?”

“Oh, yes sir!” said the clerk.

“Very well then,” replied Splurge. “We do need to spend to revive the economic system. Have the papers drawn up for my signature tomorrow!”

And with that, spent out by the day’s events, he made his way tired but happy up to his private apartment on the top floor of Downing Street, where a generous supper awaited him.

Now, it is a fact, that there was nothing at all particular about this, in that he dined free at the public expense every day.

So let any man explain to me, if he can, how it happened that Splurge, having this free feast before him, felt a strange need to check his own wallet, and saw on one of the banknotes an eery image of someone he thought he had put out of his mind for good…

Right question, wrong solution here

Given that it is Christmas Day an opportunity for us to play The Grinch. There’s a certain amount of truth in the analysis here, although not a great deal. It’s just the solution proposed that is wrong:

Some people in private rental accommodation are having to cut back on food and heating to cope with rising rents, according to research by the National Housing Federation (NHF).

The organisation, which represents housing associations across England, said soaring rents and high deposits were making life increasingly difficult for those locked out of homeownership.

In a survey of 1,183 private tenants it found that 41% of those with children had struggled to pay their rent at least once. Across all tenant households, 31% had been in difficulties.

More than a quarter of the families surveyed said they had cut back on buying food to meet their housing costs, and just under a quarter had cut back on heating.

Well, yes, we’re sure this happens. As it also happens that some in social housing cut back on heating and or food to afford their rents, as those in owner occupied housing cut back on both or either at times in order to pay mortgages or maintenance bills. This is simply a fact of life for anyone at all facing income constraints. As all of us do of course. Our desires are unlimited and our incomes, as with the more general point about economic resources, are limited.

It is, of course, possible to insist that the general cost of housing (of any and all types) is “too high” and thus propose solutions to this perceived problem.

The group called on the government to provide more affordable homes for families on low and middle incomes. Its chief executive, David Orr, said: “We have too many renters just keeping their heads above water, who are being kept awake at night and suffering from stress over the worry of paying the next rent bill.

“The government needs to come up with a bolder, long-term plan for housebuilding so that families across the country can find the homes they need, at a price they can afford.”

And a bold new plan would also be a nice idea. But that call on the government “to provide” is the wrong way to go about this. For it is the government, as we’ve said innumerable times before, with the Town and Country Planning Acts, that is the problem. Those acts artificially restrict the pieces of land upon which housing may be built. Thus housing, as a result of those restrictions, is more expensive than it would be without the restrictions. This is true of any form or sort of housing: owner occupied, rental, social, “affordable” or otherwise.

And the solution is obvious: loosen those restrictions on what may be built where.

As, of course, happened in the 1930s when the scale of housebuilding was what actually dragged the country up out of recession.

That would be a nice seasonal present, would it not? The government solving the housing problem by the government stopping doing what the government has done to create the housing problem?