We can show that conscription is economically inefficient

Quite apart from the fact that conscription is vile in and of itself, it’s the creation of slavery to the state, we’ve good evidence that it’s economically irrational as well. This little snippet from Iran illustrates the point:

Iran has been hit so hard that its government, looking for ways to fill a widening hole in its budget, is offering young men the option of buying their way out of an obligatory two years of military service. “We are on the eve of a major crisis,” an Iranian economist, Hossein Raghfar, told the Etemaad newspaper on Sunday. “The government needs money badly.”

The amount people will pay to avoid conscription is higher than the value the government places on having conscripts. Thus the loss to the individual must be higher than the gain to the government. This makes the idea economically irrational: it’s a destruction of wealth.

Now of course we’re most unlikely to have military conscription in the UK anytime soon,. But it’s worth keeping that lesson in mind. And yes, this economic reality does also apply to all of the various plans floating around for compulsory “voluntary” service and all the rest. Enslaving people to the state is simply wrong in the first place. But the value that people put on avoiding it is greater than the value the government places upon their doing it. Therefore this is a destruction of wealth: really not what we want a government to be doing, is it?

Democratic discrimination: Minors’ voting rights, poorer households and inequality

Usually, across countries, relatively low-income households tend to have more children than higher-income households; this difference also holds between countries that have relatively high incomes versus low incomes. It’s also the case that the voting age in most countries coincides with the age at which one is no longer considered a minor but a fully-grown adult (16, 18 or 21, usually).

Since it’s not just the individuals who vote but also the entire household that is affected by the government’s economic policies – the moral principle of affected interests, would seem to imply that children should be granted the vote. Poorer households have, on average, more children than wealthier households, by denying minors the right to vote, the law is essentially discriminating against poorer households and communities on the whole. Even though both wealthy and poor households are affected by the elected government’s policies, if we presume that both households have an equal number of adults (say, for example, 2), the average wealthier household would actually have a disproportionately higher voting power relative to its own size and the size of the average poorer household. So, if the poorer household had 2 adults and 3 minors (a total of 5) and the wealthier household had 2 adults and 2 minors (a total of 4), though the poorer household is larger and, therefore, more people are impacted by the government’s policies, their voting power is equal to the wealthier household’s since only the adults can vote. In this way, by denying ‘minors’ the right to vote, the wealthier household is favoured and the poorer household is discriminated against.

In many developing countries, there is a high fertility rate amongst both urban and agricultural communities when compared to their developed counterparts and, furthermore, within these poorer countries, the difference in the fertility rate between a wealthier and a poorer household is even larger than in a supposedly free, developed country. Therefore, denying minors the right to vote discriminates against poorer households even more so in developing countries than poorer households in developed ones and, by that same logic, favours the wealthy elite in the developing nations even more so than the wealthy in developed countries!

This has repercussions for subsequent policymaking and the government’s calculations for re-election next term. If those who are less fortunate have proportionally less self-determining power in elections than others, less attention will be paid to them in proportion to those biased proportions.

Furthermore, people are generally much younger in developing countries and when we consider that various diseases, poor employment opportunities, food shortages etc. might lead to a large number of children in many developing countries dying before they even reach the legislated voting age, it is imperative that they be given the chance for self-determination as soon as possible.

One could easily argue that although there are many minors who might be able to walk, talk and vote independently, there are still those who might be unable to do so in an adequate manner (such as newly born babies and toddlers). My suggestion would be to allow children to claim their right to vote whenever they feel ready rather than at some arbitrary, legally imposed age that results in biased representation of socioeconomic groups in elections.

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)