Paul Mason discovers Hayek was right - but fails to realise it

Watching Paul Mason grapple with a new economic idea is always going to be an amusing prospect. Perhaps a little like resistance training, vast effort being expended to get nowhere. Here his concern is the new Paul Romer paper insisting that, if we're honest about it, most macroeconomic models are a bit pants.

Well, yes, they are. Mason's solution is:

Romer’s huge mea culpa on behalf of mainstream economics is a sign that, after a decade-long hunt for trolls and gremlins as the cause of crisis, academia now has to begin the search for the cause of instablity inside the system, not outside it. My hunch is that the answer lies in large, agent-based simulations, in which millions of virtual people take random decisions driven by irrational urges – such as sex and altruism – not just the pursuit of wealth.

What the left can bring to the design of these models are the insights that still draw lines of emnity through elite campuses: that class, gender and race exist as economic facts; that the 1% always acts with more information than the 99%; that crises are unavoidable but can be mitigated by accepting they might happen.

Which is rather to miss the point that Hayek made. Which is that we simply cannot do this. The centre cannot collect enough information in anything approaching real time to be able to model something as complex as an economy. Which leaves us with the economy, that market and price system, as the only thing capable of calculating the economy.

Sure, there are some thing we can vaguely plan. The central bank determines the short term price of money (as Romer insists) and influences the longer term price so a decision must be made as to what that price will be. But at any level of detail greater than that we just don't have a system.

And there's no point in invoking "computers" to replace the phlogiston of the current models. As Cosma Shalzi pointed out in "In Soviet Union Optimisation Problem Solves You." We are at minimum a century away from having the necessary sort of computing power even if we knew what we were trying to compute. But since we don't, and cannot, know what the utility function we're trying to optimise is 100 years hence doesn't get us any closer to the goal.

Oh, and whatever modelling process we do use we've still got to start with market prices meaning that we've still got to have that market and prices in the first place.

That is, the lesson that Mason has missed is that Romer's dismissal of the current models does not mean that some others are therefore going to be correct. The failure of the current best we have models means that no such models work.

As Hayek pointed out. Nothing can model an economy to the sort of level Mason desires, so that it can be controlled.

McDonnell's Marxism makes him unfit for office

Recently, footage of the Shadow Chancellor, Labour MP John McDonnell, discussing the 2007 Financial Crisis in 2013 has surfaced. The veteran left-wing backbencher was recorded commenting:

“We’ve got to demand systemic change. Look, I’m straight, I’m honest with people: I’m a Marxist. This is a classic crisis of the economy – a classic capitalist crisis. I’ve been waiting for this for a generation! For Christ’s sake don’t waste it, you know; let’s use this to explain to people this system based on greed and profit does not work.”

McDonnell has come under fire for appearing to revel in an economic crisis that resulted in job losses, recession, and not insignificant suffering. His somewhat glib response was that he was “joking”. In fairness, he probably did not mean that he was delighted by the actual impact of the crisis. That said, his comments do still reveal that he is entirely unsuited to being anywhere near power of any kind, let alone being Chancellor of the Exchequer.

Being a Marxist entails being economically illiterate and historically ignorant. It can, and in McDonnell’s case does, also imply valuing theory over people.

The financial crisis does not require a Marxist framework for explanation. From a reasonable left-wing perspective, it was the result of excessively light-touch regulation and over-reliance on the efficient market hypothesis. A better explanation is that the wrong kind of regulation was in place, which incentivised sub-prime lending. A focus on monetary policy is also instructive, with the Federal Reserve’s ultra-low Interest Rates in the early 2000s contributing to the growth of the housing bubble.

So the crisis does not vindicate Marxism. And Marxism requires extremely good vindication, given its track record, even setting aside the tyranny and massacres that it inspired and justified. Many of its central assumptions, such as the Labour Theory of Value, have been out-dated for over a century. No convincing rebuttal of marginalism has ever been advanced. Marxism’s predictions and theories about class-conflict are, at best, one-dimensional and over-simplified.

The same is true of the demand for “systemic change” and rejection of a system “based on greed and profit”. There are absolutely no success stories (quite literally none). There are no alternatives to the price system and market exchange for organising an economy. There is, of course, plenty of room for debate about what kind of market economy you want. However, whether or not you want to have more worker-owned co-operatives or a more redistributive social democracy, this can only exist within a market-based system. The profit motive is needed as an economic incentive, and greed is a universal feature of human nature that can be harnessed but not eradicated.

Command economies have consistently failed to meet people’s basic needs and have inevitably collapsed because it is impossible to circumvent the need for price signals and giving economic actors the freedom to utilise dispersed knowledge. Fantasies about a magical ‘gift economy’ remain fantasies.

Regardless of whether or not McDonnell really had been salivating over the prospect of economic collapse, his conception of it as a necessary step towards achieving Marxist systemic change is revealing. The problems of real people in the here and now are perhaps an unfortunate inconvenience, but they remain trivial compared to the heroic narrative of the workers of the world throwing off the shackles of reality.

How to cut unemployment - cut unemployment benefits

It's not a surprise that if you cut either the amount of unemployment benefit, or the time they can receive it, then someone who is unemployed will find a new job more quickly. Richard Layard has for decades been pointing out that Europe's generally higher long term unemployment rate, while short term unemployment is about the same, compared to the US is a result of our unemployment benefits not being time limited, theirs being so.

However, there's another point to be made here, which is that we don't want someone unemployed simply to take any job at all as a result of fearing starvation. We would rather that there's enough support, and thus enough time, for round pegs to find round holes. Thus there's an argument for generous support for a considerable period of time.

But how generous and how considerable? Rather less than many think perhaps:

Newly unemployed Floridians receive less generous jobless benefits for fewer weeks than allotted in most states.

The result? They find new employment more quickly, and those jobs pay as well as positions found by workers in other states, according to data the JPMorgan Chase Institute released Thursday.

In Florida, the maximum length of unemployment-insurance benefits is tied to the unemployment rate in the state. Last year it was 14 weeks. This year it’s 12 weeks. Florida is one of a number of states that has cut the maximum amount of benefits in recent years. Most states provide the newly jobless 26 weeks, or six months, of support.

Even with this less time to search the jobs found seem to meet that round/round peg/hole qualification. As the jobs are paying as much after the shorter job search.

Cutting unemployment benefits, cutting the time they are paid for, seems to reduce unemployment. Which is where we came in of course. 

Gizza' job

Perhaps the strangest report which crossed our desks this past week was the one bemoaning the vast gender pay gap in sport.

A new report has found a “vast” gender wage gap exists within sport, with female athletes battling for better pay in a billion-dollar industry that remains predominantly male.

The 2016 Gender Balance in Global Sport report, written in the lead-up to the Olympic Games in Rio de Janeiro, was released on Thursday by Women on Boards, an advocacy organisation based in the UK and Australia.

The update to its inaugural report published in June 2014 included data sourced from more than 300 bodies, and showed significant differences in pay for men and women in basketball, golf and football. There had been progress made towards parity in cycling and cricket, while athletics and tennis offered just about equal renumeration for men and women.

We just cannot find any surprise at the fact that such a pay gap exists. That we actually have different competitions for men and women in almost all sports is all the evidence we need that there is indeed a difference here. Equestrianism has no gender divide and it also has no pay gap. Most other sports change given the different propensities of the male and female physiques. That's why we have the gender divide.

One example of which is the Matildas, the Australian national women's team, losing 7 - 0 to the under 16 side from a local men's club. That is not a rugby football score, that is an association football one.

Then we did what we should have done in the first place - read the actual report itself. The solution is apparently that many more women should be appointed to, and thus paid by, the governing bodies of these various sports. The report is written by the sort of women who would get the jobs, and be paid for them, on those governing bodies of the various sports.

That is, this is not about correcting some dreadful market abuse, whereby spectators simply pay for the sport they wish to see. It's about correcting the dreadful market failure of there not being enough lucrative jobs, with interesting sporting awaydays, for a certain type of woman.

Rather than calling is gender balance in global sport the report should really have been called Gizza' Job. 

Inside George Monbiot

The Guardian ran a little Q&A with George Monbiot. And it's remarkable how ill informed he appears to be on the major points.

Can we survive without economic growth?

Monbiot:

This is a key question and it is under explored. It should now be the central issue in economics. How can we live without destroying the ability of others to live? Does that mean an end to economic growth, and if so how can that happen without harming the prospects of the poor, and while achieving democratic consent? No other issue in economics is anywhere near as pertinent and important as this one.

It is not underexplored - it has been asked and answered. Of course, we can survive without economic growth. To any reasonable approximation we did so from the Year Dot right up to about 1750. The question is whether we need to abjure economic growth in order to survive. To which the answer is no.

Which is good of course, for we generally like economic growth, it makes people happier. Where Monbiot is going wrong is in the supposition that economic growth requires more inputs. In the words of Herman Daly, that it will be quantitative growth. But, again in Daly's words, qualitative growth is entirely possible. And what we normally call "economic growth" is a mix between the two. It's entirely true that we cannot use more copper atoms than there are copper atoms on the planet - there is a hard, if very far away, limit to quantitative growth. But there's nothing obvious stopping us continuing to work out new ways to add value to copper atoms - qualitatitive growth - meaning that there's no reason why economic growth should stop.

Offsetting aviation emissions is simply not going to work. It demands that every other sector of the economy has to cut its own emissions even more than under the existing targets. And why should the sector that most favours wealthy people (who are overwhelmingly the major users of aviation) be allowed to dump its impacts on everyone else?

Assume that we do want to cut emissions. OK, we want to cut those emissions which add least value, least to human happiness, and keep the ones which produce the most value. We might, for example, cut cow farts and continue flying. If it is true that summer holidays add more value than steaks. Or, to put it in the economics that Monbiot doesn't understand, we do not want cuts in all emissions we want people to substitute away from low value such to high value such.

I think this is a big issue. GDP is an entirely inappropriate yardstick for measuring the health of society, and attempts to maximise GDP often lead to environmental destruction and the marginalisation of the poor. Yet both the media and politicians remain obsessed by it. Changing this is a major challenge but it appears to me to be essential.

Nobody does measure the health of society via GDP. It is what it is, a measure of the economic capacity of the society. And no one tries to maximise it either - GDP would rise significantly if we all worked 60 hour weeks but no one at all suggests that. Finally, just have a look around the environment of the higher GDP countries. Very much cleaner and better preserved than those of lower, no?

The simplest solution to almost all environmental problems is government intervention. But as a result of neoliberal ideology and regulatory capture (the first in service to the second) the self-hating state refuses to intervene on a wide range of issues where it could quickly make a difference.

!?!?!

It's quite remarkable how gifted he is at grasping the wrong end of the stick, isn't it?

Democracy doesn't help growth

Studies of democracy and growth are plagued with what economists call "identification problems"—it's hard to identify whether relationships you see between variables are due to those variables affecting each other, or some other variable. For example, across the world, democracies are all-round better countries than non-democracies: richer, freer, safer, and happier—but is this due to democracy itself? It's hard to say: these countries also have different institutions, favourable history and geography, and different cultures—all with roots deeper than democracy.

So economists try and come up with clever methods to work out whether democracy itself makes countries more prosperous (or indeed whether it makes them freer, happier, and/or safer). For example, you can try and control for other factors you think you might be missing out, like the rule of law, human capital, and free market institutions. I survey some of this work in a previous post.

Or instead of looking at a "cross section" of countries—a bunch of countries in one time period—and looking how countries vary, you might look at lots of countries over time, and check whether increased democratisation changed their growth trajectories. If everyone's growth seems to pick up just when they democratise, that's much stronger evidence in favour of democracy, because it controls for all the idiosyncratic factors particular to individual states (what economists call "country fixed effects").

You can improve the methodology yet further. When countries democratise, it often isn't the only thing they do at the same time, and it may not be a cause of or necessary feature of the other stuff they do (e.g. formalise land titles and allow markets in various areas). What's more, it may be caused by special circumstances—like an economic crisis—that would lead us to expect accelerated growth afterwards even if democracy itself didn't have any special effect.

A new paper takes these seriously, and attempts to identify the effect of democracy on growth by surveying 165 country-specific political experts, asking them whether an episode of democratisation came out of economic turmoil, or came out of an "exogenous" (i.e. unrelated) desire to increase democracy. They find that once you control for these "endogenous" (i.e. turmoil-related) increases in democracy, democracy no longer causes growth—previous positive findings came from faulty identification.

Now, democracy may still be good for other reasons—people may just like it, so even if it's only equal to the alternatives, we might prefer it—but we should be yet more sceptical that it is responsible for the things we enjoy in our society.

An Alternative to Grammar Schools

Theresa May’s policy bringing back grammar schools has divided the nation, and the buzzword across the country has become meritocracy. How can we ensure that the most academically gifted go to schools that suit them best, and at the same time not discriminate against those who are less academically gifted by channelling their talents into where they can be best used? 

To the political establishment there seems to be only two options; to carry on with Cameron's free school and academy reforms, or to carry through with Theresa May’s plans to introduce a new generation of Grammar schools across the country.

After Mrs May’s insistence that “there will be no return to secondary moderns” it looks as if the road forks out only two ways, now, with May tugging at the reigns of her disobedient party to get it going down her chosen route.

The prevailing issues surrounding the disagreement it seems, are those of social mobility, school choice and having healthy competition between schools. Given these, perhaps they should consider a third way, a way that the Adam Smith Institute has advocated in the past. That is, to allow profit making free schools to exist. These schools could spur the creation of school chains that compete on quality and standards, ensuring that quality of schooling is maintained. But parents still need to ensure that their desire for school choice is respected. Especially as it is essential that the future of a child is not determined by where he/she should happen to live. To address this, a digital voucher like bursary should be given by the government so that they can send their children to one of these new free schools if they wish.

Though this may be considered somewhat radical, and entail far more than simply the aforementioned, it would be an excellent and indeed highly interesting concept for MPs to consider. Not least because it would be refreshing to consider something new in education policy for a change, rather than trying to dredge up the Grammar school system from the past.

The 2013 Paper published by the Adam Smith Institute in partnership with the Centre for Market Reform of Education School Vouchers for England can be found here.

We agree with The Lancet on the goal, disagree about the method

The Lancet has a special edition out looking at maternal mortality around the world:

According to the new Lancet series, the chances of a woman dying from childbirth over her lifetime is about one in 4,900 in high-income countries, while for women in sub-Saharan Africa the figure is one in 36. By contrast, according to the World Health Organisation, the UK figure is one in 5,800.

We entirely agree that the world would be a better place if there were greater equity in those numbers. As long as the equity is achieved by the terrible numbers becoming better, not by a degradation elsewhere. However, we are deeply unconvinced that this is the correct method of gaining that goal:

 We call on all stakeholders to work together in securing a healthy, prosperous future for all women. National and local governments must be supported by development partners, civil society, and the private sector in leading efforts to improve maternal–perinatal health. This effort means dedicating needed policies and resources, and sustaining implementation to address the many factors influencing maternal health-care provision and use. Five priority actions emerge for all partners: prioritise quality maternal health services that respond to the local specificities of need, and meet emerging challenges; promote equity through universal coverage of quality maternal health services, including for the most vulnerable women; increase the resilience and strength of health systems by optimising the health workforce, and improve facility capability; guarantee sustainable finances for maternal–perinatal health; and accelerate progress through evidence, advocacy, and accountability.

We have absolutely nothing at all against those who know how to cut that carnage teaching those who do not. Indeed, think it an excellent idea.

And yet those lifetime risk rates of one in 36 - they are, like the absolute poverty in the places where those rates exist, the historical norm for human beings, even in fact rather better than that historical norm. Further, it is the poverty which is the cause.

No one does want mothers and or babies to die. It's a fairly fundamental driving force of being a human that we do our best for them. Yet what if it costs $60 to provide suitable maternity care? No, that's just a number plucked from the air - and we're in a society where GDP per capita is $600 a year. There are, tragically, still near 10% of all humanity trapped in economies of that level and destitution.

Given that urge to care for those mothers and babies we know very well that a society climbing up out of that poverty will devote more resources to those groups. We've seen it happen absolutely everywhere that any society has so climbed up out of that historical norm of destitution. 

Thus we do indeed agree with the goal. But insist that the priority to achieve it has to be economic development. Because all else will follow once that is happening. Not just resources to maternity care - but to health care in general. Indeed, things like the "greater empowerment of women" and the like which some make so much of we insist all rely upon a society with some economic surplus, however small, which allows such empowerment. So too the end of child labour, the education of all children and so on.

There are thing which we can do to help - we know how to do some of these things and we should pass that knowledge on, of course we should. But that 10% of the world is still resource constrained. The basic answer has to be, therefore, to increase the economic resources available. This can also be expressed as helping them get rich.

Fortunately we know how to do that. This neoliberal globalisation stuff has, in recent decades, led to the greatest fall in that absolute poverty in the entire history of our species. We must therefore keep that engine of economic growth running -  for the mothers and the children, you understand.

The first and most basic thing you must know about economics

The world simply will not make sense if you do not grasp the first and most basic thing you must know about economics. Which is that incentives matter.

What the incentive is, what the action or activity is, those are things which can all vary wildly. Whether something acts as an incentive or a disincentive can change too. But it really is crucial to understand that whatever else might be going on, incentives matter:

In 2004 the New Zealand government introduced legislation banning anonymous sperm donations and preventing donors from receiving any payment for their services.

Donors in New Zealand have minimal costs covered (such as travel to the clinic) but are not compensated for their time, which after rigorous medical testing and counselling, can be significant.

Under the new law, the sperm donor must also agree to being identified to any offspring when the child turns 18.

A decline in sperm donations following the introduction of the legislation coincided with a sharp rise in same-sex and single women applying for donated sperm.

It's not difficult to predict is it? On the application side the greater controls mean that fertility through donation is more desirable. On the production side the greater controls make production less desirable. Note that there's no money floating around this system but we've still got a change in demand and a change in supply.

And given that we've not got a price that can change to balance them we've got a mismatch.

Incentives really do matter.

Bitcoin and the Beeb

Crypto-currencies such as Bitcoin have already changed the way we pay for things. For a start, it speeds payments up. Instead of institutions like banks controlling our money, it is now issued independently – with thousands of bitcoin miners trying to discover more. 

But it is still rather clunky. All those bitcoin-mining computers whirring away consume vast amounts of energy. And it is still, in a sense, centralised. New generations of programmable money will be more efficient and more dispersed still. And that will change the way we pay for things yet again.

With micro-payments of a tiny fraction of a cent becoming easy-peasy, they will also become routine. Why endure TV ads, for example, when you can simply pay a tiny amount online to watch ad-free content?

Which might completely change our thinking about the BBC. The government is about to issue its thoughts on the corporation's future, and other technological changes (such as the relative ease with which we can now operate subscription systems) might change it fundamentally, even if the government doesn't. But just think about how micro-payments could change public broadcasting even further. Most of the BBC's content is pure entertainment. And bolted on are some 'public service' functions, like current affairs programmes. (That is why politicians love it - they get to watch Newsnight and other tedious political content.)

In a world of micro-payments, your TV can charge you for watching the entertainment and (if that is really what the politicians insist on), not charge you for the boring Newsnight. But think further. Who would really want ads on the commercial channels when you can pay - a tiny amount - not to have them? Or could we actually be looking at a world in which the BBC takes adverts in return for being 'free', and the commercial channels are ad-free, at least to those who pay a bit?

The possibilities are endless. Which is another good reason why the BBC should not be a public monopoly.