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.

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?

The divorce of theology from modern social science and public policy

In modern discourse, talk of God, divinity, spirituality and so on is forcibly divorced from the sciences (considered in the broadest sense). Contemporary mainstream moral philosophy, political economy, political science, economics (not to mention the natural sciences) rarely, if at all, discuss the consequences of the nature of God for the questions they all address. Consider this: God, by definition, is omnipotent, omnipresent and omniscient. Now, without introducing any metaphysical complications, we can say that either God exists or God doesn’t exist (my opinion is that the former is true). If God doesn’t exist, then we can continue working within and articulating the scientific paradigms that currently permeate throughout society. However, as soon as we presume God’s existence, theology becomes fundamental for understanding any other form of knowledge whatsoever. It becomes a primary concern of metaphysics, epistemology and logic. This then feeds through to the sciences that we practice, albeit imperfectly, in modern society. Depending on the presumed conception of God, methodologies and their employment as well as theories and their applications will differ accordingly.

In Plato’s Republic, Socrates considers the nature of the Gods whilst describing his grand, centrally planned society. In India, the caste system is said to have had divine origins (though its interpretation and enforcement became increasingly skewed with time) and this has exerted a profound impact on the socioeconomic organisation of the subcontinent that continues to this day. One of the most famous miracles of Jesus Christ was feeding the multitude with one loaf of bread – to put it simply, divinity can deal with the fundamental economic problem of scarcity for the welfare of all.

Benedict de Spinoza, like many other philosophers and theologians of his age and the preceding ones, offers his readers an account that includes both a proof and a description of the nature of God; to put one of the main conclusions in Spinoza’s Ethics crudely; everything that comes naturally and feels right is good because it has its origins in God and God is good. Now, that which comes naturally is done freely and, intuitively, freedom feels right.

So all this talk of free markets and a free society has a natural resonance with humanity. There is something undoubtedly divine about free will, freedom and a free society.

Why is Polly whining about Downton Abbey?

La Toynbee is whining about Downton Abbey. How it shows the appallingness of old English society and how we're coming back to that masters and servants type world again. Hmm:

To control history by rewriting the past subtly influences present attitudes too: every dictator knows that.

Well, yes, quite.

What we never see is bedraggled drudges rising in freezing shared attics at 5.30am; slopping out chamber pots, heaving coal, black-leading grates, hauling cans of hot water with hands already made raw by chilblains and caustic soda. We never dwell on the hardship of scrubbing floors, or scrubbing clothes, or scouring grease; in pre-detergent days, they were up to their elbows all day long. And yet they had virtually no water or time for washing themselves. Servants were often sooty and dirty. They smelled strongly of sweat, with few clean clothes, says Dr Lucy Delap, author of Knowing Their Place: Domestic Service in Twentieth-Century Britain. She says they used patchouli oil to cover the sweat, the identifying aromas of hard service. In Mrs Woolf and the Servants, Alison Light records Virginia Woolf observing “Mabel sweats when she is making jam”. Even the somewhat more enlightened and sometimes embarrassed Bloomsbury set wrote of their “inferiors”, Woolf talking of “that poor gaping imbecile, my charwoman”.

True.

Modern capitalism promotes the myth that we are all masters of our fate and birth is not destiny, as proof that swelling wealth at the top has been earned.

And that's where it jars. For it is modern capitalism that has stopped people having to carry water in chilblained hands. Stopped the scrubbing over the boiling laundry, the wrestles with the mangle. This is what both Hans Roslin and Ha Joon Chang, quite correctly, refer to as the technology of the washing machine. It's possibly the outstanding achievement of modern capitalism that it has managed to mechanise all of these domestic chores, freeing up large portions of the human race to do something more interesting and less exhausting.

The bits that are left out of Downton Abbey are exactly the bits that justify capitalism itself: the reduction in human drudgery. And no, socialism didn't do this: your humble author has been the less than proud owner of a Soviet washing machine and it did not remove said drudgery. This is exactly what is meant by the complaints that the Soviets concentrated upon heavy industry rather than consumer products.

There is, of course, something else that Polly's left out. Historically, in Britain at least, being a servant was more akin to an apprenticeship than anything else. Something done between puberty and marriage for the vast majority of those who did it. Only those who went on to become the senior servants (housekeeper, butler and so on) were likely to make a "career" of it. Being in service was, for most, a phase, not a life sentence.

No, we most certainly don't want to bring back mass service. Quite apart from the fact that the capitalist technology makes it irrelevant as an institution. But perhaps we could do without those who try "To control history by rewriting the past"?

How about an online platform through which citizens can repeal laws?

A platform through which citizens could directly vote to abolish laws would enable the electorate to directly limit the size of government. Enabling institutionalised, immediate public backlashes to legislation and responses to previous legislation would help modernise governance by creating a new, peaceful and legitimate check-and-balance on power that enhances the democratic process. One of the arguments for having elected representatives (as opposed to Direct Democracy) is that the deliberative, legislative is inherently complicated and it would be impractical for everyone were directly involved. Representatives, supposedly, effectively synthesise and present the interests of a heterogeneous constituency. Of course, it would be difficult with the current state of technology for all eligible, voting citizens to propose amendments, directly deliberate etc. in the policymaking process. However, it would only, in theory, require a majority of eligible voters to simply repeal laws (voting in favour of repeal and abolition does not, after all, require careful rewording etc.).

Some might argue that this would make government’s job very difficult since there could easily be a popular, legal revolt against newly enacted, controversial pieces of legislation. They argue that unpopular legislation is necessary “for the sake of the public good” but who are they to impose on others their vision of an ideal society? If people cannot be persuaded about the merits of their proposals, what right do they have to impose them? Providing a legal means of revolt will create an alternative, much-needed, non-violent channel through which legislators will also be able to gauge exactly how people feel about some laws.

There may, in the end, be very few laws that a clear majority of eligible voters would even agree to abolish. However, even if there are currently only a handful of laws that we would collectively repeal from the vast, voluminous collection we are subject to, it reduces the need to lobby and burden our representatives with something we ourselves, as the people, could do. This will also enable increased deliberation by representatives on more salient issues.

Wouldn’t it be an absolute pleasure if we could, en masse, stop proposed tax increases and limit the continuous extortion of individuals by government? That’s just one example though. Think of all the other absurd laws that we would collectively have the power to stop without having to lobby our representatives. Most importantly, we can see first-hand whether we would collectively choose to continue restricting ourselves or to actually abolish those laws that inhibit the free society.

The UK just isn't as unequal as people seem to think

We've often said around here that the national inequality figures overstate the actual amount of inequality that there is in the UK. Yes, there's very definitely regional inequality in incomes. But there's also significant regional inequality in the cost of living. Not all that surprisingly (with the exception of parts of the SW) the higher living costs (most especially housing) are also where the higher incomes are. The UK is very much more unequal in such regional terms than most other countries simply as a consequence of London's domination of the economy. What that in turn means is that consumption inequality, the only form of inequality that we could possibly really worry about, is a lot smaller than the income inequality that we all normally measure.

And from the Taxpayers' Alliance recent report, this little snippet:

The analysis showed a geographical divide in taxpayers and benefits recipients. Households in the East Midlands and London, as well as the south east, east and south west of England paid more in taxes than they received in benefits. All the other regions received more in benefits than they paid in taxes.

Households in the North East of England received an average of £3,175 more in benefits and benefits in kind than they paid in taxes, whereas in London households paid £4,119 more in taxes than they received.

The tax and benefit system also reduces that regional inequality even further.

We're really not as unequal as everyone likes to say that we are.

Abolishing marriage law with a smooth transition

There are several reasons for abolishing marriage law and preventing the government from regulating caring or amorous relationships (of which there are many, besides marriage) but to do this such that the transition is smooth for those affected by it is an important consideration. Many feminists, for example, emphasise marriage’s historical role in discriminating against women, other cultures, religions, ethnic minorities, homosexuals, non-dyadic relationships etc. and that, for this reason, the entire institution should be abolished. My presumption here is not that the institution itself needs to be abolished but that the laws surrounding it do. Brake (2012) wrote that marriage law is usually (though not always) sufficient for ‘amatonormativity’ – the “disproportionate focus on marital and amorous love relationships as special sites of value, and the assumption that romantic love is a universal goal” which also discriminates against other forms of caring relationships such as friendships, urban tribes, adult care networks, quirkyalones etc. She proposes ‘minimizing marriage’ in such a way that caring relationships are still rewarded by the government but that people have to ‘opt in’ to marriage’s legal rights instead of obtaining them by default. Chambers (2013), on the other hand, suggests having ‘piecemeal’ regulation where people can ‘opt out’ of certain rights they obtained (by default) through marriage.

Brake rightly flags up “transitional problems”; transition management will determine public receptivity with respect to announced liberalisations. In dealing with these problems, amalgamating both Chambers and Brake’s ideas may be fruitful. Suppose a legislative body passes a law on date X stating that all existing regulation with respect to marriage (now defined purely by individual preferences and private contracts between consenting individuals, if at all) will be annulled for those who get married at or after a certain future date, Y (the difference (Y–X) being the ‘grace period’).

So if the law is passed in 2015, and 2020 is the specified year that people who are married in or after are not subject to any government regulation whatsoever, then there is a ‘grace period’ of 5 years. For those people who married during or before 2015, we could apply Chambers’ proposal of letting them keep their default rights (so as not to impose change which they might not want) but giving them the option of ‘opting out’ of certain rights. For those who get married during the ‘grace period’, Brake’s ‘opting in’ option can be applied so engaged individuals’ lives don’t become complicated and their plans aren’t frustrated by policy changes. In this way, it would be a gradual, eased-in movement toward a purer, unadulterated freedom with respect to personal relationships.

Osborne's cuts take us back to the dark days of, umm, 2001

It's good to see that we're not the only people who have realised that Osborne's cuts are not about to plunge the nation back into the penury of the 1930s. We're actually going back to the dark old days of 2001:

Because the government does not want to raise taxes to fund these plans, public spending is forecast to fall from 41% of GDP today to just 35% by the end of the decade.

That has prompted accusations that the government wants the country to go back to the late-1930s—and the Britain Orwell describes in his cri de coeur against poverty. The Office of Budget Responsibility, Britain's fiscal watchdog, stated that Mr Osborne's plans would force public spending down "below the previous post-war lows reached in 1957-58 and 1999-00 to what would probably be its lowest level in 80 years". "You're back to the land of Road to Wigan Pier", one BBC journalist roared. The opposition Labour party also sensed good electioneering material; on December 17th, Ed Miliband accused the prime minister of wanting to send Britain "back to the 1930s".

Hmm, well, yes:

Stripping away the hyperbole about Mr Osborne's plans shows that in reality they only amount to a reduction to the levels of public spending seen in 2002-03 in real terms, or 2001-02 in real terms per capita. The government could, back then, clearly afford a welfare state, as it will be able to still do in 2020.

You might think this a tad cynical, in fact, so do we think it a tad cynical. But then we are cynical about politics. Blair and Brown were elected: they stuck to the previous Tory budget plans for their first couple of years. Then they let rip: raising public spending as a portion of GDP from the levels it had so painfully been managed down to. No, this isn't bank bailouts, nor is it just the result of the recession. It was a deliberate plan for what they thought would be a better Britain (obviously we disagree on that betterness). All that is being done now is a reversal of that Brown Terror and splurge. You might agree that this should happen, you might think that it should not, but those screaming that it's a return to the 30s well, here's the cynicism: we think they're the people that that extra money has been spent on these past 12 years. No one likes to see the gravy train shunting back into the yard one last time, do they?