The myth of Mazzucato's Entrepreneurial State

It's quite extraordinary the way in which Marianna Mazzucato, in her book The Entrepreneurial State, uses the example of the iPhone as proof that it's really the State that is the entrepreneur. Here's Owen Jones taking the argument for a walk:

Clutch your mobile phone close to your bosom, stroke it tenderly, and praise the Fairy Godmother of Free Market Capitalism that you’re not walking around with an obscene brick stuck to your ear, a breadstick aerial reaching towards the heavens. “Imagine what telephones would look like if the public sector had been entrusted with designing and making them,” as an opinion piece in the Telegraph had it this week, reflecting views widely held on the Right. “The smartphone revolution would probably be at least another couple of decades away.”

One tiny little flaw with this dystopic piece of counter-factualism: er, the public sector was entrusted with doing just that. Economics professor Mariana Mazzucato’s The Entrepreneurial State shows how – to take just one example – the Apple iPhone brings together a dazzling array of state-funded innovations: like the touchscreen display, microelectronics, and the global positioning system. The governing ideology of this country is that it is the entrepreneurial private sector that drives human progress. The state is a bureaucratic mess of red tape that just gets in the way. But free market capitalism is a con, a myth. The state is the very backbone of modern British capitalism.

So how many smartphones have been state designed? I know of a tablet being put together in North Korea but can't think of any others. So we do seem to be left with the idea that smartphones were indeed the creation of that private sector entrepreneurialism.

But other than that snark what is actually wrong with the basic argument that is being put forward here? Essentially, it's that those making it don't know their economics.

We distinguish between two things: invention and innovation. The first is thinking up entirely new things: say that GPS system mentioned. It's generally agreed that at this basic level of research and invention that the State and the market actors are equally able. The Soviets did indeed make Sputnik even if 50 years later they still couldn't make a washing machine that anyone with a choice wanted to buy.

The second, innovation, is the same as entrepreneurialism. This is taking said inventions and putting them to new uses. That State certainly never thought that the GPS system would be used to tell me I'm just passing a really great pizza joint but smartphones do indeed do that these days. But that free market did take those series of inventions, combine them in a new and interesting manner and create the technology with the fastest adoption rate ever in the history of our species.

This is all pretty standard stuff and it's been part of William Baumol's work to explain it all to us over the decades. The State can invent but finds it very difficult to innovate, the market can invent just as well but is stonkingly better at innovation. Given that Mazzucato is in fact an economics professor we might hope that she actually knew this before writing her book. Then again, she is as Sussex so perhaps not. Which is why she used the iPhone, a picture perfect example of market innovation, in her argument about state or market invention, an entirely different subject.

 

Apologies Mr. Burnham but this isn't the way that work works

It rather worries me when public policy is influenced by those who seem to have no clue. As with Andy Burnham here on the infulence of technology on pay.

Employees such as legal clerks and local government administrators will see their wages collapse as new technology makes their skills less valuable, just like manual workers have, Alan Milburn said. Across the United States and Europe jobs working life has polarised into “lovely jobs” and “lousy jobs”, with the wages at the bottom end of the jobs market falling behind growth in the rest of the economy thanks to advances in technology, Mr Milburn said.

That fate will soon be shared by office workers as their jobs are outsourced to emerging economies and replaced by computers, he warns, “hollowing out the middle of the labour market”. “It is likely that as the cost of computing power continues to fall technology will replace many more middle-class jobs that rely on repetitive and routine tasks – or at least make them less valuable in the labour market,” he told the Resolution Foundation. “In other words, the earnings squeeze already felt by people at the bottom could increasingly spread to those in the middle.”

No, that just isn't what happens when technology is added to labour. Far from wages falling they rise.

At the level of the entire economy average wages will rise. For average wages are determined by the average level of productivity across the economy. This must be so for what we can all consume is determined by what we all produce and if we're all getting more productive then there's more available for us to consume.

For the individual doing a job where technology can add to productivity one of two things can happen. If there were, say, ten bank tellers and the new technology means that only five are now required then five of those tellers will lose their jobs to the new ATMs. But far from the five who retain their jobs getting lower wages they will now get higher ones. For they can now concentrate on those higher value tasks which the machines cannot do.

The addition of technology does not lower wages in the way that Burnham is describing. It raises wages in general and in the specific it either eliminates a job entirely or raises wages.

The comparison is made to manual workers. Think through what actually happened in the move from ten men with shovels to one man with a JCB. Nine lost their jobs and went off to do something else, the remaining digger earns vastly more than any of the ten did with their shovels.

Technology will eliminate jobs, yes, but it will not pauperise the positions that remain. Quite the opposite: wages for those jobs that remain rise with the addition of capital and or technology.

What worries me is that we've got people so misinformed attempting to guide public policy.

Scott Sumner's right you know

Last time around that we had some vast economic disaster we ended up with the conventional wisdom being that fiscal policy was everything and that, as Keynes pointed out, governments should just spend more in fiscal stuimulus and she'll be right. As Friedman and Schwartz then went on to point out this wasn't quite so. The real cause of the Great Depression was not the stock market crash but the monetary response to it. The Fed rather screwing up by allowing the money supply to fall.

As we went through this particular little disaster we had Ben Bernanke no less informing us that Friedman was right and that the Fed weren't going to do that again. Thus quantitative easing and the Treasry/Bank of England agreed and we did the same. The ECB over on hte Continent didn't seem to have got the message meaning that the eurozone hasn't had that monetary policy suitable for the times:

If you are going to criticize Fed policy, you really ought not mention any eurozone policymakers, especially German policymakers. The Germans were the ones pressing the ECB to adopt a tighter monetary policy. How did that work out? Well back in 2009 and 2010 the eurozone and the US had almost identical unemployment rates (close to 10%). Since then the eurozone rate has risen to 12.2% while the US rate has fallen to 7.3%. And what explains that vast difference in performance? Mostly differences in NGDP growth, i.e. monetary policy. And what explains the difference in monetary policy? The Fed was doing one QE after another, with the avowed intention of boosting aggregate demand. The ECB was raising short term interest rates in 2011 with the intention of reducing aggregate demand. Both “succeeded.”

As Sumner has also gone on to point out fiscal policy is usually ineffective anyway. For while the Keynesian diagrams might convince the politicians (who do so love to spend lots more money) the  Central Banks end up taking the monetary actions which negate that fiscal expansion.

The end result of all of this is that monetary policy is the only one that has the desired effects out there in the real world. As, in fact, most Keynesians should agree. For all would agree as long as we're above the lower zero bound and as the various US, UK and Japanese experiences have shown, given QE and expectations management there isn't actually a zero lower bound to constrain the effectiveness of monetary policy.

Or, as I say, we could just conclude that Scott Sumner is correct.

Post-mortem on migration debate

Last night I went to Bristol Freedom Society to debate Ryan Bourne, of the Centre for Policy Studies, over whether the UK should have open borders. It was very enjoyable, and while I won very marginally, convincing one person to switch sides from closed to open borders, I thought it was extremely close, and Ryan was certainly a very fluent and convincing speaker.

My main case was (a) restricting migration restricts extremely important rights, like the freedom to take a job you are offered and the freedom to offer a job to a desired applicant, (b) when we curtail these sorts of freedoms we need to have a preponderance of evidence that the costs are very high, (c) the economic evidence says immigration is pretty good for the recipient country, very good for the source country, and amazingly good for the migrant themselves, (d) the magnitude of the social/cultural impact (i.e. the effect of migrants on our institutions, customs, etc.) is unclear, (e) therefore, we ought to have open borders (or something very close to open borders).

Ryan's counterargument centred on the claim that the benefits of restricted migration would not extend if it was unrestricted or close to unrestricted, because migration of certain amounts undermines the institutions that cause migration to benefit people at all. (It was more complex, but this formed the nub of the debate). As is suggested by my point (d), I think there is some plausibility to this argument, but I also think it is under-studied. I suggested this when we were able to discuss the points we'd made in our opening statements a bit more, and we had a lot of back-and-forth over the issue, but we didn't resolve our disagreement. Without trying to guess at Ryan's position or put words in his mouth, I will stake out three claims I think we must accept to have the debate within a rational framework.

1. All positions are on a continuum from complete open borders (as much gross immigration as non-natives wish/can afford) to complete closed borders (no gross immigration). Perhaps the best way of accurately describing positions is by how much migration they favour. Open borders advocates favour something close to 100% of the amount that would occur under open borders. Everyone else is somewhere on a spectrum from no gross migration to the 100% open borders case (past societies have also had forced immigration, i.e. slavery, so these aren't the only theoretical positions, just the only persuasive ones.)

2. The supposed socio-cultural problems of migration come from particular numbers of migrants. No one thinks 5,000 migrants a year to a country the size of the UK will fundamentally undermine its customs, laws, institutions and so on. Many people think 5,000,000 migrants per year would. So to be anti-open borders you implicitly have to have an estimate of how much migration you think is going to occur. If open borders only led to 5,000 migrants per year, then almost no one would be against it. It is because open borders would be expected to lead to too much migration that people oppose it. This doesn't change if it's a question of probability distribution—then migration is opposed because it raises the chances of too much migration occuring to too high a level. Everyone must (at least implicitly) have an expected level of migration to oppose open borders.

3. Any claim that migration should be kept to a particular level, because of the risk of undermining British institutions, implies an assumption about how much damage the marginal immigrant does or will do (reliably or with some probability). One cannot cop out of the question, you need to have an answer. But no one has yet set out good evidence about exactly how much damage to institutions the marginal immigrant does or will dotypically arguments in this area depend on anecdote or things that people feel they "just know". This won't do when the benefits to immigration are so high. We cannot simply assume the cost to our institutions outweighs the other benefits.

I think once these three points have been accepted, there is a lot of room for good empirical work. But until they have, a lot of the migration debate will be unclear, vague, and people will be talking past one another.

The lessons of Obamacare

I will admit to rather enjoying the ongoing trainwreck that is Obamacare. It's just so wonderful to see so many of my prejudices being validated.

The first, and the one that will explain that tweet up above, is the way in which the numbers are being openly manipulated to make it look as if tractor production is rising. Given the disaster that has been the website, the website that the Federal Government only spent $600 million on, there is a certain urgency to being able to show that no, really, lots of people are signing up.

The fight over how to define the new health law’s success is coming down to one question: Who counts as an Obamacare enrollee? Health insurance plans only count subscribers as enrolled in a health plan once they’ve submited a payment. That is when the carrier sends out a member card and begins paying doctor bills. When the Obama administration releases health law enrollment figures later this week, though, it will use a more expansive definition. It will count people who have purchased a plan as well as those who have a plan sitting in their online shopping cart but have not yet paid.

Quite: us private sector people would indeed be in jail if window shoppers were to be counted as sales.

But there's a larger point here too. It's entirely obvious that the people building the websites weren't entirely top of the programming class. Similarly, that the managers trying to manage the project were less than entirely competent. And that's something of a problem for all the policy wonks who like to think up complicated ways for government to solve problems. Perhaps, maybe, if we put aside our Hayekian objections to anyone really being able to design an economy, there really are plans and schemes that can be constructed, Heath Robinson style, to produce great government works.

But let us take the lesson of Obamacare to heart and note that we don't exactly have the A-Team implementing these plans for us. The programmers will be those who couldn't use Google Maps to find out where Silicon Valley was, the managers those that Ford or GM felt would never rise above chief filing clerk. This isn't a promising workforce with which to implement complex plans. They might be able to administer a flat tax system, or a very simple regulatory system that insisted "don't kill people". But complexity may well be beyond them which is just another argument in favour of that simplicity we all desire anyway.

Or, as I wish I'd originally said myself when some statist was waffling on years ago about the nationalised industries. His point being that there was nothing wrong with said form of ownership, or the unions, government interference. It was just that the management of the nationalised companies was terrible. To which one answered well, so you agree then that nationalised companies can only attract the terrible managers then? And that thus nationalisation isn't a good idea?

Tracking the disaster that is Venezuela's economy

There are various ways you could try to measure how badly a government is cocking up an economy. One favourite example is when Zimbabwe stopped printing its own money as they no longer had sufficient hard currency to be able to purchase the ink to print the banknotes. In Venezuela we have for months been regaled with storis about how the shops are out of loo roll (even, with a triumphant announcement from the State that it had confiscated an entire 2,500 rolls of the stuff that were being held by a "speculator") or milk and other basic necessities. This all coming about of course by the government attempting to control prices (Ed Miliband might want to take note here).

It is entirely possible to think that the poor should have better access to various goods and that government ought to do something about it. But the control of prices is the wrong way to do it: if you set them lower than the market rate then shortages will deveop, higher then a surplus will flood the market and if at market prices then what's the damn point? The answer is, of course, if you wish for the poor to have better access then you give more money to those you condiser to be poor, not screw with the market itself.

But back to our various methods by which we might measure that government is screwing up an economy:

President Nicolas Maduro's government announced arrests of both store managers and looters on Sunday as part of what it calls an "economic war" in Venezuela between the socialist state and unscrupulous businessmen. In a major pre-Christmas campaign reminiscent of the late President Hugo Chavez's dramatic style, Maduro has sent soldiers to "occupy" one chain of electronics stores and inspectors into scores of others to check for price-gouging. Thousands of Venezuelans have been flocking to electronics stores, hoping to take advantage of new "fair prices" the government is imposing, sometimes half the previous cost.

Well, yes, that would be a good sign. Arresting the shop keepers would be high on my list of indications that something is going awry.

In a speech to the nation late on Sunday, Maduro promised there would be no let-up in what he called an "economic offensive" against Venezuela's "bourgeois parasites." Maduro said he would use decree powers that Congress is expected to grant him this week to set legal limits on businesses' profit-margins. "Zero tolerance with speculators," he thundered, flanked by most of his Cabinet and quoting biblical, Koranic and Taoist exhortations against usury and materialism.

Price fixing again, another sign that not all is going to go well.

Among the raft of new government measures announced in the last few days, Venezuela's telecoms regulator Conatel said at the weekend it would require eight local internet providers to block websites publishing black market currency prices.

But that's rather the killer blow to me. Once a government starts to insist that the citizenry should have no access to the truth then the whole system is going to spiral down in a welter of its own lies and ignorance.

Adam Smith did point out that there's a great deal of ruin in a nation: but it's not an unlimited ability to survive economic stupidity, only a large one.

Chart of the week: Euro banks still holding lots of reserves at ECB

Summary: Euro area banks’ reserves at ECB have come down, but remain elevated by pre-crisis standards

What the chart shows: The chart shows euro area monetary financial institutions’ (MFIs, ie, mainly banks) deposits with the ECB and national central banks, specifically deposits related to ECB monetary policy operations.

Why the chart is important: Although MFI deposits with the Eurosystem have come down substantially since a peak of more than €1.1tn in the immediate aftermath of the ECB’s two three-year longer term refinancing operations (LTROs) in late 2011 and early 2012, they remain high compared with the situation before the Great Recession. What this shows is that EA MFIs are – on average – flush with liquidity, but see no outlet for this so they leave their funds on deposit with the ECB. The ECB may now be moving towards a further LTRO. But the Bank may also try to boost broad money and credit growth by other means. One possibility which has been mentioned is introduce negative interest rates in these deposits, ie, to charge banks for holding their money with the ECB. Ideally, this would cause banks to shift their funds to other uses, primarily by lending them to the nonbank private sector. There may finally be scope for this. The ECB’s Q4 bank lending survey shows demand for loans expected to rise in the current quarter for the first time in two or three years (two years for companies, three for households). Banks are also expecting to ease lending standards. This could potentially be very powerful. If, for example, EA MFI reserves were to shift back to their pre-crisis levels of around €200bn, with the rest deployed elsewhere, it could boost EA M3 by €270bn, equivalent to a 2.7% jump in the stock of broad money in a very short period of time. The effect is likely to be less than that; but it would help to oboost credit and broad money growth and also to avert threatening deflation.

A visit to the happy world of Will Hutton

As ever, Will Hutton gives us a glimpse into that happy world where more government is the solution to everything. Here it is to the lack of innovation which supposedly pervades our economy:

Inventive startups need big corporations to invest in and support them, but too many in Britain are foreign owned or obsessed by their share price and directors' remuneration. We need a state that can unleash visionary innovative initiatives at scale rather than preach endless austerity.

I'm afraid this just doesn't work and to prove it allow me to give you an example from my own working life. Over here in the Czech Republic they've got some EU money to throw at innovation. Mixed industry and academic sorta stuff and we've a couple of projects that fit into their desired categories well enough. So I had a pint with someone who knows how to apply for these funds: heck, if there's free money out there why not? The first deadline for applying is 22 of this month. The actual cash would be available, assuming we passed all the hurdles and tests, in May 2015.

Yes, 2015: and no, this is not how innovation or start ups work. 18 months is in fact the entire lifecycle of an innovative start up these days: Instagram was bought for a billion dollars in about half that time from starting to purchase.

The world simply moves to quickly these days for the state processes to be able to help with innovation. Sure, it might have been different when industry moved in rather slower c ycles (although the record of government supported entrepreneurs is not all that good even from those times) but it would be completely absurd these days to try and have the state doing anything other than just getting out of the damn way of innovation.

Equal pay day comes around again

Apologies, misogynist that I am I missed this last week when we were supposed to commiserate about Equal Pay Day. That being the day of the year when women stop being paid given that they earn so much less than men. There is really one one minor problem with this idea which is that we don't in fact have a gender pay gap in either the US or the UK. We have, as I've said many a time, a motherhood pay gap instead. And no, given that not all women are or will become mothers that is not the same as a gender pay gap.

Depressingly, we've all known about the gender pay gap for far too long. 40 years and counting. And yet here, on this special annual Day, we're all still talking about the same old issues: one, we need a culture change; two, we need more flexible working; three, we need greater transparency; four, companies should publish their gender pay gaps; five, large and small businesses should understand the business case for employing more women ... I could go on.

40 years ago we most certainly did have a gender pay gap. Women were directly discriminated against in their pay, their education and even their taxation (it wasn't until the late 80s that a woman was, finally and rightly, considered as a taxable economic unit separate from however she decided to run her love life). But that has all now changed.

Women who work part time earn more than men who work part time. Women in their 20s earn more than men in their 20s. Women who don't marry and don't have children earn more than men. What kills the average wage of all women, in comparison to the wage of all men, is that women, and it's important to note that this is on average, take career breaks to have children and often then either more time off or lighter workloads to raise them.

We might want to say that this isn't a good idea. We might think that it's just fine that people who make different life decisions earn different amounts of money. But what this isn't is a gender pay gap. And anyone who wants to change matters has to recognise that it isn't a gender pay gap so it isn't something that is going to be changed by blathering on about gender.  It's about children and the having of them. And, if we're to be honest about it all, as long as more women than men decide that they want to take those breaks and changed workloads in order to raise their children then we're always going to have that motherhood pay gap.

Whether it's a good or bad thing is entirely reliant upon your personal definitions of good or bad. But could we all at least recognise reality?

Despite what WRAP tells us we do not throw away food worth 12.5 billion each year

Another year and another report from WRAP telling us that we're all throwing away food worth some vast sum:

4.2m tonnes of avoidable food and drink waste was thrown away by UK households last year - worth £12.5bn - according to the latest report by the Waste & Resources Action Programme (Wrap).

Sadly for us who have to listen to this nonsense, even more sadly for those of us as taxpayers who have to cough up for those writing this nonsense, this is not true. No, not even as they put it in their actual report:

This new report contains some remarkable findings. It reveals that the amount of food and drink thrown away that could have been eaten fell by 21% between 2007 and 2012. However, it also shows the sheer scale of the food and drink still being wasted in UK households – 4.2 million tonnes of avoidable food and drink is wasted each year, worth £12.5 billion.

The weight of food thrown away they may well be correct about. But the value they're obviously entirely wrong about. For the obvious reason that if it were worth 12.5 billion then we wouldn't throw it away, would we?

It is possible that 12.5 billion was originally spent upon the food that is subsequently thrown away: but that still doesn't mean that what is thrown away is worth that sum. Just to take one example, perhaps you sometimes like to have seconds and perhaps sometimes you don't. So you always over cook by, say, 25% to give yourself that option of having or not having another little helping. This is your money being deployed in the manner you wish it to be: that some of that now cooked food ends up in the waste stream does not mean that you've wasted your money. It just means that your utility is maximised by your always having that opportunity to have seconds whether you actually take it or not. We can think of any number of further details like this: perhaps the option of having a meal in the fridge is worth the cost even though you then decide to eat out. Or that fifth pint of the evening convinces you to drag a burger back from the pub rather than risk a chip pan fire by cooking?

These are not wastes of your money: simply and exactly because this is how you decide to deploy your available resources. They may not be the deployment methods that WRAP thinks you should be using but then who let those prodnoses describe what we should all be doing anyway?

And of course there is the irrefutable point that if we all bundled this "wasted food" up and sent it off to WRAP they most certainly would not pay us 12.5 billion for it, would they? Therefore it cannot be worth 12.5 billion, can it? For in a market system something is only worth what someone else will pay for it.