If economics is just a religion then worth getting the tenets right

The Guardian has a long read about how economics is just a religion, doncha' know, and therefore something or other. The thing being that if you want to claim something is a religion then it's worth working out the details of what the tenets are. We do not comment upon Methodism for example, we do not know what split the Primitive and Wesleyan types nor what prompted them to become United either. We do not wade into such debates therefore.

This has not stopped John Rapley of course:

Although Britain has an established church, few of us today pay it much mind. We follow an even more powerful religion, around which we have oriented our lives: economics. Think about it. Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle”. And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy.

There is no moral code in economics, it is a positive endeavour, not a normative one. We can thus rather throw the concept out at the beginning. But there is also that ill-knowledge of what it does in fact say:

Once a principle is established as orthodox, its observance is enforced in much the same way that a religious doctrine maintains its integrity: by repressing or simply eschewing heresies. In Purity and Danger, the anthropologist Mary Douglas observed the way taboos functioned to help humans impose order on a seemingly disordered, chaotic world. The premises of conventional economics haven’t functioned all that differently. Robert Lucas once noted approvingly that by the late 20th century, economics had so effectively purged itself of Keynesianism that “the audience start(ed) to whisper and giggle to one another” when anyone expressed a Keynesian idea at a seminar. Such responses served to remind practitioners of the taboos of economics: a gentle nudge to a young academic that such shibboleths might not sound so good before a tenure committee.

Which is why absolutely every government, Treasury and central bank model works on broadly New Keynesian principles. 

The data used by economists, however, is much more disputed. When, for example, Robert Lucas insisted that Eugene Fama’s efficient-markets hypothesis – which maintains that since a free market collates all available information to traders, the prices it yields can never be wrong – held true despite “a flood of criticism”, he did so with as much conviction and supporting evidence as his fellow economist Robert Shiller had mustered in rejecting the hypothesis. When the Swedish central bank had to decide who would win the 2013 Nobel prize in economics, it was torn between Shiller’s claim that markets frequently got the price wrong and Fama’s insistence that markets always got the price right. Thus it opted to split the difference and gave both men the medal – a bit of Solomonic wisdom that would have elicited howls of laughter had it been a science prize.

The EMH does not insist that market prices cannot be wrong. It says that given the information available prices will be right given the information available. Yes, it is tautologous. Further, Shiller's claim is that incomplete markets will not incorporate all known information, complete ones will. Thus his insistence that a futures market allowing one to go short on housing would have tempered the US housing bubble. And yes, Shiller is a very useful extension to Fama, that's why the joint prize.

This amuses:

For example, Milton Friedman was one of the most influential economists of the late 20th century. But he had been around for decades before he got much of a hearing. He might well have remained a marginal figure had it not been that politicians such as Margaret Thatcher and Ronald Reagan were sold on his belief in the virtue of a free market. They sold that idea to the public, got elected, then remade society according to those designs. An economist who gets a following gets a pulpit. Although scientists, in contrast, might appeal to public opinion to boost their careers or attract research funds, outside of pseudo-sciences, they don’t win support for their theories in this way.

Friedman got the Nobel in 1976, rather before either of those two were elected to national office.

At which point:

The 2008 crash was no different. Five years earlier, on 4 January 2003, the Nobel laureate Robert Lucas had delivered a triumphal presidential address to the American Economics Association. Reminding his colleagues that macroeconomics had been born in the depression precisely to try to prevent another such disaster ever recurring, he declared that he and his colleagues had reached their own end of history: “Macroeconomics in this original sense has succeeded,” he instructed the conclave. “Its central problem of depression prevention has been solved.”

No sooner do we persuade ourselves that the economic priesthood has finally broken the old curse than it comes back to haunt us all: pride always goes before a fall. 

Well, yeeees, We did in fact prevent a depression (usually defined as a 20% fall in GDP) by noting that the first one was caused by the actions of the Federal Reserve. So, we didn't do that again, instead we did QE and so on, our solution coming from the work of Milton Friedman and Anna Schwartz in their Monetary History of the United States, published in 1963. Which, umm, sounds like a solution to us, a problem met and solved.

There are undoubtedly religious beliefs in certain forms of economics, the magic money tree coming to mind, the labour theory of value and so on. But to be able to critique the tenets one should actually know them, something not greatly in evidence from this new book.

The EU-Japan trade deal means we can be a bit more zen about Brexit

In 2013 the European Union and Japan began talks aimed at a free trade agreement. On Monday both parties said they’d made strong progress as a number of key obstacles on tariffs and protections.

At last! After 18 rounds of talks, the political will to finalise the deal had been found and success was in sight.

Across the world headlines heralded what Japanese Prime Minister Shinzo Abe described as “the birth of the world’s largest, free, industrialised economic zone,” and what the European Union described as “the most important bilateral trade agreement ever concluded by the EU”.

A deal this big is a big deal, it’s one that the UK has been integrally involved in as part of the EU and which it has strongly pursued. There are some really large barriers that are being brought down that have been making our lives more expensive and while we're party to the agreement we should celebrate these.

It’s also, crucially, a hint about what the UK can get from our own negotiations. Not because the UK wants a deal like Japan’s - it’s nowhere near the level of access that we have now. But it shows the EU is looking to promote free trade and have bespoke deals.

There’s also a nice omission that might just work to our advantage later on.

Some of the important parts of this agreement:

•    Tariffs on more than 90% of EU Exports to Japan will be removed. This means in the end that 97% of all goods duties will have been removed and all other tariff lines are subject to partial liberalisation (through quota growth or tariff reductions).
•    Japanese and EU made cars will now have safety and environmental standards that mean certification and testing for exported cars will not be needed. This simplifies exports massively.
•    Medical devices in Japan will be subject to the Quality Management System international standard which will speed up licensing.
•    Most advanced provisions on movement of people for business the EU has negotiated so far. Covers all traditional categories of intra-corporate transferees, business visitors for investment purposes contractual services suppliers, independent professionals and new short-term business visitors and investors.  
•    EU Commissioner for Jobs, Growth and Investment – Jyrki Katainen – has said that investment may be left out of the deal due to no agreement around arbitration.

This last point is really important. While I would normally complain about the lack of agreement on investment arbitration, in this case it shows flexibility on the EU’s part – as well as an understanding that their preferred long-term solution of a global multilateral court is probably off the table for the time being.

This is actually really beneficial for the UK; our arbitration courts (including the London Court of International Arbitration) are global leaders. An attempt by the EU to shoehorn continental control of arbitration into international treaties could potentially threaten London’s pre-eminent position for arbitration as we leave the EU. While the EU commits to pushing for it in future their current failure to get it into any large deal means it’s quite possible for the UK to refuse it in any future Brexit deal too.

Barriers to trade coming down is always something to celebrate and it reminds us that our largest trading partner - the EU - is out there looking to liberalise trade. It tells us also that there's appetite among our allies like Japan to have new trade deals too. We can use this in future talks.

There’s the willpower to have deals, the wherewithal to be flexible and the ability to have bespoke agreements. The UK should be confident walking into the Brexit negotiations and beyond.

The IFS introduces us to the blindingly obvious

We're told that children in single earner families are more likely to be in poverty than those in dual earner families:

Families who rely on a fathers’ earnings alone are at greater risk of poverty than other households, with average incomes stagnant for the past 15 years, according to analysis by the Institute for Fiscal Studies.

The IFS said that because the father works in most single breadwinner households, those families have not benefited from the relatively large increases in women’s earnings since the mid-1990s.

That all seems blindingly obvious, doesn't it? 

No? Allow us to explain. The modal couple household arrangement is both working full time, 66 % of couple households have both working at least part time.

Poverty is being measured as relative poverty, less than 60% of median household income adjusted for household size (and possible variations like disposable income after taxes, after or before housing costs etc).

The norm, therefore, is for one and a bit to two earners in a household. Those with only the one earner are going to earn relatively less, we measure poverty as being relative income, who is surprised at this finding?

Note that this is what is driving this finding. The connection with fathers is just because we Brits are so traditional, where only one works it tends to be the man.

It's also worth noting that as long as we measure poverty both by household income and in relative terms there's no real cure for this. Unless we want to go back to those bad old days of fathers being given a pay rise just because, well, you know, they're fathers you see, they have to provide?

Economic possibilities for our grandchildren, video games version

Famously, John Maynard Keynes predicted in 1930 that in a few generations time people would only work 15 hours a week: productivity would have risen so much that higher living standards would be possible with less work.

He thought that people would use higher productivity (and the resultant higher pay per hour) to work much less, and consume much more leisure. But that didn't quite happen: labour hours did fall, but much much slower than he expected, despite productivity growing about as much as he thought it would. People wanted more consumer goods, as well as more services, than he thought was likely.

He (and his followers, the Skidelskys) thought it was an appreciation for the higher pleasures—like contemplation and philosophy—that would eventually take up leisure time.

But it seems that it is artificial reality, in the form of ever higher quality video games, that is the first use of leisure tempting enough to really stop men working, at least according to the work of Erik Hurst & collaborators. Here's the abstract of their new paper:

Younger men, ages 21 to 30, exhibited a larger decline in work hours over the last fifteen years than older men or women. Since 2004, time-use data show that younger men distinctly shifted their leisure to video gaming and other recreational computer activities.

We show that total leisure demand is especially sensitive to innovations in leisure luxuries, that is, activities that display a disproportionate response to changes in total leisure time. We estimate that gaming/recreational computer use is distinctly a leisure luxury for younger men.

Moreover, we calculate that innovations to gaming/recreational computing since 2004 explain on the order of half the increase in leisure for younger men, and predict a decline in market hours of 1.5 to 3.0 percent, which is 38 and 79 percent of the differential decline relative to older men.

See also two Marginal Revolution posts on the phenomenon, from Tyler Cowen and Alex Tabarrok. I seem to remember a whole load of folks attempting to ridicule them for believing in this at the time, but the evidence does seem to be getting stronger and stronger.

Sorry Adonis, but there's no tuition fee cartel

On Friday, Lord Adonis had an op-ed published in The Guardian in which he conducts a volte face concerning tuition fees. Specifically, although he was responsible for increasing tuition fees from £1,000 per year to £3,000 per year, he now believes that they should be scrapped entirely on the (actually spurious) grounds that graduating students now leave university with about £50,000 of debt.

Notwithstanding the lack of a cogent argument for scrapping tuition fees, Adonis makes the highly-charged allegation that universities are running a cartel because a large number of them set fees at or close to the £9,000 maximum that is permitted. This allegation shows a shocking lack of understanding of the meaning of the term “cartel” and the jurisprudence underlying previous instances in which cartels were found to be operating.

In short, a cartel (as per Article 101 of the Treaty on the Functioning of the European Union) is defined as a group of firms that restrict or distort competition in a market by, for example (but not limited to), directly or indirectly fixing prices, limiting or sharing production / output, and so on. As such, Adonis is claiming that the universities are fixing prices when they all set their fees close to £9,000 and claims that he has asked the Competition and Markets Authority (CMA) to investigate this matter.

However, Adonis ignores the established and standard guidance for determining whether or not a cartel is actually in operation – simply taking the fact that a number of universities are pricing at a focal point is not evidence in and of itself. Instead, as per the guidance set out by the then Court of First Instance in Airtours/First Choice, three conditions are necessary for a cartel finding.

  1. The market must be transparent – i.e. the area (such as prices, volumes etc.) over which a cartel agreement is made must be able to be monitored easily and (relatively) costlessly for the members of the cartel. In the case of university pricing, this condition probably is satisfied as a university’s fees are published on their website and therefore can be monitored by other universities. However, it is the only one of the three conditions that is satisfied.
  2. More importantly, the members of the cartel must be able to ”punish” any cartel member that does not adhere to the cartel agreement. This is one area where Adonis’ claim falls down – there is no punishment mechanism available for universities to punish those that deviate from a cartel agreement. To see this, suppose that there was an agreement between universities to maintain fees at £9,000. Now suppose that one university that had made this agreement instead decided to cut its fees to £4,000 – this “deviating” firm might have a strong incentive to do so since that could enable it to get more students applying to it, enabling the university to have a wider range of students from which it could select the best candidates.

    In this scenario, how would the non-deviating universities be able to punish the deviator? They couldn’t decrease their own fees because 1) those fees are set some time in advance so cutting them as a rapid response is not really feasible; and 2) that would simply decrease those universities’ own revenues anyway, without the likely prospect of recouping that loss in future, such that doing so would be cutting off their nose to spite their face. Moreover, since the impact of the punishment would arise a year later (i.e. when the next set of students were applying to university), the punishment itself would not provide a strong disincentive to prevent the deviator from cutting fees in the first place.
  3. Any “external” competition (i.e. options other than going to the universities in the supposed cartel) must be weak. Again, Adonis’ argument fails on this criterion too - although the vast majority of UK universities are charging fees at the upper limit, the fact is that there are multiple outside options that provide a competitive constraint: 1) private universities are increasing in size and coverage and are often a viable alternative for students; 2) prospective students can choose not to go to university, but instead attend a technical college or other institution; and 3) future students can choose to study in foreign universities and are doing so in ever greater numbers. In other words, there are external options that constrain the ability of UK universities to cartelise fees.

Therefore, universities in the UK do not seem to satisfy two of the three conditions required for a cartel to be present. Hence, it is highly likely that Lord Adonis’ claim that UK universities are operating a cartel is baseless and will be given short shrift by the CMA.

We're never going to get things right if The Observer believes nonsense like this

We're quite obviously closer to the classical liberalism of the Observer's past than the progressive liberalism of their present so disagreements over policy are going to happen. But we shouldn't find that we've got disagreements on fact for unless we can all both discover and agree upon those we're never going to get anything right.

Sadly, we do so disagree:

The first task is to end the absurdity of bogus self-employment. This employment category is plainly being abused by some companies whose workers continue to be told how to behave like regular employees for all practical purposes – their work can be directed down to exact details, including time, hours, place and uniform. The only real difference is that the employer is able to avoid paying employers’ national insurance and pension contributions, and offering protections such as maternity and sick pay. It’s a scam. Massive benefits accrue to the employers and very few to the workers.

We agree entirely that all of those things are lovely for the workers to have. If they desire them of course. But we would insist that it's not the employers paying for them, all such benefits are incident upon the wages of the workers. No, really, even Richard Murphy agrees with us here.

There is an amount which employers are willing to pay for the labour being used. Whether this is sliced into wages and tax, or wages and tax and a pensions contribution and national insurance doesn't matter, the amount is the amount. Increasing the amount that must be paid in not-wages thus decreases the amount paid in wages, not the total amount being paid.

The absence of these "benefits" does not benefit the employer therefore, it raises the workers' wages. And imposing these costs will, over time at least, lower said workers' wages even as their compensation stays static.

We might wonder why there has been this explosion of jobs paying wages only, no benefits. And then we might look at the minimum wage, which insists that wages must be at a certain nominal level. To keep total compensation at the amount that the employers are willing to pay the non-wages part shrinks as the law insists that there's a floor to wages themselves.

What else did anyone think was going to happen? As cash wages have risen the non-wage part of compensation has fallen to compensate. And note what will happen next if we insist that those non-wage benefits must exist. That minimum wage floor of cash wages will start to bite and we'll get that unemployment as we raise the total compensation above what the job is worth.

All of this stemming from the simple fact that employers' NI, like any other non-wage cost of employment, is incident upon the workers, not the employers. And we really do think that a national newspaper, however progressively liberal it is, should be able to grasp this simple fact.

The problem is that what Trevor Nunn believes about inequality isn't true

Trevor Nunn is touting this new play he's involved with which is - wait for it - on the subject of the gross inequality of today. The problem being here that what he believes about inequality just isn't true

And yet, even in our enlightened social democratic western world, we remain utterly unequal – probably more so now than at any previous time.

This simply isn't so. Not in any sense that matters of course. It's well known that two of the three richest people on the planet, Bill Gates and Warren Buffett, are partial (Lord knows why) to a Big Mac on occasion. There are almost none of us in the rich world who do not have equal access to those. Nothing by Maccy D's might not be healthy but it's financially out of reach of very few of us. And it's extremely doubtful that this has even been true before, that the entire society has equal access to the food desired by the richest. The plebes didn't get access to those lark's tongues after all.

That is, of course, being tendentious, as is pointing out that we've all entirely equal access to Facebook and WhatsApp on the same terms.

Yet when we do these calculations properly, as the TUC once did, we do indeed find that the only form of inequality that matters, that of consumption, is low, very low. Using quintiles of households the TUC found that the 5 th (ie, the top) earned 12 times the 1st. After we subtracted taxes, added benefits, levered in the value of public services like the NHS and education, the consumption inequality came down to 4 to 1.

It is extremely difficult to think of any previous version of human society which was as equal as this.

Not that the inequalities which remain are also of rather less import. Not too long ago poverty meant no shoes, now it means off brand sneakers. Inequality meant empty bellies, unto the point of death - yes starvation existed in England up into the 19th century. Now such inequality, or if you prefer, poverty,. appears to mean a greater propensity to obesity.

I have to presume that the motive for acquisition is competition: that driving force, that god in Margaret Thatcher’s universe, the market. Competition to defeat all your rivals, competition to be able to declare you have more wealth than anybody except Bill Gates, competition to get more than Bill Gates.

Which is also grossly wrong. Competition is what limits that wealth that can be amassed. Monopolists do tend to be rich, the competition from Steve Jobs, Linus Torvalds, Larry Ellison and all the rest is precisely what has limited the fortune of Bill Gates.

No doubt the play will be a success given how many share these delusions. But it is a delusion, we are more equal today than almost all human societies since the invention of agriculture.

The terrors of the patriarchy in tech

A worry expressed in The Guardian. AI more generally, the use of big data to train it more specifically, risks coding into the systems the attitudes of the current society:

But this can create problems when the world is not exactly as it ought to be. For instance, researchers have experimented with one of these word-embedding models, Word2vec, a popular and freely available model trained on three million words from Google News. They found that it produces highly gendered analogies. For instance, when asked “Man is to woman as computer programmer is to ?”, the model will answer “homemaker”. Or for “father is to mother as doctor is to ?”, the answer is “nurse”. Of course the model reflects a certain reality: it is true that there are more male computer programmers, and nurses are more often women. But this bias, reflecting social discrimination, will now be reproduced and reinforced when we engage with computers using natural language that relies on Word2vec. It is not hard to imagine how this model could also be racially biased, or biased against other groups.

Yes indeed, that will happen. If you train something (anything, this applies to guide or gun dogs as much as it does to a translation program) to operate within what exists then it will operate by the rules which currently exist.

The important part here being of course that part about the world not exactly as it ought to be. This starts to smack rather of New Soviet Man, that luscious planned economy would start working right around the time that we've changed humans so that they work within that luscious planned economy. Which isn't, quite, how it turned out, was it? 

But perhaps it should be different this time? To which there is an answer, the answer being the same even as the questions differ. We use markets and competition to work this out. Some section of society would prefer to see all such structured genderism not incorporated into those AIs. Other (very few perhaps) would like to see more of it, most possibly just wanting it to reflect the real world not the dreamed one. All of which is absolutely fine. There is no shortage of capital out there, there are no legal of cultural constraints upon anyone building an AI absolutely any way they wish to.

We'll find out which people really prefer when they use the various available alternatives and, well, use them. That's what we've done with every other invention and innovation in history after all and look how much better off we are than those societies which didn't - New Soviets for example.  

At which point:

Products that are more responsive to the needs of women would be a great start. 

Well, get on with it then. For surely you're not insisting that the men should do it for you, are you?

So just why are companies sitting on vast lakes of cash?

It's not an unusual complaint these days, companies sit on vast lakes, reservoirs' worth, of cash and don't seem to do much with it. Something must have changed so what is it? At least part of the answer, accounting for just under a third of it, is that the world of business has changed. Well, obviously, but we've identified one of the ways that it has

I explore the role of the just-in-time (JIT) inventory system in the increase in cash holdings by U.S. manufacturing firms. I develop a model to illustrate the mechanism through which JIT affects cash and quantify its impact. In the model, both cash and inventory can serve as working capital. As firms switch from the traditional system to JIT, they shift resources from inventory to cash to facilitate transactions with suppliers. On average, this switchover accounts for a 4.1-percentage-point increase in the cash-to-assets ratio, which is approximately 28% of the change observed in the data.

Back decades a company might sit on months of inventory, today perhaps hours. That needs less working capital to finance the inventory of course, but also more ready cash to pay suppliers. What happens to the net investment position depends upon the balance of those two effects.

Our own guess at it, and it is a guess, would be that the reduced working capital demands outweigh the greater liquidity demands. Thus rather neatly explaining something else people seem to worry about, the decline in corporate use of capital itself.

There is also a larger point to make here, we must always be very sure that we are distinguishing cyclical changes from structural. It is possible, for example, that people might use corporate demands for cash or working capital as a measure of the state of the economy. OK, fine, why not do so? But when we do so we've got to make sure that as the underlying technology, and thus the structural demands, change we do not confuse the two, the structural and the cyclical.

Our favourite example of this error was a measure of business software investment. That this is static was used to argue that there was no great technological revolution going on and therefore we faced secular stagnation. The problem being that business increasingly rents its software, not buys it. Office and Office 365 both do the same thing, but Office is an investment, 365 a current expense. Business was indeed therefore "investing" more in software, by the amount of the size of the software as a service market, but this was completely missed by the use of the investment statistic.

Or, as we like to say, it's no use looking at an economic statistic unless you understand, in detail, what it is actually measuring and why