Austerity is not incompatible with social unrest

26/04/2012 § 1 Comment

French President Sarkozy pulled back the curtain, briefly, then let it fall back. His statement, ‘Le Pen isn’t incompatible with the French Republic’, revealed his core consideration: power. Le Pen and her father before her marked the outer edge of French politics on the Right. The National Front wins small percentages of the popular vote, but its real function is to be the bit outside the ‘reputable’ Right. With this heavily-contested election and Sarkozy’s weakness, he is flailing around for any weapon with which to beat Hollande.

Sarkozy just moved the outer edge of what is acceptable. He has since retreated, but his statement can’t be unsaid.

It is a stark reminder that economics has ramifications for the real world. Keynes noted the same issue in ‘The Economic Consequences of the Peace’ after the Treaty of Versailles. That’s the potential failure of the technocratic, expert position: it fails to account for the impacts on and reactions of citizens. And then, it is blind to the reactions of politicians keen to hold onto power.

The success of Le Pen and Sarkozy’s subsequent reaction are symptoms of how people are reacting to the European economy. They are symptoms of people’s dashed expectations about well-being and fairness.

They are also analogous to the protests in Greece. They indicate a breakdown in larger social agreements. The economy rests on these larger social agreements. The economics literature likes to talk about ‘trust’, but it really is something more than that. It is expectations for the wider fair-play in society and the impacts on each person’s individual well-being now and in the future.

The difference between a normal recession and the present situation is this: people expect and live with normal recessions, even when they are personally harmed. There is a sense that, yes, things are bad, but either ‘that’s the way things go’ or ‘it’ll get better’. In the present situation — the Great Recession, the Lesser Depression, whatever you call it — Greeks, Spanish, French, and others are starting to say, ‘This isn’t right. This isn’t what I agreed to. I want — I demand — something different.’

The danger is that something different could be something worse.

Do entrepreneurs have a duty to undertake?

23/04/2012 § 2 Comments

Mike ‘MOD’ O’Donnell, techie, entrepreneur, and columnist, revives the old bach, boat, and beemer canard about New Zealand entrepreneurs. This is the idea that the siren song of the relaxed New Zealand lifestyle lures entrepreneurs away from what they really should be doing — building companies and wealth.

It occurred to me this morning that this story is completely incoherent, in the sense that it does not cohere. To explain, we have to remember what the study of economics is about. Modern economics started in the 18th century. As Helibroner explained in The Worldly Philosophers, people like Smith and (later) Ricardo tried to understand how people could produce and consume in a world that wasn’t fully organised by hierarchies of nobility or the church. How do people know how much food or cloth to produce if there’s no one telling them to do it?

This is still the question at the centre of economics. How do it all work? How is it organised? That’s why the economic disruptions of the last few years are so important. We want to understand how and why they happened, because they tell us what makes the economy work.

Each school of thought has a somewhat different idea of the key organising principle. Mainstream microeconomics is all about individual transactions and price signals leading to markets clearing. Individual optimising behaviour leads to a well-functioning economy. Marxism is about extracting surplus value, monetarism is about maintaining a predictable supply of money, etc.

The theory that the entrepreneur (someone who undertakes to do something, from the French) is the centre of economic growth is key to Austrian economics. An entrepreneur sees an opportunity, takes a risk, organises the necessary resources, and reaps the reward for creating more value than was there before.

This theory of entrepreneurship is focused on an individual, on the capabilities of a specific person. As such, it is part of the great conflict in the 20th and 21st centuries: society vs the individual. Austrian economics comes down firmly on the side of the individual.

The difficulty with the bach, boat, and beemer complaint is that it wants to have both the enterprising individual and the wider interests of society. The complaint is that these people could be doing more for the New Zealand economy, but they are instead choosing to relax. Their country needs them! How dare they pursue their own happiness rather than the good of the many. But focusing on the good of society immediately takes us out of Austrian economics into a more structural theory. Then you need to start explaining how multiple forces of socialisation lead to entrepreneurial behaviours, and why they might be privileged over other types of behaviours, and rewarded better, and who really is benefiting, and so on. Suddenly, the enterpreneur is no longer the canny individual rewarded for risk-taking, but is instead the unwitting expression of social forces.

This is the value of having an underlying theory of how the economy works. You can see how two contentions — We need to reward entrepreneurs! They should do something for the good of the country! — are inconsistent.

Emergent illusions

20/04/2012 Comments Off on Emergent illusions

Back on the topic of emergent properties. Deleuze wants us to believe that we have a multiplicity of potentials (or is that a potential of multiplicities?). In a rhizomatic model of becoming, we push our potentials out into new spaces. No potential is necessarily prioritised over another.

This is a corollary of Sartre’s existentialism. In Existentialism is a humanism, Sartre gives the example of a young man who must choose between going to England to fight with the French Resistance or stay home and care for his mother:

Ce jeune homme avait le choix, à ce moment-là, entre partir pour l’Angleterre et s’engager dans les Forces Françaises Libres – c’est-à-dire abandonner sa mère – ou demeurer auprès de sa mère, et l’aider à vivre.

Sartre counsels him and us that he must choose; the choice is his. The criteria for his choice are also his. There is no eternal principal on which he can base his decision, to which in effect he can surrender his decision.

Thus with Deleuze, we have the freedom to choose the path that our rhizomatic becomings take.

But, but…

In First as tragedy, then as farce, Zizek takes on the notion of free choice:

There are multiple ideological investments in the topic of choice today, even though brain scientists point out that freedom of choice is an illusion — we experience ourselves as “free” simply when we are able to act in the way our organism has determined, with no external obstacles to thwart our inner propensities….There is, however, a feature conspicuously missing from this series: namely, the injunction to choose when we lack the basic cognitive coordinates needed to make a rational choice. [pp 62, 63]

This is the terrifying element of microsimulation models as well as some game theoretic experiments. They are closed universes in which agents/subjects are herded down chutes into specific endpoints. They are given illusions of choices along the way, nodes in a decision tree which was developed by the researcher. It is no longer a rhizome, but a collection of tubes and chutes, however Rube-Goldberg the model may be. Too, the agent/subject must choose. Each round of the game, each run of the model, they must register their choice and continue to the next step in the process.

The result is then treated as a true emergence from the multiplicity of potentials — this is the illusion of emergent properties. Instead, we are counting the number of marbles in the hoppers we have already built, and then asking the reader not to pay any attention to the arrangement of tubes and chutes that dropped them there.

Betting on a new convention centre

19/04/2012 § 6 Comments

Psst! Wanna new convention centre? It won’t cost you anything. I can give it to you free. Just, y’know, look the other way while I set up a few pokie machines. You won’t even notice.

Or, at least, that’s how the story seems to be shaping up in the news media.

The deal is in the same category as sports stadia. I’m busy and lazy, so I’ll send you to Eric Crampton and Sam Richardson for the literature and analysis from that perspective. The theory is that the city gains all kinds of revenue from some big facility, but no single business can get enough of the profits to build the facility. If the city (or state) intervenes, they can fund the facility. They get the increased tax revenue, business is boosted, and everyone gets free ponies and wi-fi.

Only, it doesn’t work that way according to people who’ve actually run the numbers. From the outset, it doesn’t really seem like a good use of public resources.

The Sky City deal is more convoluted than simple public financing, so the analysis is more complex. That doesn’t make it a good deal, it’s just harder to see the con.

First, let’s set aside the worrying about who knows whom. Sorry, but this is New Zealand. All that stuff about two degrees of separation is true. There are only so many people in government and business. In a country this small, they are going to know each, have gone to school together, attended a function with each other’s first cousins, or whatever the complaint is. Tied into that is that experience is thin. There are only so many people or companies with the required expertise to build a convention centre. The same problem arises in academia all the time. If you want a peer review of a proposal or paper, only a handful of people in the country can do it competently.

What about this financing deal? The government doesn’t have to pay anything, it just has to allow more pokie machines. Lotteries have been called a tax on stupidity. As a practical matter, supporting government through lotteries and other gambling is a tax on lower-income and less intelligent earners. Yes, I do know that people choose to gamble, that no one is making them feed the slots. But, we know that the practical effect is a regressive tax.

What this means is that the effect of the deal is to have lower-income people fund a convention centre. Coupled with the findings that these sorts of projects don’t tend to make money, it sounds like the plan is to have poor or stupid people to put what money they have into a bad investment. I’m not sure that’s good public policy.

Since we were discussing Christchurch

18/04/2012 § 6 Comments

…please allow me to point you to the latest Insight from NZIER (my day job). Shamubeel Eaqub has put together the numbers so you don’t have to.

A few highlights (if I can call them that):

  • residential building area consented is only just now almost reaching the pre-earthquakes level. Ay caramba! A bunch of house FELL DOWN and we aren’t replacing them?
  • non-residential building consents are below 2007, 2008, and 2009. Of course, there was talk of over-building then, and also a clear shift from run-down spaces to shiny happy tilt-slab spaces. But still, to reiterate, a bunch of buildings FELL DOWN or were pushed over.
  • Only 5,400 taxpayers appear to have left, with an unknown number of dependents in tow. That’s really good news, because it means that people aren’t just abandoning the city.
  • OTOH, the data show 28,000 lost jobs! Yikes! This is a city with a population about a bit less than 400,000 people. Lovely that people have decided to stay, but how are they putting food on the table?

So, please, have a look.

The IP enclosure movement

18/04/2012 § 3 Comments

In the news today, a TelstraClear customer has received a third infringement notice under the new NZ copyright regime. This ‘third strike’ (an odd usage in a country without baseball) opens up the possibility of enforcement action by the Copyright Tribunal.

I read something in the last week or so, about the notion of intellectual property potentially opening up a larger discussion of what property is (sorry, no reference — can’t find it). I think this may be right. I won’t go as far as Proudhon and declare that property is theft. However, property is exclusion. We exclude people from using our property, and excludability is one of the criteria for distinguishing public goods from private ones.

We have to remember that exclusion is social enforced. That’s the whole reason you need rules, laws, and ultimately the Copyright Tribunal: you are trying to prevent someone from doing something they are physically able to do. It is physically possible for someone to set up a tent in my front yard, dig a latrine, and camp overnight. But the law (in its majesty) forbids this, and the police will come round and enforce the law if asked.

With intellectual property, it’s the same. This person was physically able to download music (I love the term ‘internet piracy’ — it deserves its own post). The Recording Industry Association of New Zealand, on behalf of the copyright owner, took exception to this and called in the enforcers. They need to have the enforcers and they need to have the rules, or they can’t actually create the exclusion and thus the property.

Eric Crampton asked a really good question last month. If I can lend my CDs, can I lend my back-up files? And if I can lend the files, why can’t I just share them around? The question was very much in the flavour of Zeno’s paradox of the tortoise and Achilles.

This may be the most interesting result of the contemporary focus on IP — as we sort out what it means, will our new understanding spill over into other types of property?

Book report: The Spirit Level

17/04/2012 § 9 Comments

The Spirit Level puts forth the thesis that more-equal societies are better places for everyone; rich and poor both suffer from inequality. It marshalls many graphs and references to support the thesis. There seem to be two problems with the book. One, the authors are in love with their big idea, and make all the details fall in behind. Two, the data don’t necessarily support the thesis.

The book has been discussed, debated, debunked, and defended extensively, so I do wonder what I can constructively and accurately add. Let me start with some key links:

  • The Equality Trust was founded to support the work of the authors to reduce inequality.
  • The TaxPayers’ Alliance has taken on the book, its arguments, and its referencing. They found major problems with the research, including misrepresenting the findings of academic papers, cherry-picking of data, and non-replicability of findings.
  • The Spirit Level Delusion is a book and blog that takes on the book’s ‘theory of everything’. It has new graphs and good discussions of the datasets, and reveals inconsistencies in the analysis.

Consider yourself fully warned.

Here is one tiny example, a synecdoche for the book’s general sloppiness. In the chapter ‘Building the Future’, the authors say:

The need to provide unrestricted free access in order to maximize the public benefit was offered as an economic explanation of why roads and bridges were in public ownership — until government began to try to recoup the costs of road building by charging tolls.

This says that we used to finance roads publicly, and then government invented toll roads. As it happens, I grew up not far from Little River Turnpike, which was a toll road over 200 years ago. Oh, and Columbia Pike was chartered in 1810. Toll roads aren’t a new idea, and it isn’t the fault of some neoliberal, pro-inequality conspiracy that we suddenly have them. By an accident of geography, I happen to know a bit of toll-road history. So I wonder, what else is wrong with the book? This is where the websites linked above are useful. They have three general charges:

  • mis-representing other research
  • cherry-picking data
  • ignoring contrary findings.

Mis-representing other research is the most serious charge. It is one thing to ignore other research; it is something much worse to cite it to support of your argument when it doesn’t. The critics rightly say that this is exactly what Wilkinson and Pickett do. Take the work of James Heckman. I skimmed this report (pdf) from Cunha and Heckman (or see this similar NBER report). Heckman is talking about the impacts of inequality on people who are disadvantaged. The work isn’t about about how unequal societies perform worse for everyone, which is the thesis of The Spirit Level.

The complaints about cherry-picking data are sometimes important and sometimes not. I wouldn’t tend to be worried about whether Slovenia is in the dataset or not, for example. However, it is fascinating that the significance of the relationship depends on the countries chosen. That suggests that we may have an interesting thesis, but more work needs to be done. The complaints about choosing different series of data are also possibly non-issues. Working with these sorts of international datasets is hard and messy; compromise is inevitable. The two key things are: say what you’ve done (and why), and be prepared to back off your conclusions if new evidence calls them into question.

The complaints about ignoring contrary evidence work at two different levels. If we think just about the book, it isn’t an important criticism. The authors have a thesis and they put forward the evidence. They aren’t under any obligation to show you the contrary evidence. The second level, then, is how you as a reader and we as citizens decide to use this one book. The responsible thing is to look around and see what else is there. Are there alternative theories explaining the same data? Also, is there other research dis-proving the thesis?

One of the authors cited as providing contrary evidence is Angus Deaton. His book Economics and consumer behavior (with John Muellbauer) is an essential reference for microeconomic work, so I’m prepared to take his word/findings over Wilkinson and Pickett’s. I looked at one of Deaton’s papers. He says:

But it is not true that income inequality itself is a major determinant of population health. There is no robust correlation between life expectancy and income inequality among the rich countries, and the correlation across the states and cities of the United States is almost certainly the result of something that is correlated with income inequality, but that is not income inequality itself.

So, yeah, that pretty much says the opposite of The Spirit Level. Again, Wilkinson and Pickett are not required to tell you that this other research is out there. However, caveat lector means that you should inform yourself.

None of that, though, is the central problem with the book. As I said at the beginning, they are in love with their thesis. ‘Inequality’ functions for them as a fetish, in exactly the way that Zizek describes the role of ideology. Ideology can function as fetish or symptom, and in the modern world functions as both at once:

it enables you to fully participate in the frantic capitalist game while sustaining the perception that you are not really in it.

Wilkinson and Pickett propose to reorient the economy around a new fetish/symptom, ‘equality’. But, if inequality is as fundamental to some societies as the data suggest, it can’t be just a case of shifting them a bit or reorienting them. Real change would have to be more fundamental. Instead, the authors have covered over this conclusion with a bit of ideologic paste.

Christchurch is so screwed [UPDATED]

16/04/2012 § 26 Comments

I’ve just spent some time in the South Island. We listened to the news and got the Christchurch paper a few times. The contrast between the news there and the news in the North Island is stark. In Christchurch, the earthquakes and the recovery are front-and-centre all the time. For Wellington, these issues are just one of many stories, merging into the general cacophony of stuff-I-should-care-about.

Well, Christchurch is screwed. Sorry for the language, but it’s true. And the rest of the country should take notice, because this is what will happen to them in a big event. The problem is the government — EQC and Cera — and the insurance companies. It’s the eternal run-around. It’s your worst medical insurance problem while waiting to renew your driver’s licence at lunchtime on a Monday.

The government is doing what bureaucracies do. It is creating processes. It is making sure that everything is correct, that all the boxes are ticked, and, above all, that their asses are covered. So it moves slowly, carefully. Safer to keep people from doing something than allow them do the wrong thing.

Insurance companies are doing what they do. They are minimising their expenses and protecting their bottom lines.

Some stories:

  • TC3 land — Cera used to have three land categories, of  which Green was the safest. Then, they re-categorised land. Green was subdivided into TC1, TC2, and TC3. Now, although TC3 is still Green, it doesn’t actually mean ‘safe for building’ anymore. It means ‘we have no idea’. Something may happen, but maybe not, and you might want to build with that in mind, but we can’t tell you how. Sensibly, people aren’t buying TC3 properties. So now, the property market for big areas of the city has completely seized up.
  • Foundations — Cera says that they are working on figuring out what foundations are necessary for the different land categories. The problem is that Cera isn’t doing the rebuilding, the EQC is. EQC isn’t checking foundations unless there’s a good reason to check (house split in half or off its piles). The result is likely to be a bunch of repaired houses that either can’t be sold, sell at big discounts, or aren’t safe for the land on which they sit.
  • Rental properties — Payments to cover people’s rent while they can’t live in their houses have been a problem from the start. The latest story is an insurance company saying that it would pay, and then reneging on that. The Minister in charge has said that there are a number of ways the private market could and should be sorting things out. Robin Clements rightly points out that the market IS finding its equilibrium, but that equilibrium is socially unacceptable.
  • Red-zone repairs — The Red land zones are supposed to be beyond repair; the plan was to abandon these areas (e.g., these properties on the Avon River). [UPDATE:] Now, insurers have decided that it will be cheaper to repair houses on those sections than to pay out for them. Part of the reason they can do this is that the Government conveniently relaxed building regulations. What hasn’t been made clear is how you sell such a house, since the Government has decided that the land should be abandoned. In the comments and in his own post, Eric Crampton clarifies the situation. [END UPDATE]

These are familiar economic problems: the market for lemons, decisions under uncertainty, asymmetric information, moral hazard. They boil down to two common threads:

  • Increased uncertainty — Changing the rules and waiting for decisions have hugely increased uncertainty. These aren’t the result of the earthquakes, but of the subsequent policies. Uncertainty costs the economy, and Christchurch is paying dearly.
  • Shifting costs onto individuals —  People are having to paying out-of-pocket for rentals, fight to have legitimate bills paid, and take massive hits on their home equity. These are all costs that insurers and the government are shifting off their books and onto individuals.

Christchurch people paid their insurance policies. They paid for their earthquake coverage. They should be fully compensated. Instead, they’re getting shafted. Unless this changes, the Christchurch economy will be injured for many years. Not because of the earthquakes, but because of the aftermath.

Markets in Easter candy

05/04/2012 Comments Off on Markets in Easter candy

Easter is almost upon us, reminding me of my early lessons in endowments, preferences, and Pareto optimisation. I’m talking, of course, about trading Easter candy.

Now, parents have an impossible task. They can either give every child exactly the same endowment of candy (jelly beans, chocolate eggs, marshmallow chicks, etc.), or they can attempt to equalise the satisfaction of the children by matching endowments to known preferences.

I come from a big family. Easter morning, our baskets of candy would be waiting for us, delivered overnight by the Easter bunny. In a small family, it is possible to spend more time giving each child what they want. In a big family, everybody just needs to get in line and accept what they get.

So, we all had pretty much the same baskets. As a result, once the chocolate bunnies were eaten, we were each left with candy we didn’t particularly like. There was scope for Pareto improvement — each one of us could be better off and no one worse off by engaging in free trade. I was the only one who liked black jelly beans, so that was my ace in the hole. I was pretty much the monopsony buyer of black jelly beans. On the other hand, I don’t particularly care for marshmallow chicks, so I was happy to get rid of them. Also, as an older child, I had a bit of an advantage over my less experienced siblings.

Of course, candy is candy, even if it isn’t the best. Each piece still has a minimum sugar value. This sugar value functioned as a reserve price in the barter process.

What did I learn from all this?

  • heterogeneity of preferences can be a strong driver of trade
  • failures in initial endowments can be corrected through open markets
  • information is powerful — use it to your advantage
  • the trade price is indeterminate, so try to find your partner’s reserve price.

When I say that trades were Pareto improving, that’s a technical term. It doesn’t mean there weren’t arguments and even tears. But that’s all part of the information discovery process, right? And, as much as everyone was better off, I have to admit that I might have been a bit betterer off. What can I say? That’s what big brothers do.

Identity politics of science

03/04/2012 § 1 Comment

The results in a new sociology article have been making waves in the blogosphere. Gordon Gauchat found that conservatives in the US have become less trusting of science. This was a test of a thesis from Chris Mooney. Some quotes:


Using data from the 1974 to 2010 General Social Survey, I examine group differences in trust in science and group-specific change in these attitudes over time. Results show that group differences in trust in science are largely stable over the period, except for respondents identifying as conservative. Conservatives began the period with the highest trust in science, relative to liberals and moderates, and ended the period with the lowest.

Mooney (2005) (from the blurb):

On a broad array of issues-stem cell research, climate change, missile defense, abstinence education, product safety, environmental regulation, and many others-the Bush administration’s positions fly in the face of overwhelming scientific consensus…. This is not unique to the Bush administration, but it is largely a Republican phenomenon, born of a conservative dislike of environmental, health, and safety regulation, and at the extremes, of  evolution and legalized abortion.

I have seen something similar in my research, something broader than Gauchat’s findings. I started from the position that Slovic laid out, I think in the intro or first chapter of The Perception of Risk (2000). He called it the ‘white male’ bias. In research on risk, he found that there were ethnic and gender differences, but they interacted. He found that white males had different risk assessments than everybody else.

In my work on technology, I found sort-of similar results. But it was more subtle than that. Middle- to high-income males, particularly white males, seemed to have more positive views of new technology than everyone else. I played around with cross-tabs for a while — it was a minor issue in my research — and never quite resolved where the splits were. Other people’s work elsewhere suggested the same effect.

Because facts aren’t facts. We interpret them, we manipulate them, we try to make sense of them — and, chiefly, we insert them into narratives as best we can. With each piece of information, we ask, how does this particular fact fit with my identity and worldview? As a result, belief or trust in science is a badge we wear. We signal to the world who we are by the stance we take on science issues.

Where is this headed? The ‘white male’ bias is inherently trusting of official science. The opposite position, which tends to be correlated with females and non-whites, is sceptical. Now, US conservatives are becoming less trusting of science. It looks like the support for science — the official, lab-coated, expert-centred variety — is eroding. The ‘white male’ bias was always a minority position (although a privileged  one). But now it is losing a key bloc — the conservative white male and his allies.

I can see potential good coming from this splintering. Slovic and others have shown that the experts aren’t necessary right. They do make mistakes, they engage in groupthink, they are subject to cognitive biases. Broadening the discussion about all kinds of science issues could make it more inclusive. That’s the optimistic position. The pessimistic position is that people with the strongest views and loudest voices (and deepest pockets) will determine things for the rest of us, regardless.

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