Work, dammit!

12/08/2013 § 5 Comments

Over the weekend, I ended up at a review of The Invention of Capitalism. The book’s author is Michael Perelmen, an economist in California who has stirred up controversy over the years. Apparently, he doesn’t disappoint in this book.

Disclaimer: I have no idea whether Perelmen is right in his history, or should I say ‘right’, as history is a matter of interpretation (written by the winners and all that). Having said that, I had two reactions:

1) Aren’t we still living with the attitudes described?

This quote from a pamphlet of the day caught my attention:

The  possession of a cow or two, with a  hog, and a few geese, naturally  exalts the peasant. . . . In sauntering  after his cattle, he acquires a  habit of indolence. Quarter, half, and  occasionally whole days, are  imperceptibly lost. Day labour becomes  disgusting; the aversion increases by indulgence. And at length the  sale of a half-fed calf, or  hog, furnishes the means of adding  intemperance to idleness.

Here we have a peasant making a decision about work and leisure. He has a few animals and the wherewithal to maintain them, and that suffices. ‘Day labour becomes disgusting’ — well, or not worthwhile. Not worth the effort. And what does our peasant do to while away the time not spent working? He drinks! He is intemperant! Oh my stars and garters!

What is the problem with this? Well, he isn’t working. He isn’t being industrious. He isn’t being productive.

The review (and thus the book) suggests that the problem to the thinkers of the time was that these were potential labourers who could produce profits for the rich. They needed to be forced out of their traditional lifestyles, and hunger was the weapon.

What I noticed, though, was the command to be productive. It wasn’t up to the individual to make such decisions. They were clearly wrong. And alcohol was clearly part of the problem.

It is the same today. When the ‘social costs of alcohol’ are computed, lost productivity and lost worklife are often included. These are largely private costs, locally affecting the drinker and perhaps a few people around the drinker who are able to make local decisions about the problem (and thus force the drinker to internalise the externalities). Nevertheless, there is horror that these people aren’t working to their full potential. So, as much as this is a history book, that same command to work and produce is still apparent today.

2) What does the forced labour of those people mean for today?

We (the industrialised West) are rich. Fabulously wealthy by historical standards. Yes, there is poverty and want, but most people have enough. We have more food than we can eat. Most individuals have their own bed (or share by choice). Our farm animals don’t live in our houses in the winter. We have one room for sleeping, one for eating, one for sitting, etc.

We rarely convert this personal wealth into anything productive. It goes on consumer goods, so many that they don’t fit in our houses and we pay people to store them for us. My daughter was marvelling this weekend at the size of the Wellington Storage King.

Many of us could take all this wealth and buy back the lifestyle of the peasant or the ‘native Highlanders’ of Scotland. And yet we don’t.

So, even though as a matter of historical record the shift to factory work may have been achieved through a deliberate campaign of dispossession, and even though this is an excellent demonstration that property rights are socially constructed and enforced by rough men standing ready to do violence, how does that help us make sense of the consumer economy? Is it about understanding that we have options — that we choose to live like this? Is it about understanding the violence inherent in the system (Help! I’m being repressed!)? Or, is it nostalgia for a simulacrum?

Fat taxes — what’s the goal?

19/03/2013 § 4 Comments

Andrew Dickson (othersideofweightloss) was emailing me about fat taxes and I realised I didn’t have a well thought-out opinion on them. Let me start by asking, what are we trying to accomplish?

User pays — This is the point of the tax on fat people that Gareth Morgan Investments suggested in 2005:

Government could publish a range of tolerance for body mass index and those who fall within that over the year (certified say six monthly, bit like a VIC for a car), would qualify for a lower rate of personal tax (higher rate of benefit).

The idea is that fat people make themselves fat, and their fatness costs the public health system money, which is contrary to user-pays, so we need a fat tax to correct this.

If we accept this idea — fat is like cigarettes and alcohol, two products for which we already have a cost recovery scheme — then we need to keep going. First, we need to understand the full lifecycle healthcare costs of fat people compared to other groups, a point that Eric Crampton also makes. The comparison with smoking and alcohol is instructive: dying early is not necessarily a drain on the healthcare system.

Secondly, user-pays cuts both ways. We are told that fat people are fat because they aren’t active enough. Therefore, they aren’t using a whole bunch of services that the skinny, fit people use. So, yes, we could charge more for their use of health services, but they also get a rebate for the things they don’t use: backcountry huts, footpaths, etc.

Cost to society — This is more than just the strict healthcare costs. Jim Mann, Professor in Human Nutrition and Medicine, wrote a 2004 piece for Diabetes New Zealand on How a Fat Tax Can Help Fight Obesity.

debilitating illness and premature death linked to obesity also cause losses to society in the form of lost economic contributions from those who are forced to curtail work or retire early, or die while still in the work force, as well as lost contributions that many retirees make as community leaders and volunteers….

Note that Mann isn’t talking about helping people get the best for themselves, to ‘nudge’ them into behaviours that will bring them higher longer-term welfare. No, Mann is specifically looking at it from the perspective of society, of what the group loses when an individual cannot participate. Because the group loses, it must change the individual’s behaviour. The logical next step is fining people for shirking and jailing them for laziness — where does it stop? And is fat a leading cause of not contributing? I’d have thought that being selfish was far higher on the list, and no one seems to be proposing a fine for that.

Improving individuals’ choices — This options sounds noble — we’re just helping people do what’s best for them. The immediate problem is defining the ‘what’s best’. Economists generally use a neat trick. They assume that what the individual chooses to do is optimal for them. Now, let’s be clear, it is just an assumption, and Joan Robinson showed the circular logic therein. But, what else are you going to assume? There are only two other choices: someone other than the individual (you, perhaps?) have a better sense of what’s best, or that time-inconsistency of preferences means that the individual at some other point in time would have chosen differently for the present.

Improving choices comes down to two things: improving information and/or overcoming time-inconsistent preferences. Given all the information shoved down our throats for decades (gratuitous foie gras reference), I find it difficult to believe that lack of it is causing 1 in 4 adults to be obese. It’s pretty simple — veggies and fruits >> fried stuff. The time-inconsistent preferences angle is more plausible and interesting. But again, given all the existing ways that people can motivate themselves to be less fat, how much more can people in the present be disciplined by their future selves?

So, why fat taxes? The explanations offered don’t really stack up. We have to look someplace other than economics to understand the motivations. Take your pick of explanations — Foucault and Lacan immediately come to mind — but that’s a topic for another day.

Borrowing to spend

14/03/2012 § 2 Comments

Was the Prime Minister trying to wind up economists yesterday? ‘Cause several people pointed out to me his comments on students loans almost as soon as they were published. This morning,  Eric Crampton at Offsetting Behaviour notices, too, and offers the PM some advice. The comments were:

That is about the only thing that will get [young people] out of bed before 7 o’clock at night to vote, but it’s not politically sustainable to put interest back on student loans. It may not be great economics, but it’s great politics. It is a bit of a tragedy because it sends the wrong message to young people, it tells them to go out and borrow debt. [emphasis added]

My colleagues were stunned at the realpolitik. Eric suggests that the political calculus may not be so clear:

Would students really get out to vote en masse if new borrowing were subject to interest charges? Would Labour really look at the current deficit projections and reckon promising a return to zero-percent loans a great idea?

I don’t want to wade into the interest-free debate, since it’s been beaten to death, resuscitated, then flogged some more. No, I want to talk about the next sentence, about borrowing debt.

The life-cycle hypothesis (LCH) is that people do or should try to maintain a relatively constant level of consumption over their lifetimes. Income, on the other hand, isn’t constant: it has a definite life-cycle path. The appropriate response is for people to borrow when they are young and their incomes are low and repay when their incomes are high, then save for retirement. This neat plan is constrained by problems with intertemporal transfer of income or wealth, and there are additional issues with uncertainty.

Here’s the key point: this applies to consumption as well as investment. 

The investment part is simple to explain. I borrow to pay for my education, which raises my human capital. This additional capital provides me with a higher income. As long as the increase in income is higher than the cost of education, it is a good investment.

The LCH says that people should also borrow to fund consumption. Students borrowing money to live comfortably is just consumption-smoothing. That is exactly what textbook economics says they should do. We can quibble about the appropriate amounts and whether expectations of future earnings are well informed, but that’s a different discussion.

If young people going out and borrowing is a tragedy, the plot was written by economists.

Paying just enough attention

05/03/2012 Comments Off on Paying just enough attention

This morning’s news tells us about Magnus O’Neill’s smartphone use while on holiday in the Cook Islands:

The online checks would have cost him about $4 in New Zealand. Instead he now faces a bill from Telecom for $2000.

His roaming consumed a modest 70 megabytes of mobile data. But what O’Neill did not realise was that he was being charged $30 a megabyte.

I was overseas over the summer holidays and I have no sympathy for Mr O’Neill. It’s very clear from the information you get before you leave and the texts you get in each new place that roaming is expensive.

However, his experience is instructive for the economics of consumption.

Research on perceptions and the brain show that we don’t notice everything around us. This weekend, I watched an episode of the National Geographic show Test Your Brain, called ‘Pay attention!’ It showed a number of tests and tricks that demonstrate how much we filter the visual stimuli around us. We miss a lot.

H.A. Simon discussed this in his work starting in the 1950s. He theorised that we learn about regularities in the world around us, and then rely on those regularities to allocate our attention. Attention is a scarce resource, so we learn to use it efficiently.

One problem arises when the context changes and we don’t react. For example, we go overseas and don’t think to change our smartphone habits. We might end up paying more for the data than it was worth to us.

Consumers approach markets with many assumptions. They have to allocate their scarce attention to test their assumptions. Which assumptions to test? The ones that make the most difference. How do they know which ones make the most difference? Well, they have to make some assumptions about their assumptions and the market. It’s turtles all the way down.

These lapses in full attention create profit opportunities, but it’s an open question whether the opportunities are economically efficient. Let me put it this way: underarm bowling. At the time of the famous incident, underarm bowling was clearly within the rules. The fact that it created such a furore showed that it contravened expectations of behaviour, of what was cricket. It also sealed the win. It was profitable.

Entrepreneurs can make profits by understanding where there are expectations that create lapses in attention. But these are short-term profits until consumers learn to pay attention. At that point, consumers work harder to understand what’s on offer. And they are possibly a bit poorer for it.

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