Stumbling and Mumbling

Author: chris dillow   |   Latest post: Wed, 16 May 2018, 01:44 PM


On neoliberalism

Author: chris dillow   |  Publish date: Wed, 16 May 2018, 01:44 PM   |  >> Read article in Blog website

Is neoliberalism even a thing? This is the question posed by Ed Conway, who claims it is "not an ideology but an insult." I half agree.

I agree that the economic system we have is "hardly the result of a guiding ideology" and more the result of "happenstance".

I say this because neoliberalism is NOT the same as the sort of free market ideology proposed by Friedman and Hayek. If this were the case, it would have died on 13 October 2008 when the government bailed out RBS. In fact, though, as Will Davies and Adam Curtis have said, neoliberalism entails the use of an active state. A big part of neoliberalism is the use of the state to increase the power and profits of the 1% - capitalists and top managers. Increased managerialism, crony capitalism and tough benefit sanctions are all features of neoliberalism. In this respect, the EU's treatment of Greece was neoliberal - ensuring that banks got paid at the expense of ordinary people.

I suspect, though, that measures such as these were, as Ed says, not so much part of a single ideology as uncoordinated events. Tax cuts for the rich, public sector outsourcing and target culture, for example, were mostly justified by appeals to efficiency, and were not regarded even by their advocates as parts of a unified theory. To believe otherwise would be to subscribe to a conspiracy theory which gives too much credit to Thatcher and her epigones.

In this sense, I mostly agree with Paull Mason:

Neoliberalism is a time-limited global system sustained by coercive imposition of competitive behaviour, parasitic finance & privatisation.

I'm not sure about that word "system". Maybe it attributes too much systematization to neoliberals: perhaps unplanned order would be a better phrase. But it's better to think of neoliberalism as a bunch of arrangements ("system" if you remove connotations of design) rather than as an ideology. Ed has a point when he says that almost nobody fully subscribes to "neoliberal ideology": free market supporters, for example, don't defend crony capitalism.

And it's useful to have words for economic systems. Just as we speak of "post-war Keynesianism" to mean a bundle of policies and institutions of which Keynesian fiscal policy was only a small part, so we can speak of "neoliberalism" to describe our current arrangement. It's a better description than the horribly question-begging "late capitalism".

This isn't to say that "neoliberalism" has a precise meaning. There are varieties of it, just as there were of post-war Keynesianism. Think of the word as like "purple". There are shades of purple, we'll not agree when exactly purple turns into blue, and we'll struggle to define the word (especially to someone who is colour-blind). But "purple" is nevertheless a useful word, and we know it when we see it.

If neoliberalism is a system rather than an ideology, what role does ideology play?

I suspect it's that of post-fact justification.

Put it this way. In the mid-80s nobody argued that the share of GDP going to the top 1% should double. Of course, many advocated policies which, it turns out, had this effect. Some of them intended this. But those policies were justified on other grounds, often sincerely. Instead, the belief that the top 1% "deserve" 15% of total incomes rather than 7-8% has mostly followed them getting 15%, not led it. A host of cognitive biases - the just world illusion, anchoring effect and status quo bias underpin an ideology which defends inequality. John Jost calls this system justification (pdf). You can gather all these biases under the umbrella term "neoliberal ideology" if you want. But it follows economic events rather than is the creator of them.

So, I half agree with Ed that neoliberalism isn't a guiding ideology. But I also agree with Paul, that it is a way of describing a particular economic system.

I don't, however, want to get hung up on words: I'd rather leave such pedantry to the worst sort of academic. What's more important than language is the brute fact that productivity and hence real incomes for most of us have stagnated for years. In this sense, our existing economic system has failed the majority of people. And this is true whatever name you give it.

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On guilt by association

Author: chris dillow   |  Publish date: Mon, 14 May 2018, 01:49 PM   |  >> Read article in Blog website

When is guilt by association not a fallacy? I ask because of two things I've seen recently.

The first is Daniel Hannan's fear that we're heading for "absolutely the most harmful outcome imaginable" of Brexit, "namely leaving the Single Market while keeping the Customs Union." He tries to blame everybody but himself for this, to which Jonn Elledge replies: "it is not enough to blame your opponents for the world's failure to live up to your fantasies."

The second example is David Goodhart's claim that the treatment of Windrushers is an outrage. To this, Jonathan Portes accuses him of "astonishing hypocrisy" as Goodhart was "one of the most vocal cheerleaders for the "hostile environment" from the beginning, knowing full well what it would mean."

In both cases, their opponents accuse Hannan and Goodhart of a form of guilt by association. Hannan's support for Brexit, his opponents say, associates him with the fiasco we have, whilst Goodhart's anti-immigrationism, it is alleged, implicates him in the Windrush scandal; Goodhart denies this by saying he's not responsible for bad implementation.

Let's take an obvious example of the guilt by association fallacy: "how can you be a vegetarian? Hitler was a vegetarian!" This has exactly the same structure as: "how can you support Brexit when it is also supported by little Englanders and racists and will be implemented by buffoons?" Or: "how can you support the hostile environment policy when it's supported by racists and implemented by [insert derogatory adjective here]?"

So, if my first example is an obvious fallacy, why aren't by second and third examples?

The answer is that sometimes association has information value. When it does, guilt by association is not a fallacy.

"Hitler was a vegetarian" tells us nothing about the merits or demerits of vegetarianism. However, the fact that a policy is supported by racists and will be implemented by people who fall well short of angelhood does have information value: it alerts us to the type of policy we'll get.

In saying this, I'm not using hindsight. Just before the referendum I wrote:

Some of you have a vision of a Britain outside the EU that is a free, liberal, socialistic country. These are ideals with which I have sympathy. But we are kidding ourselves if we think a vote for Leave will be a move towards such a society. Instead, it'll be a mandate for Farage and the inward-looking, reactionary mean-spirited philistinism he embodies.

And later in 2016 I said of immigration targets that:

if you give power to the state it'll be misused, because the actually-existing state is a stupid bully. Just as "anti-terror" laws have been used to harass journalists and peaceful protestors, so immigration controls will hurt decent people. And for the same reason - because they are the softest targets.

If someone of my limited cognitive skills could see this, I'd expect others to do so.

Critics of Hannan and Goodhart, therefore, are right. The fact that their causes are associated with bad people was a strong clue that they were indeed bad ideas.

Many of you, I guess, will be with me so far.

But here's the thing. You can make exactly the same criticism of me. I support much of Labour's economic policy, especially anti-austerity and backing for coops. To this, some will ask: how can I do so, given that such policies are also supported by anti-Semites, big staters and various cranks and fanatics?

My answer is that these are a much smaller fraction of Labour supporters than were (say) little Englanders and neo-racists of Brexit, and so the information value of crankish support for such policies is low. But I'm not 100% confident in this answer.

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Job Guarantee: Marxist or Keynesian?

Author: chris dillow   |  Publish date: Fri, 11 May 2018, 02:07 PM   |  >> Read article in Blog website

For decades there has been a debate about the differences and similarities between Marx and Keynes. The question of whether we should introduce a job guarantee highlights this debate: is it a means of supporting capitalism, or a challenge to it?

A job guarantee is the offer by the government of a job at a living wage to anybody that wants one. This would, in effect, eliminate involuntary unemployment. Pavlina Tcherneva has a nice paper (pdf) describing the details. Other advocates of it are Randy Wray (pdf) and colleagues, FitzRoy and Jin (pdf), Paul, Darity and Hamilton and Wisman and Pacitti.

The case for such a policy seems obvious. Although official unemployment seems low, there are a further 2.1 million people out of the labour force who want to work. This means there are almost 3.5 million unemployed - 8.5% of the working age population. And for some groups - the young, unskilled, some ethnic minorities, the disabled or unwell - the jobless rate is far higher.

This matters because unemployment is a massive cause of misery. It is associated with (pdf) unhappiness, suicide, and lower wages (pdf) and worse job prospects even for those who return to work: Danny Blanchflower and David Bell summarize (pdf) its many ill-effects. As Jeff Spross says:

A job is not merely a delivery mechanism for income that can be replaced by an alternative source. It's a fundamental way that people assert their dignity, stake their claim in society, and understand their mutual obligations to one another. There's pretty clear evidence that losing this social identity matters as much as the loss of financial security.

What's more, there seems an obvious Keynesian* case for a JG. It would act as an automatic stabilizer, boosting aggregate demand in bad times but shrinking in good. By offering companies the prospect of high and stable demand, it should encourage capital spending.

It could then encourage a form of wage-led (pdf) growth. The JG would act as a floor for both wages and working conditions. In knowing that they couldn't drive these down, employers would have to raise productivity and try to economize on labour by investing in new technology. In this sense, a JG could do in the 21st century what strong unions and full employment did in the 1950s and 60s.

What, then, could possibly be said against the idea?

There are big practical problems. Do local governments really have the management expertise to identify necessary work and manage those projects? And there's a danger that under right-wing governments a JG will become not a way to offer dignity to the unemployed but rather a form of workfare. It's partly for this reason that I agree with Steve that a JG must be accompanied by a citizens' income.

There are, however, other issues here. Which is why I say a JG might be a Marxian policy rather than a Keynesian one.

Simon describes one:

Suppose we start with an economy with stable inflation, implying unemployment was at the NAIRU, and introduce JG. As this puts upward pressure on inflation because the costs of losing a job are reduced. the only way of keeping inflation stable is to deflate demand, which of course would reduce output.

Of course, you might claim - reasonably I think - that the NAIRU is low. And you could well argue that in bringing people into work a JG would improve skills and so help reduce the NAIRU in the longer run. But would the NAIRU then really be 0%? I suspect not, and that there'll be some point at which Simon's point holds.

When it does, a JG will crowd out capitalistic employment.

To some, such as Kate Aronoff, this is a feature not a bug. "What feeds a profit margin and what makes for a good society don't often overlap" she says:

From coastal remediation to oral history projects to avant-garde theatre [as the WPA used - CD], there's plenty of valuable and low-carbon work to be done that simply isn't valued by the private sector. It's hard to imagine any company, for instance, being able to make a profit off of building playgrounds or keeping elderly people company to help ward off loneliness, which has been linked in several studies to premature death.

This is one sense in which a JG challenges capitalism. It poses the question: what is economic value? Does it consist only in profitable activity, or instead in non-market work in reducing loneliness, and shoring up society and the environment?

There is, of course, another sense in which the JG opposes capitalism. As Jeff says, echoing Kalecki:

With full employment, the capitalists lose their leverage to depress workers' wages and must give up more profits. But, more than that, when it comes to running endeavours that are ostensibly "theirs," the capitalists are forced to bargain with and bend to the will of workers "below" them. Their position as the demigods of the economy-granting employment when they are appeased, and taking it away when they are angered-is undone.

How will capitalists respond to this? The benign possibility is that they do so by improving working conditions and thereby productivity: we've good evidence that more cooperative forms of capitalism are more efficient. The less benign possibility is that they simply close up or stop investing, as they fear that lower profit margins will do more damage to profit rates than higher aggregate demand does good. History warns us that both responses are possible: in the 50s and 60s we saw the former, but in the 70s the latter.

And then there's a third challenge to capitalism. A worthwhile JG will fit jobs to workers' needs: it'll design them around people's needs to care for family members and will provide jobs suitable for those with health problems. This is the opposite of much of what the capitalist state has tried to do, which has been to change people to suit the needs of capitalists - to, in William Beveridge's words "make and keep men fit for service."

What we have there, then, are two different conceptions of a JG. On the one hand, it might be a policy which helps capitalism function better. But on the other, it might be a form of transitional demand - a policy which whilst fulfilling human needs is one that cannot actually be sustainably adopted by capitalism and is instead a stepping stone towards socialism.

I'm honestly not sure which it is.

* Yes, I know a JG has been more associated with MMT than with Keynesianism. I'm using "Keynesian" in the sense of policies designed to support capitalism by increasing employment. I'll leave the differences between Keynesians and MMTers for another time.

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On Britain's intellectual decline

Author: chris dillow   |  Publish date: Mon, 7 May 2018, 01:46 PM   |  >> Read article in Blog website

The commemorations of Marx's 200th birthday have done at least one thing: they've reminded me of Britain's abject intellectual decline.

Listen, for example, to this debate about Marx (34 min in); Paul Mason's interlocutor couldn't tell the difference between Marx and a bucket of fish.

Contrast this with a few decades ago. Then, if you wanted a critical assessment of Marx, you might reasonably have asked Leszek Kolakowski, Samuel Hollander or Isaiah Berlin - men who, agree with them or not, knew what they were talking about. Today, his most high-profile critics are ignorant gobshites.

This, however, is but one example of the intellectual decline of public life. For me, the BBC's recent series, Civilisations, contrasted horribly with Clark's version. Most programmes seemed to be random observations with no narrative flow - and directors who lacked the courage to have the camera linger on the art as Clark's did.

In the same vein, compare Jacob Bronowski's The Ascent of Man to, say, Brian Cox.

More strikingly, can you image the BBC devoting 50 minutes to two old white men discussing Wittgenstein, as it did in 1976?

This is mirrored in our politics. On both front benches today there are pitifully few people one could call intellectuals (as distinct from intelligent): Jesse Norman and Barry Gardiner are the only ones I can think of immediately. The 60s and 70s, however, gave us Crosland, Foot, Jenkins and Crossman among others. And although Thatcher was considered no great intellectual in her time, she peppered her speeches with references to Hayek, Friedman or Popper. Can you imagine Theresa May citing similar men? Are there even any?

I know, I know, I know. You might think this is a very selective reading of history: there have always been lots of buffoons in politics (some Scottish miners on the Labour side and landed oafs on the Tory) and lots of crap on TV. Nor of course is the BBC an intellectual desert: any organization employing Jim al-Khalili and Helen Castor is doing something right. But I suspect there is at least a grain of truth here, even before mentioning the obvious dumbing down of the Today programme. (I'll leave others to say whether this applies to other fields such as literature, music and other arts.)

This poses the question. Assuming I'm roughly right, why might this be?

It could be a legacy issue. Back in the 80s, academia was demoralized and in decline. Several good judges told me that if I got a PhD I would be unemployable in the UK. I wouldn't have been a great academic, but I'm confident that many people who might have been got the same advice and went into finance, the law or other jobs.

And those who did become academics have faced another problem. The effect of the Research Assessment Exercises (and I suspect the intention) was to force academics to publish unreadable and unreplicated papers rather than to think or to engage with the public. (I gather that their successor, the REF, is a little different but its long-term effect is yet to be evident).

The upshot of these developments has been a loss of public intellectuals. Just look at the people who appeared on Bryan Magee's Men of Ideas: are there even equivalents today?

Perhaps, though, there's something else - the rise of consumer culture. There was a time when politicians and the BBC considered what was best for the country - which of course wasn't wholly incompatible with their self-interest. "The man in Whitehall [and Broadcasting House] knows best." Long debates about philosophy might not have been what the public wanted, but BBC bosses thought they were good for us. Equally, whilst Thatcher and Attlee disagreed about almost everything they had at least one thing in common - a loathing of referenda. They thought political decisions should be taken by the people paid to do so. And because such decisions were tricky, they required people of intellect.

Today, though, that ethos has been replaced by the idea that the customer is king and that giving punters what they want is all that matters. If political and TV programming decisions are determined by opinion polls and focus groups - and failing that by some image of a narrow-minded voting and viewing public with no attention spans- there'll be no room for the high-minded. Debate will be replaced by an exchange of sound-bites.

Now, this shift isn't wholly wrong: there are times when we should indeed trust the public. But I wonder: in abandoning the "Man in Whitehall knows best" attitude, might we have lost something, especially when it has coincided with other social trends.

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Progress in economics

Author: chris dillow   |  Publish date: Fri, 4 May 2018, 12:43 PM   |  >> Read article in Blog website

I'm getting cheesed off with the economic culture war. One peeve I have with it is that economists do so many things that it's easy to find examples of both bad work and good. Rather than speak in generalities, I'd prefer critics and defenders to focus more upon specific aspects of economics.

As an example of what I mean, I'll take a bit of financial economics, as this might highlight what's both good and bad in economics.

For years, we've had a mainstream theory here. The efficient market hypothesis says that all information is embedded into share prices and so you cannot beat the market without taking extra risk. And the capital asset pricing model tells us that the risk that matters is a share's covariance with the market (or beta); idiosyncratic risk doesn't matter.

Now, there is a distinction between these theories. From the off, the EMH arose from an empirical observation, that share prices seemed (pdf) random and the market was hard to beat*. Way back in 1953 Maurice Kendall pointed out the former (pdf). And in his excellent book Fischer Black and the Revolutionary Idea of Finance Perry Mehrling points out that Black had good evidence in 1967 that mutual funds under-performed the market. Even men who otherwise disagreed with the EMH shared this view. Benjamin Graham, for example, wrote (pdf) in 1972 that "the majority of the investment funds, with all their experienced personnel, have not performed so well as the general market."

The CAPM, however, was less rooted in evidence and more a theory of equilibrium prices: in Bill Sharpe's** paper (pdf) introducing the theory, there is pretty much no empirical evidence.

And in fact, there never has been any. Eugene Fama, the high priest of the EMH, has said that it "has never been an empirical success". Others have been less kind. Eben Otuteye and Mohammad Siddiquee say it has been "60 years of wasted effort". Economists have long known that beta isn't the only determinant of returns, believing that size and value also matter - hence the so-called three factor model.

In fact, economists claim to have discovered countless "anomalies" - exceptions to both the CAPM and EMH. Many of these, however, are fragile: Campbell Harvey has said they are "likely false". And many others have diminished since they were pointed out - at least in the US and UK if not elsewhere - which is sort of consistent with a weaker version of the EMH: money-making opportunities don't last for long.

There seem to me, however, to be two pretty robust anomalies.

One is the tendency for low-beta stocks do better than they should and high beta ones worse. This was first pointed out by Fischer Black, Michael Jensen and Myron Scholes in 1972 but has since been corroborated by lots of other evidence (pdf). The other is that stocks which have done well in the past tend on average to subsequently out-perform. This has been found not just in shares but in other assets too. In my day job, I have constructed very simple defensive and momentum portfolios in real time. Both have for years beaten the market.

There are, I think, some general messages to take from all this.

One is that the distinction between mainstream and heterodox doesn't mean much. The first evidence against the "mainstream" CAPM came from "mainstream" economists.

Secondly, bad theories such as the CAPM are beaten not by competing theories but by facts. Of course, behavioural finance is an alternative to the CAPM. But what gives it credence is not the plausibility of its assumptions but the existence of some facts that are easier to square with behavioural finance than the CAPM. The momentum effect, for example, might well be due in part to investors' tendency to under-react to news.

Thirdly, all this is a counter-example to what Jason Smith says. He claims that of both heterodox and mainstream economics that "neither appear to value empirical data. Neither appear to make accurate forecasts." But this is not true in this case. There's a vast library of research on empirical asset pricing, some of which - momentum and low-beta - survives the replicability crisis. And we do have some (so far!) successfully accurate forecasts, that momentum and low-beta stocks generally out-perform.

Fourthly, my story is of a retreat from a single unified theory. Empirical evidence has undermined an elegant parsimonious theory (the CAPM) and left us with a few hard facts and a few mechanisms to explain them, such as constraints upon short-sales and leverage, and the presence of at least some cognitively-constrained investors. I think there's been progress, but it's away from grand theory and towards messy reality. Maybe this is - or will be - true of other parts of economics.

* I'm speaking here of the EMH as applied to individual stock prices rather than the overall level of share prices. It's quite possible, as Paul Samuelson said, that stock markets are "micro efficient but macro inefficient."

* Sharpe was only one of several fathers of the CAPM.

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The problem with power poses

Author: chris dillow   |  Publish date: Tue, 1 May 2018, 10:18 AM   |  >> Read article in Blog website

Millions of people will have looked at the newspaper front pages this morning and wondered: why is Sajid Javid looking like an utter tool? The answer sheds light upon the nature of academic research and people's attitudes to it. Infjavid

The reason for his absurd stance can be found in a paper (pdf) by Amy Cuddy and colleagues. They claim that by using "expansive postures" a person can "embody power and instantly become more powerful":

By simply changing physical posture, an individual prepares his or her mental and physiological systems to endure difficult and stressful situations, and perhaps to actually improve confidence and performance in situations such as interviewing for jobs, speaking in public, disagreeing with a boss, or taking potentially profitable risks.

There's just one big problem with this. It's that what scant evidence there ever was for such a claim has not been corroborated by later studies. What we have here, then, is yet more evidence for the replicability crisis.

The mistake that Javid and other Tories has made is to be too credulous about academic research. For me, a single scientific paper should be the start of an inquiry rather than a basis for immediate action. When we see an interesting claim such as Cuddy's we must ask (at least) two questions: what other evidence do we have for it? And: what mechanisms might produce such an effect?

Power poses fail these tests. Possessing power is not merely a matter of what happens in your own head. It's about how others see you. When we see someone adopting an expansive posture (such as manspreading) do we really think: this is an admirable person worthy of our deference?

No. This alone should have alerted Tories to a lack of external validity in that paper. Blackadderstance

Then we have the second question: what's the mechanism? Maybe it's possible that spreading one's legs like that releases testosterone. To most observers, however, it merely reminds them of Prince Regent in Blackadder. That is no way to win respect. And in fact in England at least we have a long tradition of laughing at people who think they can aspire to power by striking unconventional poses. As Bertie Wooster says in The Code of the Woosters:

The trouble with you, Spode, is that just because you have succeeded in inducing a handful of half-wits to disfigure the London scene by going about in black shorts, you think you're someone. You hear them shouting "Heil, Spode!" and you imagine it is the Voice of the People. That is where you make your bloomer. What the Voice of the People is saying is: "Look at that frightful ass Spode swanking about in footer bags! Did you ever in your puff see such a perfect perisher?"

In not being aware of any of this, Tories such as Javid have demonstrated a tin ear for our cultural referents. They've done so, I fear, in part because of wishful thinking. The prospect of becoming "instantly more powerful" merely by standing in a particular way is a tempting one. And politicians - like other people - have always been quick to believe what they want to believe.

In truth, though, in acting on a belief for which there is no evidence, Tories have merely made themselves look stupid. This, of course, is not just true of power posing.

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On forecasting failures

Author: chris dillow   |  Publish date: Mon, 30 Apr 2018, 02:17 PM   |  >> Read article in Blog website

Economists take a lot of stick for their inability to foresee crises and recessions. But I wonder: wouldn't it be fairer to chastise politicians for their lack of foresight?

Two current events make me ask.

One is the scandal about Windrushers being deported. This injustice was not just foreseeable but foreseen. Ministers were warned of it two years ago. It should be no surprise that a "hostile environment" and crude targets would hit law-abiding British citizens. As I said in 2016:

Just as "anti-terror" laws have been used to harass journalists and peaceful protestors, so immigration controls will hurt decent people. And for the same reason - because they are the softest targets.

The second is that confusion about the fate of the Irish border is holding up Brexit negotiations. Again, this should be no surprise: we were warned of the problem at the time of the referendum.

And yet in both cases, some ministers and commentators seem surprised. They remind me of the hotel guest who complained of the poor view to whom Basil Fawlty replied:

May I ask what you expected to see out of a Torquay hotel bedroom? Sydney Opera House perhaps, or the Hanging Gardens of Babylon, herds of wildebeest sweeping majestically?