Defective Equilibrium

Still Defective...

2010-02-23T22:31:00.004+13:00

This blog has been down and out for a while now. I'm happy to blame this on Tom, the chief contributor in 2009, who suddenly decided to stop thinking and commenting about economics and politics in the level-handed, even-headed way that he was so fond of. I know not of his plans for the New Year, but I will attempt to make a more concerted effort this year to keep this forum alive. And so we'll get up off the mat, at least for a little while.

My interests are a little more obscure than Tom. I too dabble in politics and economics, but more or less tend to stay more aloof from the fray. The topics that interest me are more 'philosophical' to be crude about it. But philosophy is simply a tool to chip knowledge and understanding down to size before it can be dealt with by other disciplines, so I intend to stay fully grounded, or at the very least to leave some ballast in the 'real world'.

At the moment I am thinking about what it means to be a person in a sea of social ideas, how to best understand the nature of our artistic engagement and also some issues to do with meaning and symbolic representation. But really, I promise not to be too esoteric. Let's see how it goes.

Wrong, wrong, wrong

2009-10-13T01:02:00.005+13:00

Looks like I got thoroughly schooled by the University of Canterbury econ-blogging team in picking Nobels.

On the plus side, apparently Elinor Ostrom is the first woman to win the economics Nobel, which is cool.

Fama for the Nobel?

2009-10-09T14:57:00.004+13:00

Greg Mankiw reports that Eugene Fama is, according to a betting agency, the favourite to win the Nobel Prize for economics this year.

If this were a prediction market rather than an old-school betting agency, I would be heavily short on this contract - I just don't think this is likely. Not because I don't think Fama is an excellent candidate and thoroughly deserving of a Nobel - he is basically the father of modern finance. However, Nobels measure largely the influence someone has had on their profession - and since the financial crisis I think it's safe to say that Fama's Efficient-Market Hypothesis is not at the peak of its popularity (although I am still a fan). For that reason, Fama would be a pretty controversial pick.

The same reasoning applies to Kenneth French, who is also quite high up.

Who will win it then? I don't know. I'm also sceptical of Paul Romer (who is just behind Fama on the odds), so my bet would be with Ernst Fehr, whose work on behavioural finance and neuroeconomics is looking pretty good about now.

That said, I hope to be proven wrong and see Fama win, I think he's awesome. Here's an interesting video interview with him about his life.

Quote of the Day, supporting VSM edition

2009-09-24T14:21:00.002+12:00

From Stuff:

Weltec students association association president Therese Keil agreed that it would cause financial issues.

"We will have to cut back on services like stationery, coffee and tea facilities and perhaps we would just look at offering only advocacy services," said Ms Keil.

Sounds good to me.

Emissions Hand-Out Scheme

2009-09-14T18:48:00.008+12:00

Via The Standard it seems that the Government have released some details on New Zealand's emissions trading scheme. There's some pretty weird details in it.

My first thought though is that for people that should be all too aware of the negative effects of rapid structural changes in the economy (eg), many on the left are pretty quick to criticise policies designed to ease the transition. We pollute a lot, and it's not something you can painlessly change over night.

In terms of the actual plan however, it's a little bizarre. Firstly, it's not really a true cap and trade scheme, because it has a cap on marginal emissions rather than an overall cap (if I understand it correctly) - it's kind of a cross between C&T and a carbon tax. The actual effects of this are a little hard for me to intuit - if any of my micro-economics-loving readers (eg paging Matt Nolan) are able to explain how this is going to work I would be most grateful. It feels like it should be distortionary but I can't quite get my head around it.

Secondly, they have a 'transitional fixed price' - apparently to ease businesses into the scheme. For an allegedly market-oriented party, price fixing is an odd tack to take, and I don't know any good justification for it in this case. Were I very cynical, I would suggest that National expect the market price would be lower than their cap - enabling them to increase the price paid to the firms they choose to hand out credits to, thus rewarding the favoured firms.

I am cynical enough to entertain this as a serious possibility, and the justification they give that it will help businesses 'limit costs' and thus 'enhance stability' is not all that encouraging. Surely the whole point of a scheme like this is to increase business' costs to adequately reflect the costs of carbon emissions to society. That brings me to another point, which is the scheme, when compared to previous efforts, will

... halve the price impact on households for fuel and electricity to 3.5c/l and 1c/kWh.

Forgive me if I sound a little heartless, but the whole point of emissions trading schemes is to increase the costs of things like electricity! It's because of the externalities associated with these things that the market over-produces them in the first place. People that want to reduce carbon while keeping the cost of actually emitting it nice and cheap are simply deluding themselves, and a Government which thinks it can do so is destined to fail.

So I am pretty unimpressed with this scheme. Transitional effects are important - but if you want to reduce them you don't need to do so by giving away credits for free, or engaging in amateurish price-fixing. Simply make the cap start low and gradually increase it. Unfortunately it looks like Greg Mankiw's 'fundamental theorem of carbon taxation' is sinisterly accurate, that is,

cap and trade = carbon tax + corporate welfare.

'Eye-popping' Indeed

2009-09-01T22:10:00.004+12:00

Via Kiwiblog, I see that the ever-astute John Minto has recycled the old idea of a salary cap of 10x the minimum wage.

I am sure that all my readers are familiar with standard discussions of price ceilings (as would any high school economics student be), so I won't rehash them here, except to note that that would probably halve the incomes of most of our senior doctors (or close to it) - presumably they are also the disgusting corporate types Minto despises so much. Obviously being a perennially-incensed pundit is far more noble and civic-minded.

The more interesting point (to me) whenever someone proposes something like this is how they intuitively decide what's too much. Very few people suggest salary caps that would ever be likely to affect them. John Minto's proposed salary cap is just enough to be comfortably above what a journalist and/or author could reasonably expect to earn at the peak of his/her career in New Zealand (including speaking fees, etc). I suspect that this is not a coincidence.

Choice and VSM

2009-08-24T21:42:00.007+12:00

A persistent meme about the proposed Voluntary Student Membership Bill currently before the NZ parliament is that the current situation allows for quantitatively more choice than the proposed bill. Basically, it goes like this.

At the moment, students can have binding referenda on VSM. The bill would force VSM upon them, abrogating them of that choice. Therefore, if you support choice, you should oppose the bill. Often thrown in are some corollaries along the lines that ACT or National are 'forcing' VSM on a probably unwilling student populace.

This brings out an important difference in how people see politics generally. To me this argument is absurd, but to many it rings so clearly true that it needs no more justification. The difference (I think) lies in your conception of the relationship between the individual and society. If (like me) you think that individual rights are the only true rights, then VSM provides more choice - because it devolves it to the level of the individual. On the other hand, if you think collectives and groups can make meaningful decisions that are broadly representative of their constituents, then of course you should let the group 'choose' whether or not they want VSM.

Ultimately this distinction is unlikely to be resolved with respect to VSM, because (as with many political issues), both sides are steadfastly unwilling to acknowledge that the other might have a point, or to admit that their basic principles are even up for debate. But here are a few brief specific reasons which will hopefully be persuasive.

1) The group of university students is wildly heterogeneous, that is, individual students are huge different from each other. There are jocks, nerds, goths, anarchists, conservatives, apathetics, and all sorts of people that don't fit into silly stereotypes and definitions. How can you really say that this group 'chooses' something by simply aggregating their votes? Even calling them a group is stretching it.

2) VSM allows people to 'decide' on universal membership every year. It's like having a (nearly) free referendum! How? Well if everyone supports student unions, then everyone will join. So VSM allows people to make the same choice a referendum would, but every year! If we are interested in 'choice arithmetic' - it seems like VSM is the way to go.

3) Compulsory student membership, properly understood, is the anthesis of choice - and even voting on it is. This is because what you are voting on is whether or not you should stop your fellow students from choosing to leave. So you are choosing whether or not you should be allowed to choose. This isn't like voting in an election, it's like voting as to whether you should have elections at all, or whether everyone's vote should just be the same as yours.

The obvious response is to say that choice isn't that important, and that there are considerations at play. Obviously there are, and you can expect some posts on them in the future. But if you say that, you've conceded to me more or less the point of this blog post, which I am happy with for now.

Update: BK Drinkwater does a much more comprehensive post.

Meritocracy - Neither Descriptive nor Desirable

2009-08-17T20:21:00.004+12:00

A guest poster at Kiwiblog informs us that full equality of opportunity exists - the only reason why you might be unsuccessful in life is because you're lazy.

This is of course silly, not even the most ardent meritocrat would argue that there is a 0% correlation between your parents' wealth and your own (for example), even correcting for other factors like IQ. Hard work just isn't all the story. But underlying it is the common concept that wealth in society is and ought to be distributed according to merit.

Morally, this is the wrong way of looking at things. As Robert Nozick showed a while back, if you want a society where wealth is strictly patterned according to a particular variable you like (hard work, intelligence, number of posts read on Defective Equilibrium), you are going to have to continually interfere in voluntary (and often mutually beneficial) transactions to maintain this distribution. To take the merit-based argument, if you really want wealth to be distributed according to merit, once you had a meritocracy, you would have to forbid people giving gifts to people less meritorious than themselves, lazy people from accidentally making new discoveries and getting rich off them, etc. To actually maintain the pattern would require a state that intrudes in things most people think it probably shouldn't.

Equally important is that 'merit' is such a nebulous concept, it's more or less impossible to draw any moral conclusions from it. What attributes I think are good are likely to be highly different to the attributes you admire. Maybe I think that a lazy but brilliant person is of greater merit than a hard-working average person, or maybe vice versa. There's not an obvious set of independent standards by which we can judge this. Most people implicitly judge it by imagining what they want to be like, and assuming that everyone should also aspire to that, or something very similar. But that is not a very good way of doing it. It's easy to accept that different people can gain equal enjoyment from living vastly different lives, that is, theories of the good should be thin (at best). But people are for some reason reluctant to generalise this when thinking about desirable personal attributes.

There's also the important question of which of your attributes you deserve and which you do not (further reading: Rawls' Original Position). Surely I don't 'deserve' in any merit-based way the money my parents worked to earn (note that this is a different thing from saying I am entitled to it in a Nozickian sense). But then why should I deserve their work ethic, intelligence, or anything else I might (or might not) inherit from them? Surely I can't claim to be a better person for things I'm not responsible for in any meaningful way?

Conclusion: The meta-readers among you will notice that I've presented a kind of right-wing and a kind of left-wing argument here. My hope is that no matter where on the political spectrum you fall, you will reject meritocracy. There are just simply way better alternatives out there.

Economic History Question

2009-08-11T20:25:00.002+12:00

Who was the first person to discuss externalities and how they affect markets? The sources I've read seem to strongly imply Pigou but I am not sure if that is just because of the tax.

Does anyone know?

Theological Paranoia

2009-08-11T14:46:00.003+12:00

Say you're God and you want to kill of all of humanity, but in such a way that no-one will know that it's you (as is your want). How would you do it? You might consider what humans' weaknesses are, in order to exploit them.

Addictive behaviour? Doesn't seem to be universal enough, even if you try to compensate with substantial negative externalities. Eg. Smoking.
Risk Management and Natural Disasters? It seems like people aren't very good at anticipating rare, catastrophic events. But humans would be on to you with this one, they've already labelled these 'acts of God'.

There are plenty of others, but I think your best bet would be a lethal collective action problem dispersed across the entire world. Humans are broadly self-interested, and at the very best can only consistently be altruistic in quite a limited way. So if you set things up in such a way that heaps of their actions have costs which they themselves don't have to bear, they will by and large do little about it, while collectively making themselves slowly worse off, to the point of self-extermination, if you set it up right. It would be more effective if it was dispersed across the whole world, because that makes it harder for people to bargain with each other and come to better outcomes that way.

That sounds pretty effective, but here's how you could make it even more deadly. You would make the costs so dispersed and hard to see that it would take the smartest people in the world to notice that they actually existed. Secondly, you would notice that academics aren't very good at collaborating across genres, so you make it a massive cross-disciplinary project to determine the costs precisely.

Finally, you set up a lot of the industries that produce the most cost with high fixed costs, and economies of scale. This makes them naturally fairly uncompetitive, that is, you have a small number of big companies producing in those areas. So there will be strong incentives on very powerful interests to resist pricing in the costs appropriately.

So far, so hypothetical. It's lucky for us that God loves us and... wait. Uh oh.

We are screwed.

Thought Experiment: Printing Money

2009-08-10T22:42:00.002+12:00

Here's another thought experiment - still public policy stuff but as I have just received the latest Philosophical Review hopefully I will have some more eclectic ones shortly. This one is decidedly less abstract, I'm not even sure if it classifies as a thought experiment, but there you go.

Say the Government decides to manage the money supply itself and take over the task of printing money from the central bank. Say then that there is an enterprising politician (call him William) that now thinks he can game the system to his own advantage. William has a sure-fire investment that is going to make him a millionaire, but he needs $10,000 to get in on it.

He figures that he can use the Government printing press to print the money. Sure, that devalues everyone's money, but what would be the inflationary effect of $10,000 more across the whole economy? Far less than would be even noticeable or measurable. How can you say your rights have been violated if you can't even notice the extent to which they have been? Is there even a rights violation at all? Or if you're not into rights, surely you would accept that this investment is going to make William much happier, without noticeable effect to the rest of us. By a utilitarian standard, wouldn't he be morally obligated to print himself money?

Question: Is what William does immoral? On what grounds? Assume that he doesn't get caught, and puts mechanisms in place so it can never be done again.

Brief Thought

2009-08-10T22:39:00.003+12:00

If I support local action on climate change, but would defect in a Prisoner's Dilemma, am I being inconsistent?

It seems like I am.

Supply, Meet Demand

2009-08-10T14:28:00.005+12:00

Jeanette Fitzsimons probably needs to become more acquainted with them both, unfortunately, as well as a bit more textbook micro.

Here she is on electricity:

With shoes or toothpaste, increased demand gives economies of scale and tends to bring prices down. With electricity ... increased demand raises prices. (my emphasis)

To be fair, I suspect she's just guilty of poor phrasing. What is interesting though is how she justifies the low level of competition in the electricity sector. Apparently there are diseconomies of scale there, according to Fitzsimons.

Hold up. What do diseconomies of scale mean for market structure? It means that the efficient number of firms is lots of small ones - which just so happens to be one of the conditions for a competitive market. This is because one big firm will produce stuff more expensively (per unit produced) than lots of little ones. It's when we see economies of scale that we start to see natural monopolies, or at least oligopolies. So by Fitzsimons' own reasoning, we should probably deregulate the electricity industry and let the market get to work. On the other hand, we should probably have state-run shoes and toothpaste factories.

To be fair on Fitzsimons, she does make other arguments that are somewhat more valid. However their proposal of staggered electricity rates (ie, increasing marginal cost) seems like a great way for the power companies to capture more surplus.

Related question: Should having taken first year Econ (at least) be a prerequisite for political service? Unfortunately then the New Zealand Green Party could cease to exist.

Note: I do think that the Green Party are great and a valuable addition to NZ politics - but they do have a habit of getting themselves confused about economic issues.

Update: Paul Walker does it a little more rigorously.

Upcoming Debating Goodness

2009-08-08T15:51:00.003+12:00

If you live in Wellington and like argument, this Monday could be a good day for you.

At 10AM is the grand final of the New Zealand Schools' Debating Championships (the schoolkids are debating over this weekend to determine who makes it). It will be held in the legislative chamber of Parliament, on the topic "That citizens initiated referenda should be binding on government". All are welcome but if you want to go you have to RVSP for security reasons - check out the facebook event here for more info. New Zealand is currently the world champion for schools debating, and I've seen quite a few of the debaters debate before, they are all excellent.

Of more interest perhaps to those of us who's schedule doesn't let them take Monday morning off to watch a debate is the Victoria Uni DebSoc hosted Public Debate, on the 'smacking debate' currently very popular in New Zealand. Defective Equilibrium co-blogger Udayan Mukherjee will be debating, as well as Sue Bradford MP and a whole lot more interesting people. It is at 6:30PM at Rutherford House LT1, again check out the facebook event here. Again all are welcome, there might be a gold coin donation.

My Favourite Blog

2009-08-07T08:47:00.003+12:00

My favourite blog at the moment (apart from yours of course, if you have one!) is My First Dictionary. If you like black humour, I recommend it.

Thought experiment of the day - Rights/Welfare Tradeoff

2009-08-07T00:37:00.005+12:00

I know I don't do these every day or even every month, but perhaps if I say so it will make me do it - it could be a cool feature perhaps.

Say everyone earns the same wage, $100. The Government taxes income (and income only) at 20%, and has a choice of two policies - A and B.
Policy A lowers the income tax to zero with no other effects (I suppose the Government isn't doing much to start with). So people now earn $100 after tax (up from $80).
Policy B raises the national income level by 25%, meaning an after-tax wage of $100, however it violates people's rights slightly by doing so, perhaps by forcing them to work as slaves for 10 minutes every day.

Which policy would you prefer? In this case it's easy, as they both give the same income level but one has us working as slaves. So you would choose policy A.

But what if I change the numbers? What if policy B doubles the national income, at the cost of 20 minutes a day of slave labour?

The reason I ask this is that I think the majority of deontological theories of political justice (like that of Rawls) take into account consequences at some level (Nozick and Kant being the two obvious exceptions, and even Nozick allowed some ad hoc consequentialism). What is often less clear is how they determine the tradeoff - at what point do we bite the Kantian bullet and just say that rights are too important? At 3 hours of slavery per day? At 8? Or vice versa, at what point does welfare override basic freedoms? What if you could abolish scarcity by putting cameras in everyone's house (don't ask me how) without telling them?

This seems like an obvious question but it is one I think that is rarely spoken to. In particular, most people tend to believe in the fortunate coincidence that their favoured policy is both welfare-maximising and non-rights violating, at least to a certain degree. But if that is not the case, how much welfare is worth one rights-violation?

Notice that I am defining considerations of redistributive justice out of my thought experiment, I think that would overly complicate things.

Update: BK Drinkwater shares his thoughts. He promises he will talk less in the abstract in the future - I make no such promise.

The Length of Human History

2009-07-29T17:02:00.005+12:00

Today someone pointed out to me that civilisation has (arguably) existed for about 7000 years - since the Sumerians. So if you live to 70, you have been alive for 1% of the length of civilisation. That seems quite substantial, and perhaps a remedy for those that feel insignificant in the scheme of things. 1% is quite a substantial chance to make a difference.

That said, the earliest historical figure I can think of is Thales (can you do better?), and he was only about 600BC - which is less than half the length of civilisation ago. So perhaps our prospects for being remembered aren't all that good after all.

Of course, scientifically-inclined readers will note that if you live to 70, you have been alive for about 0.00000005% of the history of the universe so far...

The Poverty of the Politics of Poverty

2009-07-29T15:01:00.004+12:00

Udayan complained the other day that my writing is too 'vanilla'. Luckily for him, I have been a little unimpressed with the NZ blogosphere of late, and so here is something a little more strongly worded than usual. Normal posting will resume shortly; I have a few thought experiments on the morality of tax which will be coming soon.

Like many, I am little worried that the social development minister Paula Bennett thinks it's appropriate (read that link because I will assume you know what I'm talking about!) to chuck private information into the public domain to win some cheap debate points. But unlike some local commentators, I don't think it's worth hyperventilating about. It's clearly inappropriate, but saying that it is 'about the right to free speech without fear of reprisal' is way off-base. It's also a little hypocritical for those who are provoked into a righteous rage whenever someone even mentions that the 'more Government' isn't the answer to every political question to tell us to 'beware of unbridled Government'. But it's pretty apparent that many people are only opposed to Government power when it's wielded by the 'bad guys', and are quite happy for themselves or their friends to have it - witness Obama's somewhat limp redaction of Bush-era civil-rights abuses.

Let's be quite clear here - these two ladies are certainly criticising the Government. But they are also making empirical claims about the amount of welfare they receive, which appear to have been misleading, to make their case for more welfare sound stronger than it actually was. That puts them in a very different situation than your average National-hating blogger, some of whom are now ridiculously suggesting that they could be the next target. Get over yourselves. More importantly though, you should realise that National's reponse, while bad, isn't straight out of Mussolini's playbook. There's a world of difference between abusing your power to embarrass your critics and abusing it to correct them when they lie about their means. Both are bad, but only one is really a threat to the fabric of democracy. The former discourages criticism full stop, the latter discourages lying about yourself in the public sphere to try to get more money.

I think that in any healthy debate, both actors should as a general rule be able to correct factual inaccuracies in the other side's case. In this specific situation, the error related to private information, so the Government should have definitely proceeded more carefully (read: not given out the information). The appropriate response would be to defend their programs with averages and hypotheticals.

I guess a large part of the reason I am annoyed here is my views are coloured by my own situation - I am a student and (if Paula Bennett's figures are right) have an income (including weekly student allowance, not including course fees) of less than half what those women receive. In terms of Government transfers, I get less than a quarter, and I have to pay that back when I graduate (or more accurately, when I start working full-time :) ) I appreciate that it's difficult to raise a child and study at the same, but with student loans and subsidised child care on top of what they already get, I'm very sceptical that these two women can't afford to study.

Yay! I guess.

2009-07-24T10:31:00.005+12:00

From the NZ Herald:

Finance Minister Bill English yesterday said the Government was dropping criteria preventing the sale of "strategically important assets" into foreign hands as part of a raft of changes aimed at encouraging greater foreign investment. ...
The Government will introduce a new right to veto on the grounds of "national interest" - but Mr English expected it to be used so rarely that he could not think of a case which might require it to be invoked.

The latter is obviously a political move to look more centrist (median voter theorem anyone?), but probably the most disappointing part. They say that they won't use it, but given their previous actions I am very sceptical. And I think we can be pretty sure that if they don't, Labour will. The fact that they still couch their announcement in the misleading language of 'protecting national assets' is unfortunate. Are we supposed to believe that the evil foreigners will abscond our airports off to their home countries and do who knows what with them? Well perhaps not all of us, but politicians are still playing very much to those that do.

So it's good news, but not great news.

I thank The Standard for the tip.

Moral and Political Psychology

2009-07-24T01:07:00.002+12:00

In the last few days we've been exploring a putative evolutionary basis for political groupishness. Tom suggested it was due to group selection, I suggested that it wasn't, but I think that we both agree that there must be some psychological trait which underpins our political choices. Jonathan Haidt is a pscyhologist who explores precisely these issues. In this interesting lecture, he explores five dimensions of morality and how they are differently emphasised in the minds of liberals and conservatives.

This is exactly the kind of work which will hopefully help us to stop being so tribalistic, and seriously look beyond partisanship.

Rock, Hard Place, etc

2009-07-23T14:10:00.003+12:00

The popular narrative of the financial crisis is that banks got greedy, took on too much risk and subsequently got into trouble. In particular, they lent money to people for mortgages that realistically they would never have been able to pay back, and then fooled themselves into thinking they were not at risk. This is (we are told) doubly bad, because the people who took out the mortgages paid out heaps of money in mortgage payments only to be thrown out of their homes.

Obviously reality is far more complex, but if you accept something like this narrative (which a lot of people do, including many in Government) you would think that you would support banks being more conservative in their lending.

Unfortunately this looks to be one of those ideas that people like more in theory than in practice. For example, Stuff reports that a Nelson man was so upset that the bank refused his application for a mortgage (because he had no regular income) that he withdrew all his life savings from the bank in $20 notes, just to be ornery (bizarrely to the teller, who obviously has no responsibility for bank lending policy).

It seems to me that most people would like banks to be conservative about their lending and not lend too much money, except to themselves, people they identify with, or their constituents. This is an attitude that we can only hope has no effect on public policy in the short term.

Note: I don't mean to pick on this gentleman - he may not himself believe that the crisis was caused by loose lending practices, and thus be quite consistent intellectually. But it provides a good explanation of what I think is quite a widespread cognitive dissonance.

A Challenge for Political Group Selection

2009-07-22T12:06:00.005+12:00

Below, Tom argues that a dogged commitment to a political party might be well understood in terms of the dynamics of group selection. My intuitions generally agree. However, although the conclusion might be alluring, the mechanism proposed to get there seems like an all too crude application of evolutionary theory, and exactly the sort of just-so story that Darwinists should strive to avoid.

Here's why. Tom proposes that group selection produces pressures for individuals to engage in elaborate forms of signalling so that they can secure themselves as a member of that group. Crucially, this needs to be irrational, so that groups maintain their stability over evolutionary time-scales and are allowed to be selected for. The premise, of course, is that human social groups are a good way for individuals (or gene-lineages) to propagate themselves downstream.

This premise is the one which doesn't stack up, and is generally regarded with skepticism in evolutionary biology. Why? Because from the perspective of an individual (or their genes), adaptive fitness would be much higher if you exploited a group, than if you did your best to be a co-operative member of a group. This point is most vivid if we consider a possible proto-human social group: the hunting party.

It seems to make sense for a collective of cavemen to co-ordinate hunting activity, since it reduces the costs to any individual hunter, while allowing them to track bigger game (woolly mammoth et al) and thus maximise their payoff. But consider any individual hunter. They could do even better than the others, if they simply slacked off their hunting duties but still had access to the spoils. Of course, this kind of reasoning is symmetric, so every individual will think the same way and try to free-ride off the group. Obviously, this will destroy the stability of the group in favour of individual fitness.

The simple way to think of it is this. If the group is thought to be the unit of selection, then the challenge is to show that successful groups don't simply grow in number, but actually spawn new groups which are similar to themselves - groups that are their offspring. Otherwise, the best explanation for human groupish tendencies isn't group selection, but simply a cascade of individual selective pressure. Pace Tom, but I don't think his account paints the correct picture of the evolutionary architecture of political commitment, because it doesn't establish how these groups get going in the first place.

However, all is not lost for the conscientious Darwinist. I still agree with Tom's conclusion, but with a slightly different flavour. The answer, I think, is a question of cultural rather than biological evolution. And not just in a metaphorical sense, but in the literal application of natural selection to the propagation of social information. This is a big topic in itself, and hopefully one which I will explore shortly.

Evolutionary Irrationality

2009-07-21T09:25:00.005+12:00

I've been intending to write about political ideology and group selection for a while now, but a good example last night has spurred me into action.

NZ's top left wing blog The Standard has a post in which the author argues:

One of the great strengths of the Right is that the rank and file supporters are such slavish followers of their leaders. ... Simply doesn’t happen with the Left’s support base. You can’t get the buggers to agree on anything. They care about detail. They argue over it. The educated ones, especially, see simple slogans and shallow arguments as anathema. They don’t tend to go in for blind adherence to their leaders either. They see leaders as tools. Servants for furthering their shared ideals. They critically assess what their leaders say. If they do agree with it when they repeat it to others it will be in their own words. Not a simple repetition of a carefully crafted slogan*. The Left will never have our version of ‘PC’. It’s just not the way we think.

Certainly there are often cognitive differences between people on difference parts of the ideological spectrum, but I think any reasonable non-partisan would think that this far overstates any possible case.

But we shouldn't be dismissive - there is a potential evolutionary explanation for why people do things like this.

In group selection, the necessary (and most problematic) part is getting people to irrationally commit to a group - that is, so they stop considering the relative merits of other groups. A group that people left as soon as they found a better one wouldn't be very stable, and would be selected against. Of course, this is hard to do - even if you assign people to monitor defection, they are also incentivised to defect, and if you set up people to monitor the monitors, the problem just regresses! Some have proposed religion as possible solution (God is impossible to defect from if you believe in Him), but another potential one is simply costly signalling (although obviously this is part of the religion story as well).

Costly signalling is essentially just telling people that you are in the group. It has to be costly so it's difficult to fake (and therefore you are less likely to tell people you're committed to the group when you aren't). I think we can look at posts like the one discussed (and in fact a lot of political behaviour in general) as part of a scheme of costly signalling - the author is just telling his/her left-wing friends that they are part of the group, and he/she would never consider joining the other group because they are so deplorable.

Too simplistic? Of course. But I am fairly sure that it is a substantial part of why political behaviour is so irrational.

Best of the Rest

2009-07-16T13:04:00.004+12:00

Via Marginal Revolution I learn that the cool new journal Rejecta Mathematica has published its first copy. The idea of the journal is to publish interesting papers that have been rejected several times from academic publication. There's no way I have enough maths to really understand all of what's going on, but each paper includes a brief rejection history (or a link to one); they make fun reading.

Some are a little petulant:

Mathematics my foot! ... Programming is much much harder than doing mathematics. I bet that the referee will never ever be able to write such a program.

Some more forlorn:

With high optimism, we submitted a paper to a top-tier image processing journal. ... But alas, our enthusiasm was deﬂated due to the following review points...

And some kind of funny:

Our obsession with these simple matrices has generated a great deal of criticism. Lubos Motl, the string theorist, called us F–ing Crackpots on my blog ...

and

Where did I go wrong? Perhaps I should not have called professional mathematicians, in the first paragraph, “meaning-imposers” who generate “inconsistencies and confusions”. Perhaps I should not have asked “Where did I go wrong?” on page 61; or, “Have I made another blunder?” on page 62. ... Maybe I used too many exclamation marks.

It's hard to do them justice as a whole, so I suggest you read them for yourself!

Rawls' Approach to Philosophy

2009-07-14T20:30:00.004+12:00

Although from time to time I get mild criticism from some on the left for my economic views, astute readers of this blog (which is all of you of course!) might have ascertained from the name 'defective equilibrium' (c.f. this) that I am a bit of a fan of John Rawls, the great modern political philosopher.

John Rawls' most famous idea is what he calls the 'second principle of justice' (the first being a scheme of appropriate liberties, although he engaged in quite a bit of semantics about this later in his career), also known as the 'maximin principle'. The idea is that the goal of society should be to maximise the wellbeing of the worst off members. This means that inequality is permitted, but only if it makes the worst off better than the counterfactual.

As it is with a lot of influential political philosophy, a large amount of subsequent literature has been devoted to trying to read Rawls' mind, and divine what he was really advocating. Some have claimed him a defender of modern welfare capitalism (Hayek even approvingly cited his earlier work), while many on the left have portrayed him as pretty much a hard core socialist that was maybe willing to tolerate radically altered forms of capitalism (this is basically the approach of Samuel Freeman's book, for example).

I think that both these approaches are wrong, and they are show how people take different approaches to political philosophy. It seems to me that Rawls is at heart a political philosopher, and his book is a contribution to the field of political philosophy, not a political advocacy tract. The difference is subtle, and not, I feel, appreciated by a lot of philosophers. When you think something is unjust, it's very tempting to want to try to correct it, or provide a means by which others might. But trying to correct an injustice is not the same thing as rigorously proving it is actually unjust. It's not necessarily impossible to do both decently (I think Thomas Pogge would be a good example of a mixed approach), but Rawls, I think, only ever saw the task of political philosophers to be the former, not the latter. He essentially never advocated his views in a way that was even vaguely interesting to anyone without a deep interest in moral philosophy - his books are fairly long, exhaustively reasoned and create a lot of jargon. He rarely gave interviews, and certainly not in popular forums.

One way of bringing out this difference a little more sharply is to compare Rawls' work to Noam Chomsky's political writings. Chomsky writes for the most part with a general audience in mind - his goal is to change the world to make it more just. To do so, you have to persuade people, but that is essentially a tool to achieve positive change, not an end in itself. To Rawls (in my interpretation), persuasion and presenting the best possible argument are the ultimate end of political philosophy. In the preface to Theory of Justice, he essentially says that his goal is (only) to provide a more intutionally satisfying alternative to utilitarianism (my insertion).

That's not to say that Rawls was aloof and uninterested in the justice of the real world. I am sure he would have been delighted if modern states had adopted justice as fairness. But that would have been a pleasant side-effect of his writing only.

Whether or not this is the best approach (morally) is something I am not sure of.

Why the Government should lie to us

2009-07-13T23:48:00.003+12:00

One under-appreciated aspect (in my opinion) of fully 'socialised' medicine is the effect it has on Government ad campaigns and the general goal of public health.

Why is this? Socialised medicine essentially means that people pay for health insurance through tax. The amount of tax they pay is in no way related to their health needs, or perhaps even inversely related, as chronically unhealthy people may earn less money on average. Because the direct relation is missing, health insurance becomes essentially a sunk cost. It is unrecoverable, and irrelevant to rational decision making.

This means that the monetary cost of most health procedures doesn't factor in to individuals' behaviour. There are certainly other costs to unhealthy behaviour (so costs don't go down to zero) but this will mean that people will consume more healthcare and behave generally less healthily than they would if they bore the full costs of their behaviour. It is kind of like a Government-created externality. This problem exists in private markets based on insurance also, but private insurance companies can adjust premiums, etc. This of course brings in moral hazard, but I will leave this issue aside for now.

How can the Government counteract this? One thing it can do is to try to provide misinformation. If people over-estimate the health cost of smoking or other similar behaviour, then this might cancel out their under-estimation of the monetary cost. For most people, Government ad campaigns are percieved to be a credible source of information, and the cost of fact-checking usually too high. The New Zealand Government appears to have taken particular advantage of this. From a cost-benefit perspective lying to the public, while it might be annoying, may actually make (economic) sense.

Of course, the Government is hardly a unitary, cost-minimising rational actor. It's likely that this sort of misinformation is encouraged by rent-seeking lobby groups, or politicians and elites assuming other people should share their preferences. Nonetheless, it may be a way to curb healthcare spending in a socialised system, and shouldn't be immediately derided.

The Law and Justice

2009-07-12T23:28:00.003+12:00

I don't know much about law in academia, but a lot of what I see seems quite a lot like moral philosophy. That makes sense, because if we are considering new laws, the morality of them is obviously important.

In that vein, the Legal Theory Lexicon has this excellent new entry on justice, including brief primers on consequentialism, deontologicalism and virtue ethics. I suspect most of our readers already know what these are, but it is interesting to see them (and other ideas) explained from a legal perspective, as opposed to a purely philosophical one.

Spontaneous (Dis)Order

2009-07-11T16:54:00.002+12:00

Today William Easterly at his great blog Aid Watch argues that the Pope, like many, is suffering from what he calls the 'Man in Charge Fallacy' - a false assumption that the economy is or can be centrally run.

This fallacy is related to something Udayan discussed a while back on this blog; the way people like to assume design when there is none. Economist readers will no doubt recognise the links to Hayek's 'spontaneous order' theory of the economy (or perhaps Adam Smith's Invisible Hand), but an perhaps even more fundamental application of it is in our own evolution, where amazingly complex order arises without any design at all.

It is not surprising that the head of a major religion has a tendency to see design in non-designed processes. But the rest of us should be wary of making the same mistake.

Free Book

2009-07-06T18:36:00.004+12:00

They say there's no such thing as a free lunch, but you can always get someone else to pay for you. Become a fan of Sir Roger Douglas on facebook (which you can do here) and he will send you a copy of his latest book. I have no idea what the book is about (although the title is suggestive), but something in me can never say no to a free book. I have therefore become a fan, and my book is apparently on its way.

Depending on your politics and friend circles, you might argue that publicly becoming his fan is the cost, which you bear to your reputation. That's probably true; I probably wouldn't, for example, become a fan of Hitler to get a free copy of Mein Kampf. Still, if you have non-judgemental friends, it looks win-win.

No word on whether he does overseas shipping. If he doesn't, is that protectionism?

Amateur Philosophers at BERL

2009-07-04T21:22:00.005+12:00

I assume that most people who read this blog also read the excellent Offsetting Behaviour, which is why I haven't really commented on Eric Crampton's devastating critique of the BERL report on the social costs of alcohol. If you're not up on it, economic consultancy group BERL wrote a report on the costs of alcohol with (som say) some poorly defended assumptions, and some heavily misleading conclusions. It got some play through high-up lobby groups, so Crampton and Matt Burgess wrote a heavily critical response. Recently though, one of the authors defended the report in a particularly interesting way:

So for example someone who murders someone, from the individual’s point of view, Eric would be, I presume, quite comfortable with that. The person who decides to murder someone else makes an evaluation of what are the benefits and costs to me of this action? Society says ‘well some people do murder other people’, but society says ‘that’s not good.

If BERL's report was on whether or not society thought people should drink alcohol regardless of the costs, Mr. Slack (who's quote this is) would have a point. But it wasn't a x-phi survey on folk morality, it was an economic analysis. That Mr. Slack has the two confused is perhaps revealing to the approach BERL took to the analysis. Moral philosophy has an important role to play in analysis of public policy. But:

a) It should be done explicitly, rather than hiding it in leading assumptions.
b) Economists aren't generally the best people to do it.

You would think economists out of anyone would understand the benefits of division of labour.

In any case, the only (secular) case I can see for opposing consumption of alcohol prima facie in the same way we oppose murder would be a cost benefit analysis. It would be good if BERL defended their report on these grounds, and left the poorly-considered analogies out of it.

Follow-up on Pay Equity

2009-07-04T20:25:00.003+12:00

In a previous post I argued that at least part of the difference in pay between men and women (for the same job) would be attributable to social attitudes about pregnancy (and the physical realities of it).

Obviously it's given that women are in modern societies paid less than men. But are they paid less after correcting for all the other factors that affect income? My hypothesis suggests that they would be, but not by much. Unfortunately cross-sectional data with all the necessary variables is really hard to find, presumably because of privacy laws, etc. So my question is, does anyone know of any good data? It would be interesting to run a multiple regression on it to see what effect gender actually has on income, ceterus paribus.

The other thing I alluded to briefly is that I think 'pay equity laws' (currently popular with the New Zealand Left, and unpopular with the Right) are kind of like minimum wages, with the same sorts of costs and benefits. On the benefit side, obviously many women would receive higher wages. On the cost side, the number of women employed is likely to drop, as the proposal will not change the shape of the demand function for labour (and there will be an oversupply of labour). Whether or not the total amount of money paid to women increases will depend on the elasticities. There is some evidence that shows that small increases in the minimum wage don't lead to redundancies at all, but I suspect a 'pay equity' law would be a substantial enough increase.

On these grounds, perhaps a pay equity law is a good idea, particularly if you are a woman with a secure job. But like in my last post, I think it would be a better idea to try to correct the fundamentals which cause the inequity. This can be done through affirmative action scholarships for higher education, attempts to change societal prejudices (such as they exist), and so forth. To me, compared to these things, pay equity law seems crude and post-hoc. Perhaps it is intended to be a short-term solution. But I see no indication of this from its supporters.

Gender-Based Pay Discrimination and Pregnancy

2009-06-27T21:04:00.005+12:00

It is a commonly-cited fact that in New Zealand (and around the world), men and women have different incomes; with women usually, if not always, receiving lower pay. Whether women receive lower pay for doing an identical job or are simply less present in 'high powered' jobs is unclear; I think it is likely a mix of the two. However, simply citing this fact doesn't prove the existence of residual sexism (although this may also exist). There are important (but not irremediable) differences between women and men in the current labour market which at least partially account for this difference in pay.

The one I want to focus on is pregnancy and childcare, which is an interesting problem of asymmetric information. Suppose that at a particular company, a woman and a man both work, and both add the same amount of value to the workplace. Their employer knows this, and so hasn't discriminated based on gender so far. The employer however knows that both the employees are young, and likely to have children at some point. Moreover, the employee cannot know estimate the exact probability of a person having a child; marriage is no longer a good guide, as many children are born out of wedlock. The only guide (that I can think of) would be age, which I will discuss later. So the employer, to maximise expected return from the employees, has to guess, using averages.

On average, women spend more time off work during pregnancy (because they physically have to), and (I suspect) spend more time off after pregnancy as well to look after newborn babies. This means that even if they are equally good at their job, a women's expected value to their employer is lower, even if they don't plan on getting pregnant (because the employer probably doesn't know this). This means that even in a world free of sexism and any other reason to discriminate through pay, women will be paid somewhat less than men (After some basic algebra and wild guesses I very provisionally estimate this to be by about 5%).

What should we do? A popular solution is so-called 'pay equity laws', which force employers to pay women the same as men. This seems intuitive if you think the problem is sexism, but if you (like me) think there are at least some other factors involved, what you are essentially doing is placing quite an onerous minimum wage, which is likely to result in less women being employed, and probably perpetuate differences in earning power. We obviously can't make men give birth, and we can't stop people having babies. What might be a better solution (to the problem I have outlined here) is that we try to encourage more men to take on equal (or to cancel out pre-pregnancy inequalities, slightly more) responsibility for newborns post childbirth. Maybe this goes against biology, I don't know. But I suspect that if this did happen, women's pay would start to close the gap.

Note: Obviously this shouldn't be the case with older women, as after a certain age they are unable to give birth. In fact we might expect to see the effect reversed, as men can still impregnate women up to a very old age! In reality I doubt we would however, as inequalities are likely to be entrenched by late-middle-age, and older people are probably less likely to have babies at all, making the numbers relatively insignificant.

X-Phi and Distributive Justice

2009-06-21T12:24:00.004+12:00

On Public Reason they report an interesting experimental philosophy paper which tested people's intuitions on distributive justice in two cases.

In the first, they were told:

Suppose that some people make more money than others solely because they have genetic advantages.

The second group was told:

Suppose that Amy and Beth both want to be professional jazz singers. They both practice singing equally hard. Although jazz singing is the greatest natural talent of both Amy and Beth, Beth’s vocal range and articulation is naturally better than Amy’s because of differences in their genetics. Solely as a result of this genetic advantage, Beth’s singing is much more impressive. As a result, Beth attracts bigger audiences and hence gets more money than Amy.

Interestingly, but perhaps not surprisingly, people told only the abstract were far more likely to consider the situation unfair.

The question obviously has implications for Rawls' theory of distributive justice, which is fairly heavily reliant on

a) Reflective Equilibrium as a process for moral decision making
b) The unfairness of situations described above

The authors argue that:

Rawls, by his own lights, has reason to favor the judgments rendered in the more familiar concrete condition that deny the brute luck constraint over the judgments rendered in the less familiar abstract condition that affirm the constraint. A tension therefore looms between Rawls’s acceptance of the brute luck constraint and his methodology.

This is interesting stuff, but I think more depth into the psychology is needed (in the field, not in this specific paper necessarily). If we understand more fully the psychological processes which generate our moral intuitions, then we are better placed to how we should accord them value. This is really the area I see experimental philosophy making big headway in the future, as philosophers have been reticent to rely on psychological evidence in argument, and vice versa. In many ways, experimental philosophy is the behavioural economics of philosophy, and papers like this show why it is so promising, but also why it has still quite far to go.

Competition

2009-06-17T21:23:00.001+12:00

Click here and then click play to watch Australia and NZ battle it out for higher income per capita and better infant mortality rates, since last century.

Very cool website.

Loan Sharks

2009-06-17T17:44:00.004+12:00

A guest post by NZ Labour MP Chris Chauvel on the No Right Turn blog brings up the issue of loan sharks, and in particular, whether the Government should legislate them out of existence. Chauvel is of the opinion that they should be and has a members' bill in the ballot to do just that. He says:

Loan sharks prey on the vulnerable with unscrupulous rates of interest and this includes many of our Pacific people. They are the scourge of our community and instead of lending a helping hand keep borrowers in poverty.

And:

Market forces are clearly not an appropriate determinant of interest rates at this low end of the socio-economic spectrum. It's all very well to guarantee bank deposits and slowly roll out a nine-day fortnight. But this is something that would help those in real financial trouble. I call on the Government to do the right thing and take action in this area now.

Some of Chauvel's proposals have merit, in particular allowing loan sharks to charge fees, although I don't know why they should need to be registered to do this. However, I think the bill is a bad idea.

Why do these people take out loans at all, if the rates are so high? This sentence of Chauvel's is revealing:

Increasing numbers of people are pawning items like bikes and children's toys just to meet essential expenses like their power bill. I saw an elderly man taking his weed eater into a loan shark outfit in Wellington, and it was distressing to watch first hand.

It is certainly tragic for someone to have to sell their bikes to pay for their power bill. But why are they doing this? It is because they don't have enough money to pay their power bill at all, and they consider it a good trade to sell these things. Chauvel proposes no remedy for this situation (also known as relative poverty), so it seems he would prefer people sit in unpowered houses full of bikes and toys. I suspect the people in question may disagree.

In this vein, I would argue against the implicit assumption that taking out these loans is always irrational. Chauvel engages in a little evocative rhetoric with "loan sharks prey on the vulnerable" and gives some dubious examples but doesn't really argue for this at all. It's the classic prohibitionist fallacy - to assume that anything with high costs is necessarily irrational. But this isn't a useful approach. I think these loans can often be rationally entered into; if you are starving and need money for food, and you aren't getting paid for a while, it is quite plausibly rational that you might sacrifice some pay in the future so that you can eat now. Perhaps the stigma among your bogan friends of not owning a car is bad enough that you would be willing to pay extra to own it right now.

These sorts of situations are hard for our highly-paid politicians and moderately paid pundits to understand, no matter where they sit on the political spectrum. I think it is easy once you are in power and engaged in high-level discussions and important decisions, it is easy to run together an admirable concern for the poorest members of our society with an unfortunate paternalism with regards to their intelligence and ability to make decisions. If you think that poor people are inherently stupid, this sort of legislation intrinsically looks more useful. If you do not, then it looks highly patronising.

Even if you don't agree with what I've just said, you should of course still worry about the black market. As Chauvel observes, loan sharks already engage in activities of dubious legality, so it is not much of a step for them to move to the all-out illegal trading. Legislation will not stop high-risk borrowers needing short-term credit, nor, without quite substantial levels of surveillance of transactions, even stop loan sharks from operating. I predict that if this law passes, we will still see loans being given out to poor people, but with the loan sharks resorting much more quickly to violence and intimidation. Then we will see actual loan sharks, and it will not be good news for the poorer citizens of New Zealand.

Two somewhat unrelated asides:
Firstly, it is interesting that with respect to the credit crisis, we criticise lenders for underpricing the risk of loans. But here, we slam them for correctly pricing risk!
Secondly, does anyone know why they are called sharks? I suppose if they stop lending they die, much like sharks can't stop swimming. But if you generalise it, that applies to any job. Is it because sharks hunt and eat smaller fish? Surely then a more accurate metaphor would be 'loan humans'. Hm...

Assumptions

2009-06-13T21:48:00.003+12:00

This is from my microeconomics textbook.

For simplicity, suppose that medieval England was a single, large, price-taking firm that produced one type of output with a constant-returns-to-scale Cobb-Douglas production function Q=L^αK^1-α, everyone works and all capital is used.

On the face of it, this looks like an absurd assumption. You might be tempted to say that while it might have teaching value, as an actual approximation it would be a waste of time.

However, as the question goes on to show, it actually provides a decent approximation to reality. Obviously it is too simple to make too specific predictions, but if you calculate the effect of a halving in the labour supply (which is what happened in the Black Death, apparently), the results you get are a pretty good approximation of what actually happened (wages increased substantially as the marginal product of labour went up). You wouldn't want to stake your reputation on it perhaps, but it serves as a good illustrative lesson of how you can actually derive fairly useful results from very simple models. Oversimplification is something that economics is often criticised for (although it's interesting that the critics rarely extend this to physics, which has similar levels of abstraction. Perhaps this is because physics is harder to use as an ideological tool, creationism notwithstanding). So perhaps examples like this are useful for those of us who wish to defend it.

Active and Passive Investing

2009-06-11T22:17:00.005+12:00

In a previous post I argued that the debate over the New Zealand Super Fund was leading to a recurrence of popular misunderstandings about financial markets, particularly with respect to 'timing' or 'beating' the market.

A fallacy I didn't address, but perhaps should have, was the (related) idea that now is somehow a 'good' time for active investing - that by picking stocks that you suspect are going to rebound in terms of price, there is an opportunity to make a lot of money, rather than just riding up the market by buying indices or something similar. A lot of people seem to believe this is the case with the New Zealand Super Fund.

Here, Kenneth French explains why this is wrong. Consider two types of investment strategies - active investment and passive investment. Active investors try to time the market, pick under-priced stocks, etc. Passive investors just have portfolios that represent the market, so when the market as a whole goes up so does their portfolio, and when it goes down their portfolio goes down. When you phrase it like this, it is clear that both groups have to have the same returns on average. Passive investors' returns obviously average out at market levels. The market is only made up of active and passive investors, so active investors have to average out the same as well! However they usually charge higher fees. So in fact now, like every year, is a bad time for active investing.

Public Goods and City Councils

2009-06-09T17:47:00.002+12:00

This article raises interesting questions about the role of local bodies, but it made me particularly think about how they collect our rubbish.

(Rodney Hide) listed these (core functions) as transport and water services and public health and safety, such as rubbish collection.

As it stands, I don't think the current setup is ideal.

Why do they provide rubbish collection at all? Presumably there is a public good argument - an untidy town is detrimental to all, but there is an incentive to free-ride on the cleanliness of one's neighbours. However, at least in Wellington they make you voluntarily pay for rubbish collection through buying rubbish bags. So it seems like they put the incentives right back there, which kind of defies the point of centralised bodies providing public goods.

However I suspect there is a greater complication - they also clean the streets, parks and pavements. If private firms collected your rubbish, you could just get the same thing for free by dumping it in the park and getting the council to pick it up. So the private firms would go out of business, and the council would have a whole lot more work to do cleaning the parks. If you don't think people would do that, you haven't seen the streets around the student flats in Otago University.
However, we should note that these incentives still exist as long as the council makes us pay for rubbish bags.

If rubbish-collection is a public good, it should probably be free. Otherwise it should be privatised. I can't really see the benefits of having a user-pays, centrally provided system like this.

Luck, Size, and the NZ Super

2009-06-02T23:07:00.006+12:00

In light of recent substantial budget deficits and worsening outlooks, the NZ Government has cancelled contributions to the NZ Super fund in the medium term. The Super Fund is an investment fund whose board of directors reports to the Government, and up until the financial crisis it had made above-market returns, but now is (I believe) slightly below par. It was intended to cover some of the cost of superannuation in the future.

Unfortunately, the debate around the cessation of payments has caused some recurrent fallacies about financial investment to, uh, recur. Unsurprisingly this is most common at the moment among those who support the parties in opposition, but I suspect that the same fallacies are broadly shared irrespective of political affiliation.

The first is that it is possible to consistently 'beat the market'. Share prices, we are told, are really low at the moment, and so if we buy them all now (or the Super Fund buys them on our behalf), when they go back up again we will all be rich. It would be fabulous if it were as simple as buying low, selling high. It supports our basic intuitions about trends - things usually carry on in the same direction if they have been doing so for a long time. Population increases, economic growth increases, so on. But this intuition fails us when it comes to financial markets.

To find out why, we have to turn to the Efficient-Market Hypothesis, in its weak-form incarnation (which is the most empirically supported one). As any financial prospectus will (or at least, should) tell you, past returns are no guarantee of future performance. It is impossible to predict what is going to happen in the market because if it were, people would. For example, if prices were going to rise at some point in the future and this was predictable, demand would increase. But then prices would rise already! What this means is that it is impossible to systematically make economic profit (or above market profit) from any given investment strategy, except by luck. For the most part share prices are like an old man at the supermarket, they follow an unpredictable, random walk.

This obviously precludes a lot of talk about how the NZ Super Fund managers are skilled, unskilled, or whatever. Kenneth French gives a good example of how it is easy to mistake luck for skill:

Consider, for example, a hedge fund with an annual volatility of 20%. (To be more precise, the standard deviation of the fund's excess return with respect to the appropriate benchmark is 20%.) If the fund's average abnormal return is 5% per year over a ten-year period, many investors and financial reporters would conclude that the manager is truly gifted, with a real knack for identifying under- and over-valued securities. But they would probably be wrong. Suppose the manager's true alpha is zero, so he really has no skill beyond that needed to recover his costs. If we pretend his returns are normally distributed, the probability that his average abnormal return exceeds 5% per year for a ten year period is more than 20%. In other words, in a group of hedge fund managers with standard deviations of 20%, we expect one in five to have a ten-year average annual abnormal return of at least 5%—even if none actually have any skill. We expect one in twenty of the unskilled managers to produce a ten-year average annual abnormal return of at least 10%.

French and Eugene Fama (the 'inventor' of the EMH) have an interesting paper on this here.

The second argument for why we need a super fund is that somehow it can make more money simply by virtue of being large. I cannot, to be honest, see how this could be true. But even if it were, the New Zealand Super Fund is hardly a massive player on the global stage. China, for example, has a fund (used for different purposes) of over $1t. If there were advantages to be made from having more money, other people would be getting them first. Some economies of scale are non-rival, it's true. But it seems unlikely that the NZ Super fund will somehow be able to buy stocks at below-market rates just because it has lots of capital.

As I've said before, the real test of someone's conviction that there is a lot of money to be made on the financial markets is their own financial position. If beating the market is so easy, do it yourself.

Won't somebody think of the opportunity cost?

2009-06-02T18:23:00.005+12:00

A classic mistake in any public policy debate is to only point to the benefits and accounting costs. We are often told that such a policy will benefit New Zealanders in way X (such as providing them with warmer houses) and will only cost so much ($1.5b, for example). Comparison of these allegedly leads us to good public policy.

This seems reasonable, but to any economics student the mistake is obvious - it misses out opportunity cost, or what is foregone to pay for the policy. The reason it does this (and this is done all the time, at least here in New Zealand) is that often these arguments rely on a very blurred line between benefits and externalities.

One way to catch yourself from doing this, and to also explain the point I am trying to make, is to think to yourself - would people buy this if they were just given the equivalent amount of money? If they would, then your policy seems a little redundant. But few public policies are like this. The real issue comes when people would not buy the thing you would have the Government provide/subsidise, etc. You should then think to yourself, why not?

Perhaps there is a benefit or cost that goes to others when they buy it that they won't take into account. This is a decent reason, although it leads to other fallacies which I will hopefully discuss later. Perhaps people are cognitively biased in some sense that you are not (i.e. addicted to something), so their choices will not actually make them happier. Perhaps the spending serves some legitimate redistributive purpose.

However, if none of these options are true, it seems that you are left in a tricky place with policy. What you are doing is making people less happy than they could be! Surely this shouldn't be your goal. Sadly, this is the case with a lot of Government spending, but it is particularly evident in the recent decision to subsidise home insulation (and not even means-tested, at that). The supporters of the plan are happy to point to the many benefits we will see, and as someone who lives in a freezing student flat I can more than sympathise with this. However, why aren't people insulating their houses already? The answer is surely that there are other things they could buy that would make them much happier, like paying off their debts, or buying food.

It is an unfortunately masochistic political system where politicians must make society less well-off to stay in power.

A Moral Defence of Deficits

2009-05-28T23:16:00.003+12:00

Government deficits are all the rage these days, and understandably this antagonises those on the far-ish right, who really, really wanted tax cuts (*). Common on both the linked blogs is a habit of calling deficits 'fiscal child abuse'. I think this overstates the issue, and I don't think that, morally speaking, the effect a deficit will have on future generations is a terribly bad thing. There may be other reasons to oppose a deficit. But concern for our children's welfare should not be one of them.

Firstly, child abuse a singularly monstrous thing. I think you strip it of meaning somewhat by comparing it to every policy which has a negative effect on future generations. Child abuse is child abuse, but nothing else is.

Secondly, we don't actually have child labour in New Zealand. So by the time they are paying taxes, they will be adults. So it is really, if anything, 'future adult abuse'. This sounds less dramatic, because it is.

Thirdly, provided the recession doesn't last forever (or the 'anti-growth people don't get into power), our children are going to be far richer than us. Because we get richer by such small percentages every year, we don't really notice it. But it compounds, and the reality is that we are far richer than our grandparents, and our children and grandchildren will live lives of luxury we can only dream of, drastic climate change notwithstanding. So perhaps we should worry a little less as to how they'll find the money to pay for it, and take some time to look after ourselves.

* The discerning reader will notice that tax cuts actually increase deficits. Of course advocates for far more limited Government want matching spending cuts. But it interests me that they appear to prefer tax cut advocacy over spending cut advocacy (what is the ratio of posts that complain about cancelled tax cuts in the budget to the posts that complain about spending levels?). Perhaps this is a more politically palatable strategy, or perhaps they simply don't care about future generations as much as they say. That's fine, they shouldn't.

Show Me the Magic!!

2009-05-28T15:48:00.003+12:00

It's budget day, so naturally the macroeconomy is one of the big issues. For me, this means revisiting the fiction from my youth and drawing instructive analogies which can enrich ordinary discourse. Today, its Harry Potter.

On my 5th or 6th re-read of the series recently, I was struck by the basic incoherence of the principles which underpin the wizarding economy. Essentially, there is no scarcity. You need food? Gamp's law of transfiguration says that as long as you have some, you can increase its quantity as much as you want. Limited space an issue? Just build a room of requirement which can expand or contract with the wishes of the user. Issues like these bug me, somewhat destroying the realism of the novels.

But more relevant to budgetary concerns is this puzzling fact. Once students graduate Hogwarts (or Beauxbatons or even (heaven forbid) Durmstrang) there seems to be very few employment oppurtunities available. Either you join the Ministry of Magic, whose entire purpose is to keep the muggles oblivious. Or you become a teacher. Or you work on Diagon Alley in a retail store. There seems to be very little primary commerce going down in the wizarding economy.

Of course for wizards, this is not an issue, because they can just substitute magic for industry and everthing is sweet. But supporters of big government spending who believe that this can pump money into an economy and stimulate employment should learn from this. Maybe it would work if Dumbledore was the Minister of Finance. But for those of us tethered to the muggle realm, conjuring economic productivity is not so simple.

Thus ends my frivolous take on macroeconomics.

Old School

2009-05-28T15:36:00.004+12:00

Give your mind a break from fiscal policy for a second.

"(Students gave the town) a typically 'Latin Quarter' atmosphere of rowdy, lawless, carefree, frivolous youths, who got into trouble with the police, wasted their time playing ball games, were mad on horse-racing and other shows, and had a weakness for feeble practical jokes ... and of course there was sexual immorality"

Marrou, H.I. A History of Education in Antiquity, 1956, page 215. On Athenian students.

"The novitate... was set upon and badgered by the senior men about him. If he was very fresh, and inexperienced in repartee, they resorted to vulgar banter, but if he showed any quickness in retort, they tried upon him all the resources of their practised wit.... when the nerve of the freshman had been tested, they took him in and at last, the trials of novitate were over"

W.W. Capes, University Life in Ancient Athens, 1877, pages 100-101

Plus ça change, etc

NZ Budget 2009

2009-05-26T16:01:00.003+12:00

Political detective/MP for Hutt South Trevor Mallard announces on the Labour Party Blog that he has some leaks as to the content of the NZ Budget to be released later this week:

Playcentres not to get the funding promised in Nats election policy for at least another year.
Modern apprenticeships abolished.
Polytechnic funding for trades courses slashed.
Sparc budget slashed.

It will be interesting to see if these are in there or if Mallard has been mislead (or is being misleading). These are all cuts - despite the risk of a credit downgrade I highly suspect that National will have a few radical new spending plans in there, mainly for PR reasons.
I personally would be happy with minimal spending cuts, and perhaps some tax cuts also. In times of hardship firms quite reasonably cut discretionary spending, but the Government does not and should not have this luxury. I like a balanced budget as much, if not more than, the next man, but most economists would accept that if it is to be done, budget-balancing should be counter-cyclical, as it is economically contractionary. This was done quite excellently by the previous administration, something I think is under-recognised by the its critics, who frequently focus too heavily on tax cuts as the sole metric of good policy.

As an aside, there appears to be very little comment on the NZ blogs that I read as to what people expect to see in this week's budget (aside from very good satire).

Depression Chic and the Philosophy of Fashion

2009-05-26T01:34:00.016+12:00

The fashion industry irritates me. Designers and editors pontificate about 'it shoes' and 'statement handbags' and models preen and primp themselves before strutting around in whatever happens to be 'in' at the time. In response, we consumers collectively swoon and shell out the moneys. It has always seemed to me to be a vacuous circle, tapping into the crude social status circuitry in our heads in a vainglorious attempt at making our lives more fulfilling.

From the standpoint of human behaviour, I think fashion reveals two things. Firstly, I see it as an example of a cultural institution being moulded out of our genetic clay, and then misfiring spectactularly. Secondly, I think it can be used as a textbook example of monopolistic competition in a market traditionally thought of as quite competitive, and that might be illustrative of general anomalies in economic thinking. These are of course major theses in their own right, and deserve more thorough consideration which I will give them in due course.

But for now I have a different agenda. The Atlantic recently published a stimulating feature on fashion in the depression economy and the challenges the industry faces going forward. It is a great read, arguing that as we enter a winter of financial discontent, consumers will rethink their conspicuous consumption of fashion. However, the designers are ready for this, and will respond with a panoply of new trends which continue to push the envelope, assisted of course by Michelle Obama, that heraldic doyenne of all things glam. What can that family not do?

What particularly piqued my interest though was this:

Fashion’s singular ability to marry aesthetics and psychology, formalism and eroticism...consumers of fashion are undergoing a “values correction"

Sounds fascinating. But wait, there's more:

Fashion is both a form of self-expression and an outward means of defining and altering selfhood....It famously, complicatedly blends art and commerce, and perhaps the highest compliment one can pay a designer is to say that he or she understands the customer: a good part of the art lies in fathoming her mood, her desires, and her ambitions, and the ways these may shift from season to season and year to year and evolve as she ages.

The suggestion seems to be that self-identity, hopes and ambitions, emotional moods and personal narrative, nothing less than the fundaments of consciousness, can be manifest in fashion. Yes, this is a somewhat ponderous extrapolation. But to me it represents a fundamentally different way of looking at this industry and its values and purpose.

If aesthetic value can truly be ascribed such a weighty role, then we should spend more time celebrating this function, rather than allowing the rhetoric of fashion to descend into mindless platitudinous back-slapping. That would certainly stop me from so glibly dismissing the fashionistas.

Generational Racism

2009-05-24T10:15:00.002+12:00

I recently read this very bizarre article in the New York Times on 'proms' in Georgia. Apparently many schools hold segregated proms - one for black people, and one for white people (although of course, white people are allowed to attend the 'black prom').

However, the article appears to want to argue that racism isn't the issue - it's just a desire to respect tradition. Several kids are interviewed. Typical quote:

“It’s awkward,” acknowledges JonPaul Edge, a senior who is white. “I have as many black friends as I do white friends. We do everything else together. We hang out. We play sports together. We go to class together. I don’t think anybody at our school is racist.”

The impression the author leaves us with is that none of the kids are in any way racist - the tradition is enforced by their domineering parents. None of the parents are interviewed.

We could draw from this that younger generations are more tolerant, less racist, etc. Before we get caught up, however, in our excitement at the coming tolerant utopia when today's youth are in power - a few cautionary notes.

Firstly, surely there is a bit of a Bradley effect. Small-town people, especially adolescents, when interviewed by an author for the New York Times, are going to want to seem more tolerant than they are.

But secondly, and perhaps more importantly, why are their parents apparently so racist? The majority of them would have been very young through the US Civil Rights movement, if they were even born(assuming they're about 40-50 years old). Institutionalised racism has essentially been abolished their whole lives! The obvious answer is that institutionalised racism is just a symptom of a culture of racism - which doesn't get abolished quite so quickly. But if their parents managed to learn to be racist from their parents, we should be sceptical that the current generation is somehow going to grow up racism-free.

Newton, Einstein and Behavioural Econ

2009-05-22T13:08:00.005+12:00

In his recent post Udayan took me to task for my fairly conservative desire to treat neo-classical economics (and particularly the concept of homo economus) with serious respect, or at least, more respect than he thought it deserved. To clarify, I also think that behavioural economics is an exciting and fascinating new field. But I think that we should be careful, lest our excitement get the better of us, and we end up forgetting how useful our previous models were.

Uday used a useful analogy of Newtonian vs. Eisteinian physics. Newtonian physics gave us a good approximation of how the world worked for hundreds of years - but as Einstein showed, it turned out to be fundamentally misconceived. Einstein's insights gave us a deeper, more accurate understanding of how things actually work.

But have we since abandoned Newtonian physics? Of course not. In the vast majority of observable situations (that is, except for research physicists) Newton's laws still appear to hold. Engineers need not worry that people moving around in their buildings will increase in mass as they move and thus crash through the floor, for example.

I think the same applies in behavioural economics. We can use it to refine our explanations of markets, and to explain areas where the neo-classical model fails. But we should be very sure that the neo-classical model has actually failed, lest we get ironically caught up in our irrational exuberance to find more complex ways of explaining the easily explainable. In particular, there needs to be very clear and testable implications of our theory.

One very simple example is the phenomenon of hyperbolic discount rates, where people discount future payoffs inconsistently. This has clear, testable consequences for people's saving behaviour. Compare this to Udayan's post - which claims that a particular outcome is due to people not seeking to maximise utility. This may be true, but it is very vague and not susceptible to easy testing. In the comments Udayan provides a clearer and more useful explanation, but I think his post is indicative of a trend to revert to claiming cognitive biases without really exhausting other possibilities, which would be necessary to explain how your theory differs from standard predictions. This is classic scientific method, but in our rush to claim psychological experiments as the Einstein of economics it is sometimes sadly swept to the wayside.

The Behavioural Faultlines of Price Theory

2009-05-22T11:23:00.012+12:00

In reply to my previous post, Tom was scpetical of the general approach I took to explaining the missing market. He said:

People aren't perfectly rational, but it shouldn't be our default explanation for every slightly perplexing feature of the market

Well...why not?

Of course this is a more general argument about why perfect competition doesn't exist. We can try and understand market failure by using the standard tools of the economist - assume homo economicus, look for transactions costs, point to an externality, find a public good problem and so on. All of these are valid to some extent. But if we know people are't rational in significant ways, then ignoring this fact trying to shoehorn human behaviour in some preordained way seems a bit odd.

This doesn't mean we have to argue that markets are always and everywhere a non-starter. It is merely an acknowledgment that the model proferred by neo-classical economics is not the final draft of economic explanation, but that it is akin to the Newtonian Physics awaiting its Einsteinian upheaval. For me this is tremendously exciting, as it opens up the study of economics and allows its foundations to be put under the experimental zoom lens. If people are predictably irrational, then it is something we need to be aware of as empirical scientists and integrate into our models of market behaviour.

I personally am quite enamoured with this approach, while Tom is less so I believe. This should make for much fruitful disagreement into the future, exactly what the discipline needs if we want to dispel the shrill pundits wailing about the death of capitalism and all that other nonsense.

Failure in Markets for Market Information

2009-05-21T17:23:00.005+12:00

Below, Tom is vexed by the lack of information markets. I would suggest that the failure is on the demand side, a consequence of consumers who aren't as rapacious in their search for a bargain as neo-classical theory would predict.

Most people simply wouldn't care enough about finding the absolute cost minimising option. Instead, their estimation of the value would be pegged to the price they already pay, and as long as it doesn't rise too rapidly from this baseline, they will continue to think they have scored a good deal. Unfortunately, people don't maximise their utility subject to budget constraints. Instead, I (and others) suspect they pick a product, and mould their preferences around it.

Tom alludes to this in his mention of meta-information markets. If people don't know about the primary information markets, this is probably because they don't have enough of an impetus to look for it rather than the lack of secondary information markets. These would only spark a somewhat postmodern recursion of meta-markets, where we need to be informed about the information that we could use to inform ourselves....ad infinitum.

I think market failure arises here due to a divergence between the rational man of economic theory and the actual man paying power bills.

Conservatives and Individualism

2009-05-21T12:44:00.003+12:00

In this excellent piece by Will Wilkinson (which you should read the entirety of), this quote stood out for me:

For too many conservatives, “individual rights” is code for their right to remain unburdened by whatever exercise of state power they happen to dislike.

Indeed the relationship between conservatives and individualism is a tricky one. My (fairly cursory) reading of Burke and Oakeshott is that they are fairly collectivist, compared to modern liberal and libertarian philosophers.

The difficulty for American conservatives is that America has strong traditions of individual rights, individualism, etc. Conservatives want to defend these things because they are conservatives, but their philosophy is essentially a collectivist one, so often they end up confusing themselves. Conservative rumblings on nationalism are an excellent case in point - nationalism is a highly collectivist ideal, yet one embraced wholeheartedly by those who like to think that they are all about the individual.

Wilkinson makes similar points but in a far funnier way, I suggest you read his piece if you have not yet done so.

Markets in Market Information

2009-05-20T20:26:00.004+12:00

Not too long ago, a New Zealand power company Meridian came out with a new service (which is actually a wholly owned subsidiary) - Powershop. The idea behind Powershop is simple - you sign up and it finds you the lowest cost power plans. It reviews them constantly so that you are always paying for the cheapest power (from the brands that it buys from).
This made me wonder why these sorts of services aren't more ubiquitous, either in this form where you delegate your purchases, or in a weaker form where the firm just aggregates the information and lets the consumer decide, like interest.co.nz. It seems like it would easy enough for it to be profitable - the firms could get economies of scale by looking for the cheapest deals for lots of similar groups of people simultaneously. It seems a pretty good market-based solution to problems of information, at least in markets for non-differentiable goods. Update: Thinking about it, this could obviously apply to products where the goods are near substitutes as well.

I suspect there are several reasons.

First, firms (to avoid confusion, let's call them 'product firms') might refuse to sell their products to such companies ('information firms'), because encouraging them might force greater competition and lower profits. However they would play a dangerous game if they do so - if the information firm gained enough of a market then the product firm would lose custom by not selling to it. The dominant strategy would depend on what the information firm's probability of success was, which would depend on all sorts of market dynamics.

Secondly, I suspect there might be laws about buying someone else's product and onselling it, which would increase the initial fixed cost for the information firms.

Those caveats aside, I still don't get why there aren't more firms like this. Or perhaps there are and I'm missing out? Perhaps there should be a meta-information firm which provides information on all the information firms. Why is there not? These ideas seem like they would be profitable, and the fact the Meridian is investing in one suggests that they agree.

Does anyone have any ideas?

Baby Born...Thinking?

2009-05-12T17:32:00.005+12:00

Why do we care more about humans than animals? Some might demur from stating it publicly, but I reckon that if people had a choice between saving a human life and saving an animal life, everyone would pick the human. My personal instincts are even stronger: it strikes me as positively immoral to even consider saving the animal, no matter who the person is.

I suspect this is just my evolutionary tribal instinct kicking in. But for now, I'm happy to restrict my moral sphere of influence to the human race, at least as a first approximation. The 'human race' is the code-word I use for a particularly level of cognitive competence which I consider necessary for full moral consideration. There may be more things in heaven and earth than in our philosophy, but at least we humans have the sentience to appreciate it.

But animal rights activists often produce what they think is a rhetorical trump card in response. "Babies really aren't that much different from adult great apes" they smirk. "You're just a bigoted speciesist! Ha!". The central conceit of course is an empircal assertion. If chimps, gorillas and bonobos are indeed as smart or smarter than infants, then perhaps my moral instincts should yield to the hard data.

I am no expert of course, but the claim that babies and apes are intellectually equivalent has always struck me as a little suspect. While they might seem to be comparable in their mental achievements, the obvious potential of a baby's mind (in that it becomes an adult human mind) is immense. By comparison, apes never develop anything more than rudimentary language or achieve the kind of social intelligence that is de rigeur for humans. Just generally, they seem to lack the ability to respond to cultural scaffolding in the same way that we can.

Jonah Lehrer suggests why. The brain of a baby isn't inactive. Rather it is hyperactive, abuzz with neuronal activity and absorbing information much more broadly than adults do. Young children seem to lack the sort of cognitive sieves that humans typically use to filter out irrelevant information and attend to particular tasks. This is not a hinderence, but rather a cunning adaptation to accelerate the environmental learning that development requires. As we grow up, this open-ended information sink is gradually pruned down to the focussed processing machine that is the adult brain.

To me, results like this highlight our exalted status in the natural order. We shouldn't be bashful - we truly are on a different plateau to the rest of the animal kingdom. Basing the moral uniqueness of the human race on a sophisticated IQ test might feel like shaky ground. But this edifice doesn't crumble as easily as we might think.

Needy People

2009-05-12T15:12:00.005+12:00

Reading this post on the new NZ Labour Party blog got me thinking about how someone could 'need' a tax cut. Claire Curran MP says:

(National have delivered) tax cuts that put extra dollars in the pockets of only those who don’t need them...

This was only a throwaway comment in the general scheme of the post, so what follows is slightly unfair, but hopefully stimulating nonetheless.
What does it mean to need anything? I don't think that the concept of 'need' is strictly meaningful in this sentence, which admittedly is quite common usage. It seems that a concept of 'need' has meaning only in a relational sense - A 'needs' B to do P, which means that without B, A could not perform P.

Often we associate 'need' with what is really just a strong desire - everyone as a child had a toy or similar that they said they 'needed', but in reality just wanted really badly. Occasionally however, and this is the sense I think Curran is getting at, P is equated to 'to live', or even more loosely, 'to live comfortably, or in a manner we might consider a minimum in society'. In these circumstances P is often not stated - we say that people 'need food' rather than 'need food to live', or 'in the modern age, everyone needs access to the internet'. Here we have to become very careful of abusing the word 'need', and I think if we force ourselves to always state what the things are needed for, it can be quite revealing. When we leave out our P's, we allow a whole lot of assumptions to be made.

What does it mean to say that rich people don't 'need' tax cuts? Obviously people need money to live, and the rich don't 'need' any extra help here. I would hope that the amount of people that actually do need extra money (on top of current transfers) to survive in New Zealand is vanishingly small. But I also like to imagine we live in a society slightly less bleak than one where people are only permitted wealth that meets their basic physical needs. The Labour Party is not a communist party, and I am sure they agree with me. But this confused rhetoric is indicative of a party that is not serious about ideas but cheap political partisanship and playing off the visceral disgust many New Zealanders feel for small groups of their compatriots whose supply and demand curves for labour are sloped differently.

Here are a few more meaningful statements Curran could have made:
"National has provided
1) ... tax cuts that will generate lower Keynesian multipliers as the rich have a lower MPC"
2) ... tax cuts that will mainly focus on the groups that gain the least marginal utility from them"
3) ... tax cuts that make our tax scheme less progressive"

etc. Obviously it is silly to expect a politician to talk like an economist, but even something that gave the gist of the above would have been far more meaningful, and easier to judge a) its truth value and b) value as a goal.

If You Support Tax Cuts, You Should Not Support Tax Cuts

2009-05-09T23:25:00.012+12:00

This graph I appropriated from Greg Mankiw a while ago. It shows Government revenue as a percentage of GDP. It also shows that every time Government revenue noticeably decreased in the last 100 years, it increased by more in the next five years or so.

I think this is a good illustration of why in the short run, people that want tax cuts should not advocate for them alone, because under the status quo they are not and will not be enacted efficiently, and will just lead to greater tax increases in the future.

The reason is simple - Government services will never be proportionally cut with tax. Tax cuts to modern Governments don't represent any commitment to a smaller Government in the long run, they just represent political bribes and deferred greater tax rises. This is because is very often (this graph would suggest almost all the time) the Government can have their cake and eat it too - they can pander to some groups through tax cuts and others through Government transfers.

Yes, people are often aware of this, but a) the marginal benefit to any given individual of making a big enough deal about this in order to earn his/her own share of tax back is probably negative, and b) cutting services is often seen as mean or an attack on the wellbeing of specific individuals, again because the cost to each individual of providing Government services is percieved to be low. Paying for one person to dig holes and refill them might cost the Government $40,000 - this is less than 1c per person in New Zealand. Most people would be quite happy to pay this to support someone - so it seems harsh to cut the job for being wasteful. Obviously there are far greater costs from having a general policy of arbitrary make-work - our economic situation up until the 1980's being the primary piece of evidence. But I think the costs are subtly aggregated across the entire economy and thus to an extent out of sight, and out of mind.

So I think that arguing for Government to cut services is at the moment more or less a lost cause. If we support tax cuts we should not advocate tax cuts in and of themselves -they will not be sustained by corresponding service cuts. The best route to take in New Zealand would, I believe, argue for privatisation of SOE's - and use that money to firstly pay off Government debt, and secondly to provide tax cuts. In this sense the tax cuts will be seen as a windfall from a sale, rather than taking bread out of the mouths of soon-to-be-destitute state employees. Privatisation is also frequently a hard sell, partly because in New Zealand it has often taken the form of hocking off monopolies then shamefacedly buying them back. But it doesn't share those factors I outlined above which make cutting other Government services so difficult - so I think it should be a preferred route. Once this goal is achieved perhaps others ought to be considered. But until then I think arguing for tax cuts will be counter-productive.

It is true that National have promised not to sell off SOE's in their first term. So I suppose we just have to twiddle our thumbs until then.

Public Debate

2009-05-07T10:25:00.003+12:00

The Victoria Debating Society is supporting a public debate next Monday, on the topic 'That Capitalism is in Crisis'.

On the affirmative are Catherine Delahunty (a Green Party MP), Don Franks (a member of the Workers' Party), and one speaker to be confirmed. Update: It will be Jackson Wood, editor of Salient.
On the negative are Roger Kerr(Executive Director of the Business Roundtable), Stephen Whittington (student debater, researcher to Sir Roger Douglas MP) and Phil Barry from the consulting firm Taylor Duignan Barry.

The debate is at Rutherford House (by Parliament) on Monday the 11th May at 6:30, entry by gold coin donation. If you live in Wellington you should definitely come - previous public debates held by the society have been great fun and excellently attended. The obligatory facebook event is here.

Updated final affirmative speaker.

Sentence to Misread

2009-05-06T22:55:00.003+12:00

It all comes down to the long forgotten chicken wars of the 60s.

That is Robert Lawrence writing on Dani Rodrik's blog. This had me thinking of some cool science-fiction scenario, but in fact it is in reference to retaliatory tariffs which the author argues are responsible for the parlous state of the United States Automobile industry. It is a very interesting read.

Why Banks Should Offshore Jobs

2009-05-06T20:04:00.007+12:00

...if they want. It has been argued by certain politicians (who really should know better) that banks should 'do their bit' for jobs and stop firing New Zealand workers to hire overseas workers. There are two reasons why they should be able to offshore.

1) It makes the majority of New Zealanders better off. New Zealand banks are in a relatively competitive market - and any lack of competition is often made up for by the massive political and media focus they endure on every level of their pricing structure, and thus the hugely negative responses they get if they raise prices. Banks save money by sending jobs offshore - that's why they do it. Reducing their costs enables them to reduce prices for their various products, meaning New Zealanders have more money in their pockets.
Yes, jobs are lost, and it this can be very difficult for people. Firstly though, because prices have gone down, people will be spending more money in other sectors, creating jobs in those sectors. So the net job loss to New Zealand is less than the total number of local jobs cut by banks.

2) It makes foreign countries better off. Most of the offshoring creates jobs for very poor foreigners(*). Yes, they are low-paid jobs. But low-paid is better than no-paid. There is no evidence to suggest that people are coerced into working call centres or there is some sort of cognitive bias in play - so we can infer from the fact that these call centres (and the like) actually have staff that they are making people better off. If they weren't, no-one would choose to work there! Furthermore, these people spend the money they earn in their local communites, creating further jobs.

The second point I think is really important. It is often said that we should be 'looking out for Kiwis', or 'protecting Kiwi jobs', but the flip side is that by doing this we are taking bread out of the mouths of desolate foreigners. If you are worried about New Zealand reducing or restructuring foreign aid, you really have no grounds to oppose banks offshoring jobs. The two things are really morally identical, and it frustrates me that they garner support (and opposition) from such divergent political interests.

None of this analysis is particularly complex or heterodox. In this circumstance, it is highly irresponsible of politicans (and unions) to try to pretend they are doing anything else than protecting the interests of a very small group of people at the expense of the majority.

I have more to say on the bank guarantee and bank lending rates, and this will be coming in the next few days.

* Kiwibank being the exception - for some reason they offshored to a higher wage economy! Perhaps this country is already ahead of us and has offshored their workers, creating high local supply and thus lower prices than here? I'm otherwise a bit unsure as to why they might do this.

Hugs for Cash

2009-05-05T10:27:00.004+12:00

This guy makes $36US in two hours, and he's competing with someone who gives it away for free!

Via Andrew Sullivan.

Posting...

2009-05-01T23:12:00.001+12:00

... will be scarce for the next few days - Udayan and I are away over the weekend and then have an economics midterm on our return. Have a good weekend!

To The Point

2009-05-01T12:30:00.003+12:00

Here Eugene Fama, the man who more or less invented the Efficient-Market Hypothesis, pithily defends it against an attack from George Soros, a famous hedge fund manager.

EFF: All the evidence I know says that market predictions are unbiased. It's understandable, however, that hedge fund managers are immune to this evidence since it's a threat to their existence.

Poor Debating Tactic

2009-04-29T19:54:00.005+12:00

My least favourite thing to hear in any argument is 'your whole system rests on 'stupid assumption x, and thus any conclusion from your system can be rejected'. It is commonly heard in debating economics, in the form "well, economics says X, but economics assumes people are completely rational and self-interested, this is ridiculous, and thus X is refuted in favour of my theory".

Sometimes arguments like this make sense - some systems do have basic assumptions which render them invalid. But usually it is just a way of dishonestly avoiding argument, especially in arguments that have two characteristics to some degree:
a) You feel smarter than the person you are debating
b) You can't quite grasp their argument but as a consequence of 1), don't want to admit it. Thus you change the focus.

I was reminded of this when reading this Ayn Rand quote in an essay:

“[t]he entire apparatus of Kant’s system . . . [rests as] on a single point: that man’s knowledge is not valid because his consciousness possesses identity”

Perhaps unsurprisingly, Rand is wrong.

If You're So Smart...

2009-04-29T09:13:00.004+12:00

Scott Sumner makes an excellent point:

Whenever I read opinion pieces by almost any macroeconomist— Keynesian, monetarist, new Classical, Austrian, etc, there is almost invariably a point where alarm bells go off. At some point the economist will make an assertion that seems to me to be in conflict with the EMH. And after that point I have trouble taking anything they say seriously. I keep thinking “If you’re so smart . . . ”

What Sumner implies is more likely is that the market is working from the same data as you, and it has priced in the probability of your predictions already. It's more than a little hubristic to think that you've figured out something that no-one else can understand.

Also, if you think you're aware of a weakness in financial markets, be it regulatory or just some failure of the market to price something correctly - why aren't you rich?! If you're totally confident of your model, before you tell anyone (or even after, if you don't think they'll believe you), use it to make money! Whether or not you actually do this, I think this is a good internal confidence check, and perhaps you should use the results to determine how strongly you advocate for your desired remedy.

Update: Arnold Kling responds, saying that Sumner presents a false dichotomy between believing in the EMH and being rich:

But one can believe that the markets are wrong and still not get rich. The markets can be right. Or, the markets can be wrong in ways that you did not expect. As an investor, the prudent approach may very well be to act as if markets are efficient. Load up on those stock index funds and those inflation-indexed Treasury securities, and be done with it.

Surely if you consistently bet that the markets are wrong and it turns out they're right, you should reconsider the EMH! If the market is wrong in ways you did not expect, then unless someone expected it, that isn't necessarily an argument against the EMH. It may have been that whatever information the market needed to make the correct call just wasn't there. The EMH doesn't mean that markets are omniscient, simply that they price all available information. If Barack Obama abolished lending at interest, the markets would plunge. This wouldn't be evidence against the EMH.
I also don't think that the market has to be perfectly efficient for Sumner's point to stand. If the market were arbitrarily or randomly inefficient, demonstrating this still wouldn't help you make money off it.

Here's a thought: if it became common knowledge that the market was informationally inefficient in some systematic way (animal spirits, etc), would the market price that and cancel it out? Is the only thing precluding us from a more efficient market a lack of scholarship?

Should we have higher taxes in the long run?

2009-04-28T23:38:00.001+12:00

At the Financial Times website they are running a cool feature - lead writers will pen pieces on this topic and readers are encouraged to leave comments. The best comments will be brought up into posts. When I have read a few more of the posts I will add my thoughts.

Check it out here.

Dead Men Tell No Tales

2009-04-28T11:41:00.007+12:00

This is not actually true. These dead men continue to tell much in way of tales through their work even hundreds of years after their deaths.
Brian Leiter ran a poll on The 10 "Most Important" Philosophers of the Early Modern Period:

1. Immanuel Kant

2. David Hume

3. Rene Descartes

4. John Locke

5. Gottfried Leibniz

6. Thomas Hobbes

7. Baruch Spinoza

8. George Berkeley

9. Adam Smith

10. Francis Bacon

Thomas Reid was 11th, Blaise Pascal 12th. Henry More languished at 27th. Full rankings here. Rousseau was accidentally left off the list, I suspect he would have performed well, even though I am not a big fan of his.

I personally would have rated Adam Smith higher in influence than "tree in the forest" Berkeley, "Go d is everything but also looks a lot like nature" Spinoza and "the world is the best possible and also made up of tiny monads" Leibniz. Supply and demand certainly isn't as wacky and interesting as all those other ideas, but it appears to have lasted somewhat longer and been more influential. I also would have picked Hobbes to one-up Leibniz, if not Locke. I suspect I have a political philosophy bias however.

More to the point, the question was who was the "most important", so other criteria like influence on other philosophers at the time would likely complicate things more than I am really capable of assessing. Perhaps the answerers were also sceptical of conflating philosophy with economics, even though at the time this was the done thing. In this case Smith looks decidedly less impressive, although his more philosophical ideas have been getting some play from highly reputable sources of late.

Anyway, congrats to Kant.

Nude from the ankle down

2009-04-27T15:09:00.007+12:00

In searching for a picture for my previous post, I came across an article from the Orlando Sentinel, about an apparent fashion of going barefoot in situations where it used to be inappropriate.
The picture attached to the article is a man talking to a class in bare feet - the caption:

UCF philosophy professor Mason Cash, a native of New Zealand, brought the tradition of going barefoot from his native country.

Initially, I thought this was one of those clichéd examples of Americans not knowing much about foreign cultures and making slightly racist faux pas. Perhaps they are confusing us with the hobbits from Lord of the Rings. But later on:

In his fifth year at UCF, Cash is originally from Gisborne, New Zealand, where people donning shoes are in the minority.

If he's from Gisborne, that probably explains it. Although to be honest, even in sunny Gisborne it's surely not more than 50-50. However he is a philosophy professor, so the subset of philosophy professors from Gisborne has probably quite a high incidence of bare feet.

Student's Re-Distribution

2009-04-27T13:35:00.008+12:00

Although most associate them with advocacy, the biggest function performed by student unions in New Zealand is redistribution of wealth, and for the most part not very well or fairly.

In 2002 (the last available online figures) the Victoria University Wellington Students' Association (VUWSA) spent a paltry $3000 on organised advocacy, while spending, for example, over $100,000 on funding clubs and another $163,000(*) on providing them with a free place to meet in the Student Union Building. Many of these clubs charge membership fees already. While the union is busy complaining how poor we students are, only just over $20,000 went to helping needy students with food banks, etc, making up about a quarter of a percent of VUWSA's budget in 2002.

Is there any good reason for wealth redistribution within students?

There doesn't seem to be a prima facie reason to fund clubs. Perhaps there is a small positive externality to the rest of students from having a successful sporting club at a university. I suspect the overwhelming majority of the benefit goes to students that are actually members of the club; most people surely realise that Conrad Smith playing rugby at OBU doesn't mean I'm any good. Furthermore most clubs clearly have no demonstrable benefit to the rest of the students - a popular (to use) example is the sci-fi club, who appear to watch science fiction and eat pizza. I can confirm the existence of this club as I have seen their signs in the Student Union Building, although I cannot confirm their activities. But it seems that such clubs (even if this one has had its functions exaggerated) have entirely private benefits, and there is no reason to force the rest of the students to fund these individual pursuits.

What about redistribution towards disadvantaged groups? This doesn't appear to fit in with the 'all students are poor' narrative of NZUSA and the local student unions - it would be like complaining the unemployment benefit isn't big enough, and thus instituting a tax on minimum wage earners to pay for it. However if we accept that some students are reasonably well-off (as we should) it doesn't seem that unreasonable. Most university students do come from advantaged backgrounds and can afford to pay. However, even if disadvantaged students beg every week, they are unlikely to eat over $100 of free bread from the VUWSA food bank, which is what they pay in fees. Consumption of welfare services isn't means-tested but based on want - those who show up get the food, no questions asked (I understand). Presumably there is a correlation between need and want, but it seems there are going to be plenty of other factors involved - how much free time you have, whether or not you know the people in the student union, whether or not you feel accepting handouts is below you, etc. None of these seem obviously proportionally related to how much you actually need the transfer, and in the case of free time, there is probably an inverse relationship, or a correlation with prosperity! This seems like a highly inefficient way to help poor students, especially compared with the Government's ability to do so through allowances and loans (whether or not you think they do so sufficiently at the moment).

If student unions truly cared about students they would abolish all intra-redistributory funding. The best way to help students would be to give them the majority of their union fee back and let them buy their own food, pay for their own clubs, and choose their own representatives.

There are other roles that student unions perform, the highest-profile being advocacy for lower fees. I plan to write on this later in the week. Also yes, the title is a statistics joke. Joke broadly defined.

(*) This also provides offices for the student magazine and VUWSA themselves.

Ahmadinejad the Anti-Colonialist

2009-04-24T09:44:00.004+12:00

The President of Iran Mahmoud Ahmandinejad recently caused a bit of fuss at the UN summit on racism. The charge: anti-semitism, which should apparently have no place at a multilateral discussion of this kind. The speech was called "vile and hateful" by Washington and "unsavory" and "obnoxious" by the UN High Commisioner for Human Rights. Even the mild-mannered Ban Ki-Moon found it "very troubling", displaying the kind of understatement befitting the world's top diplomat.

I take issue with the universal condemnation of Ahmadinejad. Though I agree he is no saint, much of the vitriol directed his way seems to be motivated by a one-eyed support of Israel which I believe is a monumental stumbling block to progress in the region.

Let's have a look at some of things he actually said:

Following the Second World War, they resorted to military aggression to make an entire nation homeless under the pretext of Jewish suffering...In fact, in compensation for the dire consequences of racism in Europe, they helped bring to power the most cruel and repressive racist regime in Palestine.

Not the most tactful use of language I agree. But of course, this is deliberate. The atrocites perpetrated against Jewish people in the second world war and throughout Western history are indeed horrific. But I sympathise with the hundreds of thousands of Palestinians who were forcibly ejected from their land and remain oppressed to this day. They would surely feel like they are innocent victims of historical redress, and slaves to a colonial power which continues to deny them autonomy.

This is a highly contentious point, but I believe it is defensible. But the Western extablishment seems unwilling to peer beyond their partisan support of Israel to at least consider this contratrian view. I have little time for this sort of empty condemnation, which serves only to alienate Iran and polarise discourse on the issue.

Furthermore, check this out:

Ladies and gentlemen: What are the root causes of US attacks against Iraq, or invasion of Afghanistan? Was the motive behind the invasion of Iraq anything other than...to expand their sphere of influence, seeking the interest of giant arms manufacturing companies, affecting another culture with thousands of years
of historical background, eliminating potential and practical threats of Muslim countries against the Zionist regime?

This is nothing more than a version of the standard liberal critique of Bush foreign policy. But Ahmandinejad said it. So it must be obnoxious and vile I guess.

Israel has been vigourously defended and protected for more than sixty years years now by a Western orthodoxy that fails to acknowledge the scope of the problem and the multiplicity of blame for the deadlock. It is time to seriously consider voices from the other side. Ahmandinejad is no crackpot, his ideas truly represent a legitimate narrative of the middle-eastern tragedy.

Sultry New Look

2009-04-23T20:10:00.002+12:00

If you are reading this in RSS, you will not have noticed that I have changed the template of the blog to create what I hope is a seductive, fresh new look. Future changes may be coming over the next few days.

Shephard Smith drops the F-Bomb

2009-04-23T20:01:00.006+12:00

And a flippin' good call it is too.

Via Andrew Sullivan.

Coercion (longish)

2009-04-21T22:12:00.006+12:00

Paul Walker's excellent response to a previous post of mine was structured along the following lines - even if private property is an interruption of liberty (which I argued it was) it still leads to more total liberty. Thus someone interested in maximising liberty should still support it (to what extent?).
I responded that it is necessary to distinguish between maximising liberty and maximising good consequences. But of course for this we need a more rigorous definition of what constitutes liberty. The whole 'positive and negative liberty' debate is pretty heavily done, so I thought a fresh approach would be to focus instead on its antithesis - coercion.

What does it mean to be coerced? Consider three situations.

The Robber: Harold keeps all his money in a safe at home (perhaps because he expects deflation). Robber Robin breaks into Harold's house, and threatens to shoot him unless he unlocks his safe and gives him all his money.

The Slave: In a slave-owning society, a particular slave is whipped every day without fail. One day his owner says to him that he will stop the whipping for one day if the slave goes to fetch a pail of water. This example was invented by Robert Nozick, who you may have heard of in another context.

The Debtor: Bill lends his books to Ann but then he needs them back. For some reason, Ann refuses to return them. She then hears about a particular concert she wants to attend, and suggests to Bill that he can have the books back if he buys her the concert ticket. This example comes from Timo Airaksinen.

Broad Concepts
Here's a basic descriptive idea of coercion. There are other theories than descriptive ones, we'll cover those shortly. Imagine you have two agents, A and B, with B the dominant agent. Only actions Q and R are open to A (although R may constitute 'doing nothing', or 'not doing Q', or some variant).
A is coerced to Q iff:
1) B threatens A to perform Q, perhaps by imposing negative consequences for A if he/she performs R
2) In light of 1), A strictly loses when performing either Q or R
3) B gains from A performing Q.

By these broad concepts the robber is obviously coerced, and it seems like the debtor is also coerced. But is the slave? It seems that the owner is not threatening to do anything. If anything, he's promising something good for the slave. Rewarding people for good behaviour doesn't seem like coercion. You might respond that a lack of punishment isn't quite the same morally as an actual reward. This may be, but a potentially more powerful response comes from splitting into normative and descriptive coercion theories.

Normative and Descriptive Coercion Theories
The distinction between normative and descriptive coercion is first found in Nozick(1969). Normative coercion theories state that whether or not someone is coerced can be determined by appealing to morality - whether or not their human rights have been violated. So you aren't coercing someone to do something if you have some right to make them do it. Descriptive theories are those that rely purely on empirical evidence - we can determine whether or not coercion has occurred by deciding whether the victim was under some form of psychological duress or something similar. Nozick supports the concept of normative coercion (as an accurate description, not as a hobby!) but some modern philosophers differ.

Under a normative framework, Nozick argues that the slave is in fact coerced - because his human rights are violated. Likewise with the other two examples. He argues then that the normative explanation is a better one for helping us understand coercion.

There have been responses to this position and it is far from concluded. See, for example, Airaksinen(1988) and Carr(1988) (1988 was a good year for coercion!).

However I want to conclude with an application. Is taxation coercive? Under a descriptive framework it seems only coercive if the taxpayer loses from paying tax. If you are better off after paying your tax (and receiving the benefits of Government services, if any) you wouldn't need to be coerced into paying your tax - the fact that you are threatened seems irrelevant. In a descriptive sense it seems then that the only people who are coerced into taxation are those people (if any) who lose out from the Government taxation.
Does it matter if you're mistaken about whether you will benefit?

Under a normative framework it becomes more opaque. Does the Government have a right to tax you? That is the classic question of political legitmacy and redistributive justice, and I will not touch it here. However (and as Nozick correctly realised), what a normative model of coercion does for us is show that with respect to taxation, in order to show it to be coercive we have to engage with arguments of distributive justice. Nozick went on to attempt to do this in his famous book, but I feel many libertarians are content to assume that a threat equates to coercion, in any situation (and is thus wrong). This, I believe, is unsupportable.

Update: Sorry for any RSS readers that might have got to read this twice, but because I started writing this a few days ago it came up buried towards the bottom of the page, which was unhelpful. Thus I re-posted it.

Update 2: Brad Taylor responds here.

Sticky, Yet Efficient Wages

2009-04-20T13:14:00.004+12:00

At Not PC they argue that labour markets always clear, and that the only reason they are not right now is because of Government action. They link to a paper which basically gives a supply and demand analysis of the labour market, which obviously backs their conclusion.
Government action does not help, but there are plenty of persuasive reasons why labour markets might not clear, aside from union agitation and ill-considered regulation.

Consider, for example, what is called efficiency wage theory. This is predicated on the relatively simple notion that productivity is in many cases causally related to wages - as your wage goes up you work harder (c.f. the other way around). This might be because it encourages workers to stay thus reducing transaction costs for the employers, because it reduces adverse selection, and so on. This means that when setting wages, firms not only have to consider the quantity of labour their wages will attract, but its quality. So long as the marginal cost of declining productivity is greater than the marginal benefit of hiring more workers, firms will pay at above market-clearing wage rates.

This might not happen all the time. But it is at least a plausible explanation for why the labour market might not always clear.

Here is a book on efficiency wage theory, available online and including a chapter co-authored by Joseph Stiglitz.

GM Food and the Greens

2009-04-18T13:07:00.004+12:00

At Frogblog, frog says that:

GE crops are no where near to delivering on their promise...
And we want to bring these genetic failures onto our shores? For what purpose? To what end? If conventional breeding technologies are far outstripping genetic technologies, are cheaper and more readily deployable, why should New Zealand go down this path at all? It’s not like we’re world leaders or anything like it. Keep it in the lab, I say!

If so, then why do are we even considering banning it? If it doesn't work, surely nobody would want it?

Or are big corporations only self-interested when it suits you ideologically?

PS: I am writing a longer post on the philosophy of coercion which I will publish in the next few days, but it is taking longer than anticipated.

Prison Privatisation Fallacies

2009-04-15T18:16:00.002+12:00

I have been meaning to discuss this for a while.
At Frogblog, Metiria Turei wrote a relatively long post proclaiming that 'Private prisons are not cheaper'.
She argues that the cost of running the prisons is relatively similar whether they are run publicly or privately, and because private prisons must return a profit, they will provide an inferior service.

With respect, I don't think Ms Turei understands how the tender process works. If private prisons are providing a poorer service at the same price, they simply won't get the tender. As I understand it Corrections will still be competing for the tenders so unless the Government simply fail to do their research (which musn't be discounted) it is impossible for things to get worse. This is something to keep in mind when told how much more poorly private prisons are run. If this is actually the case then under National's scheme they will cease to exist. In this light, I don't see what the problem is.

For the record, of all the cases for privatisation, prisons seem to be one of the weakest.

Private Property and Liberty Maximisation

2009-04-14T18:46:00.011+12:00

Nor again, can even the enforcement of contracts be fairly said to be a realisation of freedom; for a man seems, strictly speaking, freer when no one of his volitions is allowed to cause an external control of any other.

Henry Sidgwick, in The Method of Ethics.

It is often assumed by defenders of largely unregulated private property that theirs is the system that takes liberty the most seriously - indeed the system with the most freedom of agency. On the other hand, some are pure consequentialists and are ostensibly disinterested in liberty except as a tool to maximise utility. However most are not, and even those who claim to be often use highly loaded language with respect to their positions, perhaps revealing non-consequentialist intuitions. Milton Friedman for example claims to be a consequentialist libertarian (here, 1:45 minutes in,) however, for example, his most famous book is called Capitalism and Freedom (as opposed to, say, 'Capitalism and Happiness'). This is to me hardly the mark of a pure consequentialist. That is a topic for another post, however.

However I think many people forget to consider the flip-side, that private property is in itself a highly coercive institution. This is highlighted in the Sidgwick quote given at the start. Consider two situations. In Country A, the Government passes a law prohibiting people from boarding trains on Sunday. This is obviously a restriction on people's liberty, presuming that they were choosing to board trains on that day previously. In Country B however the Government is more laissez-faire and makes no such law. Despite this, the owner of the trains decides that in accordance with his religious principles, his trains will not run on Sunday.
From the perspective of the passengers of the train, the situation is identical (assume that the citizens themselves have identical demand for the trains between the two countries). They would like to ride the trains and are unable to do so because someone has told them that they cannot.

It seems to me that it is inconsistent to claim that one of these situations is an abrogation of liberty and one is not. Perhaps in B less liberty is violated, because in A the Government places restrictions on both the customers and the owner, while in B only the customers are so restricted (as the owner is free to sell tickets whenever he likes). However my general claim (and also Sidgwick's) if were actually concerned with the maximisation of individual liberty, we would not support the institution of private property. Indeed the very principle of private property is that the owner of the property is permitted to restrict the liberty of others to do what they want with it! The case can be drawn even more clearly by considering ownership of land. Are we really expected to believe that it makes a difference to liberty whether an individual or the Government tells us not to travel on a particular area of land?

The key thing to draw from this is not that we should abolish private property, it that there are such things as legitimate restrictions of people's free choices. I believe private property to be clearly one of them. Thus the goal of liberty maximisation is a misguided one, at least as it is crudely understood by many. This is hardly a killer blow to libertarian philosophy - for example Robert Nozick was one of the most vociferous critics of the idea, critiquing it as a 'utilitarianism of rights'. But we should be sceptical of, dare I say it, the Ron Paul libertarians, who claim to opposed to the initiation of force in all circumstances, but in supporting private property support one of the greatest initiations of force there is.

Update: Edited the post slightly for clarity.

Money for Votes

2009-04-08T21:33:00.012+12:00

David Farrar has some statistics of advertising budgets and votes received from the last general election. Like any young male, I immediately thought that some statistical analysis would be informative. At risk of turning this into an all stats, all the time blog, here are my musings.

Below is the plot of all parties, sauf the Bill and Ben party and Legalise Cannabis. B&B would skew the stats because unlike many of the other parties they host a popular TV show, and Legalise Cannabis (to my knowledge) are more of a single-issue lobby group than a political party, so perhaps don't target actual votes with their advertisement in quite the same way as the others.
There's not much to see here. Unfortunately the data is so spread out that it's difficult to make any conclusions. The r squared for the linear regression seems to be pretty high, but that must be because of the lower values, because visually the residuals look pretty large for the more successful parties other than the one the trendline is jabbing in the middle-right, which is Labour.

This is basically just the minority parties - by which I mean super-minority, i.e. not even in Parliament (or barely, as with the Progressives and United Future). There is a much clearer linear correlation here. It's been said, but correlation doesn't imply causation. But it is clear that higher spending is pretty well correlated with higher votes. A lot of people just plainly assume that money buys votes, hence why we need equalised political funding, control on donations, or what have you. I tend to think that people are a bit more rational than that, and that a better explanation for this data is that people tend to donate to the parties they vote for.

In case you're too impressed by my high R squared values, I'll finish with this graph.

Correlation is easy to get.
Incidentally the maximum of this graph is visible on the chart, it is at (2.87,1.56). This means that (according to my perfectly correlative model) the optimal amount of spending is $2.87m, and it will get you 1.56m votes, which at the 2008 election would have seen you earn 67% of the votes.
I can't believe I'm giving this stuff away for free.

The Joyful Plague

2009-04-07T14:00:00.004+12:00

Via Kids Prefer Cheese I have come across this informative diagram. 'The Gay Plague' makes AIDS sound fun, in a kind of 1930's way. I still prefer Flight of the Conchords' 'fun monkey disease' however.

In other news, this girl(?)'s parents and teachers are preposterously incompetent. You read about it but it still surprises to see evidence that this sort of thing actually exists.

Update: Brad Taylor in the comments points out that it is photoshopped. Phew. I guess it is too easy to become inured to failings of American education. With hindsight I guess that is pretty obvious.

Jawboning for Jesus

2009-04-06T21:00:00.007+12:00

Via Overcoming Bias I learn of a cool new website called Wrong Tomorrow. It essentially tracks predictions made by pundits and judges whether or not they come true. Sounds straightforward, and perhaps a good way to increase the cost of poor predictions, increasing the overall quality of predictions.

The best prediction on the site is definitely high-rolling televangelist Pat Robertson's.

"The Lord said the dollar is going to go down dramatically, and when all this happens we will begin to have what is known as hyperinflation...If I'm hearing him right, gold will go to about $1900 dollars an ounce and oil to $300 a barrel."

Now it may well be that God provides Pat Robertson with commodity price forecasts. Call me sceptical, but I would be interested however to know Robertson's financial portfolio, in particular his position (if any) on the price of these goods.

It seems that this sort of thing wouldn't be too hard to do. All Barack Obama would have to do would be to go massively short on oil, then announce a $500b plan to make solar cars. Obviously others before me have thought of this, which is why political figures in the US release their personal financial dealings and positions for public scrutiny. But it seems that influential figures with little to do with financial markets like Robertson manage to slip through that net.

Note: Jawboning is generally used only with respect to Governments and central banks trying to manipulate prices in an economy. My title is therefore incorrect, but my ability to generate alliterative witticisms is weak enough as it is, so I should probably take what I can get.

Modelling Facebook Growth

2009-04-03T09:46:00.006+13:00

Interestingly, a few months ago Facebook passed Myspace in terms of popularity. Bebo is a distant third (or worse, as I only included 3 sites in the search). This graph tracks unique visitors to the site rather than users, but I think this is still a useful measure of popularity, and probably directly proportional to the number of users in any case.

Facebook growth, while high, is relatively linear, which is interesting because it seems intuitively like growth (positive and negative) for social network sites should be a textbook case of an exponential relationship. Think about it - you are more likely to use a site if your friends use it (because that's the point), so the amount of new people joining should be proportional to the amount of people that are already there (which is a key characteristic of exponential growth, or decline). Assuming that most of the people that sign up to Facebook actually have friends.

Is there a way to salvage my hypothesis? Perhaps the function is logistic, and the market is near saturation. But Facebook increased its hits by 159% in the last year, which would probably not be characteristic of such a function (*).

I guess the analysis is just too simple at one factor. Perhaps we could say that these factors influence someone's decision to join a social network.

1) The amount of friends you have that use it
2) Your level of technological literacy
3) Whether or not you have regular access to a computer
4) The amount of spare time you have (**)
5) The amount you actually like your friends and want to catch up with them via the internet

So as we see a general increase in 2) and 3) we should also see a general increase in social network users.

Am I missing anything? For the record, I use facebook, because all my friends do.

(*) Because this graph refers to hits, it could be that facebook's recent newsworthy actions increased its hits without increasing its users. But I don't think that most people read a news article and then immediately try to get to the primary source, even if it is readily accessible.
(**) Or are willing to make, provided your work computer doesn't block the site...

Historical Data Tells The Tale

2009-04-02T22:03:00.010+13:00

Interest.co.nz is a very popular and useful website with all sorts of useful info on it. They also have pieces written by various different authors.

This recent one is written by Philip O'Connor, a senior lecturer a Auckland University. As a mere student at Victoria University, I certainly hesitate before criticising him. However, I don't think this piece is very good, and it's not just because he spelt 'intuitive' incorrectly on his graph.

The good gentleman provides us with a graph of house prices and variable mortgage rates between 2003 and 2005. He argues that the high level of correlation (r=0.79, we are told) implies that there is a link and that house prices will fall as interest rates continue to drop. Obviously this is of crucial interest to those who own houses, or plan to. But the time period he analyses is very short, so I thought it would be interesting to expand it out a little bit.

In the brief time I have between studying (honestly) I couldn't find the data he is using, but I did find house prices and variable mortgage rates on the stats nz website and the rbnz website respectively, for the years of 1985 - 2003.

My hastily knocked together graph is far less pretty, but it seems to show that over a longer period of time, we observe the opposite effect of what the article suggests. This is obviously the 'intuitive' sense the author rejects - the idea that as mortgage rates rise, the cost of borrowing increases, so demand for houses goes down, and so does price. That sort of inversely proportional relationship seems to be roughly what we see here. There's certainly no way you'd get a positive r value from this bad boy.

Matt Nolan makes similar arguments.

(*Notes*) I indexed my graph, giving the first year (1985) a value of 1000. The data points were in different frequencies, which is why one came up as a line and one as dots. There may be a way to fix this, but all I have on my laptop is Excel, and it seems resistant to reason. Perhaps I will throw together a better one at uni next time I am in.
I certainly couldn't tell from the data if the house prices were inflation-adjusted, doing so might flatten them out somewhat. I don't suspect it would make them turn downward however, at least for the most part.
Update: I'm also having some formatting problems with ugly little squares showing up around the graph, but I'm not down enough with my HTML to solve this. Hopefully it is just restricted to firefox users, but if it isn't, please try to ignore them :)

Roger Douglas 'Sees Marx's Point of View', leaves ACT

2009-04-01T16:50:00.007+13:00

This press release is interesting, this is probably one of the biggest developments in NZ politics in a long time.
From the release:

Sir Roger Douglas MP has dramatically announced his departure from the ACT party, effective as of today. He states that he experienced an epiphany while being accosted by veteran protestor John Minto outside Parliament. Minto's characteristic brand of emotion-free logical analysis struck a chord with the architect of New Zealand's radical neo-liberal reforms.

Further down:

"I just really started thinking," said Sir Roger "about how the multinational corporations control our lives and how capitalism is really just about keeping down the working class. All that bourgeoisie talk about incentives and prices is just rhetoric to help us funnel money to our rich cronies"

Sources close to Douglas tell me that he is talking with Joel Cosgrove about acquiring a high ranking on the Worker's Party list, perhaps 4 or 5.

In Defence Of Plastic Bags

2009-03-30T18:22:00.012+13:00

The New Zealand Government has announced that it is considering a plan to impose a 5c charge on plastic bags. I am all for Pigovian taxation for environmental (or other) purposes, but I do not support this proposal.

The best justification for such a tax would be an externality-reducing one (although for some reason the revenue is intended to go to the supermarkets, so it is not technically a tax but a price floor). What externalities are there from plastic bags? They are not very biodegradable, so they hang around in landfills for a long time. It is probably a bit of a push to describe this as an unpriced externality, as we actually pay for the maintenance of the landfills through local body rates. It might be reasonable then to use the money to run the landfills, as it is probably very hard to charge people per plastic bag they throw out, yet heavy plastic bag users impose higher costs on the landfills. However, this is not the plan. Furthermore, I am led to believe that our landfills are far from overflowing. So I don't see any pressing environmental hazard from having them fill up with plastic bags.

Perhaps the externality comes from people that throw them away outside landfills? I don't see this is a major environmental problem facing people - I certainly don't notice clouds of plastic bags clogging up downtown Wellington. Perhaps I am missing them. Certainly plastic bags can harm animals. Google image search plastic bag pollution and you will see some horrific photos of animals being smothered by bags. However I am not sure that this is a huge (in terms of scale) problem (although if I am wrong please correct me). As a lifeguard I only very rarely see plastic bags in the ocean, and they are usually very easy to pull out and get rid of. If the problem is more widespread then this is a reasonable justification for the plan. But my intuition is that it is relatively small, and that there are measures in place to prevent this already (to the extent that it can be).

There is certainly carbon in plastic bags, and seeing as landfills occasionally engage in controlled fires (I believe), perhaps this is the start of a carbon tax. However I would be greatly surprised if the Government (especially this one) plans to implement a carbon tax one good at a time. Furthermore we aren't taxing (or raising the price of) the carbon producing action (the burning) so this would be a relatively inefficient way of correctly pricing this externality.

So I don't think there is an externality-based justification for taxing plastic bags. The final option is simply that the Government considers them a demerit good, that people just should be discouraged using for the sake of it. This seems to be the tack Nick Smith is taking in the article I linked previously. I am unsure as to why this would be, and it is certainly a surprising approach from a Government that railed against paternalism while in opposition.

I suspect it is simply to make themselves appear 'pragmatic' and 'centrist', and I imagine it will probably work in that sense.

Highly Irrational

2009-03-29T22:54:00.004+13:00

Me, that is. Apparently it's in the eyes. At least, according to Lula de Silva, the President of Brazil (via Willem Buiter). Apparently he said this:

This crisis was caused by the irrational behaviour of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing.

This stance at least has the benefit of absolving the Jews from their role as perennial scapegoats.

On Earth Hour

2009-03-29T21:47:00.004+13:00

Earth Hour is a somewhat polarising event, with some hailing it as an important stepping stone towards avoiding global catastrophe, while others openly mock it.

The first thing to note on Earth Hour is that it is obviously intended to be a symbolic gesture. Anyone who says that turning your lights off for an hour won't avert global warming is confused - no one is suggesting that it will, such a thing is obviously ludicrous. In fact, (the admittedly tendentious) Not PC blog shows us that electricity consumption spiked just prior to Earth Hour, showing that total electricity consumption was probably relatively constant over the whole day. Obviously if Earth Hour has any value, it is a symbolic one.

My worry however, is that supporters of Earth Hour make the reverse error to its opponents - assuming that their actions do more than they actually do. I worry that people will not intuitively realise that they are being symbolic and actually consider their actions part of the solution, and thus revise downward what else they would do. Earth Hour is a poor substitute for serious action.

For my part I think that any 'solution' to the problem of climate change can't on simply convincing people to reduce their own externalities. You have to implement either a cap and trade scheme, or a carbon tax (which I prefer) and make people bear the cost of their transactions. This is basic economics, but it is taking a devastatingly long time to penetrate the web of vested interests that is the public policy machine. I fear that gimmicks like Earth Hour only prolong the process.

Dennett's Dangerous Idea

2009-03-28T22:57:00.008+13:00

My favourite philosopher recently gave this talk at the superb annual TED symposium.

The inversion of logic that Dennett explains here, is one of the more subtle consequences of adopting a evolutionary outlook on life, one that most people fail to appreciate. Design without a designer seems fine when talking about nature's feats of engineering, like the wing or the eye. But when the Darwinian lens is trained on human thought, people are surprised by the implications.

Responses to Dennett's line of argument are generally more or less complicated versions of this: "But....um....I experience my experiences. Thats what gives them meaning, you reductionist fool!". The design of our subjective experiences seem to need a meaning attached to them. And while we can accept design without a designer, the concept of meaning without a 'meaner' is harder to grasp.

Obviously, I have glossed over a lot here, but I suspect this point underpins much of constructivist approaches to understanding society. Why must patriarchy have a function? Why do we need a 'death of the author' to justify alternative readings of literature? Why is political language inevitably a form of social control? The answers to these post-structuralist (or whatever) questions are only really crucial if one is unable to grasp that collective trends can simply emerge from the ebb and flow of individual behaviour.

Decoupling design from a designer should imply something similar for meaning. We should look inwards to find out how we attach meaning to things, rather than appeal to some wispy holism. Dennett channels Darwin to give a possible solution to this existential conundrum.

Racism in New Zealand

2009-03-28T18:46:00.006+13:00

This annoys me a lot. I was going to write a blog post about it, but it has been done far better by others who share my opinion on the matter.
So instead, I wrote a letter to the Human Rights Commission:

To whom it may concern,

I have recently been distressed to read in the newspaper that the New Zealand Government is actively encouraging firms to select their employees on race-based lines. These sorts of policies are widely (and correctly) derided when racist groups like the National Front promote them, but it seems that in a downturn we are all expected to become honorary racists.

I am particularly upset to see that the Human Rights Commission has not, to my knowledge, made any public statement on this appalling state of affairs. Supporting Human Rights is presumably your raison d'être, yet when the Government promotes their abolition you shy into a corner and keep your mouth shut. It makes me just a little bit ashamed to be a New Zealander.

Tom Mathews

And a letter to the paper:

Dear Sir,

It distresses me to read in your pages (24/03) that Jonathan Coleman, on behalf of the Government, encourages firms to make country of origin an issue when selecting their employees. Society is rightly outraged at xenophobia when racists from the National Front seek to promulgate it, but when our elected officials take over from them our mouths seal shut. For shame.

Tom Mathews

The important point in my mind is not that these sorts of moves are economically misguided (although they are). It's just that it is just plain racist. I have tried to emphasise that in my letters. If you feel the same, I encourage you to do similar. The NZ Human Rights Commission can be reached at infoline@hrc.co.nz, the Dominion Post at news@dompost.co.nz.

Unfortunate

2009-03-25T16:04:00.004+13:00

Via the NBR, we learn that the Labour's new President under his guise as the EPMU is planning strikes for some cabin crew. I don't think that price floors unions provide are outrageous in some situations of monopsony or low demand-side competition in the labour market, and they can also help ease information flows in the economy, thus increasing efficiency.

However:

Zeal flight attendants represented by the EPMU recently voted to reject the company offer of a 4.5% pay increase for 15 months....the EPMU is seeking base salary increases of up to 26% and allowance increases of 70%.

I have no sympathy for this on the part of the EPMU. Trying to claim such massive payrises in a worldwide recession (and in a market with several looking to buy labour) is preposterous, and will no doubt lead to hugely increased unemployment for those they purport to represent. Unions in New Zealand seem to be generally working under the assumption that whatever harms the firm is good for the worker. They will be proven wrong, but only at the expense of the most vulnerable members of society they claim to serve.

It is often said in criticism of collective bargaining that there is no union for the unemployed, but I am starting to think that they are fortunate because of it.

Refined Virtuosity

2009-03-23T22:52:00.012+13:00

Some of you might have borne witness to Sachin Tendulkar's (pictured to the left) dismantling of the New Zealand attack over the last few weeks. His 163* in the 3rd ODI and the 160 he compiled in the Hamilton test were masterpieces of batsmanship - nearly chanceless, perfectly measured and compactly elegant. His durability and sustained genius is amazing, having debuted as a 16 year-old nearly 20 years ago, and we are lucky to witness his rare talent for probably the last time in this country.

He has obviously been blessed with adundant natural ability. But he has tempered this with an assiduous work ethic which was captured today by the good folk at Cricinfo. While Yuvraj Singh (pictured below), Ishant Sharma and probably others hit the boutiques in Auckland, Tendulkar attended an optional training session. I find this phenomenal. After more than 25 000 international runs and 85 centuries, he still leaps at the opportunity to hone his skills.

This neatly demonstrates a point which is often taken to be a profound ethical criticism of nativist theories of ability as well as being used as an easy rhetorical device to guillotine high achievers in society. People are just "born with it", and from then on its simply an unstoppable rolling maul to success. Wrong. If Sachin relied only on his natural gifts, he probably would have ended up as a very good batsmen, maybe averaging in the mid-40s and being the among the best of his time. Instead, he has recognised his endowment of talent, and focused his productive energy on extracting the best possible value from it. That is why he is amongst the best ever.

More broadly, focussing on things like genetic inheritance of talent or favourable socio-economic context as explanatory variables for success seriously devalues the efforts of the individual. It is an example of a holism which pervades social analysis, a dangerous brainchild of the Standard Social Science Model which I so detest.

The individual should always be the primary unit of explanation. Also, the Indian cricket team rules all.

Interesting Graph

2009-03-22T14:49:00.004+13:00

Via an old press release from NASA. This puts in perspective those persistent claims from global-warming denialists that the earth has been cooling over the last few years. It would be easy to attribute such foolish obscurantism to an inability to think in the long term, but I think it is more likely simply to reflect ideological blindness.

The Days of the Old School-Yard

2009-03-20T12:25:00.009+13:00

In his essay Why do Intellectuals Oppose Capitalism?, the late Harvard philosopher Robert Nozick hypothesised that the considerable disdain with which many public intellectuals view capitalism was a result of their school-yard days.

The schools, too, exhibited and thereby taught the principle of reward in accordance with (intellectual) merit ... The wider market society, however, taught a different lesson. There the greatest rewards did not go to the verbally brightest.

Essentially, Nozick suggests that individuals that did well in class but struggled in the more 'anarchic' environment of the playground naturally seek a return to a centrally planned system where they were more successful.

Recently I stumbled upon the most compelling piece of evidence for this hypothesis I have seen to date. Witness this piece from Chris Trotter called "Rise of Life's Bullies".

If schools really were about preparing us for life, they'd not only teach us how to endure bullies, they'd teach us how to become one. What is a bully, after all, but a person who has embraced the basic principles of social organisation more ruthlessly than his or her peers?

Indeed, Trotter seems to think the market is indistinguishable from being bullied at school. It is unsurprising then that he views it with such disdain. He even attempts to offer an evolutionary justification for the apparent prevalence of bullying:

Millennia have taught us that when the powerful start exercising their power, the smartest thing for those not involved to do is to stand well clear. Those brave (or foolish) individuals who, in ages past, displayed their empathy too openly, or recklessly intervened on behalf of the victim, were clearly placing themselves at an evolutionary disadvantage.

This is not strictly true - there are many evolutionary advantages to a certain level of altruism. We routinely see recpirocal altruism and kin selection, to name just two. Trotter's intuitions about human behaviour are highly negative - and seeing as many such intuitions are formed at a young age, perhaps this lends weight to Nozick's thesis.

The Missionary Position

2009-03-18T15:15:00.004+13:00

Forget actual bankruptcy for a second, how about some of the moral kind. From Africa:

Pope Benedict says Africa's people were suffering disproportionately due to food shortages, financial crises and climate change.

The gall of a man who bears responsibility for the deaths of countless Africans through the church's policy on condoms to admonish anyone on the sufferings faced by said Africans is mind-boggling.

Acapella Stylings

2009-03-17T22:56:00.002+13:00

Udayan posted previously on a music video he liked.

I happen to think this one is excellent. It doesn't have any political undertones as far as I am aware however. But I thought it was worth sharing.

Protectionism as Welfare?

2009-03-17T22:23:00.001+13:00

The case for this is argued here.

Essentially, the author admits that it is a given that protectionism harms the country. But most of this harm, he asserts, will just fall upon the 'coastal elites'. It will create jobs for the poor. Therefore we should do it. An uncharitable reader of the article might be tempted to suggest that the author therefore sees only benefits, i.e. hurting the rich ceterus paribus is a desirable goal. Means-testing people to determine whether their interests are worth protecting is not an admirable position (as perhaps implied here). However I aim not to be uncharitable, so I mention this interpretation only for your personal interest.

The argument suffers from a flaw which is endemic in anti-trade positions - incorrectly or inadequately considering the effects on countries other than one's own. The argument presupposes that it is morally acceptable to hurt the rich to help the poor, but doesn't consider that unemployed Chinese are poor on a level that reaches far beyond the most destitute of Americans. The reason protectionism would create jobs for poor Americans is because it would stop firms employing Chinese people to do the same job.

Unless you are prepared to argue that Chinese people are worth less than Americans, no-one can possibly accept the argument as presented. I would hope the author isn't prepared to do that, but unfortunately I am not too sure. I suspect (once again) that it is a case of inadequate reflective equilibrium - people have essentially xenophobic intutions which conflict with their other views, but for some reason they have not noticed this and thus have not resolved the tension in their world-views.

As an aside, to someone like me with pro free-trade views, the comments are actually a little terrifying. E.g.

We are in a trade war, and losing because of the almost religious fervor of "free trade" advocates in the Commerce and Trade departments. That's like fighting a real war with a bunch of born-again pacifists as our Generals and Admirals.

This just shows to me once again that at the level of public discourse, anti-trade argumentation is on a par intellectually with creationism.

The Beautiful Young Crew

2009-03-16T00:42:00.006+13:00

Lawrence Arabia, a serenely melodic paragon of the burgeoning NZ indie-pop scene has just released a new album, Chant Darling. The first single is called 'The Beautiful Young Crew', and the music video tells a darkly comic political tale. I think it is an example of how music and other narrative arts can augment ordinary political discourse, and shouldn't just be dismissed as mere entertainment. Also, it is just a sweet song.

Ethical Investment

2009-03-10T22:10:00.005+13:00

This post on Frogblog got me thinking about so-called Socially Responsible Investment.

My two thoughts on the post in question were:

1) If frog has, as s/he appears to claim, gone through the NZ Super Fund Equity Holdings line by line and determined which parts of it are ethical and which are not, that is very impressive. It is a long list.

2) We should be careful of assuming that investing in WalMart (or by the same argument, developing countries) is bad because their workers aren't well-off. As Paul Krugman once said, bad jobs are better than no jobs.

However, I wanted to make this a post on the general concept of ethical investment.

I think that national investment funds should not invest in the following situations.

1) Where the market and/or Government has incorrectly priced externalities. E.g. highly polluting industries that are not subject to Coasean bargaining or socially efficient Pigovian taxation. This will encourage firms to restrict externalities themselves - see this interesting paper for further explanation. Of course, this is not a new idea.

2) Pursuant to the first, in situations involving repugnant transactions. We should not invest in dealers of child sex-slaves, for example. This is not at all a clear criterion, however.

In the 'pro' column, there doesn't appear to be a morally relevant difference between doing something ourselves and paying someone else to do it. A gangster that orders a drive-by shooting is culpable, even if he doesn't carry it out himself. I think child sex-slavery should be minimised, so facilitating the raising of capital for its continuance would be inconsistent.

In the 'con' column, People's moral compasses don't always completely overlap. You'll notice that with child prostitutes I dishonestly set myself up a very clear case. For example, frog from frogblog thinks that we should not invest in weapons companies. Many libertarians think that guns provide important protection against a tyrannical Government. Yet both their money would be in the pool. How should the moral criteria be set for a fund which constitutes money from the entire (tax-paying) populace?

To borrow one of my favourite Rawlsian concepts, it seems reasonable to have a moral framework determined by a loosely defined overlapping consensus of morality. Even if the majority consider an investment morally appropriate, we should not force the minority to invest in it, as it is forcing them to be morally inconsistent(*). We should only invest in things generally agreed on to be morally appropriate. It seems reasonable to set a (quite low) lower bound on this - racists might object to investment in firms owned by non-Europeans, for example. We can probably bring ourselves to ignore their cries.

Some issues are less clear-cut than this, for example investing in sweatshops. This is where we can borrow a second idea from Rawls, the well-known concept of reflective equilibrium. Essentially, on issues where there are clashes in interpretations of the situation but a broad agreement on many principles, we can solve the issue by argumentation, to ascertain which party is more consistent in its principles. We might agree that we want to maximise both the utility of the sweat-shop workers (or of their country in general) and our own through profit-making, with probably a higher weighting on the former. It wouldn't be unreasonable to rank them lexicographically, in fact. It seems then that we could refine any further intuitions we might hold (that we shouldn't give money to exploitative factory owners, etc) with recourse to evidence as to the agreed basic principles.

One final point: Does ethical investment cause your portfolio to make less profit? It seems obvious that it would, as you are selecting investments for criteria that are independent (or even negatively correlated with) profit. There appears to be mixed evidence on this score. But that is a topic for another time.

* This is more controversial than it seems, if you think through the domestic political implications. The point needs more expansion. The blog post however does not.

Resigned Realism?

2009-03-09T13:58:00.002+13:00

From Kiwiblog:

Let me let you into a secret. No matter what the Government says publicly, aid policy is always tied into a country’s foreign policy.

Well.

Some argumentation is offered to bridge the gap:

... frankly it is bizarre to suggest we should give money out in a way where we ignore NZ’s interests.

Certainly we wouldn't want to be giving out money in ways which actively harmed our interests, like giving maps of New Zealand to terrorists. But...

1) Is it that preposterous to want Governments to be altruistic? In a sense you could see it as correcting for a market failure, in that people generally act under a morally unjustifiable geographical discount rate with respect to altruism. That is an argument I broadly believe, but will not make the case for it right now.
2) Abolishing world poverty is in the long term interests of NZ (climate change issues aside). Imagine if we had a prosperous Africa buying our agricultural products. It is difficult to underestimate the economic benefit of this.

I am of the opinion that aid to developing countries should (but probably never will) be greater than that you give to citizens within your own country, if you choose to do so. I will expand on this argument in a future post perhaps.

Statistics Humour

2009-03-09T13:34:00.007+13:00

Source.

Update: Frustratingly, I can't get it not to cut off the side, but you get the idea.

Financial Market Regulation vs Labour Market Regulation

2009-03-09T12:15:00.003+13:00

I thought it was relatively clear that the financial market is different to the labour market, therefore regulation would have different effects on the two. There is no direct financial analogy to a minimum wage (what Government would set a price floor on financial products?) just like there is no direct labour analogy to a minumum liquidity ratio, for example.

It would seem then that market failure in one doesn't directly imply market failure in another. A good explanation of the market failure inherent in much banking comes from Richard Posner:

A banker is not going to forgo a risk that should it materialize would wreck the economy, because his forbearance would have no consequence, as long as his competitors continued running the risk; it is a classic case of external costs, requiring government intervention.

The whole article is here, it is mainly Posner arguing against pay caps for bailed out banks. I highlight this quote because although it seems reasonable for the financial industry I cannot think of a comparable example for the labour market. Is there a particular set of circumstances in the free market for labour that is set up in a similar Prisoner's Dilemma - type scenario of encouraging defection and worse outcomes for all? I am sceptical.

So again, although there may be market failure in the financial industry, it doesn't necessarily follow that market failure is inherent in every human activity. This is something to keep in mind when people associate financial market deregulation with all other forms of deregulation and general economic liberalisation. It may be true that these things are also bad (although I am not of this opinion) but to conflate the two is facile.

From The Standard article I linked:

Of course the (Wall Street Journal), being the free market cheerleader it is, totally approves of (the 90 Day Probation Bill) (yes, despite the current economic situation and its causes- one can only imagine what it would take to shake such faith).

(The first two brackets are mine, the third is not.) I am not aware of an argument that claims that the contraction in available credit (which we assume is the cause of the crisis) was caused by overly fluid labour markets. If anything, this is exactly what we need to help us weather it.

Putative Quantitative Easing

2009-03-05T21:59:00.003+13:00

The Bank of England may lower interest rates to half a percent, but apparently losing money from your savings account (after inflation and tax) isn't enough to get people spending again.

The BBC suggests that they will try some more creative monetary policy, ie, quantatitive easing. It will be interesting to see how this pans out. If it is successful, I wonder if people will stop clamouring for fiscal stimulus? I highly doubt it. Apparently, Rahm Emmanuel has said this:

“You don’t ever want to let a crisis go to waste: it’s an opportunity to do important things that you would otherwise avoid.”

Greg Mankiw (above link) reads this as an ominous warning for supporters of limited Government. However it is unclear whether he considers himself among them, having been an economic advisor to a President with a record of highly expansionary fiscal policy.

That is probably a bit unfair. But I let my point stand about quantitative easing. If it works, I predict no backoff in arguments for fiscal stimulus, especially from those interests most likely to be 'stimulated'.

If it doesn't work, then said proponents can probably justifiably up the ante on their pleading.

Interesting Fact

2009-02-27T22:55:00.002+13:00

According to that always accurate source of info Wikipedia, New Zealand has one of the lowest tax rates in the world. We're right up there with that exemplar of the market in action, Korea.

I think this is a little misleading though. It doesn't count GST, for a start. Secondly, our income tax is pretty highly progressive, meaning that while many members of society are paying 12.5% or not much more, a smaller number are paying almost 3 times that. So the average is low, but it is probably not what you would call highly free market.

A Tiny Bit Radical?

2009-02-24T11:01:00.003+13:00

The fact that the following quote didn't get wider coverage is perhaps indicative of how much attention is payed to parliamentary maiden speeches. It is from Metiria Turei of the Greens.

"Prof. Chomsky went on to describe the Brazilians analysis, he said and I quote: "We know we're in a cage. We know we're trapped. We're going to expand the floor, meaning we will extend to the limits what the cage will allow. And we intend to destroy the cage. But not by attacking the cage when we're vulnerable, so they'll murder us. You have to protect the cage when it's under attack from even worse predators from outside, like private power. And you have to expand the floor of the cage. These are all preliminaries to dismantling it. Unless people are willing to tolerate that level of complexity, they're going to be of no use to people who are suffering and who need help."
We too, in Aotearoa, live in a cage. We are caged by the State, a political and economic system that relegates basic human needs and ecological integrity to the fringes of our existence."

Transcript located here.
That's right, she uses her maiden speech to approvingly quote Chomsky on a method of abolishing the state. Also from her personal profile:

"My personal political journey has led me to the reasonable conclusion that the
present state has no legitimacy..."

Now I am no statist, and I think a healthy degree of scepticism towards state expansion should be a requisite of any sensible political philosophy. And I think that you will find it present in some form or other in most modern thinkers. However (and this is characteristic of left-anarchists) Turei (via Chomsky and some South Americans) sees this scepticism as consumated in first an expansion of the state (ie through massive restructuring of the market-based system) and then its abolition. So the scepticism towards the role of the state is an 'I could do it better' scepticism. In that sense it is no scepticism at all, merely a distrust of the current administrators.

I think that the powerful parties in New Zealand (and the developed world) have a shameful record of environmental degradation. But if the Greens keep finding people like this who are more about nostalgia for 60's-era political radicalism than saving the environment, they can count on me not touching them with a barge pole. I prefer coherency in the political beliefs of my elected officials, insofar as I can get it.

Through their support for inititiaves like the Buy New Zealand Made campaigns and their bafflingly rabid opposition to giving poor Chinese workers jobs through trade deals, the Greens are already one of the most (perhaps, to be fair, inadvertently) racist parties in parliament. They are already smuggling in radical political views on the back of people's genuine concern for the enviroment. If the retirement of the highly respectable Jeanette Fitzsimmons causes them to further venture down this road, they should be repudiated by any voter with an ounce of empathy and sense.