Economics and similar, for the sleep-deprived

Does anyone have any idea what might be done about the pointless blob of white space above this paragraph? It seems to be resistant to all my efforts. Update haha, it succumbed.

Wednesday, January 08, 2003

Michael Moore - the not very awful truth

I come not to praise Michael Moore, but not to bury him either. There's a fair few things I don't like about Moore. I don't like his tendency to regard his every saloon bar utterance as being worth writing down in a book, and some of his fact-checking makes him a bit of a liability to his defenders. But his heart's in the right place, and he makes good films and tells a few important truths.

Any road up, we all know that the finest sound in the world is one's own voice shouting "HYPOCRITE!", and the right wing internet appears to be beginning to buzz a little with stories of a petulant, diva-like Moore, complaining about not being paid enough and, horror of horrors, "abusing low-paid workers". Because anyone who has remotely left wing politics is, of course, intrinsically a hypocrite if they ever get angry, or indeed if they are not poor. If they're poor, of course, they're just acting out of jealousy.

Here's the story. The first thing that I want to say is that the headline is misleading. I saw Moore's stage show (which is the only reason I'm writing this; I have local knowledge), and he emphatically did not "mock the Sept 11 passengers as scaredy-cats". He was trying to make a point about the docility of the middle classes, and about the fact that middle class people tend to expect others to do uncomfortable jobs for them. He mentioned black people, but also mentioned poor whites, football thugs and (topically for London at the time) firemen as members of dispossessed classes who in their daily lives did not typically have the option of letting other people handle their problems. He also made a rather moving tribute to the white middle class passengers on Flight 93, and I have no reason to believe that he wouldn't have done the same thing on the night which is being written about. His bit on this subject came immediately after a tortured piece of self-questioning about his Columbine film, asking what it was about a police tape that made the parents of the Columbine children hold back from running into the school after their children. I thought that it was an interesting idea, but a bit half-baked. I also thought at the time that it was a mistake to try and conflate the point about conformity with a point about the fact that you don't see many black faces on aeroplanes, and not in the best of taste, but the "scaredy-cats" remark is an unfair precis. Only a columnist as unremittingly stupid as Yasmin Alibhai-Brown could have interpreted it in the way she did, as glorifying black people for being violent.

(For American readers who may thank their lucky stars that they aren't exposed to the media presence of Ms Alibhai-Brown, suffice to say that she has made a profession out of being offended by everything; mainly by white people, but also by everything else. She also has a sideline in pretending that her own experience as a favourite daughter of the most prosperous and successful immigrant community in Britain gives her a unique insight into the lives of anyone with a skin darker than Pantone 469. I've occasionally noted in the past that she's the least credible Alibhai since Lord Lucan's).

Now on to the more substantive charge of hypocrisy. The key paragraph in the linked article reads:
"He stormed around all day screaming at everyone, even the �5-an-hour bar staff, telling them how we were all conmen and useless. Then he went on stage and did it in public," IMDb quotes a member of the stage crew as saying, adding Moore complained during the performance he was making just $750 a night.

OK, a few facts.

First up, I find it pretty unbelievable that Moore was getting paid $750 a night. Even if it was �750 a night, that's still fuck-all. Due to the inexplicable taste of roundhouse.org.uk for massive great unskippable flash intros, I haven't been able to confirm the figures, but I would be very surprised indeed if there were fewer than a thousand seats in the building for his performances. There were three big blocks of seating, plus two smaller blocks at the side of the stage. They were all sold out, and they weren't bloody cheap. I paid thirty quid for my ticket; there were cheaper seats, but not many of them. If we lowball the estimates and guess 1000 seats at �25 a shot, he got 3% of the takings. That's pretty low.

Second up, does this ring true? "Moore complained during the performance he was making just $750 a night". Quite apart from the fact that either a British stagehand has forgotten the difference between pounds and dollars, or Moore's fee is �468.75, is it even remotely likely that he said it in the way that this article say he said it? Is it not possible that there was some degree of self-deprecation, humour or what have you? As I say, I was there, and Moore regularly went off on quite entertaining little rants about the minutiae of his life. The night I saw him, he was banging on about the singing at the Tottenham/Arsenal match, and his visit to the Oxford Union.

Finally, and most importantly, the "�5 an hour bar staff" at the Roundhouse are bloody useless, and it's about time someone told them so. Five quid an hour for bar work in Camden is really not bad money (Yanks: it's $8/hr, albeit that UK bar staff don't get tips), and they do a terrible job for it. On every occasion I've been there, the staff have been fingers and thumbs; they'll look at a bottle of beer as if it were some strange alien object that washed up on the shore with no clue as to its purpose. It is not a well-run venue from an operational standpoint; it's a great space and it books some great acts, but the logistics do not appear to me to be any good.

What I think is more likely to have happened is this. Promoters in North London are a pretty tough lot. It's an extremely competitive market, and it's in general dominated by veterans of the Irish music scene; the most famous one is Vince Power of the Mean Fiddler organisation. I've no idea who's in charge of managing bookings at the Roundhouse at the moment (someone working for the Roundhouse Trust), but whoever they are, they're unlikely to have got where they are by being a milquetoast. Moore got into a dispute with the promoter about money (there are always disputes between performers and promoters about money) and threw a bit of a tantrum. The operational setup of the Roundhouse as a venue, on the basis of my casual empiricism as a punter, offers a wealth of material for someone to get cross about. The next night, he decided to incorporate some of this material into his act. The promoter threw a strop of his own, and decided to play a few of his own mind games the next night, and stirred trouble with the staff. Happens all the time. I'd also note that on the night I went there it started about an hour late too, so I'm not entirely convinced that the delay on the last night was due to a "strike" by the staff. Then the whole story was embellished about a dozen fold and fobbed off on a credulous reporter.

The moral of the story is that when you're dealing with promoters, count your fingers, and that fat Yanks shouldn't pick fights with tough North London Irish. Nothing to see here, move on.

posted by the management 1/08/2003 06:03:00 AM 1 comments

Tuesday, January 07, 2003

New for the new year, a week late

Forgot I had this one hanging round in the "ready to post" buffer ...

I'm bored. I want to launch a jihad against someone. Any suggestions? I thought about taking on the weblog that this young chap's parents write for him, but it kind of seems like bullying. Not saying that I'm not going to do it, just making conversation; it seems like bullying. Also, I don't really care about Israel all that much, though I do note that it would be really quite funny for anyone who doesn't like the proponent of "benshapiroonline" to continually post sharply worded critiques of it every Friday evening to see whether his religious faith in keeping the Sabbath is greater than his desire to shoot his mouth off. Anyway, I don't think I'm going to, no matter how much fun it would be, mainly because there's something weird about that "benshapiroonline" site. When you click on a link to one of the articles, something about the way that the site loads means that it shows you the picture of Ben for a fraction of a second before scrolling down really quickly to the article. Which means that I've got a retinal image of Ben floating over the page as I read his writing, and it's rather disturbing. Thank God subliminal advertising doesn't work, or there's no telling what I might do.

But anyway, impossible as it sounds, unassuming chap like myself, I find that I have run out of enemies. I suppose I really ought to continue my lifelong crusade against Eric Raymond, but frankly, can I be bothered? If anyone can come up with a suitable target, I will award a small prize (please note; I amusing the word "award" here in an extended, metaphorical sense which does not carry any implications that you'll actually get anything). Otherwise, I guess it's going to be Den Beste, without any great enthusiasm.

Real world experiments you can do ... Make friends with a clinical psychologist at your local secure hospital facility. Then suggest to him that you're a "free speech absolutist", and that in order to make a statement about how much of a free speech absolutist you are, you're going to buy a subscription to Playboy for all of his patients who have been incarcerated for sex offences. Take two steps backward, place the index finger of your right hand on the point of your chin, roll your eyes upward, bat the eyelids and say "do you think that would be a good idea?" Or if that seems like too much trouble, just write a bollock-awful autopilot screed on your weblog about how you and your friends never raped anyone, so anyone who even thinks about a connection between pornography and sex offences is just a MacDworkinite prude who wants to paint out the nudes in Rembrandt.

Department of the Bleedin' Obvious

New Years' Resolutions are always crap, but mine are usually worse than most I've never kept one in the past, and can't see why I'm ever likely to keep one in the future. But still, we beat on, boats against the current, etc. However, this year's is quite important, and I'm hoping to hold myself to it. I've decided to give up having arguments about the bleeding obvious. Specifically, the following propositions:

That people making employment decisions are for the most part (probably unconsciously) racist in the way in which they make those decisions.
That college admissions have never in the history of the world reflected "ability" in the abstract, even if such a metaphysically dubious quality were to exist and that nor will they ever in the future, whatever happens to government policy.
That policemen are very often actively racist in their intentions, and most always passively racist in the effects of their actions.
That it is the proper function of civil society to provide a decent standard of living for its members, and that the definition of "a decent standard of living" has nothing to do with caloric survival requirements
That the standard of living in France, Germany, the UK or any other G7 country is about the same as in the USA.
That equality is a good, particularly in the field of education
That the era of imperialism in the 19th century had a profound effect on the development of the colonies
That the transatlantic slave trade was the moral responsibility of those who profited the most from it, and that it was the proximate cause of the American Civil War.
That there is no problem with respect to the provision of pensions which would be solved by privatising the current state systems anywhere.
That the IMF advised developing countries during the 1990s to liberalise the capital account, and that the effects of this policy were disastrous.
And that the rates of tax on capital gains, dividends and wage income should be the same

Are no longer up for argument, pending absolutely spectacular new evidence. I've had a number of arguments on all of these points over the last year; I've heard all sides, and I've made up my mind. If anyone has an argument which they genuinely believe to be new, go ahead, but don't expect much. Please note also that I am no longer interested in methodological debates over the merits of statistical studies which purport to prove the matter one way or another on any of these propositions. There are still lots of fairly controversial things over which I'm prepared to argue, partly because I think I might convince someone, and partly because I think it's possible to disagree with me in good faith; I edited the list above down from one three times as long. But if someone genuinely believes that there's no such thing as racism any more, or that welfare recipients are supplicants who should be grateful for whatever they're given, or believes amazingly odd things about economics, then they can go and have an argument with someone else (I believe that the Internet is a good place for this). I'm hoping to spend 2003 on more interesting questions.

posted by the management 1/07/2003 11:05:00 AM 0 comments

This is dividend, my friend, my beautiful friend

I like to argue things both ways. Here's an example:

1. It is obvious that the effect of the Bush proposals on dividends will be to increase investment. Cutting taxes on dividends makes stocks more attractive to own, which encourages investors to put their money back into the market.

2. It is obvious that the Bush tax proposals will have a negative effect on investment. When you reduce the tax on something, you increase the incentive to do that thing. If you decrease the tax on dividends, you encourage companies to pay out more of their earnings in dividends, leaving less retained earnings for them to invest.

Which is right? Well, ask an economist, get a rambling answer which leaves you just as confused as you were at the beginning but somehow manages to work its way round to a tirade about personal hobby-horses. Suffice it to say that anyone who was hoping that Post-Keynesian economics weren't going to be at the root of this one is going to be disappointed.

First up, a public service announcement. In an entirely understandable rush to bash Bush, a lot of my coreligionists appear to be saying some pretty silly things about dividend taxation, including a few, like Paul Krugman, who really ought to know better (MaxSpeak does it about the best). In ascending order of objectionableness to me:

It's amazingly inegalitarian. Actually a fairly good objection; obviously a tax cut on dividend income is targeted, as Krugman says "like a laser" on the very rich. But this is America we're talking about, not Sweden. If you're going to complain about inegalitarianism in public policy, you might not want to start here. And in any case, to concentrate on single proposals is bad analysis and bad policy; it's the progressivity or regressivity of the total stimulus package that matters.
It won't stimulate the economy. There could be a sensible version of this critique, but it would have to be hidden in so many thickets of caveats it wouldn't be worth making, and I don't think that Max's argument (that dividend cuts will be offset by the sales of bonds to the same investors) is convincing. Some of the money from the dividend cut will go straight into the government bond market, sure, but some of it will be spent, and some of the deficit will be financed by foreigners. The plain facts of the matter are that a reduction in tax on individuals, gives money to individuals and that's stimulative. It might not be the most efficient way in which to use a deficit of given size to stimulate the economy (in all honesty, the current plan looks like a load of economists got together and said "Hey! Let's smoke a really big rock of crack and design a stimulus package"), but I don't think that one can deny that it is a measure which, in principle, could have a stimulative effect on the economy.
The argument that changing dividend taxes removes double taxation is in some way mendacious or misleading. It isn't. There's a plain fact of the matter here. You pay tax on dividend income, and corporations pay dividends out of post-tax profits. Hence, two levels of tax. One might argue that double taxation is the price one pays to enjoy the benefits of limited liability, and that would be a fairly decent argument. What isn't a fairly decent argument is to start talking about sales tax or what have you. That's a clearly misleading analogy; if you were to count the tax you pay when you spend the money, then dividends are taxed three times, not two.

So anyway. What's to recommend altering the taxation of dividends? Well, quite a bit, on general taxation policy grounds. Obviously, the Bush team are, to put it as charitably as possible, overly keen on structural solutions to cyclical problems (to put it more bluntly, a la Krugman, they're keen on structural non-solutions that make cyclical problems worse but benefit some very narrow class interests). But altering the system of dividend taxation in this way is not a bad thing to do.

Why? Well, the point is that debt interest is a tax deductible expense for corporations, but dividends aren't. So (and here I oversimplify mightily), someone planning the financing of his company is comparing the pre tax cost of debt with the post tax cost of equity. It makes a big difference in dealing with the investors and capitalists who finance your plant and equipment, if you give them something that you can pay out of pre-tax income; effectively, debt financing is subsidised to the tune of the rate of corporation tax. This is a subsidy to gearing, and as any ex-employees of Enron or Global Crossing will know, debt gearing is not necessarily something which the government ought to be in the business of subsidising. As well as the general principle of tax policy that a tax ought to cause as few distortions in behaviour as possible, subsidising gearing is particularly pernicious because it fuels booms and busts; it's a lot easier to get a dodgy takeover, leveraged buyout or startup proposition off the ground if you're always able to make the post-tax cash flow numbers look a bit better by adding more debt to the balance sheet. So a subsidy to debt is a subsidy to the creation of WorldCom-like companies, with balance sheets that are incredibly vulnerable to any change in sentiment or business conditions.

But under the proposed Bush plan, the idea is that every time a company pays a dividend, it passes out along with it a tax credit, allowing the investor to deduct the corporation tax already paid on the profits from which the dividend derived from his income tax bill. It's a lot more complicated than that, obviously. But that's the gist of the thing. In principle, and if it works, there will no longer be an incentive to gear up on debt, because investors will be prepared to provide equity capital on cheaper terms in order to get those lovely tax credits.

Which is where we came in. There's clearly two factors at work here; on the one hand, dividend tax "reform" encourages people to provide equity finance to corporations on cheaper terms. But on the other hand, having provided that finance, it encourages them to demand that the profits of those firms are paid out as dividends rather than being reinvested. What's the net effect?

I'm going to ignore a whole strand of the financial economics literature here which suggests that the demand for larger dividends is irrelevant. Basically this theory, which quite deservedly won Franco Modigliani a Nobel Prize, points out that a company which pays out its entire profits as dividends can always then ask its shareholders to subscribe to a new equity issue to fund any profitable investment projects it has lying around. This theory actually goes back even further to Irving Fisher (who proved that investment decisions in capital are logically separable from decisions about how to finance that capital), and goes forward in time to Michael Jensen, who argued that it's actually better for firms to pay more of their cash flow out, because the discipline of the marketplace is better at making investment decisions than incumbent company management. I'm going to ignore this strand of the literature because a) empirically, firms didn't behave in this manner in the UK during the period in which we abolished double taxation of dividends, and Stuart Myers gives decent theoretical reasons why (asymmetric information between lenders and borrowers means that internally generated cash is always the cheapest source of income), and b) Michael Jensen was the academic guru of leveraged buyouts and junk bonds, so I regard it as safe to laugh at him rather than arguing against him these days. Terribly unfair I know.

But the Post-Keynesian point I want to make is not that far removed from Fisher's theorem proving the separability of investment and financing decisions. The point is, as Paul Davidson spends the first five chapters of his excellent book "Financial Markets, Money and the Real World" (no amazon link provided as the bloody thing costs eighty quid!), the word "investment" in the modern world has two meanings:

a) "Investment" refers to the purchase of capital goods by entrepreneurial firms

and

b) "Investment" refers to the purchase of financial securities by individuals.

What do these two definitions have to do with each other? According to the Post-Keynesians, not enough.

There is no very strong force at all which equilibrates Investment^a, the amount of money that firms want to spend on capital goods with Investment ^b, the amount of money that you and I want to chuck into the financial markets. In national income accounting, they have to add up, but that's a bit of a cheat; national income accounting counts stocks of unwanted goods piling up in a warehouse as "investment", and in this sense, ex post, investment has to be equal to ex post spending. But it's clear that this sort of "investment" isn't going to drag us out of a recession.

Then there is a weak force trying to bring the two into equilibrium, which is the same sort of ambiguous, difficult-to-understand kind of supply/demand dynamics which apparently tells that that government deficits are (on the whole and in the long run) associated with higher interest rates (on the whole and in the long run). If there's a lot of spare investment^b hanging around, then it will tend to depress the return on investment, which lowers the opportunity cost of investment^a, because you might as well buy a new lathe if all you can get in the stock market is 3% a year.

But this equilibrating force is very weak. The discount rate (the opportunity cost of capital tied up in a project) is important in capital budgeting. But it's not the most important thing. If you're planning on a bit of capital investment, the most important thing you want to know is whether there's going to be a demand for the goods you want to produce at a price which will keep you in business. How do you work out the answer to that question? Anyone? Bueller?

"Sir, you can't work out the answer to that question in any statistically reliable manner, sir, because economic processes are nonergodic, sir, because the economy is subject to positive destabilising feedback sir!"

Very well done that pupil. The rest of you, go back to the books and revise.

And now we have most of the theoretical framework to understand Keynes' great insight, Post-Keynesian interpretation thereof. The great problem in the economy is in managing the fluctuations in investment^a, a quantity which is not directly related to any economic variable today in any straightforward way, with investment^b, the planned saving of the economy, because this is the level of saving at which the economy can be in full employment equilibrium. An excess of investment^b over investment^a is what is meant by "excess saving" or "deficient aggregate demand".

To take this further, we need to think exactly what we mean by "saving" in this context. The reason that investment^b is called "investment" in the first place is that a lot of what people do when they save involves buying claims on capital assets; long term debt or equities. Although there can certainly be an excess of this kind of saving relative to capital investment plans, there is another important distinction to make which gives the model its specifically Keynesian flavour. This is the distinction between the personal sector's decision to hold claims on capital assets, and its desire to hold money balances.

Money is at the centre of Keynesian theory, because it is quite unlike any other savings instrument. Specifically, it's fully liquid, and it isn't invested in anything. You own money balances because you want something that can be converted into consumption goods instantaneously and with certain value. Some readers may remember this discussion from my now-restored archives on the subject of risk-free assets; the point I was rather obliquely trying to make was this one; for some purposes, particularly the postponement of a fixed amount of consumption in the abstract from today into an unspecified point in the future, nothing will do except a liquid asset. And the point about a liquid asset is that it's not invested in anything; if it was, it would be illiquid.

Which means that the composition of savings matters, because that's what determines whether the weak equilibrating force can work at all. Money is not a substitute for securities for people who care about liquidity, so it is possible for world to get into a situation in which the saving population wants to hold money and doesn't want illiquid assets (because asset returns are also assumed to be nonergodic, and thus there is no scientific way of answering the question "at what level of the Dow am I fairly compensated for the risk?"). In this situation, because money is not a substitute for illiquid assets, there is no change in the price of illiquid assets which will convince the population to buy illiquid assets (and thus finance investment^a) rather than holding money, and whatever money is poured into the system will be held rather than spent on illiquid assets. This is the "liquidity trap".

So to recap, there are two distinct Keynesian concepts of a recession. You can have a situation in which the companies who carry out investment^a don't want to invest because they don't expect the demand to be there for their products, whatever the supply of capital. And you can have a situation in which savers don't want to carry out investment^b because they don't expect any investment^a plans to be successful, whatever the demand for capital. Note that in both cases, the imbalance turns into a problem because a proportion of the population is employed in producing goods the consumption of which is unrelated to current income, because they are capital goods whose utility depends on perceptions of future income and consumption. If those perceptions get out of line in the economy, then the market for capital goods has some buyers who either can't (for lack of finance) or don't want to buy them, and there will be a negative income shock to the producers of those capital goods which is not offset by a positive income shock elsewhere.

So, is the Bush plan stimulative? Well, it frankly depends on what sort of a recession we are looking at. The plan under discussion would subsidise the supply of capital, by reducing a tax on the activity of investment^b. That might conceivably help matters if we were in a situation in which the problem was a liquidity trap; it's effectively a subsidy from the government which you only get if you invest in illiquid assets. But I personally don't believe that this is a reasonable characterisation of the US or world economy at the moment; I don't think that what is holding the economy back is a shortage of financing. If the problem in the economy is that the corporate sector is unable to digest the last big investment it made and can't see any profitable new investments at all, then reducing the cost of capital isn't necessarily going to help matters. The prescription for that kind of situation would be to do something to stimulate demand. Which we've already established that a dividend cut will do, but probably not enough ....

Endnote: The probability that I've got those superscript a's and b's right is pretty small. If anyone notices a wrong 'un, give us a shout in the comments section?

posted by the management 1/07/2003 09:12:00 AM 1 comments

Monday, January 06, 2003

Back on the DHSS

I'm following some of the discussions on tort reform and the spiralling cost of medical malpractice insurance in the USA with interest. One point that I don't think anyone's made so far is that, whatever you do, it's not possible to legislate economic losses out of existence. All that you can do is to ensure, via tort reform or similar methods, that the cost of medical malpractice falls on the victims, as individuals, rather than on the medical profession. This strikes me as rather inequitable but thinking about it, I don't see any solution to the problem which wouldn't involve unrealistically far-ranging changes to the kind of society that the USA is. My analysis ...

On the basis of cursory examination of the literature, admittedly mainly cribbed from "Asymmetrical Information", it seems that the problem with respect to medical malpractice awards is, in large part, the cost of awards made in the US court system for "economic damages"; in other words, lost earnings. If one wanted to be cynical and unpleasant about this, not to mention pretty swinishly sexist to boot, one would say that the stereotype American malpractice case is one of a fairly typical obstetric complication of the kind that goes wrong all the time through no particular fault of anybody's, which is blown up into a multimillion dollar settlement because the mother swears blind that, but for this calamity which has befallen her new child, she would have continued in her prepartum career as a high-flying middle manager until the age of 60, and should be awarded economic damages comensurately. The actual "tort reform" crowd (see my earlier post on "pension reform" for my views on the word "reform" as a danger sign) would also engage in some fairly moronic populist lawyer-baiting, but since I don't believe that juries are any less reasonable in jury rooms than in their normal lives, I'll pass on that.

So in any case, what could account for the fact that economic damages are so deliriously high in America? Well, think about it this way; in which country in the developed world has the lowest "replacement rate" (ratio of social benefits to average earnings)? I haven't looked it up and don't propose to, but I'd be surprised if the USA wasn't right up there. And which country has the greatest degree of inequality in earnings? Now this time, I'm pretty sure that the USA is up there. The proposition I'm trying to advance is this; in the USA, more than any country on earth, the "replacement ratio" for a middle class wage earner -- the amount of money which you would have to give a middle class wage earner in order to leave their lifestyle unchanged if they were unable to continue in paid employment -- is higher than almost anywhere else, and has got a lot higher over the last ten years. Note for the minute that I am using "middle class" in its English sense, the sense in which it is a term that makes a meaningful distinction, not in its American sense which appears to refer to the segment of Americans who earn more than subsistence farmers but less than investment bankers.

I'm not sure I've made this clear, so let's approach the problem from another angle. The idea behind a medical negligence award is (jurisprudential theorists, cut me some slack here) to make the plaintiff whole; to award them a sum of money such that they can live the kind of life which they would have led had the medical mishap not taken place. This includes a sum of money for the additional medical care they will need, plus a sum of money reflecting the fact that, for one reason or another, their earning capacity is less. We'll ignore "mental distress" here, although it is a damn sight easier for us to ignore it with scare-quotes than for someone suffering it to ignore it as a fact. The point at issue is the economic damages; they're what's driving the cost inflation in medmal insurance, and without them, there wouldn't be a problem.

So now, if you're still with me, cast your mind back to the last time you saw a really bitter argument between a European and an American about relative living standards. Chances are, I was involved ... Often, the crux of these arguments runs thus:

Europe: But what about the things which the government provides in Europe like education, healthcare, childcare, theatres, holistic massage, socks, etc?

America:: What about 'em? They don't make a difference in terms of GDP. You can't claim that they're more valued by Europeans who don't have to pay for them than by Americans who can pay for them if they want 'em.

The American is right in this context; things like this don't make a heck of a lot of difference at the level of national income. But they do make a heck of a lot of difference if you're a plaintiff in the professional classes who's been rendered unable to earn a living through medical malpractice. If you're a European, then there's whole chunks of your life which remain unchanged, because they were being provided to you and your middle class friends free of charge anyway, as a sort of kickback from the tax system. If you're American, then you and your friends were paying for those things out of your own pocket, so anyone who is going to compensate you for your loss is going to have to get you to a point at which you can go on paying for them -- as it were, they're going to have to "Put your kids through college". Lionel Jospin used to have a good riff on "yes to the market economy, no to the market society", and I think that the cost of medical insurance in the USA throws his meaning into sharp relief. Because if you're going to have a market society -- a society where a socially desirable lifestyle cannot be supported without both adult members of the household taking part in the wage economy -- then your only alternatives are to accept that the cost of compensating victims of medical negligence is going to skyrocket (which appears to be inconsistent in a practical sense with the economics of the medical profession as it is currently organised) or to insist that victims of medical negligence have to bear the majority of the cost of medical negligence themselves (which is intolerably inequitable).

I have no idea where this points in terms of policy conclusions. But it does throw a bit of light on one particular statistic which has always struck me as bizarre; the fact that the USA spends 20% of its GDP on healthcare. When you realise that, through the medical negligence insurance system, this spending actually includes a fair old chunk of what is provided under other categories of government spending in Europe, it seems a bit less bizarre, although I do have to admit that I still think that it is pretty bizarre to fund these provisions via the attorneys acting for two insurance companies and an HMO rather than through general taxation. I'd also note that there is a reason why the UK used to have a single government department in charge of "Health and Social Security", and that when you think about what the words mean rather than thinking of the various cack-handed government attempts to implement them "social security" sounds like the sort of thing that one would really like to have some sort of insurance protecting one for.

May 2003 bring you all good health, and continued social security.

posted by the management 1/06/2003 07:25:00 AM 0 comments

Friday, January 03, 2003

Grasshoper mind, part whatever it is

More flapdoodle and what have you, on a fairly scattershot day ....

Great. So now we're being brought to the brink of annihilation by the idiot son of a mass murderer who has foolishly been given access to weapons of mass destruction. Not only that, but Kim Jong-Il is pretty scary too.

Nobody on the left seems to have a good word for professional wrestling, but where else on mass market television do you see the owner-class uniformly and consistently portrayed as villains¹? Furthermore, I'd always suspected as much, but Subcommandante Marcos' latest escapade (challenging Spanish judge Baltasar Garzon to a public debate, with the stakes being the revelation of his identity) reveals squarely that he's using the mask to put himself squarely in the Mexican luchador tradition of the masked man who comes to save the day for the underdogs. Wrestling is radical

As far as I can see, a lot of people on the internet appear to hold the view that the people themselves know what is best far better than any central organisation of experts could ever do, and should thus be trusted on every subject except that of the correct size of medical negligence settlements. As far as I can tell, these wise, fair-minded sage-citizens, who know so much about the correct allocation of local tax policy and have such exquisite judgement in popular television, immediately turn into venal, slack-jawed, profligate dupes the moment they enter a courtroom, just waiting for a lawyer to whip them up into a frenzy of pity and class hatred against rich doctors. Then they leave the courtroom, having dumped vast amounts of largess on the head of some malingering ne'er-do-well, and return to Olympian sagacity, leaving behind any traces of resentment of their betters. Don't laugh, it could happen.

This article seems to miss what has always seemed to me to be the best evidence for the existence of a divine being; that an awful lot of people over the years, including a disproportionate amount of people who have proved to have been utterly honest on every other issue, have reported experiences of the divine. Given the vast number of accounts in history of experiences divine revelation, I never quite understand why people are not content to argue for the existence of God on empirical grounds alone. Unless, of course, one is using the word "empirical" to mean "all and only all those kinds of experience which tend to confirm the scientific viewpoint", or in other words, that one is going to say out of hand that anyone claiming to have had a divine revelation is mad or lying, at which point the circularity of most atheist arguments becomes pretty plain.

Supply and Demand, at work.

¹The Von Mises Institute essay is an absolute bloody riot, and someone should be given a medal for it. Where else on the Internet are you going to find out that " the most serious assault on upper-level management currently underway on American television is occurring in the world of professional wrestling, and in my expert opinion the leading cultural indicator in the U.S. is the Worldwide Wrestling"? I'm seriously considering adding them to my permalink list above. The really hilarious thing is that this website is also a massively important web resource of old Austrian texts. I'd pay a small amount of money for a "random page from the Mises Institute" button.

posted by the management 1/03/2003 08:53:00 AM 1 comments

Tuesday, December 31, 2002

Look to the future now, 'cos something has begun

A couple of short thorts because nobody can be bothered reading or writing anything longer today! Actually, I've realised that at the moment, the bottleneck in this blog is writing rather than ideas, so this partly represents a dump of the "must write a longer piece on that one" file.

Some fridges have magnetic doors and some don't. Try getting that information out of the fridge magnet industry.

I have no idea what this is all about, by the way.

A lot of people have been worrying unduly about what will happen to "free TV" in a world in which digital video recorders allow you to automatically skip the ads. How about ... having a regressive flat rate tax on television ownership and using it to fund five state-owned television channels and a radio network? Nah, couldn't possibly work. Only the free market can provide high quality entertainment. And anyway, a government-owned network would surely degenerate into propaganda.

I mentioned the last time we did one of these, that if Shania Twain was so fucking popular, how come I don't know anyone who likes her. It is instructive to think these things the other way too ... everyone I know online seems to care a hell of a lot about Andrew Sullivan. Does that mean he's important? No, because we've already established through the Shania Twain thing that the people I know are utterly unrepresentative of the general population.

Just a few facts about how things got how they are in Zimbabwe:

Before 1979: Mugabe leads his ZANU freedom fighters in guerilla war against the Rhodesians. They dream of freedom and land reform.
1979-1981: Mugabe, Nkomo, the Rhodesians and the British lay the foundations of the New Zimbabwe at Lancaster House. The key issue is land reform. The British promise that they will finance the transfer of land from the white population to the black population on an equitable basis.
1982-1997: It becomes gradually clear that the British don't like Mugabe and have absolutely no intention of keeping their promise (note: the Tories were in power throughout this period). The black Zimbabwean population waits patiently, then less patiently, for land reform. The white Zimbabweans hang around on their farms -- they know that land reform is coming, but they can't afford to leave without the compensation the British promised. Gradually, the white Zimbabweans forget that land reform was ever agreed.
1997- shortly before the present: The current fucking mess kicks off in earnest.
shortly before the present - present And then just to put a cap on it, a drought strikes the region.

Alright. First things first. I do not mean to exonerate Mugabe. There is always the option of not acting like a bastard and it is his fault he didn't choose it. Although the proximate cause of the problems in Zimbabwe is the drought, things are much worse in that country than they are in Malawi or Zambia, and this is probably Mugabe's fault. I am not going to comment on the question of him starving his political opponents, because I haven't seen that claim substantiated, but I suspect that it's the sort of thing he might do. But ... the question that really has to be asked is what the fucking fuck did Her Majesty's Foreign and Commonwealth Office think they were playing at? If you encourage a populist Third World revolutionary leader to make expensive promises about land reform, and then create a situation in which it is impossible for him to keep them, how the hell do you expect things to end up? Badly. It is very hard to avoid the suspicion that something like the current mess in Zimbabwe was planned or at least expected.

A longer article will be forthcoming on how the ball was dropped in Malawi. Meanwhile I note that the current President of Brazil has been elected on the basis of substantial promises to the dispossessed, and is being denied the financing to keep them. How does this game end? Badly, usually.

Another way of putting the point of my previous essay is that, on the old "No Blacks, No Irish, No Dogs" principle, that if it weren't for a crew of politicians a lot worse than Al Sharpton (the Kennedys, Daleys, Tammany etc), you wouldn't even be able to rent a room if you had a surname like Hannity, Coulter or O'Reilly.

Speaking of which, Ms Coulter has a new book out. I fear for its sales, given that her core readership is a bit wiped out by Christmas, the Michael Moore book & film, subscription renewal time at the Nation, soccer boots for the kids, the price of granola, plus we've still not really got round to finishing getting annoyed at the Hannity book. This thing's never going to eran out it's advance if it's dependent on conservatives to buy it!

People seem to be faintly drawn to the idea that there might be more political dimensions than just "left" and "right". Bullshit. Being in favour of allowing other people to take drugs, shag each other or read what they want isn't a political position; it's what we call "manners", "civilisation" or "humanity", depending on the calibre of yokel you're trying to educate. The political question of interest splits fair and square down a Left/Right axis: either you think that it is more important to provide a decent life for everyone in the world, or you think it is more important to preserve the rights of people who own property. You can hum and haw as much as you like about whether the two are necessarily incompatible, or whether the one is instrumental to the other, or what constitutes a "decent life" anyway, but when you've finished humming and hawing, I'm still gonna be asking you the question, and your answer to it will determine whether or not we're gonna have an argument.

JK Galbraith's maxim that "the project of the conservative throughout the ages is the search for a higher moral justification for selfishness" is still worth every word of political philosophy written since the war, as well as being a damn good explanation of why self-styled "Libertarians" and trad conservatives stick together.

The singular of "Weetabix" is "Weetabik", and I don't care what anyone else says

About a year ago, I told someone that my political position could be summarised as "in favour of more meat in the pies, more booze in the beer and fewer hours in the day, and against more or less everything else". It's still a decent summary.

The official position of D-Squared Digest on the subject of Napster, Gnutella and all similar is that copying is theft, theft is sin, sin is forgiven, so get stuck in. In other words, the fact that copyright law means that upstanding citizens are committing theft by sharing their music, is a good thing about theft, not a bad thing about the law. A sensible copyright law could not be drafted in any other way, and nobody should be expected to obey the law that we have. This is only a problem for people who hold the legal code to a standard of consistency and completeness much more stringent than that of elementary number theory. The sky will not fall in, people will not stop creating works of art and the music, film and publishing industries will continue to be roughly as profitable as they are today. How do I know? Because the only argument to the contrary is that "people won't buy music/books/films because they don't need to if they can get them for free". Take a look around you. Do you see people buying only the things that they need? Or do you see a massive goddamn lucrative edifice based on the fact that people can be persuaded to buy a whole lot of shit they don't need? Thorsten Veblen would have had a bit of fun with this one.

A Happy New Year to us all.

posted by the management 12/31/2002 04:42:00 AM 1 comments

Friday, December 27, 2002

The "N-Word" and the "M-Word"

I think I've earned a couple of short ones ... this is an opinion I've had for a while, and is reasonably topical given that the world has been buzzing recently with the news that the Republican Party in the USA might be about to re-address its Southern strategy.

I am somewhat less optimistic than, say, Brad DeLong that this will herald a new dawn of racial equality in the USA. Students of history will be aware that the "negro problem" has been around since well before De Tocqueville identified it as such, and the whole history of civil wars and civil rights doesn't appear to have done anything about it. The history of civil wars and civil rights is particularly unfortunate in as much as it tends to a) throw up clouds of partisan bullshit relating to whether it was the Republicans or the Democrats who did this or that, and b) throw up clouds of regionalist bullshit relating to whether the South of the USA is uniquely horrible and "racist" compared to the Northeast or not.

Before pursuing this line of thought, I'd like to make a quick and controversial assertion about language, which will contain one use of the word now known in polite American circles as the "N-Word". I warn readers of this because it seems, I don't know why, that this "N-Word" has taken the place of the sexual swear words as the Worst Thing You Can Say. I don't actually blame "political correctness" for this, because fear and revulsion for the "N-Word" goes well beyond those who regularly take pains not to cause needless offence. It appears that a much stronger taboo has grown up; everyone in America has agreed that the mere use of this word is beyond the pale, and I am enough of an old Freudian to believe that this taboo is based on the repression of something important. OK, warning over, here's the opinion:

In the opinion of D-Squared Digest, the epithet "nigger" is a much less offensive term when used to refer to an American of African descent, than the more popular word "minority".

Why?

Because, in the opinion of D²D, a bluntly stated truth is less offensive than an Orwellian lie. The word "minority" is the clearest and most pernicious example of Newspeak that I can come up with today. "Minority" is a word which means "Black, Southeast Asian, American Indian, Indian and all other non-white", but which is often used in contexts (particularly, university admissions) in which it can only be reasonably interpreted as meaning "Black". I will for the moment pass over the slightly revolting points of etymology whereby the Polish-Americans, Italians, Irish and even Jewish-Americans are no longer considered to be "minorities" and get to the meat of the issue.

The word "Minority" in its modern use, is offensive and pernicious because it aggregates the experience of the USA's immigrant communities with its African community. Uniquely among non-Native American ethnic groups, the majority of Americans of African descent are not descended from immigrants¹. They are descended from slaves. I do not feel that I am exaggerating, and do not expect anyone to invoke "Godwin's Law" on me, when I say that the use of the word "minority" to lump together the populations who arrived in America in search of an idea of freedom, with the single population which arrived in America as chattel slaves, is something uncomfortably akin to Holocaust denial.

"Nigger", on the other hand, is a blunt diminutive of "Negro", which is powerful in its capacity to offend African Americans precisely because it tells the truth about their status in the social hierarchy of the USA; right at the bottom, reflecting their history as slaves.

When one thinks about the matter in this way, a number of social issues become clear. America does not have a problem with "race"; it is, in all likelihood, the most non-racist society in existence. America is today, as it was in de Tocqueville's day, an open, colourblind, melting-pot society with a Negro problem.

For example, we can talk all day about why it is that Black Americans lack the "social capital" of, say Chinese Americans. Why do they not have strong extended family links and social and business networks? Because they were separated from their families by slave traders and shipped two thousand miles away from their social capital, in chains. They even lost their surnames, for God's sake..

Why is "black culture" so opposed to learning/advancement/success/anything except criminality and music? Why do black children seem to regard doing well in school as "white"? Because culture is history, and the history of black people in America is one which has given them no reason at all to trust white people.

I could go on multiplying examples, but am reluctant to do so because it would look like British America-bashing, and that would be stupid and unfair. The British bear more responsibility for the problems created by the transatlantic slave trade than the USA does, because it was for the main part the British who ran it. I'm only talking about America because it matters, and because this particular problem is located within its borders. But let's just state the main crux of the problem.

What is the Negro Problem in the USA? It is nothing to do with "racism". It has everything to do with the fact that a large minority of the population are the ongoing victims of one of the most monstrous crimes in history.

This is why, in general, I have a sneaking suspicion that the well-spoken people who use the word "minority", while "decrying all kinds of racism, black and white" are a much greater obstacle to progress than the people who use the word "nigger". I think that Martin Luther King Jr agreed.

I happened upon the points above while trying to put together a few ideas of my own in solution of the Negro problem, after reading a few articles on the history of the London Irish. Given that the problem of black people in America seems so bloody intractable, we ought to take heart from the fact that as recently as 1955, the Irish lived three families to a tenement in some of the worst slums in London. Given the hurried and scattershot nature of the Irish Diaspora, they suffered from some of the same problems of broken family networks which characterise the African Diaspora, and it is extremely encouraging to see how quickly the virtuous circle can work when it begins to happen; the Irish would have been fairly and squarely considered as "minorities" fifty years ago; to suggest that they were a systematically underprivileged or even genetically inferior group today would be to make a bad joke.

How did the Irish managed to rebuild their social capital? Basically, through local government corruption.

I'd recommend everyone to read Plunkitt of Tammany Hall, the memoirs of a ward boss in New York City at the turn of the century. It's a cracking read, and it will teach you more than a hundred years of high school civics lessons. Plunkitt describes how the Irish built themselves up in two or three generations from the lowest of the low (apart from the blacks) to the level where one of their number became President. In short, forget about all the outreach programs, "it takes a village", "each one teach one" and all the other crap you can hear on Oprah and every Black History Month. There has been only one case in which a scattered diaspora reached the USA and built itself up to become integrated with the rest of the American class structure, and they did it like this:

First, recognise that your vote is worth something.
Second, recognise that blocks of votes, if they can be delivered, are worth much more than general sympathies
Third, organise your blocks of votes under ward captains. (Tammany Hall often got 99% straight ticket voting and 99% turnout, better than Saddam Hussein)
Fourth, the ward capitans must look after their people with government jobs.
Repeat election after election, until no longer needed.

After fifty years of machine politics, there was no reason for an Irish youth to want to go into crime, booze or any other of the recreations of the poor and desperate. They were no longer stigmatised. Like it or not, it worked.

This analysis would suggest that the model for the black community in the USA has to be the Reverend Al Sharpton. I am always bewildered at the number of well-meaning, high-school civics types on the internet who profess not to understand "why the Democrats pay court to a race-baiter like Sharpton". It's because he delivers his block of votes, and by doing that, he has done more for his people at a practical level than any other Democrat has even thought about. Sure, he's often crossed over the line into outright racism, but remember: America doesn't have a problem with racism. It has a problem with black people. And when you're attempting to maintain the solidarity of a racial block, racism has to be part of the territory. What I'm saying is, that if every major city in the USA had an Al Sharpton, there would for certain be a hell of a lot more time and effort expended on things that black people care about.

Anyway, this comment has grown to be longer and more rambling than it ought to have been, and has probably lost most of its impact as a result. I'm not certain about my conclusion; I started trying to look into the Plunkitt model of development shortly after giving up hope on slavery reparations. But what I do know is that America is going to be stuck with the Negro Problem for another two hundred years if the best that polite thinking can offer us is to demonise the "Souther Racists" and dress up the problem with weasel words like "minorities".

¹This line of thinking comes from Malcom X, who memorably reminded us "We never landed on Plymouth Rock! Plymouth Rock landed on us!"
posted by the management 12/27/2002 08:07:00 AM 0 comments

Tuesday, December 24, 2002

Oh yeh

I'd like to wish a "Happy Christmas" to all the straight-laced types and a good old "Merry Xmas" to the regular readers of this blog.
posted by the management 12/24/2002 03:38:00 AM 0 comments

Twll din pob Sais!

A massive "Llongyfarchiadau!" to the Rev. Bodvan Anwyl, R J Thomas, Gareth A Bevan and Patrick J Donovan, the progenitors of the "Geiriadur Prifysgol Cymru" (Dictionary of the University of Wales), the final volume of which has now been published after 82 years' work. Anyone who cares about the preservation of minority languages should applaud this magnificent work of scholarship, the definitive historical dictionary of the Welsh language. Welsh nationalists should be particularly proud that the entirety of the work was carried out under the auspices of the University of Wales; it has been a minor scandal of British educational funding over the last few years that Oxford University for a long time had a higher-rated Celtic Studies department than Aberystwyth. Well done to all. I was going to buy myself a copy for Christmas but the fourth volume sold out on the first day of publication.

Anyway, the fact which interests me, from some of the press coverage in the FT, is that the next step for the tireless researchers and harmless drudges of the dictionary team, is a seven year plan to redraft the A and B sections. Apparently, these are now roughly fifty years out of date ... which set me to thinking. Read on for some musings on economists and the way in which we think. While you're reading, keep at the back of your mind your own experiences with management consultants, the last time you had a few round your place of work.

What is the optimal way to go about writing a dictionary? Since dictionaries take a very long time to write (the Welsh one was actually comparatively speedy at 82 years; the French version took 300 years, albeit that given that it was produced by the Academie Francaise, there were most likely a few egos involved), you really ought to take into account the fact that the dictionary will need to be used while it is being written. To write a dictionary by just starting with the A's and ploughing straight on until you reach Z (see quiz below), means that people who want to know about words at the end of the alphabet are going to have to wait a bloody long time for your help. Which is not all that great even with a language like English, where most of the important words are in the front end of the dictionary, but is pretty disastrous for a language like Welsh, where the "Y" section is onle of the longest in the whole book.

Similarly, a bit of thought about the theory of optimal scheduling would suggest that revising a dictionary in the same manner -- from start to finish -- is unlikely to be the best way to go about it. In most commercial contexts, you prioritise maintenance of the machines which are most important to the overall production process, or those which are most often used. Not only is alphabetical order an arbitrary ranking which does not match up at all well with the needs of language users for different words, but a policy of revising the dictionary from start to finish means that the average time between revisions will be the same for all words, despite the fact that some words are used much more frequently than others, and some words will have their meanings drift much quicker than others.

Thinking like an economist, I'd start attacking the problem of developing an optimal algorithm for writing a dictionary by first tackling the easier problem of updating an already existing dictionary. After a cup of coffee's worth of thinking, I've come up with the following pointers to a solution of that problem:

First, we need to replace alphabetical order by some way of scheduling revisions which recognises their use in the language. The obvious (to an economist) way to achieve this would be to use "frequency-weighted random sampling" (FWRS).
By FWRS, I mean that one should first get hold of a large representative sample of written Welsh, and then construct a frequency table of the words contained in it. Then, one should assign positive integers to each word in the table in proportion to their frequency. Then, instead of progressing through the words one by one, one should set up a random number generator to select a positive integer, then update the word which corresponds to that integer. In this way, over time, the frequency of updating of every word would correspond to the frequency of its appearance in the Welsh language.
Two immediate refinements to this algorithm spring to mind. First, one could take into account differing speeds of meaning drift between words, by using a function which, every time one updated a word, compared the size of the revision (measured in some heuristic manner) to the length of time since the word had been last updated. Words which appeared to be subject to rapid meaning drift could have their "frequency" adjusted upward in the distribution.
Second, one would presumably need to have an updating algorithm for the frequency table itself, to take account of changes in the popularity of different words.
This algorithm can obviously be adapted to the problem of writing a dictionary from scratch. Just read widely in the Welsh language and choose words at random from the ones on the page before you.

I came up with the thoughts above while drinking a cup of coffee and reading a 200 word article in the FT, so I think that they're pretty representative of the way in which an economist might think of this sort of problem. And (although I am obviously poorly placed to judge this matter), I think I make a pretty plausible case for my suggested algorithm. Which is interesting and worrying because ... it's a really stupid suggestion. I'm not trying to make a self-deprecating point here; those really were my first thoughts on reading about the University of Wales team's approach to the scheduling algorithm. And it took me a couple of weeks to realise what is wrong with my approach:

Who needs a dictionary to look up common words that they use and read every day?

Of course. Words that are common in a sample of written language, are words that everyone knows the meaning of. You get the dictionary out for words that you don't see all the time.

This isn't actually a particularly fatal objection to my algorithm, although it is interesting that it took me so long to realise it. All you have to do is to construct a frequency table not of appearances in written language, but of words as they are looked up in the dictionary (if you put your dictionary online, this frequency information can be collected automatically for you). Of course, this makes the frequency table much more difficult practically to construct, and it does mean that the updating algorithm can no longer be used as a dictionary construction algorithm, but it still feels like we're making progress.

We're not. There's a real killer objection to this whole approach to the problem.

Random sampling of the kind described is a really terrible way to update a dictionary which is meant to be complete and authoritative

Given that we now know that the main usefulness of the dictionary is in the infrequent cases, a lot of the implicit assumptions in my "optimal" updating algorithm fell apart. Like the economist I am, I made considerable use of the asymptotic, large-sample properties of the statistical measures I used. Put into plain language, I made the assumption that if something is optimal on average, probabilistically, then it will work out to be optimal for certain, in the long run. But now we know that we need to be dealing with the infrequent cases at the end of the frequency distribution, that assumption looks much less valid. It's quite probable that, under a random selection algorithm, some words will get updated several times, and some will never get updated at all. (NB at this point that, unlike my usual objections to misuse of probability theory by economists, this one has nothing to do with nonergodicity. It's purely to do with sampling theory, and the number of draws you would need in order to make the sampling distribution of something as massive as a language coincide with the underlying distribution).

This problem is disastrous for the manufacturers of a scholarly dictionary. If you have some words that never get updated at all (or even worse, if we try to design a construction algorithm based on this one, never get included at all), then a researcher who is using your dictionary can't be sure if the particular word he is looking for is one of these unlucky words. If he can't be sure that your dictionary isn't going to give him a bum steer, then your dictionary is no use at all. The alphabetical algorithm has the distinct advantage that if someone knows the alphabet, and knows what the most recent volume of updates was, then he has a good estimate of where you are in the update cycle and thus, what parts of your dictionary will be of use to him. So in fact, score one for the lexicographers and minus a million for me. In actual fact, my algorithm above would not be all that bad for constructing an adbridged dictionary for the mass market, when the only thing you care about is to trade off cost the probability that a given word looked for will be in the subset of the dictionary included. But we're talking about a reference work here.

[An engineer would at this point argue that there are low-discrepancy deterministic series which could be used instead of a random number generator to pick from the frequency table, and that using one of these would in principle ensure that all words got updated on a constant cycle, and would allow someone to determine the time to last revision by running the calculation. Perhaps so, but it seems like a hell of an inconvenience to put languages scholars to, in return for not that much gain.]

So how the hell did I come up with this lexicographer's nightmare of a plan? Well, attempting to self-diagnose, I come up with two common pathologies of economic thinking.

Over-reliance on asymptotic properties. This is the problem with respect to sampling distributions which I identified above. This goes straight back to introductory game theory; von Neumann and Morgenstern showed that there is always a mixed strategy which is as good as any other strategy for a large and useful class of problems, so my first reaction on seeing the problem was to look for a solution based on a randomised mixed strategy. A common source of economic mistakes is to treat a solution which gives an ex ante optimal solution in static one-period games as being the definition of optimality, and ignore the genuine dynamics of a problem. This is an organisational pathology of the "risk management" profession, and is similarly endemic to discussions of the "risk premia" paid by developing countries and the "moral hazard" implicit in official sector lending to them. I strongly believe that the decision to let Argentina go bust in order to convince the markets that the IMF was serious about bailouts was based on this kind of thinking. Certainly, any discussion of social equality based on "equality of opportunity" is rotten with it.
Uncritical use of frequency as a substitute for importance. Obviously, for the most part, popular things are popular because they want them. But the fact that I missed such an obvious property of dictionaries suggests that one has to guard against the overuse of this assumption. One thing that I missed almost completely was the fact that dictionary entries have group properties as well as individual properties; you could have, on average, the best individual entries in the world, but if they were mixed randomly with a few truly terrible ones, your dictionary would be unusable. An example of this sort of thinking at work might be the current proposal in the UK for the staffing of fire stations, whereby it is suggested that firemen change from a military-like "watch" system, under which stations are staffed by three crews who rotate at eight-hourly intervals, to a shift-based system under which staffing levels are calibrated to coincide with the frequency of fires. All very sensible, as long as one ignores the obvious benefits of keeping the coherency of the watches; as long as one ignores that, in complicated group physical activities, stability of the teams involved is a huge benefit in and of itself.

But the real error was just a pure and simple case of economists' arrogance, the belief that as a clear-thinking outsider with a training in constrained optimisation, I would be able to design a much better way of going about things than the people actually doing the job. This is the sort of "blackboard economics" that Ronald Coase always railed against, which is why he's a bit of a hero of mine and it's genuinely saddening to me that he blotted his copybook so badly over the lighthouse business.

The root of this counter-strand of economic thinking is in Hayek's political philosophy. Like Coase, Hayek is often really badly abused by people on the political Right who believe that he was nothing more than a yah-boo cheerleader for free markets (and woefully neglected by people on the Left for the same reason). In actual fact, Hayek, and a few of the other Austrian economists sit very uncomfortably with the Libertarian thinkers which they are usually lumped with, for the decent reason that Hayek is actually a conservative.

Hayek's arguments for free markets, as expressed in The Road to Serfdom and other works, don't come from the Lockean natural rights tradition. Hayek believes in market liberalism because he is against liberalism, and he thinks that the only non-tyrannical way in which one can organise society is a market-liberal way, because this form of social organisation is the only one in which it is possible to make use of "tacit knowledge".

Tacit knowledge is the wisdom of the lexicographers, who don't go around looking for optimised scheduling algorithms for writing their dictionaries, but instead follow their own values of diligence, thoroughness and alphabetisation; by following these goals, they end up producing something much more suited to its needs than any blackboard economist is ever likely to come up with. And we can see from this example that tacit knowledge is an inherently conservative concept. Hayek might not go quite so far as Roger Scruton, who famously stated that "prejudice", meaning "pre-judgement", or the assembled judgements of past generations, was an excellent way in which to acquire the majority of one's beliefs, but it's clear that he'd go some of the way down that same track. What isn't emphasised enough in most modern libertarian use of Hayek is that, although he in the main addressed his arguments against socialist planning, as the great evil of his day, he was not so much opposed to it because it was socialist as because it was planning. In other situations, one could easily imagine him a man of the left, railing against the similar blackboard-economics tendency of the Right.

Which is quite a revealing thing to notice. Hayek was a keen advocate of privatisation, but this should be seen as a contrast to nationalisation, not to public ownership per se. In many cases, tacit knowledge is best made use of by the market, but that's just because most human activity has been mediated through market goods for the last few centuries. There are plenty of professions -- teachers, firemen, lexicographers -- who have a huge store of tacit knowledge of their own, and to introduce the "free market" into some of these areas is just as much an instance of blackboard economics, and just as stupid, as nationalising agriculture.

Edit: Oor Brad has a bit up at the moment where an Actual Economist avows his belief that introducing competition and bankruptcy into the school system would make education better. That's exactly the sort of thing I'm talking about. Maybe it would, maybe it wouldn't. But to assert it either way without incredibly detailed analysis of the tacit knowledge of the teaching profession is pure blackboard economics.

Second edit: Despite appearances, this is not an invitation for anyone to start telling me things I already know about the "Milwaukee experiment".

posted by the management 12/24/2002 03:33:00 AM 0 comments

And after all that, won't you give me a smile?

I may or may not finish the now massively oversold "longer piece" today, depending on lunch, but here's my shot at a Christmas quiz. Prizes will be awarded, although not necessarily given, and not necessarily to the people who do best at the quiz.

The McVities Jaffa Cake. Is it a cake, or is it really a biscuit? And honestly, who cares?
When Christina Aquilera sang "Voulez vous couchez avec moi?" in the song "Lady Marmalade", was she using the French word "vous" as the formal second person singular, or as the second person plural?
Given that the Welsh language does not use the letter "Z", how many words are there in the "Z" section of the official Welsh dictionary?
How do you know if your bagpipes are out of tune?
Why do they have Braille on the buttons at drive-in ATMs? Why do you never see baby pigeons? Why aren't these questions obvious?
"No two nations with a McDonalds have ever fought a war". True or false? How about "No American has ever died in space"?
Sweden and Denmark -- only a long time ago, Germany -- most recently. France -- incessantly, but Portugal -- never. Given that the context is EU Member states, what?
The principle that everybody's vote should count equally was enacted in the UK before the USA - true or false? Give dates for both.
How much bigger than London is Los Angeles, in terms of population?
Cunt, fuck, shit, piss - which Anglo-Saxon epithet is the odd one out?

Answers in the comments section ...

posted by the management 12/24/2002 01:24:00 AM 1 comments

Monday, December 23, 2002

Shine your light on me ...

edit Welcome Brad DeLong readers. Welcome also, to a slightly smaller number of Mark Kleiman and Patrick Neilsen Hayden and Junius readers and thanks for the nice things those guys said about me. I'd just like to point out at the top of this article that I'm having real misgivings about the way in which it's been taken (or to be less mealy-mouthed, they way in which I wrote it). I like Ronald Coase's work, really a lot. My only disagreements with him have to do with lighthouses, and the outraged tone of this article reflects my disappointment at discovering that he had feel of clay. I'll probably feel a lot more equanimous about this subject once I've calmed down in a couple of weeks' time. I'd also like to point out that there is a real difference between direct government provision of services and governments' contracting out services to the private sector, and that if Coase had been making this point, it would have been well made. However, I am pretty sure, and B DeL appears to agree, that Coase wasn't making this point; he was unwisely trying to claim a new province for his theory of Coasian negotiations. You might want to read my contribution to the comments section on Brad's article for a few addenda to this one. Finally, I don't think I'm nearly hard enough on Samuelson in this article; I personally regard his sin of not checking as being far less serious than Coase's of checking and not giving the full story, but he is also pretty culpable in saying some things about lighthouses that weren't true. I have a lot of beefs with Samuelson, some discussed in past articles, and a fair few scheduled for next year. Anyway, on with the fun ...

In keeping with old tradition, I would like to dedicate this post to those men who will be spending Christmas alone, in the lighthouses around our coast, selflessly guarding against wrecks in solitude.

Actually all UK lighthouses have been converted to automatic operation for quite a couple of years now, so instead of that, today�s post is dedicated to Jim Glass, a regular inhabitant of various comments sections who has done an admirable job in keeping me honest over the last week. Post-lunch (that being the only real excuse), I have on various occasions shot my mouth off on the subjects of Adam Smith never mentioning the Physiocrats in �Wealth of Nations� (he did) and of Ronald Coase not having had a really nasty spat with Paul Samuelson on the issue of lighthouses (he did). So well done Jim for picking me up on both of �em, and we�ll ignore the fact that he called Wynne Godley a crank (them�s fightin� words).

In any case, one of the good things to have come out of my little rush of blood to the head is this link: The History of British Lighthouses, provided by the British Lighthouse Society. It�s so interesting that I ended up dropping what I was doing (the threatened �longer piece� from the last post) and decided to instead investigate the Coase-Samuelson controversy on lighthouses. Stick with me, I promise that this is less boring than it sounds.

The Controversy

First up, I�m going to need to make a full disclosure; I haven�t read the full Coase paper on lighthouses in economic history, because it isn�t on the Web and I haven�t had time to get hold of the book. However, a quick google search for "Coase lighthouses" reveals a lot about the subject, and I've looked through those pretty thoroughly. In any case, the use to which an academic article is put, is usually much more important to the generality of the world, than the specifics of what was said in the first place. It is my opinion, (an unpopular one with academics) that academic economics ought to be subject to the same sort of product liability as handguns are; that there is a duty on the manufacturer to go out of his way to make sure that no harmful use is made of his product, and that it is not good enough to simply drop a concept as toxic as "shock therapy privatisations" or "liberalised capital markets" into the world and then blame other people for abusing it.

So anyway, the original Samuelson-Coase controversy. It stems back to a paper by Coase on "The Lighthouse in Economics", which set out as an attack on the typical use made by economists of lighthouses as a public good. Lighthouses make a pretty good example for explaining to undergraduates what a public good is, because they are paradigmatically non-excludable; you can't stop them from shining on people who didn't pay for them. The main thrust of Coase's article was against comments made by Mill, Pigou and others, but he also paused to have a crack at Samuelson, who at that time was author of the most popular economics textbook, and who had used this bog-standard example in the chapter on public goods.

The problem being, unfortunately, and as far as I can see, that like so many well-meaning New Deal liberals of his kind, Samuelson had to have a fucking cherry on top of it. He wrote in his book that, not only did the non-excludability of lighthouse light mean that it was unlikely that yer basic Arrow-Debreu model of competitive equilibrium would converge on the optimal level of lighthouse production, but that he actually had something approaching a mathematical proof that the only possible way in which you could provide lighthouses properly was to pay for them out of general taxation, and then to give their services to the shipping public for free. This was actually not something that Samuelson needed to argue his point; as far as I can tell, he was just trying to hammer home the concept of marginal cost pricing; the marginal cost to a lighthouse of shining on another ship is zero, so the marginal cost to a ship of being shone on ought to be zero in an optimal solution. But in trying to punch home this message to the thick kids, he left what can only be described as a massive bloody great hostage to fortune.

The hostage to fortune being that, as anyone who fancies joining the British Lighthouse Society will tell you, for most of the history of the United Kingdom, a sizeable proportion of its lighthouses have been owned, operated and financed by private individuals and corporations. This revelation was the main theme of Coase's lighthouse paper, and since in general economists are revolted and terrified by anyone who appears to have anything approaching a clue about the facts of a matter, it threw the profession into hysterics Samuelson in particular, appears to have lost his temper a bit.

Of course, neoclassical economists being the chaps they are, this hasn't stopped the profession from continuing to use the lighthouses example as if there was no problem with it. However, as is usually the result when this particular pathology of the profession swings into action (viz, the Cambridge Capital Controversy, a past and future subject of this blog), ignoring the lighthouses problem didn't make it go away. A quick glance at that Google search reveals that there are a lot of people out there on the Internet who believe that orthodox neoclassicism said that only the government could build lighthouses, that Coase showed that free markets provided optimal levels of lighthouses, and that this disproves that there could ever be public goods. Score another victory for the head-in-the-sand faction of the modern economics profession.

But what's the truth about lighthouses?
Looking through the actual history, however, it is hard not to come away with the feeling that Coase materially over-sold his results, and that Samuelson was hard done by. Thanks to Jim Glass for this extract from an interview with Coase in Reason magazine in 1993.

Reason: What can you tell us about lighthouses?

Coase: Economists had always used this as a service that had to be provided by government. How could a private provider ever be paid for it? So without government operation you wouldn't get lighthouses. My usual practice is to look into what actually happens, and if you look into what actually happens you discover that there's a long period in which lighthouses were provided by private enterprise. They were financed by private people, they were built by private people, they were operated by the people who had the rights to the lighthouses, which they could bequeath to others and sell.

Some have said what happened in lighthouses wasn't really private enterprise. The government was involved in some way in setting the rights and so on. I think that's humbug because you could say that there's no private property in houses by that logic, since you can't transfer your rights to a house without the examination of title and registration and without obeying a whole series of regulations, many enforced by government.

Reason: I thought it was interesting that the shippers were the ones that lobbied to get the toll because they wanted the incentive for the private investor to build the lighthouse. What reaction have you had over the years when Paul Samuelson or other economists would use this example of the lighthouse as a necessary government function?

Coase: Samuelson says I was wrong and he was right, and he froths at the mouth when people talk about the lighthouse example. He says Coase is wrong; he doesn't overcome the free rider problem. Who are the free riders? The foreign ships going past the British coast which do not call at a British port. Using Samuelson's approach, what do you do? Do you ask the foreign governments to give you a subsidy? Do you tax people in Britain because the foreign ships are getting help without paying for it? What do you do?

My approach is to compare the alternatives. People like Samuelson like to set up a perfect world and say that the market does not bring us to this point and imply that the government should do something. They stop their analysis at that point.

Reason: Certainly if the government builds the lighthouses and operates them at a zero price to the shippers, there's a huge free rider problem there, free riding on the taxpayer. But you had to go back to the early days to find the private ownership?

Coase: Yes, that's right. From 1838 or some such date, I can't remember it, the lighthouse people were bought out and compensation was given. Samuelson says that no one would build a lighthouse with the idea of making a fortune. Actually, people did build lighthouses and did make a fortune.

Lots of extremely disingenuous stuff here. Like I say, I haven't actually read the original paper, but assuming that Coase was paraphrasing his side of the controversy accurately, we can straight away make a couple of points:

Coase and Samuelson are talking at cross purposes. Samuelson is talking about the optimal level of lighthouse provision, and suggesting that the observed outcome may not have been optimal (presumably what he meant by "he doesn't overcome the free rider problem"). Coase is assuming that Samuelson thought that lighthouses couldn't be provided at all without government intervention
Coase is very strongly implying, when he says that "lighthouses were provided by private enterprise", "no one would build a lighthouse with the idea of making a fortune [...] people did build lighthouses and did make a fortune" and poo-poos the extent to which government involvement was a factor, that lighthouses were built in much the same way in which any other entrepreneurial business invests in capital assets. He is implying without saying that the problem of non-excludability of light which gave rise to Samuelson's public good argument, was solved by free negotiation among the parties involved, and that all exchanges of light for money resembled normal market transactions between willing counterparties.

Let's look at the evidence

First a preliminary; people build lighthouses for all sorts of reasons, but there is only an interesting economic problem with respect to one or two kinds. Lighthouses which are built in order to guide ships into a port are not problematic in the slightest. They are a service used only by users of the port, they are paid for by the port authority, and one collects revenue for their upkeep by going round to the ship when it docks and asking for it, bundled with the rest of the services which the port fee buys you. Furthermore, you only make use of this sort of lighthouse if you're going into the port, so the people who use it can be separated from the people who don't and charged accordingly. Samuelson never gave the impression that he thought ports were public goods, so there is no reason to suspect that he thought that port lighthouses should be a particular problem

There is another kind of lighthouse, however, which is much more of a problem. If you want a lighthouse to warn ships away from a hazard of some sort, rather than to draw them toward a port, then you do have a problem in collecting your revenue; if you're manning the lighthouse on Eddystone Rock, then if you're in a position to walk over to a captain to deliver your bill, he's most likely not in a position to pay you, because he's crashed. In this case, it's also much more difficult to establish who used the lighthouse, and next to impossible, with light as it is currently designed, to stop someone from using it if they aren't prepared to pay. Hence the problem. Obviously, some lighthouses perform both functions (think of a port located next to some rocks), but it's worth noting at this point, that "lighthouses" don't form a homogeneous class of capital assets.

But anyway, it seems strange to me that Coase used the date of 1838 in talking about privately owned lighthouses. Assuming he means 1836, when Trinity House began to buy out the privately owned lighthouses, this marked the end of privately built lighthouses, not the beginning. There had actually been privately owned lighthouses for more than five hundred years.

How do we know this? Well, there exists a Royal Patent dated 1261, in which Henry III allowed some private individuals to collect "light duties" from shipping to pay for the upkeep of a light. As Ken Trethewey's excellent history puts it:
These Patents were the ultimate permission of the monarch and given under the 'Divine Right of Kings'. To fail to acknowledge this authority was considered treasonable. The Patent was given to the Barons of the Cinque Port of Winchelsea who were entitled to collect two pence from every ship that entered their port. This is the origin of the entire principle by which lighthouses have been operated for centuries right up to the present: a system of taxation known as 'light dues' based on the rule that the user pays.

To be honest, a system under which the government of the day gives you the authority to demand a payment from every ship that enters a port, and which states that failure to recognise this authority is treason (at the time, punishable by death), does not really look to me to be very much like a free market exchange. In fact, in giving the producer of a product the authority to demand on pain of death or imprisonment that everyone in a particular market has to buy their product, would seem to me to be very much more government involvement indeed, than the current rather light regulation of the housing market. I'm not saying that the analogy Coase used in that Reason magazine interview was completely outrageously misleading. I'm just sayin'.

There are numerous other episodes in Trethewey's history which rather demonstrate that the provision of lighthouses by private individuals was about a million miles away from your classic interpretation of a free market. The debacle of the Isle of Man, on which ships were regularly scuppered between 1771 and 1818 while Trinity House and a group of shipowners wrangled with a Mr Ludwidge over the matter of a poorly located proposed lighthouse which ships passing en route to Liverpool would have to pay for despite being exposed to the risks of the Calf of Man (which remained unlit). There is the case of Sir John Clayton, who obtained patents for five lighthouses, but only ever showed a light in two of them, precisely because his patent did not provide for him to charge a compulsory levy. And there are numerous accounts of "rent-seeking" behaviour in lighthouses, whereby lighthouse entrepreneurs with good political connections sought to build unnecessary lighthouses in anticipation of the stream of light duties they would be allowed to extract.

From all of the above, I draw two conclusions:

Ronald Coase is going straight on the "always check" list, which is a pity, because I've always liked his work. The analogy to house purchases is insanely misleading; the main source of revenue for private lighthouse owners was a compulsory levy, which was backed by full force of statute law and which was even collected by HM Customs and Excise on behalf of the lighthouse owners! This is either horrendous historical scholarship or intentional misrepresentation; subject to the caveat that he may have been misquoted by Reason magazine or misrepresented his own work in the interview, I have to say that the lighthouse study does not prove what Coase and his admirers seem to think it proves (a couple of prominent economists agree on this point)
Second on methodology, while the source of my sympathy for Coase is his methodology; his determination to always look for the real world example rather than the "blackboard economics" proof, this is one area in which he and Samuelson both screwed up, and it was by adopting the arrogance which is the hallmark of the economics profession. Samuelson had a good argument about the optimal provision of lighthouses, and if he'd studied the history, he would have come up with the Isle of Man and Sir John Clayton examples to show that non-excludability of lighthouse services led to real problems, which caused real ships to avoidably crash. But he had to, as I say, put a fucking cherry on top by overextending his sensible blackboard argument into a generalisation about the world. Coase then, correctly and admirably, called him on it by falsifying the generalisation, but then fell into the trap of forcing the pieces to fit into his own grand blackboard generalisation -- that free market negotiation between willing participants could always solve problems of resource allocation so long as property rights were well defined.

We shall conclude this sermon with a hymn:
Eternal Father, strong to save,
Whose arm hath bound the restless wave,
Who biddest the mighty ocean deep
Its own appointed limits keep;
Oh, hear us when we cry to Thee,
For those in peril on the sea!

posted by the management 12/23/2002 06:28:00 AM 0 comments

Wednesday, December 18, 2002

Incoherence theory of truth

Working on a bigger piece, but in the meantime a few random observations:
The world and his wife is shouting �why are CONSERVATIVE REPUBLICANS being so much louder in their condemnation of Trent Lott�s racism than LIBERAL DEMOCRATS??? Ever notice that nine times out of ten, the guy who�s making most of the noise about that terrible smell, is the guy who farted?
Brits often have a lot of fun at the expense of Americans by mentioning the popularity of the �Mullet� haircut. But I think it�s a British invention. A small prize to anyone who can find a citation for a white-trash American sporting a mullet which predates the Def Leppard album �Hysteria�.
If the Cherie Blair story was really as important as the UK press seem to think it is, you�d have thought that I would know somebody who cared about it, wouldn�t you? On the other hand, it does seem mildly scandalous that Tony Blair has �500K to spend on flats for his son; good luck to him for earning the money, but if I wanted a fucking plutocrat, I�d have voted Tory.
On a similar tack, if Shania Twain was really as popular as Radio 1 thinks she is, surely I would know someone who doesn�t outright hate her fucking records? God I miss GLR.
Needing a good night�s sleep is simply not compatible with snooker on the TV from 11.15 to midnight. Long after golf, polo and even ice hockey are integrated, professional snooker remains a sport for white people only. It�s the amount of time they spend in darkened halls. Even the black players are white.¹
Apparently, according to the Bain report, being a fireman is a really good job. So fucking what? Surely the task of rescuing people from burning buildings ought to be a good career! The working class needs its aristocracy, and why shouldn�t this be the firemen? Does capitalism actually demand that nothing be better paid or more interesting than a call centre in Glasgow?
Wouldn�t the political case for free trade be strengthened if one, just one American university took the opportunity to sack its professor of Economics and replace him with an Indian professor of Economics on half the wages? Just to sort of show willing, really.
I am still getting sleepless nights because about two months ago someone suggested that this weblog was making them think of moving in the direction of an economics degree. Just to be clear, the official position of D-Squared Digest is that nobody under the age of 25 is allowed to read this blog unless they promise to consider its contents to be some sort of erudite academic joke. Spouting heterodox economics is a massively career-limiting move, as is arguing the toss with your economics prof instead of getting a grounding in price theory. I�m starting to think this way with the luxury of an undergraduate and business school economics education and a decent job paying the bills. I�d hate to think I�d condemned some young soul to a life of unemployment and frustration.
Of course, if your economics prof is of a heterodox temperament, like Rob Schaap (yo Rob), you shouldn�t give him any fucking lip either. Little bastards. Bah.

The season of goodwill starts soon, apparently. I�ll do my best.

¹This joke (c) Tess.

posted by the management 12/18/2002 06:06:00 AM 1 comments

Monday, December 16, 2002

Pensions (too tight to mentions)

Well ... some call it hypocrisy, others call it "balance", me, I'm a neutral arbiter. But despite yesterday's pissy little rant about "deafening silences", there are a few issues where I am always personally unable to believe that nobody cares about the same things as me. The issue which is disturbing my digestion at the moment is that of defined benefit pensions ...

[Do you know, the moment I typed that sentence, I suddenly realised why it was that nobody cared? It is part of the folklore of direct mail advertising that the three words which are most likely to attract readers' attention are "free", "sex" and "chocolate". It is a hunch of mine that the three words most likely to turn off any incipient interest are "tax", "regulation" and "pensions"]

Nonetheless, for all that people don't care about pensions, they ought to care about pensions. I mean the word "ought" here in a normative but non-moral sense; the mass of the world are not bad people for not caring about pensions, but their lives would be better for them if they cared about pensions. Because, with the possible exception of war in Iraq, the current phenomenon which has most potential to effect the aggregate welfare of the developed English-speaking world, is the "reform" of pensions. Another lexicographical note; when I use the word "reform" here, I mean it in its normal sense, the sense in which advocates of reform throughout the ages have used it. In other words, I am using "reform" as shorthand for "a disgraceful attack on the common man by those better off than himself, which is made to look less disgraceful by lying about it".

I'll use scare-quotes to make it clear that by "reform", I mean nothing of the sort.

The "reform" in question is the ongoing replacement of final salary pension schemes by money purchase schemes in the private sectors of the USA and UK. If you've read my mug's guide to the subject (not many people did, possibly because I was a bit patronising to people who hadn't heard of the subject), then you'll know that, whatever the whys and wherefores of your personal beliefs about what you'd like to do in saving toward your retirement, it is impossible to deny that a shift from final salary (also referred to as "defined benefit") pension schemes to money purchase (or "defined contribution") schemes, represents a transfer of risk from the employer to the employees. I'm using "impossible to deny" here in its strict sense; there is a mathematical proof of this proposition.

Now, transfers of risk aren't always one way transactions; when you insure your car (or for that matter, your life), you transfer risk to the insurance company, but in general this is a transaction which benefits both parties. On the other hand, it's also a transaction which is noncoercive and typically takes place in a competitive market between relatively well-informed parties. Changes to pension schemes often lack any or all of these crucial factors. I'm not saying that all (or any particular) instance of pensions "reform" is a hell of a rip-off for the employees. I'm not saying that the fact that employers are mad keen for pension "reform" should probably be considered pretty good evidence that there's something in it for them. I'm not saying any of these things. I am, as they say, just sayin'.

Let's start off with an analogy. Say your cousin Kevin borrows ten pounds from you on Monday, telling you he's going to put it on a horse running on Sunday at ten to one. Then you see him on Wednesday, and he tells you he's made a decision. Instead of paying you back the tenner, he's going to give you half his winnings on the horse if he wins, and nothing if he loses. What would you do?

Yes, right, wring his fucking neck.

Quite. And it is my contention that this is exactly the sort of thing that is being carried out under the name of �pension reform�. I�d hesitate to say at this point that pension law and economics are extremely complicated, and that it is certainly far beyond my ability to pass definitive judgement on any particular actions of any particular pension fund, its sponsor or its trustees. It�s often the case in this field that seemingly innocuous measures can actually be quite deviously awful, while actions which appear prima facie to be unconscionable confiscations are actually perfectly legitimate risk-sharing transfers. I don�t want to get into any specifics. But as to the question of whether the general shape of what is happening to pension provision in the Anglo-Saxon economies passes the ISDTTMIWHFN test (if someone did that to me, I�d wring his fucking neck), my personal assessment is that it doesn�t.

It clarifies matters considerably to think about the question in the following manner. In general, we say that there are two types of funding used by companies; debt and equity. However, Marx and Ricardo, among others, noted that there is a third kind of finance, which is both far less well-defined under common law, and often quite material to a company�s financing, and that is deferred wages. If debt finance is the proportion of a company�s capital assets which are bought out of money advanced by creditors in exchange for a promise of repayment, and equity finance is the proportion of a company�s capital bought out of money advanced by investors in return for a fractional title to those assets, then deferred wages is that proportion of a company�s capital assets which are effectively bought out of the sale proceeds of goods produced by workers who have not yet been paid for producing them, in return for which, those workers get ... what?

Deferred wages finance, like bank loans, comes in short-term and long-term varieties. The short term, �working capital� kind of deferred wages finance is simply generated by the system of paying wages partially in arrears, and having paydays once a month rather than paying workers immediately they produce a piece of work. Although this is often ignored in classical theories of the financing of an enterprise, economic analysis has no real problem in dealing with this; it is simply a short term, working capital loan advanced by the worker to the employer. In some cases (I am thinking particularly of commission salesmen working on annual bonus payments), the sums can be really quite substantial, and ever since Marx and Ricardo�s day, the employees of bankrupt firms have been surprised to discover that without realising it, they have effectively been acting as creditors.

However, once we have carried out this piece of fairly obvious analysis, the conclusion seems inescapable that the pension fund obligations of a company also represent financing claims on it. Although this fact is obscured by the thickets of legal wrangling which surround the ownership and trusteeship of pension fund obligations, the truth of the matter (since about the 1980s) has been evident on the face of the balance sheet of most companies; the pension fund obligations are recorded as a long term liability; a claim on the cashflow and assets of the company which is not debt, not equity, but which nonetheless represents a binding obligation on the firm, one which was provided by someone in anticipation of a future benefit and one for which some present benefit (presumably, a higher cash wage rate) was sacrificed.

Right now, we can see that an important and politically significant truth is concealed by the very language of pensions-speak. Pensions are not �employee benefits� any more than dividends are �shareholder benefits� or coupon payments and principal redemptions are �creditor benefits�. Pension fund members are suppliers of investment capital to the firm, not vassals or serfs of it, and the payments made to retirees are not tokens of gratitude for long service, but the redemption of investments made over time. I only hesitate to publicise this fact more as I fear that it would make the retired persons� associations of the self-titled �Greatest Generation� even more insufferably self-righteous than they already are.

But the analysis I want to make right now is a comparative one of the legal rights and protections afforded to the three classes of investors. Debt investors are, of course, protected by the full apparatus of the common law; though it be ever so complicated in its development and specifics, the law relating to debt investments stems from the tort of breach of contract, and most of its judgements can be reasonably predicted by the consideration of the nature of that tort. The law relating to equity investors is somewhat more modern as it only came into being with the creation of the joint stock corporation in the eighteenth century, but by the Companies Act 1824, it was quite recognisable in its modern form; the protection of equity investors stems from a fiduciary duty of the directors and officers.

The law relating to investors through deferred wages, however, is much less clear; much of it is implicit rather than explicit and all of it is much more recent and less settled. For short term wage creditors, things are reasonably clear; unpaid salaries rank (under UK law; yours may vary, but not too much) just above floating charge-holders; behind mortgagors, bankruptcy practitioners� fees, excise duties and PAYE, but ahead of corporation tax and outside unsecured creditors. Things become much more murky when one gets into the matter of bonuses and deferred commissions, but this murk is as the sparkling waters of Lake Treviso when compared to the law relating to pension funds.

The trouble with pension funds is that for too long, they have been treated as if they were benefits provided by a benevolent employer, rather than as a long-dated financial claim. Pension fund claimants have few rights; they have the right that the employer keep sufficient financial asset holdings to reassure an actuary that the claims can be paid, and that these asset holdings be held in a trust legally separate from the company. They have the right to appoint a minority of the trustees of that trust. And that is about it.

Which brings us back to the ISDTTMIWHFN issue above. Although there is no contract between us, I had provided �10 sterling of finance to my cousin Kevin on the understanding that we had a debt-like contract in which he was bearing the risk that the underlying investment (the horse) would fail to produce its expected returns. When he chooses to take advantage of the ambiguity of the contractual relationship between us to unilaterally alter our contract to an equity-like one, in which I share the risks and rewards of being a bettor on the 3.30 at Kempton Park, then, whatever my personal beliefs regarding the likely investment performance of Lucky Boy, I would consider myself to be in a WHFN situation.

Add on top of this the fact that according to the last survey, the shift from final salary to money purchase pension schemes in the UK has resulted in, on average, a halving of the cost of provision to the companies who run the schemes (which however way you cut it up, has to be considered equivalent to a c5% cut in wages!), and the fact that nobody seems to care about this becomes even more curious. All in all, it�s a shame that pension fund economics isn�t as interesting as horse racing.

posted by the management 12/16/2002 11:33:00 AM 0 comments

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