The Occupy Movement

Naturally, the Occupy movements around the world are generating quite a bit of media attention, and not a little bit of right wing scorn, and some left wing support.

I wouldn't want to make sweeping statements about what one side or the other says, but I can't help noticing that the essential point being made by right wingers, once again, is that you can't be socialist, or have sympathy with non-business owners, and also be Christian.

The man imposing as Archbishop Cranmer is at it once again, with his last of the linked posts somehow comparing what Fraser did at St Pauls inversely to what Jesus did in throwing traders out of the Temple in John 2:12-25.

In the Torygraph, Tim Stanley writes that those who profess support for the protesters are "more socialist than Christian". What about saving souls, he writes? Well, what about the fact that currently there's a whole load of non-Christians camped at St Pauls? What about the fact that St Pauls isn't throwing them out but instead engaging with them? Stanley justifies his attack on Fraser in particular in the same way that "Cranmer" does - that Fraser is a liberal Christian, and of course once again we're into the internal bickering that goes on, rather than focussing on "saving souls" - it may be that Stanley needs to begin practicing a little more of what he preaches.

Nonetheless, the point of this post isn't so much to attack others as to set out my take, and probably along the way justify being slightly left of centre (I'd hesitate to call myself an outright socialist) and also a conservative Christian. My position I believe is based on basic economic theory which I've learnt over the years (and supposedly teach), but also on the Biblical principles also.

Of course, we must start with the Fall, and acknowledge the sinfulness of man. This gives us the context in which to study all human interaction, something which economics also attempts to do. Economics essentially splits up interaction into a spectrum, with what is often called the non-cooperative solution at one end, where we all individually go about out own interests in our own way, and the social planner solution at the other end, where some benevolent social planner decides what will happen. The latter is essentially unachievable since as any Christian knows, the possibility of a benevolent social planner (outside of God) is essentially zero in our sinful world, but nonetheless this possibility does bound the spectrum of possibilities.

Now, right leaning folk, including those of a Christian variety, are rightly suspicious of power concentrated in one person's hands - any dictator. Left leaning folk should also be wary too but for some reason aren't - the Bible tells us we are sinful, hence any system which concentrates power in the hands of one sinful person cannot be good. Hence we have the idea that capitalism, and markets, are good because they do not concentrate power in the hands of one particular individual.

The problem though, is that this conclusion is based on a number of conclusions in a simple theoretical model called perfect competition. The conclusions from perfect competition that we all like are bound up in the first and second theorems of welfare economics, notably that equilibria from such competition are Pareto optimal in that we cannot improve the resulting allocation of resources without reducing someone's welfare.

But moreover, these conclusions are based on a number of conditions holding, notably that there are no barriers to entry for firms, no barriers to trade, and an infinite number of traders hence no one of them can influence the price - not to mention perfect information, and an absence of any missing markets, or what economists sometimes call externalities (things that cost you but for which you aren't compensated - or vice versa).

As a result of one or most or all of these simple assumptions failing, usually the price mechanism fails to do its job, and this often concentrates power into the hands of a small number of individuals, those who can play the system to their advantage. There are plenty of results in economics which tell us about the adverse selection (the market selecting not the best producer of a product) that results, and the consequences of this. Peaches and lemons, anyone?

So, those of us who lean more to the left at this point say: Shouldn't something be done? Shouldn't we protect those that are the victims of abuses of power, misselling, etc?

Those on the right say, rightly, "not necessarily". There are market-based solutions. Car dealers that sell dodgy cars get a bad reputation and hence nobody buys from them in the future - better dealers offer warranties to send a signal to potential customers that says "I'm reputable".

However, there are decisions and markets in which bad reputation in the light of an unfortunate trade is no concolation. In healthcare, if you happen to pitch up to a shoddy disreputable provider (Nick Riviera in the Simpsons, for example), the cost to you could be death, or severely impaired health afterwards.

The principle is this: If the cost of information being provided to all in markets is high (it isn't, for example, in PC markets via PC magazines), if the cost of a bad decision is high and irreversible, then there is a case for intervention, and it is unlikely that the market can provide solutions.

Extreme right wingers at this point say "how do you quantify these costs" and still choose to ignore them at this stage, but we'll ignore them in the interests of getting along.

What we've established is a role for government. Not for a socialist dictatorship, which it would seem is what any right winger thinks all left-of-centre yearn for (see "Cranmer's quote: "The moment you rail against capitalism and economic liberty, you usher in tyranny, despotism, absolutism, totalitarianism and dictatorship." - utter dross when we have already identified here that the market system does not provide liberty for the person duped into the dodgy healthcare procedure that went wrong). Sure, we open up the possibility of cronyism since governments have their own incentives and are highly corruptable - but that cronyism is there anyway when businesses cosy up to governments - what's new here exactly?

What we've also established is that a fully free market system would likely lead to considerable inequality as those who can grab hold of the levers of power (appeal to the legal system is all well and good, but we all know that most people without scruples don't play by the law and get out while they can). Such situations can lead to great levels of social unrest, ordinary folk on the street with depressed incomes noticing those on much higher incomes seemingly benefitting from something unfair.

Now one response is to in a condescending manner tell people they shouldn't envy. I'd have loved to have seen these right wingers wandering around London in August telling the amassed hordes not to envy. Now, of course, we shouldn't - God doesn't permit us to covet our neighbours. But we are sinful and hence we do, and God also makes it clear it is not for us to judge others with haughty eyes.

As "Cranmer" rightly writes, "Caring for widows and orphans, feeding the starving, and clothing the naked, are at the very heart of the Christian vocation", and indeed he is correct. But the bottom line is this: the free market will underprovide charity because it has a positive externality. Should we just wait for Heaven and say "the government shouldn't force me to be charitable"? I believe the Bible is equally as scornful of those waiting for Heaven and doing nothing here as it is of those who lose sight of Heaven and think they can make it here somehow.

So my bottom line is this: The market system is the best system in a fallen world, but it is not perfect. Its imperfections should not be idly observed, they cause genuine pain and grievances and social unrest and most importantly for (Christian) right wingers, deprive people of their liberty, being made in God's image. Our job is not to judge thus those engaged in that, feeling that, but instead to think about what could be done about it. For sure, protest might not be the most effective way, and in particular protest in a church (!), but the bottom line is that those on the right sitting back and judging ("Cranmer" and Stanley amongst others) are just as wrong as the Pharisees were and any of the other many characters in the Bible for which God devotes his distaste.

The Conservatives: The gift that keeps giving...

I try to keep this blog as free from politics as possible, which may be hard to believe given its title refers to the political spectrum, but nonetheless I do try. Again having said that, a motivation to set this up was friends of mine who are Conservative voters suggesting to me it was the "Christian" thing to do, much to my consternation.

I think the main reason I try and keep away from politics and government action is that I don't think that governments should be forcing people to do "Christian" things; so I don't think abortion should be outlawed, and I think all other government actions that discriminate unfairly against people made in God's image is wrong.

I believe Christians vote Conservative because they believe that small governments better enable people to get on in life; bigger governments stifle effort and creativity, crowding out small business and entrepreneurship. But this involves a healthy level of confidence in market mechanisms to deliver, and I believe too high a view of the goodness of man - particularly too high for Christians aware of how sinful man is.

Why do I say this when from Adam Smith onwards, economists have espoused the virtues of the market in mitigating man's own greed and enabling it to contribute towards the greater good? Because there are plenty of situations in which the price mechanism fails. It doesn't need government intervention for the price mechanism to stop doing its job of revealing relative scarcity and relative abundance, it just needs unscrupulous men and women.

I've mentioned in previous posts how a "nice equilibrium" where everyone does a good honest job and hence everyone trusts everyone to do a good honest job - the incentive is there for someone to deviate and do a bad job, and get out while they can (and even if they fail, their actions will succeed in destroying the good equilibrium since now people know with non-zero probability there are some bad people about).

All this by means of an introduction to what I was planning to write about - recent Tory announcements regarding the economy. In particular repeated comments on the 50% tax band, and also recent talk about abolishing all employment protection.  The bottom line of these is a trust that despite bosses being unscrupulous, the end product is a much better, clean, shining functioning economy because of competition - the bad bosses, the nasty ones, will be weeded out and left on the scrapheap if they don't become nice shiny bosses.

If I sound a little sarcastic there, it's because I don't buy it. Those proposing it probably think it has basic economics on side, but it may do: Very classical economics that hasn't considered much recent economic study into areas such as industrial organisation, game theory and behavioural economics. There's no point in me repeating what Chris Dillow writes about much more elegantly, but if you want some demolitions, here are a couple.

Now the question is, as Christians, what should we be doing?  James 1:27 says "Religion that God our Father accepts as pure and faultless is this: to look after orphans and widows in their distress and to keep oneself from being polluted by the world."

I seriously wonder how scrapping the 50% tax rate on those earning above £150k (polluted by the world?!), and stripping away all employment rights of workers (usually pretty low paid - widows and orphans in their disress?!), counts here. The hardest of hard Tories would say "Charity should do the hard work", yet this again ignores some basic economics: If there's a positive externality (net social benefits greater than net private ones) the market (charity) will underprovide it. As was evident before the Welfare state.

Of course, I'm proposing little positive in this post, just getting some things off my chest. The main one being this idea that a small government is what we need, and that it's somehow more Christian, if that were possible.

Executive Pay

Apparently, it's up 50%.

As always, Chris Dillow has something interesting to say about this from a left-of-centre perspective.

What do I think as a Christian, and someone who leans left of centre (but not all that much to the left)? Is it immoral that folk get paid the marginal product? Nope, but then the question is whether they are being paid their marginal product, and that's something that Chris pushes at in his blog.

Your libertarian, right-leaning person (Christian or otherwise) will say that we shouldn't stand in the way of this: The market is determining the right level of remuneration for these individuals, yet is it? Is the price mechanism really at work here?

Basic economic theory says that as well as wages being determined by the marginal product of the worker, it also points to the existence of economic rents that can be exploited by either the principal (employer) or agent (employee) in any given wage situation - there is wage bargaining going on. Right-wingers of an extreme form would say that there exists no power without government, but executives certainly have some form of power to extract the kinds of rents they extract - i.e. the kind of pay they manage to get, which seems to be entirely independent of their performance (again see Chris's blog linked above).

Funnily enough though, I think the solution to the problem is to free markets a little bit more. From my limited understanding, the shareholding structures of big companies is skewed in favour of larger investors (which are usually institutional investors), and these large investors do not necessarily exert the kind of influence that might be hoped for. If instead legal structures were such that the voices of small investors were given more say, then we'd certainly see more shareholder activism, which might not be a bad thing in helping bring companies more in line with social marginal costs and benefits rather than just private marginal costs and benefits.

My Supposed Hubris

I do macroeconometrics, if pushed to define one of my research areas. This is a classic area for criticism by those towards the right of the political spectrum, not least Arnold Kling. Kling has an essay entitled Science of Hubris, in which he carries out his usual attack on what he calls scientism, i.e. any attempt to put really precise numbers on things that we can't be precise about. In Kling's mind, we just can't be precise about any kind of economic aggregate, notably GDP, or investment, because there's just too much going into them, and these aggregates are made up of very different things too.

So essentially, he dismisses the entire field of applied macroeconomics because statistical agencies aren't able to add things up particularly well, and because, well, economists shouldn't be thinking in such broad terms; they should only be thinking at the microeconomic level. Those who practice is, apparently, are the very epitome of hubris; that is, to have "excessive pride or self confidence" as my Mac's Dashboard dictionary tells me.

Of course, anyone who puts their head up above the parapet is liable to accusations of hypocrisy, but folk like Kling at EconLog, and Boudreaux at Cafe Hayek are remarkable examples of precisely this. Kling and Boudreax (and others on their respective blogs) have remarkable confidence in one thing, and one thing only: The price mechanism in a fully free market. They are scornful and incredibly bitingly sarcastic (esp. Boudreaux) of those who dare to suggest anything otherwise, who dare to imagine that government intervention could possibly be a useful thing. To be that requires a heck of a lot of hubris, from what I can see.

And it's not limited to that; Russ Roberts and David Henderson at EconLog had a number of posts about Ideological Turing Tests, and how those on each side of a debate characterise the other, declaring (of course), that those on the right, those nearer to the libertarian school of thinking, were much better than those anywhere else on the spectrum at accurately describing the position of their opponents. Then just today, a post about confidence, where the application is not to Austrians with their remarkable over-confidence in the price mechanism in many inappropriate contexts but, yes, you guessed it, Keynesians (or at least, their crude caricature of them). Utterly stunning the amount of times I think about pot calling kettle when I read Hayekian/Austrians on their blogs.

But back to macroeconometric models. What I struggle to understand is this. If an econometric model is built that happens to include all the relevant explanatory variables for an aggregate variable (e.g. inflation) such that the residuals are white noise, then to all intents and purposes, that aggregate variable has been explained. A humble presentation of such a model would not make bold predictions about the future (forecasting is entirely different to macroeconometrics), but would instead make suggestions at what had been learnt from this exercise. But Kling and those in his camp would disregard it entirely.

Kling et al suggest that one of the most dangerous things about Keynes and his teaching was that he let loose governments and convinced the common man that there was intellectual rigour behind their own whims and desires. Equivalently though, via their scepticism of absolutely everything other than what they previously believed in, Kling et al promote an unhelpful atmosphere of scepticism through which genuine academic progress is hindered - all because of their ideology rather than any desire to be scientific in their pursuit of knowledge.

What is the point of Libertarian Economists?

What useful function to they perform? Economics is a practical discipline, studying the allocation of resources by (semi) rational agents in the context of conflicting interests. On of the agents that will always exist is the government - it's fair to say few examples of anarchy have succeeding, for whatever reason (man's desire for power and to control, probably mostly).

The mere existence of that government will mean that there will be an incentive for some to lobby it to further their interests - creating laws, tariffs, imposing taxes, whatever it may be.

So, what is more useful: Libertarians, who spend their entire time talking about how corrupt, inefficient and a pure waste of space government is (here's just one of hundreds of examples I could link to), or other economists who attempt to study the nature of the beast for what is it, and try to devise the best possible solution given that government will always exist and hence incentives to manipulate government will always be there?

Libertarians, who essentially just sit on the side bleating on about how terrible things are, or other economists who actually try and understand the nature of these interactions in order that they may, in the future, reduce the problems of crony capitalism? In response to what I think the latter group of economists do, libertarians would provide some pithy quote from Hayek about how because of information constraints, it is silly of us to think we can design things better. How lame is that? This essentially lumps libertarians in with folk like Creationists who try to get in the way of learning more about the world around us.

I think you know where I stand. I think this is the aspect of libertarians that irritates me most of all - their lack of a constructive alternative that could constitute a stable equilibrium.

I should really stop....

...however, I do keep reading blogs by libertarians. Here's one, where Arnold Kling describes another economist as using the "stupidest argument for stimulus". Apparently, that argument is that teachers are being laid off, and it's stupid because schools could instead be reducing salaries for teachers instead, if they valued these teachers so highly.

Now, of course Kling is averse to just about any argument in favour of fiscal stimulus because he is averse to just about any argument for government intervention it would seem (because the market always performs better - despite unending amounts of economic theory and empirical evidence to the contrary).

However, I think most of all it's just inconsistent of him. He says it's stupid because in economics there's always another way. Yet I suspect that when faced with the assertion "the deficit needs cutting", he wouldn't describe statements like "we must cut spending if we're going to cut the deficit" as stupid, even though perfectly equally, we could raise taxes to cut the deficit.

Maybe I'm just stupid, but I don't see what the difference is, and why Kling is also not advocating the stupidest of arguments, just because there is another perfectly reasonable way to do the same thing.

Academic Reality?

So, as you're aware, I try as much as I can to read what folk I don't agree with are saying. I read from the fringes of the academic debate quite often it seems - certainly from the right-hand side of the fringe in libertarians, and also the left-hand side with quite a few liberal blogs. Anyhow, David Henderson in classic fringe rant style posts this on "academic reality". If you read it, yes you have understood it correctly: A kid, not yet even started at university, has been able to process all the nuances and details of a number of academic fields (chemistry, humanities, English, etc), and come to the conclusion they are all populated by some extreme liberal agenda. And Henderson thinks this is a "one gritty piece of academic reality", apparently.

The liberal agenda that apparently catches this poor student's eye is that chemists have apparently in the mainstream come to the conclusion that global warming is happening. Does the kid (and Henderson for that matter) discuss why she thinks this conclusion is wrong? Does she present some evidence to suggest that, actually, global warming is not happening, or whatever is happening has conclusively nothing at all to do with human activity?

Nope, she just states that this is bias. It's propaganda, it's an agenda. It's polluting kids in the US, and all over the world. Apparently.

Henderson trumpets the rant of a student who hasn't yet studied anything at university about things studied at university. I teach at university and I wouldn't claim to have even all the nuances of my own subject understood as yet, let alone all these other subjects. Yet this kid is qualified in the eyes of Henderson to pass judgement on what is happening at all US (and presumably worldwide) universities.

I guess the botton line is that this is just those on the fringes moaning that they are on the fringe. Throwing some trite "bias" accusations to the mainstream because the mainstream doesn't really care for what they have to say. Now knowing mainstream economics as I do, I don't thus claim the mainstream is right. But I do at least expect criticisms of it to be a little less rant-style than this. Particularly when it comes to something as important as global warming. Yet the level of the debate is that climate change deniers think it's a contribution to post the rant of a kid that doesn't even start to look at the evidence for or against it.

Personally, I like to read the accounts of those I know are able to process and understand the various literatures on this. I'm talking about Prof. Sir David F. Hendry, a man who produced the ideas for two Nobel Prizes that went to other people, a man whose empirical work is as transparent and faithful to the underlying realities he is trying to model as possible. He's written a paper on climate change, it's short (17 pages), and it certainly doesn't just cry that it's all some liberal thing. It engages with the evidence from many fields, and concludes that - shock horror - something does need to be done. Not necessarily what is being done, but something needs to be done. But people like Henderson would just dismiss it out of hand as "propaganda" or something.