Intellectual imperialism and the behavioural turn in economics

Further to the decision of the Nobel committee to give Richard Thaler this year’s prize for economics (about which I bloggeda few days ago), Frank Pasquale pointed me to an interesting critique by Juan Pablo Pardo-Guerra, who picks out “three problems in economics and its relation to the ‘real world’ it inhabits”.

Firstly, it skates over the fact that what Thaler is being rewarded for — realising “that people can be influenced by (mostly social) prompts to alter their behavior” — was, well, rather old-hat in other social science disciplines. So the Swedish recognition of behavioural economics is really just “a legitimation of economic imperialism: a finding is only truly relevant if published by an economist (corollary: being an economist from Chicago helps).” Ouch!

Secondly, though Thaler’s contribution might make economics “more human—and real”, the behavioural turn “doesn’t make away with the ontological commitments of discipline, privileging market processes and individual action as the fundamental sources of virtue.” Take the metaphor of the ‘nudge’, as articulated by Thaler and Sunstein. “Rather than questioning the economics of general equilibrium”, says Pardo-Guerra, “‘nudging’ is a proposal in calculated engineering: we can build policies that create outcomes similar to those of theory by gently walking slightly irrational, bounded economic agents through the correct ‘architectures of choice’”. But who conceptualises those architectures? And within what ideological constraints?

And finally, this year’s prize confirms that to win a Nobel prize in economics, it really helps to be male and white. To date, only one woman — Elinor Ostrom — has been recognised, and Amaryta Sen is the only non-white laureate so far. I don’t know much about the overall demographics of the economics discipline, but if the Nobel list is representative then one can see why it might be more problematic than the Swedes recognise.

Apple, Ireland and neoliberal delusions

Imagine this scenario: an International authority decides that a transnational company has deprived a sovereign state of anything up to €19B in back taxes plus interest over 25 years. The company, naturally enough, screams blue murder and declares its intention to appeal the judgment. The ruling, says its CEO, is “total political crap”. So what does the sovereign state decide to do? Why, it’s going to appeal the ruling and stand shoulder-to-shoulder with the transnational company. If you wanted a case study in how power has shifted from states to corporations, then this, surely is it.

The country in question is the Republic of Ireland, and the company is Apple. The ruling that so enrages both comes from the European Commission, which has decided that that Ireland must recoup the sum of up to €13 billion in unpaid taxes (plus interest, which could bring it closer to €19B) from Apple because the deal the country struck with the company 25 years ago amounts to illegal state aid to a corporation. The commission said the deal allowed Apple to pay a maximum tax rate of just 1%. In 2014, the firm paid tax at just 0.005%. The usual rate of corporation tax in Ireland is 12.5%.

Now Ireland is a small country which, despite the hype to the contrary, is not in great economic shape. There has been a much-vaunted ‘recovery’ from the devastation caused by the collapse of its major banks and the bursting on an insane property bubble, but that recovery is largely an illusion, and confined mainly to Dublin, the capital city. Last year, the Fine Gael government called a general election and campaigned under the slogan “Keep the Recovery Going”. Outside of Dublin the electorate replied “er, what recovery?”, with the result that neither of the two main political parties was able to form a government, and now an uneasy coalition rules with the assistance of five independent members of Parliament.

Ireland’s health service, for example, is in very poor shape. Likewise its social services. So €19B is a very significant sum for a country in such conditions. It would, for example, be enough to run the health service for an whole year. You’d have thought, therefore, that the European Commission’s ruling would be seen as manna from heaven. But that is not how the country’s benighted government views it.

To understand why, you need to know a bit of modern Irish history. The Republic gained its independence from British rule in 1923, and for the first 50 years of its independence it was a poor, backward, inward-looking, priest-ridden country dominated by Eamon de Valera and his Fianna Fail party. Its main industry was agriculture and its biggest export was its young people, who left in their hundreds of thousands to seek better lives in the UK, the US and Australia. At one stage in the 1930s, ‘Dev’ waged an “economic war” with Britain under slogans like “Burn everything British except their coal”. But eventually, in 1959, Dev stood down from the premiership and became the (non-executive) President, and was replaced by his son-in-law, Sean Lemass, a technocrat who realised that the country had to become outward-looking in order to survive. Along with a visionary senior civil servant, Dr T.K. ‘Ken’ Whitaker, Lemass concluded that the country’s salvation — given that it had no natural resources, lay in attracting inward investment from foreign — mainly American — companies. The vehicle Lemass charged with making this happen was the country’s only truly dynamic government agency — the Industrial Development Authority — which had the mission of attracting overseas investment to Ireland.

In this, the IDA was spectacularly successful. Foreign corporations came to Ireland in droves, and in the process began the transformation of the country, creating jobs and bringing wealth on an unprecedented scale. The companies were lured with all kinds of incentives, including planning and infrastructure provision and exceedingly generous tax holidays. The resulting turnaround was then given a spectacular boost in 1973, when Ireland joined the European Community (as it then was), which led to a massive infusion of development funds from Brussels, much of which were sensibly spent on infrastructure and reviving the moribund rural economy.

The deal which brought Apple to Ireland conformed exactly to the IDA template. The company set up a manufacturing plant in Cork, Ireland’s second city, and eventually located its European HQ in Ireland. The taxation deal which so exercises the European Commission dates from this period. And it explains the strange reluctance of the current government to refuse the windfall that the Commission has now bestowed upon it.

As the Irish Times columnist, Fintan O’Toole, puts it,

Since the Whitaker/Lemass revolution, the unspoken rule of all Irish policy has been – don’t do anything that in any way threatens to upset the huge, mostly US-based corporations whose investments shape both the economy and a remarkably enduring political consensus. This is not mere cravenness. If Ireland has sold its soul to the corporations, it has arguably got a very good price for it – not just jobs and tax revenues but a relatively peaceful transition from conservative nationalism to global modernity. It is not surprising that the entire Establishment is of one mind on the Apple ruling – there must not be the width of an ultra-thin sheet of silicon between Apple and Ireland on this. The tricolour has an Apple logo in the centre and we will all rally behind it to ensure that the tax bite out of the apple is as tiny as the corporation wants it to be.

O’Toole, who is Ireland’s most perceptive and trenchant columnist, is strongly of the opinion that the government should take the windfall and put it to imaginative use. It could be used, for example, to

  • Build 50 new hospitals
  • Build an extension to Dublin’s Luas rapid transit system that is needed to ease the traffic congestion that is choking the capital’s social and economic life
  • Boost the supply of sorely-needed social housing
  • Fast-track the construction of a metro system in the capital
  • Abolish the country’s crippling property taxes
  • Provide a break from the additional Universal Service Charge levied to pay for the bail-out of the country’s zombie banks
  • And encourage the formation of a sovereign wealth fund.

The decision to ignore these necessary measures and appeal the European Commission’s ruling therefore represents a clear strategic decision by the government. Or, more precisely, it suggests that the country’s ruling elites are not interested in funding the measures needed to reduce inequality and improve the country’s provision of social services. This mindset believes, O’Toole argues, that

even this vast windfall might in fact be a booby prize. If we take this money from Apple, we will make the corporations angry. When the government talks of ‘reputational damage’ it ostensibly means damage to Ireland’s reputation from the EU ruling’s implication that the State was being used as a tax haven. But the reputational damage it actually fears is quite the opposite – damage to our well-earned reputation among corporations for facilitating tax avoidance on a global scale.

He’s right. Ireland has become the world centre for corporate tax avoidance. The decision to appeal the ruling suggests that neoliberal ideology rules OK in the Emerald Isle. And it shows that the Irish state has actually given up on the idea of sovereignty. It ignores the fact that

amid a longterm crisis in global capitalism, massive corporate tax avoidance is becoming politically unsustainable. And a vision of Ireland that places the facilitation of that tax avoidance at its heart is therefore not sustainable either.

In that sense, the Irish government has deliberately chosen to put the country on the wrong side of history. Or, as Yeats might have said, my countrymen have disgraced themselves — again.

Algorithmic-driven markets and the future

This morning’s Observer column:

‘When a true genius appears,” wrote Jonathan Swift, “you can know him by this sign: that all the dunces are in a confederacy against him.” We need to update this for our age: whenever a really new technology arrives, you can tell it by the fact that most right-thinking people think it’s a scam.

Thus, to the average person the idea of a “cryptocurrency” like Bitcoin seems daft. I mean to say: a “currency” that was invented by a geek; is not backed by any bank or government; has no central authority; and operates on the basis of a public ledger that is secured by arcane cryptography. It has to be a scam, doesn’t it? Well, actually it doesn’t – but it would take more space than is available here to explain why. The point is that most people can’t see the point of cryptocurrencies, which, paradoxically, is why they are interesting.

On the other hand, most people – non-geeks as well as geeks – can see the point of Uber, the cab-hailing service that is causing such turmoil on the other side of the Channel (and occasionally over here too). You download an app to your smartphone. When you need a cab you launch the app and it shows you on a map where the nearest available cars are, and you hail the nearest one. Within three to five minutes it shows up. And when you arrive at your destination, you don’t pay the driver: the fare is charged to your credit card. QED.

Compared with currencies, therefore, Uber seems pretty comprehensible…

Read on

Quote of the Day

Thomas Piketty on the cynicism implicit in neoliberal dismissal of the capabilities of the state:

“We are told constantly that states can’t do anything, that it’s impossible to regulate the Cayman islands and the other tax havens because they are too powerful, and all of a sudden we send a million soldiers 10,000km from home to allow the emir of Kuwait to keep his oil.”

Financial Times, 27/28 June, 2015.

Technology and Inequality

This morning’s Observer column:

Someone once observed that the difference between Tony Blair and Margaret Thatcher was that whereas Thatcher believed that she was always right, Blair believed not only that he was right but also that he was good. Visitors to the big technology companies in California come away with the feeling that they have been talking to tech-savvy analogues of Blair. They are fired with a zealous conviction that they are doing great stuff for the world, and proud of the fact that they work insanely hard in the furtherance of that goal. The fact that they are richly rewarded for their dedication is, one is given to believe, incidental.

The guys (and they are mostly guys) who manage these good folk are properly respectful of their high-IQ charges. Chief among them is Eric Schmidt, the executive chairman of Google, and a man who takes his responsibilities seriously. So seriously, in fact, that he co-authored a book with his colleague Jonathan Rosenberg on the care and maintenance of these precious beings. Dr Schmidt objects to the demeaning term – “knowledge workers” – that economists have devised for them. Google employees, he tells us, are much, much more impressive than mere knowledge workers: they are “smart creatives”.

In the opinion of their chairman, these wunderkinder are very special indeed…

Read on

The concierge economy

My Observer essay on the implications of Uber:

In a way, the name of the company – Uber – gives the game away. It has connotations of elevation, superiority, authority – as in Nietzsche’s coinage, Übermensch, to describe the higher state to which men might aspire. Although it’s only been around since 2009, Uber, the smartphone-enabled minicab company, is probably the only startup of recent times to have achieved the same level of name recognition as the established internet giants.

This is partly because Uber is arguably the most aggressive tech startup in recent history and partly because it has attracted a lot of bad press. But mainly it’s because a colossal pile of American venture capital is riding on it. Its most recent investment round valued the company at about $40bn, which is why every MBA graduate in California is currently clutching a PowerPoint presentation arguing that his/her daft idea is “Uber for X” – where X is any industry you care to mention.

What lies behind the frenzy is a conviction that Uber is the Next Big Thing, fuelled by the belief that it is the embodiment of what Silicon Valley values most, namely “disruptive innovation” – as in disruption of established, old-economy ways of doing things…

Read on

LATER

Om Malik has a very thoughtful essay which starts with a meditation on a conversation he had with an Uber driver, and then moves into a meditation on the apps economy.

Keith [Malik’s Uber driver], who aspires to be in the fashion business was pretty ruthless in his assessment of the company and brought up many questions that have coursed through my mind. He appreciates the financial flexibility Uber has provided him — his luxury car rental business wasn’t enough and he has benefitted from this augmented income. He isn’t the first one who felt that Uber look some pressure off their back — the other day I met a $12-an-hour bouncer at a Tenderloin music venue who is happy dealing with traffic rather than drunks and strung out addicts. “It was worth $19 billion three months ago and now it is worth $41 billion,” says Keith, “isn’t that something. And yet they don’t care about their contractors.”

Still, like many others Keith is befuddled by Uber’s treatment of its contractors. Many of the rule changes seem arbitrary and he too is confused by the tone-deafness of the company. He laments the recent directive (later modified) by Uber to classify all cars before 2010 as a UberX and thus relegated them to lower money making tier. When I point out that as a customer if I am paying premium prices, why shouldn’t I get a premium experience. Today, you end up riding in “black cars” who are a pale imitation of their real self. Shouldn’t the car upgrades result in better cars and through process of elimination bring fewer, but better drivers on the road? Like most drivers, Keith agrees, but points out that logic and reality of being a contract driver are two different things.

It is very hard for people to understand that it isn’t easy to upgrade your car, especially when you are trying to make a living driving an Uber in an intensely competitive marketplace where there are more cars on the road and the pie is getting sliced into thinner and thinner slices. Still, Keith said that he was planning to upgrade, though he didn’t care much for Uber’s financial plans or deals with car companies — he is going to get a Mercedes as part of the upgrade. During our conversation, Keith points out that Uber is good for helping him and others make money in the near term, but the current model doesn’t allow much optimism for the future, thanks to too many cars, too many rules and demand which isn’t rising as fast as the cars.

LATER STILL: this:

Dan Sperling, Founding Director of the Institute of Transportation Studies at UC Davis, says that while Uber “will continue to do battle with local and state authorities, it’s pretty clear that they’ve got a very good business model, they’ve got a lot of momentum, and they’ve got a very good product that people love. They’ll figure out a way around the challenges because it’s clear they provide a valuable service. And that’ll force regulators to reassess their rules, some of which were written up years ago and make absolutely no sense today.’’

As Sperling sees it, “while it’s true that taxis are way over-regulated, the answer is not to smother all the babies competing with them; the answer is to regulate the Ubers of the world better while you deregulate the taxi industry.’’

And what about that $40 billion price tag? Uber and its rivals “are entering a marketplace that has seen almost no innovation in many decades,’’ according to Sperling, who says adding courier and food-delivery services could make Uber even more of a behemoth. “There’s a lot of pent-up demand for real-time, on-demand-type services, so there’s huge upside potential here.’’

For neoliberalism, poverty and inequality are features, not bugs

The thing about neoliberalism is that the poverty and inequality that it produces are not regrettable side-effects of a basically sound engine, but the whole purpose of the exercise. In programming terms, they are features, not bugs. This point is nicely made by Benjamin Selwyn in a blog post in Le Monde diplomatique – English edition.

In his film Inequality for All, Robert Reich, who was Bill Clinton’s labour secretary between 1993 and 1997, documents the collapse of US wages over the last four decades. In the late 1970s the typical male US worker was earning $48,000 a year (inflation adjusted). By 2010, the average wage had fallen to $33,000 a year. Over the same period the average annual income of someone in the top 1% of US society rose from $390,000 to $1,100,000.
Neoliberal policies aim to reduce wages to the bare minimum and to maximize the returns to capital and management. They also aim to demobilise workers’ organisations and reduce workers to carriers of labour power — a commodity to be bought and sold on the market for its lowest price. Neoliberalism is about re-shaping society so that there is no input by workers’ organisations into democratic or economic decision-making. Crises and austerity may not be intentionally sought by most state leaders and central bank governors, but they do contribute significantly towards pursuing such ends. Consequently, these politicians and leaders of the economy do not strive to put in place new structures or policies that will reduce the recurrence of crisis.

HT to Julia Powles for spotting it.

The hegemony of marketisation

Technically hegemony is “is the political, economic, or military predominance or control of one state over others” and in the world of realpolitik (e.g. Ukraine at the moment; or the cringe-making UK-US ‘special relationship’) it’s a grim reality. But it’s also a phenomenon in intellectual life, where it signifies that a particular ideology has become so pervasive and dominant that it renders alternative viewpoints/ideologies literally unthinkable. Since the 1970s, neoliberalism (aka “capitalism with the gloves off”) has increasingly acquired that hegemonic status, to the point where it now infects every aspect of public policy.

I came up against this yesterday when I had a conversation with someone who described the BBC as an “intervention in media markets”. I balked at this: the BBC, it seems to me, is a public service which existed long before there were media markets of any recognisable kind, and it was therefore not designed to be an “intervention” in anything other than the public sphere. And even now, when there are global media markets with which the BBC co-exists, it’s misleading — even for those who approve of the BBC and public service broadcasting services generally — to view it as an “intervention” to remedy market ‘failure’. The fact that the commercial media market doesn’t provide publicly-valuable services isn’t a ‘failure’ of that market. Commercial markets exist to make profits, and media markets are doing just fine at that. Any societal benefits they happen to provide — unbiased current affairs coverage, employment — are side effects of the core business.

But after the conversation I fell to brooding on the dominance of market ideology in the thinking of the policy-makers I meet — which is where the idea of hegemony came from. Since the 1970s we have all become like one-club golfers: whenever a policy issue arises we tend to think about it in terms of markets. We’ve seen that in the National Health Service in the UK; and in the 1980s and 1990s we saw it in the way the Birt regime that ran the BBC conceptualised the corporation’s alleged inefficiencies in terms of the absence of an “internal market”, which it then implemented under the banner of “Producer Choice”. (Which in turn led to celebrated absurdities, like the “£100 black tie” — of which more later.)

The truth is that markets are good at some things and hopeless at others. If you think about them in functional terms, they are self-organising systems which operate by transmitting price signals to their participants. These signals tell participants whether their strategy/tactics are working or not, and indicate the direction of change needed to rectify things. But when policy-makers reach for marketised solutions to operational or administrative malfunction in non-market institutions they have to distort the institution so that they ape market affordances. And since the only signals that markets send are prices, marketised non-market institutions have to invent pseudo-prices in order to function. Which often leads to absurd outcomes, and usually means that organisations that need to harness the synergies that come from departments working together become less than the sum of their parts, because the parts are now ‘trading’ with or against one another.

Just to take the BBC as an example. Pre-Birt, the BBC had a fabulous research library which was available — free — to every employee of the corporation. Similarly, it had a wonderful Wardrobe department, also available free to every producer. After the introduction of ‘producer choice’, these services were no longer free, so producers and researchers had to make a decision about whether the budget could afford a lot of library research, or whether to experiment with a range of costumes. As told to me by a BBC insider, the legendary £100 black tie episode arose as follows. The News and Current Affairs department used to periodically rehearse plans for covering the death of the then Queen Mother. To be realistic, these rehearsals had obviously to be unannounced in advance: staff would have to drop what they were doing and go into Queen-Mother-dead routine. This required the (all-male) News anchors to wear black ties. On one such occasion, none of them had a black tie, so a request was sent to Wardrobe. Wardrobe quoted an internal price that the producer regarded as exorbitant. So a production assistant was dispatched to M&S in a taxi in order to procure said ties. The cost, including taxi fares, came to £100 per tie.

I’ve no idea if this story is true or not. It does, however, illustrate something that I believe to be true, namely that phoney internal markets are an absurdly inefficient way of organising the feedback signals needed to make departments responsive to failure or inefficient performance. But a signalling system is essential to avoid the kind of stasis, complacency and conservatism that often characterises non-market institutions. The good news is that with computing and networking technology we now have lots of ways of signalling satisfaction/dissatisfaction — e.g. by means of online and instantaneous rating systems. They’re not magic bullets (witness the ways in which customer ratings of Uber drivers can be dysfunctional), but compared with the absurdities implicit in distorting non-market institutions to make them mimic markets, they’re likely to be much less damaging.