November 29, 2007

The Maestro Speaks

Filed under: Economics — duncan @ 9:23 pm

Alan Greenspan, April 2005:

“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country… Deregulation and consolidation have… cultivated the expansion of the financial services marketplace… With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers… Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortages outstanding, up from just 1 or 2 percent in the early 1990s.”

Alan Greenspan, September 2007:

”[T]his was an accident waiting to happen… [A] lot of the subprime lending has been frankly truly egregious and I think in many cases, criminal fraud.”

November 24, 2007

The Inequality of Labour.

Filed under: Economics, Marx — duncan @ 8:16 pm

For vulgar economics money is the principle of commensurability which permits capitalist exchange to take place. For Marx, money is merely a veil concealing the true principle of commensurability: labour time.

I confess to being confused by Marx’s theories (I’m still labouring through the early chapters of ‘Capital’). How, for instance, is Marx able to distinguish between price and value, given his theory of value?

But what interests me right now is the way in which Marx makes labour time the ontological foundation of his economics. Marx homogenises labour into abstract labour time – and this homogenisation allows Marx to posit the proletariat as possessing a single unified political will. Marx’s proletariat is the subject of ‘abstract labour’: a single entity that bears little relation to actual workers.

“Equality in the full sense between different types of labour can be arrived at only if we abstract from their real inequality.” (Capital, p. 166) This is one of the most basic theoretical moves of Marxism. Real inequality must be elided, in favour of a fictional, abstract equality of labour-time.

Should radical economics really be based on such an elision of the inequality of labour? Isn’t this just as much a fiction as the capitalist economists’ ‘utility’ or ‘welfare’? And doesn’t it have many of the same consequences for economic theorising?

On page 199 of my edition, Marx accompanies “the owner of some commodity, say our old friend the linen weaver, to the scene of action, the market.” The weaver’s linen is valued at £2. “We leave out of consideration here any possible subjective errors in calculation by the owner of the commodity, which will immediately be corrected objectively in the market. We suppose him to have spent on his product only the average socially necessary quantity of labour-time.” (pgs 201-2)

Marx here binds together one of the distinctive features of his own theory – the emphasis on labour-time – and one of the guiding myths of capitalist economics – the objectivity of the market. These two ideas support each other. Though Marx mocks vulgar economists’ emphasis on money, Marx’s theory here supports that emphasis. The market price is the objective price – because “real inequality” has been abstracted out of existence.

Marx, I’m sure, complicates and expands this as he goes on. But at this stage of my reading I’ll ask again – why does Marxism have such a grip on the radical left? Surely we can do better than this…

Greg Mankiw on Social Mobility

Filed under: Economics, Politics, Science — duncan @ 8:12 pm

Greg Mankiw is one of the most widely read economics bloggers. He teaches at Harvard, and was chairman of Bush’s Council of Economic Advisers from 2003-2005. I’ve recently been looking at some of his old posts.

On April 27 2006 Mankiw discussed “intergenerational transmission of inequality.” In a talk to the Centre for American Progress, the economist Tom Hertz said: “the chances of [an American] getting rich are about 20 times higher if you are born rich than if you are born in a low-income family.” Mankiw expresses annoyance with Hertz’s liberal “spin”.

Mankiw: “One might ask why being born into a high-income family means you will likely have higher income. Is it the good genes that you inherited from your successful parents or the nice neighbourhood and expensive private schools that their high income could purchase for you? Is it nature or nurture?

The evidence suggests that nature trumps nurture.”

Mankiw refers to a study about adoption by the economist Bruce Sacerdote. [For some reason I can’t get the link to work – but you can download the study from Mankiw’s site.] Sacerdote studied 1117 families who adopted children through Holt International Children’s Services from 1970 to 1980. (The data was collected in 2003). He attempted to calculate “the transmission of income, education and health characteristics from adoptive parents to adoptees. I then compare these coefficients of transmission to the analogous coefficients for biological children in the same families, and to children raised by their biological parents in other data sets.”

Here’s the passage Mankiw quotes:

“Having a college educated mother increases an adoptee’s probability of graduating from college by 7 percentage points, but raises a biological child’s probability of graduating from college by 26 percentage points. In contrast, transmission of drinking and smoking behaviour from parents to children is as strong for adoptees as for non-adoptees. For height, obesity, and income, transmission coefficients are significantly higher for non-adoptees than for adoptees.”

As Sacerdote puts it, parents’ education has an “economically meaningful” effect on adoptees’ education. “Each additional year of mother’s educational attainment raises the adoptee’s educational attainment by .07 years. But the effects for adoptees are modest when compared with the corresponding effects for non-adoptees… [F]or educational outcomes, the level effects of parental education are quite important, but only about one quarter of the story.”

So ‘nature’ and ‘nurture’ both play a role in educational attainment – and ‘nature’ seems to play a larger role than one might expect. But Mankiw’s post focuses on income, and here Sacerdote’s conclusions are counter-intuitive. “The adoptee’s income appears to have almost no relationship to parental income.”

Mankiw: “Sacerdote suggests that income is like height. Having a tall father means you are likely to be tall, but it is because he has given you the tall gene, not because he has created an environment that fosters height. The same appears to be true of income.”


I hardly know where to start. Perhaps its worth mentioning that human growth is massively influenced by environmental factors. As Wikipedia puts it: “Genetics is a major factor in determining the height of individuals, though it is far less influential in regard to populations. Average height is increasingly used as a measure of the health and wellness (standard of living and quality of life) of populations. Attributed as a significant reason for the trend of increasing height in parts of Europe is the egalitarian populations where proper medical care and adequate nutrition are relatively equally distributed… Genetic potential plus nutrition minus stressors is a basic formula.”

So income is indeed a lot like height, in the sense that there’s a causal relationship between them. Living in “an environment that fosters height” – i.e. having a high standard of living – is going to influence how tall you are. Still, Mankiw and Sacerdote are only talking about U.S. families, so Mankiw’s shorthand is, perhaps, acceptable.

Far more dubious is Mankiw’s interpretation of Sacerdote’s paper. In the first place, Sacerdote does not discuss the range or distribution of the adopting parents’ incomes. Although Hertz makes strong claims about transmission of income levels from parents to children (“our parents’ income is highly predictive of our incomes as adults”), he also argues that this relationship is far stronger at the extremes. “Children born to the middle quintile of parental family income ($42,000 to $54,000) had about the same chance of ending up in a lower quintile than their parents (39.5 percent) as they did of moving to a higher quintile (36.5 percent).” The problem, put simply, is that the poor stay poor, while the rich stay rich. Within the broad range of middle-income families, the relationship between parent and child income is not strong.

We don’t know details of the incomes of the families in Hertz’s study. But we do know that Holt’s background check requires adopting families to have a “minimum income.” Sacerdote doesn’t say what this income threshold is – but it must surely exclude the low-income extreme at which, according to Hertz, the intergenerational transmission of income is strongest. In a word, adoption agencies have a responsibility to place children with families who can support them. Sacerdote’s study therefore cannot adequately incorporate many of the most important factors by which income inequality is perpetuated. (Not just factors directly related to income – Holt also runs a criminal record check, for instance, and requires parents to have been married for at least three years.) This is not “a data set in which adopted children were, literally, assigned randomly” (as Mankiw writes), because a number of strict criteria must be met before the random allocation of children to families can begin.

But even when this is taken into account, one would expect to find a relationship between the incomes of parent and adopted child. The apparent lack of such a relationship is particularly striking given the reported link between different generations’ educational attainment. If there really is no intergenerational transmission of income to adopted children, one would need an explanation for why the relationship you’d expect between income and education has here broken down.

As it happens, Sacerdote offers two such explanations. This result “could be driven by the restriction of range among Holt families, or by higher measurement error in my survey.” Higher measurement error, that is, than in similar surveys which do find a positive link between the incomes of parent and adopted child. In his Table 3a, Sacerdote compares “Transmission in Holt Sample Versus Transmission in Other Samples.”

Holt Adoptees:

Transmission of Years of Education: 0.069
Transmission of Income: -0.087

Swedish Adoptees:

Transmission of Years of Education: 0.144
Transmission of Income: 0.154

NLSY Adoptees:

Transmission of Years of Education: .277
Transmission of Income: .112

There are, of course, many possible reasons for the disparities between these figures. But it’s striking that Mankiw picks an apparently anomalous result as the basis for his post.

Sacerdote himself seems to favour “measurement error” over “restriction of range” as the explanation for his counter-intuitive income transmission result. “The lower income transmission in my sample is quite possibly driven by higher measurement error in my income survey question.” “Loss of parental income is not statistically significant in predicting child’s years of education, which may be a statement about the measurement error in my parental income variable.” But Mankiw doesn’t mention this possibility. For Mankiw, “Sacerdote suggests that income is like height.”

In other words, Mankiw is misrepresenting the paper he quotes. He is picking a result that conflicts with previous studies of intergenerational social mobility, and with common sense, in order to advance his political views. These views are, of course, that the poor are to blame for their poverty, while the rich deserve their wealth. Don’t talk about social justice: entrenched inequality has nothing to do with society.

Generally the right talks about weakness of character here. (See, for instance, Mankiw’s New York Times piece on American health-care. One reason for the failures of the American health care system is “the sexual mores of American youth”.) In this post Mankiw has an alternative explanation. It’s all in the genes.

[NB:  It turns out that Sacerdote’s original study prompted an absolute deluge of internet comment, which I’ve  just belatedly discovered.  If I get time I’ll try to see if any of it blows apart what I say above.]  [I never did get round to it.  If you spot any grievous flaws in the above, please leave a comment.]

November 17, 2007

Thoughtcrime in the U.K.

Filed under: Politics — duncan @ 8:47 pm

This joke isn’t funny anymore. Last week Samina Malik, 23, who, until her arrest, worked at WHSmith in London’s Heathrow airport, became the first person to be convicted under the Terrorism Act 2006. Her crime? She downloaded material from the internet which could assist in the perpetration of a terrorist offense. Not only that. When police searched her bedroom, they found a “library” of extremist literature. She also wrote, and posted online, poems which praise Osama bin Laden.

Here’s Peter Clarke, head of the Metropolitan Police Counter Terrorism Command: “She had the ideology, ability and determination to access and download material which could have been useful to terrorists. Merely possessing this material is a serious criminal offence.” According to Jonathan Sharpe, the prosecutor, those poems, or, as he calls them, “communications”, “strongly indicate Samina Malik was deeply involved with terrorist related groups.”

Just how nightmarishly Orwellian are our anti-terror laws going to get? Malik has been convicted for writing poetry – for owning books. This crime carries a maximum sentence of ten years. There’s no evidence that she had anything to do with actual terrorism. Yet the government is pushing to further increase the powers of the Terrorism Act, because it isn’t authoritarian enough. Unbelievably, the current protector of our liberties is David Davis.

Malik’s online name was ‘Lyrical Terrorist’. Here she tells the court some basic truths. “It is only a user name. You have taken it too literally and out of context. It was only because it was a cool name. It doesn’t mean I’m a terrorist… This does not mean that I wanted to convert my words into actions… To partake in something and to write about something are two different things.” Malik will be sentenced on December 6th. Until then she’s under house arrest.

[Update: Free Smina Malik]

November 10, 2007

‘The Lives of Others’ Rant. (‘The Wire’ Addendum).

Filed under: Uncategorized — duncan @ 8:26 pm

I finally got round to watching ‘The Lives of Others’ on DVD. (Spoilers! Spoilers!) It has an extremely clever conceit. A Stasi captain is ordered to spy on an apparently ideologically sound writer. The writer slowly moves towards dissidence, while the captain becomes entranced by the writer’s life and lover – and decides to protect them. As the writer abandons socialist plays for underground journalism, the Stasi captain starts fabricating his reports – writing, in effect, ideologically sound plays under cover of reporting. It’s a very neat reversal. (more…)

November 9, 2007

Stiglitz on Bush

Filed under: Economics, Politics — duncan @ 9:26 pm

In this month’s edition of Vanity Fair, Joseph Stiglitz makes his bid for the Nobel Prize in coldly furious polemic. Check it out, here.

November 1, 2007

Marx on Property. (Part 1 of a series of 840)

Filed under: Economics, Marx — duncan @ 9:34 pm

Like most blogs, mine occupies a slightly ambiguous rhetorical or conceptual space. Polemic; calls to action; whingeing; whimsy. An attempt to change the world; solipsistic mumbling. Much of what I’ll be posting here will basically be notes to self; a record of my autodidacticism. In other words, I know fuck all about my chosen topics. Foamy sludge of the brainchurn, and so on.

On which note. In Chapter 2 of ‘Capital’, Marx writes: “Things are themselves external to man, and therefore alienable. In order that this alienation may be reciprocal, it is only necessary for men to agree tacitly to treat each other as the private owners of those alienable things, and, precisely for that reason, as persons who are independent of each other.” (page 182 of my Penguin edition. [The high page number’s an illusion; this is really p. 57.])

When Marx first introduces the concept of alienation in Capital, he does so in relation to commodities, not people. Similarly, in ‘A Contribution to the Critique of Political Economy’, we first encounter alienation on page 42 (of my collapsing Progress Publishers / Lawrence & Wishart edition). “Only as a result of this universal alienation of commodities does the labour contained in them become useful labour.” At least in this exposition, our alienation from ourselves or from our work is secondary to commodities’ alienation; man’s alienation is derived from the alienation of his labour’s products.

That alienation is, basically, the treatment of objects in terms of exchange, rather than use. Again, Marx quotes Aristotle. “[A] sandal… may be worn and is also exchangeable. Both are uses of the sandal, for even he who exchanges the sandal for the money or food he is in need of, makes use of the sandal as a sandal. But not in its natural way. For it has not been made for the sake of being exchanged.” (‘Capital’, p. 179; ‘A Contribution…’ p. 27.) A good Derridean like me gets hot flushes, reading this. Don’t we have here the old theme of the ‘proper’; an attempt to draw a boundary between an object’s true essence and the contaminating or parasitic external force which divides that essence against itself? Same old, same old. A sandal is always already made with the possibility of exchange in mind; there can be no fundamental line drawn between use- and exchange-value. Alienation is a constitutive element of all things and all people. I know this tune.

In the opening pages of ‘Capital’, Marx develops an extraordinarily tangled set of arguments in order to establish the conceptual space he needs to advance his political claims. I can’t remember reading any text, except perhaps some of Nietzsche’s, in which key terms’ meanings are so obviously mobile. One day I’d like to try to discuss this. For now I want to say a few far-too-simplistic things.

First: Marx’s critique of private property is based on the concept of the proper. The problem with private property is that it prevents us from achieving real possession – of ourselves or of commodities. An object contaminated by the alienating exchange-relation can never truly be our own – unless it leaves the capitalist system of exchange altogether. And this means that while we inhabit the capitalist world we can never be truly ourselves; we are infected and condemned by our possessions’ alienation.

Second, and more interestingly: For Marx, the idea of the individual is derived from the institution of private property. This is the point of the first quote above. It is precisely because we treat people as owners of alienated things that we treat people as independent of each other. Or, to put it another way, the modern concept of individualism is a product of our social system. First the commodity; then the modern concept of the individual. To quote one of Marx’s most famous lines: “It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness.” (‘A Contribition…’ p. 21)

A big question for anyone interested in economics is: why does the idea of the rational self-interested individual have the dominance it does? Marx gives us an approah to an answer: the idea of the rational self-interested individual is the corollary or product of the institution of private property. The more private our real selves are – the more individual or discrete – the more this institution is praised or justified (for corresponding to the true demands of the self). Similarly, if individual motivation is understood in terms of self-interest, which is in turn understood in terms of accumulation, then possession is made fundamental to our identity. Economics tries to ground its analysis in the utility-maximising individual; but we can analyse this idea as itself a fiction, created to justify the true ground of economics: private property.

Well… that’s playing pretty fast and loose with both ideas and facts. The next step, I fancy, would be to follow Foucault’s advice, and examine the institution of private property as it actually exists – which would reveal that our idea of ‘private property’ is also a politically-motivated fiction, concealing an almost unthinkably complex collection of social relations and historical contingencies. But we’ll do that next week…

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