capitalism

The injustice of talent

pnrj core principles, ethics, inequality, mathematical models, personal , , , , , , , , , , , , , , , ,

Sep 4 JDN 2459827

Consider the following two principles of distributive justice.

A: People deserve to be rewarded in proportion to what they accomplish.

B: People deserve to be rewarded in proportion to the effort they put in.

Both principles sound pretty reasonable, don’t they? They both seem like sensible notions of fairness, and I think most people would broadly agree with both them.

This is a problem, because they are mutually contradictory. We cannot possibly follow them both.

For, as much as our society would like to pretend otherwise—and I think this contradiction is precisely why our society would like to pretend otherwise—what you accomplish is not simply a function of the effort you put in.

Don’t get me wrong; it is partly a function of the effort you put in. Hard work does contribute to success. But it is neither sufficient, nor strictly necessary.

Rather, success is a function of three factors: Effort, Environment, and Talent.

Effort is the work you yourself put in, and basically everyone agrees you deserve to be rewarded for that.

Environment includes all the outside factors that affect you—including both natural and social environment. Inheritance, illness, and just plain luck are all in here, and there is general, if not universal, agreement that society should make at least some efforts to minimize inequality created by such causes.

And then, there is talent. Talent includes whatever capacities you innately have. It could be strictly genetic, or it could be acquired in childhood or even in the womb. But by the time you are an adult and responsible for your own life, these factors are largely fixed and immutable. This includes things like intelligence, disability, even height. The trillion-dollar question is: How much should we reward talent?

For talent clearly does matter. I will never swim like Michael Phelps, run like Usain Bolt, or shoot hoops like Steph Curry. It doesn’t matter how much effort I put in, how many hours I spend training—I will never reach their level of capability. Never. It’s impossible. I could certainly improve from my current condition; perhaps it would even be good for me to do so. But there are certain hard fundamental constraints imposed by biology that give them more potential in these skills than I will ever have.

Conversely, there are likely things I can do that they will never be able to do, though this is less obvious. Could Michael Phelps never be as good a programmer or as skilled a mathematician as I am? He certainly isn’t now. Maybe, with enough time, enough training, he could be; I honestly don’t know. But I can tell you this: I’m sure it would be harder for him than it was for me. He couldn’t breeze through college-level courses in differential equations and quantum mechanics the way I did. There is something I have that he doesn’t, and I’m pretty sure I was born with it. Call it spatial working memory, or mathematical intuition, or just plain IQ. Whatever it is, math comes easy to me in not so different a way from how swimming comes easy to Michael Phelps. I have talent for math; he has talent for swimming.

Moreover, these are not small differences. It’s not like we all come with basically the same capabilities with a little bit of variation that can be easily washed out by effort. We’d like to believe that—we have all sorts of cultural tropes that try to inculcate that belief in us—but it’s obviously not true. The vast majority of quantum physicists are people born with high IQ. The vast majority of pro athletes are people born with physical prowess. The vast majority of movie stars are people born with pretty faces. For many types of jobs, the determining factor seems to be talent.

This isn’t too surprising, actually—even if effort matters a lot, we would still expect talent to show up as the determining factor much of the time.

Let’s go back to that contest function model I used to analyze the job market awhile back (the one that suggests we spend way too much time and money in the hiring process). This time let’s focus on the perspective of the employees themselves.

Each employee has a level of talent, h. Employee X has talent hx and exerts effort x, producing output of a quality that is the product of these: hx x. Similarly, employee Z has talent hz and exerts effort z, producing output hz z.

Then, there’s a certain amount of luck that factors in. The most successful output isn’t necessarily the best, or maybe what should have been the best wasn’t because some random circumstance prevailed. But we’ll say that the probability an individual succeeds is proportional to the quality of their output.

So the probability that employee X succeeds is: hx x / ( hx x + hz z)

I’ll skip the algebra this time (if you’re interested you can look back at that previous post), but to make a long story short, in Nash equilibrium the two employees will exert exactly the same amount of effort.

Then, which one succeeds will be entirely determined by talent; because x = z, the probability that X succeeds is hx / ( hx + hz).

It’s not that effort doesn’t matter—it absolutely does matter, and in fact in this model, with zero effort you get zero output (which isn’t necessarily the case in real life). It’s that in equilibrium, everyone is exerting the same amount of effort; so what determines who wins is innate talent. And I gotta say, that sounds an awful lot like how professional sports works. It’s less clear whether it applies to quantum physicists.

But maybe we don’t really exert the same amount of effort! This is true. Indeed, it seems like actually effort is easier for people with higher talent—that the same hour spent running on a track is easier for Usain Bolt than for me, and the same hour studying calculus is easier for me than it would be for Usain Bolt. So in the end our equilibrium effort isn’t the same—but rather than compensating, this effect only serves to exaggerate the difference in innate talent between us.

It’s simple enough to generalize the model to allow for such a thing. For instance, I could say that the cost of producing a unit of effort is inversely proportional to your talent; then instead of hx / ( hx + hz ), in equilibrium the probability of X succeeding would become hx2 / ( hx2 + hz2). The equilibrium effort would also be different, with x > z if hx > hz.

Once we acknowledge that talent is genuinely important, we face an ethical problem. Do we want to reward people for their accomplishment (A), or for their effort (B)? There are good cases to be made for each.

Rewarding for accomplishment, which we might call meritocracy,will tend to, well, maximize accomplishment. We’ll get the best basketball players playing basketball, the best surgeons doing surgery. Moreover, accomplishment is often quite easy to measure, even when effort isn’t.

Rewarding for effort, which we might call egalitarianism, will give people the most control over their lives, and might well feel the most fair. Those who succeed will be precisely those who work hard, even if they do things they are objectively bad at. Even people who are born with very little talent will still be able to make a living by working hard. And it will ensure that people do work hard, which meritocracy can actually fail at: If you are extremely talented, you don’t really need to work hard because you just automatically succeed.

Capitalism, as an economic system, is very good at rewarding accomplishment. I think part of what makes socialism appealing to so many people is that it tries to reward effort instead. (Is it very good at that? Not so clear.)

The more extreme differences are actually in terms of disability. There’s a certain baseline level of activities that most people are capable of, which we think of as “normal”: most people can talk; most people can run, if not necessarily very fast; most people can throw a ball, if not pitch a proper curveball. But some people can’t throw. Some people can’t run. Some people can’t even talk. It’s not that they are bad at it; it’s that they are literally not capable of it. No amount of effort could have made Stephen Hawking into a baseball player—not even a bad one.

It’s these cases when I think egalitarianism becomes most appealing: It just seems deeply unfair that people with severe disabilities should have to suffer in poverty. Even if they really can’t do much productive work on their own, it just seems wrong not to help them, at least enough that they can get by. But capitalism by itself absolutely would not do that—if you aren’t making a profit for the company, they’re not going to keep you employed. So we need some kind of social safety net to help such people. And it turns out that such people are quite numerous, and our current system is really not adequate to help them.

But meritocracy has its pull as well. Especially when the job is really important—like surgery, not so much basketball—we really want the highest quality work. It’s not so important whether the neurosurgeon who removes your tumor worked really hard at it or found it a breeze; what we care about is getting that tumor out.

Where does this leave us?

I think we have no choice but to compromise, on both principles. We will reward both effort and accomplishment, to greater or lesser degree—perhaps varying based on circumstances. We will never be able to entirely reward accomplishment or entirely reward effort.

This is more or less what we already do in practice, so why worry about it? Well, because we don’t like to admit that it’s what we do in practice, and a lot of problems seem to stem from that.

We have people acting like billionaires are such brilliant, hard-working people just because they’re rich—because our society rewards effort, right? So they couldn’t be so successful if they didn’t work so hard, right? Right?

Conversely, we have people who denigrate the poor as lazy and stupid just because they are poor. Because it couldn’t possibly be that their circumstances were worse than yours? Or hey, even if they are genuinely less talented than you—do less talented people deserve to be homeless and starving?

We tell kids from a young age, “You can be whatever you want to be”, and “Work hard and you’ll succeed”; and these things simply aren’t true. There are limitations on what you can achieve through effort—limitations imposed by your environment, and limitations imposed by your innate talents.

I’m not saying we should crush children’s dreams; I’m saying we should help them to build more realistic dreams, dreams that can actually be achieved in the real world. And then, when they grow up, they either will actually succeed, or when they don’t, at least they won’t hate themselves for failing to live up to what you told them they’d be able to do.

If you were wondering why Millennials are so depressed, that’s clearly a big part of it: We were told we could be and do whatever we wanted if we worked hard enough, and then that didn’t happen; and we had so internalized what we were told that we thought it had to be our fault that we failed. We didn’t try hard enough. We weren’t good enough. I have spent years feeling this way—on some level I do still feel this way—and it was not because adults tried to crush my dreams when I was a child, but on the contrary because they didn’t do anything to temper them. They never told me that life is hard, and people fail, and that I would probably fail at my most ambitious goals—and it wouldn’t be my fault, and it would still turn out okay.

That’s really it, I think: They never told me that it’s okay not to be wildly successful. They never told me that I’d still be good enough even if I never had any great world-class accomplishments. Instead, they kept feeding me the lie that I would have great world-class accomplishments; and then, when I didn’t, I felt like a failure and I hated myself. I think my own experience may be particularly extreme in this regard, but I know a lot of other people in my generation who had similar experiences, especially those who were also considered “gifted” as children. And we are all now suffering from depression, anxiety, and Impostor Syndrome.

All because nobody wanted to admit that talent, effort, and success are not the same thing.

Capitalism can be fair

pnrj core principles, ethics , , , , , ,

Aug 22 JDN 2459449

There are certainly extreme right-wing libertarians who seem to think that capitalism is inherently fair, or that “fairness” is meaningless and (some very carefully defined notion of) liberty is the only moral standard. I am not one of them. I agree that many of the actual practices of modern capitalism as we know it are unfair, particularly in the treatment of low-skill workers.

But lately I’ve been seeing a weirdly frequent left-wing take—Marxist take, really—that goes to the opposite extreme, saying that capitalism is inherently unfair, that the mere fact that capital owners ever get any profit on anything is proof that the system is exploitative and unjust and must be eliminated.

So I decided it would be worthwhile to provide a brief illustration of how, at least in the best circumstances, a capitalist system of labor can in fact be fair and just.

The argument that capitalism is inherently unjust seems to be based on the notion that profit means “workers are paid less than their labor is worth”. I think that the reason this argument is so insidious is that it’s true in one sense—but not true in another. Workers are indeed paid less than the total surplus of their actual output—but, crucially, they are not paid less than what the surplus of their output would have been had the capital owner not provided capital and coordination.

Suppose that we are making some sort of product. To make it more concrete, let’s say shirts. You can make a shirt by hand, but it’s a lot of work, and it takes a long time. Suppose that you, working on your own by hand, can make 1 shirt per day. You can sell each shirt for $10, so you get $10 per day.

Then, suppose that someone comes along who owns looms and sewing machines. They gather you and several other shirt-makers and offer to let you use their machines, in exchange for some of the revenue. With the aid of 9 other workers and the machines, you are able to make 30 shirts per day. You can still sell each shirt for $10, so now there is total revenue of $300.

Whether or not this is fair depends on precisely the bargain that was struck with the owner of the machines. Suppose that he asked for 40% of the revenue. Then the 10 workers including yourself would get (0.60)($300) = $180 to split, presumably evenly, and each get $18 per day. This seems fair; you’re clearly better off than you were making shirts by yourself. The capital owner then gets (0.40)($300) = $120, which is more than each of you, but not by a ridiculous amount; and he probably has costs to deal with in maintaining those machines.

But suppose instead the owner had demanded 80% of the revenue; then you would have to split (0.20)($300) = $60 between you, and each would only get $6 per day. The capital owner would then get (0.80)($300) = $240, 40 times as much as each of you.

Or perhaps instead of a revenue-sharing agreement, the owner offers to pay you a wage. If that wage is $18 per day, it seems fair. If it is $6 per day, it seems obviously unfair.

If this owner is the only employer, then he is competing only with working alone. So we would expect him to offer a wage of $10 per day, or maybe slightly more since working with the machines may be harder or more unpleasant than working by hand.

But if there are many employers, then he is now competing with those employers as well. If he offers $10, someone else might offer $12, and a third might offer $15. Competition should drive the system toward an equilibrium where workers are getting paid their marginal value product—in other words, the wage for one hour of work should equal the additional value added by one more hour of work.

In the case that seems fair, where workers are getting more money than they would have on their own, are they getting paid “less than the value of their labor”? In one sense, yes; the total surplus is not going all to the workers, but is being shared with the owner of the machines. But the more important sense is whether they’d be better off quitting and working on their own—and they obviously would not be.

What value does the capital owner provide? Well, the capital, of course. It’s their property and they are letting other people use it. Also, they incur costs to maintain it.

Of course, it matters how the capital owner obtained that capital. If they are an inventor who made it themselves, it seems obviously just that they should own it. If they inherited it or got lucky on the stock market, it isn’t something they deserve in a deep sense, but it’s reasonable to say they are entitled to it. But if the only reason they have the capital is by theft, fraud, or exploitation, then obviously they don’t deserve it. In practice, there are very few of the first category, a huge number of the second, and all too many of the third. Yet this is not inherent to the capitalist work arrangement. Many capital owners don’t deserve what they own; but those who do have a right to make a profit letting other people use their property.

There are of course many additional complexities that arise in the real world, in terms of market power, bargaining, asymmetric information, externalities, and so on. I freely admit that in practice, capitalism is often unfair. But I think it’s worth pointing out that the mere existence of profit from capital ownership is not inherently unjust, and in fact by organizing our economy around it we have managed to achieve unprecedented prosperity.

Escaping the wrong side of the Yerkes-Dodson curve

pnrj cognitive science, heuristics and biases, personal , , , , , , ,

Jul 25 JDN 2459421

I’ve been under a great deal of stress lately. Somehow I ended up needing to finish my dissertation, get married, and move overseas to start a new job all during the same few months—during a global pandemic.

A little bit of stress is useful, but too much can be very harmful. On complicated tasks (basically anything that involves planning or careful thought), increased stress will increase performance up to a point, and then decrease it after that point. This phenomenon is known as the Yerkes-Dodson law.

The Yerkes-Dodson curve very closely resembles the Laffer curve, which shows that since extremely low tax rates raise little revenue (obviously), and extremely high tax rates also raise very little revenue (because they cause so much damage to the economy), the tax rate that maximizes government revenue is actually somewhere in the middle. There is a revenue-maximizing tax rate (usually estimated to be about 70%).

Instead of a revenue-maximizing tax rate, the Yerkes-Dodson law says that there is a performance-maximizing stress level. You don’t want to have zero stress, because that means you don’t care and won’t put in any effort. But if your stress level gets too high, you lose your ability to focus and your performance suffers.

Since stress (like taxes) comes with a cost, you may not even want to be at the maximum point. Performance isn’t everything; you might be happier choosing a lower level of performance in order to reduce your own stress.

But once thing is certain: You do not want to be to the right of that maximum. Then you are paying the cost of not only increased stress, but also reduced performance.

And yet I think many of us spent a great deal of our time on the wrong side of the Yerkes-Dodson curve. I certainly feel like I’ve been there for quite awhile now—most of grad school, really, and definitely this past month when suddenly I found out I’d gotten an offer to work in Edinburgh.

My current circumstances are rather exceptional, but I think the general pattern of being on the wrong side of the Yerkes-Dodson curve is not.

Over 80% of Americans report work-related stress, and the US economy loses about half a trillion dollars a year in costs related to stress.

The World Health Organization lists “work-related stress” as one of its top concerns. Over 70% of people in a cross-section of countries report physical symptoms related to stress, a rate which has significantly increased since before the pandemic.

The pandemic is clearly a contributing factor here, but even without it, there seems to be an awful lot of stress in the world. Even back in 2018, over half of Americans were reporting high levels of stress. Why?

For once, I think it’s actually fair to blame capitalism.

One thing capitalism is exceptionally good at is providing strong incentives for work. This is often a good thing: It means we get a lot of work done, so employment is high, productivity is high, GDP is high. But it comes with some important downsides, and an excessive level of stress is one of them.

But this can’t be the whole story, because if markets were incentivizing us to produce as much as possible, that ought to put us near the maximum of the Yerkes-Dodson curve—but it shouldn’t put us beyond it. Maximizing productivity might not be what makes us happiest—but many of us are currently so stressed that we aren’t even maximizing productivity.

I think the problem is that competition itself is stressful. In a capitalist economy, we aren’t simply incentivized to do things well—we are incentivized to do them better than everyone else. Often quite small differences in performance can lead to large differences in outcome, much like how a few seconds can make the difference between an Olympic gold medal and an Olympic “also ran”.

An optimally productive economy would be one that incentivizes you to perform at whatever level maximizes your own long-term capability. It wouldn’t be based on competition, because competition depends too much on what other people are capable of. If you are not especially talented, competition will cause you great stress as you try to compete with people more talented than you. If you happen to be exceptionally talented, competition won’t provide enough incentive!

Here’s a very simple model for you. Your total performance p is a function of two components, your innate ability aand your effort e. In fact let’s just say it’s a sum of the two: p = a + e

People are randomly assigned their level of capability from some probability distribution, and then they choose their effort. For the very simplest case, let’s just say there are two people, and it turns out that person 1 has less innate ability than person 2, so a1 < a2.

There is also a certain amount of inherent luck in any competition. As it says in Ecclesiastes (by far the best book of the Old Testament), “The race is not to the swift or the battle to the strong, nor does food come to the wise or wealth to the brilliant or favor to the learned; but time and chance happen to them all.” So as usual I’ll model this as a contest function, where your probability of winning depends on your total performance, but it’s not a sure thing.

Let’s assume that the value of winning and cost of effort are the same across different people. (It would be simple to remove this assumption, but it wouldn’t change much in the results.) The value of winning I’ll call y, and I will normalize the cost of effort to 1.


Then this is each person’s expected payoff ui:

ui = (ai + ei)/(a1+e1+a2 + e2) V – ei

You choose effort, not ability, so maximize in terms of ei:

(a2 + e2) V = (a1 +e1+a2 + e2)2 = (a1 + e1) V

a1 + e1 = a2 + e2

p1 = p2

In equilibrium, both people will produce exactly the same level of performance—but one of them will be contributing more effort to compensate for their lesser innate ability.

I’ve definitely had this experience in both directions: Effortlessly acing math tests that I knew other people barely passed despite hours of studying, and running until I could barely breathe to keep up with other people who barely seemed winded. Clearly I had too little incentive in math class and too much in gym class—and competition was obviously the culprit.

If you vary the cost of effort between people, or make it not linear, you can make the two not exactly equal; but the overall pattern will remain that the person who has more ability will put in less effort because they can win anyway.

Yet presumably the amount of effort we want to incentivize isn’t less for those who are more talented. If anything, it may be more: Since an hour of work produces more when done by the more talented person, if the cost to them is the same, then the net benefit of that hour of work is higher than the same hour of work by someone less talented.

In a large population, there are almost certainly many people whose talents are similar to your own—but there are also almost certainly many below you and many above you as well. Unless you are properly matched with those of similar talent, competition will systematically lead to some people being pressured to work too hard and others not pressured enough.

But if we’re all stressed, where are the people not pressured enough? We see them on TV. They are celebrities and athletes and billionaires—people who got lucky enough, either genetically (actors who were born pretty, athletes who were born with more efficient muscles) or environmentally (inherited wealth and prestige), to not have to work as hard as the rest of us in order to succeed. Indeed, we are constantly bombarded with images of these fantastically lucky people, and by the availability heuristic our brains come to assume that they are far more plentiful than they actually are.

This dramatically exacerbates the harms of competition, because we come to feel that we are competing specifically with the people who were handed the world on a silver platter. Born without the innate advantages of beauty or endurance or inheritance, there’s basically no chance we could ever measure up; and thus we feel utterly inadequate unless we are constantly working as hard as we possibly can, trying to catch up in a race in which we always fall further and further behind.

How can we break out of this terrible cycle? Well, we could try to replace capitalism with something like the automated luxury communism of Star Trek; but this seems like a very difficult and long-term solution. Indeed it might well take us a few hundred years as Roddenberry predicted.

In the shorter term, we may not be able to fix the economic problem, but there is much we can do to fix the psychological problem.

By reflecting on the full breadth of human experience, not only here and now, but throughout history and around the world, you can come to realize that you—yes, you, if you’re reading this—are in fact among the relatively fortunate. If you have a roof over your head, food on your table, clean water from your tap, and ibuprofen in your medicine cabinet, you are far more fortunate than the average person in Senegal today; your television, car, computer, and smartphone are things that would be the envy even of kings just a few centuries ago. (Though ironically enough that person in Senegal likely has a smartphone, or at least a cell phone!)

Likewise, you can reflect upon the fact that while you are likely not among the world’s most very most talented individuals in any particular field, there is probably something you are much better at than most people. (A Fermi estimate suggests I’m probably in the top 250 behavioral economists in the world. That’s probably not enough for a Nobel, but it does seem to be enough to get a job at the University of Edinburgh.) There are certainly many people who are less good at many things than you are, and if you must think of yourself as competing, consider that you’re also competing with them.

Yet perhaps the best psychological solution is to learn not to think of yourself as competing at all. So much as you can afford to do so, try to live your life as if you were already living in a world that rewards you for making the best of your own capabilities. Try to live your life doing what you really think is the best use of your time—not your corporate overlords. Yes, of course, we must do what we need to in order to survive, and not just survive, but indeed remain physically and mentally healthy—but this is far less than most First World people realize. Though many may try to threaten you with homelessness or even starvation in order to exploit you and make you work harder, the truth is that very few people in First World countries actually end up that way (it couldbe brought to zero, if our public policy were better), and you’re not likely to be among them. “Starving artists” are typically a good deal happier than the general population—because they’re not actually starving, they’ve just removed themselves from the soul-crushing treadmill of trying to impress the neighbors with manicured lawns and fancy SUVs.

Capitalism isn’t bad for the environment

pnrj public policy , , , , , , , , ,

Sep 27 JDN 2459120

There are certainly many legitimate criticisms to be made against capitalism, particularly unregulated, unfettered capitalism. But many of the criticisms the left likes to offer against capitalism really don’t hold water, and one of them is the assertion that capitalism is bad for the environment.

The world’s most polluted cities are largely in India and China. In fact, as China has opened up to world markets and become more capitalist, it has become more ecologically efficient, in the sense of producing far less greenhouse emission per dollar of GDP.

Indeed, the entire world has been getting more efficient on this metric: We now produce about twice as much GDP per ton of CO2 emitted than we did in 1990.

Pollution in the Soviet Union was horrific; even today, many of the world’s most polluted places are in the former Soviet Union. Much of the ecological damage was hidden while the USSR was still in place, but once it collapsed, the damage that Soviet policy had done to the environment became obvious.

If you sort countries by their per-capita greenhouse emissions, the worst offenders are Kuwait, Brunei, Qatar, Oman, and Bahrain—small, oil-producing countries in the Middle East. The US and Canada also do pretty badly, and are certainly quite capitalist; but so do Libya, Kazakhstan, and Turkmenistan, not exactly known for their devotion to free markets.

I think this in fact too generous to socialist countries. We really should adjust for GDP per capita. It’s easy to produce zero pollution: Just let everyone starve to death. And if that sounds extreme, consider that millions of people literally did starve to death under Stalin and Mao. It’s a fair question whether we really need the high standard of living we have become accustomed to in the First World; perhaps we could afford to cut back. But clearly some kind of adjustment is necessary: A country is obviously doing better if they can produce more GDP for the same carbon emissions.

Therefore, let’s see what happens when we rank countries by kilograms of CO2 emissions per dollar of GDP. The highest polluters are then the Central African Republic, Belize, Libya, Gambia, Eritrea, Niger, Grenada, Palau… not a First World country among them. CAR produces a horrifying 126 tons of CO2 per $10,000 of GDP. The US is near the world average at about 3.0 tons of CO2 per $10,000 of GDP, and as usual Scandinavia Is Better with about 1 ton of CO2 per $10,000 of GDP. China does worse than the US, at about 4.0 tons of CO2 per $10,000 of GDP. Russia and most of the former Soviet Union does substantially worse, generally around 5.0 tons of CO2 per $10,000 of GDP.

Then again, these figures use production-based accounting; perhaps we should be using consumption-based accounting, so that First World countries can’t simply offshore their emissions. The data is less complete and probably less reliable, but it’s still pretty clear that the highest per-capita emissions are in small oil-exporting countries in the Middle East, like Qatar and Brunei.

Moreover, on consumption-based accounting, the highest emissions per dollar of GDP are in Mongolia, Namibia, Ukraine, South Africa, and Kazakhstan. The US actually does better at 2.6 tons of CO2 per $10,000 of GDP, while Scandinavia is still at about 1 ton of CO2 per $10,000 of GDP. China closes the gap, but still does worse than the US, at about 3.0 tons of CO2 per $10,000 of GDP.

No matter how you slice it, the US just isn’t the world’s worst polluter, and we only look like we are in the top 10 because we are so fabulously rich. If it were generally true that higher wealth always comes with proportionally higher pollution, then perhaps capitalism could be blamed for producing all this pollution—though then we’d have a difficult tradeoff to make between reducing pollution and increasing wealth. But in fact there is wide variation in the ecological efficiency of an economy; nuclearize your energy grid like France did and you can cut your emissions in half. Do whatever Scandanavia does and you can do even better.

Now I suppose it would be fair to say that France and Scandinavia are less capitalist than the United States; they certainly have much stronger social welfare states (including universal healthcare) and more redistribution of wealth. But they’re still quite capitalist. They have robust free-market economies, thousands of for-profit corporations, and plenty of billionaires. France has 41 billionaires among 65 million people, just a slightly lower rate of billionaires-per-capita than the US. Sweden has 31 billionaires among 10 million people, a substantially higher rate of billionaires-per-capita than the US. It may be that the optimal level of capitalism for environmental sustainability is not 100%; but it doesn’t seem to be anywhere near 0% either. National Review overstates the case a little (I mean, they are National Review), but I don’t think they are wrong when they say that socialism is bad for the environment.

Indeed, it seems quite important that France and Scandinavia are democratic (by some measures the most democratic places in the world), while China and Russia are authoritarian. It’s not hard to see why democracy would be good for the environment: It solves the Tragedy of the Commons by including the interests of everyone who is impacted by pollution. Policies that produce really catastrophic pollution tend to get leaders voted out.

The rather surprising result is that empirically there doesn’t appear to be a strong effect of democracy on environmental sustainability either. There’s some evidence that it helps, but it seems to depend upon a lot of factors, and on some measures democracy may actually make matters worse. I honestly don’t have a good explanation for this; I would have expected a really strong benefit, since the theoretical argument is quite strong: Voters have strong reasons to want clean air and water, while dictators don’t (especially water, which they can easily pay to import).


Perhaps capitalism is bad for the environment, but democracy is good, and the two sort of cancel out? But there isn’t even much reason theoretically to think that capitalism would be worse for the environment. Private ownership yields private stewardship, and poisoning your employees and customers is not good business. Yes, some forms of pollution spread out far enough that they become a Tragedy of the Commons; but it’s actually hard to find clear examples where pollution spreads far enough to be a Tragedy of the Commons for a corporation but doesn’t spread far enough to be a Tragedy of the Commons for a whole country. Some multinational corporations are large enough that they probably have more reason to care about the environment than many small countries—Walmart’s total revenue is nearly 15 times higher than Brunei’s total GDP. Indeed, one of the few upsides of concentrated oligopolies is that they are less likely to pollute!

I can understand why it’s tempting to blame capitalism for the degradation of the environment. Indeed, if the argument could stick, it would be a really compelling reason to dismantle capitalism—we simply cannot continue to degrade the environment at the rate we have been for much longer. But empirically it just doesn’t work; whatever determines a country’s ecological sustainability or lack thereof, it’s something subtler than capitalism versus socialism—or even democracy versus authoritarianism.

Failures of democracy or capitalism?

pnrj core principles, current events, public policy , , , , ,

May 24 JDN 2458992

Blaming capitalism for the world’s woes is a common habit of the left wing in general, but it seems to have greatly increased in frequency and volume in the era of Trump. I don’t want to say that this is always entirely wrong; capitalism in its purest form certainly does have genuine flaws that need to be addressed (and that’s why we have taxes, regulations, the welfare state, etc.).

But I’ve noticed that a lot of the things people complain about most really don’t seem to have a lot to do with capitalism.

For instance: Forced labor in Third World countries? First of all, that’s been around for as long as civilization has existed, and quite probably longer. It’s certainly not new to capitalism. Second, the freedom to choose who you transact with—including who employs you—is a fundamental principle of capitalism. In that sense, forced labor is the very opposite of capitalism; it spits upon everything capitalism stands for.

It’s certainly the case that many multinational corporations are implicated in slavery, even today—usually through complex networks of subsidiaries and supply chains. But it’s not clear to me that socialism is any kind of solution to this problem; nationalized industries are perfectly capable of enslaving people. (You may have heard of a place called the Gulag?)

Or what about corporate welfare, the trillions of dollars in subsidies we give to the oil and coal industries? Well, that’s not very capitalist either; capitalism is supposed to be equal competition in a free market, not the government supporting particular businesses or industries at the expense of others. And it’s not like socialist Venezuela has any lack of oil subsidies—indeed it’s not quite clear to me where the government ends and PDVSA begins. We need a word for such policies that are neither capitalist nor socialist; perhaps “corporatist”?

And really, the things that worry me about America today are not flaws in our markets; they are flaws in our government. We are not witnessing a catastrophic failure of capitalism; we are witnessing a catastrophic failure of democracy.

As if the Electoral College weren’t bad enough (both Al Gore and Hillary Clinton should have won the Presidency, by any sensible notion of democratic voting!), we are now seeing extreme levels of voter suppression, including refusing to accept mail-in ballots in the middle of a historic pandemic. This looks disturbingly like how democracy has collapsed in other countries, such as Turkey and Hungary.

The first-past-the-post plurality vote is already basically the worst possible voting system that can still technically be considered democratic. But it is rendered far worse by a defective primary system, which was even more of a shambles this year than usual. The number of errors in the Iowa caucus was ridiculous, and the primaries as a whole suffered from so many flaws that many voters now consider them illegitimate.

And of course there’s Donald Trump himself. He is certainly a capitalist (though he’s not exactly a free-trade neoliberal; he’s honestly more like a mercantilist). But what really makes him dangerous is not his free-market ideology, which is basically consistent with the US right wing going back at least 30 years; it’s his willingness to flaunt basic norms of democracy and surround himself with corrupt, incompetent sycophants. Republicans have been cutting the upper tax brackets and subsidizing oil companies for quite some time now; but it’s only recently that they have so blatantly disregarded the guardrails of democracy.

I’m not saying it’s wrong to criticize capitalism. There certainly are things worth criticizing, particularly about the most extreme free-market ideology. But it’s important to be clear about where exactly problems lie if you want to fix them—and right now we desperately need to fix them. America is in a crisis right now, something much bigger than just this pandemic. We are not in this crisis because of an excessive amount of deregulation or tax-cutting; we are in this crisis because of an excessive amount of corruption, incompetence, and authoritarianism. We wouldn’t fix this by nationalizing industries or establishing worker co-ops. We need to fix it first by voting out those responsible, and second by reforming our system so that they won’t get back in.

Just how rich is rich?

pnrj core principles, ethics, inequality, public policy , , , , , , , , , , , , , , , ,

May 26 JDN 2458630

I think if there is one single thing I would like more people to know about economics, it is the sheer magnitude of global inequality. Most people seem to have no idea just how rich some people are—and how poor so many others are. They have a vision in their head of what “rich” and “poor” are, and their “rich” is a low-level Wall Street trader making $400,000 a year (the kind of people Gordon Gekko mocks in the film), and “poor” is someone who lives under a bridge in New York City. (They’re both New Yorkers, I guess. New Yorkers seem to be the iconic Americans, which is honestly more representative than you might think—80% of Americans live in urban or suburban areas.)

If we take a global perspective, this is not what “rich” and “poor” truly mean.

In next week’s post I’ll talk about what “poor” means. It’s really appallingly bad. We have to leave the First World in order to find it; many people here are poor, but not that poor. It’s so bad that I think once you really understand it, it can’t but change your whole outlook on the world. But I’m saving that for next week.

This week, I’ll talk about what “rich” really means in today’s world. We needn’t leave the United States, for the top 3 and 6 of the top 10 richest people in the world live here. And they are all White men, by the way, though Carlos Slim and Amancio Ortega are at least Latino.

Going down the list of billionaires ranked by wealth, you have to get down to 15th place before encountering a woman, and it’s really worse than that, because Francoise Bettencourt (15), Alice Walton (17), Jacqueline Mars (33), Yang Huiyan (42), Susan Klatton (46), Laurena Powell-Jobs (54), Abigail Johnson (71), and Iris Fontbona (74) are all heirs. The richest living woman who didn’t simply inherit from her father or husband is actually Gina Rinehart, the 75th richest person in the world. (And note that, while also in some sense an heir, Queen Elizabeth is not on that list; in fact, she’s nowhere near the richest people in the world. She’s not in the top 500.)

You have to get to 20th place before encountering someone non-White (Ma Huateng), and all the way down to 65th before encountering someone not White or East Asian (the Hinduja brothers). Not one of the top 100 richest people is Black.

Just how rich are these people? Well, there’s a meme going around saying that Jeff Bezos could afford to buy every homeless person in the world a house at median market price and still, with just what’s left over, be a multi-billionaire among the top 100 richest people in the world.

And that meme is completely correct. The math checks out.

There are about 554,000 homeless people in the US at any given time.

The median sale price of a currently existing house in the US is about $253,000.

Multiply those two numbers together, and you get $140 billion.

And Jeff Bezos has net wealth of $157 billion.

This means that he would still have $17 billion left after buying all those houses. The 100th richest person in the world has $13 billion, so Jeff Bezos would still be higher than that.

Even $17 billion is enough to spend over $2 million every single day—over $20 per second—and never run out of money as long as the dividends keep paying out.

Jeff Bezos in fact made so much in dividends and capital gains this past quarter that he was taking in as much money as the median Amazon employee’s annual salary—which is more than what I make as a grad student, and only slightly less than the median US individual income—every nine seconds. Yes, you read that correctly: Nine (9) seconds. In the time it took you to read this paragraph, Jeff Bezos probably received more in capital gains than you will make this whole year. And if not (because you’re relatively rich or you read quickly), I’m sure he will have in the time it takes you to read this whole post.

When Mitt Romney ran for President, a great deal was made of his net wealth of over $250 million. This is indeed very rich, richer than anyone really needs or probably deserves. But compared to the world’s richest, this is pocket change. Jeff Bezos gets that much in dividends and capital gains every day. Bill Gates could give away that much every day for a year and still not run out of money. (He doesn’t quite give that much, but he does give a lot.)

I grew up in Ann Arbor, Michigan. Ann Arbor is a medium-sized city of about 120,000 people (230th in the US by population), and relatively well-off (median household income about 16% higher than the US median). Nevertheless, if Jeff Bezos wanted to, he could give every single person in Ann Arbor the equivalent of 30 years of their income—over a million dollars each—and still have enough money left to be among the world’s 100 richest people.

Or suppose instead that all the world’s 500 richest people decided to give away all the money they have above $1 billion—so they’d all still be billionaires, but only barely. That $8.7 trillion they have together, minus the $500 billion they’re keeping, would be $8.2 trillion. In fact, let’s say they keep a little more, just to make sure they all have the same ordering: Give each one an extra $1 million for each point they are in the ranking, so that Jeff Bezos would stay on top at $1 B + 500 ($0.001 B) = $1.5 billion, while Bill Gates in second place would have $1 million less, and so on. That would leave us with still over $8 trillion to give away.

How far could that $8 trillion go? Well, suppose we divided it evenly between all 328 million people in the United States. How much would each person receive? Oh, just about $24,000—basically my annual income.

Or suppose instead we spread it out over the entire world: Every single man, woman, and child on the planet Earth gets an equal share. There are 7.7 billion people in the world, so by spreading out $8 trillion between them, each one would get over $1000. For you or I that’s a big enough windfall to feel. For the world’s poorest people, it’s more than they make in several years. It would be life-changing for them. (Actually that’s about what GiveDirectly gives each family—and it is life-changing.)

And let me remind you: This would be leaving them billionaires. They’re just not as much billionaires as before—they only have $1 billion instead of $20 billion or $50 billion or $100 billion. And even $1 billion is obviously enough to live however you want, wherever you want, for the rest of your life, never working another day if you don’t want to. With $1 billion, you can fly in jets (a good one will set you back $20 million), sail in yachts (even a massive 200-footer wouldn’t run much above $200 million), and eat filet mignon at every meal (in fact, at $25 per pound, you can serve it to yourself and a hundred of your friends without breaking a sweat). You can decorate your bedroom with original Jackson Pollock paintings (at $200 million, his most expensive painting is only 20% of your wealth) and bathe in bottles of Dom Perignon (at $400 per liter, a 200-liter bath would cost you about $80,000—even every day that’s only $30 million a year, or maybe half to a third of your capital income). Remember, this is all feasible at just $1 billion—and Jeff Bezos has over a hundred times that. There is no real lifestyle improvement that happens between $1 billion and $157 billion; it’s purely a matter of status and power.

Taking enough to make them mere millionaires would give us another $0.5 trillion to spend (about the GDP of Sweden, one-fourth the GDP of Canada, or 70% of the US military budget).

Do you think maybe these people have too much money?

I’m not saying that we should confiscate all private property. I’m not saying that we should collectivize all industry. I believe in free markets and private enterprise. People should be able to get rich by inventing things and starting businesses.

But should they be able to get that rich? So rich that one man could pay off every mortgage in a whole major city? So rich that the CEO of a company makes what his employees make in a year in less than a minute? So rich that 500 people—enough to fill a large lecture hall—own enough wealth that if it were spread out evenly they could give $1000 to every single person in the world?

If Jeff Bezos had $1.5 million, I’d say he absolutely earned it. Some high-level programmers at Amazon have that much, and they absolutely earned it. If he had $15 million, I’d think maybe he could deserve that, given his contribution to the world. If he had $150 million, I’d find it hard to believe that anyone could really deserve that much, but if it’s part of what we need to make capitalism work, I could live with that.

But Jeff Bezos doesn’t have $1.5 million. He doesn’t have $15 million. He doesn’t have $150 million. He doesn’t have $1.5 billion. He doesn’t even have $15 billion. He has $150 billion. He has over a thousand times the level of wealth at which I was already having to doubt whether any human being could possibly deserve so much money—and once it gets that big, it basically just keeps growing. A stock market crash might drop it down temporarily, but it would come back in a few years.

And it’s not like there’s nothing we could do to spread this wealth around. Some fairly simple changes in how we tax dividends and capital gains would be enough to get a lot of it, and a wealth tax like the one Elizabeth Warren has proposed would help a great deal as well. At the rates people have seriously proposed, these taxes would only really stop their wealth from growing; it wouldn’t meaningfully shrink it.

That could be combined with policy changes about compensation for corporate executives, particularly with regard to stock options, to make it harder to extract such a large proportion of a huge multinational corporation’s wealth into a single individual. We could impose a cap on the ratio between median employee salary (including the entire supply chain!) and total executive compensation (including dividends and capital gains!), say 100 to 1. (Making in 9 seconds what his employees make in a year, Jeff Bezos is currently operating at a ratio of over 3 million to 1.) If you exceed the cap, the remainder is taxed at 100%. This would mean that as a CEO you can still make $100 million a year, but only if your median employee makes $1 million. If your median employee makes $30,000, you’d better keep your own compensation under $3 million, because we’re gonna take the rest.

Is this socialism? I guess maybe it’s democratic socialism, the high-tax, high-spend #ScandinaviaIsBetter welfare state. But it would not be an end to free markets or free enterprise. We’re not collectivizing any industries, let alone putting anyone in guillotines. You could still start a business and make millions or even hundreds of millions of dollars; you’d simply be expected to share that wealth with your employees and our society as a whole, instead of hoarding it all for yourself.

Pinker Propositions

pnrj cognitive science, core principles, current events, public policy, tribal paradigm , , , , , , , , , , , , , , , , , , , , ,

May 19 2458623

What do the following statements have in common?

1. “Capitalist countries have less poverty than Communist countries.”

2. “Black men in the US commit homicide at a higher rate than White men.”

3. “On average, in the US, Asian people score highest on IQ tests, White and Hispanic people score near the middle, and Black people score the lowest.”

4. “Men on average perform better at visual tasks, and women on average perform better on verbal tasks.”

5. “In the United States, White men are no more likely to be mass shooters than other men.”

6. “The genetic heritability of intelligence is about 60%.”

7. “The plurality of recent terrorist attacks in the US have been committed by Muslims.”

8. “The period of US military hegemony since 1945 has been the most peaceful period in human history.”

These statements have two things in common:

1. All of these statements are objectively true facts that can be verified by rich and reliable empirical data which is publicly available and uncontroversially accepted by social scientists.

2. If spoken publicly among left-wing social justice activists, all of these statements will draw resistance, defensiveness, and often outright hostility. Anyone making these statements is likely to be accused of racism, sexism, imperialism, and so on.

I call such propositions Pinker Propositions, after an excellent talk by Steven Pinker illustrating several of the above statements (which was then taken wildly out of context by social justice activists on social media).

The usual reaction to these statements suggests that people think they imply harmful far-right policy conclusions. This inference is utterly wrong: A nuanced understanding of each of these propositions does not in any way lead to far-right policy conclusions—in fact, some rather strongly support left-wing policy conclusions.

1. Capitalist countries have less poverty than Communist countries, because Communist countries are nearly always corrupt and authoritarian. Social democratic countries have the lowest poverty and the highest overall happiness (#ScandinaviaIsBetter).

2. Black men commit more homicide than White men because of poverty, discrimination, mass incarceration, and gang violence. Black men are also greatly overrepresented among victims of homicide, as most homicide is intra-racial. Homicide rates often vary across ethnic and socioeconomic groups, and these rates vary over time as a result of cultural and political changes.

3. IQ tests are a highly imperfect measure of intelligence, and the genetics of intelligence cut across our socially-constructed concept of race. There is far more within-group variation in IQ than between-group variation. Intelligence is not fixed at birth but is affected by nutrition, upbringing, exposure to toxins, and education—all of which statistically put Black people at a disadvantage. Nor does intelligence remain constant within populations: The Flynn Effect is the well-documented increase in intelligence which has occurred in almost every country over the past century. Far from justifying discrimination, these provide very strong reasons to improve opportunities for Black children. The lead and mercury in Flint’s water suppressed the brain development of thousands of Black children—that’s going to lower average IQ scores. But that says nothing about supposed “inherent racial differences” and everything about the catastrophic damage of environmental racism.

4. To be quite honest, I never even understood why this one shocks—or even surprises—people. It’s not even saying that men are “smarter” than women—overall IQ is almost identical. It’s just saying that men are more visual and women are more verbal. And this, I think, is actually quite obvious. I think the clearest evidence of this—the “interocular trauma” that will convince you the effect is real and worth talking about—is pornography. Visual porn is overwhelmingly consumed by men, even when it was designed for women (e.g. Playgirl—a majority of its readers are gay men, even though there are ten times as many straight women in the world as there are gay men). Conversely, erotic novels are overwhelmingly consumed by women. I think a lot of anti-porn feminism can actually be explained by this effect: Feminists (who are usually women, for obvious reasons) can say they are against “porn” when what they are really against is visual porn, because visual porn is consumed by men; then the kind of porn that they like (erotic literature) doesn’t count as “real porn”. And honestly they’re mostly against the current structure of the live-action visual porn industry, which is totally reasonable—but it’s a far cry from being against porn in general. I have some serious issues with how our farming system is currently set up, but I’m not against farming.

5. This one is interesting, because it’s a lack of a race difference, which normally is what the left wing always wants to hear. The difference of course is that this alleged difference would make White men look bad, and that’s apparently seen as a desirable goal for social justice. But the data just doesn’t bear it out: While indeed most mass shooters are White men, that’s because most Americans are White, which is a totally uninteresting reason. There’s no clear evidence of any racial disparity in mass shootings—though the gender disparity is absolutely overwhelming: It’s almost always men.

6. Heritability is a subtle concept; it doesn’t mean what most people seem to think it means. It doesn’t mean that 60% of your intelligence is due to your your genes. Indeed, I’m not even sure what that sentence would actually mean; it’s like saying that 60% of the flavor of a cake is due to the eggs. What this heritability figure actually means that when you compare across individuals in a population, and carefully control for environmental influences, you find that about 60% of the variance in IQ scores is explained by genetic factors. But this is within a particular population—here, US adults—and is absolutely dependent on all sorts of other variables. The more flexible one’s environment becomes, the more people self-select into their preferred environment, and the more heritable traits become. As a result, IQ actually becomes more heritable as children become adults, called the Wilson Effect.

7. This one might actually have some contradiction with left-wing policy. The disproportionate participation of Muslims in terrorism—controlling for just about anything you like, income, education, age etc.—really does suggest that, at least at this point in history, there is some real ideological link between Islam and terrorism. But the fact remains that the vast majority of Muslims are not terrorists and do not support terrorism, and antagonizing all the people of an entire religion is fundamentally unjust as well as likely to backfire in various ways. We should instead be trying to encourage the spread of more tolerant forms of Islam, and maintaining the strict boundaries of secularism to prevent the encroach of any religion on our system of government.

8. The fact that US military hegemony does seem to be a cause of global peace doesn’t imply that every single military intervention by the US is justified. In fact, it doesn’t even necessarily imply that any such interventions are justified—though I think one would be hard-pressed to say that the NATO intervention in the Kosovo War or the defense of Kuwait in the Gulf War was unjustified. It merely points out that having a hegemon is clearly preferable to having a multipolar world where many countries jockey for military supremacy. The Pax Romana was a time of peace but also authoritarianism; the Pax Americana is better, but that doesn’t prevent us from criticizing the real harms—including major war crimes—committed by the United States.

So it is entirely possible to know and understand these facts without adopting far-right political views.

Yet Pinker’s point—and mine—is that by suppressing these true facts, by responding with hostility or even ostracism to anyone who states them, we are actually adding fuel to the far-right fire. Instead of presenting the nuanced truth and explaining why it doesn’t imply such radical policies, we attack the messenger; and this leads people to conclude three things:

1. The left wing is willing to lie and suppress the truth in order to achieve political goals (they’re doing it right now).

2. These statements actually do imply right-wing conclusions (else why suppress them?).

3. Since these statements are true, that must mean the right-wing conclusions are actually correct.

Now (especially if you are someone who identifies unironically as “woke”), you might be thinking something like this: “Anyone who can be turned away from social justice so easily was never a real ally in the first place!”

This is a fundamentally and dangerously wrongheaded view. No one—not me, not you, not anyone—was born believing in social justice. You did not emerge from your mother’s womb ranting against colonalist imperialism. You had to learn what you now know. You came to believe what you now believe, after once believing something else that you now think is wrong. This is true of absolutely everyone everywhere. Indeed, the better you are, the more true it is; good people learn from their mistakes and grow in their knowledge.

This means that anyone who is now an ally of social justice once was not. And that, in turn, suggests that many people who are currently not allies could become so, under the right circumstances. They would probably not shift all at once—as I didn’t, and I doubt you did either—but if we are welcoming and open and honest with them, we can gradually tilt them toward greater and greater levels of support.

But if we reject them immediately for being impure, they never get the chance to learn, and we never get the chance to sway them. People who are currently uncertain of their political beliefs will become our enemies because we made them our enemies. We declared that if they would not immediately commit to everything we believe, then they may as well oppose us. They, quite reasonably unwilling to commit to a detailed political agenda they didn’t understand, decided that it would be easiest to simply oppose us.

And we don’t have to win over every person on every single issue. We merely need to win over a large enough critical mass on each issue to shift policies and cultural norms. Building a wider tent is not compromising on your principles; on the contrary, it’s how you actually win and make those principles a reality.

There will always be those we cannot convince, of course. And I admit, there is something deeply irrational about going from “those leftists attacked Charles Murray” to “I think I’ll start waving a swastika”. But humans aren’t always rational; we know this. You can lament this, complain about it, yell at people for being so irrational all you like—it won’t actually make people any more rational. Humans are tribal; we think in terms of teams. We need to make our team as large and welcoming as possible, and suppressing Pinker Propositions is not the way to do that.

For labor day, thoughts on socialism

pnrj critique of neoclassical economics, ethics, inequality, market failure, public policy , , , , , , , , , , , , , , ,

Planned Post 255: Sep 9 JDN 2458371

This week includes Labor Day, the holiday where we are perhaps best justified in taking the whole day off from work and doing nothing. Labor Day is sort of the moderate social democratic counterpart to the explicitly socialist holiday May Day.

The right wing in this country has done everything in their power to expand the definition of “socialism”, which is probably why most young people now have positive views of socialism. There was a time when FDR was seen as an alternative to socialism; but now I’m pretty sure he’d just be called a socialist.

Because of this, I am honestly not sure whether I should be considered a socialist. I definitely believe in the social democratic welfare state epitomized by Scandinavia, but I definitely don’t believe in total collectivization of all means of production.

I am increasingly convinced that shareholder capitalism is a terrible system (the renowned science fiction author Charles Stross actually gave an excellent talk on this subject), but I would not want to abandon free markets.
The best answer might be worker-owned cooperatives. The empirical data is actually quite consistent in showing worker co-ops to be as efficient if not more efficient than conventional corporations, and by construction their pay systems produce less inequality than corporations.

Indeed, I think there is reason to believe that a worker co-op is a much more natural outcome for free markets under a level playing field than a conventional corporation, and the main reason we have corporations is actually that capitalism arose out of (and in response to) feudalism.

Think about it: Why should most things be owned by the top 1%? (Okay, not quite “most”: to be fair, the top 1% only owns 40% of all US net wealth.) Why is 80% of the value of the stock market held by the top 10% of the population?

Most things aren’t done by the top 1%. There are a handful of individuals (namely, scientists who make seminal breakthroughs: Charles Darwin, Marie Curie, Albert Einstein, Rosalind Franklin, Alan Turing, Jonas Salk) who are so super-productive that they might conceivably deserve billionaire-level compensation—but they are almost never the ones who are actually billionaires. If markets were really distributing capital to those who would use it most productively, there’s no reason to think that inequality would be so self-sustaining—much less self-enhancing as it currently seems to be.

But when you realize that capitalism emerged out of a system where the top 1% (or less) already owned most things, and did so by a combination of “divine right” ideology and direct, explicit violence, this inequality becomes a lot less baffling. We never had a free market on a level playing field. The closest we’ve ever gotten has always been through social-democratic reforms (like the New Deal and Scandinavia).

How does this result in corporations? Well, when all the wealth is held by a small fraction of individuals, how do you start a business? You have to borrow money from the people who have it. Borrowing makes you beholden to your creditors, and puts you at great risk if your venture fails (especially back in the days when there were debtor’s prisons—and we’re starting to go back that direction!). Equity provides an alternative: In exchange for giving them the downside risk if your venture fails, you also give your creditors—now shareholders—the upside risk if your venture succeeds. But at the end of the day when your business has succeeded, where did most of the profits go? Into the hands of the people who already had money to begin with, who did nothing to actually contribute to society. The world would be better off if those people had never existed and their wealth had simply been shared with everyone else.

Compare this to what would happen if we all started with similar levels of wealth. (How much would each of us have? Total US wealth of about $44 trillion, spread among a population of 328 million, is about $130,000 each. I don’t know about you, but I think I could do quite a bit with that.) When starting a business, you wouldn’t go heavily into debt or sign away ownership of your company to some billionaire; you’d gather a group of dedicated partners, each of whom would contribute money and effort into building the business. As you added on new workers, it would make sense to pool their assets, and give them a share of the company as well. The natural structure for your business would be not a shareholder corporation, but a worker-owned cooperative.

I think on some level the super-rich actually understand this. If you look closely at the sort of policies they fight for, they really aren’t capitalist. They don’t believe in free, unfettered markets where competition reigns. They believe in monopoly, lobbying, corruption, nepotism, and above all, low taxes. (There’s actually nothing in the basic principles of capitalism that says taxes should be low. Taxes should be as high as they need to be to cover public goods—no higher, and no lower.) They don’t want to provide nationalized healthcare, not because they believe that private healthcare competition is more efficient (no one who looks at the data for even a few minutes can honestly believe that—US healthcare is by far the most expensive in the world), but because they know that it would give their employees too much freedom to quit and work elsewhere. Donald Trump doesn’t want a world where any college kid with a brilliant idea and a lot of luck can overthrow his empire; he wants a world where everyone owes him and his family personal favors that he can call in to humiliate them and exert his power. That’s not capitalism—it’s feudalism.

Crowdfunding also provides an interesting alternative; we might even call it the customer-owned cooperative. Kickstarter and Patreon provide a very interesting new economic model—still entirely within the realm of free markets—where customers directly fund production and interact with producers to decide what will be produced. This might turn out to be even more efficient—and notice that it would run a lot more smoothly if we had all started with a level playing field.

Establishing such a playing field, of course, requires a large amount of redistribution of wealth. Is this socialism? If you insist. But I think it’s more accurate to describe it as reparations for feudalism (not to mention colonialism). We aren’t redistributing what was fairly earned in free markets; we are redistributing what was stolen, so that from now on, wealth can be fairly earned in free markets.

Did the World Bank modify its ratings to manipulate the outcome of an election in Chile?

pnrj current events, development economics, ethics, inequality, public policy , , , , , , , , , , , , , , ,

Jan 21 JDN 2458140

(By the way, my birthday is January 19. I can’t believe I’m turning 30.)

This is a fairly obscure news item, so you may have missed it. It should be bigger news than it is.
I can’t fault the New York Times for having its front page focus mainly on the false missile alert that was issued to some people in Hawaii; a false alarm of nuclear attack definitely is the most important thing that could be going on in the world, short of course of actual nuclear war.

CNN, on the other hand, is focused entirely on Trump. When I first wrote this post, they were also focused on Trump, mainly interested in asking whether Trump’s comments about “immigrants from shithole countries” was racist. My answer: Yes, but not because he said the countries were “shitholes”. That was crude, yes, but not altogether inaccurate. Countries like Syria, Afghanistan, and Sudan are, by any objective measure, terrible places. His comments were racist because they attributed that awfulness to the people leaving these countries. But in fact we have a word for immigrants who flee terrible places seeking help and shelter elsewhere: Refugees. We call those people refugees. There are over 10 million refugees in the world today, most of them from Syria.

So anyway, here’s the news item you should have heard about but probably didn’t: The Chief Economist of the World Bank (Paul Romer, who coincidentally I mentioned in my post about DSGE models) has opened an investigation into the possibility that the World Bank’s ratings of economic freedom were intentionally manipulated in order to tilt a Presidential election in Chile.

The worst part is, it may have worked: Chile’s “Doing Business” rating consistently fell under President Michelle Bachelet and rose under President Sebastian Piñera, and Piñera won the most recent election. Was that the reason he won? Who knows? I’m still not entirely clear on how we ended up with President Trump. But it very likely contributed.

The World Bank is supposed to be an impartial institution representing the interests of global economic development. I’m not naive; I recognize that no human institution is perfect, and there will always be competing political and economic interests within any complex institution. Development economists are subject to cognitive biases just like anyone else. If this was the work of a handful of economic analysts (or if Romer turns out to be wrong and the changes in statistical methodology were totally reasonable), so be it; let’s make sure that the bias is corrected and the analysts involved are punished.

But I fear that the rot may run deeper than this. The World Bank is effectively a form of unelected international government. It has been accused of inherent pro-capitalist (or even racist) bias due to the fact that Western governments are overrepresented in its governance, but I actually consider that accusation unfair: There are very good reasons to make sure that your international institutions are managed by liberal democracies, and turns out that most of the world’s liberal democracies are Western. The fact that the US, France, Germany, and the UK make most of the decisions is entirely sensible: Those are in fact the countries we should want making global decisions.

China is not underrepresented, because China is not a democracy and doesn’t deserve to be represented. They are already more represented in the World Bank than they should be, because representing the PRC is not actually representing the interests of the people of China. Russia and Saudi Arabia are undeniably overrepresented. India is underrepresented; they should be complaining. Some African democracies, such as Namibia and Botswana, would also have a legitimate claim to underrepresentation. But I don’t lose any sleep over the fact that Zimbabwe and Iran aren’t getting votes in the World Bank. If and when those countries actually start representing their people, then we can talk about giving them representation in world government. I don’t see how refusing to give international authority to dictators and theocrats constitutes racism or pro-capitalist bias.

That said, there are other reasons to think that the World Bank might actually have some sort of pro-capitalist bias. The World Bank was instrumental in forming the Washington Consensus, which opened free trade and increase economic growth worldwide, but also exposed many poor countries to risk from deregulated financial markets and undermined social safety nets through fiscal austerity programs. They weren’t wrong to want more free trade, and many of their reforms did make sense; but they were at best wildly overconfident in their policy prescriptions, and at worst willing to sacrifice people in poor countries at the altar of bank profits. World poverty has in fact fallen by about half since 1990, and the World Bank has a lot to do with that. But things may have gone faster and smoother if they hadn’t insisted on removing so many financial regulations so quickly without clear forecasts of what would happen. I don’t share Jason Hickel’s pessimistic view that the World Bank’s failures were intentional acts toward an ulterior agenda, but I can see how it begins to look that way when they keep failing the same ways over and over again. (I instead invoke Hanlon’s razor: “Never attribute to malice that which is adequately explained by stupidity.”)

There are also reports of people facing retaliation for criticizing World Bank projects, including those within the World Bank who raise ethical concerns. If this was politically-motivated data manipulation, there may have been people who saw it happening, but were afraid to say anything for fear of being fired or worse.

And Chile in particular has reason to be suspicious. The World Bank suddenly started giving loans to Chile when Augusto Pinochet took power (the CIA denies supporting the coup, by the way—though, given the source, I can understand why one would take that with a grain of salt), and did so under the explicit reasoning that an authoritarian capitalist regime was somehow “more trustworthy” than a democratic socialist regime. Even in the narrow sense of financial creditworthiness that seems difficult to defend; the World Bank knew almost nothing about what kind of government Pinochet was going to create, and in fact despite the so-called “Miracle of Chile”, rapid economic growth in Chile didn’t really happen until the 1990s, after Chile became a democratic capitalist regime.

What I’m really getting at here is that the World Bank has a lot to answer for. I am prepared to believe that most of these actions were honest mistakes or ideological blinders, rather than corruption or cruelty; but even so, when millions of lives are at stake, even honest mistakes aren’t so forgivable. They should be looking for ways to improve their internal governance to make sure that mistakes are caught and corrected quickly. They should be constantly vigilant for biases—either intentional or otherwise—that might seep into their research. Error should be met with immediate correction and public apology; malfeasance should be met with severe punishment.

Perhaps Romer’s investigation actually signals a shift toward such a policy. If so, this is a very good thing. If only we had done this, say, thirty years ago.

Several of the world’s largest banks are known to have committed large-scale fraud. Why have we done so little about it?

pnrj core principles, current events, ethics, financial fraud , , , , , , , , , , , , ,

July 16, JDN 2457951

In 2014, JPMorgan Chase paid a settlement of $614 million for fraudulent mortgage lending contributing to the crisis; but this was spare change compared to the $16.5 billion Bank of America paid in settlements for their fradulent mortgages.

In 2015, Citibank paid $700 million in restitution and $35 million in penalties for fraudulent advertising of “payment protection” services.

In 2016, Wells Fargo paid $190 in settlements for defrauding their customers with fake accounts.

Even PayPal has paid $25 million in settlements over abuses of their “PayPal Credit” system.
In 2016, Goldman Sachs paid $5.1 billion in settlements over their fraudulent sales of mortgage-backed securities.
But the worst offender of course is HSBC, which has paid $2.5 billion in settlements over fraud, as well as $1.9 billion in settlements for laundering money for terrorists. The US Justice Department has kept their money-laundering protections classified because they’re so bad that simply revealing them to the public could result in vast amounts of criminal abuse.
These are some of the world’s largest banks. JPMorgan Chase alone owns 8.0% of all investment banking worldwide; Goldman Sachs owns 6.6%; Citi owns 4.9%; Wells Fargo 2.5%; and HSBC 1.8%. That means that between them, these five corporations—all proven to have engaged in large-scale fraud—own almost one-fourth of all the world’s investment banking assets.

What shocks me the most about this is that hardly anyone seems to care. It’s seen as “normal”, as “business as usual” that a quarter of the world’s investment banking system is owned by white-collar criminals. When the issue is even brought up, often the complaint seems to be that the government is being somehow overzealous. The Economist even went so far as to characterize the prosecution of Wall Street fraud as a “shakedown”. Apparently the idea that our world’s most profitable companies shouldn’t be able to launder money for terrorists is just ridiculous. These are rich people; you expect them to follow rules? What is this, some kind of democracy?

Is this just always how it has been? Has corruption always been so thoroughly infused with finance that we don’t even know how to separate them? Has the oligarchy of the top 0.01% become so strong that we can’t even bring ourselves to challenge them when they commit literal treason? For, in case you’ve forgotten, that is what money-laundering for terrorists is: HSBC gave aid and comfort to the enemies of the free world. Like “freedom” and “terrorism”, the word “treason” has been so overused that we begin to forget its meaning; but one of the groups that HSBC gladly loaned money to is an organization that has financed Hezbollah and Al-Qaeda. These are people that American and British soldiers have died fighting against, and when a British bank was found colluding with them, the penalty was… a few weeks of profits, no personal responsibility, and not a single day of prison time. The settlement was in fact less than the profits gained from the criminal enterprise, so this wasn’t even a fine; it was a tax. Our response to treason was to impose a tax.

And this of course was not the result of some newfound leniency in American government in general. No, we are still the nation that imprisons 700 out of every 100,000 people, the nation with more prisoners than any other nation on Earth. Our police officers still kill young Black men with impunity, including at least three dozen unarmed Black men every year, many of them for no apparent reason at all. (The precise number is still unknown, as the police refuse to keep an official database of all the citizens they kill.) Decades of “law and order” politicians promising to stop the “rising crime” (that is actually falling) have made the United States very close to a police state, especially in poor neighborhoods that are primarily inhabited by Black and Hispanic people. We don’t even have an especially high crime rate, except for gun homicides (and that because we have so many guns, also more than any other nation on Earth). We are, if anything, an especially vindictive society, cruel, unforgiving, and violent towards those we perceive as transgressors.

Except, that is, when the criminals are rich. Even the racial biases seem to go away in such circumstances; there is no reasonable doubt as to the guilt of O.J. Simpson or Bill Cosby, but Simpson only ended up in prison years later on a completely unrelated offense, and after Cosby’s mistrial it’s unclear if he’ll ever see any prison time. I don’t see how either man could have been less punished for his crimes had he been White; but can anyone seriously doubt that both men would be punished more had they not been rich?

I do not think that capitalism is an irredeemable system. I think that, in themselves, free markets are very useful, and we should not remove or restrict them unnecessarily. But capitalism isn’t supposed to be a system where the rich can do whatever they want and the poor have to accept it. Capitalism is supposed to be a system where everyone is free to do as they choose, unless they are harming others—and the rules are supposed to be the same for everyone. A free market is not one where you can buy the right to take away other people’s freedom.

Is this just some utopian idealism? It would surely be utopian to imagine a world where fraud never happens, that much is true. Someone, somewhere, will always be defrauding someone else. But a world where fraud is punished most of the time? Where our most powerful institutions are still subject to the basic rule of law? Is that a pipe dream as well?