Monthly Archives: May 2013

Economics, Star Trek and me

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It’s time to come clean. I’ve been a lifelong Trekkie – never to the extent of attending fan conventions in Starfleet costume, but nevertheless devoted. Yesterday I went to see the new movie, Star Trek: Into Darkness, which is excellent. It sent me to a superb 2001 book on my shelves, [amazon_link id=”074562491X” target=”_blank” ]Star Trek: The Human Frontier[/amazon_link] by mother-and-son team Michele and Duncan Barrett. I love this book. They write: “We interpret Star Trek in a historical, cultural context. Much of its preoccupation lies in the nexus of questions about what we might shorthand as ‘modernity’ and ‘humanism’.”

[amazon_image id=”074562491X” link=”true” target=”_blank” size=”medium” ]Star Trek: The Human Frontier[/amazon_image]

They argue that the entire Star Trek oeuvre both embodies progressive 1960s politics and constitutes a reflection on what it means to be human. Over time, the simple rational and scientific optimism of the early series gave way to darker themes, explorations of fragmented identities, mental illness, religion and irrationalism, and the character of leadership. Not surprisingly, given the state of the world, the new movie continues in this more pessimistic vein, while ending with an upbeat reaffirmation of the original Enlightenment principles. It raises the pressing modern question of trust and distrust in authority. I thought the design of the movie was also fascinating – particularly the new versions of the Starfleet uniforms. The working uniforms are very similar to the 60s originals, but the dress uniforms in the ceremonial scenes on Earth are strikingly 1930s and conformist.

As anybody mildly interested will know, Benedict Cumberbatch stars as the bad guy, a rational, calculating genius with a strategic mind. I thought it was interesting that he should turn up in the role, given his characterisation as Sherlock – see my previous post on economists’ vision of ‘rational man’.

Finally, Spock has a simply brilliant line, which will appeal to all economists: “I’m a Vulcan; we embrace technicality.”

It should be the motto of all economists: Live long and prosper!

Robots v aliens

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There has been an awful lot about robots around lately. As well as the links in my previous robot blog post, there was this primer from Robin Hanson, for example. Yesterday I did a talk at COMPAS in Oxford about research questions in the economics of migration, drawing on my experience as a practitioner for five years on the Migration Advisory Committee and also eight years talking to businesses when I was a Competition Commission member.

In MAC discussions, I was always keen to make sure what we called ‘bottom up’ evidence from companies, as well as ‘top down’ evidence from economic indicators,  informed our reports. The reason is that there was always a category of immigration that didn’t sit neatly in the framework of a labour market ‘shortage’. Economists naturally would expect a shortage to be resolved by rising real wages and/or increased labour supply, subject to frictions so it could take some time. But some businesses were clear they always need some immigrant workers, because they operated in global markets. They ranged from law, finance and professional service firms through to high-tech start-ups and engineering businesses. How should we think about their needs, in the context of migration policy?

My suggestion is that economists researching migration need to look more closely at ‘task-based’ models of production and trade. Rather than the conventional models that derive labour demand from a ‘production function’, with firms choosing how much (and what kind) of capital and labour they need to fulfill specific roles in producing the output, task-based models split production into tasks, and allocate inputs to tasks depending on the prevailing wages and technology. When technology is changing rapidly, as it has been, and factor prices change, tasks can be reallocated. In particular, many sectors of the economy, including services, have split their production into stages,some of which can be located anywhere in the world. In the existing literature, this is the phenomenon of ‘global unbundling’ or supply chains stretched over international borders. It can be driven either by low wage costs overseas, or simply by it being more efficient to allocate certain tasks to overseas contractors and workers.

There are some excellent papers on separate aspects of the choices this approach presents to firms – Richard Baldwin and Frederic Robert-Nicoud on trade, Daron Acemoglu and David Autor on labour markets, Ottaviano, Peri and Wright on migration – all building on a 2008 AER paper by Gene Grossman and Esteban Rossi-Hansberg. These need joining up to account for the joint decisions many businesses are taking: do they hire native workers, aliens or robots? Do they locate them at home, requiring some immigrants, or overseas via offshoring? What are the effects of different choices on the level of employment of natives, rather than either aliens or robots? And on their real wages? If migration flows are reduced, what adjustments will businesses of different kinds make in assigning other inputs to tasks – will offshore aliens or robots in fact do better than onshore natives?

All of these are empirical questions so the big problem, it seems to me, is data. The US has a skills database (O*NET) but I’m not aware of one in other countries. The trouble is, if the task-based approach is more useful (more realistic) than the production function approach, it requires quite a significant mental shift. For one thing, wages will be determined by productivity in tasks, so regressing real wages on individuals’ skills will be misleading whenever firms reallocate people with given skills to different tasks. The newer approach fits much better with how I’ve heard businesses describe their strategic decisions over the years. The Acemoglu and Autor survey chapter in the [amazon_link id=”0444534520″ target=”_blank” ]Handbook of Labor Economics[/amazon_link] is a good, comprehensive starting point. The Economist did a brief write-up on the robot aspect a while ago, too.

[amazon_image id=”0444534520″ link=”true” target=”_blank” size=”medium” ]HANDBOOK OF LABOR ECONOMICS, VOL 4B (Handbooks in Economics): New Developments and Research on Labor Markets[/amazon_image]

 

Predatory capitalism

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Isn’t all capitalism predatory, some contemporary critics might well ask, looking at the post-crisis economic landscape? Geoff Mulgan, chief exec of NESTA, is more optimistic in his recent book [amazon_link id=”0691146969″ target=”_blank” ]The Locust and the Bee: Predators and Creators in Capitalism’s Future[/amazon_link]. He foresees the possibility of sustainable economic growth built on relationships, with productive health and social care sectors, green innovation and social enterprise.

[amazon_image id=”0691146969″ link=”true” target=”_blank” size=”medium” ]The Locust and the Bee: Predators and Creators in Capitalism’s Future[/amazon_image]

It won’t be business as usual; instead we’ll see “concentrations of capital guided by social and environmental goals as well as commercial ones; circular production systems; the civil and social economy; the ever-growing social industries providing health care, education and support; the collaborations of cyberspace and new tools for collective intelligence; the household reasserting itself as a place of production; the worlds of parallel exchange systems, collaborative consumption and time accounts.”

This lovely vision of ‘creative capitalism’ is some distance from the ‘predatory capitalism’ that brought us the crash, and continues to serve up poor service at high prices to support executive pay packets. The book makes a good case that the dysfunction we’re all too aware of now is itself the dynamic that will change the character of the capitalism mixed economies we live in. Mulgan draws on the literature on technology-driven long waves to explain how cycles of change come about: every crisis contains the seeds of its own destruction, as it were. Of course there are forces of reaction, but he has a fundamental belief in the power of innovation and human creativity to overcome them. The chapters on these dynamics form the core of the book, and set out the dynamics very clearly.

This is cheering, but I’m not so sure. The book is excellent on the economic dynamics of innovation, but oddly quiet – certainly for such a politically-aware author – on the politics of changing ‘the system’. It discusses, and dismisses, the utopianism of anti-capitalist protest, but does not cover the forces of cynicism and inertia. Mancur Olson’s classic work on rent seeking and the political economy of elite predation (for example in [amazon_link id=”0674537513″ target=”_blank” ]The Logic of Collective Action[/amazon_link]) is cited briefly; this theme is underplayed. The predators are in a strong position. They are defended by a barricade of legislation, ways of doing business and social norms.

Take one small example of the ability to resist change: today’s FT reports that the drive to increase the proportion of women in the boardroom of FTSE companies has ground to a halt, might in fact be going into reverse. The reason is almost certainly that the method of recruitment remains the old boys’ network: incumbents and headhunters will say, with sincerity, they’d love to appoint more women, they make huge efforts to shortlist women, but there aren’t enough suitable candidates. But ‘suitable’ means known to them and with the same career path as a male candidate. Of course, nothing will change without a legal quota. What are the odds on getting that legislation? Indeed.

Now pan out, and think about the legal and regulatory changes needed to open large swathes of the economy – banking, transport, pharmaceuticals, farming & agricultural trading – to the innovative start-ups that are indeed, as the book suggests, all around.

So although I like the vision set out in [amazon_link id=”0691146969″ target=”_blank” ]The Locust and the Bee[/amazon_link], and like Geoff Mulgan am encouraged by the opportunity offered by the crisis and inherent dynamics, it’s time to plunge into the legal and political nuts and bolts of turning predation into creation.

The robots are coming. Or are they?

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This morning I warmed up for work by reading some intriguing articles that have been much linked-to in recent days: an interview with Jaron Lanier about his new book [amazon_link id=”1451654960″ target=”_blank” ]Who Owns The Future?[/amazon_link]; a Mother Jones article Welcome Robot Overlords, Please Don’t Fire Us; and an essay about how the intellectual left must re-engage with practical political economy.

[amazon_image id=”1451654960″ link=”true” target=”_blank” size=”medium” ]Who Owns the Future?[/amazon_image]

All three articles are inspired by the economic precariousness of the (former?) middle classes, the loss of jobs in the middle of the income distribution compared to the top and bottom, and the downward dip in real incomes in the middle too. We’re not scared about robots turning rogue and killing humans, but we are scared about them taking on the 9-to-5 grind, the commute, the office politics…. Robot angst has also shown up in economics with the excellent book by Brynjolfsson and McAfee, [amazon_link id=”0984725113″ target=”_blank” ]Race Against the Machine[/amazon_link], and in Paul Krugman’s blog posts.

[amazon_image id=”0984725113″ link=”true” target=”_blank” size=”medium” ]Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy[/amazon_image]

The underlying hypothesis is that the way robots substitute for humans today is different from the way machines have substituted for us in the past; that they can now perform cognitive rather than physical tasks and the technical change is therefore capital-biased. It will be good for capital but not people. The ‘therefore’ in that sentence is an assumption, which might turn out to be true. I have an open mind on it.

However, there are some questions I’d pose before we let technological determinism run away with us.

1. The pattern of shifts in employment and income distribution – the hollowing out of the middle – is common to all OECD countries but rates of robotisation differ widely. What’s the linkage?

2. Why has automation so far coincided with increases in returns to education but will from now on be linked to decreasing returns to education?

3. The debate tends to focus on creative and routine admin or manufacturing jobs but the most heavily-automated sector of the economy is finance, which has seen the biggest increases in real incomes. How has this happened and why would it be different elsewhere?

My alternative hypothesis is that the returns to any new technology, whatever its bias, will be determined by social and political factors. So that leads me to think James Harkin’s LA Review of Books essay challenging people to stop being distracted by ‘nudge’ politics and think about the classic political economy questions of social structure and income distribution is the most optimistic of this morning’s three reads.

 

The ABC of counterfactuals

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Breakfast is one of my favourite times of day. I’ve been out for a run with the dog so feel very virtuous, and of course have the Financial Times to enjoy. This morning, one article had me spluttering over my coffee, however. Premium headphone-maker Sennheiser is leading a campaign against fake electronic goods. This is understandable; as a spokesman pointed out, if people buy cheap rip-offs thinking they’re the real thing, it will damage the company’s reputation. But what provoked me was the statement that the fakes had cost the company $2m in lost sales.

No they haven’t. That sum is based on a comparison with the false counterfactual that everyone who bought fake headphones would have bought the real thing if the cheap copy had been unavailable. The true counterfactual is that almost nobody who bought the fake item would have otherwise bough the real one, which apparently costs around $300. If anybody suffered lost sales, it was makers of cheap headphones, who should be joining Sennheiser’s campaign. Similarly, almost nobody who buys a $20 ‘Louis Vuitton’ handbag at the local market would otherwise have spent $2000 on the real McCoy. I suspect that relatively few people who buy fakes consumer goods actually think they’re getting the real item, although some no doubt are fooled. The price contains the information about authenticity and most people understand that.

The erroneous counterfactual about market size is often introduced into discussions of online piracy too. Although some people who download free music from filesharing sites would otherwise have bought it, many would not. Demand is negatively correlated with price in most markets.

This is not to condone piracy at all. In the case of electronic items it can be seriously dangerous, and I think it’s a big problem. I just wish people would learn to think about counterfactuals. It isn’t taught properly in economics courses, although essential in competition analysis – and also in good econometrics, including estimating the effect of introducing a low-priced copy of a consumer good into a market. The best discussion I’ve come across is in [amazon_link id=”0691120358″ target=”_blank” ]Mostly Harmless Econometrics[/amazon_link] by Joshua Angrist and Jorn-Steffen Pischke.

[amazon_image id=”0691120358″ link=”true” target=”_blank” size=”medium” ]Mostly Harmless Econometrics: An Empiricist’s Companion[/amazon_image]