Tag Archives: inequality

Choose your ancestors carefully

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Gregory Clark’s [amazon_link id=”0691162549″ target=”_blank” ]The Son Also Rises: Surnames and the History of Social Mobility[/amazon_link] is one of the most genuinely thought-provoking books I’ve read for quite a while. It’s the fruit of obviously many hours of archival and other research, looking at the lessons that can be drawn from using rare surnames to track directly what happens to status through the generations. The results are startling.

[amazon_image id=”0691162549″ link=”true” target=”_blank” size=”medium” ]The Son Also Rises: Surnames and the History of Social Mobility (The Princeton Economic History of the Western World)[/amazon_image]

Our received wisdom is that social mobility, measured by the persistence of income (usually) or perhaps wealth or education over time, was sluggish, improved in the 20th century, and has perhaps diminished again. The surname evidence indicates very low intergenerational mobility, in many countries and over many centuries. There is a slow, slow regression to the mean in status, but no evidence of any change in trend, even through major political and social changes, such as the extension of the franchise, the welfare state or even the Cultural Revolution in China. Clark writes:

“Mobility is consistent across generations. Although it may take 10 or 15 generations, social mobility may eventually erase most echoes of initial advantage or want. Counter-intuitively, the arrival of free public education in the 19th century and the reduction of nepotism in government, education and private firms have not increased social mobility. Nor is there any sign that modern economic growth has done so.”

So, to give some examples of the data sets used, the records of the Swedish Bar Association show that names associated with the nobility from the 17th century appeared six times as often in 2012 as they did in the general population. “The 18th century elite in Sweden have persisted to the present day as a relatively privileged group.” Sweden! At the present rate of decline of greater-than-average representation of their names among US doctors, “It will be 300 years before the Ashkenazi Jewish population of the United States ceases to be under-represented among physicians.”

In the UK where – notoriously – it helps to have attended Eton to get into the government, the surnames of the mediaeval elite were still eight times over-represented (compared to the average name) at Oxford and Cambridge in 1980. Someone with an unusual  ‘wealthy’ surname was about 50  times more likely to attend Oxford or Cambridge in the mid-19th century, and still 8 times more likely in 2010. “In terms of social mobility, what did the Scientific Revolution, the Enlightenment and the Industrial Revolution achieve? Very little.” Surnames associated with the invading elite after the Norman Conquest in 1066 are still heavily over-represented in Parliament and in the British armed forces.

Even in China after Communism and the Cultural Revolution, Qing elite surnames are found more frequently than the three most common Chinese surnames among elites such as professors, government officials and the chairs of company boards.

There are many examples. The bulk of the book presents the data sets and the persistence of the over-representation of certain surnames among high status groups. The rate of ‘social entropy’ is both high and astonishingly consistent across space and time, at 0.7-0.8.

Why are the surname estimates of social mobility so much lower than conventional estimates looking at the correlation of (say) income over time? Clark suggests that this is because a single indicator like income is an imperfect proxy for social status, which will depend on a number of attributes. The resulting error in measuring underlying status will bias downward the estimated persistence (or bias upward the estimate of mobility). Explaining why mobility is more or less constant and universal is harder. The book tentatively suggests that status is an inherited trait in the sense that an initial combination of talent and luck is sustained over the generations by assortative marriage. “The law of social mobility tends to produce a long arc of privilege or want for those who end up at the extremes of the status distribution.”

If correct, the conclusion seems pretty disturbing. But Clark insists that there is no reason for fatalism. Surname is not destiny. Slow social mobility does not imply a society rife with nepotism or corruption. Individuals’ efforts can act on the opportunities they get and the elements of luck that affect all lives. “Even with an inter-generational correlation of 0.75, more than two-fifths of variation in outcomes in generalized social status is still unpredictable.” The chance of moving from the bottom to the top of the pecking order in one generation is negligible, but there is plenty of scope for upward (or downward) movement.

There are both personal and policy conclusions, however. For anxious parents, the message is that much of what you’ve done for your children is genetic, so by all means give them every encouragement but don’t fret about the flash cards and expensive schools. Most of the old Etonians who thrive in modern Britain would have done just as well without costing their families the fees (£33,000 a year plus extras for seven years).

In terms of public policy, the message is avoid institutions and structures that amplify inequality. “If we cannot change the heritable advantages and disadvantages of families in the economic and social world, we should at least mitigate the consequences of these differences.” This means redistributing income via the tax system, providing universal healthcare and education, having a higher education system that avoids sorting by ability (more like the German than the US or UK systems), and so on. Sweden again. If you want to do well in modern Sweden, it helps to have had an ancestor who was ennobled in 1700, but if you don’t have that inheritance, you won’t be as far behind your country’s elite as a scion of the English working class will be behind ours.

It seems hard to quarrel with the data assembled and presented in this book. I certainly wouldn’t argue with the policy conclusions either – why would you want to amplify inequalities anyway?

Still, this is a troubling argument because it does seem to imply a necessary fatalism about our ability to shape social and economic outcomes. I’ve always been greatly encouraged by the work of [amazon_link id=”0262019132″ target=”_blank” ]Jim Heckman[/amazon_link] and others suggesting that early interventions in the lives of disadvantaged children can make a big difference to their lifetime success – partly because of experience in a local primary school making me so aware of how unequal children’s capabilities and prospects are at an early age. Clark challenges the Heckman-type results in one section, presenting some evidence that there is a large effect but temporary, and that it fades rapidly in adulthood.

So I hope [amazon_link id=”0691162549″ target=”_blank” ]The Son Also Rises[/amazon_link] stimulates a lot of further debate and research. It’s an important book, and anybody at all interested in inequality and the kind of society we have should read it. Although there are many charts and a few equations, it’s very well written, and full of fascinating historical detail as well.

Poverty and inheritance

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There’s an old Pelican on my shelves, [amazon_link id=”0804614679″ target=”_blank” ]The Economics of Inheritance[/amazon_link] by Josiah Wedgwood, nicely musty and yellowed. It was first published in 1929; I have the revised 1939 edition.

[amazon_image id=”0804614679″ link=”true” target=”_blank” size=”medium” ]The economics of inheritance,[/amazon_image]

It begins with a discussion of poverty and inequality, including this section.

“Material welfare has no significance except in its relations to men’s feelings and as one element in the psychological state called happiness. And the extent of a man’s happiness depends on the number and intensity of the desires which he is able to satisfy relative to he number and intensity of those which he is not able to satisfy. For this reason, certain religious teachers have striven to achieve happiness by eliminating all desires save those which they believed were capable of complete and permanent satisfaction. By contrast, in the search for material welfare, our modern civilisation under conditions of industrial progress is continually manufacturing new and previously unwanted sources of pleasure, so that old luxuries become new necessities, alike for those who can and cannot afford them. …

“`Though the amount of good and services enjoyed by the poor man in 1924 may be enormously greater than those enjoyed by his predecessor in 1824, the former’s poverty is probably little less tedious and unpleasant to him than an actually more grinding poverty was to the latter.”

There is a very thoughtful review of Julia Unwin’s book [amazon_link id=”1907994165″ target=”_blank” ]Why Fight Poverty?[/amazon_link] on 3am Magazine by the philosopher Richard Marshall (he reviews the whole Perspectives series). Lee Crawfurd also reviews Unwin’s book and takes issue with the idea of relative poverty, expressed above by Josiah Wedgwood.

[amazon_image id=”1907994165″ link=”true” target=”_blank” size=”medium” ]Why Fight Poverty? (Perspectives)[/amazon_image]

Incidentally, I’m pleased to see OUP is bringing out a collection of Richard Marshall’s essays, [amazon_link id=”0199969531″ target=”_blank” ]Philosophy at 3:am[/amazon_link] very soon.

[amazon_image id=”0199969531″ link=”true” target=”_blank” size=”medium” ]Philosophy at 3:AM: Questions and Answers with 25 Top Philosophers[/amazon_image]

As for Josiah Wedgwood, the second half of his book recommends inheritance tax (at 60% or so) and a gift tax, as well as progressive income tax. He wrote: “The ethical arguments in favour of claims to inherit… are extraordinarily weak.” Parents should support their children to give them a good start until they reach adulthood. He rejects the idea of any right to bequeath property. It’s a radical read in today’s climate – but that’s why we have a new gilded class. Like so many others, I’m keen to read Thomas Piketty’s [amazon_link id=”067443000X” target=”_blank” ]Capital in the 21st Century[/amazon_link].

[amazon_image id=”067443000X” link=”true” target=”_blank” size=”medium” ]Capital in the Twenty-First Century[/amazon_image]

Robots, floods and the Kobayashi Maru

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The discussion at the core of [amazon_link id=”0393239357″ target=”_blank” ]The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies [/amazon_link]by Erik Brynjlofsson and Andrew McAfee is whether or not the benefits of the current wave of digital and digitally-enabled technologies will outweigh the costs – or not.

[amazon_image id=”0393239357″ link=”true” target=”_blank” size=”medium” ]The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies[/amazon_image]

The book has three parts. The first describes digital technology, explains why it is only now that its consequences are becoming dramatic, and describes some of the impending technological advances. There is a useful survey of (mainly) robotics and AI advances, and a very clear explanation of ‘why now’ when computers and the Internet and even the web have now been around quite a while. The timing is partly due to the nature of exponential doubling. Moore’s law says computing power roughly doubles roughly every two years. If you start with one grain of rice on one square of a chess board and double it for every successive square, it isn’t until the second half of the chess board that the number of grains soars to an incomprehensible degree. It is also due to the need for organisational and infrastructure investments alongside technology investment. This section draws on the work of economic historian Paul David as well as Brynjolfsson’s own excellent work on how firms use the technology to increase productivity, by reshaping processes and work. In short, human institutions move far more slowly than technology progresses.

The second part of the book divides the consequences of technology into two types, which the authors call bounty and spread. Bounty is the potential for human progress, the almost science-fiction fruits of technology that are just starting to emerge in fields from medicine to driverless cars. By ‘spread’ they mean inequality or dispersion of outcomes. (I found this a counter-productive term as ‘spread’ to me carries the automatic word association of ‘evenly’, as in a million recipes I’ve used over the years: ‘Spread the icing evenly over the top of the cake.’) This section of the book has attracted much attention in reviews and articles. It discusses the well-known underlying economics – skill-biased technical change, Sherwin Rosen’s ‘superstar’ effect, and winner-take-all dynamics when there are high fixed costs and increasing returns.

There is an inevitable tension between progress for many humans and costs for a few humans. For example, IBM is getting its Watson computer to absorb all the world’s published medical information and use it to diagnose and recommend treatments. It would apparently take a human 160 hours of reading time every week just to keep up with the literature. The computer will produce far, far better patient outcomes. But what will happen to doctors’ careers? This is just one of many examples underlining the current angst about the ‘race’ between humans and robots. This is of course also the theme of Tyler Cowen’s excellent recent book, [amazon_link id=”0525953736″ target=”_blank” ]Average Is Over[/amazon_link].

The Second Machine Age has a chapter on measurement about which I want to get a bit picky, having just published my own book [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link]. Brynjolfsson and McAfee rightly point out that GDP does not measure adequately the welfare benefits of innovation, and specifically the digital goods freely available. After all, if there’s no price, it isn’t part of economic activity at market prices. But they are unclear about the distinction between GDP and consumer surplus, the latter never having been measured. For example, to cite a Tim O’Reilly example, if you dry your clothes in a dryer, you’re contributing to GDP and if you hang them on the line in the sunshine (remember that?), you’re not. It is probably true that the wedge between GDP and consumer welfare has been increased significantly. The authors are also astonishingly uncritical of alternatives to GDP, even describing Bhutan’s cynical PR effort to emphasise Gross National Happiness in place of GDP as ‘promising’.

The third section of the book turns to policies that might minimise the costs of ‘spread’ while retaining the ‘bounty’. The recommendations could be summed up as more and better education, to ensure that humans and robots are complements rather than substitutes, and a minimum income or – better in their view – a negative income tax.

These are obviously valid and interesting suggestions. Do they really address the massive technology-driven structural change described in the first two thirds of the book? As so often, my mind turned to the Star Trek Kobayashi Maru example – a Star Fleet training exercise designed to test the character of a trainee captain in a situation where failure and death are inevitable. But Kirk reprograms the test in order to save the crew. This is where we’re at. We need to reprogram society’s institutions. To use a more topical metaphor, if it rains torrentially for two months, there’s going to be flood water – but the damage it does will depend on the landscape it washes over, the kinds of structures that have been built, river-management institutions.

As [amazon_link id=”0393239357″ target=”_blank” ]The Second Machine Age[/amazon_link] makes clear, rising inequality has occurred everywhere. It is indeed driven by the tidal waves of technology and globalisation. But these are interacting with economic and social institutions. Policy prescriptions will need to look at the minimum wage; at the ownership of assets especially the intangible kind – what are the intellectual property rights in a drug that has been tested on thousands of humans and draws on taxpayer-funded basic research?; at public service provision and the tax base to pay for it; and so on. The institutional revolution that meant the Industrial Revolution ultimately benefited everyone is little-studied ((Douglas Allen’s [amazon_link id=”0226014746″ target=”_blank” ]The institutional Revolution[/amazon_link] is an exception) but just as important.

Anybody interested in these questions will want to read [amazon_link id=”0393239357″ target=”_blank” ]The Second Machine Age[/amazon_link]. I wholly agree with the conclusion: “We need to think much more deeply about what it is we really want and what we value, both as individuals and as a society. Our generation has inherited more opportunities to transform the world than any other. That’s a cause for optimism but only if we’re mindful of our choices. Technology is not destiny. We shape our destiny.”

Minimum wages and robots

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This morning I read a good article in The New Republic about the Silicon Valley jobs market and the exercise of power in the labour market. It describes documents showing that the tech giants in 2005 colluded to keep wage rates down. This was news to me and seems pretty scandalous.

The article goes on to discuss in general why labour markets are not like goods markets, although most economics courses, and many grown-up economists, often speak as if they are. The fact that searching for a job is costly gives all employers a bit (or a lot) of monopsony power (or buyer power). And the prevalence of monopsony power needs to be taken into account in analysing the effect of an increase in the minimum wage: it will slightly decrease the employers’ power and reduce both job turnover and vacancies in low-wage jobs. There is some evidence to support this. The article also cites Alan Manning’s excellent book on this subject, [amazon_link id=”0691123284″ target=”_blank” ]Monopsony in Motion[/amazon_link].

[amazon_image id=”0691123284″ link=”true” target=”_blank” size=”medium” ]Monopsony in Motion: Imperfect Competition in Labor Markets[/amazon_image]

The US and UK minimum wages are middling by OECD standards (this chart from the OECD database deflates the statutory minimum by the national CPI and uses PPP for private consumption exchange rates to convert to US dollars). There is no obvious correlation with unemployment rates at this headline level.

OECD real hourly minimum wages

Labour market economics is one of the areas of the subject where economics most needs input from the other social sciences. Jobs and pay can’t really be understood without thinking about factors such as institutions, power, psychology and social norms. Never forget this when next reading about the way technology means inequality is inevitable.

Global governance by stealth

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Last night I attended the Dimbleby Lecture given by IMF Managing Director Christine Lagarde – it will be broadcast tonight on BBC1. Her theme was reinventing multilateralism for the 21st century. What global governance structures will ensure the international system delivers mutually beneficial co-operation rather than zero-sum competition, in the face of technologies that are creating an ever-denser web of decentralised connections, significant demographic change and long-term and other environmental challenges? She also underlined the serious challenge to stability posed by the current degree of income inequality. I think all reasonable people would agree with that, but how interesting to hear the head of the International Monetary Fund speak about it in such strong terms:

“Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential.”

Her focus on reform of global governance is understandable when the US Congress recently made America pretty much the only country in the world that has failed to ratify a first step IMF funding proposal. As Mohamed El-Erian wrote for Project Syndicate:

“This is an unfortunate and regrettable outcome for both the IMF and the international community as a whole. Congressional obstinacy is forcing the Fund to miss out on an opportunity to strengthen its finances at a time when most other countries have already approved the initiative. It is also being held back from addressing, albeit modestly, governance and representation deficits that have steadily eroded the integrity, credibility, and effectiveness of this important multilateral institution.”
Nobody I know of believes global institutions do not need reform. Apart from the challenges described by Mme Lagarde, the large, growing economies – the BRICs and then the MINTs – urgently need to have a voice that reflects the weight they already have in the world economy, as Jim O’Neill has argued in his book The [amazon_link id=”1907994130″ target=”_blank” ]BRIC Road to Growth[/amazon_link]. A forthcoming (May)  book by Ian Goldin, [amazon_link id=”0691154708″ target=”_blank” ]The Butterfly Defect[/amazon_link], looks specifically at how to manage the serious new systemic risks posed by global interconnectedness, such as pandemics or new financial catastrophes. These are just two of a whole sub-genre.
[amazon_image id=”0691154708″ link=”true” target=”_blank” size=”medium” ]The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do about It: How Globalization Creates Systemic Risks, and What ot Do about it[/amazon_image]
So the need is clear. But how to get from here to there? I’ve not yet heard or read about the specifics. My hunch is that if the minor reform of existing institutions is impossible, given the almost-everywhere increasingly dysfunctional politics of different nation states, we need to look at building new institutions that can perhaps start under the radar. It could be global governance reform by stealth or not at all.