what does IQ measure?

March 2nd, 2015

In 1982, James Flynn [born 1934], a philosopher and psychologist based at the University of Otago in New Zealand, was looking through old American test manuals for IQ tests. He noticed that when tests were revised every 25 years or so, the test-setters would get a panel to sit both the old test and the new one.

“And I noticed in all the test manuals, in every instance, those who took the old test got a higher score than they did on the new test,” says Flynn. In other words, the tests were becoming harder.

This became known as the Flynn Effect, though Flynn stresses he was not the first to notice the pattern, and did not come up with the name.

But if the tests were getting harder, and the average score was steady at 100, people must have been getting better at them. It would seem they were getting more intelligent.

If Americans today took the tests from a century ago, Flynn says, they would have an extraordinarily high average IQ of 130. And if the Americans of 100 years ago took today’s tests, they would have an average IQ of 70 – the recognised cut-off for people with intellectual disabilities. To put it another way, IQ has been rising at roughly three points per decade. ….

[E]xplanations of the Flynn Effect abound – but what precisely does it signify? Do these steadily improving results indicate that the IQ test is not, after all, measuring intelligence? Or are people really cleverer than their forefathers?

“I don’t think smarter has anything to do with it,” says Flynn.

William Kremer, “Are humans getting cleverer?“, BBC News Magazine, 1 March 2015.

For much more, read the full article. And view, also, Flynn’s March 2013 Ted Talk “Why our IQ levels are higher than our grandparents’“.

Amitav Ghosh at lunch with the FT

March 1st, 2015

Ghosh’s novels are full of British cant. Many of the empire-builders he describes spout high principles but deal in slaves and poison. In his research, he came upon the wonderfully illustrative diary entry of an opium trader in China of the 1830s who noted, apparently without irony, “so busy selling opium could not read the Bible today”.

Like other nations, Britain has expunged much of this unpleasantness from its collective memory. Ghosh reminds me, for example, of Winston Churchill’s refusal to divert food to Bengal in 1943, a decision that contributed to the starvation of 3m people. Yet how, I ask, … are we to use history? In Asia, memories of past wrongs — whether Japanese atrocities in China or massacres committed during Bangladesh’s independence push in the early 1970s — poison the present. Perhaps history should not be so much remembered as quietly forgotten?

“You make a very good point. The Middle East is completely imprisoned in the past. Nobody can let go,” he says. “The great thing about Southeast Asia is really exactly what you’re pointing out, that people are able to let go. I remember being in Vietnam and asking people what do you think about the war? And they said, ‘which war?’”

David Pilling, “Lunch with the FT: Amitav Ghosh“, Financial Times, 28 February 2015 (metered paywall).

Bengali Indian writer Amitav Ghosh (born 1956) is best known for works of historical fiction. His latest novel, River of Smoke (2011), was inspired by the lives of Indian migrants in Mauritius.

lobbyists and sex workers

February 28th, 2015

This post is not about lobbyists’ payment to sex workers for services rendered (nor vice versa). Rather, it is about difficulties both groups face in legal collection of fees for services rendered.

Economist John Kay explains that only five years ago did the US Supreme Court begin to classify lobbying as a remunerative activity worthy of judicial protection. Previously, the court ruled that an agreement to lobby for pay, like an agreement to provide sex for pay, is “pernicious in its character”, so unenforceable. Sex workers, presumably, are still unable to appeal to courts for collection of unpaid bills.

[In 1874] the [US] Supreme Court … [ruled that a] contract to lobby government … was contrary to public policy and hence, like an agreement to sell sex, unenforceable in the courts. Paid lobbying, said Mr Justice Swayne, was “pernicious in its character”. But this was only the beginning of his denunciation. “If any of the great corporations of the country were to hire adventurers to procure the passage of a general law with a view to the promotion of their private interests,” he thundered, right-minded men “would instinctively denounce the employer and employed as steeped in corruption and the employment as infamous”. ….

But in Citizens United in 2010, the same court held that the expression of views you were paid to hold was no longer “an infamous employment, steeped in corruption”, but an activity deserving of the protection awarded to free speech under the First Amendment. That contentious decision probably did not, in the end, seal the outcome of the 2012 election — though the tide of political donations that it unleashed will surely decide a presidential contest before long. Americans may look back on Justice Swayne as the wiser judge. “If the instances (of paid lobbying) were numerous, open, and tolerated,” he predicted, “they would be regarded as measuring the decay of the public morals and the degeneracy of the times.”

John Kay, “What did the US Supreme Court have to say about Sir Malcolm Rifkind in 1874?“, Financial Times, 25 February 2015 (ungated link). Published earlier in the FT with the title “Good lobbyists augment legislators’ work”.

Noah Haynes Swayne (1804-1884) was a Republican politician, the first Republican to be appointed as a justice to the US Supreme Court. He was in office from 1862 to 1881.

In response to Mr Kay, the Deputy Chief Executive of the Chartered Institute of Public Relations (London, UK) describes lobbyists’ service to clients as legitimate, positive and useful.

John Kay … draws on another age to summarise the problems of the present and denigrates the modern lobbying industry, which is a legitimate business service and a positive and useful part of our democracy.

Modern lobbyists service their clients and employers by helping them understand legislative and political processes and to create ethical and achievable objectives within them. They are highly skilled at introducing information into political dialogue in the most effective way to assist in the achievement of these objectives. Good lobbyists know their interests are best served by enabling legislators to exercise their critical judgment based on a range of relevant, balanced information.

Phil Morgan, “Good lobbyists augment legislators’ work“, letter to the editor, Financial Times, 27 February 2015 (metered paywall).

communicating with stories

February 28th, 2015

 

FT columnist Simon Kuper writes that it is difficult to sell political ideas without a story.

The best story (as the authors of the New Testament knew) is about attaining paradise. In politics, the right traditionally locates paradise in the past. The Conservative MP Laura Sandys once told me her party instinctively tended towards “a mythical view of the 1950s, when everyone had a rose arch in the garden, the children came home smiling from school, and the father from his secure job at 5.30. There was no crime or antisocial behaviour, and everyone respected authority.”

The left used to locate paradise in the future: think of Bill Clinton’s “the boy from Hope”, or the British Labour party’s fabulously unimaginative “Forward, not back” of 2005. Since the financial crisis the left has lost its optimism, so that the US Democrats now locate paradise in the Clintonian 1990s ….

Messianic movements locate paradise in the afterlife. That is Isis’s great story: ditch your PlayStation, come to Syria, build the caliphate, die with your place in history assured and collect your virgins in heaven. ….

If you want to be heard, you need a story. But the corollary is: if you don’t want to be heard, don’t tell a story. Be boring. Banks and Brussels both do that brilliantly.

Simon Kuper, “How to make people listen“, Financial Times, 28 February 2015 (metered paywall).

To read the rest of Mr Kuper’s column (highly recommended), click on the link above.


 

Wikipedia’s paid editors

February 27th, 2015

Wikipedia is produced by an online community of thousands of volunteers. The internet encyclopedia is one of the top-ten most-visited websites in the world. Its editors are not supposed to write or update articles for pay, but the rule is difficult to enforce.

On the eve of its stock market flotation, an (unnamed) American company approached Mark Bray, who lives in Sheffield, the steel town in the north of England. The company required the 28-year-old’s help on a matter the directors felt could affect the share price: its Wikipedia page. Short, uninteresting and uninspiring, the page was in dire need of some pizzazz.

So Mr Bray advised the company how to polish, update and expand its entry in the crowdsourced online encyclopedia. He did this for pay. ….

Wikipedia’s beauty is that it is free, according to Katherine Maher, chief communications officer at Wikimedia. “Paid editing disrupts the values. Wikipedia is a volunteer collaborative community. If it was paid it would be a different site.”

Last year, a Wikimedia employee stepped down after it was discovered that she had been editing on behalf of paying clients.

Emma Jacobs, “Editors-for-hire on Wikipedia“, Financial Times, 27 February 2015 (metered paywall).

The nonprofit Wikimedia Foundation, with headquarters in San Francisco, California, operates Wikipedia and other wikis.

does human (and physical) capital exist?

February 25th, 2015

In the heated bloggers’ debate over human capital, I was surprised by the absence of discussion of how to measure human capital, a point that was crucial in the earlier “Cambridge controversy” over physical capital. Typically, human capital is measured as years of schooling. All this is added up (sometimes with adjustment for levels of schooling – counting a year in High School or University as more than a year in primary school). The sum total is then taken to be a nation’s stock of ‘human capital’, which becomes an input into an aggregate production function for the economy. This seems wrong, to me. Some schools are terrible, whereas others are excellent. How can we take account in differences in the quality of schooling?

Nick Rowe has a clever solution to the problem. “Capital” – whether physical or human – is not really a thing, so it is not necessary (impossible?) to measure it.

We invest in increasing our skills, our strength, our knowledge, etc. It just easier to use the words “human capital” to describe the things we have invested in in the past. And we can talk about how our human capital depreciates too, as we forget stuff, or technology changes so our skills become obsolete.

Now the word “capital” is deeply problematic, because time has many future periods, and so trying to convert a vector into a single scalar number is….tricky. That is true for both human and non-human capital. I prefer to say that “capital” isn’t really a thing; it’s just a name we give to a production process where time matters, because inputs and outputs come at different times. And once you start to think of “capital” as just the time-structure of production, then brain surgeons are just as much capital as blast furnaces. Costs come first, and benefits come later.

Nick Rowe, commenting on Max Speak, “For Noah and Nick”, 24 February 2015.

I find it difficult to understand Nick’s argument. If capital is not a ‘thing’, how can it be an input producing output “in a production process where time matters”? If it is an input, it is certainly not a measurable output.

The implication is that we should do away with the aggregate production function, and much of econometrics. I am sympathetic to this idea, and will give it more thought.

For much, much more, see

Nick Rowe, “Does capital income exist?“, WCI, 24 February 2015, and

Nick Rowe, “Ours the task eternal — investing in human capital“, WCI, 24 February 2015.

financial advisers continue to fleece clients

February 23rd, 2015

President Obama seeks legislation to protect consumers from purchasing bad products from financial advisers. Opposition from Republicans and the industry means that there is little chance that his proposal will see the light of day.

President Barack Obama is launching a crackdown on the US pensions industry ….

The proposed rules will require brokers and advisers to abide by a “fiduciary” standard, meaning they must act solely in the best interests of their clients, and are likely to spark a fierce backlash from parts of the pensions industry.

A report from the White House Council of Economic Advisers found … an incentive [for advisers] to persuade consumers to buy bad retirement products — with high costs and low returns — because they earned “backdoor payments and hidden fees” from them. ….

The fiduciary duty rule was proposed in 2010 but abandoned after a backlash from the brokerage industry and Republicans. They warned the rule would put many investment advisers out of business, which would deprive consumers of assistance. ….

Daniel Gallagher, a Republican SEC [Securities and Exchange Commission] commissioner, [responding to the proposed rules] said: “To be blunt, the White House memo is thinly veiled propaganda designed to generate support for a widely unpopular rulemaking.”

Gina Chon and Barney Jopson, “US launches crackdown on pension adviser conflicts“, Financial Times, 23 February 2015 (metered paywall).

Jack Bogle, founder of Vanguard funds, continues to support a federal fiduciary standard. Republicans and nearly everyone in the industry oppose it, however, so Obama’s modest proposal is unlikely to become law.

An FT reader (The Pouca), in an online comment, writes

I for one would like to see the names of companies opposing the rule – so I would know which ones want to be able to rip customers off.  

Any company that lobbies against this rule should be identified in the press so that they can be blacklisted by consumer groups and their customers advised to take a hard look at whether they have been cheated.

the human capital controversy

February 22nd, 2015

Back in the 1960s there was a famous debate between economists (led by Joan Robinson and Piero Sraffa) of the University of Cambridge in England and economists (led by Paul Samuelson and Robert Solow) of MIT in Cambridge, Massachusetts. The debate, known as “the Cambridge capital controversy“, was over measurement and aggregation of physical capital. The Cambridge (England) economists argued that aggregate physical capital could not be measured without reference to the rate of return on capital. Cambridge (Massachusetts) generally agreed that the Cambridge (England) side won, though many professors of economics continue to teach aggregate production functions and economic growth theory as though the debate never took place.

A similar debate is now taking place, over human rather than physical capital. Noah Smith (HT Mark Thoma) provides a nice overview for those are interested.

Is “human capital” really capital? This is the topic of the latest econ blog debate. Here is Branko Milanovic, who says no, it isn’t. Here is Nick Rowe, who says yes, it is. Here is Paul Krugman, who says no, it isn’t. Here is Tim Worstall, who says yes, it is. Here is Elizabeth Bruenig, who says that people who say it is are bad.

Noah Smith, “Is human capital really capital?“, Noapinion, 21 February 2015.

Noah Smith offers an alternative view: human capital requires owners to work (give up leisure time) to obtain a return from it, so the more leisure is valued relative to other things, the less valuable human capital is. This will be different for each person. In consequence, you are “entitled to your own modeling conventions and definition of terms. So whether human capital is capital is up to you.”

This is an interesting, complex debate. I am still thinking about it but, as TdJ readers might predict, I am most persuaded by the arguments of Carleton University economist Nick Rowe. Before turning to Branko Milanovic and Nick Rowe, however, I would like to emphasize two points that are not always appreciated by participants in this debate. First, financial capital is not capital in an economic sense. Nick makes this point clearly, but others confuse financial capital with physical capital. Financial capital – stocks, bonds and the like – are just pieces of paper, IOUs. They are claims of lenders, and the loans may even have been made for the purpose of consumption rather than investment.

Second, even if human capital is a useful category of income-producing assets (and I think it is), it is as difficult to measure as physical capital is. In fact, it is probably even more difficult to measure. This does not really matter though, as it is impossible to measure aggregate assets of either asset apart from (only in theory!) the present value of the future income the assets produce. The problems of measurement of human capital are  very similar to the problems of measurement of physical capital. For example, if I purchase an automobile which I use for pleasure, and also – as an Uber driver – to generate income, part of the purchase represents investment (addition to physical capital) and part is consumption. Similarly, part of the expense of schooling represents investment (for the purpose of earning more income than I would without skills) and part is consumption (the satisfaction of obtaining knowledge and the ability to better understand the world in which I live).

There is much, much more at the links above. Bloggers will no doubt continue to debate this issue for weeks and months (years?) to come. Here, to get you started, are brief quotes from Branko Milanovic (on the ”No’ side of the debate, and from Nick Rowe (on the ‘Yes’ side, the one that I support):

If “human capital” and “real” capital are the same thing, how can there be a conflict between labor and capital?  If profits and wages are the same thing, why should we fight about distribution? You have your form of capital (which just happens to look like labor), and I have mine, which just happens to look like T-bills and stocks.

Branko Milanovic, “On ‘human capital’ one more time“, Global Inequality, 19 February 2015.

 

What we call “labour” is as much capital as labour. The wages on “labour” are as much a return to capital as they are a return to raw labour.

Some labour needs very little investment to make it productive; other labour requires a lot. Some labour gives a high return on investment; other labour gives a low return. It’s all different.

“Human capital” is not a synonym for “labour”. It tells us something important about the investment needed to make labour productive.

Nick Rowe, “Human Capital” and “Land Capital“, Worthwhile Canadian Initiative, 14 February 2015.

Once again, I encourage you to click on the links above, to get a feel for the full debate.

what is “sharing economy”?

February 21st, 2015

It is an increasingly important portion of the “market economy”, providing consumers with goods and services, for a price.

[A]lthough “the sharing economy” is a widely used term, broadly meant to describe person-to-person sharing of resources, most economists I’ve run into gag on the term. Companies like Uber drive you where you want to go, for a price. Companies like Airbnb let you stay in someone’s home or apartment, for a price. eBay had almost $1 billion in profits last year. This isn’t “sharing.” It’s perhaps better called the “finding productive uses for underutilized capital” economy.

Timothy Taylor, “Who are the Uber Drivers?“, Conversable Economist, 18 February 2015.

Spain’s populist surge

February 20th, 2015

Podemos (“We can”), a populist party formed just over one year ago, has gained a huge following in Spain. Tobias Buck, Madrid bureau chief for the Financial Times, provides a full report, with profiles of secretary-general Pablo Iglesias and other party leaders.

Podemos, like Syriza in Greece, sees itself above all else as an anti-establishment party: it rails against the corruption of Spain’s political elite, calls for an end to austerity and promises to restore dignity to the millions of Spaniards suffering the effects of the recent crisis. The party has hinted at plans to roll back labour market reforms, to shield financially troubled homebuyers from eviction and to raise the pressure on tax evaders. Like their Greek allies, its leaders are fierce critics of Angela Merkel, the German chancellor, and often voice sympathy for the idea of a pan-European round of debt write-offs.

Beyond such slogans, however, it is hard to trace the outlines of a future political manifesto. There is no party programme, and Podemos leaders have consistently refused to be drawn on concrete measures or prescriptions. The party’s reluctance to set out a clear programme reflects in part the helter-skelter nature of its rise. Podemos formally elected a leadership, and gave itself a proper organisation, only three months ago. But the group’s ambiguity is also part of a strategy to downplay its leftwing origins.

Tobias Buck, “Spanish politics: Podemos’ populist surge“, Financial Times, 20 February 2015 (metered paywall).

Spain

Spain