Archive for the ‘Political Economy’ Category

the human capital controversy

Sunday, 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”?

Saturday, 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

Friday, 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).



corruption continues in Mexico

Monday, February 16th, 2015

Corruption and crony capitalism has a long history in Mexico. Sadly, despite many promises, nothing changed with the return of Mexico’s leading political party (the PRI) to power. Mr Luis Videgaray, Mexico’s finance minister, provided an “unusually candid assessment” in a recent interview with the Financial Times. This is surprising since Mr Videgaray most definitely is part of the problem.

[President Enrique] Peña Nieto’s poll ratings are the lowest for any Mexican head of state for 20 years. ….

There has been vehement criticism of the president’s “White House” family mansion and the finance minister’s weekend home on a luxury golf course, as well as the government’s leaden handling of the disappearance and apparent grisly murder of 43 students in the state of Guerrero. ….

While entrenched corruption has long been tolerated in Mexican politics, public patience would appear to have snapped as the scandals have multiplied. ….

But Mr Videgaray refused to blame disgruntled powerful interest groups, which include trade unions and big businesses shaken up by the reforms, for fanning popular discontent. “We need to take responsibility for what we have done and what our challenges are,” he said, while acknowledging this required consistent policy rather than “cute speeches”.

The promise to use fewer words and more deeds was underlined with last week’s arrest of the brother of the former opposition governor of Guerrero, and several former state officials suspected of diverting millions of dollars in public funds.

Jude Webber and John Paul Rathbone, “Mexico urged to rebuild public’s trust“, Financial Times, 17 February 2015.

school reform

Sunday, February 15th, 2015

School reform is a burning issue in many countries, not least the United States. Tim Taylor, in his Conversable Economist blog, reports the research findings of Harvard economist Roland G. Fryer (born 1977).

It is no longer news that the United States is a lackluster performer on international comparisons of student achievement, ranking about 20th in the world. But the position of U.S. black students is truly alarming. If they were to be considered a country, they would rank just below Mexico in last place among all Organization of Economic Cooperation and Development countries. ….

As befits an arrogant economist, my first thought was that this [improving performance] will be easy: We just have to change the incentives. …  My solution was to propose that we pay them [students and teachers] incentives now to reward good school performance. ….

We decided to try the experiment and raised about $10 million. We provided incentives in Dallas, Houston, Washington, DC, New York, and Chicago. ….

What we learned through this $10 million and a lot of negative press and angry citizens is that kids will respond to incentives—and that incentives to teachers do not have a significant effect on student achievement. They [students] will do exactly what you want them to do. By the way, they don’t do anything extra either. I had this idea that they were going to discover that school is great and to try harder in all of their subjects, even those that do not provide incentives. No. You offer $2 to read a book, and they read a book. They are going to do exactly what you want them to do. That showed me the power, and the limitations, of incentives for kids.

When the incentives approach failed, Fryer and his researchers decided to study schools, to see how methods used in successful schools differed from thos used in unsuccessful schools. The result was a simple five-step approach that, when applied to 20 public schools in Houston, produced dramatic improvements in low-performing schools.

It is not rocket science. It is not magic. There is nothing special about it…. We are now repeating the experiment in Denver, Colorado, and Springfield, Massachusetts. We actually do know what to do, especially for math. The question is whether or not we have the courage to do it.

Timothy Taylor, “The Journey to Becoming a School Reformer“, Conversable Economist, 13 February 2015.

All quotes are from Tim Taylor’s edited version of a lecture that Fryer delivered at the National Academy of Sciences in April 2014. Tim Taylor provides links to the video, powerpoint slides and full text of Fryer’s lecture.

the failure of financial and healthcare markets

Thursday, February 5th, 2015

The economics of finance is surprisingly similar to that of healthcare.

Both sectors absorb vast amounts of resources, yet provide consumers with poor value for money. A major reason for this dismal outcome is that few consumers of financial or healthcare services have even minimal understanding of products they are purchasing. In the jargon of economists, the markets suffer from information asymmetry.

Between 1960 and 2012 while the financial industry [in the USA] grew from 4% of GDP to 8% of GDP, the healthcare sector grew from 5% to 18%. ….

The healthcare sector is a particularly good comparison for the financial one. Both sectors provide a service everybody needs, but very few people understand and thus both sectors depend heavily on trust. Both sectors are plagued by conflicts of interest and experience enormous abuse and fraud. ….

Both sectors lobby heavily to direct government intervention to their own advantage. In 2014 they were at the top of the ranking for money spent in lobbying with $369M (finance) and $367M (healthcare).

Luigi Zingales, “Does Finance Benefit Society?“, 2015 Presidential Address to the American Finance Association, January 2015.

HT Russ Roberts’ EconTalk. His recent, hour-long interview with Professor Zingales complements nicely the presidential address.


Adam Smith’s ‘invisible hand’

Saturday, January 24th, 2015

What, exactly, is the “invisible hand”, a phrase attributed to Adam Smith? Is it a sound economic principle or a myth propagated by the misreading of Smith? All this continues to attract controversy. If you are interested, I recommend a lucid, 12-minute podcast on the topic. You can access it without charge, courtesy of  The Guardian newspaper, at the link below.

When we asked you to nominate some intellectual cliches for this series earlier this year, Adam Smith’s “invisible hand” cropped up repeatedly ….

In the third episode of The Big Ideas, Benjamen Walker discusses the meaning and uses of Smith’s concept with philosopher John Gray, academic Marianne Johnson, economist Eamonn Butler and Guardian columnist Polly Toynbee. ….

As we mention in the podcast, Smith himself only used the phrase “invisible hand” sparingly. ….

Benjamin Walker, “The Big Ideas podcast: Adam Smith’s ‘invisible hand’“, The Guardian Comment is Free podcast, 6 October 2011.

Smith did use the term ‘invisible hand’ quite sparingly. It appears only once in each of three published works, for a grand total of three times.

In The History of Astronomy (written before 1758, but published in 1811), Smith writes that there is no need to resort to the supernatural, to “the invisible hand of Jupiter”, to explain natural phenomena:

Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. [Emphasis added.]

The phrase appears a second time in The Theory of Moral Sentiments (1759), in paragraph 10 of the first and only chapter of part IV:

The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. [Emphasis added.]

His third and last use of the phrase is in book IV, chapter 2, paragraph 9 of The Wealth of Nations (1776):

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. [Emphasis added.]

softening the war on drugs

Saturday, January 24th, 2015

FT columnist John Paul Rathbone favours legalization of cannabis (marijuana), but recognizes that this brings costs as well as benefits.

The biggest cost will mostly be carried by those who might lose control of their drug use. This is unavoidable, even if the general increase is modest (as in Portugal). Still, while a cannabis habit may be far less destructive than alcohol — which accounts for more problems than all illegal drugs combined — it is still plenty bad if it happens to you, or someone in your family.

The benefits, however, include raising state revenues from taxing a global business estimated to be worth more than $380bn a year; freeing up police time to investigate other crimes; reducing (even if not eliminating) revenues to criminal gangs and terrorist groups; bringing on to the right side of the law the 80 per cent of consumers whose drug use is occasional and mostly harmless; and making huge savings on what is now spent arresting and imprisoning drug users and sellers. The US spends over $40bn a year on this alone, making drug prohibition a surprising example of a big government programme. Here it is worth remembering that Milton Friedman, the Nobel-prize winning economist who grew up during Prohibition and concluded that it caused more problems than alcohol itself, saw the war on drugs as a criminal waste of money.

John Paul Rathbone, “The never-ending war on drugs“, Financial Times, 24 January 2015.

Alcohol and tobacco are legal in most countries. Why not cannabis?

Stiglitz on organizations and economics

Friday, January 23rd, 2015

Somewhat surprisingly, most economists have traditionally relegated the study of organizations to business schools, or worse still, to sociologists. …. Many economists argued that there was no need to look carefully into the black box called the firm: firms maximized profits (stock market value); if managers didn’t, they would be replaced; and firms that didn’t maximize value wouldn’t survive.

Joseph E. Stiglitz, “Symposium on Organizations and Economics“, Journal of Economic Perspectives, Spring 1991.

This view is still common, but less now than when Stiglitz wrote this. All issues of the Journal of Economic Perspectives are accessible online at no charge, compliments of the American Economic Association.

State of the Union

Thursday, January 22nd, 2015

Few newspaper editorials are worth reading. Editorials of the Financial Times, in my opinion, are an exception to this rule. Today’s editorial on President Obama’s State of the Union address is an example of what newspaper editorials should be: clear, informative, concise and opinionated.

Much of what Mr Obama put forward on Tuesday night should be passed on its own merits. The US federal minimum wage is low by historic standards. Community college remains too expensive for many low-income Americans. Seven days of annual paid sick leave is not too much to ask. Marginal taxes on the middle class remain too steep. Yet in failing to acknowledge the scale of his party’s heavy defeat in last November’s midterms, Mr Obama set the wrong tone for a productive Congress. Whatever the merit of its substance — and there was much — it was an ungracious speech.

That said, it was also a coherent one. Mr Obama’s tax proposals make sense on their own terms. Under his plan, he would raise $320bn in the next decade by raising the capital gains tax on high-income earners to 28 per cent — the same level as under Ronald Reagan. He would also close a big loophole that enables many wealthy estates to avoid paying inheritance taxes altogether.

There was also a small surcharge on the liabilities of “too big to fail” banks. The proceeds would be spent on rewards to work, including tripling the child credit to $3,000 a year and raising the benefits to two-earner households. In addition, Mr Obama would step up much needed spending on US infrastructure, which would also boost the middle-income labour market.

Barack Obama sets out case for middle-class economics“, Financial Times editorial, 22 January 2015.

The editorialist mixes praise with criticism of Obama, concluding with these two sentences: “Once again, Mr Obama has shown what a good campaigner he is. The doubts concern his aptitude for governing.”

Registered non-subscribers: Accessing this editorial counts as one of your ten free downloads for the month. (It really is much longer that the paragraphs I copied and pasted above.)