Does the existence of intangible goods mean we shouldn't maximise wealth?
The proposal I made last week—that we abolish parliamentary democracy and turn over decision-making to a a set of betting/prediction markets—faces a number of serious objections. In this post I will deal with the objection that national wealth in principle misses out several important contributions to welfare like liberty, love or other intangibles. I have four further serious objections, which I will attempt to tackle in a third and final piece.
What makes us happy, and helps or allows us to satisfy our desires and preferences, may not be wealth alone. A millionaire who desires only a dishwasher is no better off for all her wealth if she is unable to buy one. A world in which dishwashers are harder to get hold of—perhaps due to a ban—is worse than one in which they are widely available, for a given amount of wealth.
But introducing "for a given amount of wealth" might be begging the question. Our measure of wealth, to be a good one, will include some correction for changes in prices (like the official measure). Even under our current system of drug prohibition there are measures of illegal substance prices. Similarly, if we banned dishwashers, perhaps in some bizarre return of the lump of labour fallacy, they might still exist, albeit underground and more costly. In this way the measure would show an expected dip in real wealth in the prediction market for the national wealth effects of dishwasher banning.
And many other restrictions on liberty that we'd have independent reasons against would also depress our wealth, e.g. racist employment regulations, restrictions on travel. Even something like the ability to marry could be factored in—if people want to have marriages, they will have a higher demand for housing in areas where marriages are allowed. However this faces a lot of difficulties in a world where so many goods are unpriced and thus we cannot measure all of these effects. And it's unclear whether all of the cost to an individual of, for example, restrictions on marriage would be fully capitalised into house prices. So there might be some reason to expect a wealth maximising state to be less liberal than the ideal happiness-maximising state would be.
Further, typically unmeasured goods like love—which many people see as one of the most important—may not be measured by any element of the wealth markets. While current parliamentary systems don't necessarily directly consider what effect policies will have on aggregate love in the country, were it to be significantly effected by a (proposed) policy they would be able to factor it in. But a pure national wealth-driven system would not.
This is certainly a difficult objection for the model of government, but it isn't necessarily fatal. After all we know there are devastating problems with the current system, including distorted incentive structures, but even more than that public ignorance. We'd want evidence that not only would maximising expected wealth tend to cut the amount of aggregate love in society—it would do so to an extent that outweighed the improvements in policymaking down to an unbiased, properly incentivised and dispassionately rational decision-making system.
We'd need particularly robust evidence to overturn the strong established empirical connections between wealth and happiness (which presumably takes into account the effect of love on happiness). This means the love objection is not telling on our account without much further exploration. As suggested above, there remains the objection that some liberty contributes to happiness without contributing to wealth, or being fully accounted for in wealth measures, and this stands, and should be weighed against the other benefits gained from the wealth-maximising state. And the wealth-maximising state may well be more liberal than current parliamentary arrangements, given what we know about free markets and long-term growth.
A new governing paradigm—maximising national wealth
How should governments decide on policy? One answer is that policy should follow a particular ideology, such as libertarianism or socialism. Another answer—direct democracy—is that policies should be arrayed in front of the populace at large so they can pick. Another is that the people at large should choose people who vote on policies from options selected by a third group of people—roughly the Westminster system. Absolute monarchy would give a family and their descendants control of policy. But an under-considered method of choosing policy is via markets.
Here I don't mean getting rid of social democracy and having most or all goods provided by the market; instead I mean choosing policies—whether free market or interventionist, right- or left-wing—with respect to the result of a hypothetical prediction market, specifically, one looking at some measure of national wealth.
Why wealth? Well what we really want to do is make people have better lives—increase their well-being. But measuring well-being directly is controversial and difficult. The two leading theories of well-being are that well-being consists in happiness/pleasure and that well-being consists in satisfying one's desires or preferences. We know wealth makes people happier, particularly when they are poor, but even when they are already well-off, and we know more wealth means more ability to satisfy most different preferences.
Thankfully, both measures (like the official ONS statistic) and proxies (like the total market capitalisation of, FTSE All-Share firms, which make up 98% of total business wealth) of wealth are fairly widely available. Of course, these happen after the fact—so while we could easily judge past governments by their effects on these metrics, we couldn't judge current policy proposals. But that needn't hold us back! We already have markets in future RPI inflation in the UK (and CPI inflation in the US), called TIPS spreads. These take the price differential between RPI-linked and regular gilts or T-bills to work out what the market expects inflation will turn out to be. We know this because if it didn't represent the market opinion, then traders could buy and sell bonds to achieve a higher expected return (i.e. take arbitrage opportunities).
Even a simple, TIPS-like market in national wealth would help us rationally guide policy. It's not exactly clear whether central banks check TIPS markets, but if they did, the markets would give them advance guidance on whether their policy would help them hit their target level of inflation, based on reactions to policy changes, suggestive speeches, and explicit forward guidance like the Carney or Evans rules. In the same way, important policies would shift the wealth markets, and governments could use that as evidence for doubling down on wealth creating policies and for getting out of wealth-destroying moves.
However there are important distinctions between the Bank of England's role in stabilising the nominal side of the economy, and the government's role in making policy that makes it likely that lots of real wealth is generated. The best nominal policies, like NGDPLT, focus on stabilising, or ensuring the stable growth of, some nominal variable. The optimal result is extremely reliable stable growth. But that's not what we want in real wealth. When it comes to real wealth, the more the better. That a policy boosted the markets' expectations of national wealth by 10% in five years would not prove it was an optimal, or even good policy, if there was an alternative that could boost wealth by 50%.
So when it comes to national wealth we need conditional prediction markets. We need markets that tell us what would happen if we implemented a given policy. The specifics of implementing these sorts of markets become quite complex and difficult, as we do not want to restrict the policy choice too much, but it may also not be practicable to open up a gilt market for every permutation of every major political idea. But if we could start conditional prediction markets up, we'd have a range of policy options with very interesting and suggestive evidence of what is best for the country's social welfare.
I think there are some persuasive objections to the results of these markets, and—further—to running policy in any rigidly-linked way to these markets. But I also think they can all be plausibly dealt with, and I will attempt to do so in a blog post tomorrow.
Quote of the day: On anarchist calisthenics
One day you will be called on to break a big law in the name of justice and rationality. Everything will depend on it. You have to be ready. How are you going to prepare for that day when it really matters? You have to stay “in shape” so that when the big day comes you will be ready. What you need is “anarchist calisthenics.” Every day or so break some trivial law that makes no sense, even if it’s only jaywalking. Use your own head to judge whether a law is just or reasonable. That way, you’ll keep trim; and when the big day comes, you’ll be ready.
— James C. Scott, Two Cheers for Anarchism, quoted in Jason Kuznicki's Cato Journal review.
Bleeding heart libertarianism and British politics
I have a chapter in a new publication by Liberal Reform, the classical liberal movement within the Lib Dems, in which I make the case that non-libertarians and libertarians may find a surprising amount of common ground if they put their differences of opinion about wealth and income redistribution aside. (Unfortunately, you have to sign up to Liberal Reform's mailing list to read that piece. You use my email address to login instead: sam at adamsmith dot org)
Basically, the chapter is an attempt to sketch out a British political economy of Bleeding Heart Libertarianism, the movement that has sprung up around American philosophers like Matt Zwolinski. The main areas I identify are immigration reform, drugs legalization and 'modern mercantilism' (a broad term for corporate and middle-class welfare).
I do think there's a lot of common ground between libertarians and people on the left, but for a serious dialogue to work I propose that libertarians shift their focus from opposition to wealth and income redistribution to a single-minded focus on the regulatory apparatus of the state:
I suggest that libertarians concerned with the plight of the poor should abandon their opposition to wealth redistribution in practice and focus instead on the regulatory state, where we have a much greater degree of certainty about the harm caused. For libertarians who wonder if they are BHLs, the question might be: If libertarian institutions existed and serious, significant poverty persisted, would state action be justified in acting to relieve at least some of that suffering, if we had a pretty good reason for thinking that that action would work?
I think that it would, and if you have a serious commitment to welfare so should you. The only problem should be an empirical one, which I cannot say is strong enough to reject all wealth redistribution. While I am extremely confident about the benefits of liberalising planning to allow new homes to be constructed in the UK, I feel less confident about saying that all redistribution is harmful.
So I propose a compromise: a ‘libertarian welfarism’. This might see us reform tax credits and the welfare system into a combination of universal basic income and a ’negative income tax’ that acts as a top-up to people’s wages, adjusted to give a little more to people in low-income jobs and the unemployed. The details of this approach to income redistribution are not important for now: what matters is the idea of a simple, cash-based redistributive mechanism. I find myself very comfortable with this kind of redistribution; other libertarians will be less so. But perhaps they could accept it as the cost they have to pay to persuade others about the other, much more important, things they have to say.
I expect many people to find this kind of thinking quite outrageous, but to me the really strong arguments for libertarianism are based on our beliefs about ignorance and incentives, not justice, so they should only preclude redistribution of wealth as a matter of pragmatism. There's no intrinsic reason you can't combine those ideas with "left-wing" beliefs about what a good world looks like any less than they can be combined with "right-wing" beliefs about the kind of world we watnt. I don't know if libertarians will ever be able to have the same influence on the left that we've had on the right, but it's worth a try.
Professor Kenneth Minogue
Sadly Prof Kenneth Monogue has died. Born in New Zealand and educated in Australia, he taught at the LSE since 1959, eventually being appointed Emeritus Professor of Political Theory. He fought tirelessly and bravely for freedom at a time when it mattered most, and has a huge range of scholarly works to his credit, including "The Liberal Mind," "Nationalism," and "Alien Powers - The Pure Theory of Ideology." He made an important contribution to the understanding of ideologies, and took apart some once-popular ones with forensic skill.
He was a good friend and supporter of the Adam Smith Institute, along with other right-thinking think tanks. We knew him personally for over 35 years and enjoyed his wit and charm as well as his insight. He often attended ASI functions and was widely liked and admired by our members.
He was 82 when he died, having just attended and delivered a paper at a successful conference of the Mont Pelerin Society in the Galapagos Islands, which both Eamonn and I attended. He was a former President of the Society. He remained lively and alert to the end of his life and died quickly and among friends. His shrewd observations and mischievous sense of humour will be much missed.
Think Piece: Good and bad arguments against positive discrimination
The US Supreme Court has just left one Texan affirmative action scheme in place, but it has recently busted schemes elsewhere. I discuss what libertarians should think about positive discrimination and affirmative action.
Many of the arguments libertarians make against affirmative action/positive discrimination do not hold. For example, it neither needs to interfere with equality before the law, nor does it need to imposed by state coercion. And in its favour, affirmative action may be one way to overcome some of unjust forms on inequality in our society. On the other hand, it is clearly not even close to the best way of dealing with unjust inequality. And some evidence suggests that these schemes actually hurt those they are designed to help. But without sufficient evidence perhaps the best short-term approach is to allow universities to experiment with their admissions process, so they can among them discover the best approach.
Check your fallacies
The latest game on the left is called "check your privilege," and if you make any point about others perhaps less advantaged than you, you are given to understand that you cannot really comment objectively, given your advantage.
It’s quite an old game. Marxists used to call it "sociology of knowledge", but the rules were similar. All of your opinions were alleged to be only the product of your class interest, and could therefore be discounted. If you advocated market economics and classical liberalism, for example, this was simply an expression of your class interest as a member of the bourgeoisie. It has the advantage that the intellectual content of your views can be ignored. Opponents do not have to argue with what you say; since it represents only your class interest it can be ignored. There is an exception. One group is sufficiently detached from the class system that their views have objective import. These are the Marxist intellectuals, of course.
The fallacies in "check your privilege" are straightforward and easy to identify, though Herbert Marcuse (remember him?) would no doubt have dismissed them as part of "bourgeois logic." First is the argumentum ad hominem In which what is said is discounted, not because of any flaw or fault in its argument, but because of something pertaining to the arguer. It is not the substance or sense of what is said that is being criticized, but the status of the person putting it forward. The fallacy lies in the fact that the argument itself is not addressed, but irrelevant material is considered in its place.
The second fallacy is the genetic fallacy. Despite the name this has nothing to do with Darwin or Mendel, but involves a dislike of where an argument comes from. People are less inclined to accept views from those they dislike, whatever the merits of the actual views. The mistake is to suppose that the source of an argument affects its validity. A common meme is to assume that eventually someone will associate one side of an argument with Adolf Hitler, but it is still committed if you think that the views of rich white males can be discounted because of the three categories of those holding them.
Other fallacies are touched on, but all belong to the category of informal fallacies of relevance (intrusion), and represent considering that qualities pertaining to the arguer somehow undermine and diminish the argument. They don't. In its latest form it is simply an anti-intellectual way of doing down what the other side is saying without facing the difficulty of considering their argument.
What kinds of inequality should we be worried about?
1. When inequalities come about as a result of different levels of effort. Some people are born with vast natural talents (e.g. Wilt Chamberlain) while others are not, or their talents are not in such high demand by the market. Some are born to dedicated, loving parents while others are raised in far less supportive environments. No one could claim they bear most of the responsibility for their genes or upbringing. But even if we could even out the differences in income or wealth due to different upbringings and talents, we'd want to leave in the differences from different levels of work. This is because leisure can be seen as a form of income, as it adds to utility. To give those who take more leisure the same money income as those who take less would be subverting equality, rather than enforcing it.
2. When inequalities derive from differences in job satisfaction or riskiness. People who do more dangerous jobs are paid more. This is exactly what economists would expect; extra money compensates the worker for the extra risk of injury or death. But it's also what we should want. A more satisfying, less risky job (like teaching or creating art) should pay lower by justice, and this is one of the really good and egalitarian elements of the market economy. This ties in with the previous point as one extremely undesirable element of certain high-paying jobs is the extreme hours they demand. If typically people's willingness to do extra hours begins to decline at an accelerating rate, we would expect high hours occupations—in a just, egalitarian system—to be paid disproportionately well.
3. When inequalities are necessary, due to the infirmities of current human nature, to produce a greater total pot to help the needy. A prominent element of John Rawls' A Theory of Justice, the book that kick-started the recent era of social justice theorising, was the difference principle, the idea that inequality in society should only be as much as is necessary to make the worst-off person as well off as possible. But driving inequality any narrower would harm the worst-off and would thus be unacceptable. Of course, as G.A. Cohen shows in "Incentives, Inequality and Community" and his book Rescuing Justice and Equality, this isn't a demand of justice—it's just a practical consideration when we have the welfare of the badly-off in mind. But in the real world pragmatic considerations are often appropriate, and it may well be that certain inequalities in a given society can be practically justified on these grounds.
The really interesting question is this: how much of the inequality in real-world capitalist societies is down to these three legitimate sources, and how much is down to undeserved luck? The key difference between 'bleeding heart' libertarians and traditional left-wingers may come down to this crucial (empirical?) question.
Is nationalism a force for good? Yes
The nation state is—in its fundamental nature—a free and tolerant political system. National loyalty requires only fondness for a geographical location (and its history) which can be acquired by anyone who moves to a nation, as well as those born and brought up there. In principle national loyalty requires no significant revision of values, nor does it exclude people on the basis of their family, colour or any other unsavoury criteria. It is, taken on its own, a remarkably benign form of attachment.
Loyalty is necessary for political institutions to uphold their laws. Laws protecting private property, free speech and so on do not hold sway because they have been written down by a legislator but because those subject to them believe they are authoritative. This requires general acceptance of their content and the body charged with enforcing them, which in turn requires a loyalty and trust for that body and for other citizens. In non-nationalistic countries such as Kazakhstan trade can't rely on its participants' having particular reason to trust one another. Nationalism avoids such pitfalls by enabling a trust of a pool of strangers – something which characterises flourishing societies.
The strongest ties among humans have proved to be religious, tribal-ethnic and national. They are typified by attachment to that which is familiar. The first two of these however, when elevated into political form, are intolerant of differing values and of differing bloodlines. The conflict between family love and religious obedience has characterised some of the worse strands of the Middle-East's history. In Africa tribal loyalties have underpinned devastating atrocities – in the 1994 Rwandan genocide for instance the Hutu people massacred the Tutsi (a group seen to have different physical characteristics). Twenty-two years earlier the Burundi Genocide had seen a reversed tragedy. Similarly fascism is not an extreme form of nationalism but an extreme form of tribalism—members of Hitler’s Aryan race were identified by their appearance and bloodline, not their attachment to a particular nation. We would do well to celebrate our often mocked pride for the rolling hills. Other attachments have proved much less tolerant of our differences and freedoms.
Another reason is philosophical. Where we happen to have been born and brought up is certainly arbitrary from a moral point of view – but this is no good reason to rule it out as mattering. Which mother we happen to have been born to is arbitrary, and yet no one claims we should shun her on that basis. Similarly we come across our friends arbitrarily, even if they have been chosen carefully from those we’ve met. My point is not that we should consider important all aspects of our lives that aren’t up to us, but rather that their being arbitrary shouldn’t be a reason not to think them important. In other words, arbitrariness should give us no reason to feel uneasy about the benefits that national attachment brings.
Is nationalism a force for good? No
My colleague Geoffrey Taunton-Collins argues that nationalism is a force for good, as the loyalty and fellow-feeling it generates are necessary to create high trust law-abiding societies. He says that examples of atrocities committed partially in the name of nationalism—the Rwandan genocide, the second world war and Holocaust, strife in the middle east—are all better explained by ethnic tribalism or religion. I disagree. Firstly I'm sceptical that successful modern societies are driven by nationalism, secondly I think it's impossible to disentangle the nationalist element in many of the terrible occurrences he lists, and thirdly I think that nationalism underlies some very bad policies adopted by many modern societies.
Why does an individual obey the law? One obvious reason is that the penalties for disobedience, weighted by the likeliness of their being incurred, often outweigh the benefits from breaking the law. A second reason, is that individuals believe there is some sort of justice in the laws. This is why people give "because it is against the law" as a reason independent of any further explanation for why a course of action ought not to be followed. Anecdotally, the arguments people give for the duty to obey the law—if these can be taken as also being the reasons they actually do obey the law—seem to go against Geoff's claim, centring on reciprocity, universality and fairness. And the cases where people disobey the law appear to go with my analysis. Consider illegal downloading: some estimates say PC games are illegally downloaded as many as 20 times as they are bought legally. People seem unswayed by the laws—brought about by the authority of the nation state they are supposedly loyal to—requiring them to buy games (or films, television programmes, music) legally. Because others are not following the law, and because the likelihood of punishment is low, they don't themselves.
Can nationalism and ethnic strife be disentangled? Certainly Hitler's regime looked no more favourably on the many proudly German Jews who had served the Kaiser honourably in the first world war than they did on any with Jewish ancestry. And certainly Nazism was centred on the idea of a Volk—a people—united despite the borders of Weimar Germany. But the purest form of an ideology is rarely what gets through and propagates throughout society, and the Dolchstosslegende—the idea that Germany didn't really lose the first world war, but was stabbed in the back by a Jewish-Bolshevik conspiracy—was a vital part of the Nazis' appeal. I think the general bleeding of racialist, ethnic and religious ideas into nationalism and national identity is inevitably tied into Middle Eastern conflicts and the two major central African genocides.
And finally, look at the policies nationalism produces. True, as Geoff points out, there is no necessary reason why nationalism should exclude anyone born outside the country, if they are willing to switch their loyalty to their destination nation, but in practice we know that's what happens. Taking the UK as an example, the tide of anti-immigration feeling has been rising and rising since Gordon Brown's 2007 pledge to provide "British jobs for British workers", culminating in the rise of UKIP and Tory policies like the 99,999 or less net inward migration pledge. Surely it can't be denied that a sense of nationalism, that the UK is collectively owned by only its current inhabitants, a sense of insider and outsider, is intimately connected to this ethically indefensible and economically incompetent trend?
As far as I can tell, actually-existing nationalism is not responsible for our generally law-abiding society, cannot be disentangled from many gross moral horrors, and is responsible for bad policy. Therefore I conclude that nationalism is a force for bad.